This blog is the first in our series exploring the often overlooked customer segment within the RegTech market – Financial Market Infrastructures (FMIs) providers.
We begin to explore the nuances, which provide challenge and potential in equal measure, for those RegTech firms willing to accommodate the unique needs and requirements of this area of the market.
This introduction aims to help RegTech firms begin to realise the opportunity to reach a new customer base, as well as the high-pressure regulatory regime they are subjected to and the close relationship FMIs have with the rest of the world of finance.
What are FMIs?
FMIs are key components of the financial system, delivering services critical to the smooth functioning of financial markets. They act as coordinators and connectors, bringing the network of market counterparties together. They cover a wide range of functions from trading liquidity, to netting of exposures, counterparty risk management, settlement obligations, payments, safeguarding of assets.
- FMIs have a central role in a financial market – it is a point of convergence, and therefore it has a particular responsibility to a large number of market players and investors.
- Any new initiative or new investment undertaken by an FMI needs to be well thought through, as it will have an impact on a large number of external parties, and customers and its implementation will require fairness and transparency. This also means that FMIs make decisions for the long term.
- FMIs are often considered as utility service providers – their services are relied on by a large number of users, need to be accessible at all times, and resilient.
Types of FMIs
We have looked at the following four main categories of FMIs:
These include traditional national exchanges like The London Stock Exchange, Deutsche Börse, Euronext, the Australian Stock Exchange (ASX), the Japanese Exchange (JPX), Nasdaq to name just a few. It also includes large global derivatives exchanges like ICE, CME. These exchanges are heavily regulated in the various jurisdictions they operate from.
Post-trade market infrastructures:
Clearing houses (or Central Counterparties, CCPs): these infrastructures manage counterparty risk and step in the middle between the two counterparties to the trade. Examples of clearing houses are The London Clearing House (LCH), which is part of the London Stock Exchange Group. Eurex Clearing is the clearing house for the Deutsche Börse Group, Depository Trust & Clearing Corporation (DTCC) is the main US clearing house.
In several markets, the clearing house is part of the local exchange group – this is the case in Australia (ASX), and in Brazil (B3), Thailand Clearing House is a subsidiary of the Stock Exchange of Thailand (SET).
Due to the central role they are playing, and to their critical risk management function, all clearing houses are regulated.
It is worth noting that not all markets have a clearing house – this depends on the level of sophistication of the market.
Central Securities Depositories (CSD): handle settlement and custody of assets. CSDs are key to ensure the protection of clients’ assets is regulated infrastructures and most markets have a local CSD.
Euroclear is the CSD for the UK market, as well as other European markets including Belgium, France, Ireland, Sweden. Clearstream, which is part of the Deutsche Börse Group, is the CSD for Germany and Luxembourg.
Trade repositories: were created to address the regulators’ requirement for transparency in derivatives markets (Dodd-Frank, EMIR requirements and their equivalent in the main derivatives markets). This requirement is extended to securities financing transactions in Europe (SFTR). Trade repositories collect and maintain the records of derivatives transactions, and securities financing transactions.
Examples of trade repositories include DTCC Global Trade Repository, UnaVista (part of the London Stock Exchange Group).
Trade repositories are regulated market infrastructures.
Regulations from FMIs
FMIs are impacted by many regulations and various types of regulators depending on:
- Which markets they operate in – domestic and/or international
- What financial instruments they deal with
- Whether they are impacted by regulations affecting third party countries
- Whether they are part of emerging market infrastructures who look to European and US regulators to adopt best practices in their own market.
FMIs and RegTech vendors
There are ample opportunities for tech vendors to work with FMIs – how best can these be approached?
FMIs are very heavily regulated and compliance with the regulations is their top priority. If they don’t, then they can no longer continue to operate. Because of this, FMIs are heavily reliant on technology to ensure they can service the markets which require scale, consistency and resilience.
While some FMIs have developed their own technology, and are selling their technology services to other infrastructures, this remains the exception. Technology is not part of the core competences of FMIs. They need help from technology companies to remain agile, competitive, and up to date with the latest technology developments. In-house developments are not an option in a fast-moving and increasingly competitive environment.
We understand both the regulatory and technology landscapes and have previously been able to help other RegTech vendors tap into new and adjacent markets. Get in touch with the team for a free initial consultation to understand if we can help you do the same here.