Ong Chong Tee: Review of post-crisis regulatory reforms and initiatives Opening address by Mr Ong Chong Tee, Deputy Managing Director (Financial Supervision) of the Monetary Authority of Singapore, at the ISDA Regulators and Industry Forum, Singapore, 13 November 2017. * * * Mr Christopher Giancarlo, Chairman CFTC, Mr Scott O’Malia, CEO ISDA, Distinguished guests, ladies and gentlemen 1. Allow me to first thank ISDA for inviting my colleagues and I to join you today in this Regulators and Industry Forum, and for me to deliver the opening remarks. LOOKING BACK 2. Let me start with an analogy from the popular children story of The Three Little Pigs and the Big Bad Wolf. I am sure you are all familiar with that – how the Big Bad Wolf ‘huffed and puffed’ and blew down the houses of straw and sticks; except for the one made of bricks. 3. Almost a decade ago, we had a Big Bad Wolf that blew down the house of global finance, triggering the worst financial crisis since the Great Depression. In the post-crisis commentaries and debates that followed, a lot of attention had focused on who was the Big Bad Wolf at that time – was it Lehman together with other investment banks, insurance companies and hedge funds, or was it this product called subprime mortgages? But the more important lesson was that the global financial system was not as robust nor sturdy as previously thought.
By mandating more OTC derivatives to be centrally cleared on CCPs (Central Counterparties), market participants benefit from netting of exposures and reduction of credit risks, ultimately reducing systemic risks. However, without ensuring sufficient access to CCPs before implementing such a mandate, some market participants may find themselves scrambling to sign up with the fewer clearing members who have access to the CCPs. Some may even find the new economics of clearing prohibitive. Such factors should therefore be carefully considered so that in the desire to address possible vulnerabilities, and to cover all bases, perfection does not become the enemy of the good. 11. I have mentioned the important work around coherence. Taken individually, each set of reforms have been well-considered and for good reasons. For instance, the banking capital and liquidity reforms strengthen the ability of banks to better withstand future shocks; OTC derivative reforms seek to improve transparency, prevent market abuse and reduce systemic risks. The two sets of reforms aimed at achieving a safer financial system, albeit from different angles. However, to ensure that they complement each other without creating unintended consequences, we also need to carefully examine how the different elements will interact. 12. Take the example of the impact from the leverage ratio on the capacity of clearing members to offer client clearing services. The leverage ratio is intended to be a non-risk-based backstop to supplement the capital reforms and does not factor in risk offsets.