Transatlantic Coordination of Systemic Risk Management
CFA Institute sponsored a symposium in March produced by the Harvard Law School Program on International Financial Systems which convened senior bankers, investors, regulators, and academics to discuss regulation of derivatives, cross-border resolution of bank failures, regulation of non-bank financial institutions, and a review of the current sovereign debt crisis. The summary report for the proceedings is available here.
A common theme for many of the conversations over the three-day symposium was the challenge of bridging European and American financial, legal, and political systems to better coordinate regulation. For example, the use of centralized clearinghouses for OTC derivatives trade settlement won broad support as a way to focus counterparty risk management efforts.
But the prospects for international interoperability among clearinghouses seemed anything but sure, with the recognition that national and regional regulators might approach clearinghouse rules differently. The results could run counter to the intended better coordination, with clearing becoming more fragmented across national boundaries and increasingly concentrated within nations.
So how to address international coordination? Getting agreement on general principles is a start, but a lot of complications can ensue in the implementation details for each jurisdiction. Some symposium participants stressed the importance of standardizing as many of the operational details as possible — so finding agreement on standard contractual details and data elements, for example.
This is an appealing notion, akin to agreeing on a common vocabulary even if we know we won’t all be reading off the same page all the time. Standardization would also make it easier to share information among different regulatory authorities without trying to make sense of different definitions or formats. Of course, building in appropriate protections for data that is shared is also a considerable task to confront.
Ultimately, getting started is more important than waiting for the perfect design for international coordination. Reconciling different approaches to the same problems is likely more productive than doing nothing while global systemic risks mount. Discussions like those at this meeting help keep international coordination a priority, and should be encouraged in more venues. Investors need a voice in these discussions.