The International Swaps and Derivatives Association (ISDA) has published a “set of principles aimed at promoting regulatory consistency in the development and application of centralized trading rules for derivatives,” according to a company statement, the latest step in the industry group’s efforts to get regulators and firms on the same page when it comes to derivatives rules.
The execution of standardized derivatives on electronic exchanges was a key objective in the G20 summit of 2009, which paved the way for legislative reform packages like the Dodd-Frank law and the European Markets Infrastructure Regulation (EMIR).
However, “ISDA and its members are concerned about the potential for divergences in how these rules are applied in each jurisdiction, which could lead to market fragmentation, low trading liquidity, duplicative compliance requirements and increased risk,” the statement says. ISDA research shows some signs that market fragmentation has been increasing since US Swap Execution Facility (SEF) rules went into effect in October 2013.
“ISDA believes it is critical that trade execution regimes work on a cross-border basis to ensure regulatory consistency across jurisdictions, proper oversight, transparency and continued competition,” says Scott O’Malia, ISDA’s CEO, in a statement. “ISDA and its members believe that targeted regulatory corrections in the U.S. can improve the utilization of SEFs [swap execution facilities] and enhance the likelihood of coordination with European transaction rules currently under development.”
ISDA’s white paper, “Path Forward for Centralized Execution of Swaps,” sets out several principles to help ensure the regulatory consistency of centralized trading rules, including:
- The trading liquidity of a derivatives contract (and consequently the regulatory obligations to which the contract is subject) should be determined by reference to specific objective criteria;
- Derivatives contracts that are subject to the trading obligation should be able to trade on a number of different types of centralized venues;
- And trading venues must offer flexible execution mechanisms that take into account the trading liquidity and unique characteristics of a particular category of swap.
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