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Saturday, 21 October 2017

Regulatory train crash heading to Asia

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I’ve been meaning to comment on for weeks now on the work unveiled recently by the Asia Securities Industry & Financial Markets Association (ASIFMA) on regulatory extra-territoriality. Reg ET is one of the hot-button issues of the day and one that in my view has received too little attention amid the multiple strands of the global bank regulation debate.

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

In Asia, the issue is particularly problematic since, as the lobby group points out, some large Asian markets are not in G20 jurisdictions. This absolves them from having to implement any legislation adopting G20 commitments. Or at best, they may decide only to implement aspects – or tailor them – to suit their own local requirements. “… [B]ecause of the fragmented nature of Asian markets it is not practical for Asian jurisdictions to adopt the approach taken by the EU and assess equivalence in each relevant jurisdiction. As a result, Asian jurisdictions are less likely to implement a regime which requires them to provide recognition to foreign entities or jurisdictions,” ASIFMA noted.

In an open letter, chief executive Mark Austen said he is “primarily concerned about regulation that is inappropriately extraterritorial in effect and regulation that diverges significantly between major financial centres. This is a danger that is particularly pronounced in an industry that is as global and interconnected in nature as financial services.”

Global regulatory collaboration leading to solutions that work for everyone is easy to say; hellishly difficult to achieve as it screams compromise.

Research was conducted around half a dozen key themes: duplicative requirements; incompatible or conflicting requirements; distortion of competition/reduction of customer choice; unintended impact on clients/counterparties not directly subject to regulation; lack of process for mutual recognition or comparability; and regulatory uncertainty. The findings that were published contain long lists of examples across each of the themes where Asian market players risk being caught in the middle of a patchwork of global regulatory initiatives each being pursued with zing and zeal; it’s a bit scary.

Equally scary is the list of regulatory initiatives in play that are covered by the research. In Europe: the European Market Infrastructure Regulation; Short Selling Regulation; Capital Requirements Directive (CRD IV); Financial Transactions Tax; Alternative Investment Fund Managers Direction, Markets in Financial Instruments Directive (MiFID 2); and UK proposed rules in relation to non-EEA depositor preference regimes.

In the US, Title VII of Dodd-Frank – the Wall Street Transparency and Accountability Act (swap market reform); Enhanced Prudential Requirements (for bank holding companies with consolidated assets of US$50bn or more, including foreign banks covering living wills and the Volcker Rule); the Swaps Push-Out Rule (Section 716); amendments to the Investment Advisers Act of 1940; and the Foreign Account Tax Compliance provisions of the US Hiring Incentives to Restore Employment Act of 2010 (FATCA).

Angst

The language in Austen’s introductory letter suggests this issue is causing some angst. The research says global regulatory initiatives are geared towards achieving “significant gains in levels of protection for customers and levels of financial stability for the global economy”. But therein lies one of the problems: Whose customers? Where do you draw the line on what constitutes appropriate ET? More to the point can you draw the line? For that matter, is any ET appropriate or on the contrary is it, in today’s climate, simply an inevitable – perhaps even reasonable – element of doing business cross-border?

Whatever the case, it looks like Asian jurisdictions will be saddled with the consequences (fully intended) of the efforts of two powerful and competitive regulatory blocs to have it their own way.

Austen references the global and interconnected world that banks inhabit, but in fact we’re facing a swing towards a weird form of parochial and introverted de-globalisation; weird in that it is, at the same time, intended to be applied globally as regulators (maybe understandably in the light of the depth of the global financial crisis) focus on supporting and strengthening national/regional champions and protecting national/regional interests.

“Our shared goal and interest is to implement reforms in a co-ordinated and consistent manner,” Austen said in his letter. Good luck!

One of ASIFMA’s concerns is that overlapping regimes will encourage participants to make venue choices “based on avoidance of administrative complexity, potentially reducing the focus upon execution quality and fragmenting international markets”.

And that’s the point. Global regulatory collaboration leading to solutions that work for everyone is easy to say; hellishly difficult to achieve as it screams compromise. But the flip-side to collaboration and what may end up taking its place is uninhibited regulatory protectionism and ultimately an un-level playing field that could end up undermining the very protections that this is all seeking to accomplish.

Asia stands between two regulatory juggernauts driving towards each other and despite the region’ best efforts, it may have some difficulty getting out of the way.

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