The head of the London Stock Exchange Group has called on European regulators to stand by their plans to allow investors greater choice in trading derivatives as policy makers finalise their technical rules.
Xavier Rolet, the LSE’s chief executive, said the forthcoming drafts from the European Securities and Markets Authority were “the key test of European willingness to embrace reforms,” he said.
Market participants are awaiting the final draft rules that accompany a review of Europe’s main Markets in Financial Instruments Directive, completed earlier this year. Among the most controversial was a provision that enshrined open access in derivatives trading, which was supported by many fund managers, banks and traders.
The decision allows traders to clear their trades at a clearing house of their choice, and prevents exchanges and clearing houses linking trading, clearing and licensing of indices to a specific venue.
The rules are also being balanced against policy makers desire to strengthen the market against systemic risk and the complexity of the rulemaking is such that some have worried the legislation may lose some of its impact during the drafting stage. Esma is due to publish its final versions of 175 rules before Christmas.
Rivals have warned some interpretations of open access could fragment trading, raise costs for investors and hamper innovation.
Mr Rolet described open access as underpinning all LSE’s products and compared it to the availability of generic drugs like paracetamol. “When these benchmarks are finally established, why should it be restricted to a single operator. This is not customer choice within an internet economy.” he said. “Mifid has plenty of safeguards and [the open access debate] confuses interoperability with open access.”
Speaking at a conference hosted by Futures and Options World, Mr Rolet also indicated the LSE may look at more foreign exchange clearing. “The foreign exchange market is under intense scrutiny and we understand further mandates are likely,” he said. "We support the need for the clearing obligation."
Together with the purchases of Russell Investments, the index complier, and a controlling stake in LCH.Clearnet, the clearing house, Mr Rolet said the exchange had the tools to finally overcome “the one that got away” — the LSE’s failure to purchase the Liffe derivatives exchange in 2002. The bourse went to Euronext and is now part of the US’s Intercontinental Exchange. Compared to rivals such as CME, ICE and Deutsche Börse, the LSE is under-represented in futures trading.
Mr Rolet also said the LSE supported some plans being discussed by policy makers that would explicitly lay out plans for the recovery and resolution of clearing houses such as its own LCH. Clearnet. However a proposal for the risk managers to hold more capital via a Total Loss Absorbing Capacity, as had recently been imposed by banks, was not workable.
“The clearing house risk to which members are exposed are different from the members own risk. The debate has blurred the distinction between them.”
Some of the world’s largest traders of swaps, such as JPMorgan, Pimco and Citigroup, have called for clearing houses to hold more of their own capital in their own default fund, to align their incentives with those of their users.