– Inter-governmental agreements will enhance cross-border information exchange
– Regulatory interoperability in the absence of a global regulatory body is a myth
GreySpark Partners, the capital markets consultancy, has published a new report today exploring the emerging global regulatory landscape, taking an international perspective of what are often seen only as regional mandates. A key finding is that despite differences in regulations between territories, the uptake of intergovernmental agreements (IGAs) highlights the desire for cooperation among some jurisdictions.
The report – titled The Global Regulatory Landscape 2013: Five Key Regulatory Initiatives Impacting Global Wholesale Finance – provides an informed and comparative analysis of: financial transactions tax (FTT), the US Foreign Account Tax Compliance Act (FATCA), the EU’s Markets in Financial Instruments Directive (MiFID II) and European Market Infrastructure Regulation (EMIR), the US Dodd-Frank Act (DFA) and the Basel III accords.
The report focuses on nine territories, chosen owing to the influence of their regulations on global capital markets. They are: Australia, Brazil, Canada, the EU, Hong Kong, India, Japan, Singapore and the US. Regulatory changes in these territories continue to create uncertainty, mismatched objectives and extensive opportunities to misinterpret requirements for market participants. The following points are of interest for both regulators and market participants:
· Regulatory avoidance – It is increasingly apparent that regulatory avoidance can only take place beyond the jurisdiction of the US, the EU and the G20 in areas where there is a distinct lack of legal and regulatory maturity. This makes for an unattractive business and trading environment, thus discouraging moving trading activity to such regions. FATCA is likely to generate the strongest degree of international cooperation as IGAs are signed by jurisdictions seeking reciprocal information from the US.
· Substituted compliance – There is a great and costly challenge to integrate many complex legal and regulatory infrastructures. Substituted compliance, whereby local regulations are substituted with similar, foreign regulations, due to their relative comparability to the CFTC’s rules on cross border swap trading, exists in a variety of forms across several jurisdictions, though there is little evidence of directly comparable regulations between many territories. GreySpark does not view substituted compliance as a necessary condition for effective global regulation.
· Interoperability – GreySpark’s findings show that while cooperation can exist, regulatory interoperability across jurisdictions, pursuing a variety of regulatory agendas, is a myth. There is a great and costly challenge to integrate many complex legal and regulatory infrastructures. Without a single, truly global regulatory body with the authority to sanction deviants there is no likelihood of seamless information exchange or the need for overseas counterparties to conform to absolutely standardised compliance requirements.
· Regulatory exemptions – Exemptions to regulations offer compliance relief to entities and transactions under certain conditions. For example, in both the EU and the US, regulators appear to agree on the exemption of legitimate hedgers and certain end-users from bilateral clearing mandates. However, they differ in the detail. Under the DFA, exemptions are in place for non-financial entities that use derivatives to hedge commercial risk while, for EMIR, end-users are only exempt provided that their positions are legitimate hedges and fall below a certain threshold. The extent of exemptions across the regulations explored is not far-reaching enough to have a powerful market impact.
Saoirse Kennedy, GreySpark analyst consultant and lead author of the report, said: “There is strong evidence of a trend toward increased international cooperation in terms of regulatory reciprocity, particularly where information exchange allows for mutually beneficial endorsement of regulations that are cross-border in nature.”
Bradley Wood, GreySpark partner, added: “We expect to see a trend where institutions will be expected to share transaction information for the purposes of taxation with a wider breadth of jurisdictions, and consequently standardised reporting will become more likely. This will require investment to ensure cohesion in often uncoordinated business and technology streams.”
The Global Regulatory Landscape 2013 report is part of the Market Structure and Regulations branch of research. The next report in this stream of publications, EU Financial Transactions Taxes, gives an in-depth analysis of the current state of the EU and member state positions on a financial transaction tax. This will be followed by Effective Liquidity Risk Management later in 2013, providing advice on how to develop strategies that can be used to implement Basel III capital requirements.
For further information and to purchase copies of GreySpark’s research, please visit: http://research.greyspark.com or e-mail: research.reports@greyspark.com
