Over the past five years, the European Union and the U.S. have developed separate, new regulatory regimes for derivatives, aimed at protecting our financial systems, economies and taxpayers from a repeat of the 2008 crisis. The next challenge is to use those reforms as the foundation for a single, global framework.
European Markets and Infrastructure Regulation, the EU’s strict and comprehensive set of rules for derivatives transactions, became law in August and took effect in March. EMIR fulfills the commitments made by the leaders of Group of 20 nations to improve safety and transparency by requiring reporting and mandatory clearing for derivative trades. Trading rules will soon follow.
Contrary to what some U.S. critics have said, EMIR is broader in scope than the Dodd-Frank Act of 2010, which regulates U.S. markets. And in many ways, the EU rules are stricter. For instance, in Europe, all financial companies regardless of size are required to clear their derivatives trades and report them to trade repositories, and there is no carve-out for foreign-exchange transactions. The EU’s capital standards for clearing houses are much tougher, too. And EMIR’s transparency obligations, both pre-trade and post-trade, are more rigorous than those in force in the U.S.
Supervisory Authorities
In addition, three new supervisory authorities have been created to ensure effective and uniform enforcement across the EU, with binding powers over national regulators. Penalties for unlawful behavior have been increased.
The EU system creates a solid basis for cooperation between international regulators. This is essential because the derivatives market is global and all trades must be regulated in broadly similar ways, wherever they are booked.
Yet in talks over the past two years, finding common ground with the U.S. toward a global system has proved elusive. The European approach is simple: If two countries’ laws address the same concerns -- and offer similar regulatory oversight -- then it is both logical and reasonable to mutually recognize enforcement powers.
Some people in the U.S. disagree with this notion and support imposing U.S. rules worldwide. Those who hold this view say they are motivated by the desire to protect U.S. taxpayers from financial crises, whether they occur in the U.S. or elsewhere.
I share that concern. My job is to protect the European taxpayer. But trying to impose national rules worldwide won’t deliver the outcome we all seek.
The U.S. approach is flawed because it creates the opportunity for regulatory arbitrage and inconsistencies that put companies in the impossible position of having to comply with rules in one country that are prohibited in another. This fragmentation won’t work in a global market and would impose far higher costs on companies -- including American ones -- that use derivatives as a hedge.
Worse, the efforts by U.S. regulators to protect their taxpayers from risk in other countries will be self-defeating. Insisting on applying U.S. rules to global markets will eventually mean that all trading and clearing is done within U.S. jurisdiction -- and will bring to the U.S. all the associated risks of the global market. If anything goes wrong, there is no country -- not even the U.S. -- that can deal with the staggering amount of global derivatives risk. Well-managed, shared risk is in everyone’s interest.
Cooperation and mutual reliance, not confrontation, will protect investors and taxpayers far better than duplication and protectionism. The creation of such a binding, and mutually beneficial, framework is one of the main reasons Europe wants financial-services regulation to be included in the negotiations toward a free-trade agreement with the U.S. that begin in July.
The EU and the U.S. can take a step toward a global system when derivatives regulators meet today in Montreal to prepare for the G-20 summit in September in Russia, where progress toward an international framework will be on the agenda. Because of the size and interdependence of our derivatives markets, the EU and the U.S. must take the lead in protecting the global economy from the dangers of what the billionaire investor Warren Buffett once called financial weapons of mass destruction.
(Michel Barnier is European commissioner for the internal market and services.)
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