Open and shut case
By Xavier Rolet and Suneel Bakhshi
Open access to any market, from labour and intellectual property to food and industrial goods, lies at the heart of the philosophical approach to the European Union single market. The opening of Europe’s markets in goods and services to its more than 500 million citizens has driven down prices, increased innovation and improved service. Financial markets are no exception and its users – everyone with a bank account or a pension – will benefit when they too are opened in a fair and transparent way.
The tightly controlled world of European derivatives trading and clearing, the backbone of a trillion euro industry, is now set to undergo this revolution. The revolutionary agent is the dryly named MiFID II, the regulation currently passing through the European rule-making process.
Legislated in May, it enshrines the principle of “open access,” enhancing the ability of investors to choose where to trade and clear their products, by stopping exchanges and clearing houses from operating a so-called “closed” silo model, which ties the trading, clearing and licensing of products to a specific venue. Some of Europe’s largest market infrastructure providers remain hopeful that the provision will lose its teeth through the rule-making phase. We hope otherwise: we believe the EU should, and will, see open access implemented as intended because it is fundamentally right for the market.
There is no doubt that this transformation poses a challenge to the industry. Are we ready as an industry to support growth and safer markets in Europe by embracing a model that gives power, choice and transparency to our customers across all our businesses, or are we going to fight to keep the status quo which results in greater systemic risk and higher costs ultimately borne by European citizens?
In the age of the internet, characterised by transparency and consumer choice, we believe there can only be one answer. That is why we welcome the EU’s determination to show global leadership and introduce an open access model that gives investors transparency, competition and better risk management across European markets.
Today’s challenge bears a remarkable resemblance to 2007, when European exchanges, including the London Stock Exchange, enjoyed a virtual monopoly on the trading of shares. We use that word very deliberately. As with all monopolies, the provider enjoys the fruits of guaranteed income and inflated pricing while customers are squeezed.
The revolution brought about by MiFID I, the EU’s landmark legislation introducing competition to equity trading, made difficult reading for Europe’s exchanges. However, the result for customers and investors was transformational: lower trading prices, reduced spreads, faster and more resilient technology, and a fundamental rebalancing of the relationship between the providers of infrastructure and its users. That’s the power of competition.
Today, the European derivatives market finds itself in a similar position. Exceptional change is just over the horizon. We must learn the lessons of the crisis and establish broader, deeper pools of mutualised market risk. More open markets not only bring economic benefits to the customers, they also increase transparency and safety. In an open environment, in which clearing houses are free to compete, risks are dispersed rather than concentrated through imposed and artificial barriers.
London Stock Exchange and LCH.Clearnet already operate under an “open access” model – giving customers choice is at the heart of how we operate. And we’re not alone in that view. In an open letter issued last summer, the vast majority of the financial services industry voiced its support for the more open model, including the world’s largest asset managers, investors, major sell-side participants and trade associations.
Regulators too have voiced their opinion, identifying fair and open access as an important foundation in the building of safe, efficient and continuous markets. Not everyone in our industry has embraced these changes. But, most importantly, customers have. Fairness, safety and choice are coming to the derivatives markets – and not a moment too soon.