Market Infrastructures And Market Integrity: A Post-Crisis Journey And A Vision For The Future

Exchanges and central counterparties (CCP) – financial market infrastructures (MIs) – have evolved since the 2008 global financial crisis in response to regulatory reform. Our joint report with the World Federation of Exchanges (WFE) looks at how trends in financial markets are impacting MIs, and offers a vision for how they can continue to ensure financial market integrity in future.

The supervisory role of MIs has changed fundamentally in the last decade, primarily as a result of the post-crisis G20 reforms.  The move towards more transparent exchange or exchange-like marketplaces, together with a shift towards CCP clearing for OTC securities, along with developments regarding central reporting of trades and tighter capital, liquidity, and risk management standards, have increased the mandate of MIs.

This in turn requires significantly more focus, and resource, on risk management and supervisory practices. More than 70% of survey participants for our report confirmed that supervision requirements have increased over the past 10 years, and predicted they will increase further over the next decade. Meanwhile, more than 60% of survey respondents believe that market supervision is a core focus area.

Trends and challenges impacting financial markets

Many of the trends that have shaped financial markets since the crisis will intensify soon. Our report finds that these trends (namely changing stakeholder expectations and evolution of markets) will present new challenges for MIs in preserving financial market integrity, but also new opportunities to conduct supervision and surveillance more efficiently.

How financial market infrastructures can ensure market integrity

The report identifies five key areas that MIs will need to focus on over the coming decade to ensure market integrity.

First, higher standards of financial market integrity as a competitive differentiator will see MIs with more robust market integrity attracting improved liquidity and carrying lower risk. Surveillance and supervision as both a regulatory function and a client offering, meanwhile, will help reduce industry-wide cost of compliance. Thirdly, there needs to be broad industry cooperation and collaboration across MIs and the wider markets industry such as issuers, brokers, investors, analytics, and custodians.

The potential for (near) real-time surveillance with integrated functionality across trading floors, trading markets, and regulators, will shape the industry as a direct result of technology advances in the fields of AI, machine learning and big data.

Finally, interactive, outcome oriented supervision with a focus on the definition of standards and adherence to principles rather than a rules-based approach will also be key.

The cost of ensuring financial market integrity

Our report concludes that the financial markets industry will need to spend up to $3-4 billion over the next five years to realize the agenda set out above, with roughly 40% of this investment undertaken by MIs (with some of this investment already underway). The expenditure estimates include upgrades to industry infrastructure as well as the development of new capabilities to address the trends outlined in the report.

More information

For more information about the future of financial market infrastructures (MIs), and how they can ensure financial market integrity, download the full version of the report. 

Market Infrastructures And Market Integrity: A Post-Crisis Journey And A Vision For The Future