Open Access: Myth-busting
What does open access mean for you?
Risk. Liquidity. Innovation. What are the real opportunities Open Access provides?
What is Open Access?
Open Access is the principle at the heart of free and fair markets. It underpins the EU’s philosophical approach to the European single market and has been applied to labour and intellectual property as well as food and industrial goods.
The principle that markets are better served by a diversity of competing suppliers is well understood and evidenced by the lower prices and improved service that open competition provides.
For too long however, the world of European derivatives trading and clearing, the backbone of a trillion Euro industry, has not embraced the principle of Open Access. That has allowed large exchanges and clearing houses to operate a "closed" silo model, which ties the trading, clearing and licensing of products to a specific venue.
We believe customers should have the ultimate choice in where they take their business. That’s why we welcome the European Union’s determination to introduce an Open Access model, via MiFID II that gives investors transparency, competition and better risk management.
Will Open Access mean greater risk?
This is a common refrain from those opposed to Open Access and those with most to lose should the principle be enshrined in European legislation.
We believe that Open Access will create broader, deeper pools of mutualised risk. It will increase transparency and safety within an environment in which clearing houses are free to compete, and risks are dispersed rather than concentrated through imposed and artificial barriers.
If we are to learn anything from the tumult of 2008-9, it is that concentrated, poorly-lit and undiversified pools of risk are the genesis of financial crises. It was for precisely that reason that the G20 made the bold decision to mandate the clearing of a wide array of financial products, to shed more light on previously opaque markets.
We should not fall short in our aim of safely managing risk by allowing the perpetuation of closed silos operating at the heart of the European derivatives market.
What are the potential efficiency gains through Open Access?
One of the largest drivers of efficiency in any market is competition. While silo-operating venues might argue that they are providing sufficient innovation or service levels, we know that the cold, hard light of competition always reveals more that can be done to better serve customers.
Why are we so certain of this? Because we have lived through an almost identical market transformation when MiFID I introduced competition to the world of cash equities.
In equity trading and clearing, competition has significantly reduced costs while at the same time improving speed and technology as well as customer service. Noone today would argue for a return to a pre-MiFID I world where national exchanges enjoyed a monopoly on the trading of shares.
What is difference between Open Access and Interoperability?
The difference between the two is important and should not be confused.
Open Access means ensuring non-discriminatory access to trading and clearing infrastructures. In short, trading venues should have non-discriminatory access to CCPs – allowing investors to trade on alternative platforms and benefit from lower trading fees across asset classes. Similarly, CCPs should have non-discriminatory access to trading venues – offering investors the opportunity to benefit from reduction/ netting of their clearing margin within an aggregated and enhanced liquidity pool.
Interoperability means allowing products traded on separate venues to be fully fungible. In other words, it obliges clearing houses to interconnect, sharing their open interest pool and helping market participants to reduce costs by netting and cross-margining trades taking place on different venues.
Our position is clear. We firmly believe that Open Access is the only right choice for European markets and that interoperability should be permitted but not mandated, particularly in respect to OTC derivatives where nothing should stop CCPs and Trading venues seeking to cooperate to meet the needs of investors.
Why does LSEG have an Open Access approach?
We believe that markets defined by the principle of Open Access are more efficient, more innovative and crucially, more customer-focussed. We know this from our own experience and from what our customer tell us every day.
And we’re not alone. Last summer, the vast majority of the financial services industry voiced its support, via an open letter, for the more open model, including the world’s largest asset managers, investors, major sell-side participants and trade associations.