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G-20 Calls for Globally Consistent Regulation of Hedge Funds and Derivatives and Coordinated Resolution Authorities to End Too Big to Fail

By Jim Hamilton

In the final communiqué from their Seoul summit, the G-20 committed to take action at the national and international level to ensure that national authorities implement global financial regulatory standards developed to date in a consistent manner that ensures a race to the top and avoids fragmentation of markets, protectionism and regulatory arbitrage. In particular, the G-20 pledged to implement fully the new bank capital and liquidity standards and address too-big-to-fail problems.

Also, with the European Parliament having just passed legislation similar to Dodd-Frank to regulate hedge funds, the G-20 committed to work in an internationally consistent and non-discriminatory manner to strengthen regulation of hedge funds, OTC derivatives and credit rating agencies. They endorsed the Financial Stability Board?s recommendations for implementing OTC derivatives market reforms, designed to fully implement previous commitments in a consistent manner, recognizing the importance of a level playing field. The FSB was asked to monitor the progress regularly. They also endorsed the FSB's principles on reducing reliance on external credit ratings. Standard setters, market participants, and regulators should not rely mechanistically on external credit ratings.

The G-20 again re-emphasized the importance of achieving a single set of improved high quality global accounting standards and called on the International Accounting Standards Board and the Financial Accounting Standards Board to complete their convergence project by the end of 2011. They also encouraged the International Accounting Standards Board to further improve the involvement of stakeholders, including outreach to, and membership of, emerging market economies, in the process of setting the global standards.

The G-20 reaffirmed that no firm should be too big or too complicated to fail and that taxpayers should not bear the costs of resolution. Addressing the moral hazard risks posed by systemically important financial institutions and addressing the too-big-to-fail problem requires a multi-pronged framework combining: a resolution framework and other measures to ensure that all financial institutions can be resolved safely, quickly and without destabilizing the financial system and exposing the taxpayers to the risk of loss. This is the goal of the resolution authority created by Title II of Dodd-Frank.

Financial institutions that are globally systemic should have higher loss absorbency capacity to reflect the greater risk that the failure of these firms pose to the global financial system; more intensive oversight; robust core financial market infrastructure to reduce contagion risk from individual failures; and other supplementary prudential and other requirements as determined by the national authorities which may include, in some circumstances, liquidity surcharges, tighter large exposure restrictions, levies and structural measures. In the context of loss absorbency, the G-20 encouraged further progress on the feasibility of contingent capital and other instruments.

Full post as published by Jim Hamilton's World of Securities Regulation on November 12, 2010 (boomark / email).