Pushing Harmonisation

This post was originally published in the print edition of IFLR on September 26, 2016.

The Securities Industry and Financial Markets Association (SIFMA) is the voice of the US securities industry while the Global Financial Markets Association (GFMA) brings together three of the world’s biggest financial trade associations to address the global regulatory agenda.

Unsurprisingly then, SIFMA’s managing director of international policy & advocacy, Peter Matheson, and GFMA’s executive director, David Strongin, are perfectly placed to tackle the regulatory initiatives affecting cross-border finance.

Here they discuss global regulatory coherence since 2009 and the challenges such cooperation faces, post-Brexit uncertainty and more.

What do you think are the most important issues, globally, in cross-border finance?

Peter Matheson,
I think your questions acknowledge, implicitly, that you recognise the importance SIFMA places on the coordination and cooperation between jurisdictions. Here we are, depending on how you measure it, six to seven years into the global reform agenda, and the degree of coordination has been a very important issue. It was certainly recognised by the G20 in Pittsburgh in 2009
and it’s really still an important issue and subject to same problems. Global coordination is an ongoing theme that underpins everything. There’s obviously a lot of different policy issues and agendas that different parts of SIFMA are working on and thinking about, for example the prudential side, or on derivatives where there have been quite a lot of cross-border headaches. And there are a lot of other issues to, for example our colleagues on the buy-side are entering the
international space. Underpinning all of this is a problem held in common: the way that individual jurisdictions just don’t coordinate in a way that lives up to the aspirations of 2009.

Why is that?

PM: Well, that’s a very big question. To some extent, it reflects the differences jurisdictions have in terms of their different policy making systems. In the US, and this isn’t a judgment but a fact, there are 12 different regulators. In Europe, there’s not the same patchwork regulatory environment, but there are 28 countries, all of which have to agree. That provides a lot of fundamental difficulties, in that it’s harder to do in practice what has been agreed to in theory. SIFMA works, on various matters, with an eye on how the current mechanisms that countries have could be used to better coordinate their efforts.

David Strongin, GFMA: That’s right. And now within the G20 you have a diverse set of economies too. There are emerging market economies (EME) alongside developed economies. Another factor is that these countries are increasingly at different points in the business cycle, which translates into different economic policy goals. And there are also differences in the nature
of financial systems, with the EU far more heavily reliant on bank financing than the US, which relies more heavily on capital markets. When you put all that together, and this is leaving out political differences, different histories and cultures, it’s pretty hard to keep it all in sync. We might have hoped that the G20 would have pushed a little more forcibly in ensuring a
little more consistency in some issues.

Is it fair to say there’s been a slowdown in the EU regulatory agenda? And if so, how does the US view it?

DS: I wouldn’t call it a slowdown, but the EU has indicated it would like to take a careful look at the initiatives that have been introduced over the last few years. If you take a look at Basel Committee’s work since 2009, the reforms came in fast and furious. And now, before Basel III is implemented they’re pushing us towards Basel IV. So the EU is saying it’s impossible to get all of this right at once and, instead, let’s do some empirical work. By contrast, the US has taken an approach that is moving ahead of the EU, one in which the attitude is that we’ll see what happens and then we will adjust. I don’t think that’s a particularly good way to go about things.

PM: That’s right. The former British European Commissioner Lord Hill has resigned his position, but I’m sure his successor [Valdis Dombrovskis] will agree with what Lord Hill said originally upon taking up his post. That was on the importance of introducing less by way of new policy initiatives and instead to finalise and evaluate what was already in train. So it’s about focusing on different parts of the process, which is what the EU’s call for evidence does. It looks at the reform from a macro point-of-view and in terms of how the various regulations all interact. At the same time, however, there’s plenty of work going on in Europe in terms of finishing and advancing the regulator agenda. I don’t think that’s indicative of bigger split between the US and EU on the
global reform agenda.

DS: Yes. There is clearly a commitment by all G20 members to, eventually, live up to the G20 agenda so I don’t think that’s the question to ask of the EU.

How do US financial market participants view all these issues? Almost a decade after the crisis, are things generally going in right direction?

DS: Most people would say that, from a financial perspective, the system is sounder and safer
than it was pre-crisis. But the issue is that, with the reform programme and the Basel programme of increased capital and liquidity requirements, there’s been no modelling or analysis conducted by anyone, at either a global or a regional level, that analyses what the impact is on the economy and on jobs. You can see some of the impact, in that firms are starting to make choices about what parts of businesses they want to be in and disbanding others, so there have been disruptions. But the overall negative impact has yet to be seen. Many regulations, for the example the fundamental review of the trading book (FRTB) and the net stable funding ratio (NSFR) have been finalised but not implemented. They’re two or three years down the line. So, we really don’t know what the future impact is on growth jobs and markets.

PM: Ultimately, it depends on what your benchmark is. If you think purely from the perspective of safety and soundness, and in terms of avoiding the risk of replaying 2008, well then you’d probably say things are better. And in that regard, there’s certainly been good policy. But, at the same time, there are many policies that carry both adverse and unintended consequences, so that if you’re thinking about the overall ability of the financial sector to contribute to economies – to contribute to growth and jobs – it probably is that bit harder to contribute in a maximalist way and that’s really quite frustrating for our members.

“We certainly don’t want increased fragmentation: if anything, we want financial markets to become more joined up”

What is your reaction to Brexit?

PM: Ultimately, we have to deal with the world that we’re given. June 23 was a blow, but the new UK Prime Minister Teresa May has been clear that Brexit means Brexit. Now, if that’s the case, then that’s the state of affairs within which we must advance. AFME is our partner organisation based in London and Brussels and they’re in the front lines more than we are on this issue. They’re in fact working very hard to understand this from an institutional position and from a European market perspective and are in regular contact with policymakers there. In turn, we’re in regular contact with our colleagues at AFME. Now, our goal is, as far as possible, for all financial markets to be integrated. We certainly don’t want increased fragmentation: if anything, we want financial markets to become more joined up. Now, that means we wouldn’t want the UK vote to give rise to increased divergence or fragmentation, which would make it harder for market participants to operate cross-border US to UK, US to EU or UK to EU. In that sense, our overall objective has not changed with Brexit. It just means the world has become somewhat more complex.

And how do you feel things will proceed?

PM: It’s early days yet. We’re all aware of the various models being sketched out – there’s an idea that the UK can model its future relations with the EU on the Norway model, or on some other third country arrangement, or indeed another trade-based system. But what it is hard to see, at this point, is how you can replicate what the UK currently in terms of its EU membership, at least not without a lot of downside versus what some people who voted for EU exit now expect. So there are policy headaches and political headaches both. At this point, we’re monitoring the issue and discussing it with our members in order to stay in step with them.

What opportunities are there for other financial centres, such as New York and Hong Kong – and for that matter Paris and Frankfurt – to swoop in on London’s market share?

PM: Once you start getting into these questions, it’s essentially a crystal ball-gazing exercise. But I would say, as much as anything as someone who used to work for the British government, that EU membership is certainly a very import feature of the UK economy and has been important for the City of London. But the City’s status as a financial centre is founded on much more than EU membership. London is a cluster of human capital, focused on the financial sector. And the success of the City also reflects fundamental things like the UK’s convenient time zone, smack bang in the middle of Asian and US markets. That factor won’t change as a result of Brexit. And the UK has a reasonably free market approach to things too. Now, we don’t know what policy
dynamics Brexit could set off – for better or for worse, but you’ve already seen the UK make some positive noises about the sorts of things it could do to offset some of the downside of Brexit. That’s not a prediction that London will be as eminent in 10 or 20 years’ time as it is now, but it’s an important point.

And what do you make of US-EU regulatory cooperation going forward? Will it be damaged or enhanced by Brexit?

DS: Despite Brexit, the UK relationship is still key for the US and will continue to be a strong and ongoing relationship, one in which we are equally important to each other in terms of trade and capital flows. Whether the UK is part of the EU bloc or not is not going to lessen the importance of
the relationship the US has with the UK. There’s a new regulatory forum, the Financial Markets Regulatory Dialogue (FMRD), that shows how everyone from an US and UK perspective is putting a lot of energy and time into making sure that the UK relationship remains one of the closest in the world.

What aspects of cross-border financing are you watching in North America?

PM: There are many different issues and across SIFMA you’d get different answers from our various experts. From an external perspective, right now trade issues are very important. It’s important not to let Brexit shadow that – in that we’re not just concerned about the UK-EU-US nexus, but also about China. Our members are very much invested in the US-China bilateral trade
negotiation and we’ve recently also endorsed Trans-Pacific Partnership (TPP), something about which we’re very pleased.

Peter Matheson, Managing Director of International Policy & Advocacy, SIFMA

David Strongin, Executive Director, GFMA