The blueprint: Striving for efficiency in an evolving market
23 July 2024
ICMA鈥檚 Bryan Pascoe, Andy Hill and Natalie Westerbarkey sit down with Carmella Haswell to discuss the association鈥檚 new internal structure, divergence issues between the UK and EU, and how its role has changed with increasing pressure
Image: stock.adobe/Uladzimir
Over the past decade, the International Capital Markets Association (ICMA) has needed to professionalise, as the level of challenge and regulation has 鈥済one through the roof鈥� 鈥� putting a greater onus on trade associations. To better engage with all areas of market activity, whether that be standard setting and best practice or regulatory advocacy, the team at ICMA has undergone a new leadership structure.
Andy Hill and Natalie Westerbarkey will sit on top of the existing Market Practice and Regulatory Policy (MPRP) team as co-heads. ICMA CEO Bryan Pascoe believes the move will provide a level of substance and content in the senior leadership, to be able to drive discussions with the industry and regulators.
鈥淭his new leadership structure puts us in a better position to future proof the association,鈥� Pascoe says. 鈥淎nd [it] enables us to engage with our stakeholders and members.鈥�
Hill is tasked with industry-driven best practice initiatives, where he will work to build greater resilience in the market, and investigate the connection between market structure changes and challenges around stress and liquidity. From a regulatory advocacy perspective, the team will focus on the risks of regulation more strategically, and develop a clear understanding of how the organisation identifies changes in market structure.
Pascoe remarks: 鈥淚CMA can provide industry input, presenting a viewpoint or position that is more in the interest of best outcomes, rather than individual benefits to individual institutions. This has helped to support and grow the importance of trade associations.鈥�
He indicates that regulation and the broadening of capital markets have added further complexity and pinch-points, because of the size and scale of the markets relative to what they used to be. For example, the US Treasury market has grown to US$27 trillion from US$5 trillion 20 years ago, while the high-yield bond markets in Europe and the Chinese bond market have evolved.
鈥淲hen it comes to some of the basic elements of capacity building 鈥� helping market participants and regulators understand how to create a blueprint for the most efficient market that can serve the real economy in the best way 鈥� we can do without looking like we are representing our own view, that we have the general industry interests at heart,鈥� Pascoe adds.
Positively, Pascoe reports that the association is 鈥渙ften pushing on an open door鈥� in relation to regulators, who are keen to engage and understand the industry viewpoint. One of the roles that ICMA plays in its committees around digitalisation and technology, and certainly in sustainable finance, is trying to look at ways in which it can help to support consistency, harmonisation and standardisation.
In terms of new initiatives, different jurisdictions and organisations are looking at how they will develop their own views on sustainable finance. Sustainable finance is more jurisdictional, where the EU comes up with a set of standards, Southeast Asia has its own taxonomies, and the UK has its transition plugged into the Transition Plan Taskforce (TPT).
鈥淗ere you have an array of different standards and different approaches,鈥� Pascoe highlights, whereas in the digitalisation world, banks are using new digital bonds off of their own blockchain platforms. Or banks are using different protocols or different interpretations of the law. 鈥淚ncreasingly, in many of the new initiatives you tend to see a lot of fragmentation 鈥� which is typically not helpful when it comes to achieving resilience and liquidity,鈥� he continues.
The current environment
ICMA has an embedded presence within the fixed income, ie bonds and repo space, now with cross-cutting themes of sustainable finance, digitisation and technology. It sets the standards for various areas of market activity in primary and secondary markets, including the primary market handbook, dispute resolution, and legal documentation in the repo space.
The organisation continues to review the growing focus of global and regional regulators on the non-banking financial institution (NBFI) space as it grows in size, the US drive towards efficiency and resilience through the T+1 initiative, as well as the future central clearing of US Treasury cash and repo transactions. ICMA is also keen to examine the ongoing divergence issues between the EU and the UK.
The association鈥檚 reflection of the current market remains positive, as it 鈥渇eels pretty healthy鈥� in Hill鈥檚 mind. The core themes facing participants include quantitative tightening (QT), the unwinding of targeted longer-term refinancing operations (TLTROs), the relative improvement in collateral scarcity, the next move from the European Central Bank (ECB), as well as the expected rate cuts and how that has been revised over the course of the year.
An interesting development impacting the market is the growth seen within the dealer-to-client (D2C) space, which Hill believes is set to continue. He notes an ongoing move to make the markets more electronified.
Settlement fail rates have been key to watch for ICMA, as Pascoe notes a reduction in fail rates with more availability of collateral. It is a 鈥減ositive reflection鈥� of a market that is showing less dysfunction than what was seen 18 months ago, he adds.
While ICMA has been reviewing settlement efficiency rates, Hill pinpoints a 鈥渕arked improvement鈥� across all bond classes in this respect. He says: 鈥淲e can attribute this to a couple of things; higher interest rates which make failing expensive; and we are not seeing the same bottlenecks around collateral availability.鈥�
It will be imperative for authorities to track this development carefully, following the amount of pressure to initiate the move to a shorter settlement cycle, T+1. Pascoe states that the industry needs to solve the problems in the existing system before putting an 鈥渙verload of additional challenges鈥� on the market by shortening periods through which 鈥減eople need to deal with all of the necessary processes to settle and clear securities鈥�.
ICMA has been vocal in trying to mandate some of the initiatives around shaping the size of transactions such as partialling, to create a better infrastructure and ecosystem for collateral fluidity and the ability to avoid outright fails.
The desired outcome, in terms of T+1, is to converge as much as possible across the EU, UK and the Swiss markets. Pascoe says: 鈥淚ndustry participants have been encouraging the regulators to work together as closely as possible from a timeframe perspective. Especially where there are similar asset classes that might have to operate across the European settlement cycle to avoid that fragmentation.鈥�
Hill signifies the importance of acknowledging the distinction, from a fixed income perspective, from a UK move and an EU move to T+1. There is a level of complexity in having multiple CSDs, CCPs and different payment systems across Europe. In addition, the UK gilts market already settles on T+1, whereas the whole of the EU bond market would be transitioning to T+1.
These events will be key discussions for the MPRP team. To further the development of this division, and ICMA as a whole, Natalie Westerbarkey says the association can improve the interconnectedness of its relationship with other regions from a policy perspective.
She adds: 鈥淚t is very valuable that ICMA offers training and certification, building on that core activity is where we feel we can add a lot of value. This will be beneficial for policymakers also, as some may not have a financial services background, and may require the sharing of practical experience. It is not just advocating for specific changes in regulation, but supporting a more educational engagement.鈥�
Preparing for new leadership
With new policymakers coming in with a new European Parliament, European Commission and Commissioner鈥檚 cabinets, the next five-year period will require more work in terms of engagement, warns Westerbarkey.
2024 is the election year, as around 65 countries will be heading to the polls by the end of December. The results of such will play a role in which direction the financial markets will take. For example, with a new party leading the UK, market participants will look to Labour and its policies to prepare for a possible new direction of travel.
Pascoe is keen to see how the new government will view the Treasury, in terms of keeping up the pace on a number of regulatory initiatives. 鈥淭he initiatives that come out of the European Commission, or the FCA or the Treasury in the UK, are often heavily driven by the need to deepen markets, because there is a big focus on growing that long term 鈥榮kin in the game鈥� investment, boosting retail investment in the ownership of companies, in particular with medium and small sized companies,鈥� Pascoe highlights.
For ICMA, many of the retail investment strategy initiatives and the listing act initiatives are more equity driven, but they still have significant implications for the fixed income space. Westerbarkey intends to focus on regulations that have the largest impact on the bond market. A core area of engagement is in the capital markets union in the EU, she adds, which is trying to solve the need for more private capital funding in the EU and beyond for investors 鈥� both institutional and retail investors.
The Sustainable Funds Disclosure Regulation (SFDR) speaks to how certain sustainability type bonds are distributed to consumers, and is a key focus area for the association. In addition, Westerbarkey says NBFI will continue to be of importance, this connects with the capital markets union because it looks into not just fund liquidity from a financial stability point of view, but it also looks into the activities of non-banks in terms of private lending.
For Pascoe, the 鈥渂ig unknown, the elephant in the room right now鈥�, is all of the discussions that will be happening around this 鈥渧ery broad term of NBFIs鈥�, and in what way they should be regulated, particularly from a macro prudential basis.
Furthermore, the likes of the Markets in Financial Instruments Directive (MiFID) and its work towards a consolidated tape, the Central 色花堂Depositories Regulation (CSDR) for T+1, as well as the European Market Infrastructure Regulation (EMIR), will remain a priority for ICMA.
Westerbarkey explains: 鈥淭hese policies have been around for some time, but what is new in terms of policy is everything around fintech and digital. Policy around fintechs addresses innovation and new entrants to the market, while the digital aspect addresses more of the process, for example, electronification, digitisation.鈥�
As the industry looks ahead, the T+1 agenda is going to be of high priority for the European Commission, and the UK. Increasingly, the market will hear more about central clearing as the US remains significantly focused on this. Pascoe comments: 鈥淲hat we have seen of late is that when the US and the SEC begin regulatory initiatives and imperatives, the European bodies have followed suit to maintain competitiveness.鈥�
Lessons learnt
Looking ahead to the second half of the financial year, engagement and reconnecting will be top priorities for the ICMA team. Especially in terms of the newly appointed members of the European Parliament, in particular in the Committee on Economic and Monetary Affairs (ECON). This is in addition to the new politically appointed commissioners, the cabinets, and also within the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA).
The association will begin the second phase of the Bond Market Liquidity Taskforce, which produced a paper in March on liquidity and resilience in the European sovereign bond market. Hill explains: 鈥淪omewhat ambitiously, we intend to finish [the second phase] by the end of the year. But the focus is going to be on the European investment grade corporate bond market.鈥�
The team will remain heavily engaged in the European Commission consultation on NBFIs, and with the Financial Stability Board (FSB) work more broadly.
Hill speaks to the challenges of this work, using the phrase 鈥渋t only tells us where it isn't, it doesn't tell us where it is鈥�. He describes it as a 鈥渘ebulous concept鈥�, which is diverse in terms of the underlying entities and strategies and how they are funded. 鈥淭rying to get a better handle on that, which is what the regulators are trying to do and struggling with, is something that we are working on,鈥� Hill adds.
For over 50 years, ICMA and its members have worked together to promote the development of the international capital and securities markets, pioneering the rules, principles and recommendations that have laid the foundations for its operation.
Learning lessons from the past, Westerbarkey says from a public policy perspective, 鈥渨e should expect the unexpected鈥�. The trade association needs to immediately react to policy changes that suddenly appear.
In December 2019, Ursula von der Leyen announced her European Green Deal, and shortly after, more geopolitical themes related to international security and autonomy were driving the global policy agenda. Now, in the next five-year cycle, there will be a focus on competitiveness.
Leading ICMA, Pascoe believes that themes of resilience and efficiency are key. 鈥淓verything is interlinked, interdependent, and we have to look across all of our committees and all of our different areas of activity to make sure that we are best serving our membership and the broader stakeholders alike,鈥� he explains.
In conclusion, he believes: 鈥淭here are features of the market that may look to be very distinct, but there is an underlying overlap. We need to be very focused on this going forward, perhaps that was not the way trade associations were operating previously.鈥�
Andy Hill and Natalie Westerbarkey will sit on top of the existing Market Practice and Regulatory Policy (MPRP) team as co-heads. ICMA CEO Bryan Pascoe believes the move will provide a level of substance and content in the senior leadership, to be able to drive discussions with the industry and regulators.
鈥淭his new leadership structure puts us in a better position to future proof the association,鈥� Pascoe says. 鈥淎nd [it] enables us to engage with our stakeholders and members.鈥�
Hill is tasked with industry-driven best practice initiatives, where he will work to build greater resilience in the market, and investigate the connection between market structure changes and challenges around stress and liquidity. From a regulatory advocacy perspective, the team will focus on the risks of regulation more strategically, and develop a clear understanding of how the organisation identifies changes in market structure.
Pascoe remarks: 鈥淚CMA can provide industry input, presenting a viewpoint or position that is more in the interest of best outcomes, rather than individual benefits to individual institutions. This has helped to support and grow the importance of trade associations.鈥�
He indicates that regulation and the broadening of capital markets have added further complexity and pinch-points, because of the size and scale of the markets relative to what they used to be. For example, the US Treasury market has grown to US$27 trillion from US$5 trillion 20 years ago, while the high-yield bond markets in Europe and the Chinese bond market have evolved.
鈥淲hen it comes to some of the basic elements of capacity building 鈥� helping market participants and regulators understand how to create a blueprint for the most efficient market that can serve the real economy in the best way 鈥� we can do without looking like we are representing our own view, that we have the general industry interests at heart,鈥� Pascoe adds.
Positively, Pascoe reports that the association is 鈥渙ften pushing on an open door鈥� in relation to regulators, who are keen to engage and understand the industry viewpoint. One of the roles that ICMA plays in its committees around digitalisation and technology, and certainly in sustainable finance, is trying to look at ways in which it can help to support consistency, harmonisation and standardisation.
In terms of new initiatives, different jurisdictions and organisations are looking at how they will develop their own views on sustainable finance. Sustainable finance is more jurisdictional, where the EU comes up with a set of standards, Southeast Asia has its own taxonomies, and the UK has its transition plugged into the Transition Plan Taskforce (TPT).
鈥淗ere you have an array of different standards and different approaches,鈥� Pascoe highlights, whereas in the digitalisation world, banks are using new digital bonds off of their own blockchain platforms. Or banks are using different protocols or different interpretations of the law. 鈥淚ncreasingly, in many of the new initiatives you tend to see a lot of fragmentation 鈥� which is typically not helpful when it comes to achieving resilience and liquidity,鈥� he continues.
The current environment
ICMA has an embedded presence within the fixed income, ie bonds and repo space, now with cross-cutting themes of sustainable finance, digitisation and technology. It sets the standards for various areas of market activity in primary and secondary markets, including the primary market handbook, dispute resolution, and legal documentation in the repo space.
The organisation continues to review the growing focus of global and regional regulators on the non-banking financial institution (NBFI) space as it grows in size, the US drive towards efficiency and resilience through the T+1 initiative, as well as the future central clearing of US Treasury cash and repo transactions. ICMA is also keen to examine the ongoing divergence issues between the EU and the UK.
The association鈥檚 reflection of the current market remains positive, as it 鈥渇eels pretty healthy鈥� in Hill鈥檚 mind. The core themes facing participants include quantitative tightening (QT), the unwinding of targeted longer-term refinancing operations (TLTROs), the relative improvement in collateral scarcity, the next move from the European Central Bank (ECB), as well as the expected rate cuts and how that has been revised over the course of the year.
An interesting development impacting the market is the growth seen within the dealer-to-client (D2C) space, which Hill believes is set to continue. He notes an ongoing move to make the markets more electronified.
Settlement fail rates have been key to watch for ICMA, as Pascoe notes a reduction in fail rates with more availability of collateral. It is a 鈥減ositive reflection鈥� of a market that is showing less dysfunction than what was seen 18 months ago, he adds.
While ICMA has been reviewing settlement efficiency rates, Hill pinpoints a 鈥渕arked improvement鈥� across all bond classes in this respect. He says: 鈥淲e can attribute this to a couple of things; higher interest rates which make failing expensive; and we are not seeing the same bottlenecks around collateral availability.鈥�
It will be imperative for authorities to track this development carefully, following the amount of pressure to initiate the move to a shorter settlement cycle, T+1. Pascoe states that the industry needs to solve the problems in the existing system before putting an 鈥渙verload of additional challenges鈥� on the market by shortening periods through which 鈥減eople need to deal with all of the necessary processes to settle and clear securities鈥�.
ICMA has been vocal in trying to mandate some of the initiatives around shaping the size of transactions such as partialling, to create a better infrastructure and ecosystem for collateral fluidity and the ability to avoid outright fails.
The desired outcome, in terms of T+1, is to converge as much as possible across the EU, UK and the Swiss markets. Pascoe says: 鈥淚ndustry participants have been encouraging the regulators to work together as closely as possible from a timeframe perspective. Especially where there are similar asset classes that might have to operate across the European settlement cycle to avoid that fragmentation.鈥�
Hill signifies the importance of acknowledging the distinction, from a fixed income perspective, from a UK move and an EU move to T+1. There is a level of complexity in having multiple CSDs, CCPs and different payment systems across Europe. In addition, the UK gilts market already settles on T+1, whereas the whole of the EU bond market would be transitioning to T+1.
These events will be key discussions for the MPRP team. To further the development of this division, and ICMA as a whole, Natalie Westerbarkey says the association can improve the interconnectedness of its relationship with other regions from a policy perspective.
She adds: 鈥淚t is very valuable that ICMA offers training and certification, building on that core activity is where we feel we can add a lot of value. This will be beneficial for policymakers also, as some may not have a financial services background, and may require the sharing of practical experience. It is not just advocating for specific changes in regulation, but supporting a more educational engagement.鈥�
Preparing for new leadership
With new policymakers coming in with a new European Parliament, European Commission and Commissioner鈥檚 cabinets, the next five-year period will require more work in terms of engagement, warns Westerbarkey.
2024 is the election year, as around 65 countries will be heading to the polls by the end of December. The results of such will play a role in which direction the financial markets will take. For example, with a new party leading the UK, market participants will look to Labour and its policies to prepare for a possible new direction of travel.
Pascoe is keen to see how the new government will view the Treasury, in terms of keeping up the pace on a number of regulatory initiatives. 鈥淭he initiatives that come out of the European Commission, or the FCA or the Treasury in the UK, are often heavily driven by the need to deepen markets, because there is a big focus on growing that long term 鈥榮kin in the game鈥� investment, boosting retail investment in the ownership of companies, in particular with medium and small sized companies,鈥� Pascoe highlights.
For ICMA, many of the retail investment strategy initiatives and the listing act initiatives are more equity driven, but they still have significant implications for the fixed income space. Westerbarkey intends to focus on regulations that have the largest impact on the bond market. A core area of engagement is in the capital markets union in the EU, she adds, which is trying to solve the need for more private capital funding in the EU and beyond for investors 鈥� both institutional and retail investors.
The Sustainable Funds Disclosure Regulation (SFDR) speaks to how certain sustainability type bonds are distributed to consumers, and is a key focus area for the association. In addition, Westerbarkey says NBFI will continue to be of importance, this connects with the capital markets union because it looks into not just fund liquidity from a financial stability point of view, but it also looks into the activities of non-banks in terms of private lending.
For Pascoe, the 鈥渂ig unknown, the elephant in the room right now鈥�, is all of the discussions that will be happening around this 鈥渧ery broad term of NBFIs鈥�, and in what way they should be regulated, particularly from a macro prudential basis.
Furthermore, the likes of the Markets in Financial Instruments Directive (MiFID) and its work towards a consolidated tape, the Central 色花堂Depositories Regulation (CSDR) for T+1, as well as the European Market Infrastructure Regulation (EMIR), will remain a priority for ICMA.
Westerbarkey explains: 鈥淭hese policies have been around for some time, but what is new in terms of policy is everything around fintech and digital. Policy around fintechs addresses innovation and new entrants to the market, while the digital aspect addresses more of the process, for example, electronification, digitisation.鈥�
As the industry looks ahead, the T+1 agenda is going to be of high priority for the European Commission, and the UK. Increasingly, the market will hear more about central clearing as the US remains significantly focused on this. Pascoe comments: 鈥淲hat we have seen of late is that when the US and the SEC begin regulatory initiatives and imperatives, the European bodies have followed suit to maintain competitiveness.鈥�
Lessons learnt
Looking ahead to the second half of the financial year, engagement and reconnecting will be top priorities for the ICMA team. Especially in terms of the newly appointed members of the European Parliament, in particular in the Committee on Economic and Monetary Affairs (ECON). This is in addition to the new politically appointed commissioners, the cabinets, and also within the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA).
The association will begin the second phase of the Bond Market Liquidity Taskforce, which produced a paper in March on liquidity and resilience in the European sovereign bond market. Hill explains: 鈥淪omewhat ambitiously, we intend to finish [the second phase] by the end of the year. But the focus is going to be on the European investment grade corporate bond market.鈥�
The team will remain heavily engaged in the European Commission consultation on NBFIs, and with the Financial Stability Board (FSB) work more broadly.
Hill speaks to the challenges of this work, using the phrase 鈥渋t only tells us where it isn't, it doesn't tell us where it is鈥�. He describes it as a 鈥渘ebulous concept鈥�, which is diverse in terms of the underlying entities and strategies and how they are funded. 鈥淭rying to get a better handle on that, which is what the regulators are trying to do and struggling with, is something that we are working on,鈥� Hill adds.
For over 50 years, ICMA and its members have worked together to promote the development of the international capital and securities markets, pioneering the rules, principles and recommendations that have laid the foundations for its operation.
Learning lessons from the past, Westerbarkey says from a public policy perspective, 鈥渨e should expect the unexpected鈥�. The trade association needs to immediately react to policy changes that suddenly appear.
In December 2019, Ursula von der Leyen announced her European Green Deal, and shortly after, more geopolitical themes related to international security and autonomy were driving the global policy agenda. Now, in the next five-year cycle, there will be a focus on competitiveness.
Leading ICMA, Pascoe believes that themes of resilience and efficiency are key. 鈥淓verything is interlinked, interdependent, and we have to look across all of our committees and all of our different areas of activity to make sure that we are best serving our membership and the broader stakeholders alike,鈥� he explains.
In conclusion, he believes: 鈥淭here are features of the market that may look to be very distinct, but there is an underlying overlap. We need to be very focused on this going forward, perhaps that was not the way trade associations were operating previously.鈥�
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