2020 has already seen record-breaking market data rates due to increased volatility around the COVID-19 pandemic and the uncertainty of the US elections, but the year is not over yet and European markets remain in an ambiguous position as Brexit approaches.
While the EU and the UK could still strike a deal, many in the finance industry are preparing contingency plans for non-equivalence—where UK-based firms would be removed from the EU’s single market structure and vice versa.
As the new year approaches, financial market participants should be aware of options available to them to prepare for one of two wildly different outcomes—either a seamless transition or for the surge of expected volatility alongside additional regulatory requirements. At Exegy we have a long-standing history of adjusting and operating in fragmented markets, with over 12 years of supporting EMEA-based trading firms through the quickly evolving electronic markets, ever-changing fragmentation, and more recently the regulatory change to MiFID II.
Which is how we know that keeping up to date with new regulatory requirements, venues opening in new geographic locations, and increased market data rates coming in from new sources can all effect everyday trading activities.
UK Dominated Clearing and Settlement
Knowing how to get through regulatory red tape and what transitions are already taking place in the European markets is vital to seamless operation in a worst-case scenario. After Brexit was announced in 2016, many market participants began planning and as a result have already established roots on either side of the potential divide via new physical locations or registering with the prospective entity for cross-border activity.
One notable transition will be the clearing and settlement of European dominated securities. Over 90% of European derivatives are cleared through the UK. The European Commission (EC) recognizes that UK-based Central Counterparties (CCPs) are crucial to European markets and have allowed an extra 18 months past the Jan. 1, 2021 deadline to wean European markets off LCH and ICE—two major clearing houses in the UK that handle the majority of that 90% market share.
Deutsche Börse has been pushing its clearing platform Eurex Clearing AG to take some interest rate swaps (IRS) off of LCH’s hands and now hold about 18% market share in that category. For the most part though, London houses still dominant CCP’s making the UK a vital part of the EU’s market structure.
Venues and Exchanges
Market participants within the EU and the UK are obligated to trade on venues within their respective areas. Most major venues and exchanges have prepared for this and have made moves to ensure their continued operation. Deutsche Börse has registered all its trading venues as Recognized Overseas Investment Exchanges (ROIEs) allowing them to continue to serve their UK members. Others are preparing to move their derivative trading to US swap exchanges that cater to both the UK and EU already.
The FCA’s list of all other approved ROIEs:
- Börse Frankfurt Zertifikate AG
- Borsa Italiana SpA
- Cboe Europe B.V.
- Deutsche Börse AG
- Eurex Frankfurt AG
- Euronext Amsterdam NV
- Euronext Paris SA
- European Energy Exchange AG
- ICE Endex Markets B.V.
- MTS S.p.A.
- Nasdaq Oslo ASA
- Powernext SAS
A perk of being included in the European Economic Area (EEA) is the ability to passport or conduct business in any other member state. EU based firms can apply for Temporary Permissions Regime (TPR) to continue passporting in the event of a no-deal Brexit scenario, buying time until a more permanent solution is available. It is worth noting that the Temporary Permissions Regime is subject to change pending the outcome of the withdrawal agreement.
UK Based Market Participants
While European participants have been preparing, so have UK venues. Cboe, Aquis, and Turquoise have all established themselves in EU regions. Cboe and Turquoise have opened venues in the Netherlands, while Aquis has opened in Paris. The venues are set up so that firms will have to file their regulatory paperwork in whichever area is their legally designated market as well as apply for new membership in the case of non-equivalence.
With the possibility of increased market fragmentation and uncertainty on the horizon, infrastructure couldn’t be more vital. Implementing new regulations and operating within a different liquidity pool can be challenging which is why it is important to take a second look at capacity to handle increased market data rates.
We Know Volatility
While deal or no deal is up in the air, volatility is certain. Even without Brexit in the foreground, December is projected to be a chaotic month as COVID-19 cases rise with holiday gatherings and companies close in on vaccines. In March, the VSTOXX hit record breaking numbers as new information regarding the pandemic hit the media. Recent months are seeing similar trends as sentiments change regarding how Boris Johnson speaks about the Withdrawal Agreement discussions. As both events coincide with the new year volatility is only expected to rise. This is the year of preparing for the next potential market shock or the comorbidity of multiple potential shocks.
Firms need to know if their infrastructure can handle increased rates. Those that can handle the change can even profit off shifting market conditions. Exegy has been tracking US volatility since March 2020. Volatility was high and market data rates were hitting record levels requiring firms to ramp up their processing capacity. When Exegy’s equipment was tested against 2020’s volatility levels our infrastructure couldn’t be forced to drop packets and held up at 12 times the recorded rate. Exegy’s hardware and software solutions can provide the capacity to deal with the extreme volatility to come.
And We Know Market Data
Capacity is only part of the equation, the other is how quickly firms can access data and place orders, given new geographic realities. Firms will need to decide based on their latency needs whether to source market data in the UK, the EU, or both. Exegy can provide access to more than 100 equities, commodities, and derivatives feeds in the EMEA region and even offers APIs for systematic internalisers like those established by Virtu Financial.
With concerns on almost every level, from clearing houses to temporary passporting, Brexit can seem daunting, but it doesn’t have to be that way. With a longstanding history of helping firms comply to regulatory requirements and navigate fragmented markets Exegy can provide global solutions no matter the outcome of Brexit.
Exegy’s Ticker Plant can handle co-location options for latency-sensitive operations, while Axiom is a consolidated feed for more cost-aware firms. For more information on how Exegy can help global firms wade through new regulations and market changes, request a consultation.