Global Financial Regulation

FINANCE AND BANKING / by Miguel Gallardo Guerra

Global financial regulation refers to the rules and standards that govern the operations of banks and financial institutions in multiple jurisdictions. These regulations are designed to ensure the financial system’s stability, protect consumers, and prevent fraudulent practices or systemic risks. The main components are highlighted below:
 a) Basel III standards
 Basel III is a set of reforms developed by the Basel Committee on Banking Supervision, to strengthen regulation, supervision, and risk management in the banking sector. This regulation seeks to increase the financial soundness of banks by requiring higher levels of capital and liquidity reserves. International financial institutions must comply with these standards to operate in regulated markets and demonstrate soundness in the face of financial crises.
Main points:

Capital requirements: Increase in capital reserves that banks must maintain to cover possible losses.

Liquidity ratios: Requirement that banks maintain sufficient liquid assets to face short-term crises.

Leverage ratio: Limits the leverage of financial institutions to reduce excessive risks.

b) MiFID II (Markets in Financial Instruments Directive)
MiFID II is a European regulation that seeks to improve transparency and investor protection in financial markets, especially in the purchase and sale of financial instruments such as stocks, bonds, and derivatives. It also regulates the operations of trading platforms. This regulation affects any company that provides investment services or participates in capital markets in the European Union, which has a global impact given the scope of the European markets.
Key aspects:

Investor protection: New rules to ensure that investors are better informed and protected, including price transparency obligations.

Transparency in trading: Greater supervision and transparency in financial transactions, with emphasis on pre- and post-trade disclosure.

c) Dodd-Frank Act (United States)
The Dodd-Frank Act is a response to the 2008 financial crisis. It aims to reduce risks in the U.S. financial system, improve consumer protection, and increase transparency in financial markets. Global banks operating in the United States must comply with the provisions of the Dodd-Frank Act, especially regarding derivatives regulation, capital requirements, and supervision of “too-big-to-fail” financial institutions.
Important points:

Regulation of derivatives: Greater supervision of derivatives, which were one of the causes of the financial crisis.

Consumer protection: Creation of the Consumer Financial Protection Bureau (CFPB) to regulate financial products and protect consumers.

Supervision of systemically important institutions: Tighter supervision of large financial institutions that may pose a risk to the system.

d) Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) Regulations
Globally, countries have implemented strict anti-money laundering and counter-terrorist financing regulations. These regulations require financial institutions to verify the identity of their customers, monitor suspicious transactions and report ilegal activities to the appropriate authorities. Regulations such as those of the Financial Action Task Force (FATF) have been widely adopted and have a direct impact on how banks manage their international operations.
Key elements:

KYC (Know Your Customer): Mandatory procedures to verify the identity of customers and assess the risk of involvement in illicit activities.

Transaction monitoring: Detection and reporting of suspicious activities related to money laundering or illicit financing.

Sanctions and blacklists: Banks must ensure that they are not doing business with internationally sanctioned individuals or entities.

e) Interaction between Local and International Regulations
One of the main challenges international banks face is the need to comply simultaneously with local and global regulations. For instance, a financial institution operating in Europe, the United States, and Latin America must ensure compliance with Basel III standards, SEC regulations in the United States, GDPR rules (data protection) in Europe, and any local legislation in Latin American countries. This involves implementing vital compliance programs that consider the various regulatory demands.
f) International Financial Reporting Standards (IFRS)
In many jurisdictions, financial institutions are required to follow IFRS to prepare and present financial statements. Lawyers and legal consultants must ensure that companies comply with these standards to maintain global transparency and consistency in financial information.
 
Legal and Operational Challenges
For experts in international legal practice, advising banks on compliance with these global regulations presents several challenges:

Coordination between jurisdictions: Banks often face conflicting regulations between countries, which can complicate compliance.

Compliance costs: Implementing international standards such as Basel, MiFID II, and Dodd-Frank, among others, involves significant operational costs, including restructuring processes, hiring specialized staff, and updating technology.

Risk of sanctions: Financial institutions that fail to comply with regulations face sanctions that may include multimillion-dollar fines, bans from operating in certain countries, and even license revocation.

Innovation and technology: With the emergence of new technologies such as fintech and cryptocurrencies, regulations are evolving rapidly, requiring lawyers to stay current and anticipate future legal risks.

Conclusion
Global financial regulation is a complex field that profoundly affects institutions operating internationally. An expert in international legal practice must be aware of the rules and standards of significant jurisdictions and global regulatory trends. This is essential to ensuring that banks and financial companies can operate safely and efficiently and comply with all applicable laws. them navigate this complex regulatory environment and maximize the benefits of this transition.

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