What impact will the new regulatory requirements have on firms trading OTC derivatives and are they well prepared?
Even though it has been nearly five years since the G20 first proposed initiatives to mitigate systemic risk, reduce operational inefficiencies and promote transparency in the global OTC derivatives market, practitioners believe the industry is still evolving and remains unprepared. The impact of the Dodd-Frank Act and European Markets Infrastructure Regulation (EMIR) is being felt by market participants in the US and Europe respectively, particularly the mandate of executing all derivatives subject to a clearing obligation on a regulated market, swap execution facility or organised trading facility.
The four key proposals of global regulators include:
- Increased standardisation of products
- A move to central clearing
- Promoting trading on electronic platforms
- Reporting to trade repositories.
Standardisation of products results in greater liquidity, improved market transparency, more reliable pricing data and better risk management. Standardisation of products is also conducive to electronic trading. However, trading in the European OTC derivatives market will follow a hybrid model with voice RFQs remaining strong for the foreseeable future. The requirements around central clearing, trading and reporting also aim to reduce risk, promote transparency and enhance market surveillance. These moves are important considering that credit default swaps were one of the major causes of the global financial crisis.
What we have done at IPC is to create a community of market participants - buy-side firms, sell-side firms, inter-dealer brokers, liquidity venues, clearing and settlement firms, market data providers and software vendors – that consume trade lifecycle applications, market data and other services from other providers in the community. And we have leveraged this community to create a swap ecosystem which includes swap dealers, major swap participants and swap execution facilities (organised trading facilities in Europe). Our ecosystem has become a magnet for market participants in the OTC derivatives asset class.
What role is London playing in the European financial services industry in terms of addressing key regulatory challenges?
We are seeing increased technology, communications and software investments in London. As it is a historical financial centre and because it is in a central time zone, equidistant between North America and the Asia-Pacific region, people look to London as the global hub of trading. It is the main centre to connect to other market participants in the EMEA region given the attractive business environment, skilled personnel, infrastructure, government responsiveness and abundant supply of professional services here. We see a lot of demand to connect to other markets in Europe - not just to the developed markets like France, Germany, Spain, Italy and Scandinavian countries but also emerging markets in Eastern Europe, Africa and the Middle East.
IPC has substantial operations in London as it is the primary market in Europe and a major global financial centre. IPC operates a dark fibre network in London – we have a lot of different data centres in the London metropolitan area, from Slough in the west through the Docklands and out to Basildon. We operate a robust and secure infrastructure in London for our community of market participants – the buy-side, sell-side, inter-dealer brokers, liquidity venues, independent software vendors and market data providers. We’re also continuing to make a lot of investments in the City and in the greater European trading community.