Question: What do the EC Commissioner for Internal Market and Services, finance ministers in Brazil, France, Germany, Italy, Japan, Russia, South Africa, Switzerland and the UK, and regulators and central bankers in Australia, Hong Kong and Singapore have in common?
Answer: They have all written to the US CFTC to express their concerns about cross-border derivatives regulations.
“We are already starting to see evidence of fragmentation in this vitally important financial market, as a result of lack of regulatory coordination. We are concerned that, without clear direction from global policymakers and regulators, derivatives markets will recede into localised and less efficient structures, impairing the ability of business across the globe to manage risk. This will in turn dampen liquidity, investment and growth.”
To anyone who has watched this issue unfold over the past two or three years, such concerns are no surprise. It is, though, a bit of surprise to see how The New York Times describes the situation. Witness this page one headline from the Wednesday, May 1 paper: “Banks Resist Strict Controls of Foreign Bets”
There are (at least) three things wrong with these seven words:
1) There’s nary a mention of the concerns of some of the world’s leading policymakers in the headline.
2) No one is resisting strict controls. The issue, as the finance ministers point out, is that “We share a common commitment with respect to OTC derivatives reform, and are implementing rules across very different markets with different characteristics and different risk profiles, to support this global initiative… An approach in which jurisdictions require that their own domestic regulatory rules be applied to their firms’ derivatives transactions taking place in broadly equivalent regulatory regimes abroad is not sustainable. Market places where firms from all our respective jurisdictions can come together and do business will not be able to function under such burdensome regulatory conditions.”
3) Bets? Even better, foreign bets? How and why are derivatives transactions characterized as bets? Is capping your interest rate exposure a bet? Is hedging your currency exposure a bet? Is protecting your credit exposure a bet?
We’re an international organization, and especially sensitive to these sorts of things, but even so, doesn’t this seem a touch xenophobic? If the letter mentioned above had been co-signed by a US Treasury Secretary and sent to his EC counterpart, would it have been described in the same way?
But wait, there’s more.
Further down in the article, there’s this description of the “bitter international campaign” being waged by Wall Street and the world’s top finance ministers (as if they are working in concert):
“The effort…is just one front in the battle still being waged nearly three years after Congress passed the Dodd-Frank law, which revamped financial regulations in the United States in hopes of curtailing risky trading practices blamed for the global financial crisis in 2008.”
We’re the first to admit that the financial system needed strengthening (and we have made good progress doing so), but let’s not forget what the financial crisis was all about. It was, first and foremost, about bad real estate decisions and bad mortgages. That was true in the US just as it was true in the UK, Ireland, Portugal, Spain and other hard-hit nations.
Unfortunately, The Times’ treatment of the important issue of cross-border derivatives regulation really crosses the line.