Finance Industry Warns of Transatlantic Discord over Derivative Rules

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Transatlantic sniping by top policymakers could make it harder to agree new rules to crack down on derivatives, derivatives market officials said on Tuesday.

“The high policy debate is going in the wrong direction right now,” said Futures and Options Association Chief Executive Anthony Belchambers.

“We need to get close together and we need to stop sound bites floating across the water in the way they do from both sides,” he told the opening day of London’s annual “derivatives week”.

Belchambers said significant differences, protectionism and regulatory overreach have already emerged in the way the United States and EU were meeting a common global pledge to regulate derivatives and needed to be ironed out.

U.S. Treasury Secretary Timothy Geithner called on Monday for global coordination of rules, saying there must not be a repeat of Britain’s pre-crisis light touch regulatory regime which “ended tragically.”

Belchambers said there were equal regulatory failures in Britain and the United States, a sentiment echoed by other industry leaders.

“I find it a little odd he is pointing fingers at this stage,” John Damgard, president of the U.S. Futures Industry Association, said at the opening session of the event.

Others, speaking on condition there not identified, were less diplomatic. “If the UK was light regulation, what was the United States — no regulation?” one official said.

NO RETALIATION
Geithner’s comments followed a strong call from EU financial services chief Michel Barnier in Washington last week for the United States to implement new rules and avoid a race to the bottom.

Hannah Gurga, deputy director for securities and markets in Britain’s finance ministry said global markets needed global solutions and tit-for-tat moves must be avoided.

“I certainly worry a great deal in the European context for the potential for a somewhat retaliatory approach,” Gurga said.

“Introducing extra territoriality into (EU derivatives rules) won’t help. It simply makes a difficult situation much worse,” Gurga said.

Scott O’Malia, a commissioner at the U.S. Commodity Futures and Trading Commission, said he had not seen Geithner’s speech but sought to ease tensions.

“There is a commitment on both sides of the Atlantic that higher, stronger, better standards are going to be imposed,” O’Malia told Reuters on the sidelines of the conference.

“We want to avoid regulatory arbitrage,” O’Malia said.

Alexander Justham, director of markets at Britain’s Financial Services Authority which regulates Europe’s top derivatives centre, made light of Geithner’s speech, “He was clearly not referring to derivatives regulation as there was not that much in America at the time.”

REPORTING COMPULSORY
Justham said there must not be a “one size fits all” approach to derivatives regulation in the EU which is expected to dampen profits for the banks who trade the instruments.

Regulators must not be formulaic by “squeezing out the last pip” to force everything to be centrally cleared as this could increase risks, Justham said, adding that in some cases the mandatory clearing rule should not be implemented unless the right market infrastructure is in place.

EU financial markets watchdogs will make reporting of derivatives trades compulsory within 18 months in an attempt to improve their chances of spotting market bubbles, Justham said.

Reporting of trades in the $600 trillion global derivatives market, which is dominated by London and New York, is one of the pledges world leaders made a year after the collapse of U.S. Lehman Brothers in 2008 left a trail of opaque contracts. “We expect it to be enforced in late 2012 or early 2013,” Justham said.

Chris Allen, a managing director at Barclays Capital, said the sheer volume of new rules risked creating unintended consequences and uncertainties.

(Editing by David Cowell)