Asian financial market policy makers are becoming increasingly concerned with extraterritorial measures emanating not from the US, but from Europe.

While swaps dealer registration, swap execution facilities and the Volcker rule have grabbed the attention, there are a number of developments in Europe that are causing as much consternation – if not more – in Asia.

A prime example: how many people have heard about the impact of the European Market Infrastructure Regulation (Emir) and its enormous potential to shut out European banks from key Asian markets, thereby severely damaging their liquidity?

Financial reform has been slower to make its presence felt. Like the US, Europe too experienced the same once-in-a-generation crisis, but it is still in much worse financial shape. Many countries have been bailed out, its banks are weaker than its US equivalents and overall gross domestic product is still almost 3 per cent lower than it was five years ago. This environment has understandably created a huge political backlash in the EU against banks, as well as an overwhelming desire for financial market reform.

The US moved first with the Dodd-Frank Act, and when this mammoth piece of legislation was launched, the media focus in Asia was on its impact here. With one political system, the US could move fast.

The EU, with its 28 member states, diverse EU parliament and entrenched EU Commission, is not built for such crisis management. It is built for slow-burn consensus. When crafting its regulation, the EU looked across the Atlantic and picked what it liked but, more crucially, what it did not like in the US. No one thought about Asia.

But the US could not be singled out. So the EU implemented regulations dealing with entities and jurisdictions that were “non-EU” in origin. And as they had the benefit of seeing the US regulation, the EU could be overly prescriptive in setting out its own standards.

Politics certainly pushed in this direction, in order to ensure that the banks and others could not escape the long arm of EU regulation. We are now left with the unintended consequences for Asia – and there are many.

There are limitations on EU companies in using ratings issued by non-EU credit rating agencies for regulatory purposes. On short selling restrictions, the market maker exemption is only available to institutions in non-EU markets where the regulatory framework has been declared equivalent by the European Commission.

Will the extremely prescriptive rules in Emir be enforced that restrict branches of EU banks from using clearing houses in non-EU countries unless that jurisdiction is deemed equivalent by the EU? Will a non-EU financial institution be subject to the proposed Financial Transaction Tax (FTT) where it deals with a counterparty in the FTT zone or in securities issued by an entity established in the FTT zone?

The EU is increasingly becoming the focus of concern and frustration in Asia as these measures affect liquidity. These are all unresolved issues and are just the tip of the iceberg for a host of proposed regulations that have an extraterritorial impact in Asia.

The US, through no-action letters and its unitary state structure, has more capacity to make amendments where unintended consequences are discovered along the way. Once level one regulation is passed through the EU trialogue process, it becomes extremely difficult and time consuming to change.

So what is the solution? The EU needs to stop overly focusing on the US and realise if it wants to export its multilateral approach as a model to the world, it needs to be more comprehensive in its engagement with Asia at a much earlier stage in the process.

We all can share the EU’s concerns for well-regulated markets, but Asia does not want its own markets damaged in the crossfire due to squabbles across the Atlantic.

The EU and the US need to understand that Asian capital markets are not nearly as mature or complex, so it is not a one-size-fits-all approach that will work.

Over regulation or the wrong kind of regulation could be highly detrimental to the development of Asia’s capital markets and thereby its continued economic growth. Asia, too, has much to do to protect itself.

It needs to adopt a much stronger regional mindset rather than a “silo”, market by market approach – being a lone voice can be easily dismissed in Washington or Brussels. Countries must club together to do what is best for the region and to have the most impact.

The region needs to be practical about global reforms and know when to push back – especially publicly – or when to accept. What the most recent crisis showed us is that something starting in one country can easily spread to another and trigger a global crisis. The world needs a well regulated and global financial system to further economic growth. Let’s hope the regulators can put aside their national political prejudices and pull together to deliver one.

Mark Austen is the chief executive of the Asia Securities Industry & Financial Markets Association

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