Regulate FMIs but tell us what the ground rules are
2nd October, 2014
FMIs must meet the demands of current regulations, but also pre-empt future rules
By Thomas Zeeb, CEO, SIX Securities Services
Yesterday I sat on the closing ‘Crystal Ball’ panel sessionof Sibos’ Market Infrastructure stream. My fellow panellists and I were askedwhat was going to be high on the radar for FMIs (financial marketinfrastructures) over the next three years.
None of you will be surprised to learn that regulation wasat the top of everyone’s agenda.
FMIs and the financial services industry as a whole must nowget used to a constant flurry of ever-evolving regulation. It would be nice tosay that the pendulum will go back to a pre-2008 situation but it would beunrealistic.
This means that FMIs and other institutions in the valuechain must now readjust their business aims and aspirations; in a post-crisisworld, the compliance burden will continue to cost everyone significantresources both in time and money.
Those of us in the market infrastructure space are facing aparticularly heavy torrent of regulation. From Emir to CSDR, Dodd-Frank toBasel III, the list goes on. In isolation, any of these regulations would bemanageable but taken together, they are a huge challenge.
As FMIs are the backbone of the financial system, it isright that we should have a stricter regulatory regime than other types offinancial institution.
No-one would argue that FMIs should be allowed to takeproprietary positions. However, I would like to see a more principles-basedapproach to regulation rather than a prescriptive approach accompanied by muchclearer guidelines for FMIs as to how regulations should be implemented.
As a case in point, infrastructures quite rightly have a keypart to play in maintaining the integrity of the financial system through theflow of high-quality collateral. If you ask any CSD, each one would agree thatCSDs shouldn’t compete on quality of collateral.
However, we don’t necessarily agree on what Ihigh-quality collateral. What do terms such as ‘liquid’ and‘easy-to-understand’ mean? Regulators have a role to play here by guiding FMIson issues such as these rather than letting them fly blind.
Compliance departments at FMIs are tasked with not onlymeeting the demands of current regulations, but pre-empting future regulationsthat have yet to be implemented.
The approach of regulators currently is to implementregulations without necessarily having a clear understanding of theirinterdependencies.
When unintended consequences manifest themselves, regulatorsare in the habit of issuing ‘sequels’ or ‘fixes’ to regulations. We’re now inthe habit of seeing ‘Mifid, ‘UCITS’ or ‘Basel’ with ever-lengthening Roman numeralsattached to them.
The danger here is that FMIs can then be penalised inretrospect for not envisioning future regulations adequately enough. FMIs havea critical role to play in the stability of the financial systems but weshouldn’t be the final safety net that covers the mistakes of other players inthe value chain.
