Diana Chan, CEO, EuroCCP gives us her viepwoints for the year ahead.
Looking ahead to 2018, what are the most important regional and global trends shaping your exchange or CCP?
At the regional level, pressure on costs will continue in Europe as growth is still elusive. The number of listed companies across all stock exchanges in Europe has remained relatively flat for the last few years and there are no signs there will be any significant upturn in 2018. The impact of MiFID II on equities trading will take a few more months to become clear, but so far we have not seen major shifts or changes in volumes yet.
At the global level, we will for sure continue to hear much about block chain and distributed ledger initiatives – maybe 2018 will bring news of a major breakthrough of this technology applied in financial services. However, I do not expect it to be in the equities trading or clearing sector. The transformation of equities trading from a two-day settlement cycle to instant settlement at the point of trade execution might be an attractive application for the technology, but the business case is still to be made.
An area of less certainty is the development of conflicts and tensions in many parts of the world. Geopolitical developments could cause market volatility, which we have not seen much of in the last couple of years. It is advisable for trading and clearing infrastructures to remain vigilant and be well prepared for unexpected volume surges.
Are there any significant regulatory changes on the horizon that may impact the way you do business?
The programme of regulatory initiatives that started ten years ago after the collapse of Lehman Brothers, that aim to make financial institutions and infrastructures more robust is still ongoing. The final pieces of the programme – the Recovery and Resolution Regulation for central counterparties, the CSD Regulation (CSDR), and the Securities Finance Transactions Regulation (SFTR) – are all significant for EuroCCP and are still to be completed.
My vision for EuroCCP is for it to become a shared infrastructure for multiple platforms.
Each of these three regulations is significant to us in its own way. We are already preparing a recovery plan even though the Recovery and Resolution Regulation hasn’t been finalised, and our resolution authority has also started work. The outcome will certainly require some changes to the rules and regulations governing our relationship with clearing participants. The CSDR imposes many obligations on CSDs which will require their members - that is us - to make changes in rules, connectivity and data processing. It could be a complex exercise for us since EuroCCP is a direct member of 15 CSDs in Europe which could all be implementing various aspects of CSDR differently. We will try our best to shield our clients from the complexity as much as possible. The SFTR has an altogether different impact – it imposes reporting requirements on market participants and gives us an opportunity to offer them a valuable service when we launch our service for clearing securities finance transactions.
What are your key strategic priorities for the coming year?
EuroCCP has succeeded in minimising post-trade costs through bringing competition to equities clearing. We start the year with EuroCCP being a valid choice for market participants to direct 82% of all equities trades in Europe on 27 trading platforms towards EuroCCP. Our strategic priority for 2018 is to obtain access to a further 13% of equities trades. In doing so, we help achieve an important aspect of the Capital Markets Union agenda in the European Union: through the ability to channel trades in the same security executed on multiple trading platforms to a CCP of their choice, investors will find cross-border investment as easy and low cost as within their own jurisdictions.
My vision for EuroCCP is for it to become a shared infrastructure for multiple platforms, especially smaller markets which find it relatively costly to operate their own CCP. EuroCCP has five shareholders at present, of which three are stock exchanges. The shared infrastructure model is efficient for both market operators and trading firms alike. Our current shareholders are open to more exchanges joining them in shared ownership.
A third strategic priority is service diversification. When we started business ten years ago, we cleared five Dutch and five German stocks for one trading platform; we now clear over 8,000 securities traded on 27 platforms, and have become the largest equities CCP in Europe. We are now working on multiple fronts to diversify into adjacent spaces as we start our second decade of operation. In 2018, we will see some of these efforts bear fruit.
How do you feel the social role of financial market infrastructures is changing?
Regulatory efforts after the outbreak of the financial crisis in 2008 to ensure that market infrastructures are robust have a major impact on emphasising the social role of market infrastructures as shock absorbers and circuit breakers. Prior to that, public awareness of financial market infrastructures was more limited to the role of exchanges in safeguarding fair, open and orderly markets for investor protection.
Besides the effect of regulation, the ownership structure of financial infrastructures is also an important determinant of their social role. Stock exchanges used to be cooperatives owned by their members. Starting in the 1990s, almost all have demutualised and become publicly listed companies. At the same time, technology and regulations enabled and encouraged competition. This transformation makes it more difficult to define what an 'infrastructure' is and what society should expect from it. The idea of an infrastructure being an essential facility has become somewhat blurry.
The changed nature of market infrastructures from cooperatives into commercial entities, and the impact this has on their social roles is probably most vivid in the current debate about who bears the cost of the resolution of central counterparties. Whereas profit and loss sharing among a CCP’s owner members is generally deemed reasonable, there are different social expectations when owners and members are separate populations.