Speech by SEC Commissioner:
Remarks to American Bar Association International Section
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
“Live at the SEC”
October 2, 2012
Thank you so much for inviting me to speak with you today and thank you for your kind introduction. Of course, before I go further, please let me remind you that my remarks represent my own views, and not necessarily those of the Commission, my fellow Commissioners, or members of the staff.1
As you may know, I am the Commission’s designated representative on the Financial Stability Board, or FSB, which is an international forum of prudential financial regulators, market regulators, international financial institutions and standard setting bodies. And last spring I finished a tour of duty as the Commission’s head of delegation to the International Organization of Securities Commissions, also known as IOSCO, a position now ably filled by the Commission’s Director of the Office of International Affairs, Ethiopis Tafara. The experience I have had representing the Commission in these institutions has been enlightening. While I, like most people, already understood that we are living in an increasingly interconnected world, serving on IOSCO and the FSB has helped me better appreciate the extent of these connections in the financial system, as well as both the power and the limitations of these international forums.
One of the better-known achievements of IOSCO is how it has increased international cooperation among securities regulators in the area of enforcement. This cooperation has been extraordinarily valuable, facilitating countless Commission cases where crucial evidence rests outside of the United States. Building on this success, we are now establishing cooperative arrangements with other regulators in our supervision program. You’ll likely hear more today about these cooperative efforts from the Commission’s Enforcement staff and Elizabeth Jacobs, our Deputy Director of the Office of International Affairs.
Today, I would like to speak to you about something a bit different than international cooperation, and that is the idea of international coordination. By that, I mean the process of regulators across jurisdictions working together to develop compatible regimes for the regulation of the international financial marketplace.
Despite its global nature, the financial system is still regulated, rightly, in my view, by national regulators. National regulation is appropriate because different countries are at different levels of development with respect to their financial systems and capital markets. Regulation that makes sense in one jurisdiction might not work well in another due to a myriad of factors—including the nature of local markets, the legal system, the forum for dispute resolution and the cultural expectations with respect to regulation.
But this national system does make the regulation of global markets more challenging, both for regulators and market participants. If left unaddressed, it can leave regulatory gaps –instances in which regulators unintentionally leave unregulated certain market activities. On the other hand, multiple systems of national regulation can lead to duplicative or even inconsistent rules.
The global nature of capital markets, particularly the ease with which capital and market actors can travel across borders, also presents dilemmas for national regulators. For example, suppose that a national government wants to adopt more stringent regulations that it believes are warranted in order to protect investors and promote market stability. But in doing so, it may risk the possibility that if it adopts higher standards in isolation, its domestic market will be impaired as liquidity and capital flow to jurisdictions with more lax regulations. This could put its domestic institutions at a competitive disadvantage vis-a-vis their foreign counterparts. At the same time, as we experienced in 2008, financial crises have a stubborn tendency to ignore national borders, which for us means that the robustness of other countries’ regulatory framework can be important in protecting the stability of our own market, particularly in times of stress.
For all of these reasons, international coordination among regulators is increasingly important, and indeed vital. From my experience serving on IOSCO and the FSB, I want to assure you that the global regulatory community is sensitive to the need for coordination in order to promote a financial system that works for the benefit of all market participants. We also recognize that a regulatory “race to the bottom” among nations will serve no one’s long-term interests. Instead, we must work together to foster an international regulatory architecture that encourages global growth and innovation while mitigating risk and maintaining the integrity of the financial markets.
One area that illustrates both the challenges and the importance of international coordination is the regulation of OTC derivatives – in particular, swaps and, for the SEC, security-based swaps, including credit default swaps. The OTC derivatives market is large and truly is a cross-border market that links many of the world’s most important financial institutions. The vast majority of credit default swap activity has at least one non-U.S. counterparty. We have learned that this interconnectedness can have impacts across the financial system and across the globe. Lawmakers in the United States recognized the importance of developing an effective regulatory regime in this space by enacting Title VII of the Dodd-Frank Act. Europe and Japan have recently adopted mandates for the regulation of derivatives as well. Several other jurisdictions are well on their way to finalizing reforms. These regimes share many common features and, importantly, have been designed to achieve similar goals. Nevertheless, the risk of regulatory arbitrage is not insignificant. Derivatives are simply contracts – they are not anchored to any particular geographic location. If regulators do not coordinate their regulation of OTC derivatives, derivatives activity might simply move from those jurisdictions that have moved quickly to impose regulations, to those jurisdictions that choose to regulate more slowly or less comprehensively. Successful international coordination should lead to consistent, or at least compatible, standards across national markets, which is in the interest of all regulators. This may be why our Congress included in Title VII the notion that the Commission and the CFTC should strive to consult and coordinate with foreign regulatory authorities to promote the establishment of consistent international standards.2
These factors have contributed to regulators across the globe making cross-border coordination in OTC Derivatives regulation a priority. We understand the need of market participants to have compatible regulatory systems to make this global market workable. IOSCO and FSB have been helpful forums for developing high level principles in this space, taking actions such as consistently reinforcing the commitments made by member jurisdictions to mandatory clearing of derivatives. IOSCO and the FSB have also undertaken comparative market studies and moderated technical discussions on important implementation issues. But derivatives are complex products, and the derivatives market even more so. We regulators must tackle many difficult, detailed questions. For example:
- Under what circumstances should entities be required to register in the United States as swap or security-based swap dealers?
- When should a transaction be subject to our jurisdiction?
- Should there be a distinction between the reach of our regulatory authority and our anti-fraud authority?
- In what circumstances should a regulator accept compliance with another jurisdiction’s regulatory regime, or “substituted compliance,” in satisfaction of its own requirements?
There are practical limitations to how effectively we can tackle these kinds of questions in large, multilateral forums like the FSB and IOSCO. As a result, bilateral and smaller multilateral dialogues among regulators in key jurisdictions have been and continue to be a crucial component to international coordination of cross-border issues. This is particularly true in this new and complex regulatory space.
Meetings among regulators have allowed those with the greatest technical expertise, those that are most familiar with the behavior and incentives of participants in their markets, to discuss these issues. Perhaps even more significantly, these regulators are the bodies with the authority and responsibility to consider, adopt, implement and enforce market regulations. These meetings are important opportunities to discuss and hopefully reach accord concerning the multitude of details and issues that arise as we work toward building our new regulatory architecture.
To further advance the dialogue, the Commission intends to address the international implications of its rules under Title VII of the Dodd-Frank Act in a single proposal. This will give investors, market participants, and non-U.S. regulators an opportunity to consider as single, integrated whole our approach to the cross-border issues that arise in regulation of security-based swaps. The CFTC has recently published for comment a similar release concerning cross-border treatment of swaps.3 It is my understanding from the public comments and from my participation on the FSB that there has been some angst about certain aspects of the CFTC’s proposed approach. I am not prepared to opine on the CFTC’s proposed policy choices – the Commission staff is still working through these same complicated issues, as am I. However, regardless of whether market participants and other regulators agree with the substance of the CFTC’s proposal, the simple act of publishing it for comment is itself an important step forward. It demonstrates a commitment to go beyond the discussion of overarching principles and to begin the more challenging exercise of grappling with the practical details of implementation. It provides a framework and a focal point for advancing the public dialogue on these difficult issues. This is what our notice and comment rulemaking process is all about. The Commission is considering, and in many ways benefiting from, the thoughtful comments on the CFTC proposal as we prepare our proposing release on cross-border issues, and we will continue to work with both the CFTC and non-U.S. regulators on these questions.
All of this is to say that coordination among regulators about international securities issues is challenging, but I understand the importance of it to global market participants, and I believe that our non-U.S. counterparts do as well. We want rules that make sense and that buttress, not burden, the effectiveness, as well as the integrity, of the global financial markets.
Of course, the market for OTC derivatives is not the only space in which international coordination is playing a role. For example, the FSB, acting on recommendations of the G-20, is collaborating with private sector experts to implement a unified legal entity identifier system.4 This will provide a unique identifier to market participants and will allow both regulators and private firms to clearly and easily identify the parties to transactions. Once implemented, this will be a great achievement, and the private sector collaboration for this effort in particular should be commended. I expect that the eventual implementation of this system will prove invaluable both to regulators and to private firms. It should lower the cost of data aggregation and reporting. It should also allow private firms to improve their own risk management practices, and to provide better data to financial regulators as we monitor the markets and the financial system.5
Additionally, apropos of the technology roundtable taking place at the Commission today, I expect that the role of technology in the market will lead to a greater level of coordination with non-U.S. regulators. As markets rely more and more on automated systems and become increasingly interconnected, we will need to work together to maintain a reliable and robust market infrastructure, one that is capable of detecting and mitigating risks that technology and automation may bring.
I cannot promise you that regulations across borders will always conform. First and foremost, the Commission must adhere to its mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Occasionally, that might lead to answers that differ from those of non-U.S. regulators. And, that might mean that our coordination efforts in some areas take longer than perhaps our foreign counterparts would hope. An example of this relates to whether the U.S. should incorporate IFRS into the U.S. capital markets. As you might be aware, SEC staff from the Office of the Chief Accountant has published its final report on the IFRS Work Plan. 6 This report has given the Commission much to consider. While I continue to believe that converged standards are important to serving the interests of investors in the increasingly global capital markets, we cannot incorporate IFRS unless and until we are confident that it will serve U.S. investors well. For IFRS, I continue to think that we will get there eventually, but the timeframe is uncertain. For some issues concerning the securities market, however, we might not be able to find common ground with our foreign counterparts. The Commission cannot take actions in areas merely for the sake of international consistency if it is not the right thing to do for U.S. investors and U.S. markets.
But I believe that more often than not, what is in the best interest of the U.S. markets and what is in the best interest of the global market will not be mutually exclusive. To the contrary, our fate and the fates of our peers around the world are increasingly tied. I remember during my first tour of duty at the Commission as a member of the staff in the 1980s and 1990s, international issues came up only occasionally. That is certainly not the case today. As you will hear further today, consideration of the global marketplace reaches every corner of the Commission. We continue to look for opportunities where international coordination will protect the stability of the global marketplace. As we do so, I welcome – and in fact urge — your input, through comment letters, through meetings with us, and through opportunities to make your voices heard through institutions like the ABA. I’ve been making this appeal at practically every speaking engagement, but that is because I mean it and because it is important. Cross-border issues are complex, and guidance from market participants is vital. So tell us where we can improve – and it doesn’t hurt to tell us occasionally what we’re doing right – and I can assure you that this Commissioner will take those considerations to heart. Thank you for having me today, and I hope you enjoy the rest of the program.
1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publications or statements by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, other Commissioners, or the staff.
2 Dodd-Frank Act, Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 752(a) (2010).
3 Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act, 77 Fed. Reg. 132 (July 12, 2012).
4 Office of Financial Research Frequently Asked Questions: Global Legal Entity Identifier (LEI) (2012), http://www.treasury.gov/initiatives/wsr/ofr/Documents/LEI_FAQs_August2012_FINAL.pdf.
6 Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers, Staff Final Report (2012), http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-final-report.pdf.