Joint Statement of Leaders on Operating Principles and Areas of Exploration in the Regulation of the Cross-Border OTC Derivatives Market (with Lofchie Comment)

Leaders of several authorities with responsibility for the regulation of the OTC derivatives markets (which included the SEC, CFTC and EC, among others) met on November 28 to discuss reform and released the attached Joint Statement. The Agencies stated that "conflicting or inconsistent cross-border application of rules . . . may inhibit the execution or clearing of certain cross-border transactions or impose additional compliance burdens," and further recognized that regulatory gaps may provide the potential for regulatory arbitrage.

The Joint Statement addresses issues of harmonization and duplicative requirements, and outlines the following understandings:

• Understanding on Clearing Determination.
• Understanding on Sharing of Information and Supervisory and Enforcement Cooperation.
• Understanding on Timing.
• International Engagement.
• Areas of Exploration - Scope of Regulation and Recognition or Substituted Compliance for Cross-Border Compliance.Next Steps:
  1. Options to address identified conflicts, inconsistencies and duplicative rules.
  2. With respect to the basis for determinations of comparability of regulatory regimes:
     • Discuss expected regulatory outcomes with regard to the regulation of market participants, intermediaries, and infrastructures;
     • Identify possible standards, including relevant international standards, that will help to inform an assessment of whether a given regulatory regime achieves particular outcomes; and
     • Identify the types of arrangements, including supervisory and enforcement memoranda of understanding, that need to be entered into by each relevant supervisory authority.
  3. In relation to timing and sequencing, the authorities will meet in January 2013 to inform each other of the planned timing of the finalization and implementation of our rules and advise of possible transition periods, and to update each other on progress on the concrete steps being taken in our own jurisdictions to improve global regulatory oversight in these markets.
  4. In relation to clearing determinations, we have reached an understanding and will:
     • Develop a process and the means for consulting with each other prior to making any final determinations regarding which derivatives products will be subject to a mandatory clearing requirement; and
     • Reach an understanding of the objective of such consultation process.

Lofchie Comment: The approach to cross-border regulation taken in the release is quite different from that suggested by the CFTC. For example, in terms of recognizing non-U.S. regulators, while the CFTC at first took the view that it would analyze each country's system of regulation on a rule-by-rule basis (which was broadly attacked as impractical), the SEC suggests that mutual recognition could be achieved by acknowledging that a non-U.S. regulator has the same goals as a U.S. regulator and has the means to accomplish those goals, even if the method of regulation is quite different. The joint statement also says the regulators agree that none of them will make any decisions as to which products should be subject to mandatory clearing without consulting with other regulators. I don't know how that gibes with the CFTC's having already issued its first rule specifying certain contracts that are subject to mandatory clearing. CFTC Commissioner Chilton issued a separate, somewhat mysterious, statement of support as set forth in a separate news item.

See: Joint Statement.