Let me briefly comment on an issue that has been the subject of much discussion of late here in Europe: the location of euro-denominated derivatives clearing. I am respectful of the fact that this is an important regulatory policy decision that needs to be made with care by European officials. I do not presume to tell those in Europe what they should do or what should be the outcome of important discussions between representatives on both sides of the Channel. I do not envy the choice that European officials will have to make between the perceived additional benefits of re-location to facilitate central bank support against the higher costs to the European financial system associated with loss of netting of euro-denominated risk exposures.
I would note, as has my thoughtful colleague, CFTC Commissioner Sharon Bowen, that the CFTC has much experience and expertise in the supervision of CCPs both in the US and abroad. We welcome the opportunity to discuss the CFTC’s experience with officials in Europe.
To date, the US has not deemed a body of water – even as large as the Atlantic Ocean – as an impediment to effective CCP supervision and examination. Given the closeness of the US and European derivatives markets, what Europe chooses to do on the supervision of CCPs undoubtedly will inform the evolution of US regulatory policy for cross-border swaps clearing.
Getting the International Reforms Right and Efficient Regulation
The President’s order to have US regulators review the impact of our recent regulation on the financial system10 has proven to be an invaluable opportunity. I believe a similar effort should be done on a global scale.
Recently, my CFTC colleagues and I had the pleasure of hosting, along with Svein Andresen and his colleagues at the Financial Stability Board (FSB), a roundtable to discuss the market impact of the G-20 derivatives reforms. Scott O’Malia represented ISDA at the roundtable. I think Scott would agree that it was first-of-its-kind in bringing together the various heads of international standard setting bodies and senior leaders of the financial industry to have a concrete dialogue about the effects of the G-20 reforms.
Participants in the roundtable generally agreed that the reforms have made the global financial system more resilient by enhancing capital reserves of banks and other financial institutions. But one key message that came through was that we need a better understanding of how the various reforms work together.
Since 2009 when the G-20 Leaders outlined the basic components of the reforms, international bodies like the Basel Committee, the FSB (whose dedicated Secretary General Svein Andresen is with us today), the Committee on Payments and Market Infrastructures (CPMI), and IOSCO, produced reports on capital, margin, central clearing, and other reforms, all with the goal of making the global financial system more resilient. And many of these reforms have been implemented into law in the US, Europe, Japan and other major market jurisdictions.
But not enough has been done to examine how these reforms interact with each other and whether the reforms – when applied in the aggregate – have made the financial system as effective as possible in supporting economic growth. FSB Chair Mark Carney describes this challenge as one of achieving “efficient resiliency.” As I said earlier, I believe that some of these reforms, like the SLR, have over-weighted balance sheet safety at the expense of trading liquidity resiliency.
It is critical that international bodies make it their top priority to take up this challenge of looking across reforms to see if we have this balance right. We risk causing irreparable harm to the global markets if we do not do this. Some of the issues I have noted, like SLR, have their origins in these international discussions. And SLR is a perfect example where regulators, who focused narrowly on the goal of increasing bank capital, failed to appreciate the impact on another important risk buffer, central clearing. This has undermined the resiliency and efficiency of the financial markets.
So, in conclusion, let us again be reminded of the essential role of global derivatives markets: to help moderate price, supply and other commercial risks – shifting risk to those who can best bear it from those who cannot. Thus, well-functioning global derivatives markets free up capital for business lending and investment necessary for economic growth – economic growth that still remains far too meager on both sides of the Atlantic.
Flourishing capital markets are the answer to global economic woes, not diminished trading and risk transfer. We must foster safe, sound and vibrant global markets for investment and risk management to stimulate greater job creation and broad-based prosperity.
The time has come to take stock of global swaps market reforms to better enhance trading market liquidity, reverse market fragmentation and reestablish regulatory comity.
I intend to do my part – as I may have the honor to serve – to oversee vibrant and durable markets for risk transfer in the twenty-first century, global economy.
I thank you for your time.