The 2015 Burgenstock SFOA conference in Geneva kicked off with a lively discussion on “Crossfire,” the well known panel hosted for many years by Patrick Young, the editor of Exchange Invest News. The panelists were Phupinder Gill, CEO of CME Group, Chitra Ramkrishna, CEO of the National Stock Exchange of India, David Peniket, president and COO of ICE Futures Europe, Magnus Billing, the president of Nasdaq, and Christian Katz, the former CEO of Six Swiss Exchange and former president of FESE.
The panel was at odds over the horizontal versus the vertical clearing model. Nasdaq strongly believes in the horizontal model as a key component of competition in the exchange space, said Billing. A recent regulatory proposal regarding open access among exchanges will bring Nasdaq’s model forward, he added.
The CME Group is not wedded to a vertically integrated model but “feels strongly about it”, Gill said. The exchange has achieved dominance in the industry by adhering to that model, and a change would do them no favors.
The NSE has historically always been a vertically integrated model. NSE’s Ramkrishna said that regarding interoperability of exchanges, “it is important to be cognizant of the risks involved before the regulators regulate in India.” The industry must assess the risks of one central clearing party (CCP) becoming insolvent and compare the risks and benefits. “The Securities Commission of India has recommended we tread very carefully,” she said. “They don’t want to create models that are too big to fail.”
Peniket said that while there is healthy competition among horizontal and vertical exchanges, “what we don’t want is enforced markets of one kind or another.” Interoperability among exchanges is good if it is on a voluntary basis but should not be compulsory, he said. “CCPs shouldn’t be compelled to take on trading venues they don’t want, and traders shouldn’t be compelled to have netting between them and other venues.”
Nasdaq’s Billing aroused mild laughter and incredulity when he said that, looking at the history of the markets, “we haven’t seen any true competition in the derivatives space.”
“That is a truly unbelievable comment, ” Peniket said. “We slug it out every day between other markets. And if that is in fact the case, it means we need more competition, not more regulation.” He noted that the derivatives markets, unlike the equity markets, performed effectively through the 2008 financial crisis, and asked rhetorically, “Should we really look to the equities markets as a model during a crisis?”
The FX market is coming onto exchanges, opening up the potential for real competition in that space, Katz said. The over the counter FX market has been revealed to be opaque and not necessarily fair to end users when it comes to execution, and that will continue to push trading onto central marketplaces, with or without clearing.
However, Gill pointed out, the exchange traded FX space is still a very small portion of the overall FX market.
Five or six years ago, when the Indian FX markets moved onto exchanges, bid ask spreads dropped to 1/10 of what they had been, Ramkrishna said.
“After the 2008 crisis, it worked for banks to come onto an exchange with guaranteed settlement,” she said. “It has greatly benefited the derivatives markets in India.”
Panelists agreed that blockchain technology has the potential to shake up the exchange business, although the benefits are not really clear yet. “So far, the technology seems best suited to complex instruments with fewer transactions, like syndicated loans,” Katz said.
In the next 20 years, the industry will see strong development in India, China and Indonesia, Gill said. The merger of regulators in India should bring about a convergence between markets and is a progressive step that is eagerly awaited, Ramkrishna said. A new initiative there, the International Financial Center, will open up competitive platforms for global products, not just Indian products, and is a recognition that India wants to be globally competitive as a market, Ramkrishna added.
Although there are some obstacles, the will to reform is there, and once started, reforms keep going, Katz said. But he warned against regulators changing the rules of engagement ex-post, as was done recently in China, resulting in futures markets grinding to a halt.
A meeting of regulators was taking place nearby at the same time as the Crossfire panel, so we will see if the pot is stirred up yet again when we hear from them.