It was no surprise that two of the five panel discussions at last week’s Mondo Visione Exchange Forum in London were devoted to the impact of regulatory reform on the over-the-counter (OTC) derivatives market. Slightly unexpected perhaps was the weight of representation from US futures market infrastructures.
NYSE Euronext and Nasdaq OMX have the right to consider themselves global, European and American. But the presence of the Options Clearing Corporation, the Intercontinental Exchange (ICE) and CME Group (with both European CEO Robert Ray and Andrew Lamb, head of the group’s European clearing operations) underlined the nature of the opportunities for growth afforded by the post-crisis derivatives market makeover. Lamb and his fellow panellist in last Wednesday’s discussion on post-trade developments in the OTC market, Paul Swann, COO, ICE Clear Europe, are both British and well-known figures in the City. But the growing European presence of ICE and CME Group, both of which are already gaining first-hand experience dealing with the new regulatory framework for OTC derivatives in the US, implies quite a battle for trading and clearing volumes in Europe once the European Securities and Markets Authority begins to approve instruments suitable for exchange-like trading, central clearing and reporting.
Both ICE and CME have used their experience of the energy markets, where central clearing has been the norm in the decade since Enron, to steal a march on swap execution facilities (SEFs), the exchange-like venues established by the Dodd-Frank Act, but subject to slightly different rules depending on whether they are regulated by the Securities and Exchange Commission (for equity-based derivatives) or the Commodity Futures Trading Commission (most of the rest). Both exchanges have positioned themselves to offer products that will have much the same characteristics of SEF-traded swaps but will be cheaper to use and will have the benefit of running on tried and trusted rails. That won’t be exactly the same in Europe, where LCH.Clearnet, Eurex and NYSE Liffe will be hoping to exert home advantage in the post-trade space, but ICE and CME will have invaluable experience to count on due to the fact that the Dodd-Frank reforms will be rolled out well ahead of Europe’s regulatory restructuring. Also speaking at last week’s event, MEP Kay Swinburne suggested that some parts of MiFID II, which defines the new European trading platforms for OTC derivatives (organised trading facilities), is unlikely to be ready for implementation until well into 2015.
By that time, perhaps the UK/EU row over regulation of clearing houses at least might be resolved. Only one of the clearing houses represented at Mondo Visione is regulated outside London. Eurex was also the most vocal in its recognition of a new relationship with the buy-side. Jens Quiram, head of clearing business relations at Eurex Clearing, said his firm was getting ever close to the buy-side, offering new ways of protecting their assets through segregated accounts that would be accessible in the event of clearing member’s collapse. CME’s Lamb raised a laugh by suggesting that Quiram’s tripartite arrangements, covering both clients and their clients, might not meet all eventualities – quadripartite agreements might be necessary – while Swann at ICE wondered whether Eurex would soon be seeking a banking licence, while also pointing out the distinct requirements of different clients, particularly those with fiduciary responsibilities. Behind the mirth, the serious point is that clearers, brokers and the buy-side will have to work more closely together in the new world of OTC derivatives trading. And it may be that market structures from the new world take a large role in setting the agenda for those in Europe. I’ve accepted the invitation of BNY Mellon, the US-based global custodian and investment services provider, to celebrate Thanksgiving with their collateral management and derivatives experts today (one of the sacrifices I have to make in the run-up to the launch of The Trade Derivatives!) so hope to report back on further evidence of a new ‘special relationship’ for the buy-side.