ISDA Proposes Risk-based Framework for Substituted Compliance via Cross-border Principles

The importance of cross-border harmonization is something that was recognized by regulators at the very start of the post-crisis regulatory reform effort. According to the Group of 20 (G-20), regulators should implement global standards to reform derivatives markets “consistently in a way that ensures a level playing field and avoids fragmentation of markets, protectionism, and regulatory arbitrage”.

While significant progress has been made by the industry and regulators to implement changes to improve the resilience of financial markets, the hoped-for march towards global consistency and cross-border harmonization has been much slower. This has resulted in duplication, complexity and unnecessary compliance challenges for derivatives users.

Given the progress made in implementation at the national level, ISDA believes the time is now ripe to relook at the cross-border framework, with the objective of developing a process for comparability determinations that is risk-centered and principles-based.

This whitepaper:

• Proposes a risk-based framework for the evaluation and recognition of the comparability of derivatives regulatory regimes of foreign jurisdictions;

• Establishes a set of risk-based principles that may be used as a tool in the assessment of derivatives regulatory regimes of foreign jurisdictions; and

• Analyzes the derivatives regulatory frameworks of representative G-20 nations against the proposed risk-based principles.

ISDA believes the proposed framework strikes the proper balance by focusing on risk and its cross-border implications, rather attempting to align each and every regulatory requirement between jurisdictions. This approach will allow for substituted compliance determinations, while reducing the chances of protracted negotiations that could lead to diminished liquidity and market fragmentation.

The proposed principles could be deployed globally, but this paper focuses on the cross-border framework introduced by the US Commodity Futures Trading Commission (CFTC). ISDA believes the proposed approach is more consistent with the intent of the Dodd-Frank Act by allowing for appropriate regulatory oversight of derivatives trading – specifically, the activities that contributed to the financial crisis – while giving deference to foreign rules that are not intended to address risk.

Click on the PDF link below to read the full paper.

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