A while ago, I wrote a blog about how encouraged I was by the level of global co-operation on policy and regulatory change. Subsequently, it would appear that my praise was rather premature, as two months down the line, new cracks are beginning to appear between Europe and the US, while existing divisions between Europe and the UK are widening.
Until recently, the proposed reforms to the OTC markets had been held up as an example of where policymakers on both sides of the Atlantic appeared to be making a commitment to co-ordinating efforts. Recent comments made by US policymakers on the topic of corporate use of OTC derivatives has shown that a divergence of opinion is beginning to develop. While the EC has mooted the idea of exempting corporates from having to set aside collateral for OTC derivatives transactions undertaken for hedging purposes, the US has not been as forthcoming. This led to heavy criticism from the European Association of Corporate Treasurers who claimed that such an approach would lead to regulatory arbitrage, with the possibility of corporates moving their hedging functions to jurisdictions with more end-user friendly regimes.
On top of this, there has been much controversy around the appointment of Michel Barnier as EU Commissioner of Internal Markets. This was exacerbated by Nicholas Sarkozys inflammatory comments on France having achieved a triumph for French ideas on regulation, while the UK had lost out, opening the old wounds between France and the UK on European financial services policy.
All this is extremely unhelpful. Just as we were beginning to see encouraging signs of collaboration between policymakers, politics and jingoism have thrown a spanner in the works. The financial markets are in dire need of standards and harmonisation and we require co-ordinated efforts to ensure that this takes place. The discussions around the harmonisation of settlement cycles in Europe is a good example if this. Initiatives such as Target 2 Securities will be impossible to implement without consistent securities settlement. Without co-operation and global collaboration we face the serious threat of policy fragmentation and, with it, gaps in the system which could leave us vulnerable to another crisis.