When I stood here last year, we were coming to the end of a year of substantial geopolitical change around the globe with the election of a new U.S. President just a few weeks earlier, following a summer of shock in Europe when the U.K. voted to leave the European Union.
In contrast with these political shockwaves in the west, in October at the 19th party congress, Chinese President XI Jinping continued his rule by heralding a “new era” in Chinese politics with a seeming eagerness to step into the global leadership void left by the political uncertainty in the west.
The impact of these major political developments on our industry are becoming clearer over time and will shape the opportunities and challenges that lie ahead. Luckily, uncertainty is something this industry is built to manage and thrive on.
In the U.S, the change in administration has focused attention on economic growth and led to a constructive review of financial regulations, with CFTC Chairman Giancarlo launching his Project KISS initiative with the aim of simplifying and rationalizing Dodd-Frank regulations.
For those unaware, KISS is an acronym (Keep It Simple Stupid) coined by the U.S. military in the 1960’s to encourage simplicity over complexity in the design of aircraft in order to maximize performance and minimize catastrophic failure. This maxim holds true for regulations as well and U.S policymakers are making significant progress on rationalizing the regulatory framework to promote safety AND growth.
In Europe, policymakers appear on a different trajectory and continue to push ahead with more regulations post-Brexit, whether it’s the massive MIFID II implementation or new regulations aimed at overseeing foreign clearinghouses.
In China, we have witnessed several recent announcements about opening access to markets and allowing foreign investments that would have been improbable only months ago.
These varying policies are a function of the political dynamic in each of these jurisdictions as well as the maturity of their respective markets. The good news is that FIA’s global structure allows us to advocate for consistent global standards that enable our industry to thrive, no matter the political winds or lifecycle of the market. Our stature, expertise and reach are equally effective in developing markets as mature ones.
In promoting these consistent global standards, FIA supports the comprehensive review of financial regulations post crisis to ensure that regulations are fit for purpose, proportional and cost effective. FIA produced a whitepaper on smart regulation in response to the financial regulatory review called for by President Trump but the principles contained in this report are universal and global in nature—which is to say they are applicable to the policies of any jurisdiction—no matter where they are located around the globe.
FIA advocates for three broad principles for healthy markets globally:
1. We support smart regulation and enforcement.
2. We support end-users’ ability to access markets on a level playing field—no matter the location of these markets.
3. We support responsible innovation and fair competition.
What do I mean by Smart Regulation? I mean that regulators must focus on those activities that pose the highest risk to the markets and their participants--not technical violations caused by the complexities of regulation. Such regulation should be proportional, predictable, and outcomes-driven. In tailoring these rules, policymakers should conduct thoughtful cost-benefit analyses, striving to use both qualitative and quantitative data. Smart regulation does not mean more or less regulation, but the right level that allows us to keep our markets safe without stifling growth.
Second, policymakers should ensure that global markets remain accessible for end users. Whether you are an exchange in Singapore, London, Chicago, or Brazil, a significant amount of trading comes from outside your home markets. In order for customers to utilize these risk markets wherever they are located, regulators must create a regime that allows for cross-border access without overly burdensome and duplicative regulations. Otherwise, we risk the balkanization of our markets to the detriment of end-users and market liquidity.
In light of this view, we were especially pleased with the recent news from the China State Council that the ownership restrictions on certain segments of the financial services industry will be phased out over the next several years. On Monday in Shanghai, I met with CSRC Chairman Liu as part of his International Advisory Council to express our support for additional market liberalization, including the expedited launch of the INE crude oil contract open to foreign investors. While more needs to be done, I believe President’s Xi’s October address that expressed support for developing China’s financial markets has set a tone at the top--witnessed this week at our meetings with the CSRC and may serve as a tipping point to drive further changes to open China’s expanding capital and derivatives markets in 2018.
My third and final principle for healthy markets is that of promoting innovation and fair competition - an objective shared increasingly by regulators across the globe, as illustrated by the Fintech Regulatory Sandbox launched by the MAS here in Singapore.
Over the years our industry has welcomed innovation and competition that have served to drive the industry forward – whether that was the introduction of electronic trading more than two decades ago that democratized our markets or more recently, the development of new technologies such as distributed ledger technology, artificial intelligence or cloud computing which are all showing signs of providing efficiencies to our markets.
FIA aims to provide a forum to showcase and allow discussion on some of these technologies. For example, our Chicago Expo conference hosts the Innovators Pavilion, which brings together twenty start-up innovators, selected by a committee of market professionals, to show their offerings.
At this year’s conference, we also held a panel session on cryptocurrencies and exchange-traded derivatives. This turned out to be the most popular breakout panel session we have ever held, with delegates spilling out of the room. This shows the level of interest in this new product class and we are thrilled to have bitcoin entrepreneurs the Winklevoss twins speaking tomorrow at our cryptocurrencies 101 session.
FIA is supportive of these new and innovative products but also believe that such developments should be undertaken with due care and consideration over the potential risks and impacts on the world’s financial systems. We believe that the launch of new exchange-traded derivatives products in cryptocurrencies requires a healthy dialogue between regulators, market structures and the clearing firms who will be absorbing the risk of these new and potentially volatile, emerging instruments. We look forward to working with the various stakeholders to ensure that once these products go live, they can succeed as a price discovery mechanism for these innovative products with the proper risk guardrails that ensure their long-term viability.
While these new offerings and products are a positive sign that our industry is returning its focus to growth, we are also keenly aware of the ongoing industry challenges.
As I mentioned earlier, a key concern has been the proposal by the European Commission for the supervision of third country CCPs, which could require certain systemically important third country CCPs to the EU to relocate to one of the EU 27 nations, if certain conditions are met.
FIA has raised concerns with this proposal. While we support the EC’s commitment to ensuring third-country CCPs are appropriately supervised as part of a well-regulated central clearing system, we believe that forced relocation of clearing could distort markets, fragment liquidity and raise costs for market participants globally. The EC can better achieve the goal of improving the oversight of third country CCPs by updating its proven equivalence regime and enhancing the supervision for CCPs that are systemically important in the EU.
We also remain concerned about the unresolved treatment of customer margin under the leverage ratio, as proposed by the Basel Committee. Unfortunately, the current standard fails to recognize customer margin as an offset for losses by a client.
This negatively impacts central clearing by making clearing prohibitively expensive and limiting the ability of a clearinghouse to transfer client positions during a default. If the leverage ratio effectively places a cap on the amount of clearing a firm can profitably conduct, there will be fewer clearing members stepping up to accept a portfolio of clients from a defaulting clearing member. Without willing buyers, a clearinghouse would be forced to conduct a fire-sale of these client positions in a distressed market. This could leave many clients unhedged during a crisis and intensify market stress at exactly the wrong moment.
FIA has been a tireless advocate on this issue and we have spoken to regulators around the globe on this topic. And our efforts are beginning to pay off. For example, the European Commission has proposed that it will include an offset for initial margin in its revised capital requirements. The US Treasury also recommended in its latest Capital Markets Report that initial margin for centrally cleared derivatives should be deducted from the Leverage Ratio. And the newly nominated Chairman of the Federal Reserve, Jerome Powell, has come out in favor of calibrating the leverage ratio to incentivize clearing. FIA looks forward to continuing to be the voice for the industry on this important issue in 2018.
Specific to Asia, FIA prides itself on being the industry’s voice in responding to impactful regulatory developments. That has included responding to SEBI’s Discussion Paper on the Growth and Development of the Equity Derivatives Market in India. Our recommendations included the introduction of industry-wide standard processes and documentation as well as the introduction of omnibus accounts and block trading.
We also submitted responses jointly with ISDA and ASIFMA to the Monetary Authority of Singapore regarding proposed amendments to the Securities and Futures Act for the reform of OTC derivatives markets in Singapore.
And just last week, FIA submitted a comment letter to the JFSA in Japan regarding their proposed rule on automated trading to ensure these rules do not harm market liquidity and align with global standards in other jurisdictions.
Which brings me full circle. FIA’s position as a global industry association reflects our belief that the guiding principles of derivatives market regulation are universal in nature. We will continue to be your tireless advocate around the globe to make sure these markets are healthy and thriving.