London, Wednesday 5 June 2019 – Dr Urs Rüegsegger, Chairman of the World Federation of Exchanges (“WFE”), the global industry group for exchanges and CCPs, today delivered a speech at the FESE Convention in Dublin on two topics that are key strategic priorities for the WFE: international market fragmentation, and the debate around market data pricing.
“Ladies and Gentlemen,
I am delighted to be able to address you today on behalf of the World Federation of Exchanges.
As you may know the WFE is the global industry group for exchanges and CCPs – spanning geographic territories to cover members such as Nasdaq to the National Stock Exchange of India. Earlier this year the WFE’s members came together to agree its business priorities for 2019:
- market fragmentation;
- technology-related policy – crypto assets and cyber resilience;
- ESG issues in market structure;
- clarifying the nature of market data; and
- CCP-related capital matters.
The significance of these issues to our industry is quite apparent, and it is more important than ever that the WFE and other stakeholders continue to form an authoritative and respected set of voices in the coming debates.
Many would consider it an understatement to say that we currently live in ‘uncertain times’. Around the world we see protectionist forces causing economic and political divisions which in turn create great uncertainty for the public and the financial markets which serve them. As a gathering of Europe’s market infrastructure, we are the critical infrastructure supporting these markets. As such, it is important that we consider how we help to manage the response to this uncertainty; how we continue to promote the interests of our citizens and consumers; and how we can make our voice heard when so many are scrambling to be the loudest and only voice.
To that end, I would like to address my remarks on two topics which are priorities for the WFE, firstly that of international market fragmentation, and secondly, the debate around market data pricing.
It is widely recognised that few national market barriers are an important prerequisite to helping to level the playing field necessary for the functioning of globalised financial markets. Where we see the introduction of barriers, we also see higher costs, slower innovation, threats to financial stability and a host of other negative attributes. Sadly, this form of international fragmentation is a trend which continues to exist not only in post-crisis regulation but also in contemporary policy proposals. The effects of the creation of cliff-edge effects in liquidity could, ultimately, give rise to market dislocations, reduce the diversity of market participants, and consequently decrease risk diversification. Bad for growth, bad for stability, and bad for consumers.
A particularly prominent issue surrounds that of geographic fragmentation in the implementation of certain standards, a pertinent example being the implementation of a share trading obligation, where, in fact, standards are objectively equivalent. I am, however, pleased to see that ESMA has reconsidered its position on this in relationship to potential future arrangements with the UK, but, I understand, the issue is not yet resolved. Moreover, there is a wider need for such jurisdictions to recognise outcomes-focused approaches, rather than line-by-line legislation as an objective. This would ensure that we do not accidentally create a multitude of unintended consequences but instead seek to raise all objective rather than political regulatory standards in an appropriate manner. I suggest this as a representative of an organisation which has experienced first-hand the concerns such actions can create for an organisation’s ability to serve its customers.
There is one issue in particular which has benefitted greatly from international cooperation in the form of MoUs and global sandboxes – financial technology (fintech) innovations. We operate in an age of technological innovation and application that creates new challenges for regulators and the jurisdictions they supervise. Fintechs often disrupt markets while not fitting neatly in established policy frameworks. When they do not operate under regulatory policy they can succumb to compromises in their systems to the detriment of investors. This is especially the case with crypto-assets. National regulators are reacting, and rightly so, but there is a unique opportunity for international regulatory standards to be developed now. This would head off the challenges they present at an early stage, rather than patching together a conflicting set of requirements from multiple national authorities. Having a coordinated regulatory approach would enhance financial stability, reduce regulatory arbitrage, reduce regulatory costs, and push future growth in the industry in the right direction to the benefit of all consumers.
The damaging consequences of international market fragmentation, as a result of a lack of regulatory coherence, is something which I am pleased to see has been prioritised by the Japanese Presidency of the G20. Indeed, it speaks for itself that the Financial Stability Board has produced a report on the issue for this month’s gathering of the G20 and I welcome its recommendations for further work to address fragmentation.
But international standard-setting bodies should go further in ambition and creativity to pursue ex ante policy co-ordination and monitor national divergence from international standards. To achieve this, they require political backing to drive forward a principles-based regulatory approach centred on:
- increased transparency in international agreements; and
- enhancing the dialogue between international standards setters and national policy makers.
I am encouraged by yesterday’s statements by IOSCO and the FSB which endorse this sentiment and I hope that the leaders of the G20 enable them to achieve this. This is necessary to ensure continued stability and sustainable growth.
A consequence of regulatory coherence is that it facilitates exchanges competing for consumers’ business. Innovative and competitive markets operate under defined rules to create products that benefit consumers – including reliable trade executions, transparent price formation, and the resulting equity data.
Given the recent pricing debate on that last subject, I would like to briefly expand on this point.
It is clear to me that market data would not exist in the first place but for the role played by the exchange in establishing the trusted price and providing a safe trading environment. Data is what the exchange creates – market participants are matched together, they standardise data intake, and aggregate data to an order book and generate market prices. Stand-alone order prices provided by one single market participant would be of no value. By bringing together otherwise fragmented interests, and doing so in a structured, ordered way, exchanges provide a more relevant and useful picture of the market.
Further, the trading environment created by an exchange is one under defined, heavily regulated rules that enables reliable outcomes on transactions as well as transparency. This environment is further developed by exchanges investing in business lines, from IPO listings to liquidity incentivisation and high-speed matching engines which leads to the price formation. In turn that results in the joint product of trade execution and data.
To ensure the accuracy and integrity of the data, an exchange will invest in its IT systems that enable an exchange to function, both hardware and software, such as market surveillance. It will protect its data via investment in cyber resilience and control mechanisms to avoid conflicting or abusive behaviours.
As result of these actions reliable, authoritative, transparent data is produced from which companies such as data vendors benefit by enabling investors to evaluate the performance of their portfolios. Amongst the entities who also generate business from the exchanges’ data are brokers, inter-dealer brokers, institutional investors and index providers, as well as the data vendors. So, to pursue a line of seeing the data as some form of public property would simply be handing a huge advantage to one sector of the financial services industry to the detriment of others.
The quality of the information that exchanges create means it has a value. The price at which information is licensed is accordingly a commercial matter for each individual consumer and exchange. Indeed, I found it particularly insightful that the Oxera report established that aggregate market data revenues are equivalent to an annual real growth rate of 1%. Given the time that we are being forced to spend on this, I hope that we are soon able to reach a sensible, final conclusion on this matter.
I will close by saying that like the issue of market data pricing, we, as an industry, must continue to emphasise the value and integrity of exchanges to the regulators and supervisors – when other sectors seek to shout the loudest. We have to be the clear voice calling for, and providing the framework for open, transparent and fair markets. For sustainable growth, for stability and for consumers.
I would encourage our industry to work together in order to clearly broadcast the benefits to society and help create the framework needed to allow us to best serve the customer.
N.B. This is a transcript of the speech, so please check against delivery.