A Long Way to Go

Despite the progress made, however, reforms are long past the 2012 deadline for implementation, with the only real high point so far being the CFTC's finalization of swap execution facility (SEF) rules earlier this year. The G20's goal may have been unrealistic to start with, given the myriad concerns and tangential problems that have been presented with transitioning the OTC market from a bilateral, voice-based trading model to one that incorporates electronic trading, central clearing and reporting.

One of the key areas of contention has been around the applicability of foreign rules when it comes to non-nation firms, with the most extraordinary example being the extraterritoriality of the Dodd-Frank Act, and its Title VII provisions that govern OTC trading. While the FSB is right to point out the steps forward made with regards the cross-border substituted compliance work undertaken by the CFTC, these are individual agreements made between regulators, and do not encompass some important financial centers.

US Advantages
Europe must take a weighty portion of the blame by continually dithering over the implementation of the Markets in Financial Instruments Directive review (Mifid II) and the European Market Infrastructure Regulation (EMIR), both of which have provisions designed to implement G20 mandates. It is somewhat alarming that, five years after the financial crisis truly began and four years after the G20 decrees, there is only minimal practical implementation, the rest being theory and debate.

The technology is there to put these things in place, if the many, many conversations I had with vendors and platforms around the time the SEF rules came out are anything to go by. Most of them are eyeing Europe and its organized trading facility (OTF) regime as a money spinner, given their experience with SEFs and operating trading platforms long before they were called that.

Organized Chaos
What the entire process of OTC reform has done, however, is highlight the difficulties in achieving harmonization across different jurisdictions. This isn't just in Asia-Pacific, which is well known for its fragmented structure, but also across the US, the EU, Latin America and other markets. The US has the ball rolling, and it will be coming to other areas, but questions remain over how much disruption it will cause when it does become widespread. The central clearing deadlines for large institutions, for example, passed uneventfully for some, but for others caused chaos, and volumes were lower.

Europe must take a weighty portion of the blame by continually dithering over the implementation of the Markets in Financial Instruments Directive review (Mifid II) and the European Market Infrastructure Regulation (EMIR), both of which have provisions designed to implement G20 mandates.

Of more concern are the holes in the system, the potential weak points consistently identified by nearly every trader I speak to, such as the CCPs. What happens if they fail? People don't seem to be concerned about another Lehman, so much, as they do a clearing house failing, and the standards must be in place before they're implemented fully.

Essentially, there may be steps forward, but the industry as a whole still has a long way to go.