Mark Wetjen, Managing Director and Head of Global Public Policy, The Depository Trust & Clearing Corporation
Globalization looks likely to continue despite ongoing strained public confidence in the financial system caused by the global financial crisis. However, the near-term impact of the current political environment could make market infrastructure more complicated and costly for market participants.
At the heart of this concern is that policy decisions are increasingly being made with greater parochial interests in mind, and that some countries may try and assert greater control over market structure used by entities domiciled in their country and the rules that govern them. However, cross-border trading will not go away, making it all the more important that we take a fully global approach to market infrastructure.
For example, political agendas may impact the global nature of market structure as the clearing house equivalency debate continues. A host of factors will determine where market participants will be able to clear their derivatives contracts, but it is highly unlikely that a clearing house located in the UK will become inaccessible to firms located in the EU-27 and the same is true of the reverse.
Draft legislation in the EU envisions that Europe's financial market regulator, the European Securities and Markets Authority (ESMA), will directly supervise all critical European-based market infrastructures that provide clearing, data reporting and financial benchmark services. The ECB recently endorsed this type of approach, and in order to be able to carry out its EU-wide supervisory role effectively, ESMA will also co-ordinate the work of national competent authorities (NCAs) to ensure harmonisation. As a result, the impact on market participants – unless they pull out of the UK market altogether – will be the additional cost of managing compliance within the UK, as well as at the national and regional level in the EU.
The largest market participants have a worldwide presence that requires the services of global market infrastructures in order to serve their own clients around the world. Market infrastructures that can provide intermediary services to help global firms support their clients, regardless of where they are placed, can provide a more centralised view of risk and exposures, including counterparty, credit and operational risks. Also, global market participants are continuing to search for efficiencies as they face increasing economic pressures due to continued low interest rates and regulatory compliance requirements. By working with these global market infrastructures, these challenges can be addressed. However, we are seeing some market infrastructures operate on a regional basis, which can introduce operational complexities for global firms and exacerbate fragmentation of markets for various assets.
Finally, the introduction of new technologies into market structure also supports a global model. The reach of new technologies transcends national borders, and they are being used by global financial market infrastructure providers to further increase efficiencies for market participants. For example, many public cloud providers today serve a truly international client base, while blockchain technology can operate on an international scale supporting a vast community of users.
Further, the global co-ordination to advance blockchain technologies through organisations such as the Hyperledger Project, hosted by the Linux Foundation, is yet another example of how industries are harmonising efforts and attempting to move away from the siloed approach to market structure that existed previously. Global market infrastructures are perfectly placed to contribute to the global standards, which will support the development of enterprise-grade distributed ledger technology frameworks.
In short, the political environment may increase the complexity of the regulatory landscape and the cost and complexity of complying with new rules on market structure. However, due to the international nature of financial markets and its participants, as well as other drivers such as cross border co-ordination to create industry-wide standards and new conduct principles, ultimately globalization and the subsequent demand for global market infrastructures will continue.
This article first appeared on Global Investor/ Futures & Options World (FOW) on October 24, 2017.