U.S. and global regulators should harmonize rules on derivatives to prevent financial risks from migrating to the least-supervised economies, said Michael Gibson, senior associate director of the Federal Reserve.
“The goal of all of these efforts is to develop a consistent international approach to the regulation and supervision of derivatives products and market infrastructures,” Gibson told lawmakers at a Senate Agriculture Committee hearing today in Washington. “Our aim is to promote both financial stability and fair competitive conditions to the fullest extent possible.”
Gibson’s comments echoed those by U.S. Treasury Secretary Timothy F. Geithner, who told international bankers meeting in Atlanta earlier this month that he favored having global authorities agree on a minimum level of regulation to avoid a “race to the bottom” among countries.
“The Board is committed to continuing to work with other authorities, both in the United States and abroad, to ensure that a largely consistent international approach is taken to central counterparties and trade repositories and that their risk-reducing benefits are realized,” Gibson said.
The U.S. Commodity Futures Trading Commission, which is required under the Dodd-Frank Act to write new regulations for the $601 trillion over-the-counter swaps market, may enter agreements with foreign officials to recognize comparable rules, said Gary Gensler, CFTC chairman.
“We look to enter into maybe 15 to 20 mutual understanding arrangements with foreign regulators where we sort of defer where we can as long as there is enough comparability,” Gensler testified at the hearing. The agreements would provide for the sharing of information between regulators and the coordination of supervision of swap dealers and other market participants, he told reporters after the hearing.
Following the 2008 credit crisis, regulators around the world agreed that new regulations were needed to boost transparency and reduce risk in global swaps. Differences have emerged, however, since the heads of the G-20 nations laid out principles to adopt by the end of 2012.
Global regulators have been moving at different speeds and with different ideas about clearing of derivatives, trading methods and the types of data that must be reported to new databases, according to an April report from the Financial Stability Board, an international panel set up in 2009 by the heads of the G-20 nations to oversee coordination among nations.
Gibson said Dodd-Frank’s so-called push-out provision that will force financial firms to separate swaps trading from banking units may disadvantage overseas firms because of an exemption that will let U.S.-based banks continue trading in interest-rate and currency swaps.
“A possibly unintended effect of the act’s push-out provision may be to require some foreign firms to reorganize their existing U.S. derivatives activities to a greater extent than U.S. firms,” Gibson said.
The CFTC voted 5-0 June 14 to propose “temporary relief” from some requirements set to be in place on July 16, a year from the enactment of the Dodd-Frank Act. The delay would give the CFTC more time to complete its rules.