Too much, too soon?
Global regulators could be pushing
financial markets towards a tipping point, with contradictory objectives
placing market participants in danger of unintended economic consequences,
according to Anthony Belchambers, CEO at the Futures and Options Association.
With reforms such as the Dodd-Frank Act in
the US and the European market infrastructure regulation in the EU attempting
to reduce systemic risk in OTC derivatives markets by demanding central
clearing for the majority of contracts, market participants face increased
costs on both sides of the Atlantic. For Belchambers, who will be chairing a
panel discussion at the International Derivatives Expo in London later
this month, these costs represent a problem, since buy- and sell-side firms face
a tightened regulatory environment at the same time as revenues are being
squeezed by global economic downturn.
“There is a conflict between the desire of
regulators to clamp down heavily on innovation and risk for their role in the
financial crisis, and the desire for economic growth, which depends on these
same factors,” he says. “One might well ask whether policy makers are pursuing
Reforms in both the US and Europe will
likely see the range of customised, bilateral contracts decrease in the next 12
months, with collateral and margin requirements raised substantially as
regulators seek to meet the G-20 imposed deadline of end-2012 for the
standardisation and centralised clearing of OTC derivatives. But Belchambers
questions the drive to reduce the size of the bilateral OTC markets, in view of
parallel drives to improve their transparency and reduce their risk with new
“OTC markets still have something to offer.
We need diversity, and it would be a mistake to remove choice,” he says. “Why
are we driving derivatives transactions onto multilateral execution platforms?
If we are truly fixing the issues of transparency and collateral, then why not
allow bilateral execution?”
Constraints on the ability of market
participants to transact using highly-customised derivatives contracts are not
the only complaint that may be levelled against regulators in a depressed
trading environment. Pointing to moves by European politicians to further restrict
order flow, such as the imposition of the transaction tax and fees levied on
high-frequency trading, Belchambers suggests that regulators should not forget
that order flow is crucial to liquidity, especially for niche markets that
depend on specific flows.
Moreover, he notes that an overall change
in the regulatory climate could dampen activity. “The UK Financial Services
Authority has made it clear that enforcement intensity will be high,” he says.
“Firms are aware of this, and they are focusing on compliance, accordingly –
but are we missing out on the investment that would drive real growth?”
The tight deadline for implementation of
centralised clearing for OTC contracts has been a bone of contention between
market participants and regulators in Europe in recent months. It has been
discussed in several recent public forums, including a panel discussion
involving European Commission representative Patrick Pearson at TradeTech
London 2012. In April, market participants expressed concerns about possible
unintended consequences if new rules for fixed income and OTC derivatives
markets were rushed through without due care.
“Europe will not be subject to mandatory
clearing on 1 January 2013,” said Pearson at the session on 28 May, adding that
the G-20 may need to revisit its timetable for reform due to lack of global
progress towards the new rules.
According to Belchambers, further time may
be needed in any case to allow buy- and sell-side market participants to meet
their compliance goals in a timely fashion.
“The timetable has to be realistic,” he
says. “The original MiFID was a fiasco in that respect – only one or two
countries made the deadline. If the G-20 really believes in unity, open access
for clearing and mutual recognition of regulation between different jurisdictions,
it should step in and take a more active role before it’s too late.”