As the debate on post-trade interoperability gathers pace, David Wright, one of the architects of MiFID and currently the secretary general of International Organisation of Securities Commissions (IOSCO), hopes MiFID II will enshrine existing arrangements between central counterparties (CCPs).
“Clearing interoperability is important because the benefits of being able to net positions across different markets and products can be really significant. I hope that the ability to do so will not be thwarted by over-protectionism,” he said.
Clearing interoperability allows European trading platforms to let brokers choose between post-trade providers and forces competition between CCPs that has reduced charges and improved service levels in recent years. BATS Chi-X Europe introduced four-way interoperability in January, meaning brokers can choose between EMCF, EuroCCP, SIX x-clear and LCH.Clearnet. The arrangements have regulatory approval and are expected to be given backing in the reforms to the European securities market framework contained in MiFID II. The directive and its attendant regulation are currently being debated in the European Parliament. If MiFID II supports it fully, incumbent exchanges with their own clearing houses will be forced to implement interoperability.
Introduced in 2007, MiFID was instrumental in bringing greater competition to the European financial markets by breaking the national monopolies of the exchanges. As well as his involvement in the drafting of MiFID, Wright also advised on the recent transparency, prospectus and market abuse directives.
“Having been very involved in MiFID, I think it was a pioneering attempt to introduce more competition, transparency and investor protection in the financial markets,” he said. “It did have the effect of increasing cross-border trading in Europe and was very positive overall. Now there are new challenges, such as high-frequency trading, dark pools, so I feel the improvements the Commission is seeking are quite natural.”
Wright predicted the outcomes of the MiFID review processes would be measured, pro-competitive and provide a deeper and more effective intermediation of savings for the European economy. “As the world is moving to a greater reliance on securities markets, it is very important that Europe gets MiFID right,” he said.
Talking about broader regulatory issues, Wright says financial regulation should be founded on strong economic principles and a full understanding of the consequences. “Regulators need to ensure that while drawing up new disciplines, business doesn’t migrate away from clearing houses or trade repositories to a parallel form – similar to what happened in the context of shadow banking. Regulators need to be attentive and alert to avoid such slippage from the required disciplines,” he said.
Under Wright’s leadership, IOSCO is in the process of helping emerging markets develop their securities market to high standards by imparting research, training and education, and technical assistance. Wright feels that this will prove to be beneficial and help the global economy in the long run as the world is moving towards a more securities-based financial system. “Banks have capital constraints and leverage will be reduced. The public sector will also have capital constraints for decades ahead because of the strain on deficits and ageing populations in the Western world. Hence global securities markets are going to play a key role and developing them would be very beneficial.”
A full interview in which Wright also talks on risk management and the need for innovation in the financial market is will be published in the Q3 2012 issue of The Trade magazine and on www.dialogueonline.info.