Competition in the Derivatives World
The recent crisis, the regulatory framework that might come into place, cost-cutting, technology all make an impact on the derivatives industry. Newedge’s Guillaume Roux-Chabert shares his opinions.
One of my ‘hit-by-the-crisis-turned-consultant’ friends described the current environment as: “When I call a client, I just ask them if they were long this year. Then I know if it’s worth meeting them or not”.
As we look forward to 2010, and many of us would like to forget about the past year, it is worth remembering the significant number of changes and opportunities which have been presented over the course of the last 12 months. Certain voices have screamed for more regulations, some exchanges are lining ex-IRS inspectors to hunt down any user of their precious market data while others claim there is not enough competition between securities and futures clearinghouses. There have even been calls for a combination of the CFTC and SEC into one agency. So how do competitors in Asia-Pacific play a fair game when a growing part of this world appears to think: ‘Heads: Wall Street wins; and tails: the taxpayer loses’?
Regulation and its many effects
Play by the rules and watch closely how it affects the order flow! Today, as retail clients have become extremely sensitive to transparency, the brokers should be the forerunners who ensure comprehensive and consistent regulatory oversight over all derivatives. There have been requests for the Commodity Exchange Act (CEA) to be consistently applied to all derivatives, no matter what type of derivative is traded or marketed. To avoid a similar scenario every financial instrument that is directly sold to the public should be regulated. Given the call for transparency from the retail clients and the fact that the US Congress might soon mandate firms to put a framework in place to enhance transparency, retail brokers should continually repeat the following to their clients ‘A derivative is not like any financial instrument. It is not a security as it does not clear and settle within one day of trade date’.
Competition between the Exchanges will also bring about better transparency. Of the four principal segments of our financial markets system (securities trading, futures trading, securities clearing and futures clearing), we currently have strong competition among exchanges and clearinghouses in only one segment: securities trading. It is indeed interesting to note that trading fees charged by the U.S. Equity options exchange (regulated by SEC) is much lower than that charged by U.S. Futures exchange (regulated by CFTC). Even if better regulation and higher transparency are for the best of the public and its government, the smart players in the industry might like to wait and watch for the US to set their rules, and then see what Asian exchanges and clearinghouses eventually decide. Higher transparency and better regulation also means more administrative work, extra resources and higher costs.
Some clients like the ‘Sovereign Funds’ might be uncomfortable with the changes and might prefer other pools of liquidities, for instance in Asia, where they could be delivered the privacy they legitimately deserve. This plus the consistent growth of regional production/consumption as well as new Asian Commodities Exchanges could be the stepping stone in setting the material prices without having to wait for other Time Zones.
Service: Proprietary trading and Conflict of Interest
Let’s face it! No matter how high the ‘The Chinese Wall’ in a company, having both the proprietary desk and the brokerage/clearing unit under the same umbrella means we are basically combining two activities that strongly impact each other. The sales team that many a time represents both the activities might or might not make the right delivery of information to their clients.
This is definitely not an issue for pure agency clearers enabling their sales team to focus on the service, fees and technology. Yet, very few brokerage houses offer only pure brokerage/clearing services or agency/research service.
