The report provides an informed and comparative analysis of regulations, both current and emerging, in nine territories: Australia, Brazil, Canada, the EU, Hong Kong, India, Japan, Singapore and the US. Regulatory activities in these territories were chosen for their relevance to the global financial regulatory landscape. Within these territories, there are five systemically important regulatory mandates that are explored in the report: financial transactions tax, the US Foreign Account Tax Compliance Act (FATCA), the EU’s Markets in Financial Instruments Directive and European Market Infrastructure Regulation, the US’s Dodd-Frank Act (DFA) and the Basel III accords.
Collectively, these regulatory changes create an environment characterised by uncertainty, mismatched objectives and extensive opportunities to misinterpret requirements. As a result of these concerns, three scenarios are points of interest for both regulators and market participants: regulatory avoidance, substituted compliance and regulatory exemptions.
Regulators have sought to determine all potential opportunities for regulatory avoidance and have included measures to close these loopholes. The most prominent regulatory actions are those that require intergovernmental cooperation to ensure compliance; the wide uptake of intergovernmental agreements (IGAs) highlights the desire for cooperation. It is increasingly apparent that regulatory avoidance can only take place beyond the jurisdiction of the US, the EU and the G20 in areas where there is a distinct lack of legal and regulatory momentum makes for an unattractive business and trading environment, thus discouraging moving trading activity to such regions.
Substituted compliance exists in a variety of forms across jurisdictions with little evidence of direct substituted compliance, apart from IGAs. GreySpark does not view substituted compliance as a necessary condition for effective global regulation. It primarily serves to appease the requirements of US regulators, giving any global regulatory mandate a DFA flavour as the number of jurisdictions with ‘DFA equivalent’ regulations rises. Likewise, regulatory interoperability across jurisdictions, pursuing a variety of regulatory agendas, is a myth. There is a great and costly challenge to integrate many complex legal and regulatory infrastructures.
Exemptions to regulations offer compliance relief to entities and transactions under certain conditions. The extent and remit of exemptions across the regulations explored is not far-reaching enough to have a powerful market impact or to substantially affect profit and loss for a significant proportion of affected parties. This is similar to the case for regulatory avoidance where regulators seek to have extensive reach. Exemptions that currently exist will, for a large part, be curtailed over time.
