Association of Financial Markets in Europe: Keynote address: "Europe's financial markets regulation agenda"

Los Angeles

A summary of the following speech can be heard in Dr Swinburne's remarks to AFME following the 2018 European Trading & Market Liquidity Conference keynote address:

Thank you Richard for that introduction.

Good morning and thank you to AFME for inviting me to speak to you all today. I would like to welcome you to 200 Aldersgate, where I have been asked to talk to you about the European Financial Markets regulation agenda.

I will focus my remarks today on two principles - those of trust and confidence - the vital role they play in well-functioning markets and the importance they should be ascribed in the regulation agenda.

I would like to begin by looking back 10 years, to a time when trust and confidence was somewhat scarce.

10 years ago this week, the financial crisis was gaining momentum.

On the 17th of March, the US Federal Reserve held its first emergency weekend meeting in 30 years, in which it agreed to the guarantee of Bear Stearns' bad loans so that JP Morgan would purchase it.

Two days later on March 19th, Federal regulators agreed to let Fannie Mae and Freddie Mac take on another $200 billion in subprime mortgage debt.

That same day, Federal Housing Finance Board authorised regional Federal Home Loan Banks to take an extra $100 billion in subprime mortgage debt, debt that was to be guaranteed by Fannie May and Freddie Mac.

Three huge decisions, taken this week - ten years ago. The effects of which we still see today.

I joined the European Parliament’s Economy and Monetary Affairs committee not long after these events and I will talk later about some of the specific reactions to the financial crisis that came out of that committee and the other EU co-legislators.

But beyond the Recovery and Resolution type legislation that has dominated my working life (and I’m sure many of yours) since 2008, the crisis also brought about what I believe - especially in today’s climate - to be an equally important result.

Global cooperation.

A global crisis - gave us global cooperation, to a level unseen and indeed unprecedented before that point.

The crisis necessitated and forced a breakthrough in huge swathes of global work on the financial system.

At the G20 level, you had the Pittsburgh decision on Clearing.

At an IOSCO level, you had the agreement on PFMI’s - the Principles for Financial Markets Infrastructures.

Within the EU, we began to produce legislation that required information exchange between jurisdictions and a high level of cooperation between EU and global supervisors.

The creation of colleges with the EMIR legislation for example - and similarly for Banks within the framework of BBRD.

The setting up of the European Supervisory Authorities - the ESA’s - brought the National Competent Authorities together in a formal arrangement, mandated open dialogue between them and forced a better understanding of each other’s markets.

The ESAs also brought about the single rulebook, not a universally popular piece of work of course, but a piece of work that forced them to construct collaborative rules with a regional focus and to understand that this approach was not paradoxical.

Why was it so vital to do this globally? Because only globally could we restore the trust and confidence that the markets desperately needed and indeed still need.

Such was the level of the shock and such was the lack of conviction in the system - that only globally, only through global collaborative platforms were we able to restore these two principles.

For the EU, this global cooperation gave them the impetus and motivation that would never have come from within. To see this, we only need to look at the current reluctance today that greeted the Commissions plans to enhance centralised supervision.

So trust and confidence were rebuilt through global cooperation, and now it is only through that existing trust and confidence that global cooperation can be preserved in the face of Brexit.

A somewhat role reversal.

A break in trust between the UK and the EU, has given way to a lack of confidence in each other’s amended regulatory regimes and future regulatory intent.

A break in trust between the EU and the US, has given way to a lack of confidence in each other’s current methods and existing commitments.

In terms of the UK - EU relationship, the idea that the UK will deregulated post Brexit is a major sticking point.

Self-regulating entities, lax prudential requirements, low tax - Singapore but thousands of miles closer and in the same time zone. A Singapore on the Thames that will threaten and undermine Europe’s safety and competitiveness.

This narrative is misplaced. The UK has never adopted a low regulation approach, indeed we often gold plate regulation from Brussels and are the driving force within EU discussions advocating for higher standards - not just for financial services but pharmaceuticals, aviation and other highly regulated sectors.

Moreover, in the UK we recognise that the reliability and expertise of our regulators, their strict adherence to the law and their non-discriminatory approach to market participants are a major competitive draw for the City of London.

The independent UK regulators are not about to turn their backs on this and the complex ecosystem that has been built around it.

Between the US and the EU, changes to the Dodd Frank Act have made headlines and sounded alarm bells in some European capitals -but again this is misplaced.

The reality is that we all know that there is merit in refined amendments to Dodd Frank - just as there are to all legislation including our own - the current EMIR Re-Fit for example. However, without the trust that these amendments will move in the right direction, there is no constructive dialogue just further headlines.

For the United States, the lack of confidence they have in the EU’s ability to be proportionate and not apply a damaging blanket Brexit policy to all third countries, is causing huge concern and paves the way for retaliatory action. This is most notable in the area of CCP supervision.

There will always be political events and statements that make relationships sensitive and we in the UK markets must be sensitive to that in light of Brexit and not inadvertently or deliberately contribute to it.

It is apparent and expected that the implementation and adherence to all of the large EU market files that Brussels has produced in recent years are being monitored closely - especially in those global markets like London and New York that are starting to be viewed with unease.

Innovations that have long been a commendable selling point of the City of London must adhere to the principles of free, transparent and non-discriminative.

Inventive interpretations of new rules - like the double volume cap under MiFID II being viewed as periodic auctions, will be seen and called by the EU for what they are - a move to the dark space - and they will not be viewed favourably.

It is vital that moving forwards in our relationship with the EU we secure clear and well-constructed mechanisms so that regulatory divergence may occur without it being interpreted as a sudden breach of trust.

Just as you find in multiple Free Trade Agreements around the globe, the future UK-EU agreement will need to include an arbitration system so that disagreements in policy can be explored. For financial services and indeed many other sectors, this will need to be technical in nature and discussion.

As a compliment to this, we will also need a regulatory forum - in which action yet to be taken can be discussed. Where conscious divergence takes place in terms of regulation, the opportunity to demonstrate why this is the most appropriate line of action for each market and to demonstrate how this adheres to the FRAND principles will be vital.

It is my firm belief that these two principles should shape the European Regulatory Agenda moving forward, as it is only with these strong foundations that commitment to global dialogue and standard can be assured.

Both the UK and the EU must recognise that they are only as good as their institutions and that short-sighted, politically driven and projectionist regulatory agendas will not give their institutions a seat at the global table- and will therefore greatly damage their potential to succeed.

The European Financial regulation agenda is full - recent FinTech initiatives including Crowdfunding, a plan for post-Brexit CMU through the cross border distribution of funds proposal, the implementation of post trade files CSDR, SFTR and the EMIR Review and the continuation of MiFID II implementation.

We will hear all about these throughout the course of today’s conference. What I want to stress is the need for the principles of trust and confidence to set that agenda and the role that everybody here today, market players, policy makers, trade bodies, everyone can play in ensuring the continuation of these principles installed at a global level.

Thank you.