Javelin OTC Derivatives Establishes Presence in Telx’s Chicago Data Center

Javelin OTC Derivatives Establishes Presence in Telx’s Chicago Data Center


Telx, a leading provider of global interconnectivity, cloud enablement services and datacenter solutions, today announced at SIFMA Tech 2013 that Javelin Capital Markets, an OTC derivatives execution platform, has leveraged Telx’s network & interconnection rich Cloud Connection Center, “CHI1” at 350 East Cermak Road, Chicago, Illinois, providing Javelin with access to Telx’s extensive Financial Services community. As a colocation and interconnection client in Telx’s strategically located data center in downtown Chicago, Javelin can now offer Telx’s financial community high-performance connectivity to derivatives execution platforms for Interest Rate Swaps and Credit Default Swaps. Javelin offers both anonymous electronic and voice-hybrid methodologies for trade execution.

Newly formed Swaps Execution Facilities (SEFs), that have emerged as aspects of Dodd-Frank become implemented, are incorporating their services in secure data center environments. Low-latency connectivity is a critical component for the OTC Derivatives market linking SEFs and Central Counterparty Clearing (CCPs). With CCPs being located in Chicago, the proximity of Telx’s CHI1 facility at 350 East Cermak provides financial customers with high-performance and flexible connectivity to Javelin as well as to other SEF engines from a single location.

“As aspects of Dodd-Frank become cemented in the financial community, the need to establish SEFs in secure environments is a crucial step for our eventual classification as a Swap Exchange Facility,” said Michael Black, MD of Infrastructure of Javelin. “Telx’s ability to provide us with access in their premier Chicago facility, and their proximity to the clearing venues, swaps execution facilities, and buy-side participants put us in a strong market-leading position to service current and future clients.”

“We are excited to have Javelin join the expanding Telx financial ecosystem in our CHI1 facility. Javelin’s secure exchange platform with a state of the art user interface is well positioned in the rapidly changing OTC Derivatives market,” said Shawn Kaplan, general manager of Financial Services for Telx. “In recent months we have seen an increasing number of trading systems turn to Telx and our CHI1 facility, most recently with the announcement of Sky Road joining Telx’s financial community. Javelin and other industry leading financial institutions at 350 East Cermak benefit by connecting with other financial institutions in the facility, which allows them to offer their full suite of services with flexible connectivity to current and future clients.”

Telx’s CHI1 facility, located in the South Loop of the Chicago Central Business District, provides customers with the financial eco-system at 350 Cermak, one of the leading financial eco-systems in the world. As the operators of the “Meet-Me-Room,” and one of the largest colocation providers at the CHI1 facility at 350 Cermak, Telx provides industry leading data center and connectivity services for the global financial community.

Attendees at SIFMA Tech 2013 in New York City can register to attend Telx’s grand opening event of its new flagship data center, NJR3 in Clifton, New Jersey on June 19, 2013 from 3:00 p.m. to 7:00 p.m. Round-trip transportation will be provided by Telx for all registered guests. The event will feature a keynote address by NFL Legend Phil Simms, along with public remarks Clifton Mayor James Anzaldi, State Senator Nia Gill, and Telx’s Executive Vice President of Engineering and Construction Michael Terlizzi. Cocktails and refreshments will be served, and tours of the new data center will be given.


Asian institutions strive to become better modellers of derivatives

The search for yield is seeing Asian institutional investors taking on more multi-asset class and pan-jurisdictional positions, while a drive for greater risk management is increasing the usage of OTC (over the counter) derivatives, and as a result many Asian institutions are upgrading th

via Pocket http://www.thetradenews.com/Asia_Agenda_Archive/Asian_institutions_strive_to_become_better_modellers_of_derivatives.aspx May 16, 2013 at 07:06PM

Clarus Financial Technology Launches SDR View for Swap Data Repositories

Clarus Financial Technology today announced the release of SDR View, its Swaps Data Repository viewer application. The DTCC DDR trade repository has been set-up to publicly disseminate all OTC Derivatives trade activity that is required to be reported under the Dodd-Frank Act.

via Pocket http://www.bobsguide.com//guide/news/2013/May/14/clarus-financial-technology-launches-sdr-view-for-swap-data-repositories.html May 15, 2013 at 07:14PM

Kas Bank to report European trades to REGIS-TR ‘exclusively’

European trade repository REGIS-TR has signed up Kas Bank as its first client to report derivatives trades on behalf of market participants.

via Pocket http://thetradenews.com/news/Regions/Europe/Kas_Bank_to_report_European_trades_to_REGIS-TR__exclusively_.aspx May 11, 2013 at 04:46PM


via Pocket http://globalcustodian.com/au/news/news_article.aspx?id=2147483901#.UYGItsu9KK1 May 01, 2013 at 10:27PM

MST Capital selects SunGard’s Hedge360


First Published 19th March 2013

SunGard’s Hedge360 provides MST with holistic hosted investment management suite

MST Capital, an Asian focused Global Macro hedge fund based in Australia, has chosen SunGard’s Hedge360, a hosted front-to-back office hedge fund investment management application suite.

Now live, Hedge360 aims to provide MST with an enhanced ability to provide analysis, trading, portfolio and risk management of OTC and exchange-traded derivatives and securities, in real-time.

“Crucial to us was the ability to choose tailored components of the investment management suite to meet our specific requirements. The breadth of SunGard’s asset coverage, its unified team support across all the solutions and complete technology outsourcing and security, combined to make Hedge360 our top choice.” – Les Andrews, chief operating officer, MST Capital

Collateral being wasted – IMF’s Singh



OTC derivatives reforms may risk “wasting” a scarce commodity by causing collateral to be posted across multiple central counterparties (CCPs), according to Manmohan Singh, senior economist, International Monetary Fund.

Speaking in a personal capacity, Singh said the large number of jurisdictions looking to establish domestic clearing houses to clear OTC derivatives in competition with international CCPs could fragment collateral over 20-25 entities globally, with the result that “netting efficiencies are destroyed”.

“It’s important not to waste a good commodity that is getting scarcer: collateral”, he told delegates at an Economist Group event in London yesterday.

Central clearing of standardised OTC derivatives – primarily interest rate swaps and credit default swaps – is being mandated across Group of 20 countries to reduce systemic risk in response to the financial crisis of 2008.

Singh has persistently warned that restrictions on the ability of market participants to re-use collateral is a key factor in addressing concerns about a widening gap between demand and supply as OTC derivatives migrate to central clearing.

Simon Gleeson, partner, Clifford Chance, said new rules being implemented to shore up financial markets stability were making it “impossible” for institutions to re-use collateral. “An astonishingly smaller percentage of collateral is available for use … and a lot of the rules are not even in place yet,” he said, noting the rolling deadlines set out by the Basel Committee on Banking Supervision for higher capital requirements for high-risk activities, such as trading non-cleared OTC derivatives trades.

Singh added that asking clearing houses to take on risk in the OTC derivatives market only served to create another tranche or financial institutions – alongside global investment banks – that are too big to fail. Furthermore, central clearing did not address the key issue of under-collateralisation of transactions.

“Everyone with skin in the game is not posting their fair share of collateral …It’s ironic that a lot of the people who don’t post sufficient collateral are still exempt [under the new regulatory framework].”

Gleeson agreed that, however unlikely, the question of CCP failure had to be addressed by regulators. At present, he said, the choice seemed to lie between unlimited liability for clearing members or the assumption of public sector rescue. “Both are unacceptable, but they seem the only choices we have,” he said. Singh said a further taxpayer bailout for the financial markets would prove the post-Lehman crisis reforms to have been to have achieved little other than to fragment netting opportunities.

According to Nadine Chakar, executive vice president, global collateral services, BNY Mellon, financial institutions are working with CCPs to widen the range and increase the availability of assets eligible to be posted for margin purposes – through services such as collateral transformation – to meet growing demand as implementation of new OTC derivatives rules nears.

Noting upcoming US deadlines for categories of institutional investors to start clearing OTC derivatives in June and September, Chakar suggested that “stress on the system may not be felt until late 2014 and into 2015”, but insisted that the buy-side needed to “step up” their efforts to prepare for the new regulatory framework. “Better risk management for underlying investors is something we’re not seeing a lot of,” she added.

Clearing houses are open to accepting a more diversified portfolio of acceptable collateral to offset the expected shortfall in supply, said Bryan Durkin, chief operating officer, CME Group. But he asserted, “We will not reduce our commitment to prudent risk management.”

Financial Stability Board Suggests Centralised Trade Data Aggregation System for OTC Derivatives Market


The Financial Stability Board (FSB) is addressing issues of data aggregation for regulatory purposes in the OTC derivatives market with the suggestion of ‘a centralised or other mechanism to produce and share global aggregated data as a complement to the direct access by the different authorities to data held by trade repositories’.

The FSB notes its support for a study of the feasibility of a system to share global aggregated data, perhaps a global data utility, in its fifth progress report on the implementation of OTC derivatives market reforms published last week.

The report considers progress towards the September 2009 G20 agreement that all standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms and cleared through central counterparties by the end of 2012 at the latest. The agreement also requires OTC derivative contracts to be reported to trade repositories, with non-centrally cleared contracts being subject to higher capital requirements. The work of the FSB is to regularly assess implementation and consider whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk and protect against market abuse.

In its latest progress report, the FSB notes that implementation of the G20 commitments through the development of international standards, adoption of legislative and regulatory framework, and changes in market structures and activities are not complete and continues beyond the 2012 deadline. It acknowledges, however, that progress is being made and points to issues, including data management, resulting from solutions being implemented to meet the G20 requirements.

The report notes that some trade repositories have begun receiving OTC derivatives data and states on the issue of aggregating data held by trade repositories: “There is a risk of data fragmentation across trade repositories, with different data fields and formats used by trade repositories for collecting data resulting in challenges to aggregating and comparing data. There should be a study of the feasibility of a centralised or other mechanism to produce and share globally aggregated data, or other means by which authorities can achieve the aggregation of data they need for comprehensive and meaningful monitoring and risk assessment.”

Other data issues have also been exposed in trade reporting. The FSB says about half the jurisdictions within its remit expect to have requirements for reporting in at least some asset classes in place in the first half of 2013, but notes that as well as the data aggregation issue, difficulties have been discovered in ensuring necessary data is reported to a trading repository.

The report states: “Reporting a counterparty’s identity to trade repositories may be limited by domestic privacy laws, blocking statutes, confidentiality provisions and other domestic laws. Such barriers may prevent the reporting of information necessary for regulatory purposes. A number of jurisdictions have plans to address these issues as part of their overall reform package, but interim solutions may also be needed. Jurisdictions should continue to monitor the development of or changes in such laws and their proposed reporting requirements to ensure that any planned reforms adequately address barriers to reporting OTC derivatives transactions.”

On the issue of access to data by authorities, the FSB reports that clear and consistent international guidance on appropriate access by authorities to the data in trade repositories is needed so that they can fulfil their mandates on an ongoing basis. Final guidance on this issue is due to be published by the Committee on Payment and Settlement Systems and the International Organisation of Securities Commissions (IOSCO) by September 2013.

The standardisation of data elements in trade reporting is also considered in the report. The FSB states: “To better meet authorities’ needs (including understanding global risks), the transactions data held by trade repositories must be able to be aggregated across various dimensions including, for example, products, counterparties, geography, asset classes and also across several repositories. To facilitate this, at least three steps would be extremely useful: a system of unique, universal identifiers for counterparties, products and transactions; compatibility of reporting data formats; and validation that each transaction record is an accurate representation of the terms of the transactions.”

The legal entity identifier (LEI) first developed under the auspices of the FSB and now the responsibility of the Global LEI Regulatory Oversight Committee is cited as a solution to counterparty identifiers and the FSB reports that industry initiatives are underway to develop globally recognised unique product identifiers and unique transaction/swap identifiers to increase efficiencies in trade reporting. But it cautions: “While the development of the LEI has been internationally coordinated, there has not yet been a strong international regulatory focus on developing global standards for unique product identifiers and unique transaction/swap identifiers and other identifiers.”

On the basis of the FSB’s findings on the implementation of systems to meet the G20 requirements for OTC derivatives trading, the board’s chairman, Mark Carney, has written to member jurisdictions requesting confirmation that legislation and regulation for reporting to trade repositories is in place, and information on timetables to complete all OTC derivatives reforms. He noted the need for solutions to outstanding policy issues, such as the need to remove barriers to trade reporting by market participants and also reiterated the need for further international work on remaining issues around authorities’ access to trade repository data and the feasibility of a centralised or other mechanism to produce and share global aggregated data, taking into account legal and technical issues and the aggregated trade repository data that authorities need to fulfil their mandates and monitor financial stability.

The FSB is expected to publish its next progress report on OTC derivatives reforms ahead of the G20 Leaders Summit in St Petersburg in September 2013.

Asian fund managers brace for FTT, OTC regulations

The Asset Update

Asian fund managers brace for FTT, OTC regulations
17 Apr 2013 by Bayani S Cruz

Five years following the financial crisis, the financial services industry is preparing in earnest for new regulations that are intended to prevent such a crisis from happening again.

While there is consensus in the fund management industry that the regulations are necessary, their onerous nature is expected to put additional pressure on a sector that is already reeling from increasingly challenging market conditions.

The most urgent issues facing the fund management industry on the regulatory front in 2013 are the financial transaction tax (FTT) and the implementation of the regulatory regime for the over-the-counter (OTC) derivatives market.

Both regulations are unique although they have one common feature that make complying with them daunting: their extraterritorial nature. The FTT was proposed by the EU on February 14 2013. Under the proposal, a 0.1% tax on equity and debt equity transactions as well as a 0.01% charge on derivatives transactions will be imposed as early as January 2014 by 11 member states: Portugal, Spain, France, Belgium, Germany, Austria, Italy, Greece, Slovenia, Slovakia and Estonia.

Although in September 2011 the directive on the FTT was proposed to cover the 27 EU member states, it met strong opposition from the UK and Luxembourg. Under the new proposal issued last February, the 11 member states mentioned are seeking the implementation of the FTT under the principle of “enhanced cooperation” wherein some EU member states can adopt a directive that does not apply to the other member states. The FTT directive will require unanimous agreement between the FTT zone states. If an agreement is obtained, the FTT will come into force on January 2014.

Although some in the global fund management industry believe that the FTT may not be approved, others argue that the enormous tax windfall that these countries stand to gain – estimated at E30-35 billion annually – improves the chances of the FTT’s adoption.

“There are some who believe that the FTT will never come to pass, but ignore it at your peril,” warns Diana Chan, chief executive officer of the European Central Counterparty during a keynote speech at the Citi Securities Market Leadership Forum.

Extraterritorial scare

The wide extraterritorial nature of the FTT makes the prospect of its approval intimidating for the fund management industry, especially in Asia.

According to the EU proposal, the FTT will encompass not only purchases and sales of all financial instruments (including securities and derivatives) but will likely apply equally to repos, securities lending and collateral transfers.

In addition, the FTT has wide extraterritorial coverage based on the so-called resident principle, which catches all such transactions as long as one of the entities involved is a resident of any of the 11 EU states. The tax also applies to transactions undertaken by the overseas branches and subsidiaries of such entities. The transactions of, say, a French bank in Hong Kong or anywhere else in Asia would be covered by the FTT.

The FTT’s location principle captures all securities transactions undertaken by entities established in the FTT zone (the 11 EU countries) regardless of where the securities are traded. As such, transactions cleared by Euroclear Bank in Belgium could be subject to FTT even if the transacting parties and the securities are both outside the FTT zone.

Another unique feature of the FTT is that in transactions where an intermediary (or chain of intermediaries) is involved, the tax will be levied at every step of the intermediation chain.

For the fund management industry, the implementation of the FTT is expected to increase the cost of capital, raise the cost of hedging for businesses and reduce the return on its investment.

On the other hand, fund managers believe such challenges and restrictions may open up new opportunities for non-FTT markets should investors and fund managers switch their businesses to these places in a bid to avoid the FTT.

OTC derivatives

Another regulatory issue deemed burdensome by the fund management industry is the implementation of the OTC derivatives regulation.

This regulation stems from an agreement announced in September 2009 by the G-20 (Group of Twenty Finance Ministers and Central Bank governors) to prevent another crisis by making it mandatory that all OTC derivatives contracts are traded on exchanges or electronic trading platforms and cleared through central counterparties (CCPs). The agreement was based on the proven robustness and usefulness of CCPs in the wake of the collapse of Lehman Brothers; clearing could also help capture data, useful to regulators.

Under the G-20 agreement, regulators in individual countries must implement OTC regulations consistent with a common set of requirements.

One such requirement stipulates that OTC derivatives contracts must be cleared through CCPs and that non-centrally cleared contracts must be subject to higher capital requirements for banks. One of the main objectives is to provide an audit trail through electronic trading, unlike the situation prior to the crisis when there was practically no way to monitor the level of activity in OTC derivative transactions.

For their domestic OTC derivatives markets, market regulators in Asia have been enacting regulations designed to be consistent with the G-20 requirements.
According to the proposed amendment, the reporting and clearing requirements will initially be applied to interest rate swaps and non-deliverable forwards.

The Hong Kong Monetary Authority (HKMA) will set up a local trade depository for the reporting of OTC transactions within its existing central moneymarkets unit (CMU). The HKMA will ensure that the reporting standards and specifications adopted by the trade depository are in line with those set by international standard-setting bodies and major industry platforms. Reporting will be done either directly or through an agent.

On the clearing side, the new regulation will require the banks, approved money brokers, licensed corporations and other entities to clear through a designated CCP all transactions which have exceeded the specified clearing threshold. For this, the Hong Kong exchange will establish a CCP to provide central clearing services for OTC derivative transactions.

One further aspect of OTC derivatives clearing is that in anticipation of the much higher views of collateral requirements transactions, Clearstream and Euroclear Bank, the international central securities depositories (ICSDs), as well as other custodian banks, have announced stronger collateral management programmes.

Bank of New York Mellon too announced in January 2013 that it is establishing a new central securities depository (CSD) in Europe that will provide collateral management services.

Re-engineering infrastructure

Another issue raised by the fund management industry are the challenges of enforcing the principles and standards agreed in the global financial markets reforms, such as the G-20.

On the regulatory front, the fund management industry is also confronted with issues such as high frequency trading, shadow banking, complex structured products, credit agencies, financial benchmarks to replace Libor and resolutions’ regimes for banks and non-bank financial institutions.

“Large re-engineering of financial markets infrastructure is difficult because of the complexity and interconnectivity of the many parts. We can expect that most of the major problems will be on a cross-border basis because major financial institutions have multiple branches and subsidiaries all over the world. Regulators need to identify where the next big issue might occur and do what they must do to minimize its systemic risk,” according to Chan.

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Is there a way to avoid regulatory arbitrage?

Is there a way to avoid regulatory arbitrage?
Elisse Walter, Chairman of SEC, (profile here) spoke in Washington D.C, at the American Bar Association Spring Meeting and explained the reason why a middle ground should be sought when it comes to regulation of cross-border OTC derivatives. As she puts it, there is far too much at stake and the regulators of OTC derivatives across the globe working together in good faith and common purpose can bring about a more stable, more transparent, and fairer OTC derivatives market, while preserving its global, dynamic character. Her speech can be found below.

Maria L.

Sarbanes Oxley : SEC : Thought Leader

Regulation of Cross-Border OTC Derivatives Activities: Finding the Middle Ground

April 10, 2013 01:00 PM

American Bar Association Spring Meeting, Washington D.C., April 6, 2013

Elisse Walter
Securities and Exchange Commission

Today at the SEC and in government agencies around the world, regulators are shaping the rules that will govern the way over-the-counter derivatives are transacted. It’s a crucial task given the magnitude and importance of this market to the international financial system.

In the process, all of us are grappling with the fact that these transactions rarely respect national boundaries. They are complex transactions that routinely cross borders, and are potentially subject to multiple sets of rules.

To ensure our regimes work effectively, we need to have a common sense, flexible approach to the cross-border regulation of derivatives.

The Cross-Border Reality of OTC Derivatives
As most of you know, following the financial crisis there was a new focus placed on the regulation of OTC derivatives – and for good reason. The experiences of companies like AIG highlighted how the default – or even the potential default – of a single party involved in a series of derivatives transactions could create widespread instability.

We all saw that it didn’t matter whether the counterparty or trading desk was here or overseas, or whether the contract was executed in Miami or Milan. What mattered was that the potential spillover ultimately limited the willingness of market participants worldwide to extend credit.

In the United States, Congress passed the Dodd-Frank Act mandating the creation of a new regulatory regime to govern this multi-trillion dollar market – a market that U.S. regulators previously had been largely barred from regulating.

The CFTC was given responsibility for “swaps,” and the SEC responsibility for a portion of the OTC derivatives market known as “security-based swaps” – those which include, for example, swaps based on a security, such as a stock or a bond, or a credit default swap.

But the increased focus on OTC derivatives regulation was not exclusively a U.S. phenomenon. Other regulators and governments also sought to address the tremendous risks associated with derivatives transactions. And, they came to the conclusion that a comprehensive scheme of regulation would be necessary.

Consistent with this effort, the leaders of the G20 nations committed to a global effort to regulate OTC derivatives with the stated goals of mitigating systemic risk, improving market transparency, and protecting against market abuse.

For our part, the SEC has pursued those goals by proposing substantially all of the core rules required by Title VII of the Dodd-Frank Act – the portion governing OTC derivatives. We also have published an overall roadmap – or “policy statement” as it is formally known – to let market participants know how and in what order we intend to implement the new regime.

A key element of the policy statement concerns how we intend to apply our rules to cross-border activities. We have committed to issuing this cross-border proposal before fully implementing our regulatory framework. To help ensure we get this right, both the SEC staff and I have spent countless hours meeting with other regulators in the U.S. and around the globe who are also dealing with these same issues.

Of course, trying to get all the various regulatory pieces to fit together in a sensible way is crucial for a derivatives market that is international in scope. That’s because a party to any transaction needs to know which laws it must abide by when its transaction touches more than one country.

The Uniqueness of OTC Derivatives Compared to Other Securities and Financial Products
This cross-border challenge hasn’t manifested itself in the same way for other securities and financial products as it has for the OTC derivatives markets – in part because of the way in which those markets developed.

Consider securities regulation, which pre-dated the technology that made cross-border transactions feasible on a large scale. So, for many years securities regulation was largely crafted with only domestic markets and domestic market participants in mind.

Over time, as cross-border activities became more common in various parts of the securities arena, regulators began to address questions that arose on an issue-by-issue basis. A holistic approach to considering cross-border securities transactions generally wasn’t considered because, frankly, it wasn’t needed. Now, with derivatives, it is.

In sharp contrast to the traditional securities markets, the multi-trillion dollar OTC derivatives market became a significant market well after the advent of global trading – exploding in size over the last 20 years, operating relatively seamlessly across jurisdictions, and evolving largely without regulatory restraints. Today, cross-border derivatives transactions are the norm not the exception.

Therefore, once regulations are implemented across the major derivatives jurisdictions, the majority of derivatives transactions could be subjected to multiple regulatory regimes. The potential for conflicts among those regimes is obvious.

Against this backdrop of conflicting or contradictory rules, market participants have the ability to move – or restructure – their OTC derivatives activity with relative ease, avoiding more regulated markets, in search of less regulated ones. After all, derivatives are contracts between counterparties – they need not be anchored to any particular geographic location or market.

Some refer to the threat of migration to less regulated jurisdictions as regulatory arbitrage; others a “race to the bottom.” But whatever you call it, this very real possibility threatens the objectives of all of us who seek to reduce systemic risk, improve transparency, protect against market abuse and ensure the global system functions properly.

Investors and the markets deserve better.

Dealing With the Cross-Border Impact of Regulation
That means that getting these cross-border issues right for OTC derivatives is crucial. I know that. And my domestic and international counterparts know that. Yet, as we build this new framework from the ground up and with a common set of goals, we must accept that each jurisdiction necessarily is approaching derivatives reform from a slightly different direction.

Countries come at the process from different historical, legal and regulatory perspectives, and move forward at different speeds. No amount of effort is going to completely reconcile these differences.

After many years of regulatory experience, I have learned that it may not be fruitful to try to convert one another to our own particular regulatory philosophies. Instead, we should continue to expend our energy on a search for compatible, rather than identical, approaches to cross-border issues.

This means ensuring that our different regulatory regimes do not produce the gaps, overlaps or conflicts that could disrupt the global derivatives market and lead to regulatory arbitrage. Focusing on “compatible” rather than “identical” regulation brings us close to a system that achieves our collective goals of mitigating systemic risk, improving transparency, and protecting against market abuse, while also recognizing the legitimate and important differences between our regulatory regimes and markets.

Two Ends of the Spectrum
The importance of a compromise approach becomes evident when we look at the spectrum of approaches available.

The All-In Approach
At one end of the spectrum is the view that any transaction that touches a jurisdiction – or a person in that jurisdiction – in any way, needs to be subjected to the entire range of regulatory requirements specific to that jurisdiction. Let me call this the “all-in” approach.

Although this approach gives full weight to the unique requirements of local law, I am concerned that subjecting any derivatives transaction – that has any connection to a country – to all of the rules and regulations of that country risks unnecessary duplication and conflict. Indeed, to the extent two sets of rules conflict, this approach would place market participants engaging in a cross-border transaction in the untenable position of choosing which country’s requirements to violate. Market participants may have to withdraw from one of those markets or incur the costs associated with restructuring their business.

The Recognition and Reciprocity Approach
At the other end of the spectrum is the view that broad deference should be given to a foreign jurisdiction’s full regulatory regime – in lieu of one’s own regulatory regime – so long as it is comparable in its objectives. Market participants, intermediaries, and infrastructures would be subject to one set of rules for their cross-border activity. The entire regime is recognized as comparable or not comparable – it’s all or nothing. This approach is often referred to as “equivalence” or “recognition.”

Along these lines, some proponents of this approach also demand reciprocal treatment. In other words, “I will recognize the comparability of your rules only to the extent you recognize the comparability of mine.”

At first glance, a recognition approach may appear reasonable and consistent with a desire to reduce conflicts, inconsistencies, and duplicative requirements among regulatory regimes. But as I have discussed the details with my foreign counterparts, I have developed increasingly serious concerns about the potential consequences of an “all or nothing” approach.

Recognition may be an important tool in crafting cross-border regulation in some contexts, but wholesale recognition cannot be the exclusive tool if it means critical regulatory requirements in one regime are jettisoned as a result.

Further, I become particularly concerned when such wholesale recognition is combined with reciprocity. In other words, “I refuse to recognize your regime unless you recognize mine as equivalent in all respects.” In my opinion, tying recognition and reciprocity does not move us toward our united goals.

This is a because a regulator might feel compelled to recognize a foreign country’s regulations as “equivalent” solely to avoid the quid pro quo consequences of not having its own regulations deemed “equivalent” in return. The regulator might feel pressure to gloss over major differences and make a sweeping equivalency determination – that is, even when a regime imposes a critical policy requirement and the foreign regime does not.

This type of recognition, driven by the threat of reciprocity could actually create regulatory gaps between these so-called “equivalent” regimes, allowing certain market participants to exploit the differences and escape important requirements by simply choosing to comply with the more permissive regime.

Additionally, a regulator may feel forced to submit to the threat of not being eligible for recognition treatment because its own regulated entities could suffer if the foreign country does not determine there is equivalence. This could happen when Country A chooses not to allow market participants from Country B to do business in Country A unless Country B deems the other country’s regulatory regime to be equivalent.

I am particularly concerned that this forced recognition approach could substantially disrupt an established market and spark a regulatory race to the bottom, as regulators facing such “equivalency” determinations realize the seeming futility of maintaining comparatively higher standards in key policy areas. Alternatively, it could spark a kind of trade war in financial services, and lead to fragmentation of the global marketplace.

There must be a better way.

A Middle Ground

In short, subjecting every OTC derivatives transaction that touches the United States in some way to all aspects of U.S. law – that is, the “all-in” approach – ignores the realities of the global marketplace. And yet, treating clearly different regimes as equivalent across all key policy areas risks will create regulatory gaps, regulatory arbitrage, and a potential regulatory race to the bottom

I believe that there is, in fact, a middle ground.

The Commission has not yet, as a body, proposed the specifics of its approach. But I personally support an approach that would permit a foreign market participant to comply with requirements imposed by its home country that are comparable with U.S. regulation, so long as it abides by U.S. requirements in areas where the home country’s regulations are not comparable.

I call this approach “substituted compliance.”

It’s an approach that accepts the inevitable differences between regulatory regimes when those differences nevertheless accomplish similar results. There’s no “my way or the highway.” Instead, parties may substitute compliance with one regulatory regime for another. But we would reserve the right to insist upon compliance with our own regulations when necessary. It’s an approach that focuses on what we see as real threats to the Dodd-Frank goals of stability, transparency, and investor protection.

For example, the SEC could make a determination that would allow market participants based in a foreign jurisdiction to follow their own jurisdiction’s capital requirements. But at the same time, the SEC could require these market participants to follow SEC rules concerning, for instance, public reporting requirements, if the foreign jurisdiction itself did not have a comparable set of public reporting requirements. This approach provides flexibility to market participants and regulators alike, allowing us to eliminate duplicative regulation when it is truly duplicative, while recognizing that regulatory regimes will necessarily differ in some respects.

While this approach does envision looking at different pieces of a jurisdiction’s set of rules, I do not believe that the ultimate determination of substituted compliance will be based on a line-by-line comparison of those rules. Instead, in making a substituted compliance determination, one would look at key categories of regulation. In addition, one would keep the focus on regulatory outcomes, not the means of achieving those outcomes.

Of course, in making these determinations, one would look not just at the way in which a country’s laws and regulations are written, but also, and crucially, at how that country supervises and enforces compliance with its rules.

I can’t stress how important this aspect of the substituted compliance approach is to me. Because effective regulation does not end with writing rules, it begins there. Effective supervision and enforcement of those rules is key not only to achieving the G20 goals, but also to advancing the SEC’s core mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

For all of these reasons, I believe that the substituted compliance approach provides a workable approach and a necessary balance in the global market and regulatory environment in which we operate.

A Comparison of Substituted Compliance to Recognition and Reciprocity
As the SEC staff and I have discussed this approach, I have learned that the distinction between substituted compliance and what I call recognition and reciprocity is sometimes elusive. So let me illustrate.

Consider the public reporting requirements I mentioned earlier. As most of you know, the Dodd-Frank Act requires that transaction, volume, and pricing data of all security-based swaps be publicly disseminated in real time, except in the case of block trades. These requirements are designed to promote transparency and efficiency in the security-based swap market, by providing more accurate information about the pricing of security-based swap transactions, and thus about trading activity. Promoting transparency and efficiency in the security-based swap market is one of the primary goals of the new regulatory framework established by the Dodd-Frank Act, not an afterthought.

Given the key role that public transparency requirements play in the U.S. efforts to bring sunshine to the largely opaque OTC derivatives markets, I fully expect that public reporting would be one of a number of key categories of requirements that would be the focus of a substituted compliance determination for foreign regulatory regimes.

But the fact that a foreign regulatory regime might not be comparable to ours with respect to public transparency should not be fatal to an SEC substituted compliance determination in other areas. In fact, the SEC could still recognize other areas of a foreign regulatory regime – such as mandatory clearing or capital requirements. Foreign market participants would, however, continue to be subject to the SEC rules regarding public reporting.

This outcome under a substituted compliance approach contrasts markedly with the “rock and a hard place” approach that an equivalence determination for an entire foreign regulatory regime would present. If the SEC were to adopt such a “recognition and reciprocity” approach, we would be faced with the difficult choice: either not make an equivalence determination with respect to the foreign regime or determine that a foreign regulatory regime is “equivalent” – even if a key aspect of our regulatory regime were absent.

I recognize, of course, that the differences between substituted compliance in specific regulatory areas and an equivalence determination for an entire foreign regulatory regime raise difficult issues and there are many competing interests. And regulators, me included, can have very strong views about the right approach. I nonetheless am committed to resolving these and other difficult issues. And I am gratified that our regulatory partners are equally determined to fashion arrangements that support investor protections and capital formation, while bringing needed stability to our global financial system.

Trade Repositories and Access to Data
So clearly it will be crucial to align the different regulatory regimes for cross-border transactions in a way that minimizes the risk of gaps, conflicts, and inconsistencies. But, this is not the only consideration in working through effective regulation in the cross-border arena. It also will be crucial for regulators to make sure that their different regimes work together, for example, to provide comprehensive data on cross-border transactions.

This is important because the relevant authorities must have an accurate view of the global derivatives market through access to data they need to carry out their mandates. Comprehensive information helps regulators identify and address systemic risk and promote stability across markets, as well as monitor for, and protect against, market abuse.

However, compiling comprehensive transactional data is challenging enough in a complex domestic market. And, it gets far more complicated in the cross-border world of derivatives, where, for example, the vast majority of credit default swaps cross national borders.

Fortunately we’re not starting from scratch. It is estimated that some information on well over 90 percent of outstanding gross notional amounts in credit derivatives were reported to a trade repository at the end of 2012. However, submission of this information was largely voluntary, and the result of substantial supervisory encouragement. Additionally, it didn’t include all the information regulators need to effectively oversee this market.

One goal of regulation in this area is to increase the quality and quantity of information reported to trade repositories, so that regulators have the data they need to do their jobs.

There are, however, challenges to getting the data that regulatory authorities need. Certain countries have privacy laws, blocking statutes, and other laws that restrict or limit the disclosure of certain information about trade counterparties. Such measures may interfere with global regulatory reporting by prohibiting or limiting entities from reporting the identity of their counterparty into trade repositories – thereby undermining the usefulness of these repositories. Regulators internationally, as well as individual jurisdictions, are actively working to develop potential cures.

As an interim solution, some market participants have received temporary relief to submit reports to certain trade repositories with “masked” data – that is, data that includes some, but not all, of the required relevant information. This is of course a temporary, pragmatic fix to an immediate challenge arising from the new regulatory regime for reporting. But, it is not a long-term solution.

Regrettably, potential impediments are not solely the province of foreign law. Another challenge to getting data comes from the Dodd-Frank Act itself. That Act requires regulators to agree to bear certain potential costs arising from data sharing. In particular, before an SEC-registered trade repository can share information with a domestic or foreign regulator other than the SEC, the regulator must agree, among other things, to indemnify the trade repository for certain litigation expenses that may be incurred by the repository. The CFTC has a similar provision.

We understand that foreign authorities may be prohibited under their laws from satisfying the indemnification requirement. In fact, even certain U.S. authorities, are not permitted to provide an open-ended indemnification agreement. Given the limitations of the indemnification requirements, foreign regulators have expressed concerns about their ability to directly access data held in an SEC- or CFTC-registered trade repository.

That is why the SEC has publicly advocated for a legislative fix and is considering ways to address this issue in our forthcoming proposal on cross-border issues.

More generally, I can tell you that I personally am committed to doing what I can to make sure that comprehensive data on the global OTC derivatives market are made available to all regulators with a mission-based need for that information. As one of the regulators charged with reforming the OTC derivatives market, I believe the SEC and fellow regulators must strive for no less.

In short, I believe that the regulators of OTC derivatives across the globe working together in good faith and common purpose can bring about a more stable, more transparent, and fairer OTC derivatives market, while preserving its global, dynamic character. But I believe we will succeed only if we find the middle ground.

There is far too much at stake, in my view, for regulators to do any less.

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