Nation-first politics threaten financial market infrastructures, warns CLS

An unprecedented political environment in which leading economies are pushing national agendas at the expense of globalization could threaten the cross-border regulatory cooperation that is critical for financial market infrastructures (FMIs), a senior official at FX industry utility CLS has warned.

“Most infrastructures are about systemic risk and that is by definition about connection. The way you solve problems of connection is through cooperation. We certainly are seeing effects on that cooperation, and a lack of cooperation has obvious consequences,” said Alan Marquard, chief strategy and development officer at CLS.

“When you start talking about regulators not getting on and driving national agendas, that goes right to the heart of the ability of an FMI to function cross-border. I’m going to be bold and candid enough to say that I feel that playing out in a number of examples.”

Speaking on a panel at the Sibos conference in Toronto last week, Marquard revealed that CLS is considering creating a new utility for cross-border payments, but warned that declining cooperation between the 22 central banks that oversee CLS threatens to delay the project.

“We’re looking at creating a utility not for FX settlement but for cross-border payments,” said Marquard. “That would involve setting up a similar kind of structure, but when I look at trying to do that in this environment – going to different central banks and saying how about you make concessions and think about account access in the name of having something central for everybody? – it’s just not the same environment as when the FX settlement system was created. It’s definitely going to be really difficult to get that done.

“Being overseen by 22 central banks only really works because there is a lead regulator in the Fed that does the actual supervision, but one other designating authority of another country has now started exercising a level of supervision independently. You can imagine if a couple of others do that, the whole global cooperative model just falls apart.”

Considering the impact of both the Trump administration in the US and the Brexit negotiations in the UK, Marquard and other panellists agreed that a short-term retreat from globalization could threaten the interconnectedness of the global financial system.

While neither the US nor the UK are retreating from the international stage altogether, there has been a popular backlash against globalization in both countries over the past year, which has been reflected at the ballot box and has led in turn to more tense international relations. That makes daily operations more difficult for FMIs, which depend on cross-border cooperation.

“National interest has always been there, but at the heart of it for a long time, a lot of people took the view that globalization was in the national interest, and what we have seen is there is a lot of push-back on that. A lot of people, in particular in the western developed democracies, feel that they are under threat and have been squeezed by globalization,” said Mark Austen, chief executive of the Asia Securities Industry and Financial Markets Association.

CLS is not the only FMI to have warned of the negative consequences of the current geo-political environment. Paul Symons, head of government relations at Euroclear, explained that the company may have to restructure in order to continue to serve the Irish securities market post-Brexit, given Ireland’s economy is so closely integrated with the UK.

“What has surprised people is that the vote to leave has been interpreted by politicians so extremely. It means not reducing mobility of labour, when it was migration issues that were primarily at the heart of the vote, but an announcement that all ties are going to be broken – leave the single market, and leave the European Economic Area. We seem to have swung to an extreme version of what Brexit might mean,” said Symons.

In the US, however, the rhetoric on a nationalist agenda may be stronger than the actual policy, according to Mark Wetjen, head of global public policy at the Depository Trust & Clearing Corporation. Nominees to key positions, including Christopher Giancarlo to the Commodity Futures Trading Commission and Randal Quarles to the board of the Federal Reserve, are self-proclaimed internationalists and should give the US a strong voice globally.

“The rhetoric is obviously very real and it’s impactful, but the policymaking is different,” said Wetjen. “The Basel Committee on Banking Supervision has not had representation from the US in any meaningful way [since the retirement of Daniel Tarullo] and by all accounts, some of the really important discussions that were underway have just ground to a halt. I have every expectation that with Randal Quarles confirmed, the conversations will pick up again.”