Benoît Coeuré: Four years after Pittsburgh – what has OTC derivatives reform achieved so far Speech by Mr Benoît Coeuré, Member of the Executive Board of the European Central Bank, at the at joint Bank of France, Bank of England and ECB conference on OTC derivatives reform, Paris, 11 September 2013. *  *  *  I wish to thank Patrick Föll for his contributions to this speech. I remain solely responsible for the opinions expressed herein. Introduction Ladies and Gentlemen It is a great pleasure for me to speak here in Paris and to welcome you, on behalf of the ECB, to the conference on the OTC derivatives reform. The over-the-counter (OTC) derivatives markets were at the heart of the financial crisis and several root causes on what went wrong were identified. Increasingly complex and opaque financial products, combined with a lack of transparency, were contributing factors, but also the failure of public authorities to appreciate and address adequately the risks building up in the financial markets. Not only did regulators and supervisors not keep up with financial innovation, but they lacked the tools to monitor the risks adequately. Regulation also failed to keep up with the dynamics in the OTC derivatives markets over the last two decades, which saw an explosion in outstanding contract volumes. Post-trading infrastructures had become increasingly inadequate for coping with the growing volumes and complexity of such trades.
At a more general level, the lack of a level playing field in the enforcement of the new financial standards has a potential to fragment the global financial system and to lead to a suboptimal allocation of capital of liquidity and to overconsumption of scarce resources, such as the safe assets used as collateral by financial market participants. OTC derivatives are a case in point. I therefore strongly welcome the recent agreement reached between the European Commission and the US Commodity Futures Trading Commission (CFTC) on a common path forward regarding a number of measures on how to approach cross-border issues. In this context, the notion of substituted compliance is a useful tool, as it will help to reduce the risk of duplication and potential frictions of rules. Clearly, convergence at a very granular level may not be achieved. It may not even be desirable, as specific differences may reflect the specific institutional and regulatory frameworks in the jurisdictions concerned. Nevertheless, it needs to be ensured that the outcome in all material aspects is similar. A key objective of the G20 mandate for OTC derivatives reform was to ensure effective systemic risk reduction in these markets. It is unlikely that we will achieve this objective by converging on the lowest common denominator rather than by achieving common best practices. However, this may be the result if substantive regulatory differences are not addressed and consequently, opportunities for regulatory arbitrage open up.