When derivatives reporting rules in Europe, the US and elsewhere forced dealers to choose between honouring the requirement or honouring the privacy laws of foreign countries in which they and their clients trade, the outcome was obvious: banks decided not to breach privacy laws.
Required counterparty data is routinely withheld from authorities as a result – a practice known as masking.
The same problem arises – even more pointedly – in Europe's pending trading and transparency regime, the revised Markets in Financial Instruments Directive and its related regulation (Mifid II and Mifir). Like the swaps regime, Mifir requires counterparties to a trade to report counterparty identifiers to European authorities. But those identifiers extend to personal information, such as passport numbers, and the scope of the rule now applies to platforms as well as banks, across a wider range of instruments. Plans that would have required addresses to be reported have been dropped.
Adhering to Mifir would force reporting firms to breach privacy laws in South Korea, Switzerland and elsewhere, risking hefty fines or even jail time – at least 16 countries have laws that clash with derivatives reporting rules. Staying in line with the privacy laws would result in reporting firms breaching Mifir, but it's not clear what the penalty for that would be, or even how strictly the reporting rules will be enforced, given the clash.
It is a classic case of an irresistible force colliding with an immovable object.
So, what is the point? Reading between the lines, regulators seem to be hoping the issue can be resolved. Successive Financial Stability Board derivatives reform updates have touched on the subject, and in November 2014 said officials were "working to identify and address these legal barriers to reporting and information access and sharing, including through any legal or regulatory changes if necessary".
That does not make it clear which side will be making the change – foreign regulators or national legislators – but a footnote to the update goes a little further, saying some of the problem jurisdictions had noted the required information could be legally gathered and reported within the country. That might allow foreign authorities to obtain masked information on a ‘regulator-to-regulator' basis. No timeline has been set for these agreements.
While all of this is being hammered out, reporting firms are in the dark. It seems likely their regulators will continue to show forbearance; but some kind of official guidance would be welcome.