OPINION-The heavy lift of harmonization-CFTC’s Chilton
–The author is Bart Chilton, a commissioner at the U.S. Commodity Futures Trading Commission. The opinions represent the view of the author and not that of Reuters.
By Bart Chilton
Now that the U.S. has approved the largest financial regulatory reform ever undertaken, it’s time for other nations to join in to ensure more efficient, effective market systems. Here is what we know: free markets without sufficient sideboards led to the global economic collapse.
Banks moved away from traditional lending and into exotic mortgages and foolhardy bets — like naked credit default swaps — and ultimately the American taxpayer was left with the bill for bailing out large institutions previously thought of as too big to fail.
Some speculators used futures and derivatives markets like private playgrounds, contributing to record highs in commodity prices in 2008. Free markets are good, but rational free markets with appropriate oversight are much better (and safer).
On Sept. 15, the European Commission (E.C.) issued a legislative proposal for regulating over-the-counter (OTC) markets that looks strikingly similar to the new U.S. law. Staffs at the U.S. Commodity Futures Trading Commission and the E.C. Financial Markets Infrastructure office have been working closely on ways to make our two sets of laws consistent.
Such communication between regulators at the international level is critically important in the brave new world of global electronic markets.
Whether trading occurs in Hong Kong, London or New York, to the extent practical, there needs to be global regulatory harmonization. While important to ensure national interests, without appropriate harmonization of rules, a virtual regulatory race to the bottom could occur.
Traders seeking to “fly under the regulatory radar” may try to choose the least restrictive regulatory environment, even at the expense of necessary oversight and transparency.
In fact, opponents of increased financial oversight in the U.S. have argued that tougher rules and regulations would encourage market migration. They have postulated that if, for example, the U.S. clamped down in certain areas, trading might move to unregulated “dark markets” elsewhere, or to foreign boards of trades.
What if, for example, the new position limit rules on traders in the United States push big speculators to foreign markets that have no such limits? Many analysts agree that could happen.
Likewise, the new law will allow regulators to go after disruptive trading practices. Will the bad actors in financial markets move to jurisdictions with less stringent rules and punishments if they can’t disrupt markets here? They might.
That is why it is so exceptionally important, not only for U.S. regulators to get these new rules right, but also that other nations join in the effort to revamp their regulatory regimes to ensure more efficient and effective markets, and detect and deter of fraud, abuse and manipulation.
Of course, individual national rules need not look precisely like those in the United States, but they should be coordinated to a degree so as to avoid regulatory arbitrage. Like the European Commission, many nations are already working on this endeavor, but it may be a heavy lift. That was certainly the case in the United States. Without the personal effort and emphasis of President Obama, the law would have never succeeded.
There is a need and an opportunity to avoid regulatory arbitrage by harmonizing the financial rules of the road. Let’s hope that effort moves forward quickly. Consumers around the world, who are affected by these markets every day in the prices they pay, must be assured that the markets themselves are regulated effectively.
(The author, Commissioner Bart Chilton of the U.S. Commodity Futures Trading Commission, has worked in Washington D.C. for 25 years in the House of Representatives and the Senate, and as part of the Bush, Clinton and Obama Administrations).