CFTC Commissioner J. Christopher Giancarlo warned that while “backward-looking debate” around global financial markets is prevalent, the key to preparing for the next financial crisis is facing new challenges head-on. In a lecture at Harvard Law School, Commissioner Giancarlo brought attention to six developments transforming the global and financial environment:
- Cyber threats: “relentless assault by hostile cyber predators”;
- Disruptive technology: “rapid habitat transformation by new digital technologies”;
- Government intervention: “single species overexpansion and dominance by ‘Washington Whale’ central banks;
- Market illiquidity: “nutrient and habitat diminishment through deterioration of trading liquidity”;
- Market concentration: “reduction in biodiversity of key market service providers”; and
- De-Globalization: “habitat fragmentation of global trading environments.”
According to Mr. Giancarlo, regulators and others with responsibility for financial markets must do the following to address these challenges: (i) prioritize cyber risk resiliency; (ii) foster best practices for new trading technologies; (iii) counter the distortions caused by central bank market intervention; (iv) acknowledge and address the diminishing liquidity in trading markets; and (v) review and reduce the “numerous poorly designed rules and regulations” that are causing service-provider concentration and market fragmentation.
He further commented that market fragmentation has been exacerbated by recent government regulation: “Trading market fragmentation caused by ill-designed rules and burdensome regulations – and the application of those rules abroad – is harming market liquidity and market safety and soundness, increasing the systemic risk that the Dodd-Frank Act was predicated on reducing. Amidst the current tide of de-globalization and slowing world economic growth, market regulators cannot continue to ignore the growing systemic risk caused by market fragmentation.”
Lofchie Comment: Among the difficulties of having a forward-looking discussion about the regulation of global financial markets is that any such discussion necessarily involves making implicit concessions that: (i) at least some of the rule changes are not working out as planned and are having quite negative effects (e.g., increasing market concentration, decreasing liquidity, and separating the American, European and Asian markets) and (ii) rules that are bad for the financial system are often bad for the economy and thus, rules that are adopted to “punish” the banks or the financial system are bad for the economy. The U.S. government has demonstrated that it will win in a war against the financial system, but the value of the territory it conquers will decline.