While the Dodd-Frank regulatory process may seem like it has gone on forever here in the United States, most of the rest of the world still has not passed comparable financial reform. The European Union actually had been looking at reform before the United States, but the credit crisis changed its trajectory and Europe still is 18 months or so behind. Even before the CFTC pushed back a number of Dodd-Frank Title VII rulemakings to December, grumblings were beginning to be heard from U.S. officials about the slow pace of reform in other parts of the world.
As more Dodd-Frank rules are implemented, a big concern is regulatory arbitrage as non-U.S. jurisdictions potentially can undercut our new and tougher standards. In a speech at the International Monetary Conference in June, U.S. Treasury Secretary Timothy Geithner urged regulators to put minimum standards in place and discouraged a "race to the bottom" in which financial risk would move to the countries with the lowest standards.
Willa Bruckner, partner at Alston & Bird LLP, says the United States is setting the bar. "If they set the bar at 10, everybody else knows what they’re competing against. The concern is that if we put rules in place and nobody else does, then they are going to undercut our business," Bruckner says.
Geithner’s message may not be received well outside the United States. "The messaging that Secretary Geithner was giving everyone was, ‘We want you to follow our lead,’ and the big stick behind that is extra-territorial application of U.S. rules. In other words, ‘If you don’t join us, we’ll come find you,’" says Anthony Belchambers, CEO of the London-based Futures and Options Association (FOA). "That’s not the kind of messaging you would expect to see when you’re trying to build a regulatory consensus globally."
To create regulatory consensus between the United States and the European Union, a transatlantic taskforce was formed in June to align regulatory goals between the jurisdictions. "It’s important that we have a consensus in the way we’re going to deal with these markets because 80% of the world’s business flows through the transatlantic marketplace and there are huge amounts of cross-border business being done," Belchambers says. "We never can be exactly the same and we have to accept that. At the end of the day, everyone wants this consensus, but not if it ends up damaging markets."