NYT criticizes Mary Jo White’s ET rule – hasty?
The NY Times yesterday printed an article (subs. may be required) that criticized Mary Jo White for the SEC's recent ET ruling deferring regulations of foreign entities to foreign regulators (see my blog post here). The article was greeted by a chorus of comments on their website about the revolving door from Wall St to government and how she was looking after those that recently fed her private career. Conjecture apart I wonder if there is room to give the SEC the benefit of the doubt for a while yet? Let's look at the bigger picture for a moment: 1. SEC got a major regulation completed. This is a big step for the SEC (which previously had seemed to lack the will to complete any of the Dodd-Frank rules). CFTC final rules on the other hand are encumbered by lawsuits (swapfutures, reporting) and (unresolved exemptive reliefs (clearing regulations, ET)). 2. Common sense alone suggests that US regulators cannot in practice regulate all trading entities across the world. It will be hard enough given the scale of Dodd-Frank provisions to implement the new regulations for US-located banks / entities. This ruling allows the SEC to focus in on regulating US firms and avoids protracted long-winded discussion with non-US regulators. 3. US banks major subsidiaries will soon be subject to similar regulations in their foreign branches and subsidiaries unless they are beyond the G20 countries. Japan is already live, Europe will be live by 2014 and others in Asia will follow in 2014/15. There is some risk that foreign regulators will have a lighter touch e.g. EU parliament passed an exemption for sovereigns and corporates from the Basel III CVA add-on. There is also some potential for it to be heavier e.g. EU doesn't exempt FX forwards and swaps from some regulations from which the US exempts them. How should this be handled? 4. US banks parent capitalization is an additional buffer on residual regulatory risk to the US taxpayer. It is likely that the Fed will include in its approach to Basel III implementation the risks borne by non-US branches and subsidiaries. The Fed is – yes – a US regulator! If there is any materially lower margin, clearing mandate or capital burdens from local regulations – capitalization at parent level will trump this and the taxpayer will still be protected by US standards of regulation. Might it be true that letting Basel III capital / Fed leverage ratio rulings cover the residual foreign risk to the US tax payer is both an effective and efficient approach than attempting regulatory overreach? Let's at least see how the Fed's Basel III interpretation and implementation approach emerges before we jump to any conclusions.