Derivatives are key to Europe’s agenda

Derivatives are key to Europe’s competitiveness, resilience and sustainability agenda The derivatives market plays a key role in ensuring efficient performance of markets and mobilisation of capital, encouraging liquidity, competition and economic growth, according to the chief executive of the International Swaps and Derivatives Association (ISDA). Scott Malia said that although the composition of the European Parliament had changed somewhat in the recent elections, its priorities of European competitiveness, economic resilience, energy security and sustainability remain the same. “Tackling those challenges can’t be achieved without having strong, liquid capital markets that support financing, investment and risk management – which means a well-functioning derivatives market is an important part of the puzzle,” Malia added. The ISDA chief executive was speaking following the publication of a paper from the association on how derivatives can play a positive role in supporting key EU strategic priorities for the bloc’s 2024-2029 mandate. The paper highlighted a number of challenges facing Europe’s next parliament, including: ● Great geopolitical uncertainty and the potential impact of this uncertainty on trade, investment and supply chains. ● An approaching demographic tipping point: in the euro area, a continuous decline in the working age population looks set to begin as early as 2025. ● A commitment to make decisive progress towards a climate-neutral and sustainable economy by 2050; to this end, the EC has advocated an ambitious target of a 90% reduction in net emissions compared to 1990 levels by 2040.

The ISDA sets out in the paper that derivatives can help meet these challenges and obtain three strategic European objectives - improved competitiveness, greater resilience and achieving sustainability. To do so, the association recommends a number of policy measures for Europe, which Malia also emphasised in his remarks. He said there were several derivatives-related initiatives the European Commission (EC) could adopt to improve EU financial markets, which would thereby help support the competitiveness of the economy. “These include encouraging innovations in risk management by ensuring the treatment of financial markets and derivatives activity is proportionate to the underlying risks, improving the attractiveness of EU derivatives market infrastructure and removing barriers to entry, calibrating transparency and reporting rules to establish the EU as a global trading hub, and aligning regulatory requirements to ensure the EU is competitive on an international basis,” he said. Specifically, the ISDA is recommending that European regulators extend recognition for the largest UK-based clearing houses ahead of the implementation of new mandatory clearing rules under the European Market Infrastructure Regulation (EMIR). The ISDA’s paper points out that if European banks lose access to UK CCPs, they would be cut out of the global liquidity pool for Interest Rate Swaps and Short-Term Interest Rate contracts. “Regulators should also review the EU’s transparency framework to ensure useful information is published and to reduce barriers to entry for global market participants – for instance, by adopting international standards like unique product identifiers and by facilitating machine-readable and executable reporting,” said Malia. To reinforce resilience in European markets, the ISDA recommends automating collateral management processes to improve efficiency and cut operational and liquidity risks and reducing barriers to accepting money market funds as eligible collateral for cleared and non-cleared derivatives.

He also pointed out that given the multi-billion Euro projected cost of achieving sustainability, deep liquid financial markets will be required to provide capital for green technologies and initiatives. “Ultimately, derivatives help drive vibrant, competitive markets and enable firms to manage risk and invest. We think our recommendations will create a safer, more efficient EU derivatives market, which will help support the key EU objectives of boosting competitiveness and economic security, while helping to achieve a successful green transition,” he added. Parameta’s exclusive survey of perspectives from leading participants in the OTC market found that “some OTC market data providers are creating indices that allow participants to trade new investable funds, opening doors to novel investment opportunities”, and that Europe and the US were most satisfied with innovation from OTC market players. This innovation and the projected growth in the global OTC derivatives market, estimated to reach more than US$25.81 trillion by 2032, a compound annual growth rate of 3.14% over the decade , show the key role the derivatives market has to play.

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