Hey, did you notice the markets were broken?
Written on 14 May 2020
Written by John Gubert
I was recently asked an intriguing question. How would I have designed the markets if I had had a free hand? I have to admit I would most likely have made many of the mistakes of my peers of the last few decades, but, with hindsight, I can propose with certainty that I would definitely have changed quite a bit.
First of all, intuitively I would have closed out all the traditional Exchanges and moved activity to the MTF’s. How wrong I would have been! The MTFs have engendered a dangerous trading culture and, if one is to believe Michael Lewis’ latest book, some quite questionable practises. So how would I have designed the trading platform? First, I would have recognised that there need to be more trading divisions and those need distinct pricing, trading and transparency rules. The spread and normal market size of a trade in a Wells Fargo with a market capitalisation of $260 billion needs to be substantially different from comparable businesses with market capitalisations of less than 10% that amount. And the rules on disclosure of trading activity on the smaller counters need to be much less draconian than at present for transparency is becoming the enemy of liquidity.
Secondly, I would have resisted the temptation of creating trade repositories, not because I fear the transparency they may engender but because I question if they will prove to be of real value if ever the proverbial crunch does come. Conversely, I would have made same day electronic trade matching mandatory and ensured a link between the trade matching infrastructures and the settlement matching ones. There is still too much data out there that is passed around in duplicate between different parties, often without the advantages that STP would bring.
Thirdly, I would have launched a pan European CCP under the auspices of the ECB, rather than T2S, for settled as gross high volume trading and a fragmented CCP population is the source of much more risk than the institutionally biased settlement landscape. Moreover ECB ownership of the CCP would have answered the critical question of “who is the lender of the last resort” for, irrespective of the models used to prove invincibility, there remains a risk of major shortfalls at CCPs in times of extreme crisis.
And finally, I would have promoted regional CSDs to eliminate the unnecessary duplication of the nation state based variety. And, irrespective of the trials and tribulations experienced by Euroclear in its valiant (and effective) attempt to standardise much across its markets, I would have done the same over any broader canvases that evolved.
Going downstream into the private sector, I would have clarified two models of custody. A bare custody model would have lived alongside the much greater value added role of the fiduciary custodian or administrator. And I would have simplified regulation, hopefully avoiding the trap of the quasi- judicial regulatory structure we have today with a single entity making the rules, monitoring the participants and imposing the penalties. How does one simplify regulation? In my mind the answer is easy, at least conceptually. Regulators must have greater discretion on interpretation of the rules and the rules need to be shorter and more succinct. But, regulators need to merit that discretion and the current operating model between many of the regulated and their regulators needs to change to one of partnership and less one of confrontation.
Unfortunately all this is theory with a good portion of wishful thinking by one who has lived through four decades of failure of markets to re-engineer themselves into structures compatible with the 21st century rather than infrastructures blending automation with tradition and habit.
John Gubert will be chairing the morning of June 11th (Day One) at NeMa 2014, and also involved in the session titled ‘Oxford Debate: AMs In The Spotlight Will The Post-AIFMD Risk Model Mean The End Of Outsourcing?‘.