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Viewpoint – Listen to customers and markets will follow

Customer choice, competition, and market access will drive vibrant derivatives markets

6 April 2021

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Global cleared derivatives markets have been through a lot in the last year. But I am encouraged by the fact that, even in the face of these challenges, our industry remains resilient and adaptable as we face the future together.

These strengths were on display yet again at FIA's virtual Boca conference in mid-March. Although virtual events have obvious limitations, they allow us to reach all corners of the globe, thanks to cutting out the hurdles of cost and travel. We saw 1,700 attendees sign up for this annual event -- more than any other Boca in FIA history, with participants representing traders, brokers, exchanges, clearinghouses, technology vendors and regulators from more than 30 countries.

Though diverse perspectives were shared, there was also a common purpose to our gathering -- building better, safer, and more efficient derivatives markets that benefit us all. This shared vision is always a driving force for FIA and our Boca event, and this year was no exception.

Global cleared derivatives markets are more interconnected than ever in 2021. However, we still face challenges to ensure regulation does not fragment or limit customer access to global markets. In fact, market access was one of the most important topics in our Boca program, most notably in remarks from Mairead McGuinness regarding the future of euro-denominated clearing in a post-Brexit world. Appointed European Commissioner for financial services in October, she delivered a keynote speech that candidly described the EU27's serious commitment to lessen the reliance on UK CCPs for euro clearing and the EU's sense of vulnerability on this topic following Brexit.

FIA supports EU efforts to develop well-crafted regulation that ensures financial stability for European markets. Improved financial stability was a fundamental principle of the G20 reforms after the 2008 financial crisis, and the driver of regulated clearinghouses that brought greater transparency to our industry. FIA also applauds the European Commission's stated goal of strengthening EU financial markets and infrastructure. Further development of EU financial markets will break down barriers by enhancing competition and lowering costs for end users.

These outcomes would greatly benefit our shared global economy.

However, these important goals can and should be achieved without rigid policies or location requirements that fragment markets, reduce liquidity, or increase costs for market participants. Financial markets evolve and thrive when customers and businesses can make informed decisions on where to raise capital and manage risk—no matter the market location. International regulatory equivalence standards and recognition regimes have developed over time to allow this to occur without sacrificing the safety and soundness of our interconnected financial system.

As a former regulator myself, I can attest that "it takes a village" to regulate a global marketplace. Only through international comity and cooperation can we achieve this goal. To be clear, this does not mean that national authorities have to completely delegate their oversight. Quite the opposite. Most recognition regimes preserve the rights of home country regulators to scale up their authority as risks to home jurisdictions increase.

The good news is that EU regulatory authorities now have robust powers under EMIR 2.2 to supervise systemically important third-country CCPs and protect EU financial stability. This regulatory toolkit provides the EU with the ability to tailor oversight of foreign clearinghouses based on potential contagion risk. There are also some recent signs that rebalancing by market participants may be occurring on its own as participants seek to avoid having all their eggs in one basket as Europe builds out its financial infrastructure.

FIA strongly believes that the development of competitive, efficient and resilient markets is best achieved by market-driven solutions and client demand over the long term. Mandating where participants trade and clear would eliminate customer choice and harm the growth of financial market infrastructure by creating unintended costs and risks. These actions may ironically place EU customers and clearing members at a competitive disadvantage to their international colleagues, or in the alternative set off a ripple effect for other nations to similarly pick up their overseas marbles and go home.  Either way, customers lose.

The question of euro clearing is undoubtedly complex. FIA urges regulators to listen to customers and support the equivalence standards and recognition processes that have allowed our global markets to develop and thrive with confidence over the last 50 years.

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