The global trade association for exchanges and clearing houses, the World Federation of Exchanges, has called for a global, evidence-based refresh of public policy on derivatives.
In a recent paper published on its website, the global association sets out a coherent approach to derivatives to nurture their use, especially in regulated, lit environments, to avoid the development of an off-exchange derivatives market that is opaque and less fair to investors.
Derivatives are financial instruments whose value is derived from, or “dependent on”, the value of an underlying asset, which can be anything from stocks and bonds to commodities and currencies. The derivative market is a financial marketplace where contracts (like futures, options, and swaps) are traded.
“It is essential that all types of users have access to derivatives to manage economic uncertainty. This means avoiding bureaucracy and blocks on their use while monitoring all off-exchange and all uncleared derivatives more vigilantly and systematically. The role of exchanges in price discovery and clearing houses in neutralising counterparty risk should be nurtured, as without a thriving public derivatives market, participants will turn to less well-regulated trading venues to manage risk, jeopardising the health of the financial system,” the paper read.
Listed markets constitute the safe, reliable, and verifiable core of derivatives, as they do for other financial instruments, and regulators must ensure they can continue to do so.
WEF called for a public policy rethink of measures that push derivatives trading into under-regulated environments and develop a policy framework that encourages trading on lit public markets to benefit from their numerous public goods aspects.
Chief Executive Officer of the World Federation of Exchanges, Nandini Sukumar, said, “Public markets are the best places to trade derivatives. Any policy being considered that impedes the growth of exchange-traded derivatives misunderstands the vital role they play in managing risk. Fifteen years on from the collapse of Lehman Brothers, it is important not to let markets slip into the bad old ways and, if anything, bring more transactions into the scope of margining and clearing. The real risk is that regulatory, tax or other measures push customers into a less well-regulated place.”
Head of Regulatory Affairs at the World Federation of Exchanges, Richard Metcalfe, added, “Exchange-traded derivatives, with their integral central clearing arrangements, bring clarity as to what the price is and who holds risk positions. They provide the foundation for healthy, well-regulated derivatives markets, which bring huge benefits to savers and businesses, small and large. The balance of regulatory incentives between OTC and listed derivatives should continue to reflect this reality. At the same time, any temptation to load costs onto CCPs, rather than charging the risk-taking market participants, should be resisted to maintain the correct incentives for those risk-takers. Measures such as the current EU restrictions on CFDs are a good example of ensuring the highest standards apply across all parts of the derivatives world.”
