Don’t let Regulation Choke Innovation

This year’s FIA IDX International Derivative Expo kicked off with a pointed note of caution to regulators from FIA’s president and CEO Walt Lukken. He said that the industry is facing some real challenges from new regulatory regimes and their costs to FIA members.

“Unfortunately, so much medicine has been prescribed since the financial crisis that the health of the patient is now suffering,” said Lukken.

He hopes that a balance “between protecting the markets and allowing for innovation and growth” can be struck between regulators and participants.

In the opening session titled New Directions, Fintech was a big topic of discussion with blockchain featuring heavily. NASDAQ spoke about how it considers itself to be a Fintech, and is currently trialing blockchain with many small projects. The CME also referenced blockchain but also highlighted efforts it is making in cyber security.

Jeffrey Sprecher from ICE was less bullish about blockchain saying that any new technology needed to do things better, faster and cheaper and that he had yet to see a blockchain use case that could do all three.

Garry Jones from the LME said: “It’s not the technology, but how you use it.”

There was a lot of discussion about Fintech investment in Asia; Japan has invested $5bn in Fintech since 2015 and there is also lot of investment in Singapore. The Monetary Authority of Singapore (MAS) has proposed a “regulatory sandbox” that will enable financial and non-financial institutions   to experiment with Fintech solutions.

Although Brexit could not really be discussed – regulators are not allowed to discuss it in the run-up to the vote - the question of how to prepare for possible exit from Europe did come up (as did the question of whether the UK would be bound by European regulation post-Brexit).

Regulation would not be impacted for two years, but it was thought that after that time the UK would pick and choose which regulation it would want to adopt and perhaps fine tune.

The US election cropped up in the discussion too with the possibility of Donald Trump winning and reversing the Dodd-Frank laws. 

Regarding MiFID II, someone noted: “Intermediaries will do very well under MiFID II. End users will suffer, but will have more choice in their suffering”.

In the next session, Moving the Industry Forward, participants discussed how market liquidity has declined due to regulation and capital requirements. Banks have retreated or reduced participation in various sectors such as fixed income. The demand is there, but there is less supply. This has allowed previously smaller players to gain share.

Another topic of interest was post trade inefficiencies. Participants said it is expensive, using lots of technology and lots of people. Banks including Credit Suisse are outsourcing post trade activities to third parties.

In the session, Regulatory Reform Revisited, panel member The MEP Kay Swinburne (who has been heavily involved regulation around EMIR) noted that in reporting to regulators there results a high volume of data “but no one knows what to do with it. We also have siloed reporting which is not good. And we also have multiple reporting requirements such as EMIR, MiFID II, etc.”

In terms of reporting, MiFID II transaction reporting requirements were considered as “not the beginning of the end and may even be the end of the beginning,” said a participant.

With EMIR reporting, she said “everything is up for review” and that EMIR and MAR reporting need to be lined up.

Regarding Fintech the MEP stated that regulators will stay clear for now, but Fintechs need to prepare for being regulated by looking at existing legislation and using it as a benchmark.

On the second day of IDX, head of IOSCO Paul Andrews called for better regulation, better risk management and more innovation, saying that there had been some unintended consequences of regulation.

“We need harmonization of data repositories and sharing of data across them,” he said adding that ESMA/CFTC agreement on CCP Equivalency shows that cross border regulatory agreements can be achieved, but there are many more cross border challenges to be solved.

So, to conclude, financial institutions are looking for efficiencies, particularly in areas where there is a lot of legacy technology and manual processing.

“The industry is not looking for disruptive technology. The industry is looking for efficient technology,” said one bank participant.

Whether that is blockchain or Fintech remains to be seen.