Trade associations lobby for clarity on extraterritoriality

Eight global and regional trade associations have lobbied the European Commission (EC) and the US Department of the Treasury to address the problem of extraterritoriality, which may arise as commitments made to the Group of 20 leading economies in 2009 are enshrined into legislation over the coming year.

In a letter to European Commissioner for internal market and services Michel Barnier and US Treasury Secretary Timothy Geithner on July 5, the eight trade associations expressed their concern that regulatory change may create conditions that will lead to "fragmentation of markets, protectionism and regulatory arbitrage".

Signatories to the letter included the chief executives of the International Swaps and Derivatives Association, the Futures and Options Association, the Global Financial Markets Association and the Wholesale Markets Brokers' Association.

"Specifically, in the US and Europe, we believe that both sets of rules, as proposed in the US and as currently being debated in the EU, leave the global derivatives business with ambiguity and problematic extraterritorial challenges and issues of legal uncertainty and misunderstanding, which might give rise to material risk," the associations stated.

Key concerns voiced in the letter include potential overlap and conflict in regulation of derivatives market participants in foreign jurisdictions, discrimination in dealing with sovereigns, and rules for central counterparties. The trade associations asked regulators to enter into mutual recognition arrangements, where each would limit the extraterritorial reach of their regulation so long as a firm complies with their home country regulations.

"An example of the difficulties that can be caused in this context is the extraterritorial application of margin requirements to non-US subsidiaries, branches or affiliates of US financial services institutions, meaning these subsidiaries, branches and affiliates will face dual (and possibly, conflicting) regulatory requirements," said the associations.