Don't Let the Perfect Be the Enemy of the Good
Good morning. My name is Michael Bodson and I am President and Chief Executive Officer of The Depository Trust & Clearing Corporation. Thank you for the opportunity to participate in today's Roundtable.
Market infrastructures like clearinghouses, global trade repositories and electronic trading platforms will play a prominent role in this new regulatory landscape. Policymakers are relying on them to bring greater transparency and risk mitigation to global financial markets. However, for all the potential of these entities to support regulatory oversight and systemic risk management, their impact may not be fully realized.
Today I want to focus on three key issues:
First, how the lack of global standards is creating a more complex, riskier and costlier landscape for global infrastructures and institutions,
Second, why extraterritorial provisions are driving a wedge between regulators and discouraging collaboration and information sharing,
And third, why the global harmonization of new regulations is essential ... and the critical role IOSCO can play in providing international leadership to achieve global standards.
Comparable Global Standards
So let me begin with my first point about standards. Global financial reform efforts are intended to squeeze as much risk out of the system as possible. This is a commendable goal, but overlapping efforts in the U.S., Europe and Asia to raise the regulatory bar are creating a thicket of inconsistent rules instead of a clear set of defined international principles.
Ironically, the drive to eliminate or reduce risk is, in fact, generating new forms of risk for global infrastructures and market participants due to a lack of harmonization. We must also temper the goal of enacting a comprehensive set of regulation which will perfectly position us to respond to the problems of the past.
This reality will impose unnecessary complexity, greater inefficiencies and higher costs on the mission-critical infrastructure tools that regulators have identified as key to enhancing market transparency and mitigating risk.
For example, clearinghouses are a pillar of systemic risk management, yet central counterparties for the cash markets that operate in different jurisdictions will soon face inconsistent regulations with regard to the amount of capital they need to hold.
For an organization like DTCC, which operates CCPs in the cash markets in both the U.S. and Europe, there is enormous complexity and risk in having to comply with different sets of rules when performing the same function for the same client conducting business in different jurisdictions.
There are many factors driving jurisdictions to favor national or regional standards over global ones - some practical, some not. Regardless, if rule-writing occurs in a vacuum, we run the risk of creating inconsistent and conflicting regulations across borders. This is untenable in today's global marketplace.
It is also a zero-sum game because global infrastructures and their clients will ultimately end up trading one form of risk for another. There comes a point of diminishing returns - where every additional effort to strengthen a rule will result in negligible improvement ... or worse, an increase in risk. Some in the industry see collateral transformation as a prime example of this problem.
Extraterritoriality: The Reach of New Rules
Now let me turn to my second point regarding extraterritoriality. Establishing global standards could help resolve many of the disputes over the reach of new rules. Finding a solution is essential because a lack of harmonization has the potential to prevent global infrastructures from fully delivering on their potential.
DTCC has a front-row seat to this debate. In fact, we've been actively engaging with policymakers across the globe to address international concerns over access to OTC derivatives data held in our global trade repositories. Many regulators around the world fear that certain provisions in Dodd-Frank would give U.S. authorities access to data outside their jurisdiction. This could prompt them to build their own repositories, instead of utilizing global ones, to avoid the problem altogether.
Data fragmentation represents a clear and present danger to OTC derivatives oversight. It would deny regulators a holistic view of the market. It would reduce transparency. It would diminish the effectiveness of trade repositories. And it would stifle cooperation and partnership amongst regulators. To effectively conduct market surveillance and red-flag excessive risk taking, regulators need access to comprehensive market data that only global trade repositories can provide.
IOSCO Leadership Can Help Deliver Global Standards
Now let me move on to my third point about the role IOSCO can play in helping achieve global coordination and harmonization of rules. It has been just over four years since the bankruptcy of Lehman Brothers and the near-failure of AIG. Since then, policymakers have been working night and day to solve the problems that brought us to the brink of global financial collapse. Yet if we view these efforts through a different prism, we're still trying to solve the problems of 2008. In the interim, financial markets have continued to evolve and innovate - and new risks have been created while more continue to emerge.
The solution to these various dilemmas lies in shifting to a principles-based approach to rulemaking. This will help ease the path to harmonization. Developing a common set of global standards is the holy grail of financial reform right now. Achieving this would represent the victory of simplicity over complexity ... of clarity over ambiguity.
Harmonization is not about creating a mirror image of regulations across jurisdictions. Harmonization is about regulators trusting their counterparts to do their jobs effectively ... about sharing insights and best practices ... and about acknowledging that while rules may vary across regions, so long as the outcomes are the same, regulations should be recognized and accepted as equivalent.
IOSCO is in a unique position to tackle this challenge - to take on a more dynamic role leading the international community, spurring global debate and establishing international principles that harness the power of the infrastructure to strengthen the financial system. IOSCO provides the ideal forum for regulators to talk ... to gain greater trust in one another ... to foster regulatory cooperation instead of competition ... to demonstrate a genuine willingness to partner on cross-border issues ... and to stop letting the perfect be the enemy of the good.
In summary, IOSCO can help solve the problems of the past and refocus the debate on identifying and addressing the emerging risks facing global capital markets. And this, in turn, will create a more stable financial system that can regain the public trust and restore public confidence in the world's financial institutions.
Thank you for the opportunity to participate this morning. I look forward to hearing your thoughts and to a spirited debate over these very important issues.