Territorial Rulemaking and the Data Environment

At data services provider Markit's annual New York customer conference last week, Robert Pickel, CEO of the International Swaps and Derivatives Association (ISDA), remarked on the problem of "extraterritoriality" when it comes to regulation of financial industry operations.

Pickel defined the concept as national regulators taking different stances concerning the same areas of rulemaking, although "extraterritoriality" can also mean exemptions from local law. With either definition, the problem Pickel correctly identifies is that regulatory fragmentation can be the result. This can occur whether an international regulatory or standards body is attempting to impose rules that would supersede national rules, or whether national regulators get authority to interpret international guidance (which could still happen with the legal entity identifier).

If, as Pickel implies, national regulators may still offer up their own local laws, which appears to be an issue with margin requirements currently being considered, that will stifle global cooperation, which threatens the derivatives business he represents.

The danger, as David Schraa, regulatory counsel for the Institute of International Finance, also pointed out later in the same discussion, is that a potentially "well-regulated and reasonably stable global financial system" will "Balkanize" into territorial national markets—not just in the derivatives business. "It will be much more costly for a bank to monitor 10 major markets if they must have capital and liquidity for each of them," he says.

So what does this all mean for reference data management? The issues Inside Reference Data covers mirror what happens with overall financial and securities industry operations and regulation, including the trading sphere. The aforementioned LEI is a good and concrete example of this, with the structure of local operating units being established by a central global authority having caused concern in some circles.

Just as fragmentation of data sources based on asset classes or other factors is cause for concern (as reported back in January in "Communicate and Aggregate"), so fragmentation through "extraterritoriality" should also be a concern. In this case, it's an external factor rather than one firms can control by consolidating data, however.

Nonetheless, data managers can be proactive by anticipating extraterritorial, Balkanized or otherwise fragmented regulation as a possible outcome, rather than the globally coordinated efforts currently underway—and be prepared for both possibilities.