Securities and Growth: The Case for Convergence

Welcome and Moderator:

Frank Kelly
Managing Director and Head,
Public Affairs & Communications, Americas,
Deutsche Bank


David Wright,
International Organization of Securities Commissions

The Atlantic Council, Washington, D.C.

Monday, December 10, 2012

Transcript by
Federal News Service
Washington, D.C.

FRANK KELLY: (In progress) – everybody. Thank you for coming out on this beautiful, warm evening to be here. I am Frank Kelly, the managing director – I’ll take my microphone off – managing director and head of public affairs and communications for the Americas at Deutsche Bank. I’m also a very proud – a very proud member of the board of directors at the Atlantic Council here.

And again, thank you all for coming out and joining us tonight for this important conversation on the future of the global financial regulatory system and its reform and particularly its impact on the securities industry. As each of you well knows, a well-functioning and vibrant financial sector is vitally important to support economic growth in the real economy. And with the economic situation we have both here and Europe, this has never been more true.

In the aftermath of the financial crisis, it is crucial that the United States and Europe, in cooperation with the emerging markets, continue to work together internationally as they reform their financial and security markets. Of course, the continued vibrancy, strength and competitiveness of the trans-Atlantic economy is a core concern for all of us at Deutsche Bank, at the Atlantic Council, and I suspect for many of you here, most particularly our honored guest tonight.

I should add that tonight’s event is on the record and part of our ongoing Mapping the Economic and Financial Future speakers’ forum, which Deutsche Bank is honored and delighted to host in partnership with the Atlantic Council. And over the past three years, we’ve had the pleasure of welcoming key U.S. senators, European commissioners, finance ministers, important global financial and business leaders and dignitaries, including Bob Zoellick and Christine Lagarde, to outline the causes of the financial crisis and chart the way forward towards a strong and sustained global recovery.

Now let me turn to quickly introducing our guest, David. For those of you who don’t already know David, David Wright is secretary-general of the International Organization of Securities Commissions, otherwise known as IOSCO. Mr. Wright has been a senior adviser to the European Commission throughout the current financial crisis, including most recently serving on the commission’s task force on Greece, which is helping define and deploy a major technical assistance program for that country.

David previously spent more than 30 years at the commission advising former Presidents Delors and Santer. Since the 1990s, David has been at the forefront of the drive to integrate the EU’s financial services and capital markets. He’s also represented the commission at the Financial Stability Board and the G-20. In short, there are very few people more qualified to discuss this topic, and I should say this can get all very dry. There are very few people who make it more fun than David.

I was telling him in the back, the funny thing is I’ve seen him – I’ve seen you more here, as I told him, in the United States working on trans-Atlantic issues than I’ve actually seen him in Europe, and I can’t think of anybody who’s done more to sort of develop those relationships. So David, on behalf of both Deutsche Bank, the Atlantic Council, welcome. It’s my honor to have you here, and we look forward to hearing from you. The stage is yours.

DAVID WRIGHT: Well, ladies and gentlemen, thank you very much, and thank you, Frank, for your very kind introduction. I’m very pleased to be here at the Atlantic Council. I knew Fred Kempe when he was in Brussels. He was one of the leading journalists there, very influential. And although he’s not here tonight, my regards are paid to him and Alexei Monsarrat as well.

And I’m going to be as controversial as I dare this evening, because I’m speaking in a personal capacity. And so I’m not reflecting necessarily all the – my members’ views on these issues, although I did send this – send this text around. I thought I’d better do that. And so far it’s been reasonably positive.

So the future of global financial regulation – that’s what I want to talk about and think about and obviously from a securities perspective, and I’d like to look forward 15 or 20 years and ask a simple question here: Do we have the right global institutional structures in place for the task that we have in hand and for the changes that are likely to global financial markets? Are we instituting sufficient levels of discipline and rigor in the processes that are being set up or not? And are we actually minimizing the chances of this – of a repeat of this terrible financial crisis?

Now, it depends where you are how bad the crisis has been, of course. In Europe, it’s been pretty dire. It was at the beginning in this country, although in the U.S., I have to say I think the crisis management has been quite impressive, and not so much trouble in the emerging market countries. And I remember the first FSB meeting, one of the first – sorry, the first G-20 meetings. And I can remember going around the table, and people from emerging countries there, India and China and others, crisis? What crisis, they said. Sort it out. Well, in our countries – and that really has been generally the situation.

But most estimates I’ve heard suggest that the – globally, we’ve lost 15 percent of GDP so far. And in Europe, of course, and in this country as well, there have been high levels of unemployment, much higher levels. And I think in Europe, the social fabric of some European countries, leaving aside Greece, has been stretched to the limit, Spain, perhaps, being one of them. And I’m afraid to say I think this crisis will take a long time to work through in Europe.

But let’s take a little spot-check if I may on the overall situation in the global regulatory sphere and look at the positive side and the negative side. Well, we set this G-20 and the Financial Stability Board up to enhance global regulatory coordination. I think it’s working reasonably well; it’s functional. The U.K. played a big role in establishing these new arrangements, U.S. position, of course, vital to have got to where we are. You know, there’ll be a few jaundiced old folks like myself who remember enormous U.K. enthusiasm for the global level and far less at the European level. And some people felt that it was one of those British plots to box in the Europeans, but that is as it may. I think you have to say the U.K. had a big role.

Work is – work is going on at tremendous pace. Horizontal groups, ourselves in IOSCO, Basel, the FSB, CPSS-IOSCO, were the most prominent in all of this. But as I’ll come onto, there are a number of other hangers-on.

Very interesting – the other day I had the pleasure of listening to a colleague from a big agency here in the U.S. who said there are no less than 182 – 182 working groups of various types at the global level, which this particular agency felt it should be involved in. Well, I think any rational person might think that’s a few too many. One hundred and eighty-two is quite ridiculous, frankly speaking. But I suppose on the positive side, you’d say that decisions are being taken consensually, sense of the room, sometimes unanimity. Of course, that makes it much more difficult.

I think it’s fair to say we’ve made some good progress on some of the key subjects. I’ve just been over at the FDIC talking about resolution and recovery planning. I think that’s – there’s been a strong intellectual advance there, also on identification of SIFIs. Bank capital: good progress. OTC derivatives: some. The shadow banking system – well, at least we’re beginning to understand it. Bit – sort of alarming, really, after six years, but that’s where we are.

And I think it’s fair to say that there’s a big effort under way at the global level to improve implementation. I won’t go through all those bodies, but this spans from the FSB to IOSCO and Basel. And good leadership: I think the FSB has been outstandingly well-led by Mario Draghi and now Governor Carney.

Now, where are the problems? Well, insufficient prioritization I think is a serious problem. I don’t think all of the people – all of the major organizations here fully represent the global financial community. We do, I think, in IOSCO. We’re probably the only ones. The unanimous decision-making makes the outcomes sometimes weak and sometimes very weak.

And then we have that really rather foolish beauty contest for every new subject that comes up, the most recent example being financial benchmarking, when everybody scrambled to set up an international group. I think IOSCO should be in the lead. We’ve got – it’s a market – this is market – a market issue, basically. Anyway, there are far too many. And when I read the last two pages of the G-20 finance ministers’ communiqué, I noticed that there were 18 international organizations in barely two pages of text. Now, again, I really find this absurd. And almost every year we have new beasts come to the party. There’s a thing called FinCoNet. I still don’t understand what it is. But this is a proliferation of organizations which is far too much, and it doesn’t help in the definition of policy.

There are those – and I think securities regulators would argue this – that the central banks, bank regulators form the core of the policymaking committees. The FSB Steering Committee, which is, as you would expect, fairly vast, has one securities regulator on it, from the SEC, and nobody else. We’re not there. So some people feel that there’s an overemphasis of banking regulators. And I think another fair criticism is that the impact analysis in certain cases is being done after the policy prescription. I’ve never thought that’s a good way to make policy, and it doesn’t build confidence in the outcomes.

And I also feel – and I’ve said this a number of times – that changing incentives in firms – and by that I mean corporate governance reform, sanctions regimes, remuneration discipline – is not sufficiently present in the global agenda. And I think, again, personal view here, that if you look at those firms that failed, they were characterized by what I call the megalomaniac male CEOs, woeful risk management, hopeless boards, the (poodles ?) and auditors last seen running for the hills. That won’t do. And I think it’s – we need to spend far more time at global level thinking about that.

And now the crucial issue is that all this work is going on. So will all these standards be properly implemented by all jurisdictions evenly, equivalently, to use a European word, without distortions of capital flows, without regulatory arbitrage?

Now, if you look at the situation today, I think it’s fair to say that we’ve got a few problems building up here. Accounting convergence is not happening at the global level. We have cross-border conflicts of laws for auditors. I think two weeks ago on the OTC, the plurilateral group dealing with OTC derivative implementation has not resolved the registration issue. We have big issues coming up on margin requirements for OTC derivatives, where there are very different views.

So leaving all that aside – and I think these problems are very big problems, resolvable, but they’re on the table now, and perhaps they’re increasing in number. What do we have at the global level to resolve any differences we have? Well, we’ve got that great peer review. Everybody looks at each other. We’ve got transparency and monitoring and, as I say in my speech here, prayer, depending on where you come from. Apart from that, there’s nothing.

And I suppose one might ask whether, having put this massive effort in to reform the global financial institutions, we don’t need something like a WTO dispute settlement, for example. If you look at that as a model or as an example, the WTO has resolved, since 1997, 500 trade disputes, 65 percent without any appeal at all, or any retaliation, because in the end you can retaliate. So effectively, what we’ve got is a very soft set of implementation tools to apply these really rather important changes at the global level.

Now, does all this matter? Well – and you’ll see this in my text – it does matter. It matters a great deal. It matters a great deal because the world’s interconnected and will be increasingly interconnected. It does matter if the U.S. sells trillions of dollars of mortgages and the result is they’re flogged around the world. It does matter if the European banks are undercapitalized. It does matter if dangerous bubbles of property build up in big financial markets. Madoff scandals matter globally. So do Libor scandals matter globally. So I don’t – we cannot accept a thesis, surely, that these things don’t matter. They do matter.

And if you believe the compliance with these standards that are being worked out will basically make the financial system safer, then we have to be concerned, do we not, about implementation? And if we don’t think the standards are going to make the system safer, the job isn’t being done. And so we have no implementation toolbox, effectively, to implement those standards.

Now, let’s look forward, if I may, ladies and gentlemen, 15 or 20 years forward. And now the problem gets a little bit more complicated because instead of having a few capital markets in the world that really count – say there are three or four today, maybe five – so we’ve got a 5-by-5 matrix of big markets and interpretations. It’s not going to be like that in 10 or 20 years’ time.

If you look at the projections of economic growth – and with that will come the development of the financial markets – we’re going to have many more big capital markets – and who knows how many, but maybe another 15. If you look at – consider the so-called E-7, the biggest emerging market countries, it is said by PriceWaterhouseCoopers by 2020 they will have overtaken the G-7 in terms of GDP and so forth. So a simple world – I describe the world today as a simple world. It’s going to become much, much more complicated. Brazil, India, China, Indonesia, Singapore, Hong Kong, Russia, Turkey, Mexico – all those countries, which are big countries, are developing capital markets strongly and will go on developing them strongly, and their securities markets very strongly as well.

These new markets, interestingly, I think, realize that they have to develop their local capital markets. They can’t rely on the international banking system. The new Basel framework will constrain demand and constrain leverage, and extra capital, of course, will restrain credit provision. So they all have worked it out that they’ve got to develop their local capital markets. And when I say “local,” these are local, but they will be big.

When we add in all those new demands for collateral that are building up, which will absorb further amounts of capital for OTC and repos and central bank and so forth, the development of securities markets are going to become, we believe, very big. So that matrix is going to become a rather complicated one, and it’s going to be a complicated matrix because it’s going to have 15 or 20 big markets, big, big markets.

Now, what’s going to happen here? Are we all going to have different interpretations of the global rules? We’re all going to be interconnected, one assumes, so shocks will be potentially more – amplified more rapidly, and even – maybe there are even risks here of protectionism as well.

And who’s going to resolve the global disputes? Not three – (inaudible) – not four or five – Crispin (sp) and Peter (sp) and others have done wonderful jobs over the years in working as our representatives here in Europe, smoothing out problems with the United States. But it’s not – the world’s not going to be like that anymore. It’s going to be much, much more complicated.

So who’s going to resolve the dispute that we’re going to have on the standards, on the interpretations? What are we going to do about those big new markets who are just looking for competitive advantage and don’t apply any of the rules, the pariahs or the miscreants? And the answer is, unless we do something about it, there’s nobody. There’s nobody and no one because all we got are those soft tools.

So we got three choices before us. We can have the law of the jungle, survival of the fittest. I suggest, in the world I’m describing, that would not be a very sensible way to build financial stability.

We can have the status quo, what we have today – loose forms of cooperation, hope for the best a bit, and, of course, the prayer book and the prayer mat.

Or we can start to build – and this is the point which I think is the critical point – start to build international institutions. And there is a fatal flaw in my texts because I said “by international treaty,” and a distinguished person this afternoon told me, don’t use the word “treaty” in the United States; use the word “agreement.” Much better to use the word agreement because of the voting rules in the Senate. Barbara (sp) will tell me all about that, but – (laughter) – the point is, surely, in view of what I‘ve said, does it not make sense to start to build institutions which can help enforce these standards that I’ve been describing? Global standards to build global financial stability in a global interconnected world.

Now, before I lose you all here in the U.S., and I know how sensitive all these questions are, what are the benefits here? Well, the benefits, as I said, will be more financial stability, greater financial stability; fairness to smaller jurisdictions, like in the WTO, who can protect their interest fairly.

But I think the biggest gainer of all is the United States itself, actually. Why do I say that? Because the U.S. today has the most sophisticated financial industry, it’s the most powerful and diverse on earth. Also, you have the most technically competent regulators as well. In the world I’m describing with top-class standards agreed at global level and implemented, the U.S. industry, the U.S. financial industry, would have huge export opportunities around the world in predictable, well-regulated markets. And even you could build into that an effort to open markets further through the WTO.

Now, I think the U.S. here has to decide clearly whether this is in its interest. I think the world would follow, in many respects, a U.S. lead. But I think the window of opportunity for that leadership is not so long. I think it probably may be five to 10 years, and after that, these big markets that I’ve been describing will take a bigger, bigger share of global financial activity, which de facto will mean the U.S. influence will, I think, decline.

And will it happen without the U.S.? I think it will. I think sooner or later it will. And when I talk to my members, I feel the majority of them are willing to start to work and think about a global system.

Now, you can’t, I think, argue that the world in 15 or 20 years’ time – I mean, it may be that – we never know what happens in international politics, but on the assumption of – reasonable set of assumptions, we’re not going to bet a set of disconnected, independent islands, and we’re certainly not going to be in a world where the U.S. view going to be predominant and accepted by everybody else, I can assure you of that. There will be more sharks, as I say in the speech, in the pond. So that’s the situation. And those are the set of choices that we have.

Now, there are some intermediate steps you could make here – mutual recognition, substituted compliance, equivalence regimes. I’ve never been very keen on all of that, to be honest, partly because they’re contestable, partly because, in a 15 by 15 matrix, that becomes tremendously complicated because it would mean the United States, for example, would have to evaluate all those big markets line by line, et cetera, et cetera. And as I said, either side could decide that they don’t agree anymore: Where are you? You have no enforcement. But they could be a stepping stone, but I don’t think much more. A trans-Atlantic treaty? Jacques Larosière, very keen on that. Fine, good start. Could be – even take up a U.S. FTA – EU-U.S. FTA as well, free trade agreement. But that won’t be enough either because there are all those growth markets from outside, the big, fast growth markets outside, which will be completely separate.

So that is the choices we have: the law of the jungle; the status quo; or building what the world needs, which is global financial institution with some rule-making power, some enforcement, some sanctions – not harmonization, but building structures whereby enforcement will really work. This is – in my judgment, the U.S. has the most to gain from this. I think the world would certainly follow U.S. leadership were it to materialize.

And finally, you know, a European thought. I mean, if you look at Europe today – and my European former colleagues here I think would confirm this – that for all its faults, Europe would never even have started, would be nowhere today if it didn’t have institutions, institutions that can enforce, sanction and so forth. So the European logic, the building this great project, in my view, great political project in Europe based on institutions, the logic of that is exactly the same logic we should be trying at the global level.

Thank you. (Applause.)

MR. KELLY: Thank you, David. You know, one thing – I always – I have to say this personally, I always move hearing you talk because I can understand everything you’re saying, right?

MR. WRIGHT: (Laughs.)

MR. KELLY: Right? It’s not – it’s not securities gobbledygook. Sorry for saying that. But, you know – and being here at the Atlantic Council, which dedicated – we were talking earlier, sort of NATO and everything else, you spoke today in a way that I thought you could take certain words out, and you – but you framed the issue; it’s global security of our financial world, right? You talk about the pariahs, you talk about the folks out there that could – (inaudible) – sort of the Irans of financial services out there that we have a problem.

So I have a number of questions. I’m sure this audience – I see a number of faces out here I know who are always very inquisitive in their questions. But let me ask you, how far have we come in reforming the financial sector since the crisis has begun? I mean, can you quantify that? Can you maybe drill into that a little bit?

MR. WRIGHT: Well, I think – as I said, I think we’ve made progress. What are the key issues? The keys issues are recovery, resolution. If you can’t do that, I really wonder whether we would make, frankly, any significant progress. We have to be able to deal with failing financial firms and remove them without collateral damage and without public money.

Now, I think – Portacaras (ph) has developed the thinking – I think the world is moving towards Bailyn (ph), which is, I think right policy. Crucial question here on resolution is, who’s in charge? Are we going to be able to trust each other so there won’t be ring-fencing and positive preferences? We’re been talking a bit about these problems today. It’s very, very difficult legally. But I think there is progress, and I think intellectually I think the argument has been won. But I think there is a long way to go, not just for financial institutions but financial market infrastructures where we’re very involved as well.

OTC derivatives – again, a lot of progress, but there’s some real hard nuts to crack – on margin requirements, the issues on registration. We’ve got conflicts of laws, probably manageable, but not – we’ve got scope issues. The United States does not want forex inside the scope; others do. You know, I’m not taking a position here. I’m just describing.

On Basel, I hear delays. I hear some jurisdictions are found materially not compliant with aspects of Basel, and I wonder if those jurisdictions are going to go back and change their laws.

So I think there’s been progress, but I think the implementation of these agreements will be patchy or could be patchy. And I think right now those developing countries or emerging market countries are looking very carefully at how we do this implementation job in the future.

So I think we’re maybe four or five along the line of 10. That’s where I would put it – no more than that.

Shadow banking. Well, we’ve now seen a delay to the end of next year on shadow banking. We’re year six of this crisis, and I don’t think there’s anybody on the planet who fully knows – who knows the interconnectedness, the effects, the economic and – impacts of all the measures that are being proposed – money market funds or repos, securitization.

The sum of these measures, the impacts on the global economy, the global financial markets, collateral – I don’t think there’s anybody on the world who knows how this is going to work out.

So there, there is a big – a big way to go, and that’s why you’ve seen the agreements delayed until St. Petersburg in September next year. I would describe those as the really key ones, apart from what I call my fifth column, which is corporate governance and sanctions regimes and changing behavior. I think corporate governance is simply not taken seriously enough. I think sanctions regimes in this country are very strong, which is – I think there’s academic evidence to suggest that helps reduce the costs of capital – but in many, many parts of the world are just derisory, derisory, and I don’t think they deter. If you want to change behavior, I think you need a deterrent set of financial sanctions in the system.

MR. KELLY: I’ve heard you talk about this. What – please, would you go deeper into this? Because that’s my next question. I heard you talk about this in – outside of London. I thought this was a very important point, talking about sanctions –

MR. WRIGHT: Well, I mean –

MR. KELLY: – and a bit revolutionary. I haven’t heard that in all the Dodd-Frank debate, and I think it’s very (important ?).

MR. WRIGHT: You know, all of us in this room do not drive our cars down any high street or central boulevard in any city we live in at an absurd speed, for some simple reasons. We know that if we get caught – or likely here, that we will get caught, especially here in the U.S. – there’s going to – you’re in serious trouble, serious trouble. You may lose your license. If you hit somebody or kill somebody, usually it’s worse.

Now I just don’t think, in the financial markets, there’s been a sufficiently strong reflex among those people, for example, who manipulated Libor – I mean, pretty serious offense, this, isn’t it? Manipulating the basis of financial – for trillions of contracts, million – billions of contracts, I mean. Do they think, well, if I get caught here, I’m going to spend five or 10 years in jail? I don’t think they thought like that at all. I think they have to think like that. And that’s partly changing the tone in firms as well.

So I think sanctions regimes have got to be ramped up and we – and I have said that I want IOSCO to starting at looking at this, mapping our sanctions regime, but of course they get one or two members who are not too keen on that. But it’s really an important societal, in my view, imperative.

And I think we should look at the U.S. regime and build, to some extent, from it. It doesn’t solve all your problems, but it’s important, as is corporate governance reform. We can’t allow major firms to be led, managed by incompetent people. You wouldn’t do that with a nuclear power station or a train at – a fast train, and we shouldn’t do it with financial firms either.

So I personally support the view that there should be quite serious vetting. I know that – you know, I know people don’t agree with this, but I think there should be some vetting of board appointments and CEOs for major financial institutions – moral hazard a bit, yes, but you might weed out the odd incompetent person.

And I think what the FSA is doing here is absolutely right.

MR. KELLY: Let me – let me turn sort of from the other side of the perspective, sort of my world. How concerned are you about the relationship between financial institutions and regulators? Are they too adversarial? Is there – should they be cooperating better? Is there a way of fostering better relationships?

My personal view is a lot of financial institutions are highly fearful of dealing with regulators. Is there – is it something you’re concerned about and is it something that needs to be addressed?

MR. WRIGHT: Well, I think I’ve always been of the school that it – this, in the end, is a cooperative effort. If you want good regulation, you need all hands to the pumps. It’s a difficult job, very difficult job to make these judgments about where to place the tiller, how much capital, how – nobody can be sure about.

So you need a cooperative framework in which the industry contributes data and arguments; an arm’s length relationship, and I’m not talking about any more than that, but one in which there is a level of trust that – between the two. And where that breaks down – and we’ve seen that break down – you tend to get, you know, violent reactions or overreaction on the regulatory side, which is not good, either.

So I – I’m very much in favor of a cooperative framework, arm’s length. I want the industry to provide good ideas, sensible ideas. I mean, a good example here, I think, is money market funds, where we had a very conflictual debate here in the United States, was unresolved by the SEC, and the industry actually had one or two rather interesting ideas about what to do about money market funds, and particularly in stressed market conditions. And those ideas came too late and, I think, could have been – if they’d come earlier, they might well have solved – helped solve a situation.

So of course right now there are tensions, but that’s not the way to work. The way to work is in a cooperative framework, but for the industry also to get on with it and change its behavior. Unless that happens, the regulators – one of our – my top regulators in terms of market size said it’s up to the industry, he said. Either you behave and comply or the perimeter of regulation will keep on being extended. It’s what he said.

MR. KELLY: Fascinating.

Let me open up questions. Does anybody here – I’ve got a ton, so don’t worry if you don’t have any. But I’m sure somebody does.

Question? Yes, sir, and if you could identify who you are.

Q: Michael Penn from the Environmental Protection Agency. Can you just say a word about the insurance – the insurance sector?

MR. WRIGHT: About the –

Q: The insurance sector. And have you talked to people in the insurance sector and how they would support your framework?

MR. WRIGHT: Well, I talk much more, to be quite honest, with the banking and the FSP people. So I’ve not tested these ideas on the insurance people. But I think the principles are exactly the same.

There are – they tend to be a slightly tighter community, of course. There are fewer big insurers. They’re doing a lot of very good work.

So – no, I mean, I didn’t sort of ask all my members their views for this before I – because I would never have got it out, you know. But I think – I think what I’m trying to say here really is that I just – I just see a world – a complex world and a future which I don’t think the best efforts regime that we have of tools that we have today will create the right framework for sustainable financial stability. And I think this country has a unique chance to lead that process, if it wants to do it. That’s really what I’m saying.

And I don’t think it’s there for that long, this leadership opportunity. Sorry. I was interrupting (someone else ?).

MR. KELLY: No, no, and the funny thing is, you say this, and it reminds me of that sort of unipolar moment in the 1990s, right. The wall had come down, and your – this is exactly – I don’t think you’re doing this intentionally, but it is a matter of global financial security. And I think it’s – you’re framing this particularly well.

MR. WRIGHT: I was very struck the other day – I was out in the Far East and at one of our regional meetings in IOSCO, and the sort of growing confidence of that region and it regulators – you can – it’s – you can feel it. It’s palpable.

In this case, we were in Thailand, another country that aspires to have a big capital market. And they are all confident they’re going to get that. And they’re taking the best – they’re watching everybody, and they’re taking the best. And I think all the figures that I looked at, all the projections – again, you know, you have to make assumptions about political stability, I suppose, global political stability. But if you assume that, the growth in these markets is going to be phenomenal, absolutely phenomenal.

MR. KELLY: I’ve got so many questions to ask, but I’ve got to be generous.

Yes, sir, right up front.

Q: Stephan Richter with The Globalist. For all your appeal to United States wisdom and leadership, I mean, we’ve just seen the Doha Round, COP 18, where the U.S. has been opting out for some time. Let’s assume – let’s posit it’s not going to happen. Schizophrenia here – you know, on the one hand, we want to lead, but on the other, we’re never sharing anything. Delve deeper into two questions. The first is with regard to your matrix of 15-by-15. You ended up by talking about Europe. You just mentioned Asia. Is regionalization in a firmer sense a good second substitute? That’s the first question. And the second question, you also just touched on the real driver of my question with regard to Asia and them looking at the entire roost and best practices and so on. And if you think of people like Tharman, the Singaporean finance minister, and so on, I have a sense as if the new middle ground could well come from there, not just that – the aspirational in terms of market size, but they’ve observed the Western – the West – the (two-tiered ?) Wests for so long that they may not want to put their eggs into either of our baskets.

MR. WRIGHT: Well, Stephan, I don’t think, you know, a polarized, regional set of arrangement is anything like second-best. And I don’t think it’s – it’s just – I don’t think it’s realistic either. I mean, I think the world is too interconnected now. I – so – and I think it’s very suboptimal. You don’t want sort of blocs to form with their own trading rules or whatever. I much prefer to see a global flow of capital, free flow of capital, but subject to strong standards. Now, so I don’t like that approach.

I don’t like, by the way, either, all the fragmentation of the – of the global trading system through bilateral free trade arrangements, which I think don’t – I don’t think are global – necessarily global-welfare-enhancing. So I’m a globalist in this sense. Now, what happens if the U.S. doesn’t want to – and I’m assuming the U.S. will not do that, but I would – one hopes the – but let’s – I – my feeling is that the rest of the world, I think, will see the common interest in applying standards in a sound way, with some enforcement powers.

It’s a small example, but it’s significant, that at the global level, we have moved forward with accounting standards. I mean, in the U.S., Paul Volcker was instrumental in driving forward the IFRS. The U.S. is – after 13 or 14 years has still not been able to say whether it’s going to join the system or not. But that hasn’t stopped the rest of the world pretty well moving in that direction – not entirely. I mean, Japan is still waiting a little bit to see what the U.S. intentions are, but pretty well we’ve got a global financial set of standards. And I think when people talk about accounting standards today, they talk about the IFRS. They don’t talk about U.S. GAAP anymore.

So I think this will happen because I think there’s a – and in a way, I mean, the second-best would be a global financial system with all the countries inside it, and the – I mean, you know, so that instead of having multiple interpretations, you could just have two, which would be the global set plus the U.S. That’s not what I want at all. I want the U.S. in here.

Now, the Asians – I still think the Asians want to work multilaterally. I still think the Asians are looking to draw best practice from the U.S. and from others. But I think as their confidence increases and their markets increase, I think they will pay less attention. You’re right there, and that’s why I’m saying this window of opportunity is five to 10 years. So I agree with the second part of what you said.

MR. KELLY: Barbara.

MR. WRIGHT: I provoked some thoughts here.

MR. KELLY: Yes – (inaudible) –

MR. WRIGHT: This is – this is good. (Laughter.)

Q: Hi. Barbara Matthews.

MR. WRIGHT: Hi, Barbara.

Q: BCM International Regulatory Analytics. First, thank you for a bold, concise and very cogent analysis. I tend to think that window of opportunity is a lot shorter than five to 10 years. And my question to you is what gives you the confidence to be that optimistic that it’s even rational to propose a treaty of any kind at the global level? If you look at every institution founded in the postwar era that created multilateralism – I mean, before Bretton Woods, there was no multilateralism. It was a profoundly Westphalian, you know, Darwinian realpolitik world. I’d suggest to you the multilateral moment has passed. And I’m wondering what gives you the confidence. You know, the IMF, when it was created – the biggest sanction they have is in Article VIII, and that’s expulsion from the membership. It’s not actually a sanction. There are sanctions when they lend. The WTO has an adjudicatory proceeding, but it completely excludes – there are prudential carve-outs for monetary policy and financial systems. So both models are fatally flawed from the perspective of where you want to go, and that’s before we even talk about the sovereignty-sharing fracas in Europe right now. Why are you optimistic?

MR. WRIGHT: Well, I’m not – I’m not necessarily optimistic. I’m saying that this is what we need. And I agree with you that I think it’ll be difficult. You’re right to mention the prudential carve-out, et cetera. But I think the common interest has to be what I’ve described. Again, I’m not talking about the enforcement of granular rules. I’m talking about the enforcement of a set of agreed principles at global level, with – now, the difficult thing – and I haven’t got all the answers to this. The difficult thing is to work out what would the sanctions be in a system where there was a nonapplication of an agreed standard. You could think of things, but it’s not as simple as in trade, where you have – in the end, you can take retaliatory measures. But I think that’s a doable – a doable proposition.

Well, I hope you’re wrong about, you know, multilateralism, you know, is dead. I think that would be a very – a very serious situation. After all, we’re living in a so-called global village. I do see that more and more now as I exit Europe and become global, and I – it’s extraordinary to me how completely connected up we are. And what are we going to say? We’re just going to all live in our cocoons and – it’ll be rather dangerous if that’s the case because we will have regulatory arbitrage; we will have pariahs; we will have dangerous products and processes and financial people circulating. So that is not a world, I think, that is good. And I don’t think I share the view that, you know, multilateralism is dead. I think, actually, multilateralism needs global leadership. I think that’s what we need.

MR. KELLY: All right, starting all the way in the back, and I’ll work my way up front. Yes, sir, that’s – (audio interference) –

Q: Ed Brugel (ph) with the Peterson Institute. There’s a recent case study that connects with some of the things you’ve mentioned, which is difference of views between the U.S. Securities and Exchange Commission and the Chinese authorities in auditing and access to working papers of auditors in China, of Chinese firms listed in the U.S. in particular. So I’d like to have your views on – because this is in the securities realm. Of course, there is an independent forum of – an international forum of independent audit regulators, which is not part of IOSCO, but it’s still sort of IOSCO’s scope. So it’s – right now it’s my impression that there is no forum at the international level to settle this sort of dispute. And fundamentally, this is a dispute between the U.S. authorities and Chinese authorities, even though the most recent move has been a move of the U.S. authorities against the audit firms themselves. So it would look like an ideal case for dispute settlement mechanism. Do you see IOSCO, say, in five, 10 years’ time, taking up that sort of rule, or if not IOSCO, who? I’d like to have your views starting from this case study.

MR. WRIGHT: Well – (inaudible) – you’re right about – I mean, there’s a serious dispute here. Actually, this does and could fall under the umbrella of IOSCO because of the IOSCO MMOU, which is an interesting instrument, 92 signatories of my members who have signed up and are subject to quite a rigorous check, much more rigorous than some of the implementation mechanisms I was talking about earlier, but whereby they sign up to share information for enforcement cases. And this, for example, was used for exchanging information on the Libor scandal. There are 2(,000) or 3,000 of these exchanges of information between regulators every year.

And the question here is should this include audit working papers or not. And I think it’s fair to say that there is some – there’s a legal issue here about whether that potentially is included. But you know, this is a good example – (inaudible) – where, you know, having an international agreement would – and having a clear set of rules would be very beneficial, frankly speaking.

The MMOU of IOSCO – nothing legally binding about it. There are checks and – strong legal checks before somebody signs up, but if a party – and I’m not referring to China or the U.S. in this case, but if one party says, sorry, I’m not going to give you the bank records you want, not much anybody can do about it.

And so I would argue, in the case of access to audit records, this could form part of the IOSCO MMOU. The IOSCO MMOU could be expanded, actually, to take in more exchanges of information, for example, in the case of resolution frameworks, whatever, and it could – I mean, there’s no reason why – (inaudible) – could become a legally binding instrument if the political will was there.

And you know, if you don’t have regulators who are prepared to share information on enforcement cases – the enforcement cases don’t stick to national boundaries. I mean, it’s amazing, if you look at some of these cases, the extent of effort to camouflage insider trading, whatever. You know, this can – this can cover multiple jurisdictions. So you actually need – you need this cooperation. The question is if we start to argue about content or substance and somebody says no, well, then you’re in trouble.

So I would argue, in very brief, I think we need – this will be the – this area would be certainly one area that I would like to – like to – like to cover.

MR. KELLY: I forgot my colleague here, and then I’m going to go back here. So one and then two, three, four.

Q: Chris Bromer (ph) at the Atlantic Council. I guess two quick questions – or to ask, probably longer to answer. But first, when you think about international coordination, there’s a rule-making aspect, and then there’s an enforcement aspect. On the rule-making side of things, it’s obviously very difficult to come up with rules when countries themselves haven’t quite decided what they want. And is there anything that you’ve seen, particularly when I listen to examples like money market funds – I mean, we’re still trying to get that figured out here with the FSOC and their relationship to the SEC. Is there anything that you’ve seen lacking on the rule-making side of things?

And then secondly, when you think about enforcement, obviously, everything here is nonbinding. But what I’ve written about and what people see is, well, hard law or treaties aren’t necessarily enforced all the time either, when you think about human rights, when you think about the environment. And there’s a reason why you have soft law, effectively populating the space that’s been left by the multilateral institutions. Number one, it’s a lot faster to conclude because you’re swapping treaty ratification processes with administrative procedure. And as long and cumbersome and messy as the process is, it’s generally a lot faster than what would ordinarily be the case if you had to either, as we’ve seen in Europe, take everything back to either your home legislature or sort of – or have a referendum (or the like ?). And you also see, with certain examples in the soft law world, such as in money laundering, with the Financial Action Task Force, examples where informal laws, informal agreements, informal accords do have some bite, with capital market sanctions, blacklists, exclusion from certain kinds of capital markets. Would that, in your view, constitute an adequate substitute?

MR. WRIGHT: Well, on the first point, in terms of international rule-making and coordination, as I said, I think there’ve been some good advances. I don’t think we need 182 working groups. I don’t think we need 18 organizations. But – and I think we could streamline the effort and be far more effective. But I think – that said, I think there’s been some important advances.

One of the problems you have, of course, at the international level is you have different timetable, so if the U.S., for example, through Dodd-Frank, goes first, implements a law, and then, of course, no jurisdiction wants to go back and change its law, and it actually would make a lot more sense if everybody coordinated in the first place and decided on what the basic principles were at the global level and then everybody implemented. And they will implement differently. Of course they will. The Europeans, the U.S., the others, Japanese implement slightly – at least we’ve got an over-arching framework which is consistent. So there’s always going to be this time, unless – again, unless people are prepared to coordinate much more up. So I’d like to see that. And partly, I think, it’s the fault of organizations such as mine who should be thinking to bring the parties together, bring my members together early on issues and not ex post after the U.S. has already drawn up rules, let’s say, on credit rating agencies or swap dealers. So we can do better.

Now, on enforcement, you know, I’m perfectly happy with soft law. I mean, bring it on. But will it work? And I’m telling you I don’t think it will. I don’t think there will be consistent enforcement. I think we’re seeing more and more problems emerge. I think we’re going to see far more in the future if my thesis about the growing capital markets in the world accelerates. It may be faster, but the question for me is will it be applied.

Now, if you go back to the WTO, I know the WTO is maligned in many ways, but you know, I do think its dispute settlement system is really being quite impressive in many ways. And I think if we hadn’t had that in this crisis, well, I wonder what the governments of the world would have been up to to protect them. Now, the European competition rules, single-market rules had the same effect of keeping protectionism at bay.

So I – my thesis is that I just don’t think the soft law instruments – they may be faster, but I don’t think in the long term they’re working. I think you have to build in some sort of sanctions in the enforcement. It’s no good being fast if – you know, if the laws just disperse all over the place. You haven’t solved any problem.

MR. KELLY: We’ve got five minutes left. So we’ll see what we can get in.

Yes, sir, in the back.

MR. WRIGHT: David.

MR. KELLY: Yes. (Inaudible.)

Q: Hi. David Shropniyaf (ph). A word I don’t think I’ve heard this evening is “extraterritoriality,” and yet some of the emerging thorniest issues have to do with extraterritorial reach of different countries’ regulations, whether it’s CFTC or European securitization rules, whatever. It is also – the other side of that coin, a new thing that’s emerged – and I – somewhat caricaturing Governor Tarullo, part of his argument seems to be that if we don’t retreat to a more territorial approach to holding company regulations, we would – we would have to assert extraterritorial jurisdiction, which is completely backward as far as I’m concerned. But I wonder if you could comment on the interaction between these sort of pressures to extraterritoriality and the vision that you have of a better-governed future.

MR. KELLY: And before you answer, I’m going to attempt to be Fred Kempe for a moment.

MR. WRIGHT: Right – (inaudible) –

MR. KELLY: He’s got much better hair than I do. Yes, and he always combines the last questions at the end. So maybe we’ll take extraterritoriality, and then who was the next question? Yes, sir. That would be – yes, you.

Q: Me.

MR. KELLY: Yes, sir.

Q: Thank you.

MR. KELLY: And then do you have a question?

Q: Yeah.

MR. KELLY: OK, there we go. One, two, three.

Q: One of the – I would – I would buy your arguments for coordination. It goes without saying that the need – whether or not it is easier or not, it’s a separate issue; we can all I think understand how complex it would be to have such coordination on a global basis. There are forces that are working on a constant basis against coordination. And those, really, by definition, that led the financial crisis, the power of the financial industry that is always innovating and trying to build instruments and products where they’re least regulated in order to maximize return on equity, and that is a natural process of a global financial institution that would always be seeking that.

So one of the questions is that where you’re seeking to coordinate markets, the top financial institutions, the best and the brightest, the ones that are making the most money, the units – the trading units are always seeking – rent-seeking arbitrage activities, in fact, where they see uncoordinated markets because that’s what they do. So the – one of the questions in here is that, how will you, on the coordination side – do you find yourself in the same room with those in the trading unit? Because they will never talk to you about this. They will not divulge their trade secrets as to where uncoordinated markets do exist and arbitrage exists. It seems that one of the best sources of information on how to coordinate that is there. So what are you doing to reduce that gap between your desire to coordinate on the other side?

MR. KELLY: And then our last question.

Q: My question is very brief. Alex Privitera with AICGS. I just wondered whether you have comments about the recent moves by the – by the IMF. For instance, you know, talking about financial fragmentation here and regionalization as a – as a looming danger to accept – at least tolerate a certain amount of capital controls that would run counter to what you are actually saying because it would suggest that these capital markets that are emerging are emerging, but the global aspect of it could be actually jeopardized by certain moves, you know, in emerging markets or maybe even in Western markets, the U.S.

MR. WRIGHT: Well, those are very interesting, interesting questions.

I mean, on the last point, yes, I think the IMF has been warning about fragmentation of the global financial system. but at the same time saying – and I think this was the context in which they were saying – is that in certain situations, capital controls might be a short-term palliative or policy that we now recognize – we now recognize in crisis conditions, (not normally ?) in crisis conditions, could be something which we think might work better than we’ve said before. But certainly, when I listen to the managing director of the IMF or – I think they would argue absolutely against fragmentation, regionalization because they see the economic benefit of a global financial system.

This – interesting question about the financial industry. Back in my days in Europe, I used to say that the best Europeans was the U.S. financial industry. Why? Because the U.S. financial industry saw the benefits of a globally – of an – of an integrated European market with a single set of rules properly policed with enforcement powers and subject to the rule of law and all that. They actually saw the benefits of that more than the Europeans did, in many ways, who were much more perhaps looking at their territorial national champions.

So whilst I accept your view that industry is always rent-seeking, et cetera, et cetera, I actually think the – if you ask most financial institutions at the global level, the big ones, I think they’d be rather interested in a world in which strong standards are applied, predictably applied, predictably applied, where the rule of law applied, where they could be sure that where they do business, the conditions would be – would be good. And after all, I mean, the transaction costs would go down, the – certain costs of multiple sets of rules – I mean, nobody’s ever – I’ve never seen figures about – if you imagine the global level in my matrix of 20 different sets of rules, you can imagine what sort of costs that will be for the industry.

So actually, I think if you ask the industry – and I mean, Dave (sp) is the person to ask here, or the IIF (ph) and so forth – is to ask, well, is that what you want? Do you want to fragment it, weak – Dave (sp) is soon shaking his head violently behind. But surely not. Actually, I think the industry would much prefer a set of properly applied principles at the global level and of course then implement it into national law according to national jurisdiction.

So I think the industry will look for the benefits here. And again, this sort of world I’m describing, I think the biggest beneficiary, certainly over the next decade, would be the U.S. financial industry, who have always sought the opening up of global financial markets on the basis of sound rules.

Now, David (sp), your question on – I’m not sure I fully understood it; do you want to just – I mean, on extra – your mean on extraterritoriality, or –

Well, I mean, this is a situation we have today, isn’t it? I mean, we have – we have a messy situation whereby the Europeans are saying, well, you want to come into our market, its equivalence, and we’ve got Governor Tarullo and others saying, in the future foreign banks are going to come into our market, and there are going to have to be exactly the same rules as U.S. banks, including on the capital side. We got all those problems with audit that Nicolas (sp) was referring to where we have different rules and PCOBs (ph), foreign inspections and all this sort of stuff. Europeans arguing that, you know, the hedge funds have got to apply, but it would be equivalent to all the credit-raising agencies. I mean, this is a dog’s breakfast, you know, and it’s getting worse. It will get worse. That’s my point.

And, you know, Peter (sp) and Crispin (sp) and others and Barbara (sp), you know, worked, and I was involved, in trying to sort of smooth and void disruptions to capital flows, and I think we were quite successful for a decade or so. But it’s going to get much more difficult. And no powerful jurisdictions, whether they’re the EU or the U.S., and certainly not those big emerging markets in the future are going to accept the imposition on their markets of rules from another – from another country. I wouldn’t expect China to accept that now; even today they’re not going to accept it. And hence we have the problem on audit working papers where the Chinese law is different from U.S. enforcement law.

So I think all those points just illustrate what I’m saying, is that we better put our thinking caps on and work out something more appropriate at the global level. And my only purpose this evening is to lay it out, lay the case out and suggest that the U.S. has a major interest to lead it.

MR. KELLY: Well, David, I – we’ve gone a little bit over, but that was well worth it. I – if I may say in American – sort of American parlance, I think you’ve just hit sort of a grand slam home run today. You’ve covered financial regulation, trade –

MR. WRIGHT: I was hoping you were going to use a cricket – I mean, I don’t – (laughter) – I don’t understand that stuff.

MR. KELLY: Sticky something or other. I don’t know. (Laughter.) You – trade, finance and global security. And I think that is a – we couldn’t have asked for more, and more clearly, concisely and visionarylike. So on behalf of the Atlantic Council, everyone here, thank you very much.

MR. WRIGHT: Thank you. (Applause.)