Potential volatilities and growth of today’s global derivatives industry

This week marked the 16th anniversary of the FIA IDX in London – Walt Lukken, President and CEO of FIA opened the event with a keynote address that touched on the developments and challenges facing the global derivatives market, and particularly the potential impacts of a ‘historic election year’ for Europe, the UK and North America.

Growth in the derivatives market

While there remains uncertainties and potential volatilities around election outcomes and other ongoing events like Gaza and Ukraine, Walt was keen to focus on what’s good in derivatives markets. As we’ve touched on in recent blogs, this is a market that is seeing explosive growth – in 2023 hitting the record high of 137 billion contracts, “64% higher than the previous year and more than double the total number of contracts trading in 2021”. And as we’ve also observed previously, this growth is truly global, with exponential growth in derivatives activity in ‘newer’ markets like India. Another key activity reflected in these growth figures is the global commitment and focus on reducing carbon emissions and ensuring a more sustainable future which have had a direct impact on shifting trends in energy commodities and derivatives trading. As the FIA president noted, “[In the EU] for the first time in 2023 electricity generated from renewable sources overtook electricity derived from fossil fuels”

Other key contributors to surging derivatives growth is greater competition between existing and new exchanges, and new technologies and service providers that are supporting the transformation of traditional derivatives trading activities, processes and workflows.

Regulatory challenges

Countering this – to some degree – is the continuing challenge presented by evolving and cumbersome regulatory obligations. A new survey conducted by Acuiti surveyed over 100 individuals at industry firms to gauge opinion and sentiment on the ‘state of European markets’ currently and for the next 5 years. This survey found that 53% of market participants (responding to the survey) “believe that regulatory burdens are the biggest challenge to growing their derivatives business over the next five years” and that “40% of respondents do not believe that EU regulations are proportionate to industry risks”.

Whether supporting front end execution, post-trade reconciliation or regulatory reporting obligations, the common thread that is fundamental to end to end derivatives trading efficiency is the accuracy and quality of the reference data that underpins every single contract and transaction. Sourcing and processing quality data is a constant challenge and headache – and one that will continue to increase in lockstep with the explosive growth in derivatives markets activity and associated and evolving regulatory compliance burdens. For derivatives market participants, this also extends to a lack of standardisation in the description of the same instruments by different exchanges and data vendors. While we may achieve this standardisation nirvana over time, it does not exist today.

Whatever your reference data needs and challenges, from more efficient execution to satisfying new EMIR Refit reporting obligations, FOW have the knowledge, expertise and technologies to enhance your internal, client and regulatory reporting obligations – let’s have a conversation about how we can get rid of your derivatives reference data pain points.