Policymakers must harmonize their approaches to over-the-counter derivatives rules to prevent market fragmentation, says the hedge fund industry’s trade group in a new paper.

Global hedge fund lobbyists, the Alternative Investment Management Association (AIMA), published a paper Tuesday setting out key areas where, it says, deeper co-ordination between U.S. and European regulators is needed in OTC derivatives markets, in order to maintain the global character of those markets.

The paper identifies potential regulatory conflicts, or areas of overlap, between the European Markets Infrastructure Regulation (EMIR) and the U.S. derivatives rules, including clearing obligations, reporting obligations, segregation rules, collateral rules, and margin requirements. If these conflicts are allowed to persist, it warns, this could prevent compliance and lead to more market fragmentation.

AIMA suggests that these effects could be mitigated in cross-border transactions by allowing firms to utilize “substituted compliance”; following the rules of one jurisdiction, rather than both. It expects regulators in the U.S. and Europe to soon make decisions on the scope of substituted compliance that will be allowed in cross-border trades, which, it says, “will have a significant impact on the nature of the global derivatives market.”

“We are concerned that OTC derivatives transactions could be subject to unnecessarily duplicative – or even conflicting – requirements as a result of extra-territorial application of domestic rules,” said Andrew Baker, AIMA’s CEO. “The good news is that the regulatory authorities have the tools at their disposal to ensure we avoid market fragmentation and they are mindful of some of the potential negative consequences of uncoordinated action. We hope that, by highlighting the key examples of potential problems, our paper contributes to the current intensive international regulatory dialogue.”