Geographically speaking, Sweden might appear to be at the edge of Europe, but when it comes to the major developments impacting the European derivatives markets, it’s right in the middle of the action.
FIA went to Stockholm at the end of May in the first of its series of European forums this year with industry experts discussing issues and trends in the listed derivatives markets. Several topics dominated the panel discussions at the Nasdaq-hosted event, including operational efficiency, cyber resilience, EMIR 3.0 and the Capital Markets Union.
Operational efficiency
Panellists discussed the importance of improving efficiency in automation and trade processing at a time when volumes are increasing in the derivatives markets, partly due to geopolitical events but also because of structural changes such as a rise in the number of mini and micro contracts and the increasing use of algorithms, which splits trades into smaller transactions.
“There is an increasing trend in the number of lots that are traded in global markets. We don’t expect this trend to stop and in all our businesses we need the system capacity to be able to cope with these volumes,” said Helen Gordon, JP Morgan’s global head of clearing product development and strategy. “What these volumes show us is that there is no option to be manual…having resilient and high levels of automation in processes is critical,” she said.
“At the same time, there is a focus on T+1 settlement. We're also seeing in India, for example, a move to voluntary T+0 settlement. Automation, resiliency, capacity and scale are absolutely fundamental now,” she said.
The panellists discussed the importance of initiatives like DMIST, the Derivatives Market Institute for Standards, an independent body established by FIA two years ago that brings together participants from all sides of the cleared derivates industry to develop consensus-driven standards to make the markets more efficient and resilient.
“Businesses can invest in technology and solutions, but standardisation across the industry helps people move a lot faster,” said Kirston Winters, chief risk officer at post-trade vendor OSTTRA. “Volumes are going to keep going up and there are many firms that do not have the same budgets as the larger players. We need to make it as easy as possible for all firms to meet standards and be efficient. We're doing well so far, but we need to keep pushing and trying to take it further over time.”
The panellists highlighted cyber resilience as another key area where the industry benefits from greater collaboration. Following a ransomware attack last year on ION, a derivatives technology vendor widely used by financial institutions globally, FIA created an Industry Resilience Committee, made up of clearing firms, vendors, exchanges and CCPs. The IRC aims to identify the priority tasks firms need to perform during an outage as well as standards for reconnection following an incident.
“When a crisis hits, whether it's a one-hour or two-week outage, it's important to be able to go straight to a runbook,” said Winters. “A runbook would tell you what you can communicate to who and what you must and mustn't do, so you're not considering those questions in the middle of a crisis. This is where FIA can come in and bring participants together to create best practice standards.”
While the EU’s Digital Operational Resilience Act (DORA), which has entered the last year of its implementation period, seeks to standardise the reporting of incidents, panellists agreed that it presents a high level of prescriptiveness and a particularly challenging timeline for market participants.
EMIR 3.0
In February, following negotiation and political agreement with the EU Parliament, the Council of the European Union released the final text of EMIR 3.0, which is expected to be published in the EU Official Journal by the end of this year.
One of the central objectives of EMIR 3.0 is to encourage clearing in the EU and improve the attractiveness of EU-authorised CCPs. It also aims to strengthen EU strategic autonomy by requiring clearing members and clients to hold an active account at EU-authorised CCPs.
The active accounts requirement has proven to be a divisive issue with many EU-based clearing members concerned about increased costs through the splitting up of portfolios and the loss of operational and financial benefits through netting. They argue that it will put them at a competitive disadvantage compared to third-country firms who will remain able to transact in global markets without restrictions.
“From a business point of view, you don't want to split your collateral pool, but you do not get the full coverage of instruments within the EU, so you will have to do this,” said Erik Einerth, a senior expert at the Swedish Securities Markets Association. “Forcing members to start using another CCP will probably hurt small to medium-sized members more than larger members. For smaller firms, things like connecting to a new CCP in a short period of time could have a huge impact with big costs.”
On 10 June, European CCP Nasdaq Clearing expanded its OTC derivatives clearing service to include interest rate swaps denominated in euros. It already clears IRS in Swedish krona and says expanding to other currencies will allow customers to net more positions within a single clearer to save on collateral.
“Active accounts has not been popular with market participants, but the requirement is here, and we are hoping that this is going to lead to a shift of liquidity into the EU in due course,” said Ida Nordenström, Nasdaq’s head of legal clearing, commodities and European data office of General Counsel.
“It is important for local CCPs to have control to prioritise the types of products that are important to this market, to have control in case of a cross-border default, and also for regulators to have control in a crisis situation,” she said.
Other aspects of EMIR 3.0 got a more positive reception from panellists, including measures to simplify the procedures for CCPs when launching products and changing risk models.
“Historically, it has been cumbersome for CCPs to change risk models, to be agile, to react to market conditions and to introduce new products to market. It has been an opaque process, both in terms of the timelines and what needs to be included in approval processes,” said Nordenström. “EMIR 3.0 sets out tighter approval deadlines for regulators and, within Level 2 detail, the type of documents and information that CCPs need to submit in that process.”
Capital Markets Union
Other topics under discussion included the EU’s progress in advancing the Capital Markets Union. The CMU aims to create a single market for capital across the EU with investments and savings flowing across its borders. EU leaders believe that mobilising private cash will help fund a transition to a green and digital economy and boost the EU’s competitiveness.
With 27 capital markets and a maze of different securities laws, taxes and accounting, panellists agreed that there is still much work to do and highlighted the divisions that remain among finance ministers over handing more powers to ESMA to directly supervise cross-border financial firms.
Panellists also discussed Nordic success stories and how Sweden has become the poster child for EU capital markets due to its well-developed capital markets, large number of IPOs and listed SMEs, public and private pension funds invested in capital markets, and an approach to prudential financial investment at all levels of society.
FIA will continue its European events with a forum in Frankfurt on 9 October. The forums provide an opportunity for discussions to take place between regulators and the industry, and for participants to engage in productive conversations about the issues affecting their markets.
Visit FIA Flickr to see photos from FIA Forum Stockholm.
Visit FIA.org/events for more information on events taking place this year.
