ANALYSIS: WFE calls for regulators to support listed derivatives growth

Speaking to FOW as the London-based trade body published a whitepaper analysing derivatives markets on Tuesday, head of regulatory affairs Richard Metcalfe said exchange-traded products encourage transparency. He also warned against allowing relatively unregulated markets, such as contracts for difference (CFDs), to divert flows from lit markets.

“The main concern for us is the aggregate effect of regulatory policy and the impact it might have on the exchange-traded (and most crucially cleared) market in the post-global financial crisis landscape,” Metcalfe (pictured) said. “The issue we have with the over-the-counter (OTC) market is two-fold – a lack of transparency due to the fragmented trade repository regime, and the growing retail adoption in that space. Unlike futures and options, there is very little transparency for instruments like CFDs.”

The WFE like other derivatives trade bodies has been vocal about the need to protect central counterparties (CCPs) from onerous capital requirements such as Basel III rules and new reporting obligations.

For the WFE, the additional benefits of standardisation and price discovery, including historic data, support liquidity in the market.

“This does all depend on market-markets and clearing firms being able to run a business,” the report said. “And the trend in regulatory capital requirements in the past decade has worked against this, which is short-sighted and counterproductive. Bank capital rules in particular should work with the grain of central trading and clearing – not against it.

“Similarly, loading capital requirements on to trading or clearing does nothing to stop credit bubbles but does harm the ability to manage risks that are a by-product of productive investment in the future. Yet, to widespread and justified alarm, recent times have seen attempts to interpret the Basel rules as justifying penal treatment of clearing related exposures under the Basel II ‘endgame’ in the US.”

Michael Barr, then US Federal Reserve vice chair for supervision, outlined in September a “reproposal” of the US endgame rules but the draft was held up by negotiations with other regulators and the election in November.

The US delay has affected the regulation's progress in other jurisdictions. The UK Prudential Regulation Authority in January postponed the implementation of its Basel rules by one year to January 2027, citing a lack of clarity on the US approach.

The European Commission, meanwhile, is considering a delay and consultation on its own framework.

“At the supervisory and policy level, it is important to strike a balance between having proper systems in place and encouraging flow to go through the proper channels and not have more trading outside the markets that have proper frameworks in force,” Metcalfe said. “Ultimately, that will support the markets that have proven themselves best placed to support the growth in demand we have seen develop across regions.”

On the other hand, global standards bodies have been examining OTC markets in a bid to increase transparency and reinforce margin standards following market stress events. The WFE feels that more needs to be done to ensure OTC transparency and monitoring in key asset classes like commodities match the lit markets.

“The dynamics of commodity markets mean that the gap in monitoring between the two markets is particularly acute,” Metcalfe added. “From the CCP risk management point of view they are trying to monitor counterparty credit worthiness combined with market moves affecting the value of underlying exposures.

“This has been an area of concern since Covid and market events since have thrown a spotlight on the OTC market. We would be very keen to see global standards develop further.”

Speaking at the FIA International Futures Industry Conference earlier this month, senior executives warned regulators against hindering the adoption of exchange-traded derivatives by retail users, particularly through expanding investor protection rules.

“In terms of retail, the exchanges have made great strides in making the derivatives market more user friendly and the evidence suggests that adoption in that type of environment, supported by education, is the best way to ensure risks are managed appropriately and, ultimately, best understood by users themselves,” Metcalfe said.

Cboe Global Markets, which runs four US options venues, reported average daily volume (ADV) in February of 18 million lots, narrowly beating January’s record tally. Single stock options ADV was 13.6 million, according to figures published by the exchange.

The growth was in large part driven by retail-oriented products such as zero-day-to-expiry (0DTE) S&P 500 index (SPX) options, which made up 56% of volume last month for the first time, according to Cboe. The US group saw 69.1 million SPX options traded in January, slightly up on the same month in 2024, according to FOW data.