Part 1 – The current situation, as evaluated by the WFE
What is the WFE and what do you do?
The WFE is the global body that brings together the exchange and Central Counterparty clearing (CCP) community. We represent that community to global policymakers; we are the single voice that speaks to the organisations that deal with financial regulations globally. We also work to bring the industry together to create global standards in areas like cybersecurity and sustainability. WFE is a venue for collaboration.
What are the latest WFE initiatives?
On the one hand, we are responding to what is happening in the regulatory environment; this is driven by the policy maker community. So on the regulatory side, we are working on the finalisation of the G20 post-crisis reforms primarily, including the coherence of those regulations across borders.
In terms of standard setting, sustainability is of crucial importance, as is operational resilience. On the other hand, we are setting forward-looking priorities together with our membership; that might be in enterprise risk, crypto market structure, cybersecurity – working with our members to develop the industry thinking and new standards.
We are also very involved in educating the membership on issues of importance to them. While European and large developed markets are very familiar with MiFID II, we have been helping some of our members in developing markets to understand what issues like the MiFIR share trading obligation or the European Benchmark Regulation means for them. These are some of the areas where we work with our members to understand their needs and act as a resource to help them address their strategies and processes.
What are the main regulatory topics WFE members are dealing with?
We look at the international regulatory framework coming out of the global standard setters (IOSCO, CPMI, Basel Committee). We also engage where there are important local regulations with a cross-border aspect. For example, we have responded to the initial consultation on the revisions to EMIR that concern cross-border CCP supervision. From time to time, some jurisdictions are thought leaders in a particular area, and we respond to their consultative processes if we think we can influence the global debate for the better through the national process. One example would be the FCA innovation sandboxes initiative.
We are also dealing with the current debate around market data. We are working with our members to help explain its importance to policy makers, why it is valuable and how it is produced. To that end, we have explained that licensed market data is a ‘joint product’ with trading – not some ‘nice-to-have’ by-product. The reason we all have such high quality market data is because of all the work that exchanges do from listing businesses, market surveillance, through to connectivity. It is all part of ensuring that market data can be relied upon by market participants as they design their strategies.
In the US, market data prices must be fair and reasonable. In MiFID II, there are similar provisions – they must be under a reasonable commercial basis. At the moment, the question of market data is also part of ESMA’s review of the implementation of MiFID II. It is up to us to explain why it is fair and justified that these costs must continue to be based on market forces rather than regulatory fiat.
More generally at WFE, we are supportive of markets that are transparent, democratic and regulated. The key role of exchanges is to ensure that price formation happens in a way that is non-discriminatory, and this transparency is to the ultimate benefit of the end user of financial services. We keep a close eye on regulatory matters to do with how the implementation of MiFID II has succeeded (or not) in terms of shifting volumes to lit markets.
Where do you think technology can help address these regulatory challenges?
Technology is at the core of the businesses of exchanges, CCPs and all financial services companies. In terms of interaction with regulation, technology is both a push- and pull-factor. On the one hand, policymakers must respond to technological developments with regulation that is fit for purpose. What we advocate is that this regulation should be technology-neutral, but of course it should keep pace with a changing world. On the other hand, technology is also a solution for compliance with regulations. What technology can offer is a measure of efficiency and standardisation in terms of compliance with regulations.
What is your view on the current technology structure of exchange groups and CCPs?
We have certain technology leaders within the membership that expend great resources in R&D, and they will sell their platforms to other members. Most market infrastructures will also work closely with the well-known software, hardware and web services companies for various purposes. As technology progresses, the necessity of new partnerships becomes more and more important.
There are of course the innovative, disruptive FinTech-type providers. In order to be successful, partnerships with these firms require adopting an entrepreneurial mindset. When you are innovating from scratch, initiatives fail, it is inevitable. What we have seen with our membership, is that rather than using a very disruptive technology that would immediately transform their core operational platforms, they will do it in a silo, partnering with a FinTech and see how that eventuates. Market infrastructures must keep pace with the advances of technology, not least because they are responsible for the surveillance of their markets; if they don’t have technology that keeps up with market participants, it would be more challenging to ensure market integrity.
Sign up to our mailing list to be notified when part 2 of this article is published.