- Good morning ladies and gentlemen.
- It is a privilege for me to be here with such a distinguished international grouping of the exchange, clearing house and regulatory community, and to be able to kick off this Conference. This is the second time in the course of one year that I have been invited to speak at a WFE event taking place in Kuala Lumpur, and I would like to thank Datuk Seri Tajuddin Atan, CEO of Bursa Malaysia, Nandini Sukumar, CEO of the World Federation of Exchanges and Sandy Frucher, Vice Chairman of Nasdaq and Chairman of the International Options Market Association (IOMA) for the kind invitation.
- I also have my fellow colleague from the Board of the International Organisation of Securities Commissions (IOSCO), Ryozo Himino, Vice Commissioner for International Affairs of the Japan Financial Services Agency, who will speak later this morning on central counterparty (CCP) reforms.
International reforms on OTC Derivatives
Ladies and gentlemen,
- This Conference is taking place at an opportune time. Amidst a volatile and challenging climate, it is all the more critical that derivatives markets are able to function effectively to deal with uncertainties in commodity prices, currencies, interest rates, and foreign exchange rates. Markets must be able to withstand global volatility while deterring activities that may undermine the legitimate interests of market participants as well as the integrity of the market.
- It has been eight years since the global financial crisis where the complexity, opaqueness and build-up of excessive risks in the OTC derivatives markets were seen as a major contributor to the crisis. The main impetus behind the reforms embarked on in the aftermath of the crisis was focused on enhancing the safety, soundness and resiliency of markets, and to ensure that markets function with integrity and transparency.
- Much of the building blocks of global reform measures have now been finalised and are being progressively implemented. The implementation of these measures has led to significant changes in the way in which global financial markets operate today. For example, across the major markets, we have seen several developments already taking place. These include an increasing emphasis and attention on governance and management of conduct risk in wholesale financial markets, as well as trends of de-risking in financial market activities, in terms of proprietary trading and market making activities as market participants respond to more stringent regulatory capital, liquidity and leverage rules.
- There is also greater transparency in the OTC derivatives markets with the implementation of electronic trading, trade reporting and central clearing; as well as changes in collateral management and back-office risk management processes, including portfolio reconciliation to reduce risk of mismatches in trade details and valuations.
Ladies and gentlemen,
- As you know, OTC derivatives reforms have been one of the priority reform areas at the G20 and the Financial Stability Board, where the overarching objectives are to enhance the transparency of transaction information, promote financial stability, and support the detection and prevention of market abuse.
- As the OTC derivatives markets are global and highly interconnected with significant cross-border activity, international coordination and cooperation on standard setting is crucial. This is to avoid as far as possible duplication and inconsistencies in regulatory requirements. The International Organisation of Securities Commissions, together with the FSB and other standard setting bodies such as the Committee on Payments and Market Infrastructures (CPMI) and the Basel Committee on Banking Supervision (BCBS), have carried out important work in this area. For example, IOSCO together with CPMI have developed the Principles for Financial Market Infrastructures on central counterparties, trade repositories, central securities depositories, securities settlement systems and payment systems. Standard setting bodies have also published Reports on central counterparty disclosure and recovery, mandatory clearing, data aggregation and reporting, margin requirements, risk mitigation standards for non-cleared derivatives and data harmonisation on unique trade and product identifiers.
- With the introduction of these reforms, the focus is on the monitoring of the implementation of such reforms. For example, IOSCO and the Committee on Payments and Market Infrastructures (CPMI) are now at the stage of implementation monitoring of the Principles for Financial Market Infrastructures where rigorous peer reviews are being conducted. Further, IOSCO and the Basel Committee on Banking Supervision (BCBS) are monitoring national developments on margin requirements.
Implementation of reform efforts
Ladies and gentlemen,
- The progress of the implementation of OTC derivatives reforms across markets has been uneven. Higher capital requirements for non-centrally cleared derivatives and trade reporting seem to be more advanced, followed by central clearing; while margin requirements, exchange and platform trading and cross-border regulatory issues are further behind in terms of implementation.
- Most of the developed markets are notably further ahead in the implementation of OTC derivatives reforms, while progress tends to be mixed for emerging markets. For some emerging markets with larger derivatives volumes, regulatory frameworks are primarily in place and practical implementation is underway. In most emerging markets where the derivatives markets (be it exchange traded or OTC) are still relatively nascent, a large proportion of them have not yet begun the reform process.
- In setting priorities for the full adoption of OTC derivatives reforms that are aligned with international standards, an assessment of the impact of these requirements, including possible unintended consequences arising from these measures is required. This is important given that the priorities in emerging markets can vary in view of the levels of development and structural characteristics of the market and the existing legal and regulatory frameworks in place.
- Under the auspices of IOSCO’s Growth and Emerging Markets Committee, which I chair, IOSCO has carried out a survey regarding proportionality and equivalence considerations of OTC derivatives reforms and the implications of these reforms on emerging markets. Among the concerns relates to access to central clearing, particularly in those markets where the size of the market would not support a domestic CCP. In markets where OTC derivatives products may be less complex and transaction volumes are low, there are merits of a gradual approach in sequencing and phasing of reforms.
- Another concern is the challenge posed by the recognition and equivalence processes, which can be protracted and time-consuming, thus calling for the development of common principles for equivalence assessments or regulatory regimes and cross-border recognition of financial market infrastructures. Some of these engagements are already taking place bilaterally and through various international platforms, as well as IOSCO’s work to identify issues and approaches to cross border regulation.
- Further, it is important to consider how the implementation of global reforms will have an impact on the availability and costs of derivatives transactions for corporations and SMEs, as end-users in these markets. In some of the individual markets, aside from implementation issues, strengthening regulatory and industry capacity will also be an important measure going forward.
Technological risks and cyber resilience
Ladies and gentlemen,
- Historically, capital market industry has embraced technological innovation, but last few years, we have witnessed a “Digital Revolution” unlike what we have experienced before. Digital is disrupting the capital market ecosystem as we know it. Innovative business models like crowdfunding and peer-to-peer financing, and digital capability like distributed ledger (or blockchain), advanced analytics and machine learning are disrupting our capital market value chain.
- Technology like blockchain and advanced analytics can provide a good alternative to solving some of our current market challenges, especially in the OTC markets. As an example, blockchain supported distributed ledgers can be useful for complex financial assets where there is no clear central authority to regulate, arbitrate and/or regulate risk of trade or counterparty failure.
- Given the increasing innovation in an environment that has become much more inter-connected, cyber threats can have potential widespread systemic implications on markets, the need to strengthen the security and resilience of financial market infrastructures against cyber attack is therefore imperative. This includes having in place a robust cyber security framework, and being able to respond and resume critical services in a timely manner. The Securities Commission Malaysia places significant priority in this area and is currently seeking feedback on regulatory proposals to enhance cyber resilience in the capital market. Further, together with the Committee on Payments and Market Infrastructures (CPMI), IOSCO is also working on cyber resilience of FMIs where a consultation report has been published.
Overview of Malaysian capital market
Ladies and gentlemen,
- Turning to the Malaysian capital market, it is clear that we have built a fairly broad and diversified capital market. Today, the total size of the Malaysian capital market sits at RM2.82 trillion, equivalent to 2.5 times the size of the domestic economy. Malaysia has the third largest bond market in Asia, the largest unit trust industry in Southeast Asia and a well-established Islamic capital market.
- In keeping pace with the industry digital innovation and market demand, I am also delighted that Malaysia became the first country in ASEAN to introduce a regulatory framework back in 2015 to facilitate equity crowdfunding, with six registered equity crowdfunding platforms expected to be fully operational this year. Just last Wednesday, we announced the regulatory framework for peer-to-peer (P2P) financing, setting out the requirements for the registration for P2P platform. It is our view that the pace of digital innovation will continue to increase. As the industry caretaker for both the market integrity and market development, it is imperative that we continue to engage the industry, be proactive in facilitating the digital revolution at the same time safeguarding the market integrity.
- Notwithstanding the recent market pressures on emerging markets globally, the Malaysian capital market has remained relatively resilient, and continues to be a major source of financing for the economy. We have built significant capabilities over the years, and put in place structural reforms taking on board relevant feedback from the industry and stakeholders.
- We would also like to see similar growth in the derivatives segment to complement our well-established equity and bond markets. This emphasis is timely given the significant economic role of the derivatives market in facilitating price discovery and risk management. Further, our priority is also to enhance the transparency of the OTC derivatives information, which is important in the sequencing of the implementation of other components of OTC derivatives reform measures and strengthening the resilience of the existing financial market infrastructure.
- In parallel with initiatives to improve the transparency of the OTC derivatives market, efforts are also being made to enhance the systemic risk monitoring framework for FMIs, with particular focus on risk governance, collateral management, stress testing and recovery planning. It is important that clearing houses have in place sound risk management practices and adequate financial resources that can withstand potential default as well as effective resolution and recovery plans. These are important steps as clearing houses expand their scope to clear bilateral OTC derivatives contracts, which would effectively transform participant-level counterparty risk into systemic risk aggregated at the financial system level.
Conclusion
Ladies and gentlemen,
- Given the vital role of derivatives markets in improving the efficiency of capital markets and allowing for the redistribution of risks, there is a need to have the appropriate regulatory framework and infrastructure to support their vibrant growth and development, as well as to facilitate competition.
- In developing the regulatory architecture and strategies to govern derivatives markets, we also need to be cognisant of the different facets of international reform efforts to ensure that these markets do not create excessive risk that threaten market stability. This becomes all the more imperative as we navigate the increasingly complex and currently challenging global financial landscape.
- Thank you for your attention. Please enjoy the Conference.
