SocGen Exec: Regulatory Conflict Causing Confusion at Banks

Much of the problem stems from the US regulators ─ primarily the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) ─ defining US entities as being subject to Dodd-Frank rules, regardless of where transactions occur or the home nations of the counterparties concerned.

"For a quick example, at Société Générale, a French bank, by following US regulations, I'm going to break the law in France in January," explained Stéphane Malrait, managing director and global head of foreign-exchange (FX) and fixed-income e-commerce at Société Générale. "I cannot follow both laws ─ we have quite a large business in the US, so I have to follow their rules, as I have global clients that I need to serve there. But to do that, I'm going to break French law. We talked to the regulators, who said that maybe they won't fine us because we believe it's important that we follow US law, but it's a problem we have to resolve. The regulators in each country are keen to have their own regulations. When the US regulator implemented their definition of a US person, all of the European regulators were furious. They cannot enforce US regulation in another country."

Expanding on the confusion precipitated by the US definition of a person, Gavin Hill, executive director and head of e-distribution at CIBC World Markets, highlighted the potential for a dual-regulatory regime that could introduce conflict, as well as organizational and systemic complexity for the global capital markets structure. This, he said, was emphasized more acutely in institutions such as CIBC, domiciled in Canada, but with subsidiaries world wide.

"Equally, it's about how you interact with your clients," he explained. "That's the alarm bell, when a client says that they want us to interact with them in a certain way. So, for us, do we do that under the name of CIBC London, where we're clearly under European legislation, or do we deal under the name of CIBC Toronto? We have situations where we have to do both. An asset manager may say that they want to transact a block trade, where part A is for underlying that is predominantly US, so it becomes a US citizen we're interacting with in that part of the trade, and part B you're not. So you're looking at a dual-reporting and responsibility regime in how you're interacting with the client from a regulatory point of view, and that can be quite tough from an infrastructural perspective, as you can imagine."

Global Roll-Out for Regional Rules
Société Générale's Malrait also pointed out that US legislation on best conduct for derivatives trades means that market-makers are obliged to provide specific pricing information to US persons; however this was not replicated across other regions. Along with the mandate determining the length of time that pricing information has to be stored ─ five years in this case ─ banks, platforms and vendors will be forced to upgrade their technology gloablly in order to comply with the US regulation from January 1, 2013. 

You're looking at a dual-reporting and responsibility regime in how you're interacting with the client, from a regulatory point of view, and that can be quite tough from an infrastructural perspective, as you can imagine.

"Somebody needs to store that price for five years, and the regulation is only six weeks away," Malrait explained. "In the end, people will decide that they can't break US law, so they're going to ask the [trading] platforms to do it, because the banks are too bureaucratic. But, although I don't really want to show the price to a client in Asia or Europe, the timeframe is too short. So the agreement with the banks is that if we're required to reply to the US regulators, we have to implement this globally, for all products and all clients ─ there is no way that we could implement it on a regional basis."