[Check against delivery]
Thank you for inviting me to give this talk to you today. It is a great pleasure to address such a distinguished audience in this beautiful city.
I can think of few more appropriate places to talk about international markets than here, where as far back as the 15th century, people from across the world met to do business.
At this key junction between Europe and Asia, on the historic silk road; the diversity of skills here made this city the vibrant success that we see before us today.
And with the creation of its first stock exchange in 1826, Istanbul’s key position has made it significant, not just as the Financial heart of Turkey but as a major urban centre globally.
Istanbul’s success lay – and perhaps still lies – in bringing people together. And it is in bringing people together that the success of financial services lies too – linking people and firms across national boundaries for mutual benefit.
Six hundred years ago, we had the silk road, through which valuable commodities passed and were traded. Now we have a global financial economy, where commodities and the financial instruments that support their markets are traded across the world, on stock exchanges and through bilateral agreements. It is clear that a successful, global financial services sector – a strong and competitive financial sector – is essential in a productive modern economy.
Importance of financial services and derivatives
A strong financial services market joins up buyers and sellers throughout the investment chain – bringing finance to business and opportunities for savers to manage their finances over their lifetime.
The efficiency of this chain, linking individual savers to firms seeking capital for investment, is critical to allocating funds to the most profitable investments, providing a mechanism for saving, and raising productivity.
And by linking corporations to each other to pool and mitigate risk through the use of derivatives, the financial services sector allows those risks to be managed effectively and efficiently. It helps businesses cope with global uncertainties as diverse as the value of currencies, raw material prices and the weather.
In short, financial markets are critical to all of us. And while the crisis has rightly brought a huge amount of public and regulatory attention onto the industry, it is essential that we policymakers do not lose sight of the big picture, of what financial markets exist for and how we can make them better.
So first of all today I want to step back a bit from the immediate challenges the sector faces and look forward to how we address them.
Open trade and the single market
I want in particular to talk about trade and openness. As I mentioned, it was trade that made this city great, as a trading hub between Asia and Europe; and it is free trade that is critical to the success of a thriving, global financial sector.
Developing a single market in financial services lies at the heart of Europe’s commitment to economic reform, and can deliver benefits for all of us.
- A lower cost of capital;
- New opportunities for firms to access cross-border markets;
- And a wider range of products, competitively priced for retail consumers.
All of these in turn contribute to raising the competitiveness of the European economy.
Working together, we have done a great deal towards fulfilling this goal. MiFiD 1, for example, has opened up much competition and free trade in equities and derivatives.
And UCITS has done the same for investment funds, at the same time creating a globally recognised brand.
But as we tackle the current challenges faced by financial services in Europe, it is important that we continue the road to completing the single market, and not lose the hard won gains that we have seen as the single market develops.
One example that springs to mind is the ECB’s location policy, which, by forcing clearing houses dealing with large euro-based transactions to locate within the Eurozone, runs completely contrary to single market principles.
Ensuring that necessary regulation still protects the open and competitive markets that are critical to fostering renewed growth across all our economies is vital to the continuing success of all of Europe’s financial centres.
Europe’s role in promting third countries
But the single market is not the full story. We must also recognise the importance of Europe as a bloc globally. This means being vigilant against protectionism in financial services and playing our part in an integrated world economy.
It’s worth reminding ourselves that European financial services are a powerful force in the international market, accounting for about a quarter of financial services exports worldwide, and responsible for managing just under half of global bank assets.
It is our job to resist any proposals that seek to raise barriers to European investment in the rest of the world, and promote a world of unrestricted global trade.
Europe must take the lead in ensuring that, as we strengthen the global regulatory framework, we do so in a way that balances stability with the maintenance of global markets, sustaining economic growth.
To take a prominent current example, we should be directing a lot of focus on the extra-territorial application of the Volcker Rule as currently drafted. There is a significant risk that the Rule will restrict US banks from trading in non-US sovereign debt, and a risk that non-US banks may be restricted in their ability to transact with US investors. On this, as with similar challenges raised by the risk of protectionism , we should be acting together to preserve our common interest in an unrestricted global market.
And to that ends, we should also be doing more to push bilateral and multilateral trade agreements proactively, to ensure that free trade and the prosperity it brings is not limited to trade amongst European states.
Focusing on end consumers
I have set out in the abstract our view on the role of markets. I have spoken of the need for integration, and of openness. But what does that mean for today’s agenda? Well, I want to close with four thoughts on this, which I hope will provoke discussion today.
First, remember the end users.
Anyone who has been following the markets regulatory programme as closely as I have will be aware of how critical the proposed changes are to end users.
- Multinational exporters seek reassurance that they can continue to hedge complex commercial exposures with customised instruments.
- Food manufacturers seek comfort that commodity markets will continue to serve their needs.
- Pension funds and their asset managers seek to know how proposed changes to equity market structure will affect them
We policymakers receive a great deal of visits and representations from the financial industry and it is often our first task to distinguish between commercial interests and the common good.
In such situations, I think it is often helpful to ask: what are the end users saying?
The role of OTC
This brings me on to my second point; OTC is not a dirty word.
I firmly believe that exchanges represent the beating heart of the European market structure. Their importance in price discovery, efficient allocation of capital; and liquidity generation has been recognised since the early days of financial markets when over four hundred years ago, the very first stock exchange opened in the Netherlands to support its trade in the far East. Exchanges across Europe have provided capital raising for some five and a half thousand firms over the past decade. And there is an opportunity for them to serve a key role in the growth and financing of new businesses, in particular, over the years to come.
But what sometimes commands less attention in regulatory debates is the complementary role played by bilateral dealer markets in serving modern end users’ needs.
This is particularly the case in bond and derivative markets.
It is inherent in the nature of many of these markets that there are a huge variety of instruments available - in OTC derivatives, the number of instruments virtually infinite. And, as a result of this specialism, the number of potential buyers and sellers of a given instrument may be small compared to that in equities at any given time.
And so it is in these markets where intermediaries can play a particularly useful role. Stepping in to bridge the gap between buyers and sellers. Helping users to hedge their risks and meet their investment objectives.
My point is that exchanges and banks – each performing their role where needed – are both critical in meeting end users’ needs. And both sides need to recognise this if we are to have a sensible debate.
It is not that we should shy away from regulating OTC markets – far from it.
We have strongly supported compulsory clearing for derivatives, and we similarly support the move to increase organised trading using the new OTF category.
But policymakers and regulators cannot simply wish away the fact that for the most part bonds and derivatives are not liquid enough for traditional equity style limited order book trading.
So to portray OTC as the pantomime villain – without acknowledging the function it can perform in the real economy – is a temptation that must be resisted.
Benefits of openness to Europe
Third, I would like to talk about openness, an issue I touched on earlier. Our view is clear: openness is good for Europe.
The EU is the world’s leading exporter of financial services, with extra EU exports of €60bn accounting for about a quarter of financial services exports worldwide.
Foreign investors control a total of $5 trillion of EU assets, and invested around €230bn in the EU in 2010.
And non-EU investors provided almost 30 per cent of the total investment in EU cross-border securities in 2009-10.
European financial centres thrive not just through trade within Europe’s borders, but also through trade outside those borders. But I fear some of the proposals currently being discussed could put this at risk.
Whilst MiFID is to be welcomed, there are some proposals within this review which threaten to erect unnecessary barriers to trade with third countries.
On the basis of the current proposals, it seems that no third country would meet EU rules, so from the moment that MiFID is passed and until equivalence decisions are taken, it would close the European market entirely to any new third country firm, as well as choking off opportunities for our firms in some of the strongest and fastest growing emerging economies.
A world in which we cannot trade with a new Japanese securities house; seek capital from China, or invest in Africa is not a world that benefits Europe.
At a time when we have to do everything we can to attract investment to support the economic recovery we cannot cut ourselves off from the rest of the world.
A fortress Europe must be avoided at all costs, a message that I hope we can all embrace.
The importance of competition
Fourth, and finally, a plea – let us not forget competition.
Debate rages about the impact of the MiFID 1. The abolition of the concentration rule has led to significant changes to European equity market structure.
Clearly there are challenges in terms of fragmentation and these need to be addressed.
But what is clear is it has led to real competition in the market place forcing down the cost of trading to the benefit of investors. One study suggests that this effect may have raised the long-run level of EU GDP by as much as 0.8 per cent.
We should be looking to use every opportunity in this post-crisis phase to enhance competition where appropriate, whether we are talking about improved post trade data in equity markets or more competitive access arrangements in clearing.
And in this latter area of access arrangements, initiatives are all the more important given the regulatory movement we see towards central clearing and trading of derivatives.
As policy makers in financial services listening to the arguments on regulatory reform we are used to asking ourselves the question – ‘Cui Bono?’ – who benefits?
Arguments against access - which are principally around liquidity fragmentation – could be interpreted as looking very similar to arguments against incumbents losing market share. The starting point should be that market users are able to decide where they trade and clear their business according to their needs.
So I have outlined for you all my opinions on what the industry and policy makers should be focussing on - breaking down barriers, listening to customers and making full use of the options we have available to ensure that this vital global industry can do its work unhindered by unnecessary hurdles.
In doing so, I have tried to be deliberately challenging - I am sure my hosts at FESE expected no less! I enjoyed meeting so many of you yesterday evening, and am now looking forward to talking to local media and hearing the view of local businesses on how they view the UK and Europe’s regulation, and learning more about the plans for growth here in Istanbul. Before I go though, I’d be very happy to answer any questions.