By removing derivatives market infrastructure open access provisions in MiFID II, MEPs risk turning back the clock on developing a competitive single market in Europe, warn market participants.
The European Parliament’s Economic and Monetary Affairs Committee (ECON) has back-tracked substantially on the European Commission’s proposal to open up access to trading and clearing infrastructure, with the aim of encouraging competition in listed derivatives.
The MEPs’ final text eliminated open access requirements for listed derivatives, restricting it to equities and bonds only. It also eliminated an article prohibiting owners of key financial benchmarks from discriminating against to whom they licence their products.
Without such provisions, central counterparties could be refused access to clear for certain trading venues, while markets offering listed derivatives trading could also be prevented from establishing relationships with multiple clearing houses.
“This is effectively a step backwards in efforts to create a single, competitive market in Europe,” said Diego Valiante, research fellow at the Centre for European Policy Studies. “The most optimal post-trade structure for listed derivatives is one that allows collateral to be fungible and encourages central counterparties (CCPs) to compete on the value-added services they provide.”
Exchanges argue that if multiple CCPs cleared for the same market, open interest in specific products would be fragmented across multiple clearers, which would reduce the ability to net positions and reduce the margin that needs to be paid. While CCP interoperability could solve the issue, the long duration of some derivatives contracts could mean such arrangements create new risks.
“Provisions on open access
that were first proposed by the European Commission conflict with the G-20 agreement on improving financial stability,” said Mark
MacGann, senior vice president, head of European government affairs and public
advocacy, NYSE Euronext. “Fragmenting
clearing in listed derivatives would significantly reduce the scope for netting
outstanding financial exposures, leading to an increase in gross exposures,
which is contrary to good systemic risk management.”
If ECON’s proposals are adopted, competing derivatives markets will struggle to pose a commercial threat to NYSE Euronext’s Liffe or Deutsche Börse’s Eurex markets, which combined control the vast majority of exchange-traded derivatives in Europe. Market observers suggest the debate on open access has become overly-politicised and MEPs have succumbed to exchanges’ desire to protect revenues.
“Exchanges should not have the
weight of lobby that they have. In Europe it appears as though people still
believe exchanges are representing the interests of the market, as opposed to
their shareholders,” said Niki Beattie, managing director at consultancy Market
Structure Partners. “There are difficulties in establishing interoperability
for derivatives but it is possible to find other solutions, such as allowing
market participants to choose where netting occurs. We need to be more creative
and have other solutions rather than taking steps to protect exchange
monopolies.”
Not all ECON members were supportive of the changes but sources say the proposals were backed by the European People’s Party and Group of the Progressive Alliance of Socialists and Democrats, which hold a majority in the Parliament.
The lack of open access has already hampered London Stock Exchange-owned multilateral trading facility Turquoise from gaining a foothold with the derivatives venture it launched last year. Turquoise was denied the chance to base products on EURO STOXX, the hugely popular set of pan-European indices owned by Deutsche Börse, and was prevented by offsetting the margin in FTSE 100 index futures against the open interest held by NYSE Liffe in the same product.
A report released yesterday by the Centre for the Study of Financial Innovation (CFSI) looking at safety, efficiency and competition in Europe’s post-trade market, urged the European Commission to conduct an investigation into the pros and cons of open access for CCPs in the listed derivatives market. The CFSI paper said the investigation should run concurrently with an examination into whether open access can be safely applied for listed derivatives.
Moreover, ECON’s text lets trading venues deny CCPs access for clearing equities if they think, “such access would threaten the smooth or orderly functioning of markets”, based on technical standards established by the European Securities and Markets Authority.
This could potentially offer exchanges – that have so far resisted industry efforts to offer more than one CCP for clearing equity trades – another means of stalling progress on interoperability.
“The MEPs’ stance on clearing is very disappointing. It’s a step backwards in efforts to create a single competitive market in Europe,” said Beattie. “At this rate we will never reduce costs in cash equities.”