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Susan Mangiero, CFA
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Dr. Susan Mangiero is an independent risk management and valuation consultant with over twenty years of experience in capital markets, global treasury, asset-liability management, portfolio management, financial risk control and valuation. She has worked on several trading desks, in the areas of... More
My company:
Good Risk Governance Pays
My blog:
Pension Risk Matters
My book:
Risk Management for Pensions, Endowments and Foundations
  • The Cats and Dogs of Derivative Instrument Regulation 0 comments
    Jul 7, 2011 11:19 PM

    In survey after survey, capital market participants complain about regulatory overload and complexity. The last thing any compliance officer wants to have happen is that his or organization is trying to do everything right but ends up on the wrong side of the law because rules differ across jurisdictions. Then there are the clever arbitrageurs who recognize regulatory differences as opportunities to exploit loopholes.

    In the case of the global over-the-counter derivatives market, sized in excess of $600 trillion in terms of notional principal amount, Reuters reporter Jim Brunsden describes disparate mandates from European Union and U.S. regulators, respectivley. According to "Differing EU, U.S. Derivative Rules May Discriminate, Groups Say" (July 6, 2011), margin amounts and "different sets of licensing rules on cross-border business" could introduce costly uncertainty for investors.

    In a July 5, 2011 letter to The Honorable Timothy Geithner and Commissioner Michael Barnier, ISDA and other financial market organizations listed some of the extra-territorial concerns that should reflect coordination:

    • Licensing, authorisation or registration rules for entities to trade derivatives;
    • Application of margin requirements to banks, broker dealers and asset managers with operations throughout the world;
    • Extent to which foreign operating entities would be subject to competing authorities in multiple jurisdictions even when the parent entity is complying with home country regulations;
    • Standards for recognition of central counterparties ("CCPs") in each others' jurisdictions to minimize ambiguity; and
    • Indemnification provisions as relates to data collection by U.S. based Swap Data Repositories ("SDRs"), pursuant to the Dodd-Frank Act.

    Those institutional investors that employ derivatives - directly or indirectly - are wise to track the regulatory discussions underway. Their costs, and related investment performance, are likely to be impacted by the constraints borne by major market dealers.

    For further information, check out the following items:

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