One of FIA's top concerns in the policy arena is the growing fragmentation of markets. We have warned for many years that this trend will reduce liquidity, especially in markets that depend on crossborder flows, and harm the resiliency of clearing. At long last, it appears that our concerns are being heard at the highest levels of the official sector.
At the end of June, the political leaders of the Group of 20 nations will gather in Osaka, Japan to discuss global cooperation on economic growth, international trade, and financial market regulation. Japan, as the host of this year’s G20 summit, has put market fragmentation on the agenda, with the goal of finding “pragmatic and practical solutions” to reduce the negative impact of fragmentation on financial stability.
Having market fragmentation on the agenda is welcome news. The global derivatives markets have become increasingly fragmented in recent years as various jurisdictions around the world have implemented the G20 reforms of 2009 in ways that sometimes vary, overlap or contradict. We are glad to see that this alarming trend is finally getting more attention at the highest level of the official sector.
In response to Japan’s leadership on this topic, the two most important standard-setting bodies in our field—the Financial Stability Board and the International Organization of Securities Commissions—have launched initiatives to identify sources of harmful market fragmentation. They have held several rounds of consultations with market participants to gather input before they report to the G20 leaders in Osaka. FIA has been an active participant in this consultation process, joining these meetings in person and working with the CFTC to host one of these meetings at our annual FIA Boca conference in March.
At our flagship conference in Boca, FIA released a white paper that discussed the various issues that have led to increased fragmentation. I encourage you to read this paper, but in short, we encouraged regulators around the world to:
- Rely on counterparts in other jurisdictions to supervise certain cross-border activity through “deference” or “substituted compliance”;
- Work collectively to develop international standards and implementation guidelines while recognizing local flexibility and conditions; and
- Put in place mechanisms for cross-border cooperation, information-sharing, and crisis-management planning, which is critical for the day-to-day supervision of cross-border business.
For FIA and its members, this discussion comes at a critical time. Derivatives markets are global, but regulation is becoming more balkanized. It’s not just that we see conflicts and inconsistencies across jurisdictions. What is more alarming is that several national and regional regulators are moving toward more direct regulation of foreign activity and participation, making it much more difficult to run a global business.
This fragmentation of the regulatory framework reduces liquidity and competition in derivatives markets by creating barriers to market access and increasing the complexities of compliance. It also undermines the resilience of the clearing system by making it more difficult for clearing firms to operate on a global basis.
The coming months will be critical in our work to ensure that market fragmentation does not take root, particularly in Europe where a new government is coming into place in Brussels. For the remainder of the year, I expect that policy direction will depend mainly on key people in the regulatory apparatus. In closing, I want to take a moment to remember and honor two friends and leaders of the futures and derivatives industry who passed away recently: former Senator Richard Lugar of Indiana and former CFTC Commissioner Bart Chilton.
Senator Lugar was a significant mentor of mine over the years and served as a model Statesman and Senator: decent, fair, compassionate, earnest, and above-all wanting to do the right thing for Indiana and America. Shortly after the CFTC’s formation in 1975, Senator Lugar and his colleague from Vermont, Sen. Patrick Leahy, led the subcommittee of the Senate Agriculture Commission that oversaw this new agency. Over the next thirty-plus years, Senator Lugar participated in every CFTC reauthorization as our markets evolved. He chaired the Agriculture Committee during the passage of the Commodity Futures Modernization Act of 2000–the bipartisan legislation that implemented principles-based regulation and began an era of unmatched growth and innovation for exchange-traded derivatives.
I was also deeply saddened by Bart Chilton’s passing, who was a former colleague at the CFTC and a colorful friend that lived his life with determination, humor and passion. Bart always was looking out for the little guy and helped make derivatives understandable and fun by using obscure rock and roll references in his speeches, which always made his speeches memorable. And for those who knew Bart, he would have loved these tributes.
We honor these individuals and are comforted that their memories and contributions to our industry live on.
