Cross-Border Regulations' Coherence - a hype or need of the hour?
- by Ashima Uppal and Mayur Bansal
Regulations are essentially the prescribed ways of conduct in an otherwise un-organized environment. They are the binding rules that bring harmony, and set standards for every participating entity to follow. But, what if the surrounding environment is so different across the globe, it starts to reflect a discord between the rules of different areas?
This question aptly points to the current state of financial regulations across the globe in which - the liquidity of OTC (over-the-counter) markets is majorly divided between the US and non-US funds. Third country CCPs (Central Counterparties) have found it difficult to gain European Commission recognition under the EMIR (European Market Infrastructure Regulation). Additionally, non-EU trading institutions have faced the delay of equivalence being given under MiFID I. It is not only the capital markets, but also the banking structural reforms that have differing national and regional approaches. This is making the markets prone to the risk of fragmentation, reduced competition, and reduced number of diversified sources of funds .
These differences in the regulations may also pose as a hurdle for the developing economies. They might reduce developing countries' access to global capital markets, adversely affecting their growth prospects. The variance between regulations are majorly a result of the distrust between the regulators, high complexity of the new rules, and inconsistent implementation processes which surface due to differences in legal and political models. There have been various appeals to bring consistency in the regulations across boundaries, for which reaffirmations have also been provided by global leaders on platforms like the G-20 summit. The major showstoppers, however, are the unilateral approaches and un-synchronized implementation of rules that have impaired the global approaches from bringing harmony across regulations.
Although the issue of incoherent rules affects every region and jurisdiction, it is the Asia-Pacific and other emerging markets that face most difficulty in regulatory arrangements. The disagreements between the US and EU regulators have delayed the development of the regulatory frameworks of APAC countries. APAC countries want their regulations to be consistent with the global regulations. To get to that stage, APAC countries have to draft their regulations so broadly that they can accommodate both US and EU regulations. For instance, Australian regulators allowed the derivatives players in Australia to adhere either to the US, or the European approach. The APAC region also has various US and EU organizations as major players, which makes it difficult for the APAC countries to choose one regime to comply with.
With the growth of the global economy, APAC countries are gaining importance in the international markets and are becoming the growth-drivers of the world. The issue of regulations' disjointedness needs to be addressed. A more harmonized market environment needs to be developed to fuel international growth.