Regulating a Global Market: The Extraterritorial Challenge of Dodd-Frank’s Margin Requirements for Uncleared OTC Derivatives & A Mutual Recognition Solution

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The OTC derivatives market is fluid, global and characterized by cross-border transactions. Title VII of the Dodd-Frank Act aims to reduce systemic risk inherent in this market, which exacerbated the 2008 financial crisis, by imposing various requirements upon market participants, including margin requirements on uncleared OTC derivatives. Margin requirements protect against potential losses from counterparty default by requiring parties to exchange payments as collateral for their obligations under a derivative contract. Yet because much of the OTC market consists of cross-border transactions, which implicate multiple regulatory regimes, inadequate coordination with other jurisdictions could lead to regulatory arbitrage, gaps or conflicts and undermine the goals of this regulatory requirement. Moreover, the extraterritoriality provisions of Title VII, as analyzed in light of recent case law, indicate that the jurisdictional scope of Dodd-Frank’s margin requirements may be ambiguous and uneven. To avoid the dangers of inconsistent regulatory standards, minimize legal uncertainty and reduce systemic risk in the OTC derivatives market, foreign and domestic regulators should strive for application of comparable domestic margin regimes to cross-border uncleared OTC derivatives contracts in the context of mutual recognition. Mutual recognition is a method of international regulatory coordination that entails an agreement among two or more countries to recognize the adequacy of each other’s regulation as an equivalent substitute for their own.