Regulatory momentum continues
A flurry of regulatory activity is expected to follow once the new-look European Commission (EC) finally beds itself down, according to several speakers during the panel called Regulation and Politics: The Post-Trade Challenges. Ian Cornwall, Director, Market Structure at SIX, said the EU would continue pushing through with its sustainable finance programme, adding also that regulators are planning to revive the ambitious - albeit stonewalled - Capital Markets Union (CMU). Elsewhere, he said further revisions to the European Market Infrastructure Regulation (EMIR) and the Markets in Financial Instruments Directive II (MiFID II) are likely to emerge off the back of recent industry consultations.
Other incoming rules are causing tensions within the industry as well. Göran Fors, Deputy Head, Investor Services at SEB, acknowledged there was still uncertainty among market participants about some of the settlement discipline measures such as mandatory buy-ins being enacted under the Central Securities Depository Regulation (CSDR). Most significantly, Fors advised the industry not to underestimate the implications of the incoming Shareholder Rights Directive II (SRD II), which is due to take effect from 2020. “SRD II will affect everybody in the entire custody chain from the issuer to the investor,” he continued.
Swiss Equivalence and Brexit
As is inevitable with a session of this nature in London, the topic of Brexit arose. The speakers agreed that proactive industry engagement has played an influential role in shaping regulation for the better, but there are concerns the EU is still adopting an excessively prescriptive approach towards equivalence instead of one based on outcomes. In particular, Cornwall said the EU’s refusal to grant Switzerland stock market equivalence was indicative of this rigidity. Similar challenges may resurface post-Brexit, although financial institutions largely appear to be well prepared, said panellists. Graham Willcox said many firms had contingency plans in place, adding the UK Financial Conduct Authority’s Temporary Transitional Power scheme should help minimise disruption in the event of a no-deal Brexit.
Managed disruption: DLT and post-trade
While providers recognise blockchain could potentially transform numerous intermediary activities such as reconciliations and corporate action processing, the technology is widely expected to play a vital role in facilitating the trading of digital assets. “Digital assets are broad, comprising cryptocurrencies such as Bitcoin which are traded on public blockchains; payment tokens, securities tokens; asset-backed tokens and utility tokens,” said Nadine Teychenne, Director, Global Product Development, Custody and Clearing at Citi.
The benefits of tokenisation are well-known. Proponents such as Tomas Kindler, Head of SIX Digital Exchange (SDX) told the audience that tokenisation will help support the trading of illiquid securities such as real estate and art collectibles. “Digitization of illiquid assets will make such instruments available to investors with smaller ticket sizes. In addition, it will augment price discovery and make it easier for investors to transfer asset ownership,” said Kindler. Just as the Swiss Stock Exchange was a pioneer in electronic trading during the 1990s, he highlighted it was leading the way in the issuance, trading and settlement of digital assets.
However, the success of digital assets is not fully assured. Kindler conceded digital assets were not currently subject to proper regulatory oversight, a deficiency which risks exposing investors to fraud, either through product mis-selling or by outright theft of their online private keys as a result of cyber-attacks. This has discouraged a lot of institutional investors from participating in digital asset trading. In response, Kindler urged global regulators to introduce a consistent supervisory framework for digital asset trading. Moreover, it is essential that trusted counterparties such as financial market infrastructures (FMIs) and custodians have an active role in promoting the growth and development of the market.
Incumbent providers cannot afford to stand still, a point made by Jos Dijsselhof, CEO at SIX, who warned attendees at the Post Trade Forum that the industry was facing a number of existential challenges from new market entrants. With large technology companies such as Google and Amazon increasingly participating in financial services more generally, post-trade providers must be on alert and battle ready, he explained. “We need to continually evolve and ensure that our technology is fit for purpose. The cost pressures we face are not going to disappear so it is important that we identify new revenue streams,” said Dijsselhof.
The link to the video can be found here.