An interview with Xavier Rolet, CEO of the London Stock Exchange Group about their latest initiative.
ISS: The phrase open access seems to have assumed an almost mystical status in relation to derivatives in recent months. How do you sum it up briefly, and the driving forces behind it?
LSEG: Open access to us means, in essence, greater choice and greater transparency for our customers. Times have changed and as consumers we have come to expect choice and transparency in all of the products or services we purchase. We don’t believe that derivatives markets should be any different. The changes being brought about by MiFID II will ensure they aren’t.
ISS: Why Open Access?
LSEG: Open access to any market, from labour and intellectual property to food and industrial goods, lies at the heart of the philosophical approach to the EU single market. Financial markets should be no exception, and users will benefit when they too are opened in a fair and transparent way. This has happened in equity markets following MiFID I but for too long the world of European derivatives trading and clearing, the backbone of a trillion Euro industry, has not embraced the principle of Open Access.
ISS: How and why will it do this?
LSEG: Quite simply via the ability of investors to choose where to trade and clear their products; by preventing exchanges and clearing houses from operating a “closed” silo model, tying the trading, clearing and licensing of products to a specific venue. We will continue to offer non-bundled fees for our services and offer those services individually for users to choose the right mix for their business.
For customers that will dramatically add the potential for increased netting, reduced collateral or margin and liquidity enhancement for markets.
ISS: The LSEG website refers specifically to the power of competition. Can you elaborate upon that in this context?
LSEG: Today’s challenge bears a remarkable resemblance to 2007, when European exchanges enjoyed a virtual monopoly on the trading of shares. The revolution brought about by MiFID I, a landmark piece of EU legislation, introducing competition to equity trading, made for difficult reading for Europe’s exchanges.
However, the result for customers and investors was transformational: lower trading prices, reduced spreads, faster and more resilient technology, and a fundamental rebalancing of the relationship between the providers of infrastructure and its users. That’s the power of competition.
Today, the European derivatives market finds itself in a similar position and exceptional change is just over the horizon. More open markets not only bring economic benefits to customers, they also increase transparency and safety.
ISS: Is the LSEG on its own?
LSEG: Not at all. In an open letter issued last summer, the vast majority of the financial services industry voiced its support for a more open model, including the world’s largest asset managers, investors, major sell-side participants and trade associations. Regulators too have voiced their opinion, identifying fair and open access as an important foundation in the building of safe and efficient markets. For example, CPSS-IOSCO has identified fair and open access to trading venues, CCPs and indices, based on transparent and objective criteria, as important for ensuring safe, efficient and continuous markets.
ISS: But will Open Access mean greater risk as some market participants suggest?
LSEG: This is a common refrain from those opposed to Open Access and from those with most to lose should the principle be enshrined in European legislation. In fact, simple mathematics tell us the opposite applies. Fragmented clearing silos reduce the opportunity for increased netting and compression that Open Access would provide.
The truth is that Open Access increases opportunities for balance sheet efficiencies and reduction amongst our customers, thus reducing systemic risk
ISS: And of course you can draw on the experience of the past few years? Is there anything you can take from that?
LSEG: If we are to learn anything from the tumult of 2008-9, it is that concentrated and undiversified pools of risk are the genesis of financial crises. It was for precisely that reason that the G20 made the bold decision to mandate the clearing of a wide array of financial products, to shed more light on previously opaque markets. We should not fall short in our aim of safely managing risk by allowing the perpetuation of closed silos operating at the heart of the European derivatives market.
ISS: What are the potential efficiency gains through Open Access?
LSEG: One of the largest drivers of efficiency in any market is competition which broadly speaking, tends to drive up service levels while driving down price. Unbundled services and fees will allow customers the choice of where to spend and create significant opportunities for netting, margin reductions and improve market liquidity.
ISS: What is the difference (if any) between Open Access and Interoperability?
LSEG: The difference between the two is important, so they should not be confused. Open Access means ensuring non-discriminatory access to trading and clearing infrastructures. In short, trading venues should have non-discriminatory access to CCPs (central counterparties) – allowing investors to trade on alternative platforms and benefit from lower trading fees across asset classes.
Similarly, CCPs should have non-discriminatory access to trading venues – offering investors the opportunity to benefit from reduction/ netting of their clearing margin within an aggregated and enhanced liquidity pool.
Interoperability means allowing products traded on separate venues to be fully fungible. In other words, it obliges clearing houses to interconnect, sharing their open interest pool and helping market participants to reduce costs by netting and cross-margining trades taking place on different venues. This forces CCPs to swap collateral amongst themselves, creating a systemic link between each other.
Crucially, we do not believe and have not called for interoperability to be mandated, particularly for derivatives.
ISS: You sound certain. Is there no room for even slight doubt?
LSEG: Our position is clear. We firmly believe that Open Access is the right choice for European markets and that interoperability should be permitted but not mandated, particularly in respect to OTC derivatives where nothing should stop CCPs and Trading venues seeking to cooperate to meet the needs of investors.
ISS: This is all very laudable, even convincing, and we’re speaking here of derivatives rather than underlying securities, but doesn’t the mere existence of your Turquoise division and its exploratory work with the Plato Project undermine your devotion to openness and transparency?
LSEG: Not at all and quite the opposite in fact. Turquoise, and any work we might undertake with Plato is a great example of our Open Access approach: partnering with customers to deliver the right solution. It’s an approach we’ve adopted with LCH.Clearnet as well to great effect.
We’re also open to working with our competitors if it produces the right result for our customers. In August, FTSE Russell and CME Group signed an agreement that will see CME Group list derivatives contracts based on Russell indexes. In technology, we have provided our world-leading MillenniumIT offering to more than 40 exchanges and venues around the world.
Open access is not a new concept, nor exclusive to our Group. In fact, it has been common to successful markets in Europe, following MiFID I and in the US for a number of years. For example LCH.Clearnet clears for Cleartrade, a Singapore-based affiliate of Deutsche Borse on an open access basis.