CFTC and EU OTC derivatives regulation
An outcomes-based comparison
In September 2009 global leaders committed to reform over-the-counter (OTC) derivatives markets with the key objectives of reducing systemic risk, improving transparency, supporting financial stability and combatting market abuse. These high level commitments have now been translated into concrete rules and actions, with global jurisdictions at differing stages of implementation.
However the implementation of these rules at a global level has thrown up challenges as the constraints of domestic law, differences in market structure and timing hamper the ability for rules to work globally across the spectrum of market participants. The need for a consistent and co-ordinated approach from regulators is essential. Without it there is a real risk that market participants will be subject to conflicting, duplicative or over-lapping requirements.
Much of the focus to date has been on the variances in the detail of the approach taken by different jurisdictions. The purpose of this paper is to examine whether a difference in the approach leads to a difference in outcomes, if over-arching regulatory objectives are met.
In this paper, commissioned by the Securities Industry and Financial Markets Association (SIFMA) and the Association for Financial Markets in Europe (AFME), we consider the approaches taken in the two largest derivatives markets: the EU and the US. We compare the detailed EU requirements against the 15 categories identified by the Commodity Futures Trading Commission (CFTC) in its proposed interpretative guidance for the cross-border application of rules. In summary we find:
- High alignment of regulatory objectives: Across all 15 regulatory categories identified by the CFTC, the regulatory objectives in the EU and US are highly aligned.
- High similarity in approach: Overall there is a high degree of similarity in approach to achieving these over-arching objectives. In 8 of the 15, the approach to implementation was highly similar.
- Some differences in the detail: The categories where there is the greatest degree of variance are swap data reporting and clearing and swap processing.
- Consistency in regulatory outcomes: When combining both the objective and approach, we found that the outcome against all 15 categories was highly similar.
Overall, from an outcomes-based perspective, the EU package of derivatives regulation is likely to lead to a broadly similar set of outcomes, as envisaged by the 15 categories identified by the CFTC in its proposed interpretative guidance on the cross-border application of OTC derivatives requirements.