Dodd-Frank 30 Day Countdown: Day 25

Testimony by Mary Schapiro on Financial Regulatory Reform: The International Context

In testimony before the House Financial Services Committee, SEC Chair Mary Schapiro noted that the US regulators have consulted, and will continue to consult with, international securities regulators that are considering OTC derivatives market reforms.  Schapiro explained that because the OTC derivative marketplace already exists as a functioning global market with limited oversight or regulation, international coordination is needed to limit opportunities for cross-border regulatory arbitrage and competitive disadvantages, and to address unnecessarily duplicative and conflicting regulations. The overall goal is to reduce systemic risks, increase transparency, and improve the integrity of the OTC derivatives marketplace, while mindful of the potential effects on efficiency and liquidity.

The Dodd-Frank Act specifically requires the SEC, the CFTC, and other regulators to consult and coordinate with foreign regulators in order to establish consistent international standards with respect to the regulation of OTC derivatives and promote consistent global regulation. To that end, in September of 2009, the G20 Leaders agreed that all standardized OTC derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by the end of 2012 at the latest, that OTC derivatives contracts should be reported to trade repositories, and that non-cleared swaps should be subject to higher capital requirements.  Chairman Schapiro observed that the G20 deadline contemplates that every G20 country will have completed the legislation, rulemaking and implementation of these reforms by the 2012 deadline.

U.S. regulators are encouraging their foreign counterparties to use the Dodd-Frank Act and its regulations as a model for developing robust and complementary regulatory regimes.   Although the SEC Chair said that U.S. action on OTC derivatives presents an opportunity to shape the OTC derivatives regulatory landscape, the SEC and other regulators face challenges in negotiating with non-US regulators who have limited scope to commit to regulatory coordination before their own legislative and regulatory frameworks have been established.

Chairman Shapiro also stressed that the SEC, the CFTC, and other regulators have been “carefully considering the potential consequences of certain provisions of Title VII and our proposed rulemaking for domestic and foreign market participants – in particular the impact on the ability of U.S. market participants to compete effectively with foreign market participants that may not be subject to the Dodd-Frank Act.”

While progress is being made internationally, other jurisdictions lag behind US efforts.

Coming up:  What is the status of derivatives legislation around the world?