International Finance Regulation: The Quest for Financial Stability

CHAPTER 7 Regulating the Derivatives Market

“The current state of talks would allow markets to continue trading in total opacity and, given the size of its derivatives markets, effectively undermine the reforms that the global regulatory community agreed through the G20.”

—European Commissioner Michel Barnier

In their efforts to create safer, more transparent markets policymakers on both sides of the Atlantic have crafted extensive and aggressive rules that encroached on each other's turf and created confusion.

The result: it is harder to comply with the new regulations, and markets and liquidity are being fragmented, potentially increasing systemic risk. Discontent reached such a pitch that late in the year trade bodies started litigation against the U.S. regulator.

David Wright, secretary general of the International Organization of Securities Commissions, a standards-setting body whose members regulate 95 percent of the world's securities markets, said: “We have clear overlaps of rules. If we don't have mechanisms to deal with these difficulties, the situation will just get more and more complex.”¹

The derivatives market is one of the most difficult to regulate at national levels. They do not take place in the national sphere. Two eminent lawyers and professors at Columbia Law School, Edward Greene and Ilena Potiha, summarize that difficulty:

The cross-border derivatives market is difficult to fathom, important to regulate effectively, and central to the proper functioning ...