US regulators, preoccupied with modifying the decade-old, hastily put together Dodd-Frank regulatory regime, have let their guard down, potentially leaving the European Union’s (EU’s) fast-tracked regulatory regime to dominate US financial institutions behavior.
Two pieces of EU regulation, EMIR (European Markets and Infrastructure Regulation) and MiFID (Markets in Financial Instruments Directive), scheduled for final implementation on Jan. 3, 2018, are forcing US-based financial institutions to accommodate more onerous regulations if they are to participate in EU markets and provide services to EU clients.
EMIR forces US companies that wish to do business with European counterparties to follow their rules on derivatives for trading venues, central counterparties and trade repositories. MiFID sets out the rules for trading, market research, investment firms and sets data standards for trade and market data reporting.
US capital and derivatives markets had for long been the gold standard, thought to be the fairest, most liquid and best managed. Regulation and oversight of US markets and their financial institutions, up to the financial crisis, was thought to be first class.
Now, European rules are setting a new gold standard, more comprehensive than US ones, reversing the decades-long dominance of US markets and their financial institutions having the best-in-class risk and regulatory regimes.
Another determinant of EU’s rising prominence is their adaption of the Basel Committee on Banking Supervision’s (BCBS’s) capital and risk regimes, a global framework for implementation by sovereign regulators, that is being adhered to closely in the EU but not so in the US.
To understand the potential of the US to evolve to an EU-centric financial system, we need to understand some of the changes to practices of U.S. financial institutions fostered by EU rules: