Chicago, 12 April 2018 – The World Federation of Exchanges ("The WFE"), the global industry group for exchanges and central counterparties (CCPs), today published a joint report with global management consultancy Oliver Wyman on the pivotal role of exchanges and CCPs in supporting market integrity.
The report - entitled Market infrastructures and market integrity: A post-crisis journey and a vision for the future - looks at three key areas:
- How exchanges and CCPs - market infrastructures or MIs - have evolved since the 2008 global financial crisis in response to regulatory reform to promote safe and efficient markets;
- Trends in financial markets and their implications for MIs with respect to preserving market integrity; and
- A vision for the future role and capabilities of MIs in ensuring market integrity.
Market integrity is a cornerstone of fair and efficient markets, ensuring that participants enjoy equal access to markets, that price discovery and trading practices are fair, and that high standards of corporate governance are met. MIs foster market integrity by exercising the following functions, amongst others: rulemaking, member admission, market surveillance, market data and regulatory reporting, and investor education.
- The supervisory role of MIs has changed fundamentally in the last decade, primarily as a result of the post-crisis G20 reforms. The move towards more transparent exchange or exchange-like marketplaces, together with a shift towards CCP clearing for OTC derivatives, along with developments regarding central reporting of trades and tighter capital, liquidity and risk management standards, have correspondingly increased the mandate of MIs.
- This in turn requires significantly more focus, and resource, on risk management and supervisory practices:
- More than 70% of survey participants confirmed that supervision requirements have increased over the past 10 years, and predicted they will increase further over the next decade;
- More than 60% of survey respondents believe that market supervision is a core focus area.
- Recent trends in financial markets, such as increased regulatory demands, enhancements to corporate governance and disclosure, and the speed of technological change, all affect the role of MIs in preserving market integrity. The report identifies five key themes that MI will focus on over the coming decade:
- Higher standards of market integrity as a competitive differentiator, with MIs with more robust market integrity attracting improved liquidity and carrying lower risk premia.
- Surveillance and supervision as both a regulatory function and a client offering that in turn reduce industry-wide cost of compliance.
- Broad industry cooperation and collaboration across MIs and the wider capital markets industry such as issuers, brokers, investors, analytics providers, and custodians.
- The potential for (near) real-time surveillance with integrated functionality across trading floors, trading markets, and regulators, as a direct result of technology advances in the fields of AI, machine learning and big data.
- Interactive, outcome oriented supervision with a focus on the definition of standards and adherence to principles rather than a rules-based approach.
- The report concludes by assessing that the financial markets industry will need to spend up to $3-4 billion over the next five years to realise the agenda set out above, and estimates roughly 40% of this investment will need to be undertaken by MIs (with some of this investment already underway). The expenditure estimates include upgrades to industry infrastructure as well as the development of new capabilities to address the trends outlined in the report.
Nandini Sukumar, CEO, The WFE commented: "MIs serve a dual role: firstly, to foster economic growth, and secondly, to preserve market integrity. Today's joint WFE-Oliver Wyman report reveals the true extent of that second purpose, and showcases the evolution that MIs have undergone in the past decade to ensure the continuation of fair and orderly markets.Indeed, as regulation, technology and financial services continue to dynamically impact the markets around them, the role of MIs in preserving market integrity has never been as important as it is today. We look forward to working with our members and stakeholders to continue to take on a more significant role adding value, and safety, to the industry."
Daniela Peterhoff, Global Head of Market Infrastructure, Oliver Wyman said: "The changes we have outlined are significant and will require a robust, proactive approach. Incumbents will need to move quickly, or else risk losing share to innovative competitors. We see MIs pursuing bold investments in new technologies (such as AI and pattern recognition). We also expect MIs to take a lead in creating opportunities to collaborate between MIs, regulators and market participants. The current focus on the digitisation of risk management and compliance frameworks and tools will remain for a while. Finally, we will see continuous enhancement of supervisory functions using data analytics."
This report draws extensively on WFE and Oliver Wyman expertise, and was informed by two surveys of WFE members covering the regulatory landscape and strategic perspectives, along with interviews with senior executives across the industry. It is also supported by a number of case studies from WFE members.