International Regulatory Architecture

Global Regulatory Architecture of Financial Markets Financial markets are global, but regulation remains predominantly national. This asymmetry creates opportunities for regulatory arbitrage and coordination problems. After the 2008 crisis, attempts at international harmonization intensified, but differences between jurisdictions persist. Key US regulators have a fragmented system of regulation. The SEC (Securities and Exchange Commission) supervises securities markets, investment companies, brokers. The CFTC (Commodity Futures Trading Commission) regulates derivatives. The Federal Reserve and OCC oversee banks. FINRA is a self-regulatory organization for broker-dealers. The European Union created a unified regulatory framework through directives and regulations. ESMA (European Securities and Markets Authority) coordinates supervision at the EU level. National regulators (FCA in the United Kingdom, BaFin in Germany, AMF in France) carry out supervision at the local level. Other major jurisdictions: JFSA in Japan, SFC in Hong Kong, MAS in Singapore, CSRC in China. Each regulator has its own priorities, traditions, and approaches.

International Standard-Setting Bodies The FSB (Financial Stability Board) coordinates the development of international financial stability standards. Established after the 2008 crisis on the basis of the Financial Stability Forum. Unites G20 regulators, international organizations, standard-setting bodies. IOSCO (International Organization of Securities Commissions) develops standards for securities markets: disclosure requirements, investor protection, rules for intermediaries. Principles of Securities Regulation is the basic document for assessing the quality of regulation. The Basel Committee sets standards for banking regulation (Basel III). CPMI-IOSCO — standards for payment and settlement systems. IAIS — for insurance. IASB — financial reporting standards (IFRS).

Extraterritoriality Major jurisdictions apply their regulations extraterritorially. The Dodd-Frank Act applies to swap dealers working with American counterparties, regardless of jurisdiction. GDPR applies to any company processing data of European citizens. This creates collisions and duplication. A global bank may be subject to the requirements of dozens of regulators. Equivalence decisions recognize foreign regulation as equivalent, reducing duplication, but such decisions are politicized and can be revoked.

Regulatory Arbitrage Differences in regulation create incentives to locate business in softer jurisdictions. Before 2008, London's "light touch" regulation attracted financial institutions. Low-tax jurisdictions (Cayman Islands, Luxembourg, Ireland) attract investment funds. Race to the bottom — concern that competition between jurisdictions leads to relaxation of regulation. International coordination aims to establish minimum standards to prevent destructive competition.

Trends After 2008 Tightening regulation: higher capital and liquidity requirements for banks (Basel III), centralized clearing of derivatives, restrictions on proprietary trading (Volcker Rule), strengthened oversight of systemically important institutions. Strengthening consumer protection: requirements for product governance, bans on certain products for retail investors, disclosure of costs and conflicts of interest. Digital assets and fintech create new regulatory challenges. Regulators attempt to adapt existing frameworks or create new ones for cryptocurrencies, DeFi, AI in finance. Approaches range from complete prohibitions to "regulatory sandboxes".