Friday, November 25, 2011

SEC Chairman on the Challenges of Regulating Derivatives


Author: David Schwartz J.D. CPA David Schwartz J.D. CPA

In a dialog at the Managed Funds Association Outlook 2011 seminar held in October between SEC Chairman Mary Schapiro, former SEC Chairman Harvey Pitt, and Managed Fund Association head, Richard Baker, Chairman Schapiro commented on the international and domestic challenges regulators face in coordinating the regulation of derivatives.

Domestically, coordination between the SEC and CFTC in the area of derivatives is critical because the agencies have different approaches to regulation, statutory authority, and the OTC derivatives markets they are charged with overseeing are not exactly the same.  In addition, while the CFTC and SEC may effectively demarcate the types of OTC derivatives the oversee, the firms using these derivatives are not similarly demarcated.  Differences in regulation between the two agencies may cause these firms difficulties.

Even more critical in the regulation of derivatives is international coordination, and these challenges are quite pervasive, implicated in nearly every aspect of OTC rulemaking.
Related to that are all of the international questions which are extraordinary in this space. As Harvey said, we were recently in London last week for our bilateral meetings with the FSA, but also we held a one-day closed door session of major market regulators to talk about market structure issues, high frequency trading, undisplayed liquidity, and a number of other things. We took a little bit of time at the end of that to talk about the extra territorial implications of Title VII and the rules that we’re required to write in the US, and what does it mean for foreign institutions facing US customers, facing other US institutions or having affiliates in the US. It’s so clear to me that these questions really permeate every rule individually. 
Schapiro said that the Commission is planning be proactive and set out a holistic and broad international release for comment from investors, market participants, and foreign regulators to ascertain the global reach of US derivatives regulations.  According to Schapiro, this feedback should help the Commission fine tune the final regulations in a way that curtails opportunities for regulatory arbitrage and anti-competitive effect on US financial institutions.
Our approach to that is going to be a holistic one.  We’re going to lay out a broad international release that we hope will, again, for comment from investors, market participants, and foreign regulations to see how we’re thinking about what the reach is of the US rules into different institutions around the world. And try to get very holistic comments about that from the public to inform us about what the reach of rules would be, so we don’t create opportunities for regulatory arbitrage or opportunities for anti-competitive impacts on US institutions. Hopefully, we’ll have that out also by the end of the year, and be able to think through the comments we get on that early in the New Year.
Chairman Schapiro also said that the SEC benefits from the Financial Stability Board and many if not most of the international jurisdictions having a common framework with the Commission.  It is the details of the individual regulations where differences creep in and open opportunities for regulatory arbitrage.  To head off these differences, she also noted that the SEC's staff have been conducting weekly calls with their global counterparts, performing line by line reviews of its regulations.  She said they also discuss regularly what is expected to come out of the Markets in Financial Instruments Directive (MiFID) and the European Market Infrastructure Regulation (EMIR), and how those initiatives will translate into real regulatory frameworks in Europe. 

Schapiro stressed that the process be transparent, and announced that the SEC plans to publish a detailed implementation plan, so investors, market participants can see very holistically how we would expect to sequence the rule implementation  in a way  that’s logical  and rational.  
You’ll be able to see what we hope will be a rational sequencing of all the rules effective dates and be able to comment on those, and give us some guidance; good information and data about what will it taketo put each of these rules into place. What’s the technology that gets built in the first instance that gets built upon and changed as new tranches of rules come into effect? I’m hopeful we’ll be able to publish that implementation release this year.
From this dialog we can take away some nuggets of assurance that the process of regulating OTC derivatives is being thoughtfully considered, efforts are being made to coordinate both domestically and internationally, and that the implementation process will contain few surprises.   The full transcript of the dialog can be found at https://www.managedfunds.org/wp-content/uploads/2011/11/MFA_Outlook2011_Schapiro_transcript.pdf
Print