There are growing concerns internationally that recent geopolitical developments in Europe and the United States are signs that financial market globalization is at risk. Cross-border payments and securities transactions have grown sharply since the 1970s, as exchange controls were relaxed and barriers to trade across borders were lowered. Financial market infrastructures (FMIs) have evolved in line with the growing volumes of cross-border activity, but have we reached a turning point in the policy and support for globalization?
This was a topic discussed at Sibos 2017, during the panel, The Retreat From Globalization: Threats and opportunities for financial market infrastructures. The panel was moderated by Rebecca Harding, CEO of Equant Analytics and featured Mark Wetjen, Managing Director and Head of Global Public Policy at DTCC, Alan Marquard, Chief Strategy & Development Officer at CLS, Paul Symons, Head of Government Relations at EUROCLEAR, and Mark Austen, Chief Executive Officer at ASIFMA.
Retreat or Rhetoric in the U.S.?
The current U.S. administration has undoubtedly caught the attention of the world with its isolationist and protectionist statements. The panel of experts discussed whether or not this appears to be rhetoric or a real indicator of major changes to come in the U.S.
Wetjen shared his opinion saying, “There is more noise than fundamental shifts in policy.” He agreed the rhetoric is there and impactful, but cited the current administration’s appointments in the financial services space (Treasury Secretary Steven Mnuchin, Gary Cohn, Director of the National Economic Council and chief economic advisor to President Donald Trump, etc.) are all self-proclaimed “internationalists”. He further cited a recent report released by the U.S. Treasury Department focusing on capital markets, and one of the recommendations was for all of the agencies to continue to engage with international standard setters like Basel, IOSCO and the FSB.
Mark Wetjen, DTCC Managing Director and Head of Global Public Policy
Austen agreed with Wetjen adding, “If you look at who the U.S. has put in place in the financial sector in relation to regulation, they are top quality people, and they are internationalist, and we have every confidence in them that they are doing the right thing.”
While Symons agreed there isn’t necessarily a retreat from globalization underway, he did assert that there is a shift in the “epicenter” of the big supporters of globalization. “It’s moved from Europe and the US to Asia and more developing countries,” said Symons.
The Consequences of Brexit
The people of Britain voted for a British exit from the European Union (EU) in June 2016, stunning most of the international community and making it clear that - in Britain - there is definitely more than “rhetoric”. If the EU decides to move the central counterparty clearing (CCP) houses to continental Europe rather than London, this would fragment the market, likely increasing costs and risks. The panelists discussed how big of an impact these changes could have on globalization.
Symons had two major concerns, the negative effect Brexit could have on mobility of labor in the EU, and how Ireland, a country so interconnected with Britain, will survive the separation if a good trade deal is not reached. Conversely, Symons also shared how in some ways Brexit has increased international cooperation, stating that, “As a result of Brexit the EU has become a much more integrated economic unit. There is a renewed enthusiasm for delivering a capital markets union that is meaningful, a renewed enthusiasm for the regulators to find harmonized practices and standards, and a real demand and desire to create a capital market that can compete effectively with London.”
Austen and Wetjen also agreed that Brexit raises many concerns regarding market fragmentation, especially if Euroclearning is moved to continental Europe, but argued that these changes don’t necessarily mean a retreat from globalization. In fact, Britain’s clear desire to remain a major financial center of the world would indicate more of a desire for an internationalist agenda, Austen pointed out. Wetjen also made it clear that countries like the U.S. aren’t just going to pull out of the UK; new processes will be created to make it work.
Marquard had a less optimistic view than the other panelists. While he agreed that, “Globalization at some level will continue,” he had grave concerns over the growing nationalist agenda and “position taking” he’s seeing from regulators. With CLS being an organization that relies so heavily on international cooperation Marquard felt, in the current environment, the entire global cooperative model is at risk and already showing “cracks.”
Communicating the Benefits of Globalization
An audience member wondered if voters in the U.S. and Europe are decreasing their support for globalization because, perhaps, they don’t truly understand the benefits. The average person might feel that globalization means jobs moving overseas, but doesn’t realize that globalization also makes the everyday goods they use like diapers, toothpaste, clothes and electronics more affordable.
Harding agreed stating, “A lot of what we are talking about today is in the area of something they (the electorate) wouldn’t understand – it doesn’t buy them a loaf of bread.”
Austen pointed out that, as a result of the shrinking middle class in many western democratic countries, there is a clear backlash against globalization. On the other hand, the middle class in developing countries, like China, is booming, which could be the reason the “epicenter of globalization support,” as Symons referred to it, is shifting to those countries.
Symons also feared the consequences of this “lack of knowledge” stating, “The electorates that voted for this clearly felt that they could not be worse off than they are today, it was worth a punt, things might improve. The irony of this is, if globalization does retreat a bit, the people who will be hurt the most will be those who voted for it.”
Wetjen suggested that perhaps the organizations and/or governments that benefit the most from globalization should make more of an effort to educate the electorate on the direct benefit it’s having on them. Marquard agreed that educating the electorate would be a great benefit adding that, “People are expected to understand something quite far beyond the basics of economic.”