Remarks Before the ASIC Forum
Chairman Elisse Walter
U.S. Securities and Exchange Commission
Australian Securities and Investments Commission (ASIC) Forum, Sydney, Australia (via videoconference)
March 24, 2013
Good morning. Thank you, Greg [ASIC Chairman Greg Medcraft] for that kind introduction.
It is a real pleasure to be able to join you today — although I very much regret that I am not with you in person. I appreciate Greg’s graciousness in allowing me to present my remarks by video. The Australian Securities and Investments Commission and Greg himself have been wonderful partners in our many global ventures and that deepens my regret at not being in Australia today.
I am nonetheless honored to have this opportunity to address so many good friends, colleagues, and partners from around the globe and, especially, the men and women of ASIC. I am also honored to be joined in this session by Ranjit Ajit Singh, Howard Wetston, and David Wright, and I look forward to hearing their insights and observations today.
I was asked to speak today on what the organizers of this conference termed “The New Normal,” and three key challenges facing financial regulators. In the interest of brevity, I have elected to focus largely on one aspect of this new normal — one that I think is particularly fitting, given Greg’s recent assumption of the IOSCO chairmanship and Howard Wetston’s recent election as one of IOSCO’s new Vice-Chairs. (And, I must say, parenthetically, that I can’t think of finer choices for IOSCO to make). That aspect of our new normal is the need to encourage consistent regulation for securities markets across borders, and the degree to which international regulatory policy is part of the core mission that all of us who are market regulators share.
It has long been common to remark on the global nature of today’s financial markets.
Traders now have the ability to move billions of dollars thousands of miles in hundredths of a second, with a couple of taps on a computer screen.
Issuers are exploring a whole world of options as they decide where and how best to list securities and raise new capital.
Investors are abandoning their traditional home-country bias.
And investor portfolios are more diverse and global than ever before, benefitting from falling transaction costs, better information, and expanded access to overseas securities and financial products and services.
Nonetheless, even those of us who are regulators, who deal every day with the realities of global markets, often fall back on a largely national view of financial regulation. We sometimes act as though our own markets and our own regulations are either unconnected to the rest of the world or are — or should be — precise templates for the rest of the world to follow.
I realize that, of course, in a formal, legal sense, there is no international regulator — no financial regulatory United Nations that promulgates, oversees, and enforces a set of international financial rules. But on a practical level, most of us already are international regulators.
Our domestic regulations impact foreign issuers and market participants accessing our markets. They also affect the ability of, and ease with which, our investors can seek opportunities outside our own borders. And so we are actively engaged with one another, increasingly seeking each other out and devoting valuable resources to bilateral and multilateral discussions.
I believe that it is important that, as market regulators engaged globally, we recognize and remember these two key concepts:
- First, domestic financial market participants are increasingly affected by overseas regulation. Engaging with other regulators can minimize troubling or costly differences and help us as regulators better serve the markets we oversee and investors we protect.
- Second, as the world’s financial regulators, finance ministries, and central banks debate and seek consensus on the standards and principles that will govern the international financial system, it is important that market regulators’ voices and perspectives be heard.
We Are De Facto International Regulators
The reality of international regulation is truly vivid for those of us at the U.S. Securities and Exchange Commission. Whether we are crafting rules permitting foreign private issuers to use International Financial Reporting Standards, establishing registration requirements for foreign market participants, implementing Dodd-Frank Act requirements for OTC derivatives, or pursuing securities law violators across international borders, the SEC is actively engaged in matters that touch the international securities markets.
There are more than 950 foreign private issuers registered with the SEC to raise capital from our public securities markets.
Approximately 450 of these issuers file using IFRS, a figure that reflects an increase in the wake of Canada’s recent incorporation of IFRS into that nation’s domestic markets.
Foreign issuers account for approximately 22 percent of capital reported raised during 2012 using Rule 506 of our Regulation D — a non-exclusive safe harbor for smaller, private offerings exempting them from U.S. registration requirements — for a total of approximately $200 billion last year.
There are more than 600 foreign domiciled investment advisers, which manage over $6.7 trillion in assets, registered with the SEC, as well as 90 registered and provisionally registered foreign-domiciled broker dealers.
In some U.S. derivatives market sectors, as much as 90 percent of transactions involve foreign-domiciled counterparties.
I am sure that all of you can cite similar statistics regarding your own markets.
And like regulators from Australia and many other nations, we are active participants in key international bodies.
The SEC is a member of IOSCO and occupies a board seat on that organization.
SEC staff serve on key IOSCO committees and task forces. Several task forces are chaired or co-chaired by SEC staff, reflecting the SEC’s commitment to IOSCO and our desire to work with regulators around the world.
SEC staff played a key role, for example, in shaping the Credit Rating Agency Code of Conduct adopted by IOSCO and, earlier, International Disclosure Standards for Cross-Border Offerings and Initial Listings by Foreign Issuers.
I serve on the FSB’s Steering Committee and — along with senior SEC staff — work closely with FSB members on a range of issues, including supervisory and regulatory cooperation, standards implementation and monitoring the implementation of OTC derivatives regulation.
Between these two organizations and other international bodies, the SEC is involved in over 80 workstreams on issues ranging from accounting, auditing, and disclosure to information-sharing and supervisory cooperation, to designation of systemically important financial institutions.
We embrace the imperative all financial regulators share — to engage internationally.
But given that the interconnectedness of our financial markets will only increase, it is important that we see today’s interactions as a jumping off point for even greater engagement going forward.
And in hopes of making a case for that greater engagement, I’d like to review in greater detail the reasons we — and other market regulators — must step up the engagement with our international colleagues and our efforts to ensure consistent global regulation and a level playing field for all.
Market Participants Are Increasingly Affected by Multiple Regulatory Regimes
The first reason and the most obvious reason for an increasingly international outlook is that domestic investors in the U.S., as well as domestic companies, issuers, and financial institutions, have greater access to overseas investment opportunities, capital sources, and financial instruments than ever before, and are thus increasingly affected by foreign regulation.
Look at over-the-counter derivatives: it would be a considerable understatement to say that regulation of OTC derivatives has a “cross-border” component. OTC derivatives activity routinely involves multiple jurisdictions, even in a single transaction. Parties are typically situated in different countries, are often linked by a trading desk in a third country, and may even rely on risk management in a fourth.
And unlike our traditional securities markets, which have developed within existing national regulatory frameworks, the OTC derivatives market developed into a global market in the absence of any significant national regulation. OTC derivatives will soon be regulated in just about every major country in which they are transacted. But, this new comprehensive regulatory framework, developed in the wake of the 2008 financial crisis, is being applied to an already-developed global marketplace.
Each regulator, in regulating its own jurisdiction’s OTC derivatives activity, will potentially be regulating that activity in other jurisdictions as well. And, that means that the parties to a derivatives transaction occurring across borders will need to figure out which country’s rules to comply with before ever entering into a contract.
In fact, the cross-border component of the security-based derivatives market is so significant that, at the SEC, we are addressing cross-border issues even before fully implementing our domestic regulatory regime.
Views on how to regulate cross-border activity effectively can vary substantially. At one extreme, one could take the view that any transaction that touches a jurisdiction or a person in that jurisdiction in any way needs to be subjected to the entire range of regulatory requirements specific to that jurisdiction.
At the other extreme, one could conclude that a regulator should “recognize” the use and application of foreign regulatory requirements in place of its own requirements. Presumably, under this view, the regulator simply deems the laws of a foreign jurisdiction “equivalent,” based on very broad objectives of “comparability” to the regime, and calls it done.
In the first instance, I am concerned about unnecessary overlap and conflict: if we subject any transaction that has any connection to our jurisdiction to all of our rules and regulations, we will inevitably collide with our fellow regulators. And we will potentially place market participants in the untenable position of either choosing to violate one or the other jurisdiction’s requirements or — if unwilling to do that — to withdraw from the market.
In the second instance, making a “broadly equivalent” determination while ignoring potential regulatory gaps may allow market participants too much choice in selecting the regulatory regime that will apply to them. Ultimately, this may set a course for a “race to the bottom” — a course that would protect neither the markets nor market participants. In my view, this runs counter to both the goals of the G20 with respect to OTC derivatives, and the determinations made by the U.S. Congress in passing the Dodd-Frank Act and by legislative bodies in a number of other jurisdictions.
Insistence on either extreme represents, in my view, a resistance to reasonable and desirable cooperation among regulators. For example, deeming recognition and equivalence the only acceptable solution to cross-border problems fails to recognize legitimate and important differences between our regulatory regimes and markets. I am especially concerned by the seeming insistence in some quarters that all regulators adopt recognition and equivalence or face retaliation and potentially draconian consequences for their markets and their market participants. Those consequences could include, for example, preventing a foreign-domiciled market participant, in full compliance with local law, from operating in a jurisdiction. Such an approach could cause substantial disruption in existing markets and create significant levels of risk. This all-or-nothing approach is not, in my opinion, a productive way to regulate a cross-border market.
Any workable approach to our current dilemma needs to recognize that the OTC derivatives market is truly global and mobile, that transactions and participants are potentially subject to multiple regulatory regimes, and that conflicts and costly overlaps are real dangers. Moreover, and just as important, we have to acknowledge that gaps are also dangerous and that each jurisdiction is approaching derivatives reform somewhat differently — often in ways that are informed by their existing legal frameworks or historical experience in those jurisdictions — and that regulations will become effective in different jurisdictions on different timelines.
I personally believe that there is, in fact, a reasonable and necessary middle ground. The SEC has not yet, as a body, determined how to proceed. But, in my view, that happy medium has its foundation in an approach that recognizes comparable foreign regulation to the maximum extent possible, consistent with domestic policy goals. This approach would permit a market participant to comply with a set of domestic requirements in a particular arena — capital or risk management, say — by complying with the comparable foreign regulation. We call this approach “substituted compliance.” At the same time, the domestic regulator would continue to have the ability to apply certain key policy requirements of local law when foreign law does not impose comparable requirements or provide comparable protections. Examples of this might include public transparency requirements or enhanced protections under U.S. law for “special entities” such as municipalities.
This approach will not undermine the global market for OTC derivatives. Instead, I believe it will help ensure that we don’t have a destructive regulatory race to the bottom.
In other words, I think appropriately tailored cross-border regulation should address the fact that there may be significant regulatory gaps between jurisdictions, but be coupled with an effort to provide substituted compliance to the maximum extent possible. For example, where the regulatory frameworks in two countries are comparable in a hypothetical four out of five areas, I want to be able to allow market participants to rely on substituted compliance in those four areas, while still requiring full compliance with SEC rules in that one remaining area. The alternative — no substituted compliance in any area as a result of lack of comparability in one area — is unworkable and unnecessary.
I must admit, the effort to address cross-border regulatory issues has not always been easy. These are difficult questions and there are many competing interests. And regulators, me included, can have very strong views about the right approach to follow.
The SEC is nonetheless committed to resolving these and other difficult issues. And we are gratified that our regulatory partners are equally determined to fashion arrangements that support investors and other market participants, while bringing needed stability to our financial systems.
A Strong Voice for Market Regulators
There is a second reason why it is important for market regulators — not just the SEC, but also ASIC, the Securities Commission of Malaysia, the Ontario Securities Commission and others — to be fully committed to international workstreams. That is because effective regulation of the financial markets and their participants — regulation that diminishes unnecessary risk to the system and to investors — must take into account perspectives drawn from the world of market-based finance.
Everyone here is aware of the profound effect of the financial crisis on the global financial system. The speed with which it traveled, and its stubborn refusal to respect national borders, commanded change in the way both banking regulators and market regulators approached their mission. Regulators from around the world have gathered to seek solutions to what remains a vivid specter of another crisis — the possibility that a single match might set the entire financial system ablaze. Their collective goal — whether it is the G20’s, the Financial Stability Board’s, or another international forum’s — is to work together to reduce systemic risk.
The SEC strongly supports these efforts. Just like central banks, market regulators like the SEC and ASIC often assume the role of prudential regulator as well. At the SEC, for example, we regulate and examine broker-dealers, investment advisers, and other market participants, promoting financial responsibility that protects both investors and the larger financial system.
But, the institutions we regulate at the SEC differ from traditional banking institutions. Non-bank institutions like broker-dealers do not have a base of federally-insured deposits. They do not have access to a central bank’s discount window. They do not have a direct lender of last resort. Further, the two types of institutions tend to be differently focused in terms of their functions in raising capital, underwriting, and secondary market trading, to name a few. These fundamental differences between banks and non-bank institutions mean that the SEC’s approach to the financial responsibilities of non-bank institutions — to capital, margin, liquidity and segregation requirements, among others — will necessarily differ from the approach taken with regard to banks.
Just as U.S. financial regulation avoids a one-size-fits-all approach, so must the global standards aimed at reducing systemic risk. The current discussions underway concerning capital and margin, non-bank financial intermediation, and clearing standards are valuable endeavors. But financial institutions like broker-dealers differ from banks in fundamental ways. Regulation that does not recognize these differences risks the unintended consequences of weaker financial institutions and fewer options for businesses seeking investment capital.
Therefore, the perspective of market regulators must be heard in multilateral regulatory efforts to mitigate risk. It is important that we contribute our long experience with, and detailed insight into, the finances and operations of the non-bank financial sector to a global effort that takes into account the differences between — as well as the connections among — systemically significant entities.
This will give us the best chance to reduce systemic risk and to ensure a fair, orderly, and efficient global financial system.
Addressing “The New Normal”
When I first came to the SEC as a staffer in the 1970s, we did not even have an international office. I remember when our Office of International Affairs was created in 1989, and how difficult it was to persuade some people that agency resources needed to be devoted to such an operation.
Today, our Office of International Affairs is an essential part of the SEC, working with and across all offices and divisions. And forums like this, formal engagement though IOSCO and the FSB, bilateral negotiations, and informal chats in hallways and over dinner — signal an end to that old debate, and reflect the SEC’s ongoing effort to adopt a 21st century approach to international affairs. It’s a broad institutional commitment to a global outlook.
More importantly, it’s an aggregation of individual commitments by SEC staff — not just in OIA but throughout the agency — to work towards greater opportunity for investors and entrepreneurs, and towards stable global markets in which capital flows efficiently to those best able to deploy it, wherever they are.
Of course, commitment is only the beginning. You can’t just sew the broad variety of regulatory patches crafted by a hundred different jurisdictions into a seamless global quilt. There are concerns that must be addressed, differences that must be reconciled, and accommodations that must be reached before something as complex as an international consensus on, for example, derivative transaction regulation can be achieved. And, when moving forward in areas like non-bank financial regulation we must take care that every voice is heard and the expertise earned over many years of supervision and interaction is consulted.
These are things that are easier to say than they are to do.
But I believe that if all of us, whomever we represent, remember the importance of our efforts to the dynamic institutions that drive our economies and to the many investors who fund them — and if, in the face of complex negotiations, we keep the simple good faith of our counterparts firmly in mind — these are things we can do.
I have spent much of the recent past as the agency’s point person on international matters.
I have seen how committed regulators around the world are to the mission we share, and watched the agency I represent become more engaged and more committed to this effort at every step.
As I consider the immense tasks that still lie ahead, what I have seen leaves me confident that they will be accomplished, and that we can and will act in the interests of those whom we serve, wherever we are from.
And what I have seen makes me think: if this is “the new normal,” I like it better every day.