Global financial regulatory reforms and sovereign’s exemption

Author:Chiara Oldani
Position:University of Viterbo, Viterbo, Italy
Pages:190-202
SUMMARY

Purpose The purpose of this paper is to underline the (hidden) risks posed after the crisis by the exemption of non-financial operators, especially sovereigns, from the regulatory reforms of over the counter (OTC) derivatives undertaken by G20 countries in the absence of accounting data on trading. Design/methodology/approach Recent financial regulatory improvements are reported... (see full summary)

 
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Global nancial regulatory reforms
and sovereignsexemption
Chiara Oldani
University of Viterbo, Viterbo, Italy
Abstract
Purpose The purpose of this paper is to underline the (hidden) risks posed after the crisis by the
exemption of non-nancial operators, especially sovereigns, from the regulatory reforms of over the
counter (OTC) derivatives undertaken by G20 countries in the absence of accounting data on trading.
Design/methodology/approach Recent nancial regulatory improvements are reported to
underline that the trading of OTC derivatives by sovereigns and local administrations does not take
place under the new regulatory umbrella, because of the relative size of the institution, the lack of
incentives to adhere to Centralized Counterparty Systems (CCPs) and most of all, the absence of
proper accounting rules. Sovereigns and local administrations have the potential to undermine global
nancial stability.
Findings The limited availability of accounting data on derivativesuse by public administrations
constitutes a barrier towards a full comprehension of risks involved. Sovereigns should be compelled to
adhere to the CCPs and the collateralized system of trading; the short-term costs of adhering to CCPs are
worth $20bn.
Research limitations/implications The new regulatory system failed to explicitly consider the
trading of sovereigns and this can reduce the effectiveness of regulation itself and can have negative
impact on nancial stability; in fact, omitting sovereigns from these regulations represent a
signicant risk oversight because they are systemically important players, although with a special
political power.
Originality/value Despite progress made in improving the transparency and resilience of OTC
derivative markets after the subprimecrisis, sovereigns and public administrations are exempted from the
new regulation,posing severe risks to nancial stability.
Keywords Financial stability, Sovereign debt, Regulatory reform, OTC derivatives, Sovereign risk
Paper type Conceptual paper
1. Introduction and literatures review
After the nancial crisis, G20 countries improved the stability of the nancial system by
minimizing regulatory arbitrage and increasing transparency. However, non-nancial
operators are not subject to the nancial regulation introduced after 2009 and in particular,
sovereigns and local administrationscan manage their growing debt outstanding with over
the counter (OTC) contracts, written on interest or exchange rates, with limited data
disclosure, posingsevere risks to nancial stability.
JEL classication F55, G18, G28, K2, N20
The author would like to thank Alexandra Dostal, Wayne Foster, Corey Garriott, Domenico
Lombardi, John Kirton, Manuela Moschella, Joshua Slive, Christopher Sutherland, those attending the
seminar at the Munk School of Global Aairs, University of Toronto and the anonymous referees for
comments. The author also thanks Samantha St. Amand for her excellent research assistance. All
errors are of the authors. This research received no specic grant from any funding agency in the
public, commercial or not-for-prot sectors. The author has no conict of interest.
JFRC
26,2
190
Journalof Financial Regulation
andCompliance
Vol.26 No. 2, 2018
pp. 190-202
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-11-2016-0105
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm

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