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ISDA Offers Steps for Addressing Derivatives Market Fragmentation's picture
Commentary by Nihal Patel

ISDA recommended ways in which policymakers can reduce "fragmentation" in global derivatives markets. ISDA recommended, among other things, that regulators:

  • minimize the gaps between globally agreed-upon standards and national requirements;
  • institute global standards "when and where appropriate" for smaller jurisdictions or for those with "limited market activity," while permitting market participants from larger jurisdictions to engage in de minimis activity in these jurisdictions; and
  • establish a risk-based framework "for the evaluation and recognition of the comparability of derivatives regulatory regimes."

In addition, ISDA urged international standards-setting bodies (i.e., the Financial Stability Board, IOSCO, the Committee on Payments and Market Infrastructure and the Basel Committee on Banking Supervision) to come up with a common process for regulators to use in implementing equivalence and substituted compliance in a predictable and consistent manner.


ISDA suggestions largely come from a view that financial markets that stretch across borders would benefit from increased regulatory coordination, which in many cases would likely involve a more active role taken by international organizations such as the FSB, the Basel Committee and IOSCO.

In the United States, these bodies have become somewhat controversial. For example, the Financial CHOICE Act and other proposed legislation would impose significant procedural burdens on U.S. regulators' participation in these organizations. See also Lee Reiners, Increasing Transparency at the Financial Stability Board and Basel Committee (Mar. 14, 2017) (collecting examples of Congressional and other criticism of these organizations).

Despite this criticism, recent statements from U.S. regulators have not shown as much hostility. Randal Quarles, Federal Reserve Board Governor and Chair of the Financial Stability Board has emphasized the importance of American participation in these organizations. SEC Commissioner Hester Peirce (who is leading the push on derivatives regulation) suggested healthy skepticism for some work of international bodies, but noted that there "are certainly areas where harmonization is critically important."

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