NO 228 – FEBRUARY 2012
Clearing at the crossroads

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WFE Focus January 2012
No news is good news
Peter Clifford
Deputy Secretary General, WFE

There was nothing that you could put your finger on in January that would explain the rally in stock markets, but no news was good news, and the markets ended the month up 5.5% according to WFE’s global index performance. 

While the media, i.e. the Greek debt/ euro problems, less coverage was devoted to the value of trading on European stock exchanges that jumped by 24% (source WFE). That was news, because the value of trading had been trending down throughout the final quarter of 2011.

Similarly, there were neither parades nor demonstrations in the streets of Brussels last week as the European Market Infrastructure Regulation (EMIR) emerged. Iain Anderson, Director and Chief Corporate Counsel, of Cicero explains that there are still details to be worked out, but a major step was taken – possibly forward. The next steps are figuring out how clearinghouses in Europe will interact with non-EU counterparts. Other issues include rulings on what OTC derivatives have sufficient liquidity to be cleared. There may be fireworks yet.

Exchanges are being asked many questions by their clients on these details concerning extra-territoriality, or the impact of rule-making beyond the jurisdiction of a national or regional regulator. WFE office hopes specifically to address the questions of international coordination in an update to the 2010 report on the “Global Risk Transfer Market” with current figures.

no news was good news, and the markets ended the month up 5.5% according to WFE’s global index performance.

There was no CCP Day holiday last month celebrating the war on systemic risk. But as Matthew Harrison, Senior Vice President and Head of Research & Corporate Development for HKEx, points out there has been plenty of movement to implement the goals of G20, stated on the cover of this months’ issue. Harrrison takes a nuanced look at the OTC clearing landscape, seeing that CCPs provide solutions to manage risk better, but also recognizing that the added costs and complexity create friction for end users who need to hedge.

Figures just released by the WFE show more OTC contracts being cleared than in 2011 - IRS clearing increased by 15% last year - but the rate of progress has slowed for the first time since 2007. In late February, two directors from the WFE Board, Luis Téllez and William J. Brodsky, the respective Chairmen and CEOs of the Bolsa Mexicana de Valores and the CBOE, represented the exchange industry on a panel ‘“Financial Regulatory Reform and Systemic Stability” at the IIF /G20 Conference, “The G-20 Agenda under the Mexican Chairmanship.” The progress in implementation of the G-20 recommendations for strengthening financial stability, fragmentation and the need for a globally coordinated approach to regulation were amongst the topics they discussed.

The WFE is mobilizing teams within the federation to examine issues of market integrity including fragmentation, internalization and high-frequency trading.

When it comes to flying under the radar, few do it better than dark pools. From Rosenblatt Securities, Joseph Gawronski, President & COO, and Justin Schack, Managing Director and Head of Market Structure Analysis, wrap up the dark pool picture from 2011, and the trends to watch for this year. They expect that volumes traded on dark pools will increase in Europe, and be flat in the US markets.

The Canadian market will be implementing regulation for internalization that may significantly change the attraction of dark pools for investors and traders. Dark pools were originally intended as a solution to market impact caused by large orders. However, don’t expect to see block trades coming back to dark pools any time soon. They calculate that the US average size for a dark pool execution hit a new low in December 2011 at 226 shares.

The WFE is mobilizing teams within the federation to examine issues of market integrity including fragmentation, internalization and high-frequency trading. This coincides with an announcement from the CFTC to study high-frequency trading, and other regulatory agencies about to do the same on market structure issues.

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