Contributor: Daniel Parker

This blog post originally appeared in GARP. Now that the global regulators are in full swing of finalizing the rules that are expected to substantially change the way the financial markets operate, we are left with a growing list of disparate requirements. That is, rules promulgated by certain jurisdictions that differ from other jurisdictions, as well as rules imposed by various governing bodies of the same jurisdiction that differ from each other. In defense of the requirements gaps, regulators assert that since processes, participation, and market cultures vary, the rules will inherently follow suit. However, in real terms, the disparity is likely to inspire regulatory arbitrage. Regulatory arbitrage exists in circumstances where any marginal distinction creates a seemingly risk-free advantage or opportunity. Here, trading firms, banks, as well as commercial hedgers may change their strategy and move transactions to jurisdictions that provide risk-free advantages, including favorable regulatory treatment, a safe haven from onerous processing, or reduced costs. One issue of concern is the mandate to analyze credit valuation adjustment (CVA). CVA is a calculated value representing the possibility of a counterparty’s default. Simply, CVA is variable value, usually calculated daily, representing a counterparty's credit risk profile.... read more