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ESG confusion and CCP competition pose new challenges to global exchanges

By Peter Fredriksson, Baymarkets

I recently chaired The FIX Nordic Trading Briefing in Stockholm and attended the World Federation of Exchanges’ annual assembly in Singapore, and these two conferences on opposite sides of the world highlighted how competing market developments are poised to reshape the industry.

It was evident from both these events that exchanges the world over are now seeking ways to square shifting customer demands with changing regulatory requirements, while at the same time finding the right technology to make it all happen.

Green Credentials

One topic dominated both conferences: the proliferation of indexes linked to environment, social and governance (ESG) factors. Companies are inevitably going to be required to report in more detail on their sustainability records because index compilers and investors, like consumers, are demanding more transparency into organisations’ green credentials.

The problem, however, is that there are no globally accepted ESG reporting standards. Without clear guidance, companies won’t know what to report in order to tick the necessary compliance box to ensure their inclusion in popular green indices.

In the absence of any set of guidelines, it is falling on exchanges to be the arbiters of who is and isn’t a good custodian of the environment, even though a better alternative would be for ratings firms to take on the role.

Even with clear rules however, increasing the reporting burden on companies is likely to present its own challenges at a time when markets are seeking to streamline the trading process.

Blockchain’s Promise

Technology is opening new vistas for every industry, especially ours, and distributed ledger technology (DLT) – the backbone of blockchains – promises to provide further disruption.

However, despite DLT’s promise of shrinking settlement times towards the dreamed-of T+0, delegates appeared more interested in harnessing the technology to streamline reconciliation of positions and other processes.

It’s apparent nevertheless, that DLT is a revolution in the making; if the comments of delegates in Singapore are anything to go by, about 70 per cent of all exchanges are now looking into how they can use blockchain technology or tokenisation in their transaction and settlement processes.

Data, CCPs and the IPO drought

Data is the new oil in the digital economy – and exchanges have deep wells of the stuff. The London Stock Exchange understands this and that’s why it is buying Refinitiv, obviously realising that data is not just a by-product of what exchanges do; it can be bundled and sold with the right expertise.

Even though they’re new to the data distribution business, exchanges may already be facing a potentially existential threat from another new market entrant – central counterparty clearing (CCP) houses. Like exchanges, CCPs sit on lucrative pools of data. Business models are as yet unclear, but it’s apparent that the clearing houses are having their own data lightbulb moments.

That could be bad news for many exchanges, which are banking on data to provide new revenue sources at a time of waning initial public offerings and increased delistings. On the positive side, in the post-financial crisis regulatory environment, CCPs have been moving steadily into the over-the-counter derivatives space, potentially benefiting exchanges by bringing liquidity to a market that was hitherto illiquid. But in the longer term, exchanges will want to see a streamlining of listing rules, which they see as punitively harsh and unevenly applied, to bring IPOs back to levels that enabled them to flourish in the first place.

Nordic Commodities Hub

At the FIX Nordic event, thoughts turned to the plentiful natural resources of the region, and Euronext’s plan to make Oslo a hub for commodities trading. Some at the event backed the idea; the region is failing to take sufficient advantage of its natural wealth, they argued. Also, more could be done to trade power, timber, oil, gas and so on, they said.

The debate was lent added weight by discussion of the future of Nasdaq Commodities (formerly NordPool). The exchange is shrinking and questioners wondered whether the liquidity in the power market will gravitate to bigger, centralised European exchanges or grow back to sustainable volumes.

If WFE and FIX Nordic demonstrated anything, it’s that exchanges worldwide are working hard to meet the multitude of new challenges before them. With innovation and a little help from regulators and governments, they might just manage it.


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