Industry collaboration needed on crypto, market data & market fragmentation, says WFE Chairman Dr Urs Rüegsegger

Rosario, Argentina, Friday 13 September 2019 – Dr Urs Rüegsegger, Chairman of the World Federation of Exchanges (“WFE”), the global industry group for exchanges and CCPs, today delivered a speech at the 46th General Assembly & Annual Meeting of the Ibero-American Federation of Exchanges (FIAB) and to the FIAB HighTech Meeting, hosted by the Rosario Stock Exchange. His speech focused on some of the WFE’s strategic priorities for 2019 including: regulatory coherence or market fragmentation; technology-related policy work on topics such as crypto assets; and the importance of valuing stock market data correctly.

He also spoke about the importance of fostering the information exchange between Latin American market infrastructures with other geographies, as a way to attract more investment to the region, and how better coordination between the WFE and FIAB can facilitate that.

“I am delighted to address this established and well-respected gathering of the Ibero-American Federation of Stock Exchanges and Securities Markets.

The opportunities in this region are clear. If, for example, we take Brazil, Mexico, Argentina, Chile, Colombia and Peru, the WFE members in the region, they comprise 12% of the market capitalisation of the MSCI Emerging Markets Index, having a combined GDP of USD 5.5 trillion, which is about 12% greater than Japan. So, I am conscious that as the exchange’s aspirations in this region grow, it’s for the World Federation of Exchanges to support its members and FIAB more, and to expand and develop a supportive relationship with the institutions in this room. This is why I am particularly pleased to address you today, and have travelled many miles, to bring you the thoughts and reflections of the global exchange and CCP industry.

I am conscious that many valued members of the WFE are represented in this room, but I would like to say a few words as Chairman of the organisation to introduce it to those who may not be as familiar with it; and to update the audience on the priorities and challenges which we have been tackling on behalf of our global membership.

We are always delighted to cooperate and work alongside the FIAB because they share the values that we also strive to promote and uphold on behalf of our industry. The WFE represents and communicates those values and standards to regulators, politicians, policy makers, the media and the wider public. We do this on behalf of our 70 exchange and clearing house members, who account for over 250 market-infrastructures, ranging from those that operate the largest financial centres to those that run frontier markets. Since its foundation in 1961, the Federation has contributed to ‘’the development, support and promotion of organised and regulated securities markets in order to meet the needs of the world’s capital markets in the best interests of their users.’’ This remains the WFE’s core mandate to this day. We seek to ensure regulatory outcomes that foster well-functioning capital markets and reinforce systemic stability, while contributing to economic development and the prosperity of citizens. Together with our members we create and agree best practices and standards for the industry.

The WFE achieves this by building consensus amongst our members and leveraging their collective expertise. Besides our annual meeting and global conferences, the WFE convenes member working groups to develop policy positions, disseminate best practice, and share information. We regularly publish educational materials addressing topical and emerging issues relevant to exchanges. These groups span emerging markets and sustainability, through to cyber security and risk management.

The WFE also has an in-house research team, enabling us to publish statistics, produce cutting-edge research and bring empirical evidence to our policy advocacy. A key focus of this research in recent years has been into ways develop the capital markets in emerging markets.

Emerging market research has been one of the core focuses of the WFE in the recent years, and with six members in Latin America, accounting for nearly USD two trillion market capitalisation, 1140 listed companies, and USD 90 billion monthly trading activity as of June 2019, as well as two exchanges represented on our Board, the region has been key in influencing the focus of our research.

For example, we recently published a report on Enhancing Liquidity in Emerging Market Exchanges, which found that the highly concentrated local institutional investor base is a barrier to greater liquidity in Latin America. The report laid out tangible measures that exchanges and regulators can take to make their local markets more attractive and enhance their liquidity, including:

• Promoting the development of a diverse investor base with a focus on attracting local and international institutional investors, and enhancing retail participation;
• Increasing the pool of securities and associated financial products by increasing the number of local or foreign listings, launching derivative and ETF products, or creating market linkages; and
• Investing in the creation of an enabling market environment through the improvement of trading technology, market and reference data, the implementation of market-maker schemes, or developing securities lending and borrowing schemes.

These policies have proven successful. Indeed, we cite in the report a case study on this region’s own B3. And I am very happy to draw on this positive example of how reforms can drive an exchange’s success.

B3’s strong performance can be attributed to a combination of factors: an important domestic and international institutional participation, complemented by strong retail investment; the offering of a wide range of financial products; a favourable market environment, thanks to a proportionate regulatory framework, advanced trading technology and an efficient post-trade infrastructure.

I am conscious that exchanges in Latin America are also actively working on greater integration through the MILA agreement. This was created as a way to grow local market liquidity but there are clearly adjustments that could be made to enhance the effectiveness of this agreement. Our research proposed a few guidelines which should achieve just those benefits, including:

• Harmonising tax laws;
• Harmonising regulatory framework for mutual funds;
• Improving the trading model, for example by allowing direct (remote) access for regional participants); and
• Creating a common framework for clearing, settlement, and operational procedures (i.e. insufficient integration and interoperability of post-trade arrangements).

The WFE followed up the earlier research report with papers focusing on international investors’ participation in emerging markets, and how to attract and grow those investments. As you might expect, investors naturally look at prospective returns when deciding where to invest. As such, the report made recommendations concerning how markets can enhance international participation, namely:

1. Removing capital controls, where possible, and setting up strong regulatory standard to enforce property rights and assuage concerns about expropriation;
2. Set good corporate governance standards up to international best practices; and
3. Markets should promote international accounting standards and disclosure in English, so that investors can easily familiarise themselves with the country/companies listed in the country.

I am conscious that some people might argue that the recommendations are, while obvious, perhaps, prohibited by legal and regulatory requirements.

This brings me to the other aspect of my speech: that of the regulatory challenges for the industry and what the WFE and FIAB can do to support the growth of our members.

I do not need to tell you that the industry faces a number of obstacles to ensuring that we remain the leading example of market infrastructure standards across the globe, which delivers a fair, efficient and transparent environment for all market participants.

The WFE uses research, advocacy, educational pieces and a variety of communication techniques in order to convey the strongest and most powerful message. We do this because we are increasingly operating in a space in which some other financial services sectors seek to push their arguments to the standard setters, which are often unbalanced in terms of the interests they will serve, and are orientated by a more short-term mind-set that is often profit driven. As the market infrastructure which seeks to serve a public good and ensure the integrity of the markets for the wider benefit of the consumers and the economies they serve, we must ensure our voice is equally heard.

When I say this, I have in mind a particular issue – that of market data pricing. In the US and EU particularly, the debate around market data – information on the price at which shares are trading – periodically attracts commentary. This subject has rumbled on for a number of years as data users and vendors seek to gain a cost advantage. They lobby against the ability of exchanges to independently set their own prices and to be governed by market forces, instead pushing towards regulatory price controls.

The WFE is pressing against this. We have recently published a position paper setting out the value of market data and the things exchange do to make it valuable. We are furthermore responding to formal consultation by public authorities.

In our recent letter to the EU securities regulator we made the following points:

• Stock exchanges are characterised by non-discriminatory access and high standards of oversight, transparency, governance and disclosure.
• Market data is a joint product with trade execution, resulting from the overall activities of an exchange.
• The value of market data ought to be seen through the prism of the value it represents to those professionals and institutions who make commercial use of it.
• Price setting by the official sector is an extreme policy tool that can only be justified in extraordinary circumstances characterised by a lack of competition or market failure which is not addressable by other means.
• Any proposal around a consolidated tape in the EU should increase transparency; not merely reproduce what is already provided by data vendors.
• Intermediaries pay for market data because it is valuable to the success of their trading strategies, in 2018 the top five banking groups trading on EU equity markets reported revenues of €5.7 billion from their EMEA equity trading businesses. This contrasts with market data revenues of €245 million from the major EU exchanges.

This is just one aspect of our work. Another, which I personally view as one of the industry’s most pressing challenges is the adoption, regulation and safe use of technological innovations such as crypto assets. The WFE champions the importance of technological innovation, which can benefit competition-based growth and a healthy market, but innovation should operate in a balanced, fair and regulated manner, with appropriate alignment to that applied to established market infrastructures. That is to say, there should be a level playing field.

The use of appropriate and internationally co-ordinated regulation of crypto trading platforms will avoid unintentionally impeding early stage technology and will ensure the longer-term trust and protection of consumers. To this end the WFE is advocating for the establishment of a co-ordinated, widely understood global approach to the regulation of crypto assets and the platforms they use to trade, under the guidance of IOSCO’s Principles, and agreed with other international standard setters. This approach will benefit national regulators, consumers and the industry alike, as much needed certainty and clarity is introduced to the marketplace – which currently suffers from a fragmented and patchwork approach. Failure to tackle such an example of international market fragmentation would increase the potential for the type of negative consequences previously witnessed – increased costs, inefficient markets and barriers to trade.

In closing, I would like to directly address how the WFE and FIAB can work together to deliver a greater information exchange and unified approach can enhance growth in Latin America.

We welcome further collaboration on addressing and identifying barriers market development in Latin America and beyond. By further coordinating our approach, we can ensure that the industry moves together with pragmatic and united policy positions and standards while at the same time being able to work on market structure issues that are specific to the domestic market. Global, regional and domestic need to stand side by side to ensure we deliver the best results to our customers and to our stakeholders.

This could be further enhanced through collaboration and information exchange on research projects – for example, we would welcome greater insights from those organisations who are not currently members but are able to share their data and intelligence. This joint working could also encompass the greater mutual distribution of best practice papers, research, policy responses and engagement.

The industry should also seek to collaborate on the issues it faces via the networks represented in the FIAB and WFE – especially around mutually beneficial areas such as cyber security and risk management. Our members in the WFE have found inter-organisation collaboration on such matters a beneficial exercise and that benchmarking against each other has been a uniquely informative process. Doing this on a global level can only be more beneficial in understanding the markets and achieving best practice for all.

We have many overlapping members and it makes sense to ensure information exchange in the way that we work with other regional counterparts. Ensuring ever more broad and complete data sets will allow for a truly global perspective on our industry. Thank you.”

N.B. This is a transcript of the speech, so please check against delivery.

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