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insights – TRADERS´ Talk<br />
Listed derivatives contracts are more<br />
complicated structures than equities.<br />
TRADERS´: What does this mean in practice How will it<br />
affect key market players<br />
Simpkin: This will foster greater competition between<br />
exchange and clearing venues and should serve to<br />
drive costs down whilst increasing innovation. It will<br />
challenge the ‘vertical silos’ operated by exchanges<br />
like Deutsche Boerse, LSEG, ICE and the CME in which<br />
listed derivatives are traded and cleared at the same<br />
venue. Instead, contracts will be fungible across<br />
exchanges with a clearing structure that’s more akin to<br />
the equities model in which customers choose where<br />
they clear.<br />
TRADERS´: Is this unprecedented<br />
Simpkin: MiFID II is not unique among its peers in<br />
seeking to push clearing houses to act for numerous<br />
venues: In the US, the Dodd-Frank Act has mandated<br />
much the same process for over-the-counter derivatives<br />
whilst the Options Clearing Corporation in the US has<br />
very successfully provided fungible clearing of US equity<br />
options to over 20 competing venues for many years.<br />
TRADERS´: Can you really compare listed equities and<br />
listed derivatives Surely different products require<br />
different regulation<br />
Simpkin: Listed derivatives contracts are more<br />
complicated structures than equities. In linking<br />
clearing houses under an interoperable model the<br />
new risk, which lies between the CCPs, needs to be<br />
effectively measured and managed. The CCPs will<br />
need to understand and in some cases accept for<br />
example: each-others margin methodology, acceptable<br />
collateral and rules; legal differences in the event of<br />
a member default need to be understood and the<br />
commercial terms have to be fair, reasonable and nondiscriminatory.<br />
Whilst presenting more complexity<br />
that interoperating in cash equity clearing, this model<br />
was implemented safely and successfully between<br />
Stockholms borsen’s (now Nasdaq OMX) CCP and LCH.<br />
Clearnet Ltd.<br />
With MiFID also introducing the clearing of OTC<br />
derivatives, the need to offer customers the choice<br />
of where they clear becomes ever more important.<br />
Given the size of the OTC markets the CCPs are being<br />
asked to take on considerable new and additional<br />
counterparty, liquidity, operational and market risk. If<br />
these risks are properly measured and managed then<br />
the move to liberalise clearing could not only increase<br />
price transparency and competition but could also help<br />
provide the capacity and diversification of risk that the<br />
market will need.<br />
TRADERS´: What’s the time frame on these measures<br />
coming into force<br />
Simpkin: This is where the picture becomes more<br />
unclear. There will be a delay of at least 2.5 years on<br />
opening access to clearing – with a further, negotiable<br />
2.5 years per member state – and this could render the<br />
measure toothless for the time being. This is frustrating,<br />
but until the ‘Level 2’ text of MiFID II has been agreed –<br />
i.e. the technical detail – we shouldn’t consider it a ‘done<br />
deal’. We’re still hopeful that regulators choose more<br />
competition over protectionism, as it benefits all market<br />
participants.<br />
TRADERS´: Is BATS Chi-X interested<br />
in the listed derivatives space<br />
Simpkin: It remains to be seen how this regulation looks<br />
in its final, detailed form. We regularly review asset<br />
classes beyond equities to determine which market could<br />
prove to be an interesting addition to our business. Right<br />
now, we’re very focused on growing our market share<br />
of the European equities market, and fostering a better<br />
environment for ETFs trading. «<br />
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