The liberalisation of capital markets around the world – allowing easier access for international investors to local markets and greater harmonisation of trading and settlement practices – is widely viewed as a catalyst to economic growth.
The associated alignment of regulations and market practices are seen as key building blocks in helping to achieve a level playing field with which international investors feel comfortable.
Regulatory harmonisation and market practice harmonisation often have very different origins. The former is often the result of either a financial crisis (such as 2008) or a shared political need (such as the creation of a single market in the European Union).
Following the financial crisis, banking and securities market regulation is now driven, not by local authorities, but by global bodies such as the G20, FSB, Iosco and BIS. This means more and more regulation has greater global commonality – just look at recent rules on banking capital adequacy, derivatives trading and CCP clearing. These global initiatives then need to be implemented consistently locally. This is often complicated, as in the ongoing case of the recognition of US and EU derivative clearing rules.
Market practice harmonisation also requires a unifying common interest, which could be political, but is also often more practical and economic as market participants try to reduce costs and increase efficiency.
It usually means the harmonisation of rule books, communication and processing interfaces and message standards, and inter-operability between technical systems across an economic area.
These processes can play a vital role in integrating markets, delivering a level playing field and reducing costs for all investors and intermediaries. No securities market can be said to be fully integrated if its post-trade arrangements are not harmonised, ensuring safety, full competition and the absence of barriers across national markets.
Harmonise when you have a common interest
But even where there is such a common interest, the work to harmonise and integrate market structures is long and hard, even in a single economic area such as the EU, where many countries share a single currency.
For instance, the Giovannini reports of 2001 and 2003 outlined 15 barriers to efficient EU cross-border clearing and settlement which have taken more than 14 years to remove; and some still remain.
The development of TARGET2-Securities (T2S) will ensure that, for the first time, the eurozone’s settlement systems will operate on a common platform, with common opening hours and settlement processing.
The associated market practice harmonisation work has been immense with the ECB and the market identifying, and progressing, 16 high-priority harmonisation initiatives with eight longer-term initiatives already underway.
Indeed, we would argue that the combination of new EU CSD regulation (and globally agreed principles for financial markets infrastructures agreed by CPMI-IOSCO) and the introduction of T2S together represent the most important building blocks for a Capital Markets Union (CMU) for post-trade services.
Europe’s political structure, however, is unique. Elsewhere, harmonisation and regulatory convergence is primarily linked to the need to expand investment ﬂows and to attract external investment capital to a region.
International investors increasingly expect to be able to use international standards and international business processes and be subject to consistent regulation when accessing local markets.
In a globalising economy, national policymakers now not only have to implement global regulatory initiatives, but in addition find they have to consider using international best practices to avoid the potentially destabilising effects of regulatory arbitrage.
Even if there is willingness to invest in improved securities market infrastructure, implementation has often proved time-consuming and costly due to the challenges of collaboration and the tendency to operate in country silos.
Globally, securities markets can learn valuable lessons from the successful harmonisation already under way in various regional payments markets (such as the growth in the Southern African Development Community (SADC) SIRESS payment system, which went live in September 2014).
In Asia, the focus has been primarily on how harmonisation and integration can enhance the development of Asian bond markets under the Asean+3 initiative.
A pilot platform involving Bank Negara Malaysia, the Hong Kong Monetary Authority and Euroclear was launched in 2012. At the same time the Asian bond market initiative is looking at other regional integration and settlement architectures.
Progress here will be driven in part by the implementation of the G20 and FSB regulatory agendas. For instance, regulatory changes in the major Asian financial centres will likely require initial margin for both counterparties and a reduction or removal of thresholds for variation margin.
This means there will be increasing demand for collateral, which in turn will require increasing integration of Asian bond markets to satisfy the increased demand for high-quality, liquid assets.
The tailored approach
Only a neutral infrastructure, such as Euroclear, can work to understand each country’s position and work with its authorities to come up with tailored structures that meet their demands – while enhancing their access to international investors and allowing market participants to realise operational efficiencies.
Where countries are looking to reform their capital markets and engage more actively with international investors, a partner who listens and can work with the market authorities is required to help develop an appropriate capital-markets regime.
But above all, we understand that different markets are at different stages in their development. Our approach is to tailor solutions around the individual country’s agenda.
Harmonisation and liberalisation are worthwhile goals, and important for the development of international markets, but the interests of an individual country come first.