On 2 September 2013, the Financial Stability Board (FSB) published the sixth of its semi-annual comprehensive progress reports on over-the-counter (OTC) derivatives reform, as per the agenda of the 2009 G20 summit in Pittsburgh. Although some of the reform proposals have stalled, particularly in light of the compromised agreement between the US and the EU in late September, as well as the recent difficulty with rules implementations across the Atlantic Ocean, many countries enacting reforms are making progress towards the FSB’s objectives. But are we starting to see the shape of global OTC trading to come?
Among the many goals that the G20 set out to accomplish at the 2009 summit in Pittsburgh, the perceived threat of volatile markets in OTC derivatives prompted a collective call for action to reform the rules for high-frequency trading (HFT), trade repositories (TRs), central counterparties (CCPs), exchange/platform trading, and capital and margin requirements used in swaps trading. Many countries are making good progress complying with the FSB’s standards. The report highlights many countries’ accession to international standards, noting particular improvement across the board on trade repository (TR) reporting and the use of central clearing. Although smaller countries have been a bit slower on the uptake, signs of international understanding and implementation are generally positive. On 2 October, ESMA released further technical standards on EMIR equivalence for several countries, finding Canada, India and South Korea to be conditionally equivalent. These countries join the USA, Singapore and Australia on the list of conditionally equivalent jurisdictions, with Switzerland and Hong Kong to follow once their regulatory frameworks are finalised.
The United States, under the guidance of the CFTC, was able to create a base of swap exchange facilities (SEFs) to comply with both the Dodd-Frank Act and the G20 proposals to have more OTC trading done on a centralised exchange. Over 15 entities have registered as SEFs to host trades with US and foreign counterparties. While clarity of the new rules and seamless implementation has yet to take effect due to a number of hiccups, the CFTC and SEC aim to have all OTC trading mostly compliant by October 2014.
Perhaps one of the largest barriers to international reform collaboration has occurred between the United States’ and the EU’s rule-making, which has all but ground to a halt. JWG has covered this extensively over the past month (see tug-of-war), but with regards to the progress that should have been made under the FSB’s surveillance, it has fallen well short. In their review, the FSB noted:
“Two major constructive steps forward have been taken: first, the announcement in July by the CFTC and the EC of their joint understandings; and subsequently, a multilateral set of understandings to improve the cross-border implementation of OTC derivatives reforms, announced in August by the Regulators Group. The FSB continues to urge authorities to resolve regulatory conflicts, inconsistencies, duplication and gaps in order to provide certainty to stakeholders. However, any remaining uncertainty in this area should not slow jurisdictions in putting forward specific regulatory proposals, since these proposals provide information to help market participants prepare, and assist authorities in the identification and resolution of cross-border regulatory issues.”
While the collaboration plan was in place, complications with rules and the national interests of both parties upset the implementation on 2 October. The CFTC’s push under Gary Gensler for specific classification of counterparties and players in the SEF trading space caused market confusion and created fragmentation with rules in Europe, much to the chagrin of EC Commissioner Michel Barnier. ESMA has also experienced delays, having to push back their technical standards deadlines for third country compliance to 15 November 2013. Additionally, the complexity of the rules created on both sides of the Atlantic has made compliance by the firms involved rather difficult, as Risk.net’s poll about firm compliance illustrates. As such, the blame for new G20 implementation can be evenly distributed; compliance on all accounts seems to have reached an impasse with little clarity forthcoming.
Herein lies the problem of setting high-level standards: differences between jurisdictions are bound to develop. As Carney and O’Malia have both said, in order to achieve uniformly regulated OTC markets and avoid regulatory arbitrage, countries and international bodies (like the FSB) should have pushed for more granular standards at the start, rather than relying on countries to sort it out between themselves further down the line. Hopefully, however, the next iteration of the FSB’s review will find greater global progress toward OTC reform harmonisation – even if the transatlantic heavyweights take longer to resolve their issues.