Today the news is full of major stories related to climate change with the recent COP26 event, inflation and economic growth concerns, and a crypto market that is setting new records every day. While we track these worldwide headlines, we cannot forget our need to invest in our markets' roads, bridges, and highways that allow products to settle predictably and safely for market participants.
I say this because when Covid abruptly shut down the world economy in March 2020, our markets experienced record activity and extreme volatility that highlighted some of the bottlenecks of the trade and clearing lifecycle.
The good news is our clearing system worked. At the time, FIA worked to keep markets open to ensure that companies could properly risk-manage even in extreme volatile events. As you know, our markets were able to handle this enormous stress and continue to manage risk and discover prices.
However, this 100-year flood incident exposed some weaknesses and pointed to the need for modernizing our settlement system. Despite good intentions and the work of many people in the past, efforts to improve the workflow in the trading and clearing process have been limited by bespoke processes and the lack of interoperability of systems.
Like the equities markets recent work to shorten their settlement cycle, we must ensure that our markets have the most efficient procedures and standards to settle and clear trades in the right account on trade day. That's why FIA embarked on an initiative to assess the lessons we learned from the March 2020 event, and to develop a strategy to improve and modernize our settlement workflow. This will be our North Star that will guide our efforts.
To get there, a consensus approach is required. Last year, FIA formed a board of directors committee, utilizing subject matter experts to help drive recommendations. With this foundational work, we set up an industry Taskforce on standards that incorporated the views of global exchanges, clearinghouses, and customers.
These efforts have resulted in the recent release of a report called “Modernizing the listed derivatives workflow: a blueprint for change. JDX Consulting conducted the effort, and it is based on the interviews of more than 60 industry participants in various roles. The Blueprint addresses the challenge of achieving industry-wide improvements by establishing a framework for building consensus and collaboration among all industry segments.
Importantly, the Blueprint provides recommendations on ways to improve our infrastructure through the development of standards and best practices. These recommendations include:
- Forming an independent Markets Standards Body to oversee the development of certain market standards and best practices in the trade and clearing lifecycle
- Ensuring the standards body have proper governance that broadly represents industry stakeholders with its deliberations open and transparent to the marketplace
- Adopting a consensus-driven agenda that is developed and supported broadly by the industry
As memories of March 2020 fade, the Blueprint recognizes that the industry will need more than good intentions and recommends institutionalizing a more formal structure to align the markets with best practices. Consensus and transparency are key to the acceptance of these standards and are critical to advancing these efforts.
FIA will be working with the Taskforce and other market stakeholders in the coming weeks and months to consider these recommendations and build support for this initiative. We have launched a webpage where you can learn more about the Blueprint. We invite you to register your interest to receive updates.
This work will not be easy. Heck, if it were easy, we would have done it already. But I am confident if we work together, we can achieve a cleared derivatives market that is safe, open, transparent, and competitive, and it will set our industry up for growth and expansion.
Principles of Open Standards Initiative
The FIA Taskforce on Open Industry Standards will follow these foundational principles:
- Aim for consensus, industry-driven approach
- Must be open and transparent governance
- Leave adversarial hats at the door
- Promote competitive and innovative operating system that encourages interoperability
- Focus on practical, real-world solutions while building a foundation for larger projects
- Develop shared industry metrics that will drive accountability and success
Visit the Taskforce webpage where you can learn more about the Blueprint, or register your interest to receive updates.
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