FIA Expo: Good Fragmentation vs. Bad Fragmentation

Thom Thompson

Thom Thompson


Deborah North, partner at the law firm Allen & Overy, moderated the Wednesday morning panel titled “Is Market Fragmentation the Future?” at FIA Expo 2020. She was joined by Trabue Bland from ICE Futures U.S., Robert Booij from ABN AMRO, Erik Mueller from Eurex Clearing, and Nathaniel Lalone from Katten Muchin.   

Booij (ABN AMRO) said he appreciated the opportunity on Wednesday to go to the office, away from minors with Nerf guns.  He went on to point out that fragmentation sounds bad but need not be in reality. For example, fragmentation associated with competition benefits risk diversification, increases trading opportunities, and can spur innovation; however, it can introduce complexity. Lalone (Katten Muchin) jumped in to point out that even market fragmentation that appears very competitive is often accompanied by small differences that are complicated or expensive to bridge. He pointed to the particularities of financial and transaction reporting in different jurisdictions as an example.  

Bland (ICE Futures) said the competition between ICE and Eurex in MSCI products, a market fragmentation, provides customer choice, which is good. He noted that sometimes regulators fragment markets because they want to protect or advantage someone. Mueller (Eurex Clearing) said that his exchange and clearinghouse are core believers in competition in areas like swap clearing: “Two is better than one.” Eurex has built a euro denominated alternative to London and is competing in a “market-led way.” In this case, fragmentation is a good thing, bringing with it choice, competition, and risk diversification. 

The panel discussion was proceeding a bit too amicably for some, ostensibly because LCH (contra Eurex Clearing) and CME (conta ICE) representatives were missing from the panel. Moderator North tried to stir up a bit of what she called a “virtual mud fight” by bringing up Brexit. 

Lalone noted that the U.K. had just said it would grant 18 months of regulatory equivalence to financial institutions in E.E.A. countries (the E.U. members plus Iceland, Liechtenstein and Norway) matching the equivalence granted by them to U.K. institutions. He stressed that this arrangement was not an adequate response to potential fragmentation between the U.K and the E.U. because it is time-limited.   

The E.U. wants to provide time for swaps clearing to be brought within its new U.K.-less borders. Mueller pointed out that European regulators would like there to be a large-enough market share in euro-denominated swaps clearing to assure stability. For ABN AMRO, an E.U. bank, Booij pointed out, temporary arrangements are not satisfactory because in the long run it leaves the bank unable to service their American and U.K. clients. 

In a seeming challenge to Eurex Clearing’s Mueller,  Booij also said that the movement to European clearing should be motivated by a desire to move their business. (Eurex Clearing has been offering discounts and rebates for a while to woo clearing business. Maybe they should offer Booij babysitting services as a sweetener?)  

North asked about market fragmentation as it relates to innovation, especially with respect to  digital assets. Booij said that his bank supports futures market trading in cryptocurrencies but is very reluctant to get involved in non-regulated markets. 

According to Lalone, until recently the E.U. countries had different approaches among themselves to how to deal with digital assets. Less than a month ago, the E.U. introduced its proposal, the regulation of Markets in Crypto-Assets (MiCA) pursuant to which the existing national regimes would be displaced by a Europe-wide regulator. The regulation, if adopted, will create a single E.U. marketplace for crypto assets – defragging the internal market, so to speak. The current draft, however, does not allow for non-E.U. entities to participate in E.U. crypto asset markets, hardening global fragmentation.

North then asked whether the newest rules for clearing and clearinghouses that have been coming out of the U.S. and Europe are leading to more fragmentation. Bland, noting that in his experience all defaults are unique, questioned whether all of these rules might not be misguided because they limit the judgment of the CCPs and risk professionals involved in complex, fact-driven default situations. Mueller took some exception, pointing out that the current success of the financial services industry in weathering the global pandemic owes something to the efforts of regulators to put central counterparties between more market participants. Later, he noted that the seven percent margin floors that Eurex Clearing and some other clearers adhere to helped them confront this year’s market volatility earlier better than CCPs with four percent floors.  


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