Go to a conference where derivatives or Frankendodd are discussed, and you can’t escape without hearing somebody’s tongue trip over the word “extraterritoriality” (say it 5 times fast!) -the imposition of Frankendodd rules (such as swap dealer registration) on foreign firms. Gensler has been quite aggressive in his interpretation of where the CFTC’s writ extends: in his mind, it basically extends everywhere that directly or indirectly could have an impact on US markets. In an interconnected financial world, that doesn’t limit things much.
Foreign financial institutions (and other firms, such as pension funds and money managers) are less than thrilled. To say the least. Some smaller institutions have announced their intention to have no dealings with US firms that could put them in the monster’s grip.
Foreign regulators have also criticized US assertions of authority, both in writing and now in GiGi’s face:
Financial regulators from around the world have rounded on the main US swaps regulator over its attempts to extend new rules on derivatives overseas, warning of destabilising effects on the global financial system.
Supervisors from Japan, Europe and Hong Kong have previously criticised the Commodity Futures Trading Commission in written correspondence. On Wednesday, the regulators set out their concerns during a public meeting at the CFTC in Washington.
GiGi nodded, and then defended the CFTC’s actions.
Regulatory arbitrage is a concern, but unilateral assertions of US authority, and foreign pushback on those assertions, raise various concerns of their own. In particular, they threaten to balkanize derivatives markets (and financial markets generally) as non-US firms limit their dealings with US entities. This will reduce liquidity; tend to lead to concentrations of risk; and will impede the efficient allocation of risk.
Per usual, Gensler is appealing to a simplistic version of the financial crisis to justify his position, and not acknowledging the adverse consequences-most notably due to fragmentation-that will result from over-aggressive American initiatives. Regulatory consistency across jurisdictions (which would mitigate regulatory arbitrage) ironically is undermined by the unilateral efforts of the US regulator to impose its will around the world.
This is particularly amazing given the CFTC’s less than glorious record at regulating a subset of US derivatives markets. Hubris, anyone? And unfounded hubris at that?
Speaking of regulatory hubris, David at Deus ex Macchiato is justifiably outraged at the assertion by an Irish regulator that global regulations of OTC markets had “the explicit policy objective” of reducing the size of these markets. Because of course regulators know exactly how big OTC derivative markets should be and know with metaphysical certainty that the markets will reconfigure themselves to the regulatory fiat in ways that enhance stability. Yes, these are the most complicated, interconnected markets in the world, so of course guys in Dublin and DC should know exactly how big they should be and exactly how they should be configured. Because that always turns out just swell.
This is exactly what Hayek meant by “the fatal conceit.” And I fearlessly predict that this very conceit will be the source of the next crisis.