Derivatives market leaders say infrastructure, cross-border access are top issues

FIA's International Futures Industry Conference kicked off on 16 March with in-depth discussions about market access and market structure issues. These included the rise of retail investor participation, the impact of Brexit on cross-border trading and clearing, international access to financial markets in China, and market infrastructure issues.

Here are some of the highlights from the first day of Boca-V:

Brexit and cross-border access

Mairead McGuinness, the European Commissioner for Financial Stability, Financial Services and the Capital Markets Union, discussed market fragmentation and cross-border policies for the European Union in the wake of Brexit. She said that "transparent and liquid marketplaces are the pillar of strong and efficient European capital markets," and that the EU will remain open with equivalence decisions and deference being an important part of the regulatory framework.

However, she pointed to the European Commission's recent time-limited decision to consider UK CCPs as equivalent under EMIR through June 2022 and that the volumes at UK CCPs are "eye-watering."

McGuinness said an EC working group that includes industry representatives is currently examining possible transfers of cleared derivatives from the UK, where the majority of transactions denominated in European Union currency is outside the EU. She added that the EC will carefully consider any ESMA advice following the analysis of UK CCPs and their systemic importance.

"Change is coming," she said, "but the extent of that change is not yet clear."

In separate remarks later in the day, London Stock Exchange Group CEO David Schwimmer, said that cross-border access is a vital part of modern derivatives markets. "We prefer markets have less fragmentation rather than more fragmentation," he said. "Particularly as we work through the disruption of the pandemic, it's important to have openness of capital flows to facilitate a global recovery." He also expressed optimism that LSE's London-based clearinghouse LCH would see a long-term equivalency arrangement with European regulators.

Retail participation

Adena Friedman, president and CEO of Nasdaq, was optimistic about the rapid recent growth of retail participation in US equity markets. "We welcome investors to interact with our markets," she said. "We just need to make sure we create the right environment for them to do it safely.

Those comments were echoed by Jeff Sprecher, chairman and CEO of Intercontinental Exchange. He noted that the "democratization" of access is generally good for all markets, and said recent equity market trends may "foreshadow" similar retail participation in commodity markets. However, he noted the controversy around the trading of Gamestop has revealed what he calls a "flawed" regulatory structure that prevents liquidity from finding a "natural home."

Edward Tilly, chairman and CEO of Cboe Global Markets, said education and frank discussions of "suitability" are crucial parts of protecting market integrity as well as protecting investors themselves.

"At the end of the day, how do we prepare and arm new retail investors with the best way to access markets for their individual needs, that are different than institutions?" he asked.

Uncertainty around China policies

The importance of Chinese derivatives markets is clear based simply on how the industry now discusses the nation in 2021, said Loh Boon Chye, CEO of Singapore Exchange. "About 20 years ago, people talked about Asia as one block. Ten years ago it was Asia ex-japan, and now they will talk about Asia ex-China," he said. "That is a sign of how China has established itself as a robust, stand-alone market."

Michael Peters, CEO of Eurex, said that China continues to be "a great marketplace with huge potential." He noted, however, that market access for foreign investors is restricted, and that creates challenges for the global derivatives community.

Those concerns were also voiced by ICE CEO Jeff Sprecher, who said it's difficult for his firm to manage and plan for growth in China when the policy environment is unclear at present. "I don't know what the right balance for that is right now, as [the US] relationship with China is so fluid. And I wouldn't want to be on the wrong side of the bet right now," he said. "Are we going to work together? Are we going to be frenemies, or are we going to ignore each other and have a bit of a cold war?"

Terry Duffy, chairman and CEO of CME Group, agreed that the key question now is not whether China will open up its markets, as discussions on this topic have been ongoing for years. Rather, the important issue is "what will regulation of those open markets look like," Duffy said. "What are the rules of the road going to be?" he asked. "We all need to know them in order to move forward."

Market structure issues

Beyond market access issues, panelists and speakers at Boca-V also explored various market structure issues including:

Operational efficiency: In opening remarks, FIA President and CEO Walt Lukken discussed the results of a recent industry survey that showed expectations for increased trading volumes in 2021 -- and as a result, an increased focus on market infrastructure issues. "While the clearing system has proved itself resilient,these events have uncovered some areas in need of modernization to ensure trades are properly risk-managed and settled," Lukken said. "If we truly want to improve as an industry, we must  address such issues head-on – even if they aren't easy."

Margin volatility: Alicia Crighton, global co-head of futures and head of OTC and prime clearing businesses at Goldman Sachs, said connecting clients and clearinghouses was challenging in 2020 amid record-setting exchange volumes and "epic levels" of margin increases. Crighton noted that margin issues have become an important focus for the US Commodity Futures Commission's Market Risk Advisory Committee, on which she serves, and called for continued improvements in this area.

Post-trade processing: Erik Mueller, CEO of Eurex Clearing, noted that while cleared derivatives markets were resilient during the pandemic-related volatility of 2020, some areas of improvement have been identified in regards to post-trade processing. He noted that work in this area is "an industry task, and no single party can make these improvements." In related comments, Edwin Schooling Latter, director of markets and wholesale policy at the UK's Financial Conduct Authority, noted that there is increased focus on the benefits of real-time processing, reporting and risk management including collateral transfer. He said it is not efficient for markets to be open around the world nearly seven days a week while collateral sometimes "can only move Monday through Friday, 9 to 5."

'Futurization' of OTC derivatives: Michael Peters, CEO of Eurex, said that his firm continues to pursue the "futurization" of OTC derivatives. He said the exchange's total return futures, which provide the same equity market exposure as total return swaps, have been very successful, and he added that Eurex plans to bring out three more of these contracts this year to help customer migrate their exposures into a cleared environment.