post-trade

On 8th May 2018, CPMI-IOSCO released anonymised updates on the three critical risk areas where central clearing houses are scrambling to meet the business and regulatory demands as set forth in the 2014 Principles for Financial Market Infrastructures (‘PFMIs’). These three are recovery, coverage of financial resources, and liquidity stress testing.

In April, the global banking and capital markets authorities together announced a mid-course correction to their work transforming central counterparty clearing of OTC derivatives contracts. In their search in 2009 for the answer to the ‘OTC counterparty risk problem’ that had so brutally hit the world’s financial system and economy, the authorities grasped at a notion then circulating in central banking circles: if clearing houses had proven themselves able to manage the risk of on-exchange transactions during the market turmoil of 2008 and the failure of Lehman Brothers, then they ought to be called upon to do the same for the off-exchange business that had gone off the rails.

A core function of Thomas Murray is to provide independent, detailed third-party monitoring of post-trade service providers in the world’s capital markets. It has done so for over two decades, and has established a considerable database across 100+ marketplaces, expertise, and a reputation for rigour.

As a rule, post-trade operations take place somewhat behind-the-scenes, and they most certainly do not make the headlines on the evening news the way daily stock market index movements do. One of the most critical elements within them is securities lending and borrowing, which bolsters secondary securities market liquidity, enables tighter transaction spreads, enables disrupted settlement to go ahead, and generates relatively low-risk recurring fee income for asset owners and their custodians.

After a multitude of articles on the policy objectives of MiFID II, the new obligations of the buy- and sell-side on research and trade reporting, and the new requirements for transparency in fixed-income markets, Thomas Murray finds itself in the position of having to see how trading begins to adapt as the Directive comes into effect at the start of the year. Specialising in post-trade infrastructures and services, its business lines are not in the immediate lines of fire of this reform – its clients are, but in other of their activities.

The authorities with whom we have spoken caution that the new shape of the EU capital markets will not take form immediately, judging from how long it took to see with any certainty recurring patterns in trading after the implementation of Regulation NMS in the US and MiFID I in the EU. We have been advised to expect a period of 12-18 months in which time the order flows and ways of execution will have settled under this new regime, assuming that this adaptation is not unduly thrown off course by world events, unforeseen technological changes, and of course economic and financial changes that would alter significantly today’s outlook on trading and investment conditions. This truly is a complex mix of variability, one which does not give even the keenest of observers a clear view ahead.

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