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 books."
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 systemic risk.
"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.
While 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.