RegTech Intelligence 
At a recent conference in Switzerland, Scott O’Malia of the CFTC spoke out against his organisation’s approach to cross-border regulation thus far. The speech, entitled ‘Regulatory Harmonisation, Not Imperialism: A Workable Cross-Border Framework’, criticises US regulators’ protectionist stance when it comes to areas such as OTC regulation, putting national interests before international: ‘What the Commission should have done is the opposite: settle on a framework with international regulators, and then finalise its policy.’ This is a particularly salient point, as the same could be said for the EU authorities across the Atlantic.
As things stand, a lack of harmonisation between regulators is threatening the global nature of markets, which would lead to less activity, less liquidity and possibly greater systemic risk, as a single national event could topple an insufficiently diversified market. However, regulators seem to be more concerned about insulating their individual markets against external contagion than helping markets to recover. So what progress have they made so far?
The CFTC has opted for a system of substituted compliance, whereby firms asked to demonstrate compliance with the CFTC’s rules can instead point to compliance with a comparable set of rules and thereby avoid enforcement action. But, rather than being based on an all-or-nothing model, this system works on a rule-by-rule basis, leading to confusion and more scrambled rulemaking. As O’Malia observes, the CFTC have had to issue ‘over 100 exemptions and no-action letters – some for an indefinite time – from the very rules we just passed.’ This may be due, as he says, to the substituted compliance determinations simply not being transparent enough. Either way, the propagation of no-action letters means that many key market players, such as LCH.Clearnet, are operating under provisional terms in the US, giving them and their clients little certainty for the future.
O’Malia’s criticisms focus on the US, but the EU is equally to blame in this. ESMA’s recent recommendation to the Commission on the equivalency of the US takes a similar rule-by-rule approach, finding some rules to be ‘conditionally equivalent’, which gives market participants no certainty whatsoever. The Commission has final say on these matters, but until that happens, firms from the US and other jurisdictions cannot know what they will have to do to continue trading in Europe.
As O’Malia says, if we were doing this the right way round, these conversations would have been had before national rules were finalised.