CFTC's Chilton: We must avoid 'regulatory arbitrage'

“Stopping Stammering: Overcoming Obstacles in Financial Regulatory Reform”

Speech of Commissioner Bart Chilton to the
Goldman Sachs Global Commodity Conference, London, UK

March 28, 2011

Introduction: The King’s Speech

It’s great to be with you this evening. Thanks to Don Casturo for the kind invitation to speak with you and thanks to Ken Connolly who does your Washington, D.C. work and I have known for years. When Don first invited me, I must admit to feeling a little dash of doubt about the prospect of speaking to such a sophisticated group of financial market participants. However, as the great Winston Churchill once said, “There are two things that are more difficult than making an after-dinner speech: climbing a wall which is leaning toward you and kissing a girl who is leaning away from you.” I’ve never tried to climb such a wall, but have tried to kiss a girl leaning away, so I guess I’m more than half way there. My wife, incidentally, tells me she still loves me anyway. So, perhaps I can deliver this speech.

I’m sure that many of you have seen “The King’s Speech.” It won four Academy Awards, including Motion Picture of the Year. It was among the best pictures I’ve seen in a long, long time. Colin Firth did a remarkable job of playing King George VI. You couldn’t help but feel for a guy who never really asked for the job and had to overcome a stammer while serving as one of the most powerful people in the world. In real life, George VI became a beloved monarch, and of course, the movie had a joyful ending.

In the real life of financial markets, things were stammering in 2007 and 2008. The markets had been dominated by lax rules and regulators who may have looked the other way. Market participants took advantage of the circumstances. High-wire deals were the norm and bets upon bets on things like credit default swaps led to the collapse of some big, global entities, taxpayer bailouts and a reeling world economy.

So, we were asked to do a job we really hadn’t asked for either: reform our regulations. In the United States, our President and our Congress reacted to the economic meltdown swiftly, and the final result was passage last July of the Wall Street Reform and Consumer Protection Act of 2010—a sweeping piece of financial market regulatory reform legislation that was sorely needed. The U.S. law brings “dark markets”—that is over-the-counter (OTC) markets that had no regulatory oversight whatsoever—under federal scrutiny, and increases transparency and accountability in financial markets, to the benefit consumers and businesses alike. As you know, many other nations are moving in this direction too. In fact, Europe has been debating very similar reforms. The Japanese, who despite having a long road ahead of rebuilding their infrastructure and their economy, have put reforms in place, too. I want to talk more tonight about how we need to learn from each other and think about how we go forward in a more harmonized fashion. There are still many obstacles, but like George VI, we can overcome them if we work hard and together.

Changing Markets

First, however, it makes sense to discuss the market environments in which we currently live. One of the reasons our financial markets and our economies are so interconnected—and we need some harmonization—is because of technology. Folks screaming at each other in trading pits are quickly becoming a thing of the past. Instead, computers are screaming at each other all day and all night—most times regardless of time zones around the world. Algorithmic programs are cranking away like journeymen and high frequency traders (HFTs) are trying to scoop up micro-dollars in nanoseconds. It is amazing how quickly and vastly these markets morphed. In the U.S., well over 90 percent of the trading is done electronically. A subset of the electronic trading, HFTs, account for roughly 50 percent of the trades in the European Union (E.U.) and roughly a third of the trades in the United States (U.S.).

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