When the G-20’s finance ministers met in Pittsburgh five years ago, a global consensus was reached on the principles for regulatory reform. Prominent among their concerns was a lack of transparency in OTC derivatives. The Pittsburgh statement set out four priorities – execution transparency, mandatory clearing, data storage and accessibility, and heightened capital buffers:
“All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements.”
While 2012 is long gone, the race toward achieving the Pittsburgh Summit’s goals continues. But as European regulations – EMIR and MiFID II/MiFIR – take shape, certain questions arise as to whether the regulatory objectives can align with the realities of the market. Two issues, according to Andrew Simpson, head of post-trade services at Paris-based Euronext, are interoperability, which would allow trading firms to choose the central counterparty (CCP) to clear its trades, and open access, which requires CCPs to be “non-discriminatory and transparent.”
“As EMIR rolls out,” says Simpson, “interoperability is being limited to cash equities and, to a degree, cash fixed income securities, but will it be extended to other products such as OTC derivatives?”
“Highly unlikely at the moment, although we are waiting for ESMA and the European authorities to come back with a ruling on that.”
He says that, while interoperability has helped bring down the overall cost of trading, higher volumes have not materialized. “What we think is that people are holding on to more capital, because the capital requirements coming out of EMIR… They are protecting themselves from a margin perspective.”
Simpson is also concerned about open access and its potential to bifurcate liquidity, and the idea that, given the costs of operating a CCP, if volumes are not driven higher, CCPs may need to begin charging more to clear each trade.