Is Regulatory Arbitrage for trading inevitable?


In the ACI Square Mile debate in February, a significant portion of the debate was on regulatory arbitrage. Whilst the panel thought it would be short-lived, I recall David Clarke saying that it would be a big issue.

I have just seen an article in the FT, “US and Europe divisions emerge on derivatives”, which describes the complications ensuring harmonisation between Dodd-Frank & MiFID II. More details here (subscription required). In addition, the FSB document “Implementing OTC Derivatives Market Reforms” dated 25 October 2010 (here) clearly states in Annexe 9 that both Hong Kong and Japan have no plan to move OTC derivative trading to either an exchange or electronic trading platform.

It seems certain that different regions will have different views with respect to trading of OTC derivatives. I guess the question is whether these views are compatible with the original 2009 G20 guidelines. where the key statement is “All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest.”

…… Of course, it is the local regulator who will decide what contracts are appropriate.

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