Trust and Confidence: Essential for Global Capital Markets
Keynote speech to AFMEs 13th annual conference on European Trading and Market Liquidity
By kind permission of Kay Swinburne MEP:
10 years ago this week, the financial crisis was gaining momentum.
On the 17th of March, the US Federal Reserve held its first emergency weekend meeting in 30 years, in which it agreed to the guarantee of Bear Stearns' bad loans so that JP Morgan would agree the purchase.
Two days later on March 19th, Federal regulators agreed to let Fannie Mae and Freddie Mac take on another $200 billion in subprime mortgage debt.
That same day, the Federal Housing Finance Board authorised regional Federal Home Loan Banks to take an extra $100 billion in subprime mortgage debt, debt that was to be guaranteed by Fannie May and Freddie Mac.
Three huge decisions, taken this week – ten years ago. The effects of which we of course still see today.
I joined the European Parliament’s Economy and Monetary Affairs committee not long after these events and I will talk later about some of the specific reactions to the financial crisis that came out of that committee and the other EU co-legislators.
But beyond the banking, markets and infrastructure legislation that has dominated my working life (and I’m sure many of yours) since 2008, the crisis also brought about what I believe – especially in today’s climate – to be an equally important result.
A global crisis – gave us global cooperation, to a level unseen and indeed unprecedented before that point.
The crisis necessitated and forced a breakthrough in huge swathes of global work on the financial system. The recognition of global capital flows and the interconnectedness of Financial systems around the world led to the G20 Pittsburgh decision on central Clearing, reporting and platform trading of derivative products.
At an IOSCO level, we had the agreement on PFMI’s – the Principles for Financial Markets Infrastructures which were widely adopted around the globe.
Within the EU, we began to produce legislation that required information exchange between jurisdictions and a high level of cooperation between EU and other global supervisors.
The creation of colleges with the EMIR legislation for example – and similarly for Banks within the framework of BBRD has formalised cooperation of regulators around the world – those with a vested interest get to opine on an entity’s risk management and soundness.
The setting up of the European Supervisory Authorities – the ESA’s – brought the EU National Competent Authorities together in a formal arrangement, and mandated open dialogue between them at least monthly and more frequently in technical working groups and forced a better understanding of each other’s markets.
The ESAs also brought about the EU single rulebook, not a universally popular concept of course, but a piece of work that forced EU supervisors to construct collaborative rules with a regional focus and to understand that this approach was not paradoxical. So more communication within the EU NCAs, between NCAs across banking, markets & insurance and within global fora.
So why was it so vital to do this globally?
Because only globally could we restore the trust and confidence that the markets desperately needed and indeed still need reinforced.
Such was the level of the shock 10 years ago and such was the lack of conviction in the system – that only at a global level, only through global collaborative platforms were we able to restore these two principles of trust & confidence.
For the EU, this global cooperation gave them the impetus and motivation that would never have come from within. To see this, we only need to look at the current reluctance that greeted the Commissions recent plans to enhance centralised supervision.
Is the EU ready for a single markets supervisor? I suspect not.
So trust and confidence in the EU & global capital markets were rebuilt through global cooperation, and going forwards it will be that existing trust and confidence and global cooperation that needs to be preserved in the face of Brexit.
This is somewhat of a role reversal.
Post Brexit there is a real danger in a break in trust between the UK and the EU. The referendum decision has given way to a lack of confidence in each other’s ability to stick to already agreed regulatory regimes let alone future regulatory intent.
Concurrently recent Regulatory proposals for EU oversight of third country CCPs has led also to a break in trust between the EU and the US, which seems to be resulting in a lack of confidence in each other’s current methods and existing commitments on equivalence .
In terms of the UK – EU relationship, the idea that the UK will deregulate post Brexit is a major sticking point. Only this week I have been told that the U.K. will once again move towards favouring Self-regulating entities, lax prudential requirements, low tax – becoming more Singapore but thousands of miles closer and in the same time zone.
A Singapore on the Thames that will threaten and undermine Europe’s safety and competitiveness.
This narrative is misplaced. The UK has never adopted a low regulation approach, indeed we often gold plate regulation from Brussels and are the driving force within EU discussions advocating for higher standards – not just for financial services but for chemicals, pharmaceuticals, aviation and other highly regulated sectors.
Moreover, in the UK we recognise that the reliability and expertise of our regulators, their strict adherence to the law and their non-discriminatory approach to market participants are a major competitive draw for the City of London.
The independent UK regulators are not about to turn their backs on this and the complex ecosystem that has been built around it.
Turning to the current difficulties Between the US and the EU, changes to the Dodd Frank Act have made headlines and sounded alarm bells in some European capitals -but again I believe this is misplaced.
The reality is that we all know that there is merit in refined amendments to Dodd Frank – just as there are to all legislation including our own – the current EMIR Re-Fit for example. However, without the trust that these amendments will move in the right direction, there is no constructive dialogue just further sensational, unconstructive headlines.
For the United States, they lack confidence in the EU’s ability to be proportionate and not apply a damaging blanket Brexit policy to all third countries. It is causing huge concern currently and paves the way for retaliatory Regulatory action. This is most notable in the area of CCP supervision where it took 4 long years to agree EU/US equivalence for CCPs.
There will always be political events and statements that make relationships sensitive and we in the UK markets must be sensitive to that in light of Brexit and not inadvertently or deliberately contribute to aggravating them.
It is apparent and expected that the UK will implement and adhere to all of the large EU market files that Brussels has produced in recent years and we are being monitored closely – many colleagues in Brussels are beginning to once again question the value of global markets like London and New York and are starting to view them with unease.
We need to maintain trust & confidence in our markets and joint regulatory systems.
Innovations that have long been a commendable selling point of the City of London must adhere to the principles of fair, transparent and non-discriminatory access. Inventive interpretations of new rules – like the double volume cap under MiFID II being circumvented by periodic auctions, will be seen and called by the EU for what they are – a continued move away lit trading to maintain trading from in the dark – and they will not be viewed favourably.
It is my belief that the U.K. & EU will succeed in coming to a mutually beneficial arrangement on financial services going forward and that within a comprehensive FTA there will be an FS chapter, much as was envisaged in Chapter 6 of TTIP in 2013/4. The intention is to ensure regulatory alignment with the EU27, based on common objectives. It will therefore involve forming a new regulatory forum as envisaged by the then Commissioner Barnier in which future regulatory actions can be discussed. Conversely, it will be vital that moving forwards in our relationship with the EU we secure clear and well-constructed mechanisms so that regulatory divergence may occur without it being interpreted as a sudden breach of trust.
Just as you find in multiple Free Trade Agreements around the globe, the future UK-EU agreement will need to include an arbitration system so that disagreements in policy can be explored. For financial services and indeed many other sectors, this will need to be technical in nature and discussion.
Where conscious divergence takes place in terms of regulation, the opportunity to demonstrate why this is the most appropriate line of action for each market and to demonstrate how this adheres to the FRAND principles will be vital.
It is my firm belief that these two principles of trust & confidence should shape the U.K./ European Regulatory Agenda moving forward, as it is only with these strong foundations that commitment to global dialogue and standards can be assured.
Both the UK and the EU must recognise that they are only as good as their institutions and that short-sighted, politically driven and projectionist regulatory agendas will not give their institutions a stronger voice at the global regulator’s table- and will therefore greatly damage their potential to influence.
The European Financial regulation agenda is full – recent FinTech initiatives including Crowdfunding, a plan for post-Brexit CMU through the cross border distribution of funds proposal, the implementation of post trade files CSDR, SFTR and the EMIR Review and the continuation of MiFID II implementation.
A complete overhaul of the ESAs, and a new controversial CCP supervision proposal including a location policy for systemically important entities to the union’s financial stability make this highly political.
What I want to stress is no matter how bumpy the road the need for the principles of trust and confidence are paramount to shape that positive agenda. There is a role for everybody. Market players, policy makers, trade bodies- everyone can play a part in ensuring the continuation of these principles so that we continue to cooperate at a global level for the benefit of all.