The forthcoming review of the Markets in Financial Instruments Directive (MiFID), which came into force on 1 November 2007, is being undertaken against the backdrop of the financial crisis. It will prove crucial both for the re-regulation of financial activities and for the stability of the global financial system.
Traditional stock exchanges were membership organizations where stock exchange members dealt with one another on a preferential price basis. Fixed minimum commissions were the glue that held the New York Stock Exchange (NYSE) and other exchanges together, while members of the National Association of Securities Dealers (NASD) dealt with one another at an inside trading price. Commission price regulation similarly was the norm in Canada, Australia, London, Japan, and elsewhere. In addition, NYSE rules required members to bring all of their orders to the NYSE floor for execution, prohibited access to the exchange by non-members, and required member firms to be engaged primarily in the securities business. NYSE member firms could not incorporate or become public companies.
Legislators and regulators in Washington, D.C. are working to make changes to the way banks and markets are governed in the U.S. and how those rules are to be enforced. While this is true around the world, this article will focus on the U.S.
Many central banks around the globe had to take active and aggressive measures to protect their local financial markets and economy during the recent financial turmoil. Thus, interest rates were reduced and quantitative easing of monetary policy brought liquidity back to the market. Fiscal spending was also augmented to stimulate demand, adding more funds available to the market.
In March 2010, the WFE was invited to take part in a conference organized by the Australian market regulator, ASIC. The topic was the transparency: how had or transparent or ‘lit’ markets performed compared to the counter markets or ‘dark’ trading venues.
While the financial crisis caused massive fallout on the bilaterally traded over-the-counter (OTC) side, exchange-traded and centrally cleared derivatives escaped with barely a scratch. Since then, growing clearing volumes point to centralised clearing becoming one of the major growth areas of the financial market. The crisis exposed inefficiencies as large segments of the market were neither standardised nor automated – despite the speed of global trading activity and the increased complexity of transactions. This was not seen to be a problem in a bull market but, when the credit crisis rapidly unfolded, users of bilateral transactions were scrambling to pick up the pieces. OTC market participants and regulators alike have realized that clearing houses offering central counterparty services (CCP) provide practical solutions that the market desperately needs: transparency, neutrality and efficiency enabling the mitigation of counterparty risk.
The global derivatives market is a main pillar of the international financial system and the economy as a whole. Today, businesses around the world use derivatives to effectively hedge risks and reduce uncertainty about future prices. Derivatives contribute to economic growth and increase the efficiency of markets by improving price discovery for assets.
This article is adapted from the book being prepared to commemorate the WFE’s 50th anniversary. The book is based on a dozen essays, reflecting on transformations of various sorts – trading floor to screen, member cooperative to demutualized company, starting a regulated market from scratch, the value of regulation, the effects of deregulation, etc. The book’s purpose is to examine the various roles exchanges play in public life, and the ways in which they have contributed to the growth of capital markets over these decades.
Trade reporting and market transparency in the U.S. fixed income OTC market will expand substantially this year as trade reporting encompasses entire new classes of debt. Two initiatives by the Financial Industry Regulatory Authority (FINRA) would more than double the percentage of the U.S. debt market subject to FINRA data collection.
On 1 February, the London Stock Exchange launched its order book for retail bonds. Opened in response to increasing demand from private investors in the UK, the initiative aims to make trading in bonds as straightforward as trading in shares by offering continuous, transparent electronic access to a range of UK gilts and corporate bonds for the first time. The market is supported at launch by three dedicated market-makers, and initially offers trading in 60 of some of the most recognisable fixed-income securities currently listed in London.