Derivatives World - ‘Regulation should not be at the expense of economic growth’

21 November 2011

Volatility in the financial services industry continues to be a key topic of discussion in the sector as the 2011 conference season enters its final month.

In his opening address at the Derivatives World conference William Mitting, editor of Futures & Options World (FOW), said that instability is still present within the sector - from the uncertainty in the eurozone to the protests seen outside the Futures and Options Expo in Chicago in October.

Mitting highlighted how the fate of the derivatives market place is bound up with the wider financial services industry, which continues to feel the glare of the spotlight as the global economy stumbles and the protests go on.

While Mitting emphasised that governments and industry regulators were as much to blame for the crisis as the banks, he acknowledged that the demonstrations were indicative of widespread anger among the public which participants in the derivatives market should not ignore.

So, amid this uncertain landscape, what are the main challenges and issues facing the derivatives market place? Similar to many recent conferences, the glut of incoming regulation and technological changes dominated discussion at Derivatives World.

In his keynote presentation, Antony Belchambers, chief executive officer (CEO) at the Futures and Options Association (FOA) highlighted the vast and complex array of incoming regulatory measures. The Markets in Financial Instruments Directive (MiFID) II, the Markets in Financial Instruments Regulation (MiFIR), European Market Infrastructure Regulation (EMIR) and the Dodd-Frank Wall Street Reform and Consumer Protection Act are all expected to transform the derivatives space - but Belchambers insisted that regulators need to ensure these measures do not restrict growth.

He said: “No one will quarrel with the fact there is a need for regulation, as the crisis exposed numerous weaknesses within financial infrastructures. On the other hand, the need for post-crisis economic growth is as great as regulatory repair and one should not be bought at the cost of the other.”

Echoing sentiments made during his appearance at the TradeTech Architecture event earlier this year, Belchambers said that too much regulation and an overly cautious approach by the financial services industry would be just as detrimental to its health as too little regulation.

“As an industry we are too good at catching crises after they have happened. ‘People risk’ is where the heart of crises lies. Crises are also cyclical - they will inevitably take place. What we need to do is do our best to prepare for them and identify the early warning signs,” he said.

However, in other sessions, panellists emphasised that participants in the derivatives market will struggle to implement any meaningful changes until the full extent of the new regulation is confirmed. “The devil is in the detail,” noted Fixnetix’s director Bob Fuller, and the detail is not yet totally clear.

MFGlobal’s recent collapse was highlighted as a potential area of conflict for the industry over how future regulation is set.

Barry King, manager of OTC Derivatives and Post Trade Policy at the Financial Services Authority (FSA), said that the collapse of such a large firm suggests that there has yet to be a significant change in the sector since Lehman Brothers imploded in 2008.

“The industry is still waiting for Dodd-Frank and EMIR to be put in place. But there is a significant risk that politicians and regulators will want to go even further before this is implemented,” he explained.

High frequency trading (HFT) and the risk controls surrounding this practice was a topic which many kept returning to throughout the day. HFT has been a contentious issue for the financial services sector with some commentators claiming that it was in part responsible for the ‘Flash Crash’ of May 2010.

Hirander Misra, managing director of Misra Ventures, said that OTC derivative trades by high frequency traders are difficult to monitor as they are now cross-asset, exchange and jurisdiction.

But Phillippe Carre, global head of Connectivity at SunGard, said there is no “magic wand” to help remedy the situation.

“A crisis is going to happen at some stage and all the industry can do is implement a strategy to minimise the impact of the next failure. The market needs to work with all participants to get this right.”

By Jim Ottewill

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