Welcome to FIA’s International Derivatives Expo.
Today we gather as a community with the full weight upon us of the sober and tragic events of the last few days and weeks. We all stand in solidarity with the citizens of the UK as we search for answers and understanding. We must honor these victims by rejecting the inhumanity of these events without allowing these actions to lessen our own humanity.
FIA will join others around the country in honoring the victims today with a minute of silence at 11 a.m. London time. Listen for the chimes today marking our remembrance.
In the midst of these senseless acts, we wonder aloud about the importance of gathering to discuss our industry’s issues. Issues that—truthfully—seem small given the past couple days.
But the British people have a long history of resiliency and calm in the face of crisis. And within the tradition of keeping calm and carrying on, we will carry on with our industry’s work.
And we should be mindful that this work is of tremendous importance—to consumers who rely on consistent prices, to businesses who need to manage risk, and to all those who depend on markets for capital development and investment.
This industry doesn’t shrink from problems—we overwhelm them through innovation and resourcefulness. The price of a free and open society may sometimes lead to these dark days but this is not the time to fade into the background. We shouldn’t turn our backs on talking about the issues and policies of the day, or debating our competitors with candor and vigor, or even laughing with each other as we gather here today.
For example, I will not be dissuaded from shamelessly mentioning Pat Kenny in my opening remarks as he bribes me to do at every FIA conference. I just won’t. I won’t be stopped from congratulating Kim Taylor on bravely taking on the Kilt Challenge for Futures for Kids. Nor will I refrain from noting that this is the first time that I can honestly say that I wear the pants in this relationship.
With this resolve in mind, we carry on and mark a milestone for IDX with our 10th annual conference. In those past 10 years, our industry has seen dramatic changes. We weathered the financial crisis, we implemented an entirely new regulatory structure, we saw the birth of Bitcoin and distributed ledger technology, and we restructured and modernized FIA into a global organization.
Some things, of course, haven’t really changed.
We’re still at the Brewery, which has been renovated with noticeably smaller pillars. The Jugged Hare remains the official pub of IDX and still does not stay open late enough. And just like last year in the lead-up to the Brexit vote, no British policymakers are able to speak at this conference ahead of Thursday’s general election.
I mean does Theresa May work for ISDA or what?
With this and other elections in Europe as well as the new U.S. Administration, it feels like we have turned the page from post-crisis rule-writing to an era of making the rules work better and smarter.
No one can disagree with the G20’s goals of mitigating systemic risk and improving the health of our financial system. That being said, the regulatory apparatus built over the last seven years is clearly causing some unintended consequences and weighs on the industry’s ability to thrive. Now is an opportune time to review these rules globally.
Here in Europe, the EMIR review has already started that process. In May, the European Commission published legislation proposing changes to the current EMIR framework based on public feedback on ways to streamline and reduce unintended consequences. The EMIR proposal addresses issues around reporting, CCP transparency, and clearing obligations. We’re pleased to see that a number of FIA’s suggestions were included, but with more work to be done.
Across the pond, the U.S. is following Europe’s lead and beginning its own review of financial regulations. FIA supports the comprehensive review of financial regulations called for by President Trump and has contributed both specific recommendations as well as guiding principles. These principles are 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 is advocating for three broad principles for healthy markets globally:
1. We support smart regulation and enforcement.
2. We support end-users’ ability to access markets—no matter where they reside.
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 London, Chicago, Singapore or Brazil, a significant amount of trading comes from outside your home markets. Just in the U.S. alone, more than one-third of customer margin for futures is held by companies headquartered outside the U.S. For European exchanges, a similar flow of trading comes from outside their home jurisdiction. 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.
Finally, regulators must find the balance between making our markets safe and encouraging innovation and growth. These are not mutually exclusive goals. In the UK and U.S., regulators must not only work on strengthening customer protection but also on encouraging innovation and technology advancement. I was pleased to see initiatives like FCA’s FinTech Sandbox and LabCFTC in the U.S. which further this goal.
These principles of smart regulation, accessible markets, and competitiveness are driving our advocacy on Brexit and the issue of euro clearing. FIA is engaged with regulators in the UK and Europe to minimize disruption and to ensure continued access to the cleared derivatives markets.
Today, FIA is releasing our response to the European Commission’s Communication suggesting the need for a location policy for the clearing of euro-denominated derivatives. In our letter, FIA expresses grave concerns that forced relocation of euro clearing would fragment these markets, raise costs for EU end users, and weaken the stability of the financial system. We fully acknowledge that the EU has monetary policy and regulatory interests in these markets, but we strongly believe the EU can address these interests through enhanced surveillance and oversight.
In fact, other nations have successfully done this without a location policy. Around 86% of U.S. dollar denominated interest rate swaps are cleared outside the U.S. The EU and Japan also have a significant percentage of interest rate swaps cleared externally. This is made possible through global regulatory recognition and cooperation with jurisdictions that have comparable standards.
The euro is one of the world’s great reserve currencies and as such, should continue to be traded freely and openly. If euro products were forced to relocate, these contracts would no longer benefit from being cleared in the same pool as interest rate swaps denominated in other currencies. The resulting cost increase could be as much as $77 billion, nearly doubling the sum of margin to $160 billion.
Consistent with our principles, FIA asks that EU policymakers proceed with caution and don’t restrict the use of the euro currency in a way that cuts off access to important risk markets.
In the U.S., FIA recently issued a whitepaper on advancing healthy markets in response to the President’s call for regulatory review. In this whitepaper, we recommend ways to remove regulatory barriers to these important markets and products. We’ve requested that the CFTC withdraw and re-propose the position limit rule to ensure that legitimate hedging activities are not unduly restricted. We also ask the CFTC to provide greater certainty around the de minimis threshold for swap dealer registration to avoid harming liquidity in the commodity derivatives markets.
Perhaps the most critical recommendation was to revise the leverage ratio so that it no longer penalizes central clearing. It is imperative that capital standards include an offset for client initial margin.
The good news is that the European Commission released its proposals on capital requirements in November, which included an offset for initial margin. We are also working to ensure this issue is understood by the new U.S. leadership and we remain hopeful that these efforts will influence the Basel Committee to take a more balanced approach.
With that issue overview in mind, I’d like to quickly preview the next two days for you.
We’re excited that Andy Busch, the newly appointed Chief Market Intelligence Officer of the U.S. Commodity Futures Trading Commission, is joining us for a one-on-one interview. Later, journalist and BBC business editor Simon Jack will discuss the impact of ongoing economic and geopolitical developments. Tomorrow, Steven Maijoor, Chair of ESMA, will provide keynote remarks. We also feature our not-to-miss exchange leaders and clearing leaders panels over the next two days. And we’re pleased to debut our first Dragons in the Dungeon session, in which a panel of industry “dragons” will introduce us to innovative fintech startups trying to disrupt our industry.
Be sure to visit the dungeon—I mean, basement—and check out these innovators while you’re here.
Of course, IDX wouldn’t be complete without our annual gala dinner benefitting Futures for Kids, complete with the popular Kilt Challenge.
Over the past 10 years, Futures for Kids has raised nearly 3 million pounds to support charities around the globe in their work to build a better future for children in need. As I mentioned earlier, this year’s kilt-wearer is none other than Kim Taylor of CME Group and the first female to don the sporran and kilt. Thank you to everyone who has already supported Kim’s Kilt Challenge and FFK. I look forward to seeing many of you at the dinner on Wednesday. For those of you who can’t attend, you can still contribute to the cause by taking part in our raffle or silent auction.
Some quick housekeeping items: please download our “FIA Events” app. And for those of you on Twitter, follow us @FIAconnect using the hashtag IDX2017.
I’d like to thank the exhibitors who are showcasing services to help grow your businesses. Be sure to visit them in our three exhibit halls. And, finally, I’d like to thank our sponsors for their generous support. Please join me in thanking them with a round of applause.
With that, I’d like to welcome Andy Busch to the stage.