The Investment Management Association (IMA) has attacked the lack of consideration for buy-side firms by regulators.
In its response to a consultation on the exchange trading and standardisation of OTC derivatives by the Committee of European Securities Regulators (CESR), the UK’s buy-side industry body said, “Regulators are able to contact buy-side firms, corporates, and the various trade associations that represent these groups, but make virtually no effort to do so. We urge regulators to try and correct this imbalance.”
CESR, which is mandated to unify regulation across Europe, is using the consultation to gather information for a European Commission (EC) review of MiFID, to which CESR has already provided technical advice. It will also be used to support the EC’s proposal for legislation, expected in 2011, to increase transparency on the derivatives market by promoting the use of standard derivatives contracts and central counterparties for clearing contracts to reduce risk. The EC legislation echoes targets for trading and clearing agreed by the G20 countries for the end of 2012.
A lack of transparency resulted in firms being unable to identify their exact positions when OTC contracts such as credit default swaps were being unwound during the financial crisis.
In its response to the consultation authored by
Jane Lowe, director of markets, the IMA was broadly supportive of standardising OTC contracts if they become genuinely fungible. However it attacked the consultation process for its lack of consideration of buy-side firms and end users of financial products.
The IMA, whose members are responsible for some £3 trillion in assets under management, suggested that buy-side feedback on standardisation would be limited because the development of centralised counterparty (CCP) solutions by clearers – regarded as critical to the standardisation of OTC derivates contracts – was ongoing. “Sufficient time should be allowed to implement new systems: the buy-side of the market has to wait until the sell-side and the CCPs have completed their work before making their own decisions. We do not see anywhere that this timing mismatch has been recognised or addressed,” the IMA said.
The trade association also dismissed the proposals for exchange trading of OTC derivatives for their lack of detail on migration. “The assessment does not articulate how CESR sees the process to bring contracts into exchange trading occurring in practice,” the IMA’s response observed, adding that references to “exchange trading” for OTC derivatives in the CESR consultation do not clearly state whether an exchange platform only would be available for trading, “Or whether, as with cash equities, a range of different platform types may be offered.”
In response to CESR’s suggestion that trade information should be supplied multilaterally, the IMA warned against borrowing from current practice in the equities markets. “Fragmented data offers relatively speaking so little value that to set up a model that follows this would be an expensive and pointless exercise,” its response asserted. The IMA also said that the systematic internaliser regime, which under MiFID allows sell-side firms to cross equity trades internally, did not provide an appropriate model for OTC derivatives trading, and emphasised that crossing networks and organised trading venues must be considered as very different types of trading mechanism, due to the lack of transparency in the former.
Other respondents also offered strong opinions on the OTC market and the possible solution on offer. Market maker Optiver, which engages in very little OTC trading, said that motivations to trade OTC included regulatory arbitrage, tax evasion, allowing flexibility of mandate and a lack of transparency which prevents competition in pricing. It argued that OTC flow should be regulated and run via centrally cleared multilateral trading venues.
The French investment management body, the Association Française de la Gestion financière took a softer line, suggesting that standardisation of processes such as matching infrastructure, trade repositories and CCPs would be required along with the standardisation of the products with volumes and maturity. “Down this road, the asymmetry between sell-side and buy-side would seriously decrease,” it predicted.
A number of banks and industry bodies including The International Swaps and Derivatives Association, Association for Financial Markets in Europe, the Associazione Italiana Intermediari Mobiliari, the British Bankers’ Association, and the Nordic Securities Association offered a joint response in which they argued that mandatory requirements for standardisation or use of trading platforms for all products could “negatively affect market participants and markets in general”.