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Markets Regulation
ICE urges caution on derivatives reform
From the Financial Times of Tue, 16 Dec 2014 10:59:27 GMT

Intercontinental Exchange has urged Europe to give clearing houses leeway over what products they must accept, warning that lawmakers' plans to open up the derivatives market would remove operators' incentives for innovation.

The New York Stock Exchange owner has again warned that trading could move away from Europe if the continent pursues new rules in the coming days to introduce more competition for derivatives.

Lawmakers want to introduce competition and flexibility for listed derivatives. Among the changes will be a move that could break the link between some exchanges' control of both their futures trading and clearing products. It would allow customers like fund managers and banks the choice to open a position on one market and close it on another — a move known as “open access".

"One thing the market fails to understand between equities and derivatives is that the NYSE never invents or creates a product," Jeff Sprecher, chief executive told FT Trading Room. "We don't make the decision about where companies want to list their shares. We run a utility business. It's very different from listed derivatives where the exchanges decide to list the products. The real solution is to leave it to exchanges to decide what to allow to be netted with others. Right now there’s tremendous competition for listed products."

His comments illustrate the importance to all exchanges of the final complex, technical language that will be used to underpin the daily workings of the latest Markets in Financial Instruments Directive.

Some large fund managers, brokers and the London Stock Exchange Group have been among those calling for the changes. However, the policy is likely to depend in part on the final wording of the legislation, against which policy makers will balance clearing houses' need to manage risks in the financial system. Publication of the planned technical standards is expected in the coming days.

The continent has been one of the strongholds for ICE's business during its emergence in the last 15 years, buying the International Petroleum Exchange, Climate Exchange, APX Endex and Liffe, the London derivatives exchange. The latter is one of the biggest assets in European market infrastructure.

"If you make clearing a utility, the operator has to make a decision if it's worth it for them. The business that we're in is incredibly global — no one is contemplating netting in listed derivatives."

Xavier Rolet, chief executive of the LSE, has likened open access to the availability of generic drugs like aspirin.

"In listed derivatives, that’s a separate conversation over access to indices," Mr Sprecher countered. "That doesn’t mean that new aspirants should have access to the historical success others have invested in. Let the new aspirants take open access and build a new pool of open interest."

Mr Sprecher has invested more than $1bn in his operations in Europe in the last decade and expects ICE to be a winner from the changes as his London clearing house had extensive futures and over-the-counter clearing derivatives business.

But he said it was "unclear if we'll keep investing in London," he added, pointing out that ICE plans to launch a version of its closely watched Brent crude contract in Singapore next year.

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