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Daryl McDonald, Jefferies

Jefferies, a EuroCCP client, is a global investment bank that has been present in Europe for more than 25 years. The company provides a full range of investment banking, sales, trading, research and strategy across equities, fixed income, foreign exchange, futures and commodities, as well as asset and wealth management in the Americas, Europe and Asia.

In this Q&A with @DTCC, Daryl McDonald, who is responsible for Jefferies Global Equity Execution Strategy, talks about topics including his firm’s strategy for the equities markets, the reasons Jefferies consolidated equities clearing with EuroCCP and his outlook for the European equities market.

Jefferies has been active in the European cash equities markets for some time now and is an established broker. How has your European business developed?

The development of our European equities business has centered on building our research product and expanding our sector coverage, enhancing the distribution and execution capabilities of the business, and developing new business lines within the equities franchise. The most significant recent development was our acquisition of Hoare Govett earlier this year, which enhanced our corporate brokering and mid- and small-cap capabilities.

What are your key business priorities?

In equities execution strategy, the focus is on enhancing our execution capabilities and providing efficient access to liquidity, strategically positioning the business ahead of regulatory reform and market structure change, as well as continuing to engage and inform our clients of developments in this space.

Obligations imposed on the buyside require this community to be sophisticated in how they monitor execution quality and broker execution capabilities, and justify their choice of broker. This means their awareness of market structure changes and appetite for information in this space has significantly increased in recent times.

Jefferies has direct access to major European trading venues. When did you decide to get direct membership to cash equities central counterparties (CCPs)?

For a number of years, wherever it has been possible and beneficial to us and our clients, we have maintained direct memberships with CCPs. However, interoperability means we can now choose our preferred partner in this space.

You have decided to consolidate your cash equities clearing with EuroCCP. What criteria did you use to select a CCP?

We assessed various criteria, including the breadth of market and venue coverage, clearing and settlement fee structure, ownership structure of the clearing house, the strength of the operational support, and looked at margin requirements and calculation methodology. Over many years, DTCC has built a track record in the U.S. and since entering Europe has strongly advocated the importance of introducing competition to the region, a sentiment we share.

What convinced you that interoperability was right for European cash equities clearing?

European market structure is complex and presents unique challenges to firms operating in the region. While there are a number of similarities to the U.S., there are real differences in the post-trade area.

Interoperability is helping enhance execution quality. Being able to consolidate and net orders, which have been executed across multiple venues, significantly improves margin capture and ultimately benefits the end investor.

What benefits has Jefferies seen so far?

The benefits are primarily cost efficiencies, both on the explicit clearing charges and also through margin efficiency. We have also benefited from realizing process efficiencies throughout a number of the bank’s support areas due to the consolidation of our clearing. In addition, interoperability has given us greater control by being a direct participant.

Is interoperability worth the effort and investment?

In answer to both, yes. Interoperability is fundamental to delivering a more efficient market structure in Europe, and the benefits will only increase as this space evolves.

What is your expectation of the evolution of European clearing in the medium term?

Although progress has been relatively slow, competitive clearing is now a reality in Europe. However, I do believe that we have reached an impasse and further regulation is needed to provide the impetus for the introduction of genuine Europe-wide interoperable clearing.

What is your view of the current and likely future state of European cash equities markets?

With volumes in August down 50% on the same month in 2011 and 20% year to date, as of the end of August, and with Europe now representing around 13% of global turnover compared with 30% six years ago, markets are challenging and will continue to be for the foreseeable future. Against this, I believe sustainability will be a key theme in the future. Can Europe sustain the number of trading venues, CCPs and other post-trade service providers? The answer is probably no and so we are likely to see further consolidation in the industry.

What do you see as the main regulatory challenges for European cash equities markets?

There is uncertainty in a number of areas, including the future of crossing networks, the application of electronic and automated trading, high-frequency trading and post-trade transparency – and this uncertainty creates problems.

I do believe that increased collaboration and communication among market participants, regulators and politicians – which benefits all parties – will help create a market structure that is fit for purpose.

Do you think European cash equities markets will be safer in 12 months’ time when the European Market Infrastructure Regulation (EMIR) is in place?

This is obviously one of EMIR’s main objectives. By improving transparency, through increased reporting requirements, and with increased levels of activity being cleared centrally, we hope this objective is met so that Europe has a strong regulatory and structural platform in which markets can thrive.

Do you expect confidence to return to the cash equities markets?

Uncertainty continues to pervade the market, with concerns about the macroeconomic environment and the direction of future regulatory reform at the fore. Although this may resemble a roller coaster ride in the short to medium term, I am cautiously optimistic about markets regaining a more even momentum in the longer term.@