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Regulators Look to Up Their Game Over Cross-Border Regulation

On 19 April 2013, HM Treasury published a letter signed by the finance ministers of Brazil, France, Germany, Japan, Russia, South Africa, Switzerland, the UK and the EU Commission outlining concerns over the lack of progress in developing workable cross-border rules in relation to OTC derivatives market.  The letter is addressed to the US Treasury Secretary and copied to the Chairman of the FSB; the Chairman of the CFTC; the Chairman of the SEC; the Chairman of the US Senate Committee on Agriculture, Nutrition and Forestry; and the Chairman of the US House of Representatives Committee on Agriculture.

The letter claims that, as a result of a lack of regulatory coordination, evidence of fragmentation in OTC derivatives markets is already beginning to emerge which, if not adequately addressed will result in localised markets, impair the ability of business to manage risk and ultimately dampen liquidity, investment and growth.  A collective solution based on mutual recognition, substituted compliance and/or exemptions is recommended and a set of core principles for the regulation of cross border-swaps is attached as an annex to the letter.  These principles state that:

  • cross border rules should be adopted that, if they were replicated by all other jurisdictions, would not result in duplicative or conflicting requirements, or regulatory gaps; and
  • this should be achieved through substituted compliance or equivalence arrangements (but would be without prejudice to the right to withhold such arrangements where regulatory reforms would be materially different in outcome).
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