At my pre-conference interview with ISDA CEO Scott O’Malia (Un Parti Québécois: ISDA 2015 Montreal, JLN, Wednesday, April 22), he noted that the big issue of the conference would be achieving cross-border harmony. The first panel included people on both sides of the issue, including Commissioners Michael Piwowar and Mark Wetjen of the SEC and CFTC respectively, plus the FSA’s Masamichi Kono, who has also served as the chair of IOSCO and also serves as a regional chair of the Financial Stability Board. The final panelist was Kay Swinburne, Member of the European Parliament.
I asked O’Malia if we would see fireworks with these panelists seated together on the stage. He replied that we are not here this week just so everyone can tour Montreal, but rather to push the envelope on cross-border issues such as substituted compliance and mutual recognition of central counterparties. Of course, we also toured Montreal, and it is a thoroughly lovely city.
I can report that the panel delivered, and the envelope has been pushed this week.
No legislation or regulation is passed with the express purpose of fracturing the market, but that is exactly what has happened to the swaps market, almost from the day the SEF rules were finalized. In data studies and user polls, all the evidence points to fragmentation.
With tongue in cheek, O’Malia reminded us that, as a CFTC commissioner at the time, he voted for the SEF rules that led to the split in liquidity pools between U.S. and non-U.S. customers. “But you should have seen the first draft,” he said. “They got much better.”
Mr. Kono led off with a sort of Hippocratic Oath/Golden Rule for the swaps market – “Pay due respect to home country regimes.” Sounds simple, but the devil remains in the details. He suggested a sort of “passport” system that would allow each customer to follow home rule without separation.
Piwowar suggested taking the opposite approach to individual substituted compliance determinations. He said the G-20 should “default to automatic substituted compliance” and then work backwards to plug up any gaps between regimes.
The most animated comments came from Dr. Swinburne (comments which earned her a rare ovation from the crowd). She called the CCP spat “embarrassing,” and “absolutely outrageous,” and said that risk is the only thing that should matter, but that the U.S. and Europe are arguing over inconsequential issues.
“There should be no one-day gross versus two day net margin argument,” said Swinburne. “Compromise is not a dirty word.”
She suggested the FSB, backed by the G-20, should take a more active role, a view that Commissioner Piwowar did not share. “The FSB has other other objectives than a vibrant OTC market.” He cited the treatment of insurance companies and asset managers as examples of where the FSB did not place a high enough priority on market structure. This naturally raised an eyebrow from Mr. Kono, who serves on the board of the FSB.
My two cents? It all goes down to the nature of the process in the U.S. versus Europe. Dodd-Frank was first out of the gate, but it was only a framework that left the heavy lifting, i.e., 400 separate rulemakings, to the regulators. European legislators such as Dr. Swinburne are much more intimately involved with the details, but this means the details are easily bogged down in politics. It doesn’t help that 28 individual jurisdictions all must weigh in.
Politics plays a part in the U.S. as well. One example cited is a desperately needed technical correction to Dodd-Frank, a regulator indemnification on swap data, that all sides agree was inserted in error. Yet no such correction is on the docket, even though it is universally acknowledged that it is needed, because any change is looked at as a handout to the big banks. So we are stuck with it. This has got to end.
The envelope was indeed pushed by this week’s participants. Keep pushing; we are almost there. I hope.