Greater co-operation between global regulators and policymakers is needed to help resolve the lack of regulatory co-ordination that is currently fragmenting the global derivatives market, says Investment Industry Association of Canada (IIAC) president and CEO, Ian Russell.
The International Organization of Securities Commissions’ (IOSCO) inability to require that regulators co-ordinate their rules has allowed for disparate reforms to take hold in certain markets, notes Russell in a letter to the industry published on Wednesday.
“The strength of the organization has proven to be its effectiveness in identifying the key risks in global financial markets and setting global standards for market participants. On the other hand, the organization has found it difficult to persuade individual jurisdictions to co-ordinate rule-making in the interests of a harmonized rule framework, and has been relatively unsuccessful in encouraging jurisdictions to simplify the overlapping and duplicative rules confronting firms trading and clearing securities in global markets,” Russell says.
“Simply put, IOSCO does not have the power or the authority to force greater rule co-ordination among its members. These weaknesses have made it difficult, for example, to resolve the rule differences in OTC derivatives markets,” he adds.
This lack of co-ordination, Russell says, has led to duplication and disparity in the rules, which has resulted in a fragmentation of liquidity. “Markets have balkanized along regional geographic lines, with derivatives traders unable to execute with foreign counterparties, and clear through offshore clearinghouses, without being subject to multiple regulatory regimes. The global marketplace for OTC derivatives quickly became a regional marketplace,” he says. “The balkanization of the global market has led to less choice, less liquidity and higher costs for derivatives users.”
The solution, Russell suggests, “may be to find a way to integrate” the G20 commitment to harmonize rules and regulations directly into IOSCO rule-making and harmonization efforts. “Doing so would put pressure on individual regulators to work constructively through bilateral or multilateral negotiations to resolve the cross-border regulatory obstacles stemming from an overlapping rule framework,” he says.
“If the G20 and IOSCO can initiate bilateral or multilateral negotiations on the key cross-border regulatory impediments to capital flows, the successful outcome of these negotiations could trigger a positive response from the other small jurisdictions, like Asia-Pacific countries, that have delayed rule-making and are on the sidelines,” Russell concludes. “The negotiations would provide these jurisdictions with greater clarity on the direction of cross-border harmonization of derivatives regulation.”