Michael Spencer, group chief executive at ICAP, discusses the recent deal to combine ICAP’s voice and hybrid broking and information business with Tullett Prebon, the potential for post-trade services and the impact of regulatory change
1IQ: You have been in the derivatives markets for a long time now. What is the biggest challenge for the industry at the moment?
Michael Spencer (MS): From our perspective, a key challenge continues to be the subdued trading volumes in a low-rate environment and the ongoing deleveraging of the dealer community due to capital constraints. In addition, like everyone else, we are also dealing with an extraordinary amount of regulatory change that is taking place across jurisdictions and ensuring it is implemented in a manner that supports the effective functioning of financial markets.
2IQ: How can ISDA help firms meet this challenge?
MS: Given the global nature of the derivatives markets, it is vital there is a strong and respected body that can support consistency of approach. ISDA has been doing this very effectively for the past 30 years, all with an underlying aim of making derivatives markets safer and more efficient. ICAP’s post-trade risk and information (PTRI) users of financial products reduce operational and system-wide risks, which increases the efficiency of trading, clearing and settlement and reduces costs.
3IQ: Can you briefly explain ICAP’s changing business focus and the rationale behind it?
MS: The effect of financial regulatory reform means the global financial markets have profoundly changed. Our transaction with Tullett Prebon is designed to ensure both companies are better suited to meet the market’s changing needs and better serve our customers. Regulatory change is clearly driving an increased demand for post-trade and risk mitigation solutions, and there is also an ever-increasing drive towards trading on electronic platforms. Our strategy has consistently been to increase the proportion of revenues from our PTRI and electronic markets divisions, and we believe there are continued and substantial growth opportunities within these services. Alongside this, we have a long history of investing in innovative products and new technologies, and will continue to do this as a focused electronic and post-trade group through our Euclid Opportunities arm.
4IQ: What changes/innovations do you expect to see in the post-trade world in the next two years?
MS: There will be a continuing focus on finding efficient ways to reduce outstanding risk in the system, free up collateral and reduce capital requirements. There will also be a need for more comprehensive data warehousing and data mining. And lastly, the big question is how big a disrupter the blockchain innovations will prove to be.
5IQ: If you were a regulator for a day, what would you do?
MS: Work on ensuring there is coordination between regulators in different jurisdictions.
6IQ: How do you expect derivatives markets to change in the next five years?
MS: Recent events have shown it is always difficult to predict how things will change. Overall, I think it is inevitable we will see further increases in transparency and reporting, and ever more trading done across electronic platforms.
7IQ: What’s your favourite memory from the early days of ICAP?
MS: Our first interest rate swap trade of over $1 billion in notional, which was in 1986 – a one-year swap in dollars between Salomon and Hill Samuel.
8IQ: What do you personally expect to be doing in five years’ time?
MS: Still running the company – this is such an exciting time and there is so much going on.
9IQ: What advice would you give someone starting out in the derivatives market?
MS: Study events of the past – although things are always changing, it’s important we learn from previous issues.
10IQ: If you didn’t work in the financial markets, what do you think you would be doing?
MS: I have always had an interest in wine, and I am chairman of Bordeaux Index, which is one of the world’s leading fine wine merchants. Therefore, I would probably be involved in the wine business.?■