Handing over the Chairmanship of WFE is an easy task, for two principal reasons.
Firstly, WFE rules mandate that the office passes to a representative from another region every two years, and I believe that rotation is an appropriate solution for a member organisation like ours.
Secondly, I am stepping down with the WFE and the financial industry in a stronger, more stable position than when I took over the Working Committee of this organisation in 2015. At that time, there was an obvious need to make the WFE a more visible and influential body through closer interaction with industry stakeholders such as regulators, buy-side representatives, and index providers.
When I took over as Chairman, the WFE had three clear areas of focus: strengthening our role as a stakeholder of regulated markets, developing fact- and data-based content for key messages, and leveraging the skills of WFE’s member base as a pool of expertise.
During this period, the industry has taken several significant steps forward. Our work in cleaning up and implementing policies in the wake of the financial crisis has continued apace, particularly with regard to the evolving role of central counterparties. We have also seen Environmental, Social and Governance issues gain momentum, since the signing of the Paris Climate Agreement in 2016.
At a structural level, there has been encouraging progress in tidying up market infrastructure, especially in Europe, and handling the dispute over data and the related question of what value should be placed on price discovery in regulated markets.
And finally, since the beginning of the global pandemic in 2020, we have seen our work pay off as financial markets absorbed the greatest potential shock of our lifetimes.
We can only conclude, therefore, that the financial industry has become much more stable. The management of the financial crisis has resulted in market participants having more equity, as well as the market as a whole having better measures to deal with the counterparty default risks associated with transactions and open positions. Moreover, the most obvious conflicts of interest have been addressed via stricter governance rules.
A landscape of future challenges
Still, my successor will face challenges of equal gravity.
Concentration in the industry has continued to increase significantly. This applies to banks, brokers, asset managers, exchanges and clearing houses. While some may argue that larger entities may be stronger and more able to absorb larger shocks, the failure of a large participant could make the market structure as a whole more unstable, unless carefully managed.
Of equal concern is that the risk appetite of individual market participants has not diminished. Even modified compensation models have not had the desired damping effect, and in some individual cases risk appetite has been so great that well-known investment vehicles have collapsed, and major banks have had to be recapitalised – the most recent example being Credit Suisse.
Despite being the guarantors of fair pricing and thus protectors of investor interests, regulated markets have not been able to improve their position in recent years. On the contrary, figures show that the share of trade taking place outside exchanges is increasing rather than decreasing.
For this reason, the WFE will not run out of work.
The scope of that future work may be even broader than before, as the industry adjusts to the simultaneous emergence of potentially transformational trends.
The market entry of discount brokers will continue to pre-occupy markets and regulators. Related to this, the practice of "payment for order flow" has attracted a phenomenal amount of attention. In a way, this is understandable, in the wider context of concern for "best execution" (especially for the long-suffering retail investor). But really this is all a proxy for the underlying issue; ensuring that price discovery happens in a fair and transparent way and does not erode investor protection.
Exchanges have no interest in such an outcome. The danger it poses – along with the expansion of online platforms for the exchange of information about investment opportunities – should prompt regulators to be more forward-looking.
Cyber security is going to be another dominant theme. Reports of hacker attacks are unfortunately increasing in all walks of life, and the scale of the financial and infrastructural damage is rising in tandem with their frequency.
The financial services industry, as a whole, needs to evaluate this threat as a matter of the highest priority. This is an ecosystem challenge and, as events around the world and in multiple different industries have illustrated, this is something we need to do together if possible. We are only as strong as the weakest link.
While sections of the wider financial services industry may have underestimated or ignored the cyber-threat, it’s been all-but-impossible to ignore the emergence of cryptocurrencies and blockchain technology. The short-term revolutionary effect of these technologies has certainly been overstated but, at the same time, perhaps their potential to bring about longer-term change has been underestimated.
So far, the banking sector has been more affected, but some of the applications of crypto and blockchain also have points of contact with our industry, and will therefore sooner or later become relevant to the WFE and its members.
Blockchain has the potential to transform end-to-end value chains, from listing to settlement of assets, and build parallel infrastructures with very competitive cost structures. In theory, this could completely eliminate settlement cycles, though that would not just be an unprecedented, market-wide organisational challenge. There would also be a systemic trade-off to consider, given that the current approach embeds powerful netting benefits, which drastically reduce counterparty exposures, while allowing broad access to traded markets.
At the moment, DLT technologies are used to trade alternative assets, but all the same, it’s easy (conceptually at least) to map traditional assets on it, and in the medium term it’s highly possible that parts of the broader market will go in this direction and thus no longer go through the post-trade infrastructure operated by our members.
A strong market voice
As we move out of the pandemic era, my expectation is that market structures will continue to develop and innovate. They must do that to grow. It’s important for exchanges to closely monitor developments and respond early, and WFE can, and will, play an important role in this process.
That task is now in the hands of my successor for the next two years: Ed Tilly. I am proud to hand him a WFE that has a strong voice in the market, can build on its excellent global network, and has proven in recent years that it can identify issues early and deal with them efficiently.
It has been a great honour to serve the WFE in various capacities, and I wish Ed, all the Board members and all members success in this important task. Regulated markets are an important asset to preserve.