January 19, 2015
As Prepared For Delivery
Good morning. I want to thank the Hong Kong SAR Government and the Hong Kong Trade Development Council for inviting me. It is a pleasure to be here. I am especially pleased to be here on a panel with Chairman Xiao Gang, with whom I had a good meeting in Beijing on Friday at the start of my trip. I am also pleased to be here with Chairman Maijoor, with whom I have had a lot of constructive engagement. Since I took office in June of last year, working with my international counterparts has been a priority. I look forward to our discussion shortly with Professor Chan.
It is great to be back in Hong Kong. I spent five years living here when I was a lawyer in private practice – some of the best years in my life. I made many good friends, and met my wife here – though she happens to be from St. Paul, Minnesota.
You have asked us to discuss the prospects for sustainable growth in Asia in a world of change, particularly a world of changing financial sector regulations. I am very involved in changing financial sector regulations. I chair the Commodity Futures Trading Commission, which is the United States agency responsible for overseeing our futures, options, and swaps markets. And in that capacity, it is my responsibility to lead the U.S. effort to implement the commitments of the G-20 nations to reform the over-the-counter swaps market.
Let me first say a word about the relationship of the derivatives markets to growth. Many people probably hadn’t heard the word derivatives until the financial crisis, and today they may associate that word with bad behavior by big banks. But these markets, when working properly, are very beneficial to the real economy. When designed to help commercial users, they create substantial, if largely unseen, benefits for all of us. They enable utility companies or airlines to hedge the costs of fuel. They help manufacturers control the costs of industrial metals like copper. They enable farmers to lock in a price for their crops. They enable exporters to manage fluctuations in foreign currencies. And businesses of all types can lock in their borrowing costs. In the simplest terms, derivatives enable businesses to manage risk.
The Asian economies have grown to the point where well-developed derivatives markets can provide great value. To achieve that, there must be a regulatory foundation that enables markets to thrive and that attracts participants. That is, a framework that provides transparency and sensible oversight while also promoting competition and innovation. And because the economies of Asia, the United States, and Europe are so interconnected, we must work together to build a global regulatory framework that achieves those ends.
Our lives shape our views, so let me tell you a little about how mine has.
I agreed to move to Hong Kong in 1997 right before the handover. Things were booming here and throughout Asia at the time. But by the time I arrived in January 1998, the Thai baht had collapsed, and the financial crisis had spread throughout Southeast Asia. I spent much of the first year or so I was in Asia on transactions involving sales of distressed debt by Thailand and Korea.
Now, at that time, I never would have guessed that many years later I would work on distressed debt sales, or troubled assets as we called them, for my own country. But a decade later, I joined the U.S. Treasury Department to help the United States recover from the worst financial crisis we have experienced since the Great Depression. I oversaw the Troubled Asset Relief Program, the key U.S. response to the 2008 global financial crisis.
Today, I look back on both the Asian financial crisis and the global financial crisis as I think about the challenges we face and the relationship of sustainable growth to regulatory change.
Looking back teaches us more than a little humility. When the Asian financial crisis occurred, many in the West were quick to point out why the West would not catch what was sometimes referred to as the “Asian flu.” Some people said our markets and financial regulatory system were more mature, more transparent, and better supervised. They said that all of those things made us more resilient to shocks. Well, not resilient enough. Those things didn’t mean we wouldn’t have our own crisis. They didn’t inoculate us from the dangers that can occur when risks are not properly understood, or when authorities believe markets are fully self-policing.
By the same token, after Asia had rebounded from its crisis – and like many, I was impressed with how quickly you did so – some began to suggest that the Asian economies had “decoupled” from the economies of the West. No longer were they dependent on what happened in the West. Slow growth or even more serious problems in the West would not affect the dynamic growth in Asia.
Well, that didn’t prove true either. The Asian economies did not escape the collateral damage of the financial crisis. And that should not surprise us, given the severity of the shocks. In the United States, we lost eight million jobs, and millions lost their homes in foreclosure. With markets so interconnected, the shock waves reverberated worldwide.
Both crises illustrate the speed with which capital can move, and markets can fall, when problems hit. And these crises remind us that the economies of the United States and Asia are strongly and increasingly intertwined. What we do affects you. What happens here affects us. We are all in this together.
And that is why I am in Asia this week. I believe that we must continue to work together to build a global regulatory framework that helps our financial markets thrive. And that is especially true when it comes to the derivatives markets.
The Asian derivatives markets are growing. They represent nearly a third of global futures and options volume.
There are exciting developments taking place that may portend further growth and, in particular, greater sophistication and innovation in your markets. One is the launch of a crude oil contract on the Shanghai Exchange that is open to foreign participation. Another is what is happening in the equities market with Stock Connect.
The derivatives markets should serve the real economy. I had a good discussion about this with Chairman Xiao last week, who I know shares that view. And I believe a good regulatory foundation is critical for that.
One way a good regulatory foundation can do so is by creating transparency. This can encourage innovation, which can lead to the development of a wide range of contracts that enable businesses to hedge different types of risk. For example, in the U.S., there are futures and options contracts traded on 40 or 50 physical commodities, but there are over 2,000different listed contracts on those commodities, although not all are actively traded. They may differ by grade or quality of the product, length of term, delivery location, or other factors. The variety of contracts developed in response to the need to hedge different types of risk. And in the over-the-counter market, parties can design contracts that allow for further customization.
But a good regulatory framework is needed so that this innovation does not create excessive risk or other problems. In the U.S., we have had a strong framework for futures for many years. But we learned in the financial crisis that we needed regulation for over-the-counter swaps. We saw how over-the-counter swaps accelerated and intensified the crisis. The swaps market had grown to be a massive, global market that was unregulated. Participants had taken on risk that they didn’t always fully understand, and that was opaque to regulators. The interconnectedness of large institutions meant that trouble at one firm could easily cascade through the system. And we learned how a country’s financial stability could be threatened by excessive risk that starts outside its borders.
In response, the leaders of the G-20 nations agreed to bring the swaps market out of the shadows and achieve greater transparency. They agreed to implement some fundamental reforms such as requiring central clearing of standardized swaps.
The fact that the nations comprising the G-20 agreed on how to reform the swap market is, in and of itself, an achievement.
A G-20 communique only goes so far, however. The task of actually implementing those reforms remains with individual nation states, each with its own markets, legal traditions, regulatory philosophies and political processes. That can lead to differences.
Now, the fact is that, in most areas of financial regulation, national laws differ. Consider how securities are sold, for example. When I was working here, and we received approval for listings and initial public offerings on the Hong Kong Stock Exchange, that did not mean we could sell the same stock in a public offering in the United States.
But because the swap market was already global, many participants expect harmonization in regulation from the start. That is a good goal, though it may take time. To me, however, the glass is half full, not half empty. We are making good progress.
I can assure you that we in the United States want to continue to work with Asia to build that framework. We are aware that there are limits to the reach of any one country’s laws. We want to hear your ideas. We recognize the importance of harmonizing our rules with those of other nations where possible.
I believe Asia has much to gain from building this new global regulatory framework. It can create strong and innovative derivatives markets that can help propel growth in the real economy. And that can contribute to sustainable growth.
I look forward to working with you to build that framework, and to enhancing sustainable growth for all of us.
Last Updated: January 20, 2015