Exchanges

Interoperability impractical – exchange chiefs

Introducing a choice of clearing house is "unfeasible" and the industry should do more to pressure regulators on the issue, according to the heads of several major derivatives exchanges.

Speaking at the International Derivatives Expo (IDX) in London this week, a panel of exchange CEOs discussed regulatory issues and the changing use of technology in the industry.

Finbarr Hutcheson, CEO of NYSE LIFFE, said a move to introduce interoperability between central counterparties and trading venues proposed in MiFID II, may be attractive to regulators, but would not be practical.

"This is tantamount to requiring people to take counterparty risk where they don't particularly want to, or at least don't elect to.

"I don't think this is a sensible model and it's not sensible or prudent for our marketplaces. I think we're all aware of certain jurisdictions we wouldn't want our clearing house taking risk to."

A move to an interoperable clearing model will make it impossible to keep risk management under control, explained Andreas Preuss, CEO of Eurex, who called for the industry to do more to ensure regulators understand the implications of the proposal.

"Two years ago, a significant proportion of sell-side banking institutions were pro-actively supporting interoperability. However, since then as the implications for risk management have become clearer, some in the City of London seem to have forgotten to tell others that they are no longer in favour of this anymore," he said.

Preuss said regulators would not abandon interoperability simply because the industry wanted it to and that it was time for those who oppose interoperability to speak out to ensure regulators listen to their concerns.

Market consolidation, particularly across borders, was also a big issue after Jeffrey Sprecher, CEO of IntercontinentalExchange (ICE) confirmed his firm's acquisition of NYSE Euronext had received approval from the European Commission.

Charlotte Crosswell, CEO of the new London-based derivatives market Nasdaq OMX NLX, said partnerships would be a more important feature in how exchanges develop in the coming year, rather than large acquisitions.

"There are other opportunities apart from just doing big, transformational deals such as taking stakes or agreeing joint ventures. Nasdaq OMX Group recently bought a stake in TOM in and a stake in LCH.Clearnet, so there are other ways of doing things," she said.

Meanwhile, cross border consolidation in Asia could be a long way off, according to Muthukrishnan Ramaswami, president of Singapore Exchange.

"In Asia, an exchange is seen as something essential to a country's development and is somewhat like the family jewels, in that you don't want to give it away, so we don't see cross-border consolidation in the region as being imminent," he said.

Market technology was also discussed, with Eurex's Preuss suggesting exchanges should seek to agree on common technology standards in order to better serve the buy- and sell-side.

"Exchange trading and clearing technology as a competitive differentiator between different markets is beginning to outlive itself," he explained.

"The market does not want to have to maintain exchange connectivity to multiple platforms, services and developed in many different ways, requiring them to incur unnecessary costs."

He argued that latency was now so low that there was little room for further development and said exchanges should shift their focus away from technology and towards providing reliable, global liquidity networks for their members. He also suggested that the industry should come together to agree on common technology standards.

John Bakie john.bakie@information-partners.com