Exchange Leaders Warn On Regulatory Arbitrage

Wholesale reform of the global financial sector is raising concern among some exchanges and traders about the impact of domestic regulatory moves on international competitiveness.

With Dodd-Frank reforms and parallel changes in Europe moving at different paces, some executives are concerned about what is known as regulatory arbitrage, with business flowing to countries that have cheaper and less-restrictive oversight.

U.S.-based executives have been the most vocal about the potential for trading--and jobs--to move if other countries introduce rules for the derivatives sector that are less onerous than those laid down by the Dodd-Frank legislation.

"These businesses will shift overseas dramatically," said Terry Duffy, chairman of CME Group Inc. (CME), in an interview. "That is one of the risks you have of being a [regulatory] leader."

While lawmakers and regulators in the U.S. and the European Union agree on broad reform principles--such as greater transparency and funneling more trades through clearinghouses to reduce systemic risk--gaps are emerging.

"Some of the differences are substantial," said Anthony Belchambers, chief executive of the London-based Futures and Options Association, the main trade group for the derivatives sector in Europe.

Belchambers, speaking in a panel debate at the annual Futures and Options Association conference in Chicago, said he had scribbled down 14 or so areas of divergence. More concerning, said Belchambers, is the push by some regulators to extend their reach into other markets because of the global nature of the business.

"This thing is in danger of getting out of hand," he said.

CME CEO Craig Donohue said the "extra-territoriality" impact of Dodd-Frank was one of the greatest areas of uncertainty in the yet-to-be-finalized Dodd-Frank reform agenda. "It's a whole can of worms," Donohue said during a panel discussion among exchange CEOs.

Others are more sanguine about the potential for multi-speed regulation to see trading and jobs shift among jurisdictions, at least for long.

Andreas Preuss, CEO of the Eurex derivatives arm of Deutsche Boerse AG (DB1.XE), said in an interview that any imbalances created by regulators would quickly be eliminated if traders moved business.

-By Doug Cameron, Dow Jones Newswires; 312-750-4135; doug.cameron@dowjones.com

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