aicgs symposium speech jeffrey tessler

Clearstream Communications

Good afternoon Ladies and Gentlemen,

First of all, let me congratulate the American Institute of

Contemporary German Studies for the impressive line-up of

speakers today. This clearly shows how relevant the theme of

this symposium is “Fueling the Recovery – The Role of Capital

Markets and Banks”. This topic is obviously of great importance,

not only for Frankfurt as a financial centre, but also for the

European and US economy – in fact, for the global economy as

a whole. Deutsche Börse Group is therefore more than happy to

host today’s event.

My name is Jeffrey Tessler and I am a member of the Executive

Board of Deutsche Börse, responsible for its banking business

and the post-trade activities.

PLEASE CHECK AGAINST DELIVERY.

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I am doubly pleased about this opportunity to talk to you today,

not just from a professional but also from a personal point of

view. As an American who has been living and working in

Europe for more than two decades and for whom London,

Frankfurt and Luxembourg have become second homes, the

relationship between the EU and the US is a topic that is close

to my heart. Events like this are also very important to ensure

that the relationship between these leading economies is

constructive and driven by a spirit of mutual respect for each

other’s interests. This includes an awareness of what we have in

common, but also of where we differ – and especially, where we

can learn from each other. The AICGS and its President, Dr

Jackson Janes, are doing a great job here – so thank you once

more for making this get-together possible at Deutsche Börse’s

traditional trading floor.

Today’s theme is about recovery and how the banking business

and markets can become more transparent, safer and more

resilient. We believe that exchange organisations have a major


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responsibility and a fundamental role to play in achieving these

goals. At Deutsche Börse Group, we process any transaction

end-to-end from the initial trade until the securities are

deposited on our books. We are involved in all steps of the

trading, clearing, settlement and custody cycle and as a result

we are affected by the majority of regulatory developments that

have been or will be implemented during the recovery from the

crisis. Managing this necessary but very heavy regulatory

agenda – also in support of our customers – is one of the ways

in which we as Deutsche Börse Group are contributing to

market recovery. We are an intermediary between the market on

the one side and the political and regulatory stakeholders on the

other side and our intention is to facilitate and take a very

active role in this market dialogue.

I think we would all agree that financial markets should be

based on principles such as stability, transparency and fairness.

Regulation is helping us to amend current shortcomings where

the market alone failed to meet security and risk mitigation


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standards, in other words, the shortcomings of pure market-led

behaviour. What we need, however, are cautious regulatory

measures and increased collaboration between the market and

regulators. We also need a regulatory level playing field, a

concept which is particularly relevant to today’s transatlantic

theme.

I would like to start my speech today by taking a closer look at

the financial crisis of 2007 / 2008 and the following re-

regulation. In order to better understand how it came about, it

helps to have a look at what came before the crisis, which was

a lengthy period of deregulation. This deregulation actually

started back in the 1970s and peaked in the 1990s. At the

time, regulation was seen as an administrative burden which

stifles innovation and creates inefficiencies in the market. There

was a drive to give the markets greater freedom and to let them

find their own balance and create their own rules.


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This deregulation unleashed the leverage potential of financial

markets as a reaction to a period of stagflation and supported

the reconstruction of whole economies in Eastern Europe after

the fall of the Iron Curtain.

While it may have served its purpose well during its time the

rule of deregulation suffered a severe blow with the onset of the

financial crisis in 2007. The crisis exposed ineffective risk

management practices, a lack of transparency and questionable

incentives for individual behaviour. The increasingly deregulated

and highly leveraged markets created in the years before the

crisis did not perform as efficiently as some economic theorists

believed they would. So it should have come as no surprise that

the key response by policymakers to the crisis was to launch a

period of re-regulation. But does this mean that we should give

up the idea of markets as instruments of rational decision-

making altogether? Definitely not.


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Let me make this very clear right away: At Deutsche Börse

Group, we have always supported regulation and it is my deep

belief that there is no free market without rules and regulations.

What we need is a form of regulation that gives reason a chance

– market freedom and regulation do not need to be at odds with

each other. Regulation that is both efficient and effective

provides the framework for competition that is free in the sense

that no participant enjoys an unfair advantage over another.

This means that we must stop to see regulation and free

markets as a contradiction. To put it strongly: Only regulated

markets are free markets – with the important condition,

however, that regulation needs to refrain from intervention. Any

hidden national, political or economic agenda behind regulation

will inevitably make a level playing field impossible and will

result in regulatory arbitrage.

I feel that the crisis has exposed certain core values which

policymakers are now trying to protect and which, in fact, all


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market participants should strive to adhere to with our without

regulation:

The first value to be rediscovered after the crisis was a

greater emphasis on safety and an individual responsibility for

risk taking.

The second value to be rediscovered after the crisis is a sense

of integrity and the avoidance of excessive exposures. In

response, we have seen a greater emphasis on risk

management and collateral solutions which we will talk about

more later.

The third value to be rediscovered after the crisis is efficiency

and transparency which is being brought about by a

simplified market structure. For example, regulators are

striving to dry up dark pools and are pushing for the clearing

of more OTC trades.

Being a Member of the Executive Board of a regulated exchange

organisation, I welcome this rediscovery – while I am also


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concerned about its possible costs. However, some imbalances

are perhaps inevitable in the implementation of rules in support

of these new values, especially when carried out on a global

scale at G20 Summits.

One of the big disadvantages is that we are currently witnessing

uncertainty about the regulatory changes in Europe. Some of

these changes are so complex that even experts find it difficult

to gain an overview of their impact. Until they have become

established in the market, they will in any event cause

uncertainty – and thus restraint.

We have also noticed concern in the market about the

increasing cost of regulatory compliance – which is a side effect

of the fact that the regulatory agenda is heavily charged. What I

get to hear from our customers is that they struggle with costly

adaptations in times where revenue generation is more difficult

than ever.


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We are also witnessing an increasing politicisation of financial

markets. This is not surprising since the current regulatory push

means that financial regulation is moving closer to the top of

political agendas and hence also to party politics. The financial

transaction tax is a good example of how a rather technical –

and ultimately counterproductive – financial regulation can end

up topping political agendas and expose rifts between countries

and political parties both at EU and national level.

The danger of this politicisation is that it could undermine

certain established economic values such as entrepreneurial

spirit and free trade. The more politicised financial markets

become, the more rigid the rules. However, free trade

necessitates a certain amount of tolerance, for example it

implies the acceptance of different industrial norms and trading

practices but also understanding for trading partners with

different values and cultures to our own. I am of course thinking

about the ongoing negotiations for the free trade agreement


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between the EU and the US, where we are witnessing different

opinions despite our common aims.

However, while the financial crisis and the following re-

regulation have brought many changes, I have noticed that two

overriding principles have remained untouched: investor

protection and system protection. In other words: fair and equal

treatment of each market participant, as well as rules,

regulations and technologies that guarantee systemic stability.

And it is no coincidence that these core principles of investor

and system protection are also the objectives of exchange

organisations.

In my opinion, while regulated markets are definitely part of the

solution to stabilise the global financial services industry, they

must be duly embedded in a diversified exchange system. In

fact, I believe that diversified and regulated exchange

organisations that are oriented towards the real economy will

contribute to improving stability and fairness in the financial


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industry in the new re-regulated market environment. Exchanges

not only support regulators through risk management but also

offer solutions for banks and even the economy at large through

collateral management services. Market infrastructures such as

Deutsche Börse not only played a stabilising role during the

crisis, we are also helping to pave the way out of it.

Our strategy is to ensure greater safety and integrity, but also

greater efficiency, for uncollateralised and unregulated markets.

We are expanding our risk and liquidity management

capabilities to those areas of the capital market that hitherto

have been uncollateralised and unregulated. To this end, we are

currently focusing on two major global projects: firstly, clearing

for OTC derivatives, and secondly, collateral and liquidity

management. I do not wish to become too technical here, so

suffice it to say that they are essential and innovative offerings

to improve risk management in line with new regulatory

requirements, while keeping costs for market participants at

bay.


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So now that we have established the pros and cons of the

current re-regulation, let’s take a closer look at the regulatory

approaches in the EU and US.

As I said before, in implementing the re-regulation on a global

scale such as at G20 Summits, some imbalances are perhaps

inevitable.

According to the Bank for International Settlements, the volume

of OTC derivative markets, measured in notional amounts

outstanding, amounted to more than 600 trillion US Dollars last

year. So far, the percentage traded on derivative exchanges and

cleared via CCPs is very small in overall trading. This means

that up to the present day, a huge amount of extremely complex

financial instruments allowing highly-leveraged trading

strategies is left completely unregulated and unsupervised which

creates a huge risk. To tackle this enormous problem, the US

have implemented the Dodd Frank Act and Europe is catching


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up with the US in this respect with EMIR. However, it should be

noted that EMIR is stricter on OTC derivative clearing than the

Dodd Frank Act, especially when it is taken together with the

EU’s Capital Requirement Regulation. So while the EU might be

slower than the US, we feel that the EU standards are stricter

and we would welcome their implementation as a global

benchmark.

Similarly, the EU is looking into ways of capping trading in off-

exchange trading platforms tellingly referred to as “dark pools”.

The reason for this is, to quote the “Financial Times”, a “lack of

transparency”, which has “damage[d] the role of a stock

exchange as a venue for investors to establish asset prices”. I

could not have said it more clearly and concisely. Let me

underline again that increasing transparency is of chief

importance for regaining confidence in markets, which logically

implies limiting dark trading. The proliferation of off-exchange

trading platforms has made the US securities markets

increasingly unstable in recent years. This is an area where


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Europe enjoys a definite advantage, and we need to do all we

can to keep it this way.

It is often claimed that the American way of regulating capital

markets is superior to what we have in Europe and that this

applies in particular to the German regulatory regime because

far too much attention is paid to security here. The regulation of

high-frequency trading, which has recently hit the headlines

again in the US, seems to me to be a good example that the

opposite holds true. Here in Germany, the law regulating high-

frequency trading unites sensitivity to the market with investor

protection. Deutsche Börse combined computerised trading with

a range of security functions a long time ago. We have equipped

our trading systems with mechanisms that restore trading to

calmer waters if it is hit by irrational fluctuations. In addition,

the European market structure is different from the US market,

it is considerably less fragmented and is organised differently. I

can only hope that European policymakers will ensure that

these differences are adequately reflected in future regulation.


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And my preference would be for this German law to be a model

across Europe and the US.

Capital requirements are another area in which the EU and the

US have different regulatory approaches. In Europe we have

Basel III and CRD IV, in the US – to our knowledge – the

implementation is partly ongoing and several planned regulatory

initiatives are not yet published. Likewise, here in Europe, we

are discussing a financial transaction tax whereas the US are

currently not considering such a move.

In general, I think it is safe to say that the US remain a pioneer

in many respects, even though certain occurrences there

triggered the financial crisis. They are ahead of the EU in the re-

regulation of capital markets and they made use of the crisis to

quickly create new, effective banks and stock exchange

organisations which are strengthened through mergers and

disciplined through sanctions. We in Europe do our best but all


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too often quarrel over dubious bureaucratic and wrong

regulatory hurdles.

In general, we have observed that the US have moved on

quickly after the crisis despite party politics and that the EU is

slower than the US in adopting regulations. While I believe

there are merits to both regulatory approaches, it is of utmost

importance to aim for a harmonised regulation of financial

markets as these markets are global markets. A level regulatory

playing field is of essential. Even when regulators strive for

common solutions at a global level such as at G20 summits,

differences in the implementation speed and scope endanger

this level playing field and open the door to regulatory arbitrage

and should therefore be avoided.

So let me now come to the end of my speech by giving you a

little summary:


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Financial markets should be organised based on integrity,

stability and fairness and the current period of re-regulation can

achieve just that as long as the regulatory measures are

proportionate and do not get over-politicised. While regulated

markets are definitely part of the solution to stabilise the global

financial services industry in a sustainable manner, they must

be duly embedded in a diversified exchange system. Exchange

organisations such as Deutsche Börse Group play a key role in

ensuring transparency and fairness in line with upcoming

regulations as they provide efficient price discovery, risk

management and collateralisation services.

While we support the current push for re-regulation, there are

some considerable differences in the scale and scope of

implementation of global regulatory initiatives between the EU

and the US. I believe there are merits to both regulatory

approaches, but it is of utmost importance to aim for a

harmonised regulation of financial markets as these markets are


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global markets. A level regulatory playing field is absolutely

essential to meet the goals of transparency and fairness.

I will now hand over to the first panel that will delve deeper into

the subjects I have just touched upon by examining the role of

capital markets.

I wish you a successful conference, with insightful discussions.

Thank you very much for your attention.

aicgs symposium speech jeffrey tessler

Economy & Finance