Sometimes the simplest questions we face are the hardest to answer. That thought hit me this summer when I gave a speech to a group of summer interns at an event organized by John Lothian. As I looked out at that room, I reflected on my path through life and I thought to myself: how can I best explain to these young people my passion for these markets and my choice of this industry for my career.
The truth is that these are difficult times for our industry. The Brexit vote this past June was a tremendous shock to nearly everyone and the repercussions are still echoing through the financial markets. Newly elected Prime Minister Theresa May has said she will respect the referendum and work to separate the U.K. from the European Union, but we are facing many months and perhaps years before we know what the new relationship will look like. As our senior vice president of global communications explains in an article in this issue, there are some very fundamental questions at stake. How will European regulations like MiFID and MiFIR apply to U.K. firms? Will central counterparties and trade repositories based in the U.K. need to seek recognition under EMIR? Will clearinghouses based in London be allowed to continue clearing Euro-denominated derivatives? What about firms based outside of Europe—will they be able to continue using London as their European base of operations?
Adjusting to Change
Right now we have more questions than answers, but at FIA we are working hard to help our member firms and the industry tackle this challenge. FIA is providing educational resources and forming working groups to sort through the policy implications, and we are taking part in industry-wide consortiums so that we can systematically address the many questions that Brexit has created. We recognize that these uncertainties make planning for the future exceptionally difficult, and we will do our best to help our industry adjust to the coming changes.
While we wait for the Brexit process to play out, we also face political uncertainties in the U.S. This year's campaign for the White House has been unlike any that I can remember. Incredibly, it is likely the United States will elect a President in November that the majority of Americans find unfavorable. But one thing is certain: no matter who wins the Presidential election in November, we can expect dramatic changes in the personnel who run the federal government. At the highest level, there are more than 800 positions that are subject to Presidential nomination and Senate confirmation, and below that are thousands more political appointees. These are the people who interpret legislation, make regulations and enforce the laws. With this many positions in flux, it is very challenging to anticipate the future direction of regulation and oversight.
The Power of Innovation
The public doubt and concern caused by these political events only exacerbates the ongoing industry uncertainty stemming from the financial crisis. Eight years after Lehman Brothers’ collapse and the G20’s commitment to increase central clearing, the results have been mixed at best for the cleared futures and derivatives industry. The good news is the number of cleared interest rate and credit default swap transactions has risen to 75%, compared to only about 15% before the crisis. However, we now find more concentration in clearing than before the crisis, with the number of clearing members dwindling from 142 firms in 2008 to 73 today. Furthermore, the amount of customer funds held by clearing members in the U.S.—a measure of customer confidence in our markets—is only back to pre-crisis levels. And there are growing concerns that the steep increase in capital requirements on the banking industry has impacted market liquidity by reducing the capacity of banks to warehouse risk and absorb market shocks.
Trading volumes may rise and fall, but price discovery and risk management will never go out of style.
Despite all these headwinds, I am actually very bullish on our industry. As I explained to the interns this summer, I passionately believe in the value of markets and the power of innovation. Trading volumes may rise and fall, but price discovery and risk management will never go out of style. That is what connects us to the real economy, and that is why I am optimistic that our industry will continue to have a bright future.
That does not mean that we should be complacent or rest on our laurels. Our industry has a long tradition of reinventing itself. Think back to the explosion of innovation that took place when the concepts developed in the agricultural futures markets were first applied to financial products. Think back to the tremendous changes this industry went through as the floors of the exchanges were replaced by electronic matching engines and derivatives trading spread around the world. These were also times of uncertainty. Now we face that challenge again as we confront the next wave of technological advances such as artificial intelligence, blockchain and cloud computing. No doubt these technologies will be disruptive to existing business models, but I am optimistic that we will be among the first adopters. There is a new generation of fintech startups springing up all over the world, and they are eager to partner with firms in our industry on new ways to make the markets more efficient. At this year's FIA Expo, we will be showcasing many of these new young firms in our Innovators Pavilion and I encourage you to see them for yourselves.
As I told the summer interns, these are interesting times, and interesting times can create exciting opportunities for the next generation of young people. Our industry was built to manage uncertainty, and we’re well positioned to continue doing so. I’ll tell you what I told the interns: there is no other industry as innovative, adaptable and resilient as ours. The future may be uncertain, but it is most certainly bright.
FIA's Walt Lukken discusses the impact of the Basel Committee leverage ratio.