ISDA Europe Conference 2017:
‘Derivatives and Risk Management: The European Public Policy Agenda in 2017 and Beyond’
28th September 2017
“Ladies & Gentlemen,
It is a pleasure to come back to address an ISDA event today and I would like to thank Scott and, in particular, Roger and their team in Brussels for the ongoing work that they are doing, especially assisting those of us who are working in the ever changing and evolving world of financial regulation.
In the past, I have come to address you about clearing and settlement and the new trading environment that is soon to go live with MiFID II implementation - all technical files, where I have been able to ask you for evidence and data to assist in shaping the policy and the level one and two text.
However, I currently find myself in a very different situation, where all the operational and technical knowledge I have gained working on the Economic & Monetary Affairs Committee over the last eight years - post-crisis - are paling into insignificance compared to the political agenda.
Last night I addressed an audience in Brussels to discuss ‘The Financial Crisis - 10 years on’ and the ensuing panel then explored whether the political and legislative response to the financial crisis had made the system safer. In preparing for the event, it was a good time to reflect back on the interim period and to think about the huge volume of legislative actions that the EU has put in place since 2007. We have overseen more than seventy pieces of EU Financial Services, market infrastructure and governance laws in that time.
The formation of a new pan European system of European supervision was one of the first political tasks and it is difficult to imagine that the three ESAs and the systemic risk board did not even exist seven years ago. They were deliberately set up to co-ordinate implementation of the various directives across the EU28 and to ensure that a true single market in financial services was able to emerge. They were also given the task of writing a single rule book and enforcing national competent authorities (NCA) adherence. Although the teething problems were many, and the number of regulatory technical standards (RTS) and delegated acts they needed to address were huge, they have bedded down remarkably well. The way in which they interact with NCAs by and large is positive and the working groups are well attended and productive. Direct supervision was deliberately restricted to pan EU newly regulated entities of Credit Rating Agencies (CRAs) and Trade Repositories (TRs), so that ‘on the ground’ supervision continued at the appropriate level, the NCA, closest to the business being regulated.
The advent of the Banking Union, as a result of the Eurozone crisis that followed, meant another change in structure as the Eurozone chose to supervise their largest credit institutions via the Single Supervisory Mechanism. The UK throughout these negotiations played a constructive and positive role. It took us months to agree a dual voting structure in the EBA to reflect the Eurozone and non-Eurozone members, but it was done. Pragmatic solution won out.
As you have heard from Patrick Pearson of the Commission this morning and the subsequent panel, much was also achieved in market infrastructure reforms post-crisis. The flagship European market infrastructure regulation (EMIR) has become a gold standard and as we embark on the formal review process, we need to ensure that the political dimension to location policy for CCPs does not overshadow and harm the EMIR Refit, which, if done properly, will enhance the clearing and reporting processes and not undo the basic principles put in place following the, now infamous, Pittsburgh meeting of the G20 Heads of State.
The ability to review a piece of legislation three years after implementation is a very positive dimension to the EU legislative process and demonstrates a willingness to accept where things are not working quite as intended and allow us to make suitable changes. However the danger of re-opening a file is that the political motivations may have changed. My US political colleagues have always claimed that Congress would not revisit Dodd Frank for decades, that they would have to live with it and turn a blind-eye to the ‘bending’ of the rules by their agencies.
Given the lengthy three way process of amending EU legislation, the European Parliament negotiating team and the 28 Governments in Council, guided by the EU Commission, I never thought a review was a politically nor operationally sensitive task in the EU. But that was before 24th June 2016, when the Brexit vote totally changed the future dynamics in the Brussels bubble and throughout many EU capital cities.
When the G20 Heads of State met in Pittsburgh in 2009, I am sure many of them would not previously have known what a CCP stood for, let alone how clearing actually worked but they decided to put clearing centre stage. Suddenly politicians cared about what happened in the post trade world and once a focus has been placed on a sector, it is very hard to remove it.
Hence I was not as surprised as some when in the first statement from the then French President, François Hollande, after the Brexit Referendum result, referred to central clearing and the need to repatriate euro denominated clearing to the Eurozone. Of all the other enormous obstacles ahead, the President chose clearing. So no matter what the technical arguments and evidence may suggest, the EMIR files including the review, is about to become heavily politicised once again.
I have worked quietly on market infrastructure legislation and suddenly all colleagues, whether in the European Parliament or in the national parliaments, especially Westminster, are asking for briefings on clearing and post-trade processes. I only hope that they will take the time to learn about the technical detail and not just use it as a political football.
Having released my joint report on CCP Resolution and Recovery only yesterday, I truly hope we, as politicians, do nothing to jeopardise the CCP operations, which have been agreed and recognised globally by the regulators. But I fear we have a long political road ahead and you as industry participants, especially as clients of the system, need to start to help newly elected politicians understand the value of the risk mutualisation model and the global nature of the systems for derivatives clearing.
As we face this unprecedented disruption, which Brexit will inevitably bring, it is important that we keep the global picture in mind. Much of the banking and derivatives legislation would not have been delivered in a workable fashion, had it not been for the global regulatory bodies, agreeing standards using technical knowledge and sound evidence. The idea that the work by the FSB working groups on clearing, the work by IOSCO on market infrastructure principles, or indeed the Basel Committee will no longer be followed, is my greatest concern. At these times of unprecedented political uncertainty, surely now is the time to accept that global industries need global fora more than ever and that local protectionist measures have no place in a modern free-trade world.
I feel strongly as an elected politician, that I am not as qualified as the experts are to make a technical judgment and believe that my role as rapporteur or shadow, is to implement the standard that the global experts have decided. Where we have the privilege of such efforts I truly hope no jurisdiction involved in financial services feel able to deviate from this recent trend.
As the UK leaves the EU it will be dramatic, even with an extended transition period. My vision will be for a deep bespoke trade deal between the U.K. and EU27, which embraces goods and services equally for the first time. Our rules will be the same on day one and for some time to come, and unlike any other financial trade agreement (FTA) this will not be about future convergence of rules but how to avoid divergence, such that access is no longer permissible.
To achieve this we are going to have to build on the recent co-operation between global regulators. In all regulated sectors, but especially financial services, the U.K. and EU will need to establish a new Regulatory Forum that aligns future legislative actions, especially those being implemented locally not globally. All modern FTAs have an arbitration system built in and I truly believe that a future Regulatory Forum is not only desirable but essential, to keep financing European growth across the continent.
Politicians need to be aspirational and not protectionist at this time. I hope that we are now seeing global co-operation in financial services as only at a beginning, rather than seeing the beginning of its demise.”