Will savvy banks be able to exploit these differences in regulatory timelines?
“It’s too early to talk about the potential for business moving from or to a particular jurisdiction until the regulatory efforts across all major geographies are known,” said to Robert Pickel, executive vice chairman of the International Swaps and Derivatives Association in a written statement. “Until that point, it is all hypothetical. In the short term, we don’t believe that firms will make business decisions based on temporary and potentially short-lived differences in regulatory frameworks.”
Proprietary trading is another area where differences could arise between jurisdictions since the U.S. is the only country that has decided to tackle the issue, according to David Sahr, a partner with law firm Mayer Brown. The so-called “Volcker rule” within Dodd-Frank aims to prohibit proprietary trading in the U.S. for both U.S. and foreign banks. Although U.S. firms will also be governed by the same prohibition overseas, this isn’t the case for foreign banks. As a result, the Volcker rule may push proprietary trading from (TO?) foreign banks outside the country.
“The U.S. is really going at it alone on the proprietary trading prohibition,” Sahr said, speculating that the activity could move to Canada to take advantage of the same time zone as in the U.S.
Experts have cited bank capital requirements and off-balance sheet securitizations as other areas where legislation may ultimately differ between the U.S. and the EU.
To be sure, regulators are aware of the potential risk of regulatory arbitrage and are working in concert to avoid major differences between the new rules so that risk doesn’t materialize.
“The regulators are extremely attentive to the issue,” said Daniels of EA Markets. “The last thing they want to do is drive business offshore.” To that end, regulators, especially in the U.S. and the EU, have been reinforcing cooperation and discussion in their rule making efforts.
Additionally, there are several hurdles to moving a business offshore solely to take advantage of more advantageous rules.
“Even if moving jurisdiction is going to help you from a regulatory point of view, there are all sorts of challenges,” said Jeremy Jennings-Mares, a partner with law firm Morrison Foerster in London. “Tax, time zone and infrastructure are also going to play a part.” The difficulties of moving employees or finding skilled employees locally as well as being further away from clients should also be taken into consideration.
“It will depend on whether there are cost advantages to do business in a certain jurisdiction,” said Peter Green, also a partner with Morrison Foerster in London.
But for James Cawley, chief executive of Javelin Capital Markets, an electronic platform for derivatives trading, the lack of safety and transparency is the main deterrent to moving a business overseas to profit from more advantageous regulatory regimes.
“Investors generally chose not to do that because regulations come with safety,” he said, adding that the goal of Dodd-Frank is to bring greater transparency and safety to the U.S. system. He added that if banks and financial institutions chose the more lenient jurisdictions, they may put their business at risk.
Although experts aren’t yet hearing of any concrete cases of banks moving activities off shore, it’s clear all market participants are at least on the lookout for potential opportunities. Whether these opportunities will materialize remains to be seen.
“It’s certainly on the minds of banks, investors and regulators,” said Mr. Green. “But it’s too early to say because so much of the regulatory reform is in early stage.”