The 2008 financial crisis demonstrated how interconnected the global financial system is. What began as a real estate bubble fueled by subprime mortgages in many states ballooned into a global financial panic of unprecedented magnitude. Bundles of poorly underwritten mortgages generated toxic derivatives bet on in a global market. When the dust settled, there was broad agreement that not only did we need a new financial regulatory regime, it had to be globally coordinated.
The United States, the European Union, Britain, Japan and other nations should come up with a regulatory regime that works across all borders. This does not have to be the exact same set of rules and regulations, but rather compatible systems, based on a common set of definitions and structures.
The need for international coordination in swaps is particularly important, for many of them involve parties in different countries. One common derivative, for example, an exchange-rate swap, allows parties in the United States to get payments in dollars while those in Europe are paid in euros. Any variation is the exchange rate between the two currencies is covered by the swap — for a fee.
We agree with European Union Commissioner Michel Barnier who said, “Where the rules of another country are comparable and consistent with the objectives of U.S. law, it is reasonable to expect U.S. authorities to rely on those rules and recognize activities regulated under them as compliant.”
The devil is always in the details. Broad agreements for global coordination can quickly break down into national and international disputes over specific rules. Washington’s main legislative response to the financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act, recognized the global importance of regulation and required that U.S. regulation shall apply when derivatives have “a direct and significant connection with activities in, or effect on, commerce” of the United States.