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Randolf Roth: “It is not ‘either/or’. We need to do both.”

Release date: 27 Dec 2017 | Eurex Exchange

Randolf Roth: “It is not ‘either/or’. We need to do both.”

On 11 December, Eurex’ new price discovery service for the OTC space went live. With Eurex EnLight, the exchange is venturing into a new realm – beyond regular order book-based exchange trading. It is taking a step that might become a blueprint for Deutsche Börse Group’s other trading sectors. Randolf Roth, Member of the Eurex Executive Board, is responsible for Eurex EnLight market design. We spoke to him about how Eurex has taken MiFID II as an opportunity that goes far beyond solving regulatory issues.  

Dr. Randolf RothZoom

Randolf Roth,

Member of the Eurex Executive Board,

responsible for Market Design

Randolf, MiFID II is perceived by many as a significant burden for the financial industry. However, it may also provide opportunities. Do you agree?

Yes, I totally agree. Let’s have a look at what Eurex stands for. It stands for transparency, deep liquidity pools, resilience and operational excellence in the sense of straight-through processing. If you look at what MiFID II sets out to accomplish, you see a strong link because MiFID II is also about fostering liquidity, transparency, resilience and – last but not least – creating less error-prone processes. It is therefore obvious that MiFID II provides opportunities for Eurex. One of those is offering a way into the market for large or complex orders that cannot easily be executed via the standard exchange order book. And it is exactly for this market that we provide our new selective request-for-quote (RFQ) price discovery service, Eurex EnLight.

MiFID II mandates brokers to achieve the best possible price for their clients. What does that mean in practice?

It means that they need to take all possible steps to achieve the best result for the client. This does not only refer to the best price. One also has to consider other costs, speed, likelihood of execution, size and potential market impact. On top of that, there are substantial documentation requirements covering up to five years. That means that up to five years after a transaction took place, a broker needs to be able to prove why he picked a certain counterpart and not somebody else.

And here is where we come in: With our new service, you will have full documentation of the relevant order book situation and all prices that were available to you after you sent the request for quote. Compared to a voice-driven process where things are written down on paper this is a major step forward.

Currently the market for large and complex orders is mainly voice-driven and based on personal relationships. How can you replicate this complex pricing process in an electronic system?

We need to meet the market participants where they are. That is why we created an electronic process that reflects the current phone-driven process – a process that is by nature clearly different from regular order book trading. It involves negotiation processes, it involves a back and forth between counterparts, it may involve firm prices or indicative prices. It is in general a multi-step process. And we replicated that in order to make the transition from voice to electronic business as easy as possible for our market participants.

How do you combine that with the MiFID II transparency requirements?

To fulfill the MiFID II requirements for best execution and transparency, all of these what used to be voice-driven, manual steps will be recorded electronically. That means, we store all of those data – while of course making sure that private data are only provided to the party who owns the data. We are also working on statistics where people can compare themselves with other people on an anonymized basis.

As an exchange, shouldn’t you rather focus on your core business, i.e. order book trading?

The central order book is of course crucial for us, and that is precisely what we will continue to focus on. It has proven to be resilient, liquid, transparent, and it is exactly what the regulator wants to see. But we also need to recognize – by the way exactly like the regulators did – that there is a trading interest which is too large to be efficiently fulfilled by a public order book. These include very large orders as well as very complex strategies. In those situations, the public order book is often not able to absorb the trading volume without the market shying away. And that is exactly where we need a more sophisticated, more tailor-made process. To answer your question: It is not an “either/or”. We need to do both.

What impact do you expect for the market as a whole?

First of all, we want to streamline the process, and make it much easier and swifter for participants to trade electronically. This will definitely reduce market entry barriers because the current intransparency as well as difficult processes are frequently regarded as deterrent. And, of course, we would also like to capture more business that is automatically cleared.

The participants can choose whether to use Eurex Clearing or another clearing house or to not clear their trade at all. In case they prefer Eurex Clearing, the system will transfer the trade automatically straight to the clearing house – another big advantage of the platform.

You start with fixed-income options. Do you plan to expand this offering to other products?

Yes. We start with fixed-income options because we want to focus first on solving one specific problem for one specific user group rather than trying to help everybody at the same time. But we have already received various customer requests and we are planning to expand the product range to index and equity options, probably by Q2 2018. We are also in discussions to launch it for fixed-income futures. This would be the next step and ultimately we could roll it out not just for Eurex products but to the overall market. So people could choose among different clearing venues or even use it for true OTC trading without clearing.

Finally, do you see synergies for Deutsche Börse Group as a whole?

Of course. Eurex EnLight is built on our common T7® trading architecture and can be accessed via the T7 API. That means it could be also adapted for trading certain equity products. It is now up to my colleagues to explore the potential for the cash market.