GOID 2016: Breakfast Keynote by U.K. Sinha

Good morning everybody.

The Politics of Global Capital is a very interesting topic. Finance is a great power play – even in the domestic context it is a power play, but when we go into the international context, it is a power play which goes up exponentially.

Ever since we have had recorded history, international finance has always been dictated by the powerful. At times the laws and rules have been written either by those who have won wars or under threat of military action. In peace time, as a geography or jurisdiction starts gaining economic power, it demands a change in the power play in a very assertive manner.

Also, institutions and arrangements which were created post World War II, are being challenged again and again in a very serious and systematic way. But whether we have been able to move forward as per the requirements and realities of the present world, is a question which all of us need to address.

There are strong feelings – especially in emerging and developing markets, that the realities of the current world are not being recognized. And that is one of the reasons why demands for changes in the institutions, have become more and more vocal. When those demands are not being met, alternatives are being looked at. For years together, IMF reforms have been talked about without much success. So, in sheer frustration – if nothing else, alternate institutions are being created. Alternate boundaries are being drawn. In this context, creation of the NDB (New Development Bank) and Asian Infrastructure Investment Bank are very, very significant developments. The aspirations of the people of emerging and developing market economies have to be met or else the underlying feelings for a rightful realignment of roles will keep manifesting in newer ways.

Another point that I would like to highlight is that post the Global Financial Crisis, we saw that in the international regulatory bodies, certain additional voice was given to emerging markets, which they didn’t have earlier. For example, The Financial Stability Forum was changed into the Financial Stability Board and countries like China, India, Brazil got a seat there. In IOSCO, the executive community was reconstituted and these countries got a seat. When we got the seat on the main table, it gave us an opportunity to be heard.

Just to give an example, the Global Financial Crisis was not created by any of the emerging markets, but they nevertheless suffered. One of the reasons that this development took place was the Over-The-Counter derivatives – the OTC derivatives. There has been a consistent demand in IOSCO and also the FSB for changes in the OTC derivatives pattern. There has been some policy level engagement and agreements that ‘yes, this is a good demand – it should be met’, but unfortunately, we have not moved much from this. So while we have been heard, whether we are effective – I have my doubts.

Similarly, money market funds were one of the reasons that there was extreme volatility at the time of Global Financial Crisis. All over the world – including India, we have what we call the Net Asset Value Base Money market funds. However, the bigger countries have a system of fixed NAV which was the root of serious volatility and disturbance. It has taken IOSCO more than five to six years to even come to a conclusion that this rule needs to be changed.

Also, in global standard-settings for example, the new rules about capital for banks, in my mind, has been guided by the philosophy of ‘one size fits all’. What about the problems of the emerging markets where there are huge requirements for investments, particularly in infrastructure? How do we meet that if we have to have the same capital requirements and resulting thereby, for either the deposit rates to be reduced, the cost of employees to be reduced or the cost of lending to go up?

These are some of the developments that come to mind post the Global Financial Crisis. While dialogues have started taking place – which is a welcome development – whether we have a meaningful say in the final outcome, I think we have a lot of ground to cover.

Another thing that comes to my mind is the fair and effective market review to address the issues of market misconduct. These issues are being examined by IOSCO and FSB. Some best practices are being highlighted but a lot more needs to be done.

The point I am trying to highlight here is that there has been some progress post global financial crisis – maybe more and more discussions are taking place where voices of other countries are also being heard. But effectiveness has not yet come. Perhaps it will take some more time.

Another development, which I would like to highlight, is that in their enthusiasm to take action post the Global Financial Crisis, some national and regional bodies have come out with legislations and enactments, which have serious elements of extra territoriality. They are applicable not only for them or the jurisdictions that they cover but also outside their jurisdictions and they have the force of law.

Let us take the example of European Market Infrastructure Regulation (EMIR), where one of the requirements is that any bank or institution which is originating in the Euro area and acting as a clearing member of a clearing corporation outside the EU, then that clearing corporation, has to obtain recognition from European Securities Market Authority (ESMA). Whether that clearing corporation is following the prevalent global standards set by IOSCO or FSB is not applicable. They have to undergo a separate process of recognition by the European Authorities. This has led to serious problems. Almost all the emerging markets have been talking to them. Some temporary solutions have been brought about; but the question is – and it’s the basic question – are we guided by global standards that have been mutually accepted and agreed upon, or can national guidelines/regional guidelines override global standards and countries have to succumb to these requirements.

This is the power play.

Another example is the U.S. Commodities Futures Trading Commission (CFTC), which came out with its own guidelines about settlements of commodity derivatives. There have been problems with emerging markets dealing with it. And certain dialogues have again come with temporary solutions. So we have to consider and look at whether, as a global community, we are going for a global standard-setting, which will be followed by everybody or will there be over and above regional and national standards that will be superimposed.

Another area which is very significant in this point, is the element of reciprocity. Should there be an element of reciprocity or not? Can one country impose its will on another without caring for reciprocity? Unfortunately the current situation is where reciprocity is not being followed.

In this context, I would like to highlight the area of taxation and anti-money laundering. These are areas where Financial Action Task Force and those who are members and signatories to Financial Action Task Force, have to follow certain common guidelines. But we are seeing examples of alternate efforts being made to attract corporations to particular jurisdictions. There are corporations which are doing it, there are jurisdictions which are doing it. How to come out with a predictable regime on global taxation is something which is again not being guided by fair play, but where there are a number of other developments or power play which is being enacted. In some of these cases, the effort is not towards tax avoidance only, but also towards tax evasion. It is now becoming a global question how this type of initiative is handled in a combined way and in a common way.

So far as trade is concerned, again we are seeing that the regional treaties that are being drawn upon are primarily guided by the consideration of who is in a superior position impose that, rather than by looking into the aspirations of vast number of countries where there are significant populations residing and which are concerned with trade issues.

Because of the advantage of having reserve money, certain jurisdictions have an advantage with regards to where the central banks or sovereign wealth funds will park their money. What about the requirement of funds in the emerging markets, for example, in areas of infrastructure? What do we do about that? These are the questions that need to be deliberated and some path has to be looked at and some forward-looking thinking has to be there.

Drawing from the earlier session you had, the session on Asian Cooperation, I am reminded that as early as in 2003, there was a serious attempt to create an Asian Bond Market. Certain jurisdictions in Asia took lot of interest in that but we must blame ourselves that we could not move forward. There were some political or diplomatic issues and because of that, the savings of entire Asia continue to go into other jurisdictions and the requirements of Asia are not being met.

I would like to end by saying that the emerging markets, the developing markets, have to come together and look at areas of cooperation whereby they can jointly take care of the requirements of resources and capital of each other. If we are able to do that, we will be changing the face of this earth.

Thank you very much for inviting me.

U.K. Sinha is the chairman of the Securities And Exchange Board of India.

This speech was delivered as the Breakfast Keynote at The Gateway of India Dialogue 2016, held in Mumbai on the 13-14^th of June 2016.

Watch the full Breakfast Dialogue here.

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