Mike: Welcome, everyone. The second episode of our series on FX Rules Changes in 2023 zeroes in on Brexit Equivalence and cross-border trading. I'm Mike Cahill, head of video and podcast content production for Sales Enablement at the London Stock Exchange Group. And our guest again is Chris Leonard Appleton, head of FX Risk and Regulation. So we touched on these topics in a kind of a high level general sense of the first episode.
Mike: In more detail now, Chris, how are these three topics Brexit equivalence and crossborder training impacting FX?
Chris: Well, I think we probably need to just go back in history to sort of explain the story.
Right. So if you if you go back to 2013 and just prior to the implementation of DoddFrank and the introduction of the SIF regime, generally speaking, what we saw is pretty much all execution of FX, certainly on venues out of London.
Chris: So you had global markets that came to London pretty much effectively. It's simplistic that that's what we had Dodd-Frank started the process of breaking all of that up. So in the end, yes, and the options market, FX, the introduction of the SIF regime meant that we have to require US persons to trade those instruments on the SIF. MiFID then really cemented the MTF regime in Europe in the UK.
Chris: So we then had to further fragment things in Europe with the introduction of what was the Refinitiv MTF at the time. So we then had to figure out how to split trading between the SIF and the MTF at the same time. We then introduced the market in Singapore in Asia, so we actually had a three way split at that point.
Chris: So what in 2013 had been one big homogenous pool by 2018 had been split three ways. And then since then we've then had Brexit, which is compounded things to do that with the temporary permission regime and then we've had developments in Asia.
Chris: So in India we've had to spin up a local market for iron ore, which is very much an onshore deliverable market there. Now in the swap space in Indonesia, Malaysia and Thailand, we've done the same thing and we're seeing evolving rules in China that might require us to do the same as well. So yeah, if we if we go back to the days of MiFID, you know, equivalence got touted as a way of trying to stitch all these fragmented markets back together again.
Chris: And actually the net result of that has been not a lot really. And that's because of the way that equivalence was written, certainly in Europe. So you're equivalence is not an exemption regime in the same way that it is in the US. So while everybody thinks that equivalence may be a silver bullet to bringing fragmented markets back together again, the result has actually been completely the opposite.
Chris: Markets are fragmenting more and more as time goes by, and developments such as Brexit have just really compounded that.
Mike: So how has LSEG responded in the last few years to all these developments?
Chris: Yeah. So I have to say, we've made a profession of spending up new trading venues in different jurisdictions where we've had to do it. And looking forward with our FXI program, which is the program where we're replatforming our technology onto the LSEG millennium technology, one of our key design tenants of that system has been to enable the spinning up of local markets in a far more efficient manner than our current technology enables us to.
Chris: But I would certainly say that a lot of the effort that we put in to maintaining the markets over the last few years has really been in response to, you know, regulators erecting these sort of barriers around their own markets and in a market where that just doesn't work. As I said on the last podcast or the last episode, the minute you trade Eurodollar, you're touching two jurisdictions.
Chris: So you can't put a wall up between that. It just simply doesn't work. So, you know, the net result is end users are really getting affected by the increasing complexity here.
Mike: Are there any jurisdictions that are causing particular concern?
Chris: Well, I've mentioned Brexit a number of occasions. You can probably tell my political leanings. That's a personal view, not LSEG’s view, by the way. Yeah, I think the UK and the EU are particularly problematic, but the reason for that is just the scale that the vast markets we've got to get it right and anything that causes complications in those markets, just it affects more clients than it would in other jurisdictions.
Chris: So those two jurisdictions are problematic for us just because of their scale. But you know, if we then look at Asia, I think India is obviously a vast market as well. There's an awful lot of clients there. It's a very important currency per onshore. And markets like those sort of Asian giants is particularly problematic for us as well because we need to ensure that insofar as possible, local clients can continue to access international capital.
Chris: So we're doing our bit to think global but act local, but it's yeah, hopefully it's turning into a USP, but it's not easy.
Mike: It seems, Chris and correct me if I'm wrong here, b Brexit in particular seems to have a real big impact on cross-border trading because there's all this all these new rules and regulations, you know, with the UK being now separate from the EU, it would seem that it's causing tremendous amounts of upheaval.
Chris: Yeah, well, I mean if we look at what Brexit achieved- what it caused in the ethics markets, you effectively had a severance between buy side fundamental liquidity in the EU, which is really where most of the clients are located on the on what we would call the liquidity taker side from sell side liquidity, which was located in London.
Chris: See I pretty much overnight you erected a wall between those two bids. So, you know, it's been problematic for the banks because the banks have obviously had to replicate operations in the EU to continue providing liquidity to their clients in the EU. And it's been a challenge for us because we've well the net result is we're going to have to replicate the regulatory infrastructure that we moved to the EU in response to Brexit in the UK as well.
Chris: So yeah, we would do what we have to do, but it's the minute you start duplicating different roles, you increase the operational complexity and to some degree the operational risk around that. That's just something that we have to manage as part of our BAU. But certainly if I think back to the passporting days when you had a seamless provision of services from one EU member state into another EU member state, and one of the most important jurisdictions for that was obviously the UK, things were quite naturally quite simpler.
Mike: You know, earlier this episode you spent a little bit talking about equivalence and equivalence regimes. Have there been any unintended consequences from what's taking place in the world of equivalence?
Chris: I think they have. I think the issue with equivalence is one of expectation. So the US equivalence regime is quite a sensible regime. It relies on deference to home state regulators. It's an exemption regime, which means that effectively a venue authorized in Ireland or the Netherlands or even in the UK will be recognized by the CFTC as applying robust rules that are analogous to US rules, and therefore the venue in that jurisdiction will be exempt from SEC registration in the US.
Chris: So it's a sensible regime. The EU regime is very different. It's not an exemption regime, it's just it's germane to the trading obligation in derivatives. But all it says is if you have a SIF that is deemed equivalent by ESMA, then a European bank can trade on it to meet its obligations under the trading obligation in the EU.
Chris: But what it doesn't confer is the ability for the SIF to operate in the EU. So it's a sort of quite one sided in that regard. I think it's been misread and misinterpreted a lot. I think a lot of people see it as replacing licensing in the EU. It simply doesn't do that and that's caused dare I say it a bit of one way traffic between the two jurisdictions and then in places like Singapore, that being far closer to implementing things like the US regime.
Chris: So yeah, I think really the UK has an opportunity here to implement a regime as part of its rewrite of the Aquis in the UK to do something more analogous to the US. I suspect that politics may militate against that, unfortunately, but I think the US equivalence regime is probably the model to uphold at the moment.
Mike: Thanks again to Chris Leonard Appleton. I'm Mike Cahill and thanks for listening.
