The World Federation of Exchanges (WFE) is the global industry association for exchanges and clearing houses. We represent more than 200 market infrastructure providers, of which more than 100 are Central Counterparties (CCPs) and Securities Depositories (CSDs). Our members include exchange groups and standalone CCPs
These high-level considerations are intended to support ongoing compliance efforts, to ensure that markets are not only resilient, stable and robust, but are also able to operate on a fair and level playing field with regards to FinTech. In addition – and importantly – they are intended as a prompt for further regulatory and industry discussion to ensure – as and when they are developed – rules, standards, guidelines and expectations are designed that appropriately fit the nuances of global markets operating in local jurisdictions.
Market driven innovation
In general, innovation should be market driven. This could not only improve the efficiency and functioning of the market, but also potentially benefit regulation as well5 . Nevertheless, it is clear that authorities have a role to play in ensuring the system remains stable in the face of changing technology, and indeed that some innovation may in fact be prompted by regulatory initiatives (RegTech, for example). In any event, global authorities should be proactive in engaging with the market to identify the nature of the application, to understand the technology which underpins it, and to work with the market to ensure the existence of an appropriate regulatory framework.
The scope of existing regulations should be broadly sufficient
We believe the scope of existing regulations should generally be sufficient to extend to many or most potential FinTech initiatives; this is because initiatives tend typically to be based around new technologies as opposed to new activities. Nevertheless, it is important regulators consider initiatives on a case-by-case basis to determine legal or regulatory impact. Legislation, rules and practices should only be adapted if strictly required, and be technology neutral, i.e. avoid conferring undue advantage to one technology over another (or inadvertently limiting competition by unnecessarily increasing barriers to entry).
Any regulatory approach should encourage innovation whilst ensuring investor protection and system stability
The development of regulatory and/or legal standards should not prevent market and technological innovation. It is important that the authorities remain focused on ensuring investor protection and the safety of markets whilst at the same time encouraging an environment that enables financial technology which improves efficiency and stability of the capital markets. In order to do this, it will be important that legislators maintain an ongoing dialogue with market participants and keep track of evolution in this space to ensure the necessary investor protection measures remain adequate to the business conducted. 5 For example, possibly encouraging a gradual shift of reporting from an ex-post to an ex-ante activity, enabling more proactive policy-making
The implications of outsourcing
Due to the systemic importance of exchanges and CCPs, regulation and supervision must consider the implications of outsourcing of key market functions to a third party. It is a well-established supervisory principle that the responsibility for the outsourced functions should remain with the regulated entity. Whilst the technology inherent in FinTech applications itself may present unique risks (for example, operational, cyber, etc), the underlying principles of outsourcing remain sound and appropriate. As such – and in the absence of any other effect on regulatory roles and responsibilities – we see no reason why regulated entities’ use of new FinTech applications and solutions in and of itself should be any different in principle to the outsourcing of any other function
It is important there is regular and open dialogue between regulators and the market
As described above, whilst we consider that existing regulations should in most cases be sufficient to broadly extend to potential FinTech initiatives, it is nevertheless important that authorities are proactively engaging with the industry to identify the nature of FinTech application, to understand the technology which underpins it, and to work with the market to ensure the existence of an appropriate regulatory framework (if existing frameworks are not deemed appropriate). In this regard, regulatory sandboxes and innovation hubs have proven to be a useful tool for the FinTech industry and these should be extended – where relevant – to ensure that appropriate collaboration and exchange of information occurs between industry (whether regulated, or not) and regulator. This will also enable regulatory applications to be tested and examined before they go to market ensuring minimal disruption and a shared understanding of regulatory expectations.
It is also important – where possible – to coordinate regulatory thinking in this space at the global level
Markets are increasingly international, and FinTech innovation is likely to have global applications and uses. As such it is desirable to have global consistency based on international guidelines and principles. We therefore believe – as far as possible – there should be collaboration at the international regulatory organisation level (e.g. within IOSCO in this regard) to develop a common approach and understanding. To ensure regulatory coherence amongst the wide range of current and potential FinTech providers and participants, a multi-layered approach to regulation should be avoided. Notwithstanding the proactive nature of regulatory scrutiny from national as well as regional authorities, we believe it highly desirable for a globally harmonised approach in a topic as internationally relevant as FinTech. FinTech is innately international with global applications and uses and therefore we believe any regulatory principles and/or guidelines should be developed at that global level.
There should be consistency in the application of rules to both incumbents and new FinTech entrants
The nature of FinTech innovation is such that non-financial companies may enter this market seeking to perform core market functions, some of whom may not have any experience of regulated environments. As such, it will be important that any regulatory framework ensures appropriate consistency between such firms and traditional regulated entities such as exchanges and CCPs. This is a precondition for maintaining the integrity, stability and fairness of the financial system. Services and activities based on new technology need to abide to the same rules as for incumbents. The risk is that a lack of awareness of the regulatory environment by previously unregulated entities may result in negative consequences for investor protection, and secure and orderly markets.