Featured Commentary - U.K. Regulatory Initiatives - Anthony Belchambers, May 2012
Five Minutes with Anthony Belchambers, FOA
Anthony Belchambers is the CEO of the Futures and Options Association in London. He sat down with JLNews editor-in-chief Jim Kharouf at the recent FIA Law & Compliance conference in Baltimore to talk about Europe’s ongoing push for new regulation, cost of clearing, SEFs v. OTFs and regulatory harmonization. Part 2 of 2 To view Part 1, click HERE
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Part 2: Comparison of U.S. and European Regulatory Initiatives
Q: There is a lot of focus in the US on SEFs. And there is growing focus on a similar structure in Europe with organized trading facilities (OTF). Can you explain the differences?
A: Let’s step back. In the US, the decision on whether an OTC contract should go to multilateral execution is based on whether there is someone who has stuck their hand in the air and said “I can multilaterally execute that contract.” And then it has to go there.
The test in the EU is very different. Yes, there is a measure of standardization and is it fit for CCP clearing, but the add-on test is, does it have sufficient liquidity to be multilaterally executed? Is it a sufficiently mature market? That is a very different test to the listing test – has it been listed? In which case, in the US, it has to be cleared. In Europe, it may be listed but if its not deemed by regulators to be sufficiently mature to be multilaterally executed, you won’t be compelled to go to that listing.
So how you define sufficient liquidity is going to be increasingly important in continuing to determine the size and scale of the economics of the OTC market in Europe. It’s not about listing. It’s about liquidity and that is a very different test. Different platforms might game the system by saying,” just list it.” And then someone else says, “Well, I‘ll list it.”
And then you have to look at the platforms and there is a debate. OTFs basically have to be multilateral and have certain trading discretions. But the proprietary owner cannot put up his own capital. It’s not a million miles away from a SEF but it doesn’t have the overarching constraint on ownership you have in the US – with 20 percent ownership by a bank. In Europe there is not such a limit, so a bank can own it.
Q: There is a lot of talk about harmonization of rules between the US and Europe and elsewhere. What is your take on that? Is it indeed happening?
A: I think it is happening and a real wish to do it. But there will be redline differences that will not be harmonized either because it’s in Dodd-Frank and finalized rules or it's because there are different market priorities and differing legal frameworks. And then there is the whole balance about you as a regulator view what is being lobbied about. You may have some sympathy for the market or little sympathy for the market. And underneath all that, there is business opportunity.
In the trans-Atlantic marketplace, there is common view that we don’t like regulatory arbitrage so we will cooperate as much as we can. In Asia-Pacific and Latin America, this is more about business opportunity and minimum standards of regulation. We don’t have the business opportunity case being made in the US or Europe.
As for differences between the US and Europe, I’ve yet to see any real in-depth analysis of the differences that can and cannot be reconciled. And of those that are not, how important are they? That’s important for all the firms doing cross-border business. They need to know. And it seems to me that many firms doing cross-border business are completely in the dark about whose rules affect what kind of business and how economic effects are going to be translated.
If we don’t get this thing right, the legal risk and compliance complexity are going to be absolutely horrendous. So somebody has to cut through this and say we’re going to have regulatory transparency and we have to have a coherent framework of regulation for cross-border business, not a regionalized regulation of cross-border business.
Q: That seems to be one way to help consolidate and streamline costs.
A: It would stabilize it and slow the rate of increase significantly. For me, this is a really serious issue. We’ve been through a nasty crisis, that’s true, but part of the causation of that crisis was the failure of the regulators to properly engage in a real dialog about the ingredients that led to the crisis and they have identified.
Q: So for 2012, how important is this year in terms of getting regulation done and implemented?
A: There is a lot of determination to get this done. But all that determination to get it done is enhancing the regional approach to regulation. That is the tricky bit. There’s a philosophy in the US that said, if we rush out and do this first, we’ll set a standard for the world to follow. It didn’t quite pan out like that and is why we’re where we are today. And the overloading of the regulatory agenda is why we’ve missed timelines. Every change in regulation must be supervised and enforced by the regulators.
As for extraterritoriality, regulators understandably are struggling with their domestic agenda. The idea that they are growing into an extraterritorial agenda is just madness. There has to be inter-dependability between the regulators and jurisdictions. It’s not going to work any other way.
Q: So is that happening?
A: At some point there is going to be a realization that we can’t police the world, everything going on everywhere. We’re going to have to come up with a proper framework on inter-reliance and we haven’t really got there. We have penny packets of MOUs.
The Financial Stability Board should be doing something on these lines and setting a standard. And don’t forget we have all the IOSCO principles for securities regulation, which actually does set a bedrock of a standard. On its own its not enough but it’s an international benchmark and sets principles for international regulation. So take that, and everyone who is signed up for that and has been measured by IOSCO for compliance, they should be locked together.
There are a number of jurisdictions that have been inspected in terms of their standards with IOSCO standards that have largely passed them. And IOSCO’s members represent 90 percent of the world’s financial services business. There you have a matrix as a starter for the other 10 percent and the building blocks. And let’s build on it.