The cleared derivatives industry currently faces a dichotomy of increasingly interconnected global markets but increasingly localized regulation.
Those competing characteristics were on display at a panel discussion at the 44th annual International Futures Industry Conference in Boca Raton, Fla., that featured viewpoints clearinghouses, buy-side participants and regulators from around the globe.
Finbarr Hutcheson, president of ICE Clear Europe, characterized the differing viewpoints of central banks and regulators as "conflicting" and at times "quite contentious." The result is a duplicative and sometimes conflicting regulatory framework for clearinghouses that could create market disruptions or the fragmentation of cleared derivatives markets.
Hutcheson noted that while demands for accountability and information across jurisdictions is at times well-meaning, "too many hands on the steering wheel at a moment of crisis is a concern."
On the other side of the issue was Jochen Metzger, director general of payments and settlement systems at Deutsche Bundesbank, Germany's central bank. While Metzger conceded that extra layers of oversight can add inefficiencies, such a trade-off is sometimes necessary to protect market integrity.
"Everybody needs to have a hand on the wheel who has also a hand on the purse," he said, referencing the central bank's providing of liquidity to the marketplace. "Those who pay or bear the risk have to have a hand on the wheel and they have a right to be there."
All sides agree that central clearing is an important pillar of market integrity, and that a liquid cleared derivatives markets is key to global financial stability. As such, it is important to focus on regulatory equivalence for modern and interconnected markets and deference where appropriate, said Commissioner Dawn Stump of the U.S. Commodity Futures Trading Commission.
Stump highlighted areas such as CCP exemptions for swaps clearing where the CFTC has shown deference to European regulators, and she encouraged all global regulators to apply a similar mindset.
"That's where we need to start the conversation. We don't need to start with a blank piece of paper" when it comes to crafting new rules or modifying old ones, Stump said. "Coordination should be the goal instead of duplication."
The cross-border policy discussion at Boca 2019 echoed many of the sentiments contained in a recent FIA whitepaper on the risks of market fragmentation. Released on March 12, FIA's whitepaper urged greater harmonization through international standards set through dialogue among peer regulators, reliance on comparable home country rules and mechanisms for cross-border crisis-management planning.
"Fragmentation results in both short-term economic costs, with reduced levels of liquidity, and long-term threats to financial stability thanks to inefficient risk management," the paper states. "Conflicting and overlapping regulations discourage or even prevent deep, efficient and liquid derivative markets from functioning and direct market activity to national silos."
Download the full whitepaper, "Mitigating the Risk of Market Fragmentation."
