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  • 1. EU/US COALITION ON FINANCIAL REGULATION American Bankers Association Securities Association (ABASA) Bankers’ Association for Finance and Trade (BAFT) British Bankers’ Association (BBA) Futures Industry Association (FIA) Futures and Options Association (FOA) International Capital Market Association (ICMA) Investment Industry Association of Canada (IIAC) International Swaps and Derivatives Association (ISDA) London Investment Banking Association (LIBA) Securities Industry and Financial Markets Association (SIFMA) Swiss Bankers Association (SBA) European Banking Federation (EBF) [observer] THE TRANSATLANTIC DIALOGUE IN FINANCIAL SERVICES: MAKING THE CASE FOR REGULATORY SIMPLIFICATION AND TRADING EFFICIENCY BRIEFING NOTE APRIL 2008 /home/pptfactory/temp/20100512124237/click-here-to-see-briefing-note3441.doc 1
  • 2. EU/US COALITION ON FINANCIAL REGULATION Who comprises the Coalition? In early 2005, a group of leading EU and US financial service industry associations agreed to work together to address the urgent need to simplify the regulation of wholesale Transatlantic financial services business; and subsequently agreed to form themselves into the EU/US Coalition on Financial Regulation. They comprise, currently: ABA Securities Association (ABASA) Bankers’ Association for Finance and Trade (BAFT) British Bankers Association (BBA) Futures Industry Association (FIA) Futures and Options Association (FOA) International Capital Market Association (ICMA) Investment Industry Association of Canada (IIAC) International Swaps and Derivatives Association (ISDA) London Investment Banking Association (LIBA) Securities Industry and Financial Markets Association (SIFMA) Swiss Banking Federation (SBF) European Banking Federation (EBF) [observer] Their objective, in coming together, was not to undermine acceptable standards of market integrity or investor protection but to increase the efficiency and coherence of applicable regulation and rules. Currently, and despite the common standards and principles developed by ISOCO, the regulatory authorities and their rules continue to be geographically based and governed by differentiated national laws. The result is a complex and costly meld of regulatory duplication and conflict which sits uneasily with the increasingly global nature of financial markets and services, undermines the intended benefits of harmonisation, creates unnecessary customer confusion and imposes needless trading, investment and business costs and access restrictions on both the providers and consumers of financial services. The establishment of a more coherently regulated Transatlantic financial services marketplace will generate improvements in trading efficiency and access, and enhance greater competitiveness which, in turn, will result in lower costs for institutional and other customers of the financial services industry and greater coherence in appropriate customer protections. What are the objects of the Coalition? The objectives of the Coalition are: (a) to encourage and expedite wider acceptance of regulatory recognition (whether unilateral, bilateral or multilateral) as accepted international practice; and the Coalition notes the work programme of the Transatlantic Economic Council to establish a set of policy parameters and outputs for regulatory recognition; (b) to support the case for exemptive relief for defined levels of wholesale business as promulgated by the Institute of International Finance (IIF); (c) to identify and promote the need for “targeted” rules’ convergence where there is either (i) insufficient approximation in rules’ outputs to facilitate recognition; or (ii) where convergence would deliver tangible benefits for the /home/pptfactory/temp/20100512124237/click-here-to-see-briefing-note3441.doc 2
  • 3. providers and consumers of financial services in terms of increased business efficiency (e.g. through establishing more common internal processes), cost effectiveness, improved customer understanding or simplified market access; (d) to establish an industry forum for identifying and agreeing on a set of priority “targets” for the transatlantic dialogue and acting as a source of input into the negotiating process. (NB. Such a forum has since been set up and established under the auspices of SIFMA). The Coalition believes that, if the transatlantic regulatory dialogue is to fulfil its commercial as well as its purely regulatory objectives, the following factors should be taken into account: - avoidance of regulatory “harmonisation for harmonisation’s sake” insofar as this would impose needless regulatory change and cost for thousands of small- and medium-sized EU and US firms that do not undertake and have no aspirations to undertake transatlantic business; - consideration of the desirability of establishing: o a set of consensual policy parameters, which could be held in common by all EU- and US-regulated firms in order to set a common regulatory policy parameter around EU/US rules and which would also facilitate, where appropriate, the continuance of acceptable rules’ differences; o consensual “Principles for Better Regulation”, which would establish a common policy and set of criteria to be observed as regards the forward development of rules; - early commencement of the process of analysing and reviewing EU and US rules because it is only through this process that negotiating hurdles, legislative issues and public policy differences can be properly identified; - establishment of a regular and structured basis for facilitating ongoing industry input – recognising that financial service suppliers, infrastructure providers and consumers are critically important “stakeholders” in the outcome of the dialogue and are best placed to address the commercial and market objectives that stand behind the process. What was the Coalition’s first action? On 8th September, 2005 and after a succession of rounds of meetings with government departments and regulatory authorities on both sides of the Atlantic, the Coalition launched a major two-volume study “The Transatlantic dialogue in financial services: The case for regulatory simplification and trading efficiency1” in London and Washington. The Report highlighted areas of often needless regulatory duplication and conflict – needless largely because the rules were designed to achieve the same objective, yet their differentiation served only to complicate the process of compliance and increase cost for firms and their customers. The Report, which was produced with input from various groups of banks and brokerage houses in London and New York, focused essentially on licensing and business conduct rules and was issued in two separate parts: 1 Copies of the study are available from the Secretariat to the Coalition which is based at the FOA, 2 nd Floor, 36-38 Botolph Lane, London EC3R 8DE or may be downloaded from any of the websites of the Participating Associations. /home/pptfactory/temp/20100512124237/click-here-to-see-briefing-note3441.doc 3
  • 4. • A “legal analysis” which compared relevant US legislative requirements (including applicable rules of the SEC and CFTC) with EU directives (including CESR business conduct principles and the implementing rules of four specimen member states, France, German, Spain and the UK), since supplemented by a regulatory analysis of Swiss rules. The analysis covered licensing and business conduct rules dealing with corporate legal structures, financial promotion and solicitation, customer documentation, execution, order handling, know-your-customer rules, anti-money laundering requirements, market abuse, the handling of customer assets, recognition of qualifications and licensing requirements for key employees. It did not cover prudential rules. • A “business case”, which identified priority areas for regulatory change which would (a) simplify, without any diminution in standards of market integrity or investor protection, the framework of regulation for the carrying on of Transatlantic financial services business; and (b) play a significant role in achieving the objectives of enhanced efficiency and reduced trading costs. More particularly, the Report argued for the formulation of a common set of customer definitions for the purposes of classification, solicitation and documentation; a common approach to core investor protection objectives such as “know your customer”; the development of a common set of examination and registration requirements; a consensual regulatory approach to other firms’ outsourcing arrangements; and the development of a forward programme to simplify critical areas of regulation such as the obligation to deliver best execution, trade allocation procedures, distribution of research, etc. The Report also urged that the process of rules’ development should be underpinned by an agreed set of consensual US/EU principles of good regulation and a common approach to regulatory impact assessments. What has been the next step of the Coalition? The Coalition has noted the positive reaction to its 2005 report, the increased prioritisation that is being given to financial services regulatory recognition and convergence and the statement of intent released after the recent EU-US Summit in Washington to “take steps, towards the convergence, equivalence or mutual recognition, where appropriate, of regulatory standards based on high-quality principles”. This statement of intent was reaffirmed in the Joint Statement issued in February 2008 by EU Commissioner Charlie McCreevy and SEC Chairman Christopher Cox. The Coalition has now issued its second report “Mutual Recognition, Exemptive Relief and “targeted” Rules’ Standardisation: The Basis for Regulatory Modernisation“ in which it: (a) emphasises the importance of each of the three “gateways” to modernising the regulation of what is becoming an increasingly globalised business, namely: - Regulatory recognition: i.e. acceptance by a host state regulatory authority of compliance by a foreign firm, issuer or exchange with its home country licensing, prudential and business conduct rules through a process of unilateral, bilateral or multilateral mutual regulatory recognition based on shared regulatory policy, principles and rules’ outputs; - Exemptive relief: i.e. relief from compliance with host state rules in the case of foreign firms or issuers engaged in wholesale business where the imposition of those rules would be disproportionate for such business; /home/pptfactory/temp/20100512124237/click-here-to-see-briefing-note3441.doc 4
  • 5. - Rules’ convergence: i.e. the development of common approaches, international standards and/or converged rules “targeted” to deliver simplified market/customer access and incremental business efficiencies, or where there is insufficient approximation in the output of rules to facilitate regulatory recognition. (b) sets out the key criteria for establishing a durable basis for EU-US mutual regulatory recognition; and (c) identifies industry priorities for “targeted” rules’ convergence necessary to improve regulatory effectiveness and efficiency, the competitiveness of cross- border business and enhance customer understanding of financial services and products. (d) have a more open and efficiently regulated transatlantic market place for the benefit of its stake holders, including the providers and consumers of financial services, market infrastructure providers and the regulatory authorities themselves; - that the current market turmoil, while a key priority for regulatory authorities, has emphasised the need for stronger flows of information and greater regulatory cooperation; - and that 2008 is the year in which substantive progress needs to be made. For more information or for hard copies of the Coalition’s second report, please contact the Coalition Secretariat, which is based at the offices of the FOA: 2nd Floor Contact: Sally Hughes 36-38 Botolph Lane hughess@foa.co.uk London EC3R 8DE Tel: +44 (0)20 7929 0091 www.foa.co.uk /home/pptfactory/temp/20100512124237/click-here-to-see-briefing-note3441.doc 5