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While the framework of the new legislation has been set, with a determination on the part of the EU to show true global leadership, the devil as always is in the detail.
We share an important concern that the technical standards, as currently drafted, may limit the effectiveness of the all-important access provisions that will open up Europe’s, until now, largely closed and siloed derivatives markets. This is not an esoteric concern — getting this right is critical for the EU’s financial markets and for the EU’s economic growth.
That is why we have written a joint letter to Steven Maijoor, the Chair of the European and Markets Authority, requesting that he ensures that Esma’s draft rules cannot be interpreted with the purpose of frustrating legislators’ intent or preventing a genuine shift to open access in European derivatives markets.
In an age where transparency and consumer choice are paramount, we welcome the EU’s resolve in introducing this framework. We believe that investors and market participants will embrace and reward European leadership in this area. The status quo cannot remain that allows exchange groups to operate a model where investors are prevented from choosing where to trade products because of restricted access to clearing. This in effect forces trading and licensing of products on to a single venue that then acts as sole gatekeeper to clearing.
Properly implemented, open access will stimulate choice in the execution and clearing of products across asset classes, creating deeper pools of liquidity, reducing costs and promoting enhanced risk management across the whole financial system, through netting and cross-margining. It has significant potential to deliver margin and collateral efficiency while spurring responsible innovation, benefiting investors, market participants and the EU’s overall economy.
We understand the need for proportionate safeguards, already enshrined in Mifid II, such as transitional periods to ensure a smooth path to this new, open environment. The concept itself, though, is neither new nor frightening.
For a number of years, we have been operating safe and robust infrastructures in a highly competitive and open environment, notably in cash equities, fixed income, exchange-traded and OTC derivative markets. And even some closed infrastructure providers are recognising the benefits of this model, taking steps towards open access elsewhere in the world.
We support Esma’s approach whereby access can be denied only if it leads to undue risks that cannot be mitigated by infrastructure working together. We believe it is essential that Esma avoids including grounds for denial that are spurious, duplicative or lack objectivity, and consequently protecting the interests of incumbents.
Esma needs to ensure a robust and transparent process to determine which contracts can be classified as economically equivalent for netting by incumbent clearing houses, leading eventually to a harmonisation of standards in the EU. For the successful and practical implementation of the legislation, clearing houses must be obliged to be consistent and open about how they determine which derivatives contracts are economically equivalent and which netting processes apply. Only then can access provisions be applied fairly for new entrants.
To prevent abuse of this process, we call for a rapid appeal process overseen by Esma. This will ensure any disputes over access are efficiently and swiftly resolved. Genuine, far-reaching change is coming to the European derivatives market. Change that has the unequivocal backing of the vast majority of participants, including the world’s largest asset managers, investors, sell-side firms and trade associations.
It is in the interest of every EU citizen, every EU member state, and our collective prosperity that the open access framework is implemented with clear, effective and well-drafted rules to the benefit all market participants.
Together we ask Esma to safeguard the guiding spirit and vision of Mifid II, an epochal piece of legislation, through to the end.