Financial markets still matter. Their efficient, safe and sound operation depends on three key types of infrastructure – exchanges, central counter-parties (CCPs) and central securities depositories (CSDs). How these institutions are governed critically affects their performance. Unfortunately, few understand the diversity of how markets are governed across the world, and more importantly, nobody knows how they should be governed. Till now. This report answers the crucial questions: How are markets run? and, How should they be run?
Overview of Contents: Governance is about power. The report analyses the governance of exchanges, CCPs and CSDs from a global perspective employing a range of different disciplines - business, economics, finance, law, regulation, and politics. Conceptual analyses are undertaken to examine theoretical issues, survey evidence is presented to describe how market infrastructure institutions are governed and regulated globally, and case studies detail the particular situations and decisions at various specific institutions.
Three Key Policy Questions are Addressed: What is the most efficient form of governance for market infrastructure institutions? What regulatory powers, if any, should be allocated to them? and, What regulatory intervention in the governance of market infrastructure institutions, if any, is desirable?
The Answers are Complex: A central conclusion of the report is that there is no single right answer to each of the key policy questions addressed. They are complicated questions with complicated answers. This does not mean that all the current governance models are optimal. They are not. To assess the governance structure of any institution, it is vital to evaluate a range of conceptual issues, and also the particular context in which the institution operates.
Some Relevant Current Issues and Bullet Point Responses from the Author
1) OTC Derivatives Trading: Regulatory and legislative developments in the EU and US are seeking to encourage, or even mandate, clearing some OTC derivatives through CCPs, and also trading them on electronic trading platforms or exchanges.
- Attempts to mandate particular governance models for such infrastructure are unlikely to deliver the best efficiency/risk management balance.
2) Inter-operability between CCPs: The EU Code of Conduct sought to encourage interoperability and competition between CCPs for cash equity trades. It has not succeeded in this.
- Good governance, by itself, is not enough to deliver competition in the face of significant barriers to such competition. External regulatory intervention is required.
3) Self-Regulation: There has been a strong trend to reduce self-regulation in financial markets in favour of different forms of statutory and official intervention. The financial crisis has exacerbated this trend.
- Contrary to currently accepted wisdom, self-regulation still has many benefits, and statutory intervention still has many disadvantges.
4) Target2-Securities: The creation by the ECB of Target2-Securities has been one of the most interventionist strategies for the provision of market infrastructure in recent times in the developed countries.
- There are good reasons why the ECB’s actions were justified – but significant concerns remain about how T2S will be governed in the future.
Download: The report is available free from www.oxfordfinancegroup.com
Further information: Contact Ruben LeeTel: +44 (0)20 7700 2917
E-mail: rubenlee.ofg@btinternet.com
Sponsors of the Report
The report was sponsored by a diverse group of major institutions operating and interested in financial markets. The sponsors include the Autorité des Marchés Financiers, BNP Paribas Securities Services, The Canadian Depository for Securities, Clearstream International, Euroclear, the International Capital Market Association, and SIX Swiss Exchange. Some other sponsors chose to remain anonymous.
About Ruben Lee
Ruben is CEO and Founder of Oxford Finance Group. He has over thirty year’s experience in working, consulting and research in financial markets. He has published and spoken widely throughout the world concerning financial markets, and is the author of a book entitled “What is an Exchange? The Automation, Management, and Regulation, of Financial Markets”. From 1989 to 1992, Ruben was a Fellow of Nuffield College, Oxford University. From 1980 to 1984 he worked in the capital markets in New York and London for Salomon Brothers International. Ruben is a member of the Conseil Scientifique of the Autorité des Marchés Financiers in France, and was previously on the Advisory Panel of Financial Services Experts, established by the Economics and Monetary Affairs Committee, European Parliament.
About Oxford Finance Group
Oxford Finance Group is a consulting firm that specialises in financial markets. We undertake three main types of services. We provide advice to our clients on the complicated and difficult problems they face. We help our clients persuade private and public sector stakeholders of the merits of their strategies, policies and decisions. We provide intelligence about financial markets – by delivering targeted research for our clients, and also undertaking publicly available research into topics we believe critically important.
