FIA went to Frankfurt on 9 October for the second in its European forum series this year. The event consisted of several panels with speakers from across the derivatives industry, a keynote address from Thorsten Pötzsch, chief executive director of securities supervision at German regulator BaFin, and fireside chats with Robbert Booij, CEO of Eurex Frankfurt, and Christoph Hock, head of tokenisation and digital assets at Union Investment.
Several topics shaped the discussions:
Simplifying EU regulation
From the morning’s opening keynote address to a panel discussion on the Capital Markets Union, the message from speakers was clear – the sheer volume of rules in the EU is creating a major burden for the industry and impeding innovation.
New frameworks are lengthy and complex, requiring significant resource mobilisation, several speakers said, pointing to DORA (Digital Operational Resilience Act) and MiCA (Markets in Crypto-Assets) as prime examples.
MiCA alone requires 52 legislative acts to fully explain the scope, something many believe complicates the regulatory landscape.
“Drafting this legislation has already taken up a lot of resources and applying it might be even more difficult,” said BaFin’s Pötzsch in his keynote address. “My colleagues and I often think that we could make better use of the time and energy that goes into such work.”
While regulation is crucial for market integrity, over-regulation stifles efficiency, Pötzsch said, noting that the EU needs to cut unnecessary red tape and focus more on simpler and clearer rules. Rather than a regulatory straitjacket, rules should set principles pointing in the right direction.
“We should strive for less complex regulation,” he said. “We should not attempt to regulate every little detail. Rather, our regulation should address the big problems and set clear guardrails that would give everyone involved a sense of security.”
CMU: Centralising supervision
Simplifying regulation and supervisory convergence were two topics that came under the spotlight in discussions on the future of the Capital Markets Union and Mario Draghi’s recent report on Europe's competitiveness. For a primer on Draghi’s report, read the September MarketVoice article.
“The capital market in Europe is fragmented and inefficient. We do not have one market, we have 27 markets. How can we move forward with capital markets integration? A major step would be the creation of a true single capital markets rulebook that introduces principles-based capital market regulation,” Pötzsch said.
“We need convergence in supervision, because companies must not engage in regulatory arbitrage, and European countries must not compete with each other on the basis of the lowest possible supervisory standards. We need excellent supervision throughout Europe that is based on high standards.”
One of the recommendations in Draghi’s report – which calls for building out the CMU as a major source of funding if the EU wants to keep pace economically with the US and China – is the transitioning of the European Securities and Markets Authority from a coordinator of national regulators into a single regulator for all EU securities markets, akin to the US Securities and Exchange Commission.
Centralisation of supervision at the European level is a hot topic among supervisors and lawmakers, noted Dorothee Kohleick, BaFin’s head of division – international affairs. Although it is not a panacea – for example, it would not make markets deeper and more liquid per se, and bigger hurdles lie in the EU’s different market structures and legal frameworks – in certain cases, it may make sense if it increases effectiveness and efficiency.
“Centralised European prudential supervision could be beneficial, for example, for systemically important companies that are active in multiple countries and highly interconnected,“ Kohleick said.
“We're not generally opposed to it… One could, for example, consider centralised EU supervision of clearinghouses – even though we can currently handle them fine in Germany – but only under the condition that whoever is responsible is also accountable [if something goes wrong].”
Draghi’s report also proposes that the EU should ultimately have a single clearinghouse and a single central securities depository for all securities trades. Kohleick pointed out the complications and issues that would have to be resolved.
“As to the suggestion of having one CCP and one CSD, this raises a lot of questions, starting with competition policy and competition law and ending with issues such as resolution, substitutability and financial stability, which would need to be answered first,” she said.
Speakers also discussed the key prerequisites needed to create a thriving Capital Markets Union. These include political will from every member state, smart decision-making that focuses on “big-ticket items”, and a simplified European regulatory framework.
“The regulatory process in Europe is highly complex and creates rules and regulations that can be hard to understand and hard to implement and do not always contribute to efficient markets,” said Julia Kolbe, head of capital markets and UK policy at Deutsche Bank.
“One of the things that the UK has been able to achieve is a new regulatory framework that clearly differentiates between political decision making and technical decision making from the regulators, so they can write rules in the way that they think is necessary with a secondary mandate of international competitiveness. If we can get something like this within a European framework, we will go a long way in making capital markets more efficient,” Kolbe said.
Draghi report: Energy markets
Speakers generally agreed the EU urgently needs to make progress on the CMU project if it wants to meet its competition targets, but some disagreed with specific proposals in Draghi’s report.
One area of contention lies in the proposals for the EU’s energy sector, particularly the tightening of the ancillary activities exemption, which presently allows non-financial firms to trade commodity derivatives without needing to be authorised as an investment firm. Other recommendations include giving EU authorities powers to set position limits, price limits for normal trading and dynamic price caps during times of crisis.
“What the real economy and energy consumers need are liquid, well-functioning energy markets and wholesale markets to procure physical power and gas, as well as hedge the price risk of that supply,” said Karl-Peter Horstmann, head of markets regulation at energy company RWE.
“These markets are very efficient and did very well during the energy crisis. We do not see that any fundamental changes are needed currently, and that includes regulation of market participants, who are already very well regulated,” he said.
EMIR 3.0 and the active account requirement
As with previous FIA forums in Europe, the European Market Infrastructure Regulation (EMIR 3.0), which is expected to enter into force by the end of this year, featured prominently in discussions as market participants await further specifications in Level 2 technical standards from ESMA.
One of the central objectives of EMIR 3.0 is to improve the attractiveness of EU CCPs and strengthen EU strategic autonomy by requiring clearing members and clients active in euro or zloty-denominated interest rate derivatives and euro STIR to hold an “active account” at EU-authorised CCPs.
While market participants largely view EMIR 3.0 positively, including its measures to simplify the procedures for CCPs when launching products and changing risk models, the active account rule continues to be divisive.
Many EU-based clearing members are concerned about increased costs through the splitting up of portfolios and the loss of operational and financial benefits through netting, as well as the potential for long-term fragmentation of liquidity.
Speakers also pointed to the challenges firms face in preparing for EMIR 3.0 as they await further Level 2 technical standards on requirements for the active accounts.
Despite this, preparations are underway across the market, said Matthias Graulich, Eurex Clearing’s chief strategy officer and member of the executive board, and he is seeing continuous onboarding from market participants.
“We have 650 clearing members and clients on the platform, and we expect another 400 to onboard over the next nine months when we expect EMIR 3.0 to be effective, and we have seen a third of the onboarded members being active on a regular basis,” he said.
“We have achieved a level of total notional outstanding of €35 trillion and we have seen daily activity increasing by 50% relative to last year. I think in the meantime, no one can say any more that there isn't sufficient liquidity to use Eurex as an alternative [to LCH in the UK] for euro swaps.”
In a fireside chat, Robbert Booij, the CEO of Eurex Frankfurt and former head of ABN Amro Clearing Europe, said that Eurex was building liquidity pools and making sure that there were sufficient incentives so that the outcome for clearing firms was “at least the same as if they had not moved”.
“Working for Eurex, I see the huge efforts that the team is making in providing an alternative liquidity pool, he said. “Eurex will do what it can to make sure that it's a very solid, credible and financially attractive opportunity, so that when clients have a choice, that choice will now, more than in the past, go towards Europe.”
DORA: The final countdown
The Digital Operational Resilience Act (DORA), which will apply to more than 22,000 financial entities and Information Communication Technologies (ICT) service providers from 17 January 2025, was a big topic at the forum amid concerns about the readiness of the industry and the potential consequences for non-compliance.
DORA will apply to a wide range of financial entities operating in the EU and to their ICT third-party providers who provide services in the EU, regardless of where they operate.
It also provides European Supervisory Authorities (ESAs) with direct supervisory powers over ICT third-party providers that are designated as critical.
At a high level, DORA introduces rules for incident reporting, operational resilience testing and oversight of ICT third-party risks. It also requires financial institutions to identify and assess the criticality of their third-party service providers and ensure they have the right contractual clauses in place to manage any risks.
In July, FIA joined several trade associations in Europe in co-signing a joint statement drawing the ESAs’ attention to the challenges that industry participants – both financial entities and ICT third-party service providers – face in the implementation of DORA by the January deadline. These include contract remediation of a significant number of third-party contracts, a lack of resources for high-risk areas given DORA’s broad scope, and a lack of regulatory clarity in certain areas.
“Large institutions will have been working on DORA for the past year to three years and are likely to be compliant to a reasonable level,” said Thorsten Ihler, a partner at law firm Fieldfisher, who gave a presentation on DORA implementation at the forum. “Outside of the very large organisations, however, with the significant implementation challenges, I see smaller financial institutions in niche areas and tech vendors who are not prepared. The regulators will know this, and hopefully will take a lenient view.”
Building operational resilience: Practical steps
Continuing the theme of operational resilience in a separate panel discussion, speakers discussed the improvements firms have made to be better prepared for volume spikes, operational outages and cyber-attacks.
“The threat has never been as great as it is today,” BaFin’s Pötzsch said. “An increase in digitalisation means the potential for cyber-attacks is growing. The threat is not only coming from powerful criminals. Geopolitical tangents are rising, and they're raising the likelihood of politically motivated attacks. Cyber-attacks are not only dangerous for individual businesses but also for the financial system and for financial stability.”
Going through the practical steps firms should take to prepare for incidents, speakers stressed the importance of identifying critical business processes and putting in place alternative back-up solutions that are used or tested regularly, as well as ensuring that operations teams are set up to work independently across multiple locations. They also noted the importance of cross-training staff to build organisational resilience when dealing with an outage or cyber incident.
Industry collaboration, regular drills and standardised incident responses, as well as increased automation and the elimination of manual processes, were highlighted as crucial for recovery and enhancing operational efficiency.
Tokenisation: 10km into a marathon
The forum also hosted a panel on tokenisation, the process whereby ownership rights of an asset are represented as digital tokens and stored on a blockchain. Speakers agreed the technology shows great promise in providing a faster and safer way of managing collateral, moving margin and settling trades. Practitioners from across the industry discussed the benefits and real-world applications of blockchain and tokenised assets and their potential in the future.
“The token economy and blockchain technology is a further evolution of the internet as we know it today,” said Christoph Hock, head of tokenisation and digital assets at Union Investment. “It’s normal that there is scepticism with new technologies, and it can take a while for them to be implemented, but it's really important from a financial perspective to be ahead of the curve and to support their development.”
Speakers said the benefits of tokenised assets include operational and cost efficiencies, transparency, the potential to move to T+0 settlement, the additional utility of assets otherwise trapped and not really used as collateral, and faster collateral movement.
As a case in point, BlackRock recently used a platform developed by JP Morgan to tokenise units of a money market fund and then transfer the units to Barclays as collateral for a bilateral derivatives trade. Traditional forms of value can take days to move from one firm to another, but ownership of tokens can be transferred in minutes, something especially important when markets are in turmoil.
Speakers cautioned, however, about the need to resolve several important issues before tokenisation can be deployed at scale. For example, a wider range of firms need to be involved to drive adoption and allow an onward chain of collateral movement, but many are holding back until they see greater critical mass. Speakers also cited a lack of regulatory clarity in some jurisdictions and a lack of interoperability standards as challenges.
All speakers were optimistic about the long-term potential of tokenisation, with Hock likening adoption as a marathon. “We are probably at kilometre 10 of the marathon. There’s still a way to go, but I think tokenisation, in the long-term, will become the standard”.
