Vice President of the European Commission responsible for Competition Policy
Competition Policy Issues in Financial Markets
CASS Business School
London, 16 May 2011
Ladies and Gentlemen:
I would like to thank the Cass Business School for the kind invitation to discuss competition issues in wholesale financial markets with such distinguished personalities. I believe this is the perfect opportunity for me to give you a brief overview of the challenges we face in the industry and to discuss what competition policy can do to address them.
Against the background of the extraordinary developments in the world of finance before and after the crisis, I will argue that competition authorities and financial regulators need to work together to promote a fair, stable and efficient environment for financial markets across Europe. In closing, I will touch upon ongoing investigations led by the European Commission’s competition department on trade infrastructure and in the market for derivatives.
Let me start by talking about the challenges we are facing. Promoting competition, cross-border integration, and transparency in the financial markets has been part of the European Union’s efforts to build and strengthen the Single Market for many years. The need for EU-wide oversight of the financial sector became apparent in the 1990s as the Union moved towards closer economic integration and the single currency.
This recognition led to the adoption of the Financial Services Action Plan of 1999, which comprised 42 separate measures on securities, banking, insurance, mortgages and pensions. The plan resulted in major pieces of legislation, including the Capital Requirements Directive, the Markets in Financial Instruments Directive – or MiFID – and the Market Abuse Directive. As our first wave of legislation was being implemented, financial markets were changing fast.
Technological innovation brought new organisations and practices such as broker crossing networks, systematic internalisers, and algorithmic and high frequency trading.
Ever more complex financial products and derivative instruments were being introduced, and
There was a massive rise of over-the-counter trading, which is now estimated at around 40% of all equity trades.
More importantly, the spectacular growth of trade in new financial products took place in a very opaque environment. In that environment, too much risk was being taken, also because risk was being mispriced. In addition, the crisis generated suspicions of market manipulation and abuse which contributed to damage investors’ trust in financial markets – and these suspicions have not dissipated yet.
The EU has responded to these conditions by launching a comprehensive review of its existing legislation. The goals are to bring more transparency and stability to financial markets and to extend the scope of regulation to new financial instruments and infrastructure.
Almost three years since the crisis erupted, financial markets are the scene of dramatic consolidation of trading platforms and infrastructure. This is due to a recovering environment for financial trading and to the imperatives of globalisation and technological change. Stock exchange mergers are the clearest signs of this trend. This year, mergers have been announced between the London and Toronto Stock Exchanges and between Deutsche Börse and NYSE/Euronext, followed by a competing bid by ICE and Nasdaq.
Ladies and Gentlemen:
These are some of the current challenges in the financial services industry; now I would like to talk about what the joint action of competition policy and regulation at EU level can do to address them.
Since the onset of the crisis, regulatory authorities across the world have tried to remedy the conditions in wholesale financial markets that had helped to push the markets on the brink of collapse. The response at EU level was the creation of three new supervisory bodies to increase the coordination and powers of supervision of European financial regulators, on the basis of the De Larosière report requested by the Commission. The European Systemic Risk Board was also established to carry out macro-prudential supervision and prevent the accumulation of systemic risk.
Other regulatory initiatives are now seeking to improve the way markets operate. The European Market Infrastructure Regulation – now under discussion at the Economic and Financial Affairs Council and at the European Parliament – will mandate clearing of standardised over-the-counter transactions and will impose new obligations to register with trade repositories. This will bring transparency into the OTC markets and impose a minimum degree of risk management on them.
In addition, the ongoing review of MiFID aims to improve the organisation, transparency, and oversight of exchange-based trading. It may extend the scope of the exchanges’ obligation to publish transaction data. In addition, it may force the unbundling of the sale of pre- and post-trade data so that users will only acquire what they need. The use of common message protocols which do not attract proprietary standards might also be favoured.
The regulatory measures taken by the European Commission will shed more light into the way financial markets operate and will prevent a dangerous accumulation of risk. But regulation alone is not enough. Whereas regulation tackles broad structural market failures, you need competition policy to tackle the harmful behaviour of individual market participants. Competition control should ensure that the actual evolution of the market does not lead to structures that harm users and legitimate market participants. In particular, we should prevent that any one entity or group controls essential infrastructure – be it a trading platform, a clearing platform or a pre-trading service – to the benefit of a restricted few.
I am aware of the debate on inter-operability and the question of whether increased competition and the proliferation of market actors can undermine stability, but I cannot see a problem here. I believe that competition and stability are not at odds. If market participants comply with strict prudential requirements, I see no risk in having many of them supplying services to investors. In fact, I see potential gains. The level of concentration in the markets should reflect the search for optimal efficiency; it should not reflect the actions of powerful market players that have excluded potential competitors.
So, in my view this is not a real danger. Let me tell you what I believe is one of the major problems in wholesale financial markets. Regulatory initiatives have gone a long way to increasing transparency of over-the-counter trade vis-à-vis regulators. But for a market to function well there must also be transparency vis-à-vis all market players. Market data that are necessary for a good appreciation of market conditions and for the efficient supply of information, trading and clearing services are not sufficiently available to market participants for many financial products.
I think it is time we examined the control and dissemination of market data to establish whether there is abusive behaviour on the part of their owners attempting to leverage privileged access to information to foreclose rivals or distort the market. I also intend to discuss the legitimate scope of intellectual property rights claims on such data.
Ladies and Gentlemen:
Now I would like to move to the third and final part of my presentation and give you a quick update of our current work in competition enforcement. The first two cases I will mention are those against Standard & Poor’s and Thomson Reuters. These two cases involve financial data or market infrastructure that may be important for the operation of markets.
Our case against Standard & Poor’s regards the distribution of International Securities Identification Numbers developed by ISO, the International Organisation for Standardisation. S&P holds a monopoly position in the assignment of these ISO numbers to new securities issued in the US and in their distribution to the whole financial community. European investors have complained that S&P imposes license agreements and demands fees for the usage of the data even if they are downloaded from other vendors, something which is contrary to ISO rules.
Our concern is that S&P may be abusing its dominant position by charging excessive prices. We are cooperating with the company and have just published, for consultation, proposals submitted by Standard & Poor’s to check whether we have found an acceptable solution.
The case involving Thomson Reuters is about the restrictions the company imposes on the use of Reuters Instrument Codes – or RICs. For example, customers of Thomson Reuters cannot cross reference them with identifiers of other vendors to retrieve data from them. That makes switching to an alternative data feed vendor costly and difficult. We are concerned that the practice could amount to an abuse of dominant position. I take this opportunity to encourage the company to work with us for a speedy resolution of the case.
Finally, I would like to talk about two new antitrust investigations into the markets for Credit Default Swaps; which are the first cases we have opened in the market for derivatives.
The first case involves 16 investment banks and Markit, the leading provider of financial information in the CDS market. We want to find out if the banks are jointly coordinating the control of the information flow on CDS trade to prevent other providers and data vendors from developing competing services. Our preliminary investigations suggest that Markit may receive de facto exclusive information on the transactions and positions of many of these dealers. In addition, Markit’s licence agreements may be restricting the development of the market.
The second case involves nine large banks – all of them also part of the first investigation – and the agreements they concluded when a company called The Clearing Corporation was sold to Intercontinental Exchange, or ICE. In this operation, the nine banks gave themselves preferential fees and a profit-sharing mechanism which gives them strong incentives to use ICE’s services with a de facto foreclosure effect on other clearing houses. Finally, we are investigating ICE’s fee structure, which may give an unfair advantage to the nine banks and discriminate against other dealers. If confirmed, this could be an abuse of dominant position to the detriment of potentially efficient competitors.
Ladies and Gentlemen:
Over the past twenty years or so, the financial services sector has become increasingly larger and complex. No one knows this better than you, given that the wider industry accounts for around 14% of Britain’s GDP. Today, overseeing a few investment banks and specialised traders is simply not enough. We need to extend oversight beyond traders and banks to cover infrastructure owners, intermediaries, information services providers and possibly more.
Competition enforcement and regulation must not saddle the industry with an unnecessary burden and must not stifle innovation. But we must make sure that the market develops in ways that are compatible with long term stability and efficient growth. We need deep and liquid financial markets. We need a system that gives participants all the information they need to fully understand the risks they are taking when they invest in a product and to fully appreciate the price they are paying. Participants need to know who their counterparties are and what their exposures are. Above all, we need to promote a system that participants can trust.
I will continue to enforce EU competition law against collusion between firms and the undue influence of powerful players. I will also use every opportunity – such as our meeting today – to remind everyone to play by the rules. This is a responsibility that every player in these markets has towards their competitors, their customers, and towards society at large.