To give a littel context to those not involved, the G20 countries agreed back in 2009 to implement new regulations and controls aimed at preventing another financial crisis such as the world experienced back in 2008. Whilst in broad agreement on the intent and approach each country headed off to make the necessary changes.
In the past regulatory change for most people has been a single set of rules, from a single regulator in a specific country/region. In this was usually a prescriptive piece on what needed to be done and when. This is not so these days, at least not in the field of major derivative regulation.
Currently the best known and most advanced are the US with the Dodd Frank (DF) act and Europe (including the UK) with the European Market Infrastructure Regulations (EMIR). Both place obligations on counterparties to deals involving counterparties that are deemed relevant.
To illustrate this simply, for DF, I drew the 3 x 3 grid below. The boxes with ticks show the business transactions covered by the DF rules, ie those with a US party (either client or market counterparty).
A similar grid for EMIR looks like this
This is clearly similar, but different.
If we now combine them we get this grid. In it some points are clearly only covered by Dodd Frank, while others are only covered by EMIR; and then some are covered by both (or possibly either).
The implication for a fund manager is that this is not "one size fits all", instead one has to consider where on the grid a particular trade or relationship falls and then decide upon the appropriate obligations.
In the "Either or Both" boxes the right answer may and probably will differ rule by rule. There is some movement between the US and European regulators to deem compliance with a compatible regime sufficient, but even with just two their rules differ. For example DF only requires one partyu, the senior party to the trade to report, while EMIR will require both to report. The implication is that for a european client trading with a US Swap Dealer, the US Swap dealer must report to a UStrade repository under DF, but as that is only one sided reporting EMIR will still require the european client to report to a european trade repository too.
Firms will need to think carefully about how they respond in the cross over boxes and how best to style there processes. By way of illustration and for the sake of argument, if one could freely choose one or other regulatory regime in the cross overs, then one might decide to deal with all US client business under Dodd Frank and all European client business under EMIR and deal with "other" clients case by case. Alternatively one might stripe it by counterparty rather than client. To add complications one may need one approach for one regulation and a different one for another.
Did I mention that they are implementing at different times too??
This is going to require plenty of "smarts", looking at these changes rather holistically and making judgements that are right for the firm. The alternative is an increasingly complex set of operational processes and relationships with clients and counterparties that will undoubtedly breed duplication and inefficiency - and thus avoidable cost.
I think that unless firms are smart they will suffer much more than necessary and may indeed be crushed by the growing burden. The time to start acting differently is now.
I hope this makes sense and if it encourages even one person to think again about how they are tackling this world of complicated change then it has been worthwhile!
