An Industry Wide Solution to an Industry Wide Problem
Regulatory market change will radically affect the way commodity and energy markets function.
By Hugh Brunswick
NEW REGULATIONS ARE aimed at moving away from a predominantly bilateral to a centrally traded and settled market model. There will be winners and losers as a result and the industry will need to work together to manage the change and to preserve and improve on the best aspects of current market arrangements. This includes choice and competition in execution venues (including electronic brokers and exchanges), and open and non- discriminatory access to clearing houses and to the new trade repositories as they come online. The European energy market
enjoys a range of choice in terms of where trades can be executed whilst the compatible technology predominantly used by these venues allows traders to combine prices and optimise liquidity efficiently. It would be sad indeed, should regulatory market change lead to a reduction in choice and competition in trade execution services. As well as the impact on
competition in front office services, there is also the impact on the day to day operations of the middle/ back office and the need to ensure open, non-discriminatory access to the services they will increasingly need to use. Bilateral trading relationships will progressively be replaced by relationships with central counterparties (CCPs). Trade confirmations will be replaced by reconciliation of ‘trades of the day’, monthly settlement by daily margining and position reconciliation with associated valuation calculations becoming the norm. As the ‘centre of gravity’ of an organisation’s traded volume shifts from bilateral OTC to centrally
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cleared, middle/back offices will need to establish procedures and build technical data exchange links with multiple CCPs to reconcile trade, position and settlement and margining data. Additional complicating factors for the operations staff are: – Uncertainty in the rate and extent of the shift from OTC to centrally cleared transaction volumes, and;
– The parallel introduction of completely new and as yet largely undefined procedures to report transactions to trade repositories in a timely fashion.
As with the CCPs, there remains uncertainty over the number
of trade repositories, both at a European and national level, with which each trading organisation will need to establish data connections for submission, reconciliation and on-going maintenance of centrally registered trade data. Experience from the introduction of Dodd-Frank in the US
seems to indicate that without a clear vision and concerted leadership, that the industry may move towards proprietary pools of liquidity collecting around ‘one-stop-shops’, that offer a vertically integrated solution combining execution, confirmation, clearing and repository services. The alternative is to ensure open, standardised, non-discriminatory access to services offered by alternative competing providers. Such a vision of open industry access to services has a parallel to the de-regulation of energy markets in the late 1990s and early 2000s when the concept of Third Party Access (TPA) to the ‘pipes and wires’ was at the heart of the single market in energy.
The European energy market enjoys a range of choice in terms of where trades can be executed ...
In this case we are talking of open electronic access to clearing
houses and trade repositories. To take the analogy one step further, it will also be apparent that the failure to establish one standard interface to all European networks remains one of the major costs and barriers to the single European energy market. The equivalent of which the industry should strive to avoid reoccurring under the guise of clearing and trade repository services mandated under the new market regulations. EFETnet offers the open, standardised, non-discriminatory access to services by implementing the EFET Standards developed by EFET industry work groups. The European Federation of Energy Traders (EFET), through
its Market Supervision workgroup, has long been working with regulators to establish an appropriate regulatory framework for energy markets in Europe. At the same time the Business Process Optimisation Committee (BPOC) has been working on
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