Remarks by Chairman J. Christopher Giancarlo at the ISDA Industry and Regulators Forum, Singapore
September 12, 2018
Thank you for that kind welcome. It is a pleasure to be back in Singapore and to be here at ISDA’s Industry and Regulators Forum. I want to thank Scott O’ Malia and his team at ISDA for organizing this event. I am looking forward to the fireside chat with my colleagues from Australia, Cathie Armour, and from Singapore, Lee Boon Ngiap, to discuss the next steps in the development and implementation of our global regulatory agenda.
Last November when I was in Singapore, in addition to speaking at this event, I also spoke at the Singapore FinTech Festival. It was the first time the CFTC had participated in the Festival, and I was very pleased to have to be invited by Ravi Menon to attend. Although this year I will not be able to attend, LabCFTC will be participating in the Festival. Both MAS and the CFTC share a commitment to encouraging innovation and development in FinTech, and I look forward to partnering with MAS on Fintech initiatives in the future.
My speech at the FinTech festival focused on the digital transformation of our lives, and I described the CFTC’s forward-looking agenda to address the impact of technological innovation and changing market dynamics. I spoke about how the CFTC could facilitate market-enhancing innovation and become a more digital, effective, and efficient regulator.
My remarks today build on the theme of modernization of the CFTC’s mission, but in the area of how the agency applies its regulatory framework to activities outside of the United States, and how such modernization will benefit our close regulatory counterparts worldwide, particularly here in Asia.
Modernization of the CFTC’s Cross-Border Framework: Problems with the CFTC’s Current Cross-Border Framework
As I explained in London last week and Tokyo earlier this week, the CFTC was one of the first regulators to implement many of the G-20 swaps reforms first set out in Pittsburgh in 2009. I, for one, am rightly proud of the CFTC’s leadership. Yet, financial regulators around the world, including our colleagues at MAS and ASIC, also deserve recognition for the responsible progress they have made in recent years in implementing the Pittsburgh reforms.
Yet, going first always carries with it the risk of getting some elements wrong. In the cross border extension of its rules, I think the CFTC did so by acting on a flawed premise – that every swap a U.S. person enters into, no matter where and how transacted, has a direct and significant impact on the U.S. economy and must be subject to CFTC swaps regulations. This approach is increasingly inappropriate as other key swaps jurisdictions implement effective swaps reform. Moreover, it causes a range of problems and unintended consequences, including the potentially dangerous fragmentation of global swaps markets.
I have spent the past five years observing how the CFTC’s approach to cross-border swaps regulation has impacted global markets – not just U.S. markets, but also markets in financial centers such as Singapore. Since the start of the CFTC’s SEF regime in 2013 and accelerating with mandatory SEF trading in 2014, our global swaps markets have fractured into separate trading and liquidity pools between U.S. market participants on one side and non-U.S. market participants on the other.
Fragmented pools of trading liquidity are less resilient in the event of sudden market events, resulting in transaction volatility and higher pricing for end users. Such fragmentation of global swaps markets is not prescribed by the G20 swaps reforms, nor is it justified as an unavoidable by-product of reform implementation. In fact, market fragmentation is not only incompatible with global swap reform efforts, but detrimental to them. The time has come to complete the important mission of global swaps reform in a manner that is harmonious and effective without fragmenting world markets.
Principles for Improving to the Cross-Border Approach
In constructing a more balanced and appropriate cross-border approach, I am drawing on the following set of principles.
First is the importance of distinguishing between swaps reforms that focus on market structure and trading practices and swaps reforms that focus on global systemic risk concerns. For the former, we should show greater deference to non-U.S. regulatory authorities’ rules designed to address local market structure, customs, and trading practices. Instead the CFTC’s focus should be with respect to cross-border activity that has direct systemic risk considerations for the U.S. markets.
When it comes to swaps reforms that do involve global systemic risk transfer, we must pursue multilateral coordination to achieve high levels of comparability on the basis of comity but not on the basis of what is identical. The alternative is a world in which every regulator asserts global jurisdiction over swaps trading abroad by its home-domiciled institutions. This leads to overlapping, duplicative and possibly conflicting regulations that stymie global economic recovery.
A next principle is that regulation of U.S. derivatives markets – the world’s largest – can and will only be done by U.S. regulatory authorities. The CFTC will determine what is appropriate regulation of U.S. markets and market participants, just as other non-U.S. regulators should be expected to act as rule makers for their jurisdictions. The CFTC has every right to expect that non-U.S. regulators will defer to the CFTC on oversight of the U.S. derivatives markets.
A further principle is the utilization of a flexible, outcomes-based approach to substituted compliance. Where there is a sufficient level of regulation to justify a comparability assessment in the aggregate, we should streamline our substituted compliance determinations. We should avoid including conditions or complexity when it is not needed. Particularly for swaps execution and cross-border activities of swap dealers, we all should recommit ourselves to deference processes (such as equivalence and substituted compliance) to increase regulatory coordination and reduce market balkanization.
Based on these principles, I have set forth a number of recommendations in my proposal to appropriately revise the CFTC cross-border framework. These recommendations will be included in a White Paper to be published in the next few weeks.
Working with Like-minded Regulators
As I noted earlier, one of the primary objectives in revising the CFTC cross-border framework is to decrease derivatives market fragmentation and the systemic risk it may produce. It is vital for global businesses to have the benefit of deep pools of trading liquidity with the maximum number of counterparts with which to hedge commercial and financial risk at the most competitive terms and prices. Without unnecessary fragmentation, liquidity will naturally coalesce in well-ordered trading environments close to the underlying risk to be hedged. For Singapore, it means consolidated liquidity pools for global market participants in particular with respect to Asian interest rate derivatives, local currency FX and energy. Deep and unfragmented pools of liquidity will facilitate the efficient flow of capital across the globe and greatly benefit regional and global commercial activity and economic growth.
Another primary objective is to increase cooperation by greater reliance on regulatory deference. Our relationship with MAS is a prime example of how deference can and does work. U.S. market participants access Singaporean markets through number of regulatory mechanisms including the CFTC’s foreign futures regime, FBOT regime, and DCO regime. For foreign futures, the CFTC defers completely to MAS for all regulatory and supervisory activities based on a finding that Singapore law imposes regulatory safeguards that are comparable to those imposed by U.S. law. For the FBOT regime, while registration is required, we again defer to MAS for regulatory and supervisory activities based on a finding that MAS provides comparable, and comprehensive supervision and regulation as that conducted by the CFTC. For the DCO regime, we once again defer to MAS for the day-to-day regulatory and supervisory management of SGX. Our deference to MAS is a risk-based and outcomes-based determination that Singapore law and MAS have comprehensive and comparable laws and regulations as the U.S. and the CFTC. It allows for effective information sharing and cooperative surveillance arrangements.
Through these efforts, we have forged a close regulatory bond with MAS that has created cross-border business opportunities for U.S. and Singapore firms while still ensuring market and customer protections. It is a bond that we must reinforce.
It is my hope that by moving the CFTC towards a more deferential cross-border approach, other jurisdictions will do the same. We must meet the challenge that extraterritorial regulatory overreach presents for both the U.S. and Singapore financial entities that wish to operate in global markets.
In order to reduce the complications, conflicts and confusion for market entities that operate in global markets, it is imperative that all financial market regulators recognize that an exact alignment of regulations is not always possible. Nor is it preferable given the inherent differences in local domestic markets in areas of market structure, practice, customs, and laws. If extraterritoriality is pushed forward, it has the potential to fragment markets, decrease resilience, and increase costs for all market participants. This impact weakens the effective resiliency of the G20 reforms we have implemented over the past decade.
It should not be a surprise to anyone that I came to Asia this week. Here are some of the fastest growing economies in the world and some of the most advanced financial markets. Here – in Singapore, Japan, Australia and Hong Kong – we have major international derivatives markets. Here we have a shared interest in minimizing market fragmentation caused by cross border regulatory overreach.
To this end, I hope like-minded regulators, like the CFTC, MAS and ASIC, among others, will work together in our various multilateral and bilateral fora to confirm that all key members of the international regulatory community support the principles that will guide the revision of the CFTC cross-border approach. Such work will be a model of cooperation for regulators of the world’s major derivatives markets.
The CFTC traditionally shaped its cross-border policy based on certain basic understandings: that we all benefit if more choice is available to market participants; that market competition is healthy and necessary; and that efficient movement of capital across the globe, and the economic growth that results, is furthered by regulatory deference to other comparable jurisdictions. I intend to re-align the CFTC’s current approach to return to that traditional course. It is a path that is essential for the growth of not only U.S. markets, but also those of important global partners, such as Singapore.