UK Treasury defends OTC markets, warns on protectionism
Financial secretary to the UK Treasury Mark
Hoban has launched a robust defence of the role of over-the-counter trading in
Europe's fixed income and derivatives markets, while also warning about the extraterritorial
impact of US and European financial reforms.
Speaking at the annual meeting of the
Federation of European Securities Exchanges (FESE) in Istanbul, Hoban said that
intermediaries would continue to play an important role in non-equity financial
markets in Europe.
"OTC is not a dirty word," he
asserted, adding, "We cannot get away from the fact that some OTC
instruments are not liquid enough to trade on equity-style central limit order
The European Parliament is currently considering
amendments to the European Commission's draft review of MiFID, commonly termed
MiFID II, which extends the original directive's pre- and post-trade
transparency rules from equities to other asset classes. Together with the
European market infrastructure regulation (EMIR), which passed into law earlier
this year, MiFID II provides for the harmonisation and migration of the most
liquid OTC derivative instruments to centrally-cleared, exchange-like
electronic trading platforms, in line with a Group of 20 mandate to reduce
"Exchanges are the beating heart of
Europe's financial markets," said Hoban. "But there is a
complementary bilateral market in fixed income and derivatives markets."
It is at present unclear which types of OTC
derivatives will migrate to central clearing in Europe, as this will be subject
to negotiation between the European Securities and Markets Authority and
individual clearing houses.
In addition to regional legislative
initiatives such as MiFID and EMIR, higher capital requirements for investment
banking activities under Basel III is leading brokers to reduce their inventory
in less-liquid OTC instruments.
Hoban also warned against legislation that
"erect unnecessary barriers" to cross-border financial market activity.
As well as raising concerns about the impact of Dodd-Frank's Volcker rule on US
brokers' participation in non-domestic financial markets, the minister also
warned that MiFID - as currently drafted - would "close Europe
entirely" to participants from third-party countries.
"It will not benefit Europe if we
cannot trade with a new Japanese securities house or raise capital in
China," said Hoban. "Fortress Europe must be addressed."
The need for mutual recognition and
understanding when forming OTC derivatives regulation was highlighted by a new
report by the EU-US Coalition on Financial Regulation, which comprises a number of trade bodies such as the Futures and
Options Association, the Futures Industry Association, the Association for
Financial Markets in Europe, the International Swaps and Derivatives
Association and the Securities Industry and Financial Markets Association.
the Coalition said differences in regulation would stem from overarching legal
systems, market practices and regulatory priorities of the EU and the US it
said that national regulators should find a common foundation between policies,
objectives, standards and outcomes.