Good Afternoon and welcome to the 43rd annual FIA Boca.
Over the years, Boca has come to represent more than our industry’s break from our winter hibernation. For me, Boca embodies the perennial hope, anticipation and optimism of our industry and the belief that tomorrow will be better than today.
This industry has always been able to re-invent itself through innovation and competition and Boca has always been at the center of the deal-making, announcements and ideas that serve as the fountain of youth for our markets.
One of the highlights of Boca is the International Regulators meeting that was hosted today by the CFTC for regulators only. We are thrilled that regulators from all over the world traveled so far for that meeting and are here this week.
As you have seen, this year marks a decade since the financial crisis. Can you believe it has been ten years? Funny but I actually stopped shaving after the financial crisis and my beard has finally come in. Ten years ago, we found ourselves at the heart of one of the worst financial crises this generation has ever seen.
I was serving as acting head of the Commodity Futures Trading Commission and the warning lights on our markets were flashing red. You all know what happened next. First Bear Stearns was rescued, Fannie and Freddie collapsed, Lehman declared bankruptcy, followed closely by the bailout of AIG.
I was being called to the Roosevelt Room of the White House weekly as the President and policymakers of the highest levels searched for answers. As institutions went into survival mode, credit lines were revoked, liquidity disappeared and markets froze up, causing panic to spread among financial institutions globally. The entire financial system teetered on the brink of collapse.
Many of us vividly remember where we were that week when we saw Lehman Brothers’ collapse and AIG’s rescue. These memories seem distant and surreal now but the scar tissue remains. During the Lehman weekend, as CFTC chairman, I was one of many regulators who had commandeered the top floor of the New York Federal Reserve to work through the issues facing our markets and economy.
Specifically, CFTC officials were validating the client accounts of Lehman’s futures business and then facilitating the porting of these client positions to FCMs that were willing and able to take on these portfolios.
Ultimately, we were successful in finding homes for these positions, and the futures markets continued to function during those tumultuous days.
Our markets provided liquidity and price discovery when other markets went dark. These events caused a collective lightbulb to go on with many in the policymaking community, including myself, regarding the benefits of clearing.
People forget, but New York Fed President Tim Geithner, SEC Chairman Chris Cox and I were able to approve two CDS clearinghouses—CME and ICE Clear Credit—to clear those volatile products in late 2008 and early 2009—way before post-crisis legislation was even contemplated.
A few months later, policymakers, including House Financial Services Chairman Barney Frank, who will join us on stage tomorrow, recognized the risk-reducing benefits of clearing and how this model could add transparency and predictability to the less transparent over-the-counter swaps market.
This industry should take pride that the attributes that have made our markets safe for over a century—clearing, exchange trading and transaction reporting—became the pillars of the G20 reforms for the swaps markets.
It took 10 years and a whole lot of work, but all these pillars are now in place: Dodd-Frank, EMIR, Basel III, MiFID II and their equivalents in Japan, Hong Kong and around the globe. And the results are worth reporting as well:
We have more clearing of derivatives
More transparency in trading,
More capital in the banking system, and
Better benchmarks in both financial and commodity markets.
Of course, in solving yesterday’s crisis, it is increasingly clear that several unintended consequences are having a negative impact on our industry. Three are worth noting.
First, the number of FCMs is shrinking due to the amount of resources needed to be a clearing member. How does this affect the concentration of risk and the manner in which customers’ access our markets? Not exactly clear [no pun intended] but concerning.
Second, investments in technology and innovation have been delayed and underfunded over the last decade because the industry has justifiably devoted so much time and resources into compliance. Is this a factor in the sluggish growth, fewer products and lower volumes over the past several years? Good question.
And third, cross-border trading—which makes up a significant portion of our industry’s volume—is becoming more challenged. This may be due to the timing and substance of the reform efforts among global jurisdictions. I also believe that trust among regulators has suffered due to the crisis and other intervening events like Brexit. This is having a lasting impact on our approach to cross-border regulation.
I want to pause on this last point and speak about the cross-border divergence that has emerged because this has the potential to set-back our post-crisis progress if a commonsense framework is not reached.
Over the past 30 years, market regulators have successfully developed an oversight framework that allows cross border business to occur while avoiding duplicative or conflicting rules.
Some call this approach recognition, others equivalence and still others substituted compliance but they all result in the same thing: foreign jurisdictions deferring to home country regulators if the home nation’s laws are deemed comparable.
This has the benefit of focusing oversight and taxpayer dollars on those markets where regulators are closest and can add the greatest value. The CFTC has successfully developed such an approach with its foreign board of trade regime and the EU has used its equivalence process successfully to recognize and defer to other foreign jurisdictions.
Unfortunately, post-crisis we may be moving away from this approach, first starting with the CFTC’s registration of foreign CCPs for swaps and most recently with the EU’s proposal to regulate systemically important third-country CCPs.
It is unclear how deference plays into these approaches.
Regulators must work together to develop a framework that returns us to a more balanced deference approach for cross-border regulation. This may require all parties to rethink current practices of overseas direct regulation in order to achieve common ground.
A good first step would be for EU to validate and uphold its recent equivalence determinations with the U.S. and others to ensure market clarity as it considers legislation to improve its oversight of CCPs.
FIA will continue to work with our members and regulators around the world to ensure these markets remain regulated at the highest global standards but in a way that avoids confusing and duplicative rules. This is especially important during times of market stress when institutions most need clarity of direction.
While we reflect on ways to address these unintended consequences, we eagerly look forward to the innovations and topics that will shape the next 10 years. What will be the mega-trends that define the next decade? I want to briefly discuss three.
The largest driving force affecting our industry is and will continue to be technology.
This really hasn’t changed over the last thirty years when our markets first went electronic but Moore’s Law has exponentially quickened the pace of technological change. Whether it’s big data, cloud computing, or artificial intelligence--all of these are coming together in a way that will revolutionize how we conduct business.
According to a recent PWC survey, more than 80% of financial institutions worry that they are losing revenue to innovators. At the same time, more than 80% expect to partner with fintech firms in the next three to five years. It is clear that technological disruption is driving innovation at an accelerating rate.
The second mega trend will be China—again not a surprise. We have been discussing this for years but this year appears to be a watershed moment.
I sit on the Chairman of the CSRC’s International Advisory Committee and it was clear at our recent meeting that President Xi is driving the modernization of China’s nascent financial markets so they can better serve the world’s second largest economy.
Notably, in a couple of weeks, the Shanghai International Futures Exchange (INE) will for the first time provide direct foreign access to a Chinese futures market. Iron ore is already next in the queue and the CSRC is actively exploring the cross-listing of index futures contracts between Chinese and foreign exchanges.
Just as powerful a trend will be in the reverse direction with the increased participation of Chinese institutions in Western markets. A few Chinese brokers have already joined exchanges in Europe and the U.S. and the CSRC has indicated that they plan to approve more.
The Chinese have a saying “Crossing the River by feeling for stones” to signify their methodical and measured pace. In my view, China’s unified leadership and direction make it feel like China is starting to skip across the river. Or to quote PIMCO analysts, it's time to shift our perspective from "made in China" to "trade in China."
The final megatrend that is shaping our geopolitics as well as our markets is the revolution occurring in the energy sector. A decade ago, as chairman of the CFTC, I was testifying frequently about peak oil and $140 prices. Some were predicting $200 oil.
Today we marvel how capital investment in technology has placed a virtual cap on the price of energy for the foreseeable future and is transforming the U.S. from a net importer to a net exporter of energy by 2022. What caused more capital investments to flow into this sector, which today exceeds $1.7 trillion annually?
The answer is simple: it’s free markets discovering prices.
As economists say, the cure for high prices is high prices. That’s why it’s important that markets, not politicians, set the price of goods and services in our economy. Backdoor policies that aim to regulate prices versus wrongful activity should be condemned.
Our markets allow its participants to hedge risk and discover prices in a safe and orderly manner and FIA stands ready to defend this critical mission. We may not like the prices being discovered on our markets, but they send powerful signals that change investment patterns.
And in this case, prices discovered on our markets helped reshape the geopolitical direction of the globe for years to come.
Now, turning back to our conference, the program reflects the need to both recognize and turn the page from the financial crisis to these innovations and trends affecting the next 10 years of growth. Speaking of innovation, we are thrilled to have Walter Isaacson as our DTCC luncheon keynote speaker tomorrow.
Mr. Isaacson is a bestselling author that focuses on the innovative minds of geniuses, ranging from Einstein to Ben Franklin to Steve Jobs to most recently Leonardo Da Vinci.
We are also thrilled to hear remarks from CFTC Chairman Chris Giancarlo who brought the Boca audience to its feet last year as well as CFTC Commissioners Quintenz and Behnam.
One of tomorrow’s highlights will feature a panel that includes important figures involved directly with the financial crisis, including one of the authors of financial reform Chairman Barney Frank.
Over the next two days, we will feature exceptional panels ranging from regulatory to fintech, highlighted by an interview with bitcoin pioneers Cameron and Tyler Winklevoss on Thursday morning.
But before we kick off the program in earnest, I would like to take this opportunity to thank all the sponsors and exhibitors of Boca 2018. Without their support, Boca would not be the success it is today.