I’m working my way through my summer beach reads and I’m at the tail end of “The Wolves of K Street” that chronicles the coming of age of modern-day lobbying in Washington, DC. Authors Brody and Luke Mullins, brothers who grew up in DC as investigative journalists for the Wall Street Journal and Politico, respectively, detail the half century rise of influence peddling and the fascinating and sometimes morally pliable characters that built this billion-dollar industry.
It has all the stuff of a juicy page turner—money, sex and even a mysterious death. I must confess that I know Brody from his days at the Journal and our mutual connection to my sons’ high school Gonzaga where Brody is an alum (as well as Chicago Bears quarterback Caleb Williams). With these biases disclosed, I recommend the book if you want an entertaining read on money’s influence on DC and how it is shaping today’s policies.
Much, much farther down on my beach reading list sits a UK policy document, devoid of sex, money and politicians. But its impact could be sneakily significant.
This recently published policy guide details the return of the UK’s recognition approach for regulating cross-border business that the UK helped develop nearly forty years ago. The document suggests, in an understated British way, a shift away from the gold-plating equivalence regimes that have dominated the post financial crisis era. This nuanced change would unlock tremendous capacity for our industry to grow and return our markets to a more outcomes-based approach that could kick-start productivity in our global markets.
How we got here
The introduction of electronic trading over thirty years ago democratised trading and unlocked customers’ ability to access our markets from anywhere on the globe. The thousands of brokers who worked on the trading floors in Chicago, New York, London and Singapore in the late 1990s were replaced by millions of people who could access these markets electronically. Your physical location no longer mattered.
As you might imagine, this posed challenges for national market regulators wanting to regulate geographically dispersed exchanges. Suddenly, they had to sort out how to ensure the same strong, consistent customer protections for local participants trading on exchanges outside their jurisdiction.
National authorities turned to the international trade concept of recognition. The UK led the way, establishing its Recognised Overseas Investment Exchange (ROIE) regime in 1986, which allowed the UK to provide unilateral recognition where the regulatory framework in the overseas jurisdiction provides for similar outcomes as the UK.
In the late 1980s and 1990s, the US Commodity Futures Trading Commission developed a similar recognition regime utilising its exemptive “no action” authority to permit US customer access to foreign market brokers and foreign markets. This recognition process for foreign markets enabled foreign boards of trade to gain access to US customers if the CFTC determined they would be subject to comparable oversight by their home country regulator.
The slippery slope
In the aftermath of the global financial crisis and the loss of trust across institutions, global regulators, beginning with the US, moved away from recognising comparable regulatory outcomes to requiring registration or requiring equivalent regulatory rules – sometimes line by line. In practical terms, it only worsened in the aftermath of Brexit.
Rather than assessing countries against global standards, jurisdictions began to judge foreign regulatory regimes on whether their rules matched theirs. Fit-for-purpose rules were replaced with “race to the top” gold plating. This led to dustups on margin levels, bank capital requirements and access to CCPs. Businesses were caught in the middle. Over time, this has led to increased costs and complexities in cross-border business without measurably making the markets any safer.
Charting a course back to comparability
At a time when global policymakers are asking for ways to simplify regulations, a return to outcomes-based recognition offers a good starting point. As FIA pointed out in a 2021 whitepaper on cross-border regulation, the patchwork of national approaches often fails to recognise that another regulator already oversees the activity in a comparable manner.
Furthermore, the nature of the underlying technology has made it relatively easy for retail investors to bypass the regulatory structures designed to protect their interests. That makes it even more important to develop an approach to cross-border trading that does not unnecessarily burden regulated entities and incentivise customer workarounds.
Cross-border activity creates many benefits for the end-users of derivatives. These include commodity producers hedging their market risks, banks hedging their lending portfolio, manufacturers hedging their foreign exchange risks and pension funds adjusting market exposures to account for volatility.
To work our way back to the fit-for-purpose approach of comparability will require significant cooperation and trust among international regulators. This includes information sharing and standard setting, in addition to the avoidance of inconsistent and duplicative rules and deference to home country regulation.
I am encouraged by the recent approach of the UK government to reset the dialogue. Others would be wise to follow suit. Such a change would be a win-win for the markets and for economic growth and productivity.
And with that, I have relieved you of adding this wonky document to your summer reading list. Instead, pick up the “Wolves of K Street.” You won’t be disappointed!
