Risk and the Global Economy

The U.S. Chamber of Commerce hosted its seventh annual Capital Markets Summit, bringing together leaders from Congress, regulatory agencies, finance and business to offer their perspective on how to manage risk and create a more competitive global economy.

As keynote speakers, CFTC Chairman Gary Gensler and House Financial Services Ranking Member Maxine Waters (D-CA) provided their assessments of the evolving regulatory environment.

Chairman Gensler’s speech focused on reforming LIBOR and bringing transparency to derivatives markets. “Banks simply are not lending to each other as they once did” largely due to the 2008 financial crisis, ongoing debt concerns in Europe, recent credit-rating downgrades, and central banks’ direct-lending practices, said Gensler.

This “shift away from banks funding each other in the unsecured market…has led to a scarcity or outright absence of actual transactions underpinning LIBOR and other benchmark rates,” he said. “Given their fundamental role in the capital markets and our economy, [LIBOR] benchmark rates must be based on fact, not fiction,” he added.

Gensler believes that LIBOR “undermines market integrity” and is “prone to misconduct” because there are “hundreds of trillions of dollars of financial instruments and contracts [that] rely upon a benchmark referencing a market where essentially no borrowing occurs.” He argues that U.S. policymakers should work with their international counterparts “to promptly identify alternative benchmarks that are anchored in observable transactions and determine how to transition to such alternatives.

With respect to derivatives, specifically futures and swaps, Gensler argues that these markets work best “when they are transparent; competitive; and free of fraud, manipulation and other abuses.” He adds: “Transparency lowers costs for businesses and consumers, as it shifts information from dealers to the broader public.” As a result of recent regulation, “the price and volume of [these] transactions [are] available to the public on a website, like a modern-day ticker tape.”

In her speech to the Chamber, Rep. Waters pointed to the progress Congress has made on regulatory goals outlined in Dodd-Frank, but also mentioned the importance of allowing policymakers time “to revisit, modify and clarify” certain provisions.

She also addressed the implementation of the Orderly Liquidation Authority (OLA), a key provision of Dodd-Frank that’s been the subject of intense Congressional debate, and her belief that OLA “puts our financial system and the broader economy on a much sounder, more stable footing.”

Rep. Waters said that while market participants “can disagree with the provisions that went into the Wall Street Reform Act,” it is important to “remember that only a few years ago, markets were gripped by uncertainty and fear” and “we all have an obligation to respect and uphold laws even when we disagreed during the legislative process.”