Global financial regulatory reforms and sovereign’s exemption
| Pages | 190-202 |
| DOI | https://doi.org/10.1108/JFRC-11-2016-0105 |
| Date | 14 May 2018 |
| Published date | 14 May 2018 |
| Author | Chiara Oldani |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Global financial regulatory reforms
and sovereign’sexemption
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-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 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
financial stability.
Findings –The limited availability of accounting data on derivatives’use 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 financial stability; in fact, omitting sovereigns from these regulations represent a
significant 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 financial stability.
Keywords Financial stability, Sovereign debt, Regulatory reform, OTC derivatives, Sovereign risk
Paper type Conceptual paper
1. Introduction and literature’s review
After the financial crisis, G20 countries improved the stability of the financial system by
minimizing regulatory arbitrage and increasing transparency. However, non-financial
operators are not subject to the financial 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 financial stability.
JEL classification –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 Affairs, 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 author’s. This research received no specific grant from any funding agency in the
public, commercial or not-for-profit sectors. The author has no conflict 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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