The World Federation of Exchanges, the global industry group for exchanges and central counterparties (CCPs), 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.
- 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.