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As the CEO of a global commodities exchange, this is a topic I frequently encounter. I also spend valuable resources in terms of time and money – such as legal & compliance fees - keeping abreast of the changes. What has changed in what region (for our business and our clients, the focus is Asia, US and Europe) and waiting with anticipation the outcome of various regulatory huddles that take place on global equivalence. I then head back to my clients to try and explain why their various legal entities (operating companies) in certain geographical locations can or can’t a) be subject to certain conditions b) log in to our trading terminal and c) hedge or trade a position. Whilst regulatory change is creating opportunities, it is also true that the pace of implementation and lack of alignment between regulators over that last few years has created uncertainty which inhibits market participants from real business. In contrast, it is quite remarkable that I can login to the likes of Amazon or EBay from anywhere in the world, go through that voyage of discovery of exactly where my wants and needs lie and then go on to buy or sell and settle a transaction (including trade reporting!) in minutes with anyone around the world. Yet amazingly, it remains impossible to do that in the OTC Derivatives market even 6 years since the G20 reforms started.
I have 3 children, aged 17, 12 and 9. A recent study in the UK tells me that 30% of the jobs my children will be able to do when they reach employment age don’t even exist yet! Quite a challenge for my 17-year-old as she ponders about her future prospects and wonders what university degree to pursue, in order to optimise her chances of getting a decent job as an adult. Why? Well, the global digital economy is inventing new jobs at an incredible rate. Coders and programmers, social media marketers, visualisation designers to enhance our user experience of apps and web services, platform operators, enrichment engineers to add context and personalisation to services that we use in very specific and meaningful ways in our everyday lives, are all popping up like hot cakes. The choices – whilst seemingly plentiful – can also be pretty daunting. The rate of reinvention of the digital space continues apace at alarming speed. Little wonder that my daughter is blinded by choice.
Reform of any industry is a major challenge; however, we are amidst an interesting collision of worlds. The global financial markets - specifically the regulators of such markets - need to accelerate the equivalence of market structures. The G20 reform of OTC Derivatives set out to change execution, clearing and reporting of derivative contracts. These three principle pillars of reform have been subject to lengthy legal texts around the world. In 2016, we have certainly got closer to equivalence when it comes to reporting trades to Trade Depositories and giving up trades to clearing houses (CCPs). There are major phasing and technical differences to how these rules are being implemented. This, of course, for many market participants in Europe, was the reason MiFID II has been postponed to 2018, a gesture to allow the industry to get ready but not delay. The last pillar, “Execution” and its rules and how they will apply to platform providers, exchanges and the intermediaries of the market remain less clear. Many regulators are still in consultation with local market participants on how to design and enforce rules ranging from best execution, price discovery, position limits (to name but a few), for the different styles of marketplace designs. Of course, these could take various forms, such as, “one-to-many markets” (broker platforms) and “many-to-many markets” (Exchanges, DCMs, SEFs. AE, RMOs, OTFs) etc.
The collision that sparks my mind is the digital revolution within Financial Services, commonly referred to as the rise of “FINTECH” (Financial Technology). It is certainly catching up and possibly overtaking the rule writing of the last 6 years at a rapid pace. We already see regulatory dialogue on Bitcoin and Blockchain and indeed I am pleased to see early adopters such as Nasdaq and ASX taking up on these. It’s not out of the question to potentially see an Amazon-style challenger to the current Buy/Sell-side world, backed by a slick e-commerce front end. This could well result in the global scalability of a cloud platform integrating real-time analytics, recommendation and elastic search, powering dynamic trade reporting connected to a global STP “Blockchain Ledger” solution. This would certainly optimise collateral and capital management. All these components are readily available today and its exciting to see various solutions already appearing in the market. Gartner Research published a tool many years ago called the “Hype Cycle Curve” and applied it to markets and technologies. I think this is a great visual aid to look at the phases of a technology, product or service as it goes through its lifecycle from concept to mass scale adoption. FINTECH solutions are currently largely in the “peak of inflated expectations” phase and thus in the next 2-5 years some innovations will fall away, however it also means many will reach market adoption.
So, by the time MiFID II is legally enforced in early 2018 acting as a further catalyst for new international equivalence discussions amongst regulators, will those rules have kept enough pace with industry innovation? I fear not. Why? Because as in all capital markets new advancements lead to new opportunities which commercially innovate ahead of the rules.
I can see a very exciting era of new electronic commerce ahead. Electronic ISDAs, real-time Blockchain mines for trade settlement etc., are going to turn the current “post trade” world, as we know it, on its head. I can’t wait to understand the international tax policies associated with global cloud Blockchain powered commodities, or equity trading platforms, and how local vs global tax is going to play out. So, this begs the question. Is there ever really equivalence in such a rapidly changing world?
