Harvard Law School Symposium 7-9 April Building the Financial System of the Twenty-first Century: An Agenda for Europe and the United States

Harvard Law School Symposium 7-9 April 2016 Building the Financial System of the Twenty-first Century: An Agenda for Europe and the United States Concept Paper: Divergence between US and EU regulations Chris Cummings, Chief Executive, TheCityUK Introduction 1. TheCityUK is an independent membership body representing the UK-based financial and related professional services industry. This ranges from banking, insurance, asset management, securities and private equity through to legal, accountancy and management advisory services. These sectors as a whole account for 11.8% of the UK s GDP and financial services account for 11% of UK tax receipts. They employ 2.2 million people, more than two-thirds of whom work outside of London. 2. Our membership includes UK-headquartered and inward investor firms. We seek to engage and respond to relevant UK, EU and international developments which have an impact on the industry s competitiveness, as well as to potential opportunities and threats to the UK s economic and national interests. 3. We have taken a long-standing interest in transatlantic regulatory divergence and its opportunity costs in terms of job creation and economic growth. Two years ago TheCityUK contributed a concept paper to this Symposium, Transatlantic convergence or divergence, and how to deal with it. This present paper is both an update and a fresh examination of the issues, taking into account that, in the two years that have passed, some aspects of disagreement between the EU and the US remain wide and efforts at convergence for instance in the negotiations for a Transatlantic Trade and Investment Partnership (TTIP) have not yet met with any significant success 1 *. The reasons for this merit study, particularly given that failure to reach agreement has strong negative implications, especially in fields such as the role of central counterparties (CCPs), balkanisation of liquidity, and fragmentation of capital pools. 4. TheCityUK remains strongly supportive of the efforts being made in the US and the EU towards concluding TTIP successfully. We believe that this Partnership needs to be comprehensive, ambitious and that negotiations towards it should cover all aspects of the transatlantic economy, and that nothing should be excluded from discussion 2. As both sides regularly reiterate, negotiations over 2016 are of key importance, with an outcome capable of having a major impact not only on the transatlantic economies, but also on emerging global frameworks. *All footnotes cite references given in full on pages 10-11 1 For a fuller review see Quaglia 2016 2 As set out in the EU s TTIP negotiating mandate: see Council of the European Union 2013 1

Context and purpose 5. Regulatory convergence and divergence is a huge and expanding subject. This Symposium, Building the Financial System of the Twenty-first Century: An Agenda for Europe and the United States, is focusing on four specific aspects: the future of large global banks; divergence between US and EU regulations (in particular on CCPs and capital); liquidity in the private fixed income market; and reform of secondary market structure for equities. In many ways, the phenomenon of regulatory divergence can be viewed as mapped across all of these: its effects are allpervasive and damaging. This paper will attempt to examine why the forces favouring divergence remain obstinately strong. 6. The issues are not of course confined to the EU and the US. But the present context is one in which the US and EU are still in a position to exert a strong influence, given the fact that the US and the EU have the largest financial sectors worldwide and are the main trading partners in financial services. This position of relative dominance is under challenge, although reemergence of emerging market risk and volatility will cause some re-assessment of previously accepted growth models. It is, however, true that most of the world s evolving and aspirant key financial centres will lie outside the US and the EU 3 : 7. The EU and US therefore need to give attention to taking a lead in global regulatory coherence for financial services while their influence is strong. This paper s message is that TTIP continues to offer the most suitable vehicle for doing so. It is recognised that this view is not free of controversy. 4 The case for using it reflects the fact that the US and the EU together dominate financial markets worldwide. The combined level of bank assets in the US and the EU is about 50% of the world total and so is the combined level of stock market capitalisation. In addition the combined level of debt securities markets in the US and the EU exceeds 60% of the world total. 5 The EU and the US are also each other s main trading partners in financial services. These 3 TheCityUK 2015 4 See Johnson & Schott 2013 5 See Lannoo 2013 2

dynamics offer and require effective action to secure and deliver the opportunities afforded by that position. Previous policy development 8. Regulatory cooperation between the EU and the US in some organised framework is not new or untried. It has taken place for at least twenty years, mainly on a voluntary basis using sectorbased initiatives. TTIP is simply an added spur to existing processes, building on studies that have consistently shown that up to four-fifths of the gains to be expected from TTIP relate to greater regulatory coherence. As the TTIP negotiations proceed, there is increasing evidence of both sides willingness to agree on good regulatory practices, and to eliminate unnecessary burdens in a number of sectors. It is to be hoped that they can also agree on a continuing process (enshrined in a living agreement ) that, if flexibly operated, will result in a further expansion of regulatory coherence and cooperation in the future. 9. Contrary to perceived impressions, the EU and the US have gradually and successfully increased efforts to achieve greater coherence and convergence in regulation as means of tackling technical barriers to trade (TBTs). Much of this stems from the Transatlantic Economic Partnership (1998), the US-EU Mutual Recognition Agreement (1998) 6, and the structures put in place in the course of pursuing the objectives first set out by both sides at the 2002 EU-US Summit: to pursue, as appropriate, harmonised, equivalent or compatible solutions, and take appropriate steps to minimize or eliminate unnecessary divergence in regulations. These objectives have since become the bedrock for a set of Guidelines on Regulatory Co-operation and Transparency 7, annually adopted Road Maps intended to implement the Guidelines, a High Level Forum for Regulatory Co-operation, all capped by political oversight through the Transatlantic Economic Council. They were also reflected in the establishment of the EU-US Financial Markets Regulatory Dialogue (FMRD) in 2002, which is recognised as having delivered some modest results in its early days, before the financial crisis. 8 10. The EU-US High Level Regulatory Forum is acknowledged by both sides as having been worthwhile: The EC-U.S. High-Level Regulatory Cooperation Forum ( the Forum ) provides a setting for senior officials from all areas of the government to come together to discuss regulatory policy matters of mutual interest. The Forum aims to improve the quality of regulation on both sides, through sharing regulatory best practices such as risk and impact assessments, and techniques related to reducing the costs to business and consumers that arise from unnecessary differences in regulatory requirements. The Forum also identifies opportunities for cooperation on specific sectoral issues. The dialogue helps bridge gaps where responsibilities in the two administrations do not correspond exactly, and allows for early engagement on new emerging regulatory issues. The Forum engages with stakeholders in public sessions which form part of its regular meetings. As well as informing business and consumers about the results of Forum work, these sessions provide a platform for stakeholders to engage in discussions with officials from both sides on topics selected by the stakeholders. The work of the Forum contributes to achieving the objectives of high-level political bodies such as the Transatlantic Economic Council and the Energy Council. The Forum is co-chaired 6 Council of the European Union 1998 7 Progress has been well set out by both sides. See, for instance, USTR 2002 8 E.g. promoting the convergence of accounting standards (see Alexander et al. 2006) 3

by the Director-General of the Directorate General for Enterprise and Industry and the Administrator of the Office of Information and Regulatory Affairs in the Office of Management and Budget 9. 11. It is sometimes contended that this structure for cooperation has been more successful in providing a platform for voluntary cooperation than in mandating a forward path for greater cohesion and cooperation between regulatory authorities. This potential limitation was succinctly summarised in an Institute of International Economics study. 10 Whatever its effect, however, it is a fact that agreed solutions have been achieved in specific areas through EU-US cooperation on a voluntary basis. Examples include organic goods (where both sides recognised conformity programmes as equivalent) and marine safety (where both sides recognised that their regulations were based on the same international standard). Differences between the histories of EU and US legal and institutional developments have meant that there are corresponding differences in regulation and the systems and procedures for enforcing it, often reflecting different domestic circumstances. True, moving to a more binding system of obligations under TTIP will represent a significant new development. But past spadework has provided a foundation for working towards this outcome. 12. Another ground for optimism is that, in separate ways, both the EU and the US have already achieved significant degrees of internal regulatory coherence. In the US, the inter-state commerce clause in the Constitution, the dormant commerce clause doctrine (that there is an implied restriction prohibiting a state from passing legislation that improperly burdens or discriminates against inter-state commerce), and other legislation have effectively brought about a single market between the individual states. In the EU, the Treaties, supported by EU legislation and a system of implementing institutions at EU and Member State level, have brought about very significant progress towards a full Single Market of 28 Member States. A recent publication on TTIP 11 has rightly concluded that: There are many similarities but also fundamental differences between the two systems. Understanding both is essential to bridging the gaps between the two markets and moving towards a more transatlantic approach. It is also important to realise from the outset that once the relevant political choices and decisions have been made, implementing them will be challenging given the obvious technical and legal complexities involved, but by no means insurmountable and comparable to domestic efforts by both sides to create their own single markets. 13. All this means that, contrary to assertions that are often made, there is a living laboratory of precedent on which to draw in developing approaches to regulatory coherence and cooperation in sensitive areas where citizens rightly expect and demand the highest standards of regulation. Financial services regulation is self-evidently one of these. Regulatory cooperation: financial services 14. As has been underlined in recent studies, both the US and the EU now engage in financial services regulatory cooperation in multilateral and bilateral financial fora. They also do so through provisions in trade agreements with third countries setting up joint Financial Services Committees (in which the principal representative of each Party shall be an official of the Party's authority responsible for financial services') 12. It is sometimes contended that, 9 OMB 2011 10 Devereaux et al 2006 11 US Chamber 2016 12 See USTR 2012 4

internationally and bilaterally, the US had a predominant regulatory influence up to the 1990s, with the EU's regulatory influence increasing after the international financial crisis led to different patterns of regulatory reform in the US and the EU. The pre-crisis scenario 15. The pre-crisis scenario was very different from the scenario that now affects regulation. It had its origins in post-war institution-building for the global economic framework, notably the Bretton Woods institutions. Although these institutions have undergone steady adaptation, some of the pre-crisis regulatory practices showed a strong degree of continuity. There were relatively slow and gradual processes of evolution - on the US side, from Glass-Steagall (1933) to Gramm-Leach-Bliley (1999), and, on the EU side, gradual consolidation of the Single Market. Accompanying consultative processes were not excessively demanding and worked reasonably well, even if they fell short of the degree of US-EU regulatory cooperation on other areas, described above. There was steady market-opening and the expansion of trust between regulators. And there was progress away from balkanisation of international capital markets, even if more remained to be done. The crisis and post-crisis scenario 16. The crisis and its aftermath radically altered the challenges facing regulators. But some of the pre-crisis mind-set has perhaps been slower to change. 17. Essentially, this was a crisis of developed markets, with a consequent loss of prestige for the developed West and placing question-marks over the West s regulatory leadership and prestige. For Western regulators, the crisis produced a radically different scenario from before: there was a gradual realisation that there could be an imminent global crisis of profound proportions, and that there needed to be a strong and necessary reaction from global leaders. Machinery for this has steadily developed via and G20 and the Financial Stability Board (FSB). 18. At the same time, there were inevitable post-crisis side effects, producing a degree of reversion to nationally determined regulation. Regulation became more politicised, with political pressures to exert control. It was created and introduced as a response to crisis an essentially reactive agenda, justified as critically important, sometimes without regard to its cumulative impact. There was there had to be a race to implement to secure the system, with less time than previously for forethought, and less incentive to consult other regulatory authorities on consistency of regulation. This led to some loss of the previous implicit consensus on the balance between regulation and stability, on the one hand, and growth and competitiveness, on the other 13. Institutional questions also arose typically over how far the balance between national and regional or international regulation could remain as before: in the EU this gave rise to the searching analyses in Turner Review 14 and De Larosière Report. 15 Post-crisis regulation and its challenges 19. Overall, post-crisis international regulation can be considered to have been effective. It has averted melt-down and set rules successfully. But some key challenges remain, typified by, but not confined to, transatlantic regulation. These include regulatory divergence, carrying various costs: extraterritoriality and conflicts of law, with compliance costs and uncertainties regulatory arbitrage damage to the effectiveness and stability of the global financial system 13 See TheCityUK 2011 14 FSA 2009 15 De Larosière 2009 5

threats to the ability of leading financial authorities to export regulatory approaches and best practices to rest of the world duplicative and inefficient practices for providers and users of capital, undermining growth. 20. Newly salient regulatory divergences have also highlighted the importance of questions of process and transparency, and how these may hamper regulatory cooperation. Chief amongst these are: different administrative and political rule-making processes associated problems of transparency at different legislative and rule-making stages, with differing types of notice and comment procedures. 21. And, finally, regulatory divergences have revealed substantive differences in regulatory requirements on the two sides of the Atlantic, for reasons including: failures in synchronising key measures, for example in the implementation of Basel III differences over bank structure and geographic requirements for capital the consequent unlikelihood of common rules for bank resolution important technical inconsistences in over-the-counter (OTC) derivatives regulation. The post-crisis challenge of enhancing transatlantic regulatory co-ordination 22. Despite regulators best efforts, there have been failures in transatlantic coordination. At a general level, these arose from the fact that the road map of regulatory reforms worldwide was set by the G20 and the FSB, but was implemented via trans-governmental sectoral fora of national financial regulators (for example the Basel Committee, IOSCO or the International Association of Insurance Supervisors) who issued new or revised standards. In turn, these were given effect in individual jurisdictions by the signatory governments. 16 At the international level however standards had perforce to be framed in rather general terms, so as to accommodate different market structures and regulatory frameworks and to allow the specific provisions of post-crisis financial regulation to be decided upon at the national level (or, in the case of the EU, at regional level). This gave rise to questions about the extent to which states affected by the crisis were adopting international negotiated regulations, or whether they were instead determining their own reform priorities at the expense of greater convergence in a multi-level system. 17 In the transatlantic context regulatory divergences inevitably followed: some of these are set out in TheCityUK-Thomson Reuters sponsored Atlantic Council s Report, The Danger of Divergence: Transatlantic Financial Reform & the G20 Agenda 18. In retrospect, many of these divergences can be seen as springing from differing priorities and contrasting features of the US and EU economic landscape: for instance, most of the funding to businesses in the US is provided by capital markets, while banks perform much of this role in the EU 19. There were also differing political contexts, constituencies and popular pressures in the US and the EU. 20 23. The US-EU Financial Markets Regulatory Dialogue (FMRD), led by the US Treasury and the Commission's DG FISMA, is currently the main transatlantic forum 21 for regulatory dialogue and co-ordination. It is intended as a forum where regulators' views can be expressed and regulatory issues can be discussed in an expert way. It also aims at being a robust, efficient and flexible platform for mutual exchange of information and to search for solutions to issues, bringing together representatives of the European Commission, the European Supervisory 16 See Brummer 2012 17 See Maynz 2015 18 Atlantic Council 2013 19 See Howarth and Quaglia 2015 20 See Pagliari 2013 21 There are also other fora, at multilateral and plurilateral levels: see Lawton 2013 6

Authorities (the European Banking Authority, European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority), the US Treasury and US independent regulatory agencies (including the Federal Reserve, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission). 24. But, in its current form, the FMRD has serious disadvantages. These include: it is a pre-crisis institution, set up in 2002, and not adapted to post-crisis circumstances it is only in intermittent session and has not had a regular pattern of meetings it does not seem to have proved equal to current pressures of work it has few or no systems for reporting to market stakeholders, raising questions of transparency and accountability it has not proved equal to solving inconsistencies in post-crisis regulatory programmes despite some recent effort at improvement, its processes appear to lack openness to information on market predicaments, or clear incentives to reach solutions before problems arise, rather than after. 25. For all these reasons, TheCityUK is one of a number of bodies, including those on both sides of the Atlantic, which have pressed for a step change in the way that the dialogue between regulators works 22. Our guiding principles for meeting the challenges facing regulators and industry alike now and in the future include a process that: is more disciplined and transparent is more timely and accountable reaches better-coordinated results anticipates and solves regulatory problems in advance, rather than examining them after they have arisen - the ex-ante as well as the ex-post approach. 26. With other financial services bodies on both sides of the Atlantic TheCityUK has accordingly emphasised that there are three important characteristics that any successful regulatory dialogue should include and that TTIP should recognise these: a) A focus on discussion at an early stage in the policymaking process - It is important for effective cross-border policy solutions that an avenue exists at the beginning of the process to work through the effects on market stability and institutions operating in both jurisdictions. A framework within TTIP could provide assurances that cross-border issues would be considered before, not after, they become problems. b) A focus exclusively on future policymaking - We are not seeking changes in existing regulations via a TTIP agreement. However, as cross-border capital flows continue to grow, the transatlantic policy landscape will not stand still: rather, new rules and regulations affecting the financial services industry will continue to be devised as the industry and the world around it evolves. Instituting a workable framework through TTIP would allow the international implications of emerging issues to be discussed in a timely and effective way and increase the potential for delivering workable rules. c) Retention of the prudential exemption - Financial services are covered in trade agreements but have long been subject to the so-called prudential exception under which a financial regulator may impose regulation that is inconsistent with an FTA obligation for legitimate 22 Most recently in the Joint Statement 2016 7

prudential reasons 23. This would continue with a new TTIP-based framework. Policy on financial services regulation would, as now, remain entirely the preserve of financial regulators. 27. The focus on future policymaking at (b) above is of particular importance. New issues, barely considered at the time of the financial crisis, are now coming to the fore. For example, almost six years after the US passed the Dodd-Frank Act into law, and the EU adopted the Barnier programme of financial services legislation, there is increasing attention being paid by policymakers around the world to market conduct, data transfer, cyber security and fintech. Data transfer and cyber security raise issues (including in the international trade policy sphere) crossing the traditional boundaries of regulatory disciplines and modes of international coordination. Fintech raises wholly new questions: how and how far it should be regulated; its regulatory environment, in terms of which agencies in different jurisdictions should be responsible for regulation; and its interoperability between jurisdictions. Answering these questions correctly and flexibly will lie at the heart of harnessing this new technology in ways that will enable scaled-up fintech businesses to function best with more traditional areas of financial services. These and other issues will require close regulatory coordination. In the EU, important questions regarding Capital Markets Union and Structural Banking Reform are also being discussed - questions with policy implications that go well beyond the EU. It is absolutely essential to improve on the means of tackling the international implications of such issues. 28. The fact that they can be tackled is shown by the recent agreement 24 reached between the European Commission and the US Commodity Futures Trading Commission (CFTC) on a common approach to equivalent regulation of central counterparties (CCPs) in derivatives business. This agreement is designed to pave the way for cross border clearing, and will as a first step - allow US firms to continue to clear in the EU once mandatory clearing starts later in 2016. Given that it appears to fall short of recognition of cross-border trading, it is only a partial solution to the many questions facing businesses wishing to use derivatives flexibly in the transatlantic marketplace. It is therefore an example of both what is achievable and what remains to be achieved. The role of TTIP 29. TheCityUK believes that TTIP must contain certain essential features for promoting transatlantic regulatory coherence. For a number of reasons TTIP is the obvious vehicle in that it: will be a government-to- government agreement, focusing on what governments do that restricts imports of goods and services, and dedicated to EU-US commercial issues, including regulatory coherence is under active negotiation, with multiple agencies on both sides already involved has the right structure, aimed at covering regulatory issues affecting trade in goods (tariffs, rules of origin, customs procedures), trade in services (embracing issues including crossborder business and data-flows), procurement, investment, intellectual property and movement of people. 30. Using TTIP will mean harnessing its ambitious but realistic mutually endorsed objectives. It will require an agreed definition of scope, observing technical distinctions between wholly domestic measures and those affecting transatlantic business. The combination of horizontal regulatory cooperation disciplines of a cross-sectoral kind with sectoral annexes and, possibly, regulatorto-regulator agreements covering specific sectors, will also feature. 23 GATS 1994 24 European Commission 2016 8

31. The potential prize from TTIP as a whole is significant, as both the US and EU economies will best be able to generate growth and create jobs if they have access to the deepest and broadest capital market that their combined financial markets can provide. In the first instance, both sides should use the TTIP to deliver negotiated benefits in terms of market access and national treatment where required. Achieving this will, however, prove challenging in itself: financial services are the subject of detailed regulation which, post-crisis, has intensified on both sides. For financial services, a critical issue is the extent to which the TTIP can be made to enshrine procedures for building bridges between the two sides different regulatory approaches, now and in the future. This does not mean seeking regulatory harmonisation by creating, in effect, an identity of rules which, it is recognised, would involve renouncing policy freedoms that neither the EU nor the US would be prepared to give up. 32. Stopping short of harmonisation, there are opportunities for removing unintended regulatory obstacles to financial services flows, particularly where these obstacles affect the availability or affordability of core financial services that are vital to business end-users for funding new projects or managing risks in the interests of greater growth and wealth-creation in both the US and the EU. These obstacles arise, for instance, where global standards are differently applied, where there is a conflict or wide divergence of rules, or where extraterritorial application of rules or demands for diverging forms of compliance may make it impossible for financial services providers to supply their products, or to do so at reasonable cost. The end-result of the failure to address these issues would be the balkanisation of liquidity and capital pools, the impact of which would severely undermine prospects for economic growth and job creation not just for the sector but for the wider economy too. Promoting regulatory coherence under TTIP 33. The precise expression of the cure for such obstacles - regulatory coherence - will vary. In all cases it will require agreement by both sides: in some it may involve some form of recognition or exemptive relief, while in others some kind of substituted compliance may be the answer. Overall, TheCityUK s strong view is that the TTIP s proposed arrangements for regulatory coherence, which look likely to cover a wide range of both EU and US measures affecting trade in goods and services, should extend to financial services regulation as much as to the regulation of any other sector. It would be perverse to embark on detailed TTIP negotiations while excluding a sector such as financial services which has a central role in investment, growth, jobs and wealth-creation. 34. A key priority should be a process in the TTIP for identifying, tackling, managing and preferably removing such obstacles in ways satisfactory to both sides, thereby securing improved regulatory coherence. Gaining such coherence should not rely only on solving regulatory downstream spill-overs ex post: it should also encompass upstream or ex ante processes for anticipating difficulties and working together on them before they arise. 35. Work to bring about regulatory coherence must, of course, be done by the regulators themselves on a basis of agreement: theirs is the duty to adopt the measures that they deem necessary to protect the domestic prudential regime, and it follows that any work towards greater coherence will need to fall to them. Much of this can be done in a re-focussed regulator-to-regulator Financial Markets Regulatory Dialogue. But providing a TTIP context for this regulator-to-regulator work is important too: it will serve to underscore the shared political goal of reducing, to the greatest extent possible, unnecessary regulatory differences that affect the transatlantic economy. TTIP should also inform the regulator-to-regulator process by asking regulators to assess the impact of their decisions on the broader transatlantic economy, as might be expected within the general norms of good regulatory practice. The regulators 9

independence would not be brought into question through this process: regulators decisions would, however, be informed by a greater understanding of differences between their decisions and those of their transatlantic counterparts, the costs that those differences entail, and whether the costs outweigh the benefits. 36. Four key elements in this analysis need to be stressed. Any dialogue of the kind advocated should: remain in the hands of regulators -the only people capable of conducting it not be in the hands of trade negotiators or other non-regulators avoid curbing the much-prized independence of regulators not undermine the financial regulation of either side. 37. Against this background, this paper offers a number of specific Recommendations for regulatory coherence under TTIP. These are listed in the Annex. Conclusion 38. The objective of regulatory coherence, like all worthwhile objectives, may encounter problematic hurdles along the way. None of these, however, need be seen as an insurmountable barrier to including financial services in the regulatory coherence provisions of TTIP. And certainly none of them counterbalances the clear advantages of doing so, in terms of both the benefits to the transatlantic economy and the opportunity for transatlantic regulators to set a template for regulatory coherence for financial services with potentially global influence. 39. There is an added geo-political urgency to the need to achieve an ambitious and comprehensive agreement in the TTIP negotiations. Regardless of the financial crisis, the countries considered historically to be part of the West are facing a potential decline in terms of population and rebalancing of power over the coming decades. The EU and the US can and should together recognise every opportunity to influence the shape and direction of the future global landscape. This means leading by example, setting the standards that others are impelled to adopt, showing the value of free trade, free movement and free institutions, and co-opting and fostering the emerging markets and countries to choose our path for the 21 st century. 40. Regulatory coherence for financial services under TTIP is achievable. And studies such as the Atlantic Council Report co-sponsored by TheCityUK-Thomson Reuters clearly demonstrate that not only is it worthwhile, but failure to do so risks significant and damaging costs. But it will require some innovation in negotiating scope and negotiating concepts, with close involvement of the regulators and competent authorities on both sides, strong participation by stakeholders concerned, a focus on being ambitious but realistic, attention to institutional aspects, and a strong political will to move out of established comfort zones. This opportunity should not be lost or discarded. TheCityUK 18 March 2016 10

ANNEX Recommendations Key recommendations for regulatory coherence 1. The central recommendation is to aim for a more integrated transatlantic market place through more compatible regulatory measures. These would encompass: avoidance of new and reduction of existing unnecessary restrictions to trade and investment promotion of the development of international regulations and standards in dialogue with other partners ensuring transparency and accountability of the regulatory process, with the involvement of - and input from - relevant stakeholders. 2. There are various possible ways to be used singly or in combination to achieve more compatible regulatory measures when developing new legislation or regulation: ensuring that conditions for regulatory cooperation are in place and provide periodic information on significant regulatory and legislative initiatives, while offering scope for effective and timely dialogue between regulators, with scope for comments and receiving feed-back mechanisms for strengthened assessments of impacts on international and in particular transatlantic trade, plus a strong institutional mechanism to monitor existing and facilitate new cooperation an agreed regime to ensure transparency, together with facilities for retrospective reviews a transparency toolkit, drawing on the best of both sides use of, say, stakeholder consultations, enquiry points, and central information tools for legislative and regulatory initiatives. Specific items in the toolkit might include transparency and public participation, and inviting stakeholder inputs, plus agreed analytical methodologies for assessing the need for, and impact of, proposed regulation such as impact assessment, cost benefit analysis, or risk assessment. 3. It would be simplistic and misleading to assert that all this will be easy. A number of difficult sometimes novel challenges will need to be acknowledged and tackled, both in financial services and no doubt in other regulatory fields as well. These could include some or all of the following: legal authority for regulators to enter into agreements with counterparts compatibility of rules how is this goal to be made more specific tools, which may include new Regulatory Compatibility Assessments or existing Regulatory Equivalence Assessments savings clauses, including either side s right to suspend agreements, or even to terminate them, in given circumstances. 4. Depending on the degree of formalisation of any agreed arrangements, there could be further issues to address. For instance, any agreed regulatory compatibility assessment might well need to find ways of tackling such matters as whether the matter in question is regulated by the other side, and, if so, in what way, plus discussion with counterpart regulators on defining the problem, analysing and comparing the compatibility of different approaches, and their costs and benefits. Linked with this, any agreed regulatory equivalence assessment might require some form of prior petitioning process, plus an obligation for some form of notice and comment, a hearing, separate or joint responses, and even appeals. 11

Legislative and rule-making issues 5. In recent discussions on regulatory coherence, at least two sets of issues have already been identified, albeit with no agreed solutions. 6. The first concerns discrepancies in transparency and accountability mechanisms on the two sides of the Atlantic. The US has one set of very specific transparency and accountability mechanisms. These are often characterised, in very broad terms, as less transparent than the EU at the legislative stage, but more transparent at the implementing or rule-making stage. At the legislative stage, draft bills are drawn up by Congress on a basis that may or may not be transparent. The US rule-making stage, however, tends to follow codes of procedures originating in the US Administrative Procedure Act (1946) involving, inter alia: notice and comment accountability mechanisms for each regulatory agency to: publish on the internet all timely comments received on the regulation it is developing, and underlying analyses consider those comments include with publication of final regulation an explanation of: - significant revisions made to the regulations - how it considered and addressed significant issues identified in comments - any alternative approaches it may have considered the final rule must derive from public comments and record. 7. The EU has a different approach, which is said to be more transparent than the US at the legislative stage, but less transparent at the implementing rule-making stage. The process includes: White and/or Green Papers before the legislative stage draft proposals published at the legislative stage by the Commission with high transparency EU rule-making implementation practice is unpredictable and less transparent: draft text and impact assessments are not always available stakeholder ability to provide input on text proposal and impact assessment may be limited there is heavy reliance on invited stakeholder meetings, and on EU associations practice appears to vary by Commission Directorates-General, with a degree of unpredictability. It is not yet at all clear how or whether these differences in practice can be resolved. But they appear to have arisen sufficiently frequently in discussion for some solution to need to be discussed, even if discussion results in an agreement to differ. 8. The second question that has been identified is the issue of privileged access and the extent to which either side could or would agree to undertake to give due consideration to the other s written comments, or to take them into account in regulatory procedures, or to have a right to mandatory replies in writing to representations, or to enshrine specific modalities for regulatory cooperation in a dedicated institution. Any such agreement could raise delicate and possibly constitutional questions in relation to the right to regulate, the EU treaties, or other issues at the US sub-federal and at EU Member State or sub-member State levels. This is another set of challenging topics that could prove stumbling-blocks at a later stage, if not properly thought through and addressed. 12

Mutual recognition 9. One possible instrument for regulatory coherence is mutual recognition, or some alternative acknowledgement of equivalence. But here, again, there appear to be questions which both sides would need to tackle. There would be a need for definitions, and a common glossary of terms, to clarify the meaning and scope of mutual recognition or equivalence, perhaps embracing some or all of the following elements as alternatives: mutual recognition of authorising or standard-setting bodies recognition of each other s standards and regulations as equivalent recognition of similar functional requirements, or mutual acceptance of conformity to the other s standards or rules exploring whether vehicles such as substitute compliance or exemptive relief play a role. 10. There could also be linkages between mutual recognition and/or equivalence and other factors which might need to be analysed and understood. Some issues for consideration include the: extent to which each side s use of evidence-bases for regulation becomes a factor need for common standards for evidence-bases risk of data and evidence being influenced by political campaigns, vested interests, or the preferences of conformity assessment providers, and the extent to which this would have a vitiating effect need for factors, other than objective data, to be taken into account. 11. And, finally, there are questions about how mutual recognition or equivalence under TTIP might be implemented in practice. Key issues here include: should there be rules for mutual recognition or equivalence? how would such rules be agreed? which regulatory agencies would take responsibility for any policing or oversight activity? what would happen if trust between regulators on the two sides diminished or evaporated? Analysis and agreement 12. TheCityUK believes that there is no realistic alternative to some form of mutual recognition or equivalence as the response to regulatory divergence, whether in financial services or in other fields. The recommendations above need to be worked through, to be assessed thoroughly and agreed in order to unlock the full potential of the TTIP. 13

References Alexander, K., Ferran, E., Jackson, H., Moloney, N. (2006), A Report on the Transatlantic Financial Services Regulatory Dialogue, Harvard Law and Economics Discussion Paper No. 576 Atlantic Council (2013), The Danger of Divergence: Transatlantic Financial Reform & the G20 Agenda (Atlantic Council, TheCityUK and Thomson-Reuters 2013) Brummer C. (2012), Soft Law and the Global Financial System: Rule Making in the 21st Century, Cambridge University Press Council of the European Union (2013): Directives for the negotiation on the Transatlantic Trade and Investment Partnership between the European Union and the United States of America http://data.consilium.europa.eu/doc/document/st-11103-2013-dcl-1/en/pdf Council of the European Union (1998), Council Decision 1999/78/EC of 22 June 1998 on the conclusion of an Agreement on Mutual Recognition between the European Community and the United States of America (OJ L 31, 4.02.1999, p.1), as amended by Council Decision 2002/803/EC of 8.10.2002 (OJ L 278, 16.10.2002, p.22). Entered into force in December 1998. De Larosière J (2009), Report of the High Level Group on Financial Supervision in the EU Brussels 2009) Devereaux C, Lawrence R Z, and Watkins M D (2006), Case Studies in US Trade Negotiation, Vol. 1: Making the Rules (IIE, Washington DC, 2006) Drezner, D. W. (2007), All Politics Is Global: Explaining International Regulatory Regimes (Princeton: Princeton University Press) European Commission (2016), European Commission Press Release on Decision on equivalence for CCPs in USA 15 March 2016 http://europa.eu/rapid/press-release_ip-16-807_en.htm European Commission (2014) EU - US Transatlantic Trade and Investment Partnership (TTIP): Cooperation on financial services regulation http://trade.ec.europa.eu/doclib/docs/2014/january/tradoc_152101.pdf FSA (2009), The Turner review: a regulatory response to the global banking crisis (FSA, 2009) GATS (1994), General Agreement on Trade in Services, Financial Services Annex (1994) Howarth, D. and Quaglia L. (2016), The ebb and flow of transatlantic regulatory cooperation in banking, Journal of Banking Regulation. doi:10.1057/jbr.2015.21 Howarth, D. and Quaglia, L. (2015) The Comparative Political Economy of Basel III, University of Edinburgh, School of Law Research Paper 2015/19; Europa Institute Working Paper 2015/03 Froman, M. (2013) Johnson, S. and Schott J. (2013) Financial Services in the Transatlantic Trade and Investment Partnership, Policy Brief, Peterson Institute 14

Joint Statement 2016, by EU and U.S. trade associations and representative bodies (issued 21 February 2016) https://www.thecityuk.com/news/sifma-joins-u-s-and-eu-entities-urging-ttip-toinclude-full-coverage-of-financial-services/ Jones, E. and Macartney H. (2016), TTIP and the Finance Exception : venue-shopping and the breakdown of financial regulatory coordination, Journal of Banking Regulation. Lannoo, Karel (2013), Financial Services and the Transatlantic Trade and Investment Partnership (CEPS Policy Brief 2013) https://www.ceps.eu/system/files/pb%20no%20302%20financial%20services%20and%20ttip.pdf Lawton, D. (2013), Oral evidence, House of Lords report, Transatlantic Trade and Investment Partnership, 5 December 2013 http://www.parliament.uk/documents/lords-committees/eu-sub-com-c/ttip/uceuc051213ev13.pdf Maynz R. (ed) (2015) Multilevel Governance of Financial Market Reform, Max Planck Institute, Cologne Mügge, D. (ed.) (2014), Europe and the Governance of Global Finance, Oxford University Press, Oxford. OMB (2011), White House Office of Management & Budget: United States-European Union High- Level Regulatory Cooperation Forum https://www.whitehouse.gov/omb/oira_irc_europe Pagliari S. (2013), A Wall around Europe? The European Regulatory Response to the Global Financial Crisis and the Turn in Transatlantic Relations, Journal of European Integration, 35(4), pp. 391 408. Posner, E. (2009), Making Rules for Global Finance: Transatlantic Regulatory Cooperation at the Turn of the Millennium, International Organisation, 63 (4), pp. 665 99. Quaglia, L. (2016), The Tug War about the Inclusion of Financial Services in TTIP (FEPS Policy Brief, February 2016) Quaglia, L. (2015) The European Union and the post-crisis multi-level reform of financial regulation, in R. Maynz (ed) Multilevel Governance of Financial Market Reform, Max Planck Institute, Cologne Quaglia L. (2014), The European Union and Global Financial Regulation, Oxford: Oxford University Press TheCityUK (2011), Balancing growth and stability in EU financial reform TheCityUK and Oxford Economics, May 2011 US Chamber 2016, TTIP and the EU Member States (US Chamber & World Trade Institute, 2016) USTR (2012), Article 13(b) of the US-Korea Free Trade Agreement, setting up the US-Korea Financial Services Committee https://ustr.gov/sites/default/files/uploads/agreements/fta/korus/asset_upload_file35_12712.pdf USTR (2002), US-EU Regulatory Cooperation: TEP Guidelines on Regulatory Cooperation https://ustr.gov/archive/world_regions/europe_middle_east/europe/us_eu_regulatory_cooperat ion/tep_guidelines_on_regulatory_cooperation_transparency_implementation_roadmap.html 15