There is a high level of interest currently in “access rights” in market infrastructures – that is, the right of of one infrastructure to provide a service to its customers based on the service provided by another infrastructure, for example, to clear trades executed on a given trading platform. It has been one of the most contentious issues in the discussion of EMIR (the draft regulation covering OTC derivatives and clearing houses in Europe) and is at the heart of the the issues raised by the proposed merger of Deutsche Borse and NYSE Euronext. However, the term is often used in a broad way, whereas there are many important distinctions, which can mean that what appears to be an effective “right of access” achieves very little in practice. This post tries to explain what to look for in judging whether a “right of access” is worth anything.
The difference between a right of access and an absence of obstacles
Often the so-called rights of access are in fact merely an absence of obstacles. Many of the provisions in MIFID, for example, take the form of saying “Member States shall not prevent … market operators operating an MTF from entering into appropriate arrangements with a central counterparty … of another Member State” (Article 35). It is nice that there is no official obstacle, but there is no obligation on the CCP receiving an application to accept it.
By contrast, it is hard to find in current European legislation any provision that places an obligation on an organisation to grant access, when it is approached. The Code of Conduct, adopted in 2006, puts a positive obligation on infrastructure organisations to provide access when requested. However, the Code is voluntary and has proved impossible to enforce when an organisation puts up a series of technical obstacles to avoid granting access.
However, some of the latest legislative proposals seem to recognise the distinction. For example, the consultation paper on CSD legislation discusses widening the rights of investor CSDs to access issuer CSDs, subject, of course, to ensuring the soundness of the links that would be put in place.
Who gets the right?
Some of the rights granted in MIFID are given to market participants. For example, Article 34 gives investment firms the right of non-discriminatory, cross-border access to CCPs and CSDs. It also requires regulated markets to give their participants the right to designate their chosen system for settling transactions. However, this impressive-sounding right has proved almost useless because (1) it is subject to the necessary links being in place – but if they are not in place there is no obligation to put them in place; and (2) in practice what participants want is the right to choose the CCP where trades are cleared and this is not covered in MIFID.
Generally, it seems most effective to give rights to infrastructure organisations rather than participants. The relationship that is most important is that between trading platforms and CCPs – that is the link that is essential to open full competition between trading venues. Access to CSDs is much less important. At least for the time being, while market participants may want to trade and clear anywhere, they still generally want to settle in the home CSD of the security and there is little evidence that CCPs have difficulty settling where their participants want (even if in many cases they use custodian banks to do so). So it seems odd that so many of the legislative proposals revolve around access to CSDs rather than CCPs.
Rights to push and rights to pull
When talking about different layers of the infrastructure (e.g. trading platforms and CCPs) there is a difference between the trading platform being able to “push” a transaction feed to the CCPs of its choice and the right of a CCP to “pull” transaction feeds from the trading platforms of its choice. This has been the essence of the debate in EMIR: there was agreement that a trading platform for OTC derivatives should be able to push trades to the CCPs of its choice; the point of contention was whether a CCP should have the right to pull trades from the trading venues of its choice (apparently resolved at the recent ECOFIN meeting in favour, subject to conditions).
How far does it go?
Many of the rights in existing or proposed legislation are limited. For example, the right to choose a settlement location in MIFID Article 34 applies to regulated markets but not MTFs. MTFs are covered by Article 35, which is a weaker “shall not oppose” provision rather than a “shall require” provision. Similarly, the most contentious point of discussion in EMIR has been whether the access rights extend to all derivative contracts (which would open up access to contracts traded on derivative exchanges such as Eurex and LIFFE) or whether they are limited to OTC contracts (now resolved in favour of the more limited option).
What will happen?
Access rights are clearly an emotive subject, with these distinctions fought backwards and forwards. The competition review of the DB-NYSE merger may set out some important principles. And in the background there is an unofficial version of the draft text for a regulation to be proposed as part of the MIFID review – known as MIFIR – which contains the most sweeping access provisions possible: “A central counterparty shall accept clearing of financial instruments on a non-discriminatory and transparent basis, regardless of the trading venue on which a transaction is executed. … A trading venue shall provide access including trade feeds … on a non-discriminatory and transparent basis on request to any central counterparty …” (Articles 26-7). If this were enacted – which seems highly improbable, given the level of controversy surrounding much milder provisions – this would indeed provide a framework of open access supporting a fully competitive market infrastructure.