Next year will bring new developments in market structure, stemming both from regulatory and political change. The DESK asked Jennifer Keser, head of market structure and regulation for Europe and Asia at Tradeweb, and Matt Coupe, director of market structure EMEA at Barclays Investment Bank, which market structural change traders should focus on in 2024.
“Before looking at the likely changes that could impact market structure in 2024, I wanted to highlight an unlikely change that could have been beneficial for our industry: the alignment and scope of the derivatives trading obligation (DTO),” says Keser. “While policymakers and regulators continue to be focused on efforts to reduce systemic risk, increase transparency and maintain liquidity, they seem to have de-prioritised their commitment made back in 2009 in reforming over the counter (OTC) derivatives markets.”
This is potentially having an impact upon the adoption of e-trading in the space, intended to increase standardisation and transparency of the market.
“As an electronic derivatives trading platform, we believe more could be done to continue the significant progress that was made in previous years towards a more transparent and efficient derivatives marketplace,” she says. “In light of this year’s LIBOR transition to new reference rates, both the UK and the US decided to continue to implement a robust DTO scope, whereas the EU seems to have fallen behind with a significantly reduced scope. The lack of equivalence or, at the least, reciprocal recognition granted on the scope of DTO instruments also needs to be addressed.”
Coupe said, “For 2024 the most impactful market structural change will be the US, Canada, and Mexico migrating to T+1.”
There are a lot of things which still need to be ironed out, he notes, with conversations to be had and solutions that need to be developed for clients.
“It hits trading and FX, it affects financing, funding, workflows, confirmation, across all asset classes and across the entire investment lifecycle. Implementation is going to be the critical focus but alongside that, you’ve got the discussion and debate happening in the UK and EU. There’s a technical task force working on this from the UK perspective on how to get an effective migration. “
Keser adds, “Settlement certainty and uniformity are key when different settlement cycles across different instruments exist. Also, while there are benefits in harmonising settlement cycles, the ability of the market to operate with shorter settlement cycles underpins any harmonisation.”
In the US, Treasury market reforms will affect liquidity beyond those markets due to the role of both government bonds and cash as collateral for margining, with the repurchase market being a common source of exchange.
“Looking at wider implementation dates the most impactful is the mandate of US Treasury clearing for cash and repo,” says Coupe. “We’ve got an implementation timeframe for June 2026 but there’s a huge amount of work to be done so the industry understands and quantifies the impact, notably how liquidity is going to evolve. In the US a really important rule from a cross-asset perspective, is debate on defining a trading venue, because current platforms that trade US Treasuries with need to register as an ATS and other activities, the US version of an MTF. This definition is the same trading venue perimeter conversation as happened in Europe and the UK.”
Keser says, “With both the UK and the EU having published their guidance on the trading venue perimeter this year, there have been recent developments of previously unregulated system providers going through MTF authorisation, and 2024 could see more of that. Especially with the definition of a multilateral system now being included in MiFIR and not just MiFID, national regulators will need to apply a uniform scope of activities and enforce the proper regulatory framework for multilateral systems.”
A further development of the MiFID regime, with Christine Lagarde recently suggesting that the Capital Market Union might be failing in its present form, can also be expected.
“There will be the next iteration of MiFID – V or VI as we might call it,” notes Coupe. “The EU has a Level One text landing in Q1 or Q2 2024 with elements landing immediately and other with delayed implementation. The work being done here is fundamentally about technical points such as how transparency thresholds can be calibrated, with a huge amount of work on ESMA. It’s critical that the industry work with the regulators throughout. There’s a really important discussion around instrument identifiers, there’s a consultation paper out about OTC derivatives. There could be a lot of impact and a lot of benefits if we have an effective identifier in Europe,”
Keser adds, “One of the last pieces of regulatory review to be conducted under the current EU institutional framework is EMIR 3. Due to be finalised by March 2024, it will require EU investors to hold an active account with an EU CCP in order to clear EUR-denominated OTC derivatives transactions. This could force certain market participants to maintain at least two CCP memberships, which could prove significantly costly and increase the price of trading too. In addition, concentration of clearing on a single CCP – whose full operational/clearing capacity has not been tested previously and product offer in other currencies is limited – is not only potential cause for systemic risk, but will also affect trading workflow efficiency.”
