Where does ET end?

ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues in derivatiViews, reflecting ISDA's long-held commitment to making the market safer and more efficient.

ISDA members from around the world — nearly 1,000 of them from 31 countries —gathered in Chicago last week for our 27th Annual General Meeting. That’s a lot of cross-border activity! And it highlights precisely why one of the most important issues in the OTC derivatives market today is the need for international regulatory cooperation to address the issue of extraterritoriality, or ET.

ET was the subject of Bob’s remarks at the AGM. It’s an issue that ignites a lot of passion among our globally-active members. Concerns are growing about the potential impact of one regulatory regime reaching beyond the boundaries of its home jurisdiction. In Dodd-Frank the legal basis to reach beyond the borders is to avoid an adverse effect on the economy or financial condition of the US. The practical effects of that authority will depend on just how far those charged with implementing the law want to push their jurisdiction.

We have always believed that the ultimate resolution of the ET issue will depend on global regulators working together to resolve the issue of jurisdiction. This needs to be done in a way that preserves their legal authority while recognizing the role of other jurisdictions and regulators.

Harmonization of regulatory approaches, particularly on issues with systemic risk implications, and a concerted program of mutual recognition of regulatory regimes by global regulators are essential parts of the solution to ET. In this regard, it was helpful to hear from CFTC Chairman Gensler in his remarks to the AGM that he is working closely with global regulators and is confident that they will work towards a common approach. He reported that the day before he addressed the AGM, he was in Toronto with a group of global regulators discussing these very issues.

That’s all well and good, and we welcome that regulatory dialogue. What our member firms now face, however, is continued uncertainty regarding the reach of regulation, even as they face looming decisions to register or put in place extensive business conduct procedures.

Uncertainty is never a good thing in financial markets, as there are typically only two things to do in face of that uncertainty. One is to pull back and wait until such time as greater certainty is provided. On a firm level, that means missed opportunity. On a market level, that means less efficient, and probably less safe, markets when market participants pull back.

The other response is to try to anticipate various possible results. This can lead to costly, duplicative efforts with no guarantee that all that planning will prove effective once the rules are finalized.

Either path runs the risk of undermining what ISDA has worked so hard on over the course of the last three decades: safe, efficient markets. These markets enable the development and spread of innovative risk management tools across geographic borders.

We hope to know more soon about how global regulators will address these issues. And our members can be assured that, as we learn more about the future, we will pass that information on. As they say, knowledge is power.

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