Opening Statement of CFTC Chairman J. Christopher Giancarlo Before the Global Markets Advisory Committee Meeting

April 15, 2019

Thank you, Commissioner Stump. 

Good morning, everyone. 

A warm welcome to all of the Global Markets Advisory Committee (GMAC) Committee members, presenters and participants, both here and on the telephone. It is good to have you all with us.

Today GMAC will discuss how regulators are fulfilling the 2009 G20 directive regarding the OTC derivatives market. 

It will consider how those reforms are being implemented at the G-20 nation state level in a fashion that is “consistent,” though not identical.

The concern, of course, is whether disparate implementation of the reforms is causing undue fragmentation of what - prior to the reform implementation - were global markets for derivatives trading. 

The concern is that such fragmentation exacerbates the already inherent challenge in swaps trading – adequate liquidity – and increases market fragility as a result. 

Fragmentation leads to smaller, disconnected liquidity pools and less efficient and more volatile pricing. 

Divided markets are more brittle, with shallower liquidity, posing a risk of failure in times of economic stress or crisis. 

Fragmentation increases firms’ operational risks as they structure themselves to avoid the rules of one jurisdiction and be subject to the rules of another while managing multiple liquidity pools in different jurisdictions, through different affiliates. 

As structural complexity increases, operational efficiency is reduced.

The issue is how to conduct reform implementation is ways that are well calibrated to systemic risk mitigation without undue market fragmentation. 

Like all things in market regulation and, in fact, in life, the goal is achieving proper balance.

Fortunately, attention to market fragmentation is taking place at the highest levels of global cooperation. 

Japan has placed it on the current agenda of the G-20 Presidency for discussion at the upcoming June Summit in Osaka. 

The Financial Stability Board has assigned a fragmentation review to a key committee focused through the lens of financial stability.

IOSCO has had a long standing concern about fragmentation of financial markets.  

In 2013, it set up the Cross Border Task Force to examine ways to assist member authorities with the challenges of cross-border regulation to promote sound and effective domestic regulation without unduly constraining cross-border trade, investment, and risk mitigation.

The Task Force’s report was published in 2015 and identified three basic tools used by regulators to regulate cross-border securities market activities:

• national treatment;
• recognition; and
• passporting.

This year IOSCO decided to revisit the work of the Cross-Border Task Force, forming the so-called “Follow-Up Group.”

I am pleased to be the Co-Chair of the Follow-Up Group with my JFSA colleague, Jun Mizaguchi.

The Follow-Up Group has three important tasks:

• Examine instances of market fragmentation in securities and derivatives markets, and the potential reasons why fragmentation developed.
• Take stock of members’ experiences using the cross-border tools identified in the 2015 Report, including lessons learned and areas for improvement, and any policy implications from these experiences; and
• Build a central repository of supervisory Memoranda of Understanding (MOUs), to strengthen collaboration and cooperation between IOSCO regulators, and to increase transparency around supervisory arrangements between jurisdictions.

IOSCO has coordinated with the FSB to ensure our endeavors are not redundant. 

In this regard, IOSCO has provided input to the FSB on fragmentation with respect to the securities and derivatives markets which will be reflected in the FSB’s report.

In the last few months, the Follow-Up Group has surveyed IOSCO members about:

(i) instances and possible regulatory drivers of market fragmentation; and

(ii) use of the cross-border tools identified in the 2015 Report, focusing on deference and recognition decisions.   

It has also consulted with industry and other stakeholders in a workshop organized by the FSB in January 2019 and also organized a separate roundtable this past March at FIA Boca with senior members of the derivatives industry.

The Follow-Up Group is now in the process of writing up its observations and considerations.

That is why today’s meeting could not be more timely.  Concerns addressed at GMAC will help inform my contribution to the IOSCO Committee report.

I look forward to your discussion of how regulators are fulfilling the 2009 G20 directive regarding the OTC derivatives market.  As we confront the challenges ahead, in particular the fragmentation of the global swaps markets, we will look to the thoughtful discussions of advisory committees like yours.

And, again, thank you Commissioner Stump for organizing this meeting.  

Thank you all for attending.