LONDON Nov 5 A new global watchdog with binding
powers is needed to resolve disputes like the current clash over
derivatives rules that threatens to undermine financial
stability, top market officials said.
The European Union and United States are trying to iron out
differences between each other's rules to regulate the $630
trillion market for off-exchange traded derivatives like credit
default swaps and interest rate swaps.
The aim is to meet a pledge made by the Group of 20 leading
economies (G20) at the height of the 2007-09 financial crisis to
increase regulation in a coordinated way.
The EU says some U.S. derivatives rules will encroach on
European companies. U.S. regulators say they are legally bound
to implement the changes.
David Wright, secretary general of the International
Organization of Securities Commissions or IOSCO, said all models
and options for a global watchdog should be evaluated.
"We need a type of global de Larosiere committee to examine
the issues in detail," Wright told Reuters on the sidelines of
seminar run by the Financial Markets Law Committee, a
London-based independent group of legal experts.
Recommendations from a committee chaired by former IMF
managing director Jacques de Larosiere led to new pan-EU
watchdogs for banks, insurers and markets with binding powers
over the bloc's member states being created.
Wright said there is no global body to resolve cross-border
disputes and enforce agreements on financial rules.
IOSCO can only make recommendations and review whether its
members, made up of 120 regulators from across the world, apply
them but has no power of sanction.
"The reality is you do it if you like it and you probably
don't if you don't like it. As the number of major
interconnected capital markets grows, this problem will become
more acute," he told the seminar.
A body like the World Trade Organisation with binding powers
could help avoid rule clashes fragmenting markets, Wright said.
Financial lawyers at the event doubted such a new body could
be set up overnight given that U.S. Congress would likely be
lukewarm at best on giving up any regulatory sovereignty.
EU financial services chief Michel Barnier told Reuters last
month the lack of agreement on derivatives was starting to
fragment liquidity and bump up costs.
Larry Thompson, managing director of DTCC, a U.S. clearing
and settlement house for securities and which is expanding
across the world, said clashing derivatives rules will raise
compliance costs, and increase complexity and legal risks.
"It does not bode well for financial regulation in the
future. It's unclear if the derivatives rules will be converged
in the long term," Thompson told Tuesday's seminar.
It was time to consider a global watchdog, such as a beefed
up IOSCO with binding powers, and the derivatives market would
be a "good laboratory", Thompson added.
"I do believe we have to start thinking outside the box and
a WTO for the global financial industry is an idea that needs to
grow," Thompson said.