The WFE has launched a joint report with Oliver Wyman, global management consultants, which examines the pivotal role of market infrastructures in ensuring market integrity.
The report - entitled Market infrastructures and market integrity: A post-crisis journey and a vision for the future - looks at three key areas:
- How exchanges and CCPs - market infrastructures or MIs - have evolved since the 2008 global financial crisis in response to regulatory reform to promote safe and efficient markets;
- Trends in financial markets and their implications for MIs with respect to preserving market integrity; and
- A vision for the future role and capabilities of MIs in ensuring market integrity.
Market integrity is a cornerstone of fair and efficient markets, ensuring that participants enjoy equal access to markets, that price discovery and trading practices are fair, and that high standards of corporate governance are met. MIs foster market integrity by exercising the following functions, amongst others: rulemaking, member admission, market surveillance, market data and regulatory reporting, and investor education.
Key highlights of the report:
1. The supervisory role of MIs has changed fundamentally in the last decade, primarily as a result of the post-crisis G20 reforms. The move towards more transparent exchange or exchange-like marketplaces, together with a shift towards CCP clearing for OTC derivatives, along with developments regarding central reporting of trades and tighter capital, liquidity and risk management standards, have correspondingly increased the mandate of MIs. This in turn requires significantly more focus, and resource, on risk management and supervisory practices:
- More than 70% of survey participants confirmed that supervision requirements have increased over the past 10 years, and predicted they will increase further over the next decade;
- More than 60% of survey respondents believe that market supervision is a core focus area.
2. Recent trends in financial markets, such as increased regulatory demands, enhancements to corporate governance and disclosure, and the speed of technological change, all affect the role of MIs in preserving market integrity. The report identifies five key themes that MI will focus on over the coming decade:
- Higher standards of market integrity as a competitive differentiator, with MIs with more robust market integrity attracting improved liquidity and carrying lower risk premia.
- Surveillance and supervision as both a regulatory function and a client offering that in turn reduce industry-wide cost of compliance.
- Broad industry cooperation and collaboration across MIs and the wider capital markets industry such as issuers, brokers, investors, analytics providers, and custodians.
- The potential for (near) real-time surveillance with integrated functionality across trading floors, trading markets, and regulators, as a direct result of technology advances in the fields of AI, machine learning and big data.
- Interactive, outcome-oriented supervision with a focus on the definition of standards and adherence to principles rather than a rules-based approach.
The report concludes by assessing that the financial markets industry will need to spend up to $3-4 billion over the next five years to realise the agenda set out above, and estimates roughly 40% of this investment will need to be undertaken by MIs (with some of this investment already underway). The expenditure estimates include upgrades to industry infrastructure as well as the development of new capabilities to address the trends outlined in the report.
This report draws extensively on WFE and Oliver Wyman expertise, and was informed by two surveys of WFE members covering the regulatory landscape and strategic perspectives, along with interviews with senior executives across the industry. It is also supported by a number of case studies from WFE members.
The report was launched at the 35th IOMA Clearing & Derivatives Conference from 11-13 April, co-hosted by the WFE and OCC in Chicago.