Cross Border Regulation
Edited excerpts from a speech by Ashley Alder, Chief Executive Officer, SFC
IOSCO has been considering how it can address these issues at a global level. First, the basic problem is fairly straightforward. This is that the application of local rules to cross-border financial business which affects national interests can lead to conflicts where one internationally active firm is subject to different conflicting rules. This can ‘Balkanise’ markets and lead to a broader drag on cost-effective financing for growth. And of course the most discussed example is derivatives, where talks are still eating up a large amount of time in the EU, the US and elsewhere. Now the G20 in its 2013 Moscow and St Petersburg communiques introduced a new idea called “deference”. This was meant to solve cross-border conflicts in the derivatives world. This formula was repeated in April of this year in another G20 communique from Washington. The idea is basically a reference to substituted compliance or EU style recognition. But in reality the G20 formula begs a lot of tricky questions. It provides that jurisdictions can defer to another “when justified by the quality of respective regulations and enforcement regimes”, but only if these lead to “essentially identical outcomes” and so long as the rules are “non-discriminatory”. It also says that we all must also have “due respect to home country regulation”. This is asking a lot. And these questions are largely the same as those which IOSCO’s Task Force on Cross-Border Regulation wrestled with for over two years. Now the end result of our Task Force’s work is that we have a very detailed toolkit for regulators to refer to when looking at cross-border financial activity and the specific factors to take into account when using it. And we also decided to hardwire cross-border considerations such as timing mismatches into all of IOSCO’s standard-setting work.
But the Task Force also concluded that “IOSCO should engage more with the G20 and FSB to raise greater awareness of the key issues and challenges faced by IOSCO members on cross-border regulation, including the need for more refined thinking on the concept of deference”. Now what are these issues and challenges? First, we need to understand that national securities regulators are firmly bound by their domestic laws, national interests and national policy objectives when acting on a cross-border basis.
Second, the real authority of international standard setters such as IOSCO is inevitably weak because it isn’t based on binding treaty obligations, and as a result, global standards do not trump local law. In fact, global standards are rarely even referred to directly in securities legislation. And if they aren’t, it’s hard for national regulators to take them into account if local law already deals with an issue.
Third, peer pressure to apply international standards on a uniform basis can be effective, but this is far harder in securities markets compared to other regulatory regimes as there is far more diversity and complexity of firms, investors, products, infrastructure and exchange platforms.
Fourth, regulators sometimes act protectively if they think that recognition of a foreign regime could cause domestic business to move overseas. In other words, even if differences in rules don’t increase systemic risk or compromise investor protection, if they still imply a difference in the cost of doing business, regulators will react in their national interests.
Fifth, recognition or deference becomes harder when the countries involved are at different stages of development, as is the case in Asia. And finally, there is often a basic reluctance to outsource regulation when a failure could end up with blame heaped at the door of the domestic regulator.
So we are a long way from the ambition expressed by global firms that any proposed markets regulation that could have a significant cross-border effect must first be decided on as an international standard, before being transplanted uniformly into local law. However, there is light at the end of the tunnel. Our IOSCO report recognises that in reality, regulators have put in an enormous effort trying to overcome hurdles where it matters, normally through bilateral negotiations of different types of recognition or deference agreements supported by MOUs. We have seen how the CFTC and the Securities and Exchange Commission have both progressed their approach to recognition through substituted compliance – a big change when compared to the hard line taken a while ago. And it seems that international standards are referred to as a measure of equivalence in new EU legislation about benchmarks. And occasionally, discussions have been multilateral, a good example being an ad hoc group of regulators from major markets that meet to discuss derivatives – called the OTC Derivatives Regulators Group (ODRG). Our IOSCO Task Force therefore concluded that the general direction of travel is fairly clear. “The emphasis is towards more engagement via recognition to solve cross-border overlaps, gaps and inconsistencies through a combination of more granular international standards implemented at a jurisdictional level, and an increasing emphasis on determining when it may be appropriate to recognise foreign laws and regulations as a sufficient substitute or equivalent for domestic laws and regulations”.
To conclude, we are still dealing with the fact that participants in global markets are regulated by national regulators, and perfect harmonisation and total convergence of regulatory standards are unlikely. And a global rulebook is an unattainable ideal. But the outlook is far brighter than a few months ago, and I am hopeful that further progress will be made as we start to deal with Europe on the international reach of its benchmark legislation.
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