Extending the use of exchange trading beyond the most liquid fixed income, currencies and commodities (FICC) products is not a policy option that has found notable support, a senior official at the UK Financial Conduct Authority (FCA) has acknowledged.
| An important piece of the puzzle is missing at a time when ESMA has to make its first assessments|
Speaking at the Futures Industry Association’s International Derivatives Expo (IDX) in London on Tuesday, FCA head of market infrastructure and policy Edwin Schooling-Latter indicated that authorities would be unlikely to extend mandatory exchange trading beyond what is required under G20 derivatives market reforms.
“There really isn’t an appetite for official action to force more FICC markets onto exchange platforms, so clearly we are going to do this trading mandate in some of the most liquid derivatives, but outside that there is no appetite for further mandating of particular market structures,” said Schooling-Latter.
The comments come as the BoE prepares to publish the final report from its long-running fair and effective markets review (FEMR) on Wednesday, which has set out to restore trust in FICC markets in the light of recent scandals such as Libor and FX benchmark manipulation.
Responses to an October 2014 consultation paper on FEMR indicated that while exchange trading in futures might have eliminated some of the opportunities for manipulation that existed in OTC markets in the past, it is not suited to all FICC products.
“There is, of course, a G20 mandate to bring the most liquid of derivative contracts onto electronic platform trading, so this isn’t a no-action from authorities,” said Schooling-Latter. “There is a question about whether we should attempt to do the same thing in other markets as well.
“Responses to the consultation suggested that now wasn’t a good time to do that. One of the reasons for that is there are a lot of market initiatives that are moving in that direction anyway. Already in FX, platform trading is steadily growing in market share.”
However, implementation of the G20’s trading commitment, which required in 2009 that all standardized OTC derivative contracts be traded on exchanges or electronic platforms where appropriate, has proven problematic, largely due to a disconnect in timing between US and European authorities.
In the US, swap execution facilities (SEFs) came into existence in October 2013, with the first products mandated to trade on SEFs in February 2014. In Europe, however, the trading mandate falls under the review of the Markets in Financial Instruments Directive (Mifid) II, which won’t come into force until January 2017.
With the trading mandate only in force on one side of the Atlantic, market participants have been incentivized to avoid trading with US counterparties where possible, so as to continue trading as normal.
“Our implementation of rules ahead of other jurisdictions has presented a challenge,” said Timothy Massad, chairman of the US Commodity Futures Trading Commission (CFTC), speaking in a keynote address at the IDX conference on Tuesday.
“In a highly mobile, global market, it comes as little surprise that traders will seek to avoid the burden of dealing with new rules, if they have a choice. So we look forward to working with other jurisdictions as their rules come on line to harmonize where possible.”
In Europe, regulators face a separate timing challenge as the trading obligation is linked to the clearing obligation, but they are embodied in separate regulations.
The first wave of mandatory clearing is expected to be implemented under the European Market Infrastructure Regulation early next year.
Under Mifid II, the European Securities and Markets Authority (ESMA) would be expected to determine whether a cleared product should also be traded on a regulated platform through a liquidity test, within six months of the clearing obligation being adopted by the European Commission.
Speaking in a separate keynote address on Tuesday, ESMA executive director Verena Ross highlighted the problem with ESMA being required to develop technical trading standards within such a short time period, possibly even before Mifid II is implemented.
“ESMA will not have data available to check how liquid the relevant derivative classes are post-imposition of the clearing obligation and will not be able to assess the arrival of the new organized trading facilities,” said Ross.
“This means an important piece of the puzzle is missing at a time when ESMA has to make its first assessments.”
She concludes: “We consider it necessary to find a different timing solution for dealing with the trading obligation.”