A decade on from the global financial crisis, derivatives leaders are gathering in the City of London to assess whether and how the industry has evolved. Alongside President Donald Trump’s state visit to the UK, FIA’s International Derivatives Expo (IDX) is taking place.
In the aftermath of the crisis, the discussions during this annual derivatives conference have tended to focus on the progress being made on the regulation of the financial industry to address the root cause of the problems and meet the goals set out by the G20 summit in 2008, which were aimed at a stronger and more transparent global financial structure. Now, the debates are beginning to focus on how the industry is entering the phase of collectively assessing the effectiveness of reforms and addressing any of the rules’ unintended consequences.
Within this context, one debate is market fragmentation, which can impact market liquidity and decrease transparency. Market fragmentation can be exacerbated by differences in regulations across various jurisdictions. Some fragmentation is expected and perhaps even desired, while in other cases it is an unfortunate and unintended by-product of policymaking.
International standards-setting bodies (ISBs) can play a key role in preventing undesirable regulatory fragmentation because they drive standards that can lead to more harmonised rule sets, across jurisdictions. This sets the stage for appropriate recognition or even substituted-compliance policy frameworks, which are examples of deference-based cross-border policy.
A look at the 2019 work programme of the Financial Stability Board (FSB), a key ISB tasked with coordinating the work of financial regulators internationally, indicates this phase of regulatory reform in financial markets: evaluating the effects of post-crisis reforms. The inclusion of this agenda is a rational step that would be part of any reform effort, but this year it also happens to coincide with a change of leadership at the FSB.
As mentioned, one response to fragmentation created by policy decisions is to replace them with deference-based cross-border policies where appropriate, something both the US and the EU appear committed to pursuing, at least to some degree. The FSB can, as it already has, play a useful role in facilitating constructive discussions that lead to these constructive policies. These policies should aim to reduce cross-border complexity where possible, which can promote growth across international financial markets.
Promoting and facilitating deferential cross-border policy at the ISB level isn’t the only strategy. Fragmentation issues could be further mitigated by formalising ISBs’ involvement in the policymaking process at a jurisdictional level. ISBs assess implementation of reforms ex-post, but more formal input before implementation could lead to better aligned policies.
Global capital markets are in a new phase, where the effectiveness of post-crisis reforms is being assessed and unintended consequences -- because of rule changes -- are being addressed. ISBs have and will continue to play a critical role in this exercise. However, by ensuring that ISBs are at the centre of industry discussions and by strengthening their role in the policymaking process, their ability to drive standards that can lead to more harmonised rulesets, across jurisdictions, will be greatly enhanced. This is a vital component of achieving the G20 principles of transparency, integrity and responsibility.