18 July, 2017
Study Group on International Financial Regulations

Japan Securities Research Institute
Summary
Opinion Paper by Study Group on International Financial Regulation
In the Study Group on International Financial Regulation, members fromthe banking, securities, insurance and asset management sectors; senior
officers from trade associations and market operators, etc.; as well as
researchers and experts gathered to discuss and share opinions andconcerns about a wide range of issues related to international financial
regulation, independent from their positions and the business categories
they belong to.
On the basis of such discussions, this Opinion Paper not only compiles
the progress to date and the issues regarding the international financial
regulatory reforms but also presents the ideal design of international
financial regulation and recommends measures to achieve it.
The following are the composition and main messages of this Opinion
Paper:
I.

Purpose of the Study Group on International Financial Regulations
Background, purpose, etc. for establishing the Study Group.

II.

Reform of International Financial Regulation after the Financial Crisis:
Current Status and Evaluation
If the post-regulatory reform financial system cannot sufficiently fulfill
its essential financial functions, the reform cannot be said to haveachieved its original goal.
At present, as the international financial regulatory reforms in theaftermath of the global financial crisis move from the design stage to theimplementation stage, there is a concern that a large amount of
unintended consequences would arise which had not been expected
beforehand. This is because many regulations have been developed andestablished simultaneously in a relatively short period of time, causing
some contradictions, duplication, gaps, and differences in the timing ofi

implementation, etc. among countries and regions, which have become
noticeable in the implementation stage.
On the other hand, we are seeing moves to apply stricter (or looser)
regulation than international standards by introducing jurisdiction-specificregulation not embodied in those standards. Such moves are resulting ininconsistent national regulations and the fragmentation of regulations,which is in turn heightening the risk of fragmenting global financial
markets. As regulatory reforms are entering into the full implementation
stage, it appears to be the appropriate timing to assess again the entiretyof achievements and effects of regulatory reform, and make revisions
where necessary. Under these circumstances, while the importance ofinternational standards has further increased, the transparency of thestandard-setting process, its accountability, and the provision of sufficient
opportunities for expressing opinions are important issues for all
countries concerned.
III.

The Ideal Design of International Financial Regulation

Certain principles need to be established as guideposts for the ideal
design of regulation in the design stage of international financial
regulation. They include a requirement to follow international standards inorder to ensure consistency of regulation among different jurisdictions,consistency between the objectives and the substance of regulation, andevidence of the need for regulation. This Opinion Paper has compiled suchprinciples in the form of “Ten Principles of International FinancialRegulation” (see below). Such principles should ideally be agreed upon
and adopted by international fora leading the process of international
financial regulatory reform such as the G20 and FSB.
IV. Recommendations concerning Individual Regulations
The Study Group has also examined various individual regulations
which have global effects. They are compiled by the type of businessconcerned (Basel rules and regulations on insurance and asset
management businesses); by country and region (U.S., Europe, andregulatory changes resulting from BREXIT); as well as by subjects such as
over-the-counter derivatives and financial benchmarks, for which theissues are individually pointed out and recommendations made.
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V.

Recommendations for International Financial Regulations
Lastly, six proposals are presented in order to solve various issues ofinternational financial regulations which have been discussed so far. They
are summarized as follows:
1. Development and Management of International Standards
In the major global financial markets today, we are witnessing a
successive flow of introductions of or proposals for new regulations thatdiverge from international standards, which can be characterized as‘regulatory fragmentation’; if the unifying power of international standards
is not strengthened, such developments may only be accelerated.
In the future, those international standards may be re-positioned astreaty-based standards with stronger normative powers. In such cases, itwill be necessary to pursue an optimal combination of the principle-based
approach and the rule-based approach by making use of the merits of theprinciple-based approach rather than putting all the details into thetreaties.
2. Enhancement of the Functions, and Reinforcement of Transparency
and Accountability of International Standard Setting Bodies
While international standard-setting bodies, including FSB, BCBS,IOSCO and IAIS, have been endeavoring to enhance transparency andaccountability, there is still substantial room for improvement.
In order to develop international financial regulation with long-term
perspectives, more appropriate systems are required which arecommensurate with the roles of global organizations, such as improving
the functions of the relevant international organizations, having a morebalanced staff composition, and strengthening their financial statuses.
3. Towards a More Consistent Regulatory System
Some parts of the current system of international financial regulationlack an overall vision, consistency, and integrity. While the necessity ofregulation is understandable for each individual item, when they areapplied together, they may cause contradictions, duplications, gaps, anddifferences in the timing of implementation which cannot be said to havebeen fully taken into consideration.
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Given such a situation, an assessment of the effects of regulation
should not be just ex-post; an ex-ante assessment to confirm that theadvantages of introducing regulation will sufficiently exceed thedisadvantages should be made. Regarding such studies, it is hoped thatan international examination system is developed, for example, byoutsourcing the analysis to research institutes, etc. with specificmandates.
4. Allowing Substituted Compliance and Mutual Deference on Eachother’s Regulation by Equivalence Assessment
It is desirable for national regulations to converge globally, withinternational common standards consistently applied in individualcountries and regions. On the other hand, it is not appropriate to apply
one-size-fits-all rules globally, given that financial systems and market
activities have retain the characteristics of individual countries andregions.
Accordingly, regarding overseas activities and cross-bordertransactions of financial institutions, rather than applying national
regulations on an extra-territorial basis, application of other countries’regulation and supervision should be mutually allowed through granting
substituted compliance or by making a determination of equivalence,
thereby ensuring the efficiency and consistency of regulations andsupervision through international cooperation. Moreover, regarding theseprocesses, procedures could also be standardized and made impartial byinternational standards, and a standardized processing period can beestablished.
As long as such assessments aim to compare how effective prudential
regulation on financial institutions and market regulation are in individual
jurisdictions, the criteria for assessment should be how much theobjectives of regulation has been effectively achieved in terms of outcome,and not allow political elements to affect the assessment process.
Furthermore, for the introduction of new regulation, it could be agreed
among countries in the provisions of economic partnership agreements,etc. that a process of allowing such processes be established without
exception and in advance, with the necessary procedures to be finished
before the implementation of the new regulation.
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5. Toward Further Strengthening of Cooperation among National
Regulation and Supervision
In future regulatory reforms, better regulatory systems should be aimed
for, taking time to discuss the overall vision. Moreover, it must be pointed
out that there are weak points in the current reform process in which, oncethe substance and the timing of implementation of regulations have beenagreed upon, the entire implementation process is left to individual
countries and jurisdictions.
Accordingly, the current reform process should, in the future, have alegal basis which will further reduce differences in the substance andtiming of implementation in individual countries and jurisdictions.
Moreover, in order to avoid differences, there could be institutional
flexibility for individual countries to postpone implementation even justbefore the implementation due date, or to adjust the substance. However,such flexibility in the implementation stage of regulation should beincorporated in the rules beforehand, in the design stage of the financial
regulation.
6. Promotion of Impact Analysis and Assessment of the Effects ofRegulation
Assessment and analysis of the impacts of individual regulations havebeen conducted by the Basel Committee and other bodies. However,comprehensive assessments and analyses have not been conducted on
the cumulative or combined effects arising from these regulations. In
conducting such comprehensive assessments, it is extremely difficult toquantitatively analyze the impacts on the economy and financial markets
separately from the effects of other factors. However, it should at least
always be attempted to identify a number of regulations which areexpected to have major effects on financial activities and verify theimpacts of their introduction.
Moreover, when the impact of regulation is assessed, a forward-looking
perspective is also important. It is necessary to conduct simulations
beforehand on the impact the introduction of regulation would have on themacro-economy and the financial and capital markets overall.

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(Ten Principles for International Financial Regulation)i.

It should be repeatedly recognized that the ultimate goal of regulation is
to contribute to sound economic growth and sustainable economic
development, and confirmed that the stability of financial systems andthe securing of the soundness of financial institutions are merely themeans to achieve those goals. Regulatory reform should not place
excessive emphasis on avoiding risks so as to hamper proper risk-taking
which is necessary to provide finance for growth.

ii.

In order to ensure consistency among different jurisdictions, national
financial regulation should follow international standards to the extent
possible. However, while international standards are regarded asminimum standards, the addition of nation-specific regulations and theintroduction of exceptional treatment should be resisted, so as to prevent
fragmentation of regulation among countries. On the other hand, if there
are significant differences in the current situations of national financialsystems, or in the historical background and business practices ofnational markets, we should be fully aware that application of uniform
regulations (one-size-fits-all) will not be appropriate.

iii.

Market access, national treatment, and most-favored-nation treatment,
which have been recognized in free trade agreements or economic
partnership agreements should not be impeded. (Not effectivelycomplying with such obligations under the agreements in the name of theprudential carve-out should be avoided.)iv.

Regulation should be proportionate to risks based on the principle ofproportionality, while consistency between the purpose and thesubstance of regulation, and the necessity of the regulation (i.e. theinability to achieve the regulatory goal by other means) should beproven.

v.

Any negative impact on market efficiency should be minimized, while thefairness and transparency of regulation should be ensured. While faircompetitive conditions are important, they should be judged on the basisof substantial outcomes rather than formal requirements.

vi.

One should not pursue the development of detailed rules only, but pursue
an optimal combination of principles-based and rules-based approaches,making use of the advantages of the principles-based approach.

vii.

One should aim at an optimal combination of entity-based regulation andvi

activities-based regulation. (Identical regulation should be applied toidentical business activities, regardless of the performing entities.
viii.

Counter-cyclical macro-prudential regulation should be introduced andmade use of, while pro-cyclicality of regulation should be eliminated asmuch as possible.

ix.

Restrictions on free economic activity by ex-ante regulation should be
kept to a minimum, and make use of rigorous ex-post regulation on
violations as they occur; an optimal combination of the two approaches
should be sought.

x.

Alwaysconsidertheenforceabilityofregulation;international

coordination and cooperation between enforcing authorities should bestrengthened. Furthermore, supervision of financial groups on aconsolidated basis should be emphasized through strengthened
cooperation among authorities.

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