The Battle over Transatlantic Financial Regulation
For observers of international affairs, international financial regulation appears to be the new blood sport of transatlantic negotiation.
Last year, then-Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler released guidance on cross-border derivatives transactions, stoking the ire of both domestic market participants and EU authorities. In the wake of proposals by the Federal Reserve to regulate foreign banking organizations, EU Commissioner Michel Barnier likewise threatened to retaliate with EU rules aimed at U.S. banks. And in a highly touted speech this winter, Treasury Secretary Jack Lew, in a not-so-subtle challenge to other leading financial centers, called on the world to implement existing G20 obligations.
In this environment, the terms for assessing the effectiveness of transatlantic reforms have become increasingly rudimentary: Which of the two regulatory superpowers “really” complied with Basel III credit and liquidity rules? Which jurisdiction is “tougher” on derivatives? Who is “softer” on too-big-to-fail banks?
A recent report commissioned by the Atlantic Council, Thomson Reuters, and the City UK, for which I served as rapporteur, has attempted to provide some clarity on these and related questions. Although avoiding the thorny question of which jurisdiction’s approach has been “better,” the report concludes that issues of compliance are far more complex than expected.
Banking, derivatives, insurance, accounting, and cross-border resolution each constitute fields that themselves comprise a spectrum of sub-issues that must be haggled over. A country might, for example, go further in strengthening standard capital requirements, but exhibit weaknesses in implementing liquidity and leverage rules. Or another jurisdiction might move quickly to implement derivatives reforms to establish pre-trade transparency, but it might still need to improve post-trade rules relating to the information provided to regulators.
Critically, the report shows that the differences between these regulations are the product of more than simply brute national interest (although that will always play a role). At least part of the discord stems from the problem that the G20, as a political body, has failed to set a clear roadmap for tackling regulatory problems. As a result, after the photo ops have been taken and the declarations made, big issues have been left to be hashed out over extended deadlines. And the path of international regulatory reform has passed along the path of least resistance, with relatively easier issues like bank capital tackled first and, conversely, the more difficult issues of accounting and cross-border resolution saved for last.
All is not lost. Just recently, leaders have moved towards increasing accord on how to put a “path forward” for cooperatively regulating derivatives back on track. And though the details remain to be operationalized, one of the leading bilateral EU-US networks, the Financial Markets Regulatory Dialogue (FMRD), publicly touted measures on which the two jurisdictions agree.
But there are more ways to promote transatlantic diplomacy. Focusing on process—like developing new instruments that synch rulemaking and information sharing—can go a long way to smoothing over frictions and focusing minds. Meanwhile, the traditional means of diplomacy, such as mutual recognition and substituted compliance programs, should be upgraded to require parties to maximize collaboration by relying on real-time information sharing during rule-writing and administrative processes. Even the FMRD should get a facelift and find new life alongside G20 meetings of treasury officials and central bankers.
Longtime observers of financial regulation will likely say that process can only do so much for diplomacy. Perhaps so. Process is not a cure-all. But lawyers know that process counts, and to the extent it can grease the wheels of international economic cooperation, it should be embraced.