The World Federation of Exchanges (WFE), the global industry group for exchanges and central counterparties (CCPs), has published a joint report with global management consultancy Oliver Wyman in which it concludes there is a need for $3 to $4 billion in spending to address market integrity.
The report, which focuses on the pivotal role of exchanges and CCPs in supporting market integrity, looks how exchanges and CCPs have evolved since the 2008 global financial crisis in response to regulatory reform to promote safe and efficient markets. Additionally, it establishes trends in financial markets and their implications for MIs with respect to preserving market integrity, and a vision for the future role and capabilities of MIs.Market integrity ensures that participants enjoy equal access to markets, that price discovery and trading practices are fair, and that high standards of corporate governance are met. Market infrastructures exercise rulemaking, member admission, market surveillance, market data and regulatory reporting, and investor education.
Post-crisis G20 reforms in the last decade have changed the supervisory role of MIs with a move towards more transparent exchange or exchange-like marketplaces, as well as a shift towards CCP clearing for OTC derivatives, along with developments regarding central reporting of trades and tighter capital, liquidity and risk management standards.
As over 60% of survey respondents believe that market supervision is a core focus area, 70% of participants confirmed that supervision requirements have increased and will continue to do so over the next decade.
Nandini Sukumar, Chief Executive Officer of The WFE commented:
“MIs serve a dual role: firstly, to foster economic growth, and secondly, to preserve market integrity. Today’s joint WFE-Oliver Wyman report reveals the true extent of that second purpose and showcases the evolution that MIs have undergone in the past decade to ensure the continuation of fair and orderly markets.Indeed, as regulation, technology and financial services continue to dynamically impact the markets around them, the role of MIs in preserving market integrity has never been as important as it is today. We look forward to working with our members and stakeholders to continue to take on a more significant role adding value, and safety, to the industry.”
As market infrastructures face increased regulatory demands, enhancements to corporate governance and disclosure to preserve market integrity, the report concludes that the financial markets industry will need to spend up to $3-4 billion over the next five years to realize the agenda, with roughly 40% of this investment being undertaken by MIs
The agenda includes higher standards of market integrity, surveillance and supervision, broad industry cooperation and collaboration across MIs and the wider capital markets industry, real-time surveillance, and outcome-oriented supervision.
Daniela Peterhoff, Global Head of Market Infrastructure at Oliver Wyman, said:
“The changes we have outlined are significant and will require a robust, proactive approach. Incumbents will need to move quickly, or else risk losing share to innovative competitors. We see MIs pursuing bold investments in new technologies (such as AI and pattern recognition). We also expect MIs to take a lead in creating opportunities to collaborate between MIs, regulators and market participants. The current focus on the digitization of risk management and compliance frameworks and tools will remain for a while. Finally, we will see continuous enhancement of supervisory functions using data analytics.”
