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Exchange operators face scrutiny after bout of outages in 2020

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Stock exchanges began the year with praise for their resilience during the pandemic turbulence but are ending it with their reliability under scrutiny.

A series of high-profile outages in the second half of 2020 has put the spotlight on operators of the financial infrastructure that underlies global markets. The bumpy end of the year marks a stark contrast to the spring, when exchanges were commended by regulators for withstanding an unprecedented surge of activity at the height of the March ructions.

The glitches have underscored global authorities’ mounting concerns that the reliance across markets on technology and automation to buy and sell assets at the blink of an eye is creating a risk to the financial system.

Regulators in the EU, UK and Singapore want to tighten standards for banks, exchanges, clearing houses and payments providers, to withstand the effects of pandemics, cyber events, natural disasters and technology failures. The Bank for International Settlements, which coordinates work globally for the banking industry, is planning to create its own standards.

The matter has taken on more urgency over the past few months. Germany’s main market, Deutsche Börse’s Xetra in Frankfurt, was hit by repeated technical failures this year that took out share trading across several European countries. Tokyo Stock Exchange endured in October its worst-ever outage, prompting the chief executive to resign a month later.

The glitch in Japan was followed by the failure of the critical closing auction at Euronext, which runs six exchanges across Europe including the main Paris bourse. Traders were left in the dark on the closing prices for shares, derivatives and bonds for hours while the knock-on effects in clearing and warrants took several days to resolve.

“The reasons for these outages have varied but their impact on market and regulator confidence can’t be understated,” said Virginie O’Shea, founder of Firebrand Research, a London consultancy. “In a different year these events might not have been as visible and quickly forgotten, but the unique conditions of this year have exacerbated their impact.”

A year of exchange glitches

July

A glitch at Deutsche Börse hits share trading for several hours in Frankfurt. Vienna, Ljubljana, Prague, Budapest, Zagreb, Malta and Sofia are also knocked out as they use the German company’s software.

August

New Zealand’s primary stock exchange suffers a series of attacks from hackers.

September

The Bank of England has to use back-up systems to guarantee settlement on thousands of securities trades after the main system, run by Euroclear, hits technical problems.

October

Tokyo Stock Exchange suffers its worst-ever outage since turning fully electronic in 1999. The debacle later causes its chief executive to resign.

An outage at Euronext hits trading for several hours and disrupts the closing auction. Trading across shares, bonds and derivatives is affected, in Paris, Amsterdam, Brussels, Lisbon and Dublin.

November

Australia’s main stock market is out for most of the day after a software fault in a new trading system at ASX. The supplier, US group Nasdaq, apologises for the error.

Exchanges showcased their best qualities in March as global markets dropped with dizzying speed. They provide the peg against which rivals, such as private markets like ‘dark pools’, benchmark their prices. At its peak, the New York Stock Exchange had more than 100bn messages of orders and quotes passed across its systems, nearly three times its previous highest record, but consumed only 50 per cent of its computing capacity. Unlike at banks, there was no backlog of trades.

But exchange operators’ systems require constant upgrading to keep pace with their customers’ demands. They often rely on third parties to supply crucial hardware and software, leaving them vulnerable to unexpected issues. 

Nandini Sukumar, chief executive of the World Federation of Exchanges, the global industry group, said operational resilience continued to be a priority for the industry.

“Inevitably there will be outages and glitches but the industry always solves the problems and moves forward,” she said. “Every challenge or outage is also an opportunity to think about whether there’s something that can be done better.”

Even so, some traders and investors have said they are frustrated by what they see as lacklustre responses by some exchange operators to outages.

“This is a fundamental issue for the buyside trading desks and it needs to be urgently addressed. A clear, robust back-up plan needs to be in place to ensure an efficient marketplace going forward,” said Anita Karppi, managing director of K & K Global Consulting, which runs a network for traders in fund management to discuss industry issues.

The problem is particularly acute in Europe where Euronext and Deutsche Börse own or supply technology to the primary exchanges of more than a dozen countries. An outage can disrupt trading across multiple markets.

There is also mounting dissatisfaction among some trading executives and market markers that investors do not use alternative venues or dark pools to circumvent outages.

“It highlights important systemic fragilities in the European capital markets that should be addressed,” said Edward Monrad, head of European equity market structure at Optiver Europe, a Dutch market maker.

Companies such as CBOE Europe, Turquoise and Aquis Exchange typically take up to 40 per cent of market share in a normal day, but trading on their markets also dries up when the primary exchange goes down.

Euronext outage froze trading at rival venues

Optiver pointed out that many of the brokers’ trading algorithms are tied to the prices on the primary exchange and not the pan-Europe market. EU regulations compound the issue by allowing investors to make large block trades at alternative venues, but then still compelling them to price them in line with the primary exchange.

“It’s frustrating but this gives the industry the impetus to find improvements and enhancements,” said David Howson, chief executive of CBOE Europe.

Like many others, Mr Howson pointed out the merits of the US system, which allows orders normally sent to a stricken exchange to be traded on rival marketplaces. In 2015, a three-hour outage on the NYSE left the markets unaffected as rivals Nasdaq and CBOE Markets, as well as investment banks, scooped up business.

But Europe is a patchy mixture of cross-border and local trading. National primary exchanges often have a broader membership, drawing in big and small brokers and activity from retail share trading platforms. They also have different memberships, rule books and settlement procedures.

Furthermore, investors also benefit from the so-called “public good” that derives from centralising critical parts of trading. 

For example, investors are happy to trade on different venues on a normal day, but they prefer to direct their business back to the exchange at the close. It provides a single final price of the day, and is used as the benchmark for valuations of thousands of share and derivatives portfolios.

That leaves many market participants back where they started — dependent on one critical cog in the machine, and frustrated when it breaks. 

“I think the time has come for the regulator to mandate more stringent practices, such as standardisation of response,” said Paul Squires, head of European, Middle East and Africa trading at fund manager Invesco.

Ms Sukumar also supported a system-wide approach. It “avoids the negative unforeseen consequences of focusing on particular sectors while others have not been subject to appropriate scrutiny,” she said.



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CDU leadership backs Armin Laschet’s bid to be German chancellor

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Armin Laschet won a key victory in his campaign to succeed Angela Merkel when the party he leads, the Christian Democratic Union, backed him as their candidate for chancellor in September’s Bundestag election.

The CDU governing executive’s decision to back Laschet was a setback for Markus Söder, governor of Bavaria, who has also laid claim to the title.

The move was expected, but could prove controversial. Söder is by far the more popular politician, and many CDU MPs had argued in recent days that the party would have a much better chance of winning September’s election with Söder as their candidate.

After throwing his hat into the ring on Sunday, Söder said he would accept the CDU’s decision. However, it is still unclear whether his party, the Bavarian Christian Social Union, will accept Laschet as the CDU/CSU’s joint candidate. The CSU’s executive is meeting later on Monday.

Sunday’s events threw the process for finding a successor to Merkel, who will step down this year after 16 years as Germany’s leader, into confusion. The CDU and CSU traditionally field a joint candidate for chancellor: that person is usually the leader of the CDU, which is by far the larger party.

Volker Bouffier, governor of the western state of Hesse, said the CDU’s executive had unanimously backed Laschet at a meeting in Berlin on Monday morning. He added, however, that no formal decision had been made on the issue.

Bouffier said the executive had made clear “that we consider [Laschet] exceptionally well-suited and asked him to discuss together with Markus Söder how we proceed”. He added that “the current polls should not determine the decision over [who we choose as] candidate”.

Since Laschet was elected CDU leader in January, the party has suffered a precipitous slump in the polls and that created an opening for Söder. He has frequently argued that the CDU/CSU’s joint candidate should be the politician with the best chances of winning in September.

Voters have blamed the CDU for the government’s recent missteps in its handling of the coronavirus pandemic, in particular the slow pace of Covid-19 vaccinations. Revelations that a number of CDU and CSU MPs earned huge commissions on deals to procure face masks also badly damaged the party’s image.

The malaise in the CDU was highlighted last month when it slumped to its worst ever election results in the two states of Baden-Württemberg and Rhineland-Palatinate, which for decades had been Christian Democrat strongholds. National polls currently put support for the CDU/CSU at between 26 per cent and 28 per cent, way down on the 33 per cent it garnered in the last Bundestag election in 2017.

There was more bad news at the weekend for Laschet, who as well as being CDU leader is also prime minister of North Rhine-Westphalia, Germany’s most populous state. A poll for broadcaster WDR in NRW found that only 26 per cent of voters in the state are satisfied with the work of the regional government Laschet leads and only 24 per cent of voters consider him a suitable candidate for chancellor.

The slide in the CDU’s fortunes contrasts with the rise of the Greens. The party garnered 8.9 per cent of the vote in 2017 and is now polling at 23 per cent. It is seen as a racing certainty that it will be part of Germany’s next government.



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EU and UK edge towards accord on trade rules for Northern Ireland

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The UK and the EU are making progress in talks on how to apply post-Brexit trade rules in Northern Ireland, raising hopes of an agreement that could help reduce tensions that have spilled over into violence on the streets of Belfast.

Officials on both sides said that recent days of intensive contacts had given cause for optimism that the UK and EU can craft a “work plan” on how to implement the Northern Ireland protocol, which sets the post-Brexit terms for goods to flow between the region and Great Britain. EU Brexit commissioner Maros Sefcovic and his UK counterpart David Frost may meet to review progress this week. 

“They are advancing on a technical level and probably we will see a [Frost-Sefcovic] meeting rather sooner than later”, said one EU diplomat, while cautioning progress depended on firm commitments from the UK and its “unequivocal support” for the Brexit withdrawal agreement.

Other EU diplomats and officials said strong UK engagement in the technical talks on implementation of the Northern Ireland protocol had raised hopes that an understanding could be reached. 

“The mood seems to have warmed up a bit — the tone of the discussions is quite good,” said one British official. 

The talks are a follow up to a draft plan about implementation of the Northern Ireland protocol that was submitted by the UK to Brussels at the end of last month — a step the EU said was essential to rebuilding trust after Britain unilaterally extended waivers for traders from some aspects of the rules in March. This move prompted EU legal action.

The discussions between British and EU officials in recent days have taken place against the backdrop of violence in Northern Ireland, stoked in part by resentment within the unionist community at how the protocol treats their region differently to the rest of the UK.

From April 2 there were eight consecutive nights of unrest in Northern Ireland, involving both unionist and nationalist areas. The police responded by deploying water cannons for the first time in six years.

The Brexit deal placed a trade border down the Irish Sea in order to keep commerce seamless on the island of Ireland. The Northern Ireland protocol requires customs and food safety checks for goods entering Northern Ireland from Great Britain.

Officials said the EU-UK talks now under way about implementation of the protocol cover a wide array of practical issues ranging from trade in steel and medicines to the policing of food safety standards, how to deal with residual soil on plant bulbs, and the construction of border inspection posts. 

“Technical talks are ongoing”, said an EU official. “Depending on the progress made at technical level, a political-level meeting may be held soon.”

But EU diplomats and officials also cautioned that more work remains to be done, especially on the thorny issue of applying food safety checks. Difficult talks also lie ahead on the timetable for putting particular measures in place.

Meanwhile Downing Street played down a report in The Observer that it was resisting proposals by Dublin for a special crisis summit to address the outbreak of violence in Northern Ireland.

“We have not refused anything,” said a Number 10 official. “It’s something we will consider.”

However there are concerns on the British side about the wisdom of holding a summit in Northern Ireland with Irish government ministers at a time when pro-UK loyalist groups have been engaged in street violence.

Irish officials said taoiseach Micheál Martin and British prime minister Boris Johnson have spoken and would “maintain close contact over coming days”.



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France to offer mRNA jabs as second dose after AstraZeneca 

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France has become the second country after Germany to recommend that younger people who have had a first dose of the Oxford/AstraZeneca vaccine be given a different jab for their follow-up shot.

The mixed-dose approach has been recommended by health experts in both countries — despite there being little clinical trial data to support it — because of the slim risk that younger people can develop blood clots when given the AstraZeneca jab.

The World Health Organization reiterated its position on Friday that there was “no data on interchangeability of vaccine platforms”, noting further research was needed.

The move comes as the European Medicines Agency said it is also probing a possible link between the Johnson & Johnson vaccine and four serious cases of unusual blood clots in the US, where it is currently being rolled out. It is not yet being distributed in the EU or UK. The vaccine is based on an adenovirus vector, similar to the AstraZeneca shot.

The EMA said it was not yet clear whether there was a causal link. J&J said it is working with experts and regulators to assess the data. “Our close tracking of side effects has revealed a small number of very rare events following vaccination,” it said. “At present, no clear causal relationship has been established.” 

In France, the policy will affect roughly 530,000 people under age 55 who were given a first shot of AstraZeneca from early February to mid-March when they were eligible under its strategy of giving healthcare workers the vaccine, while reserving the mRNA vaccines for elderly people most at risk.

The Haute Autorité de Santé, a panel of medical experts which advises the government, has said they should be given booster shots from BioNTech/Pfizer or Moderna. France has changed course to use AstraZeneca only in people aged above 55 since the blood clot issue emerged.

France announced its decision on Friday after the HAS recommended the mixed-dose strategy. Germany took a similar stance in early April. 

Health minister Olivier Véran told RTL radio on Friday that the mixed-dose approach was “totally logical” given the analysis of European regulators and France’s desire to continue its vaccination campaign as the scientific evidence evolved.

European countries, whose vaccination campaigns have been slower than world leaders such as the US, Israel, and the UK, have been grappling with how to use AstraZeneca doses since the blood clot reports emerged, with some countries applying new age restrictions and others pausing its use entirely.

But with Covid-19 still spreading, officials are also seeking to reassure people that the AstraZeneca vaccine’s benefits still largely outweigh the risks. 

The European Medicines Agency recently established that there was a “possible link” between the AstraZeneca vaccine and unusual blood clots with low blood platelets that have mostly affected women under 60 years old, though regulators have said there is no specific risk factor by gender.

The EMA said it had examined at least 86 such reported cases and 16 deaths, and recommended updating the vaccine’s safety information to list the clots as a possible side effect.

Élisabeth Bouvet, a vaccine expert and member of the HAS, said on Friday that the mixed-dose approach was a practical solution intended to protect younger people, who are at lower risk of developing severe forms of Covid-19, from the risk of blood clotting side effects. “It is really a choice based on safety,” she said.

“Given that the protection of the Covid-19 vaccines begins to diminish after three months, these people need an additional dose,” she added. “The idea is to give mRNA vaccine as a second dose for this population in a ‘prime-boost’ strategy.”

Even in the absence of clinical data, Bouvet said that they believed the approach carried low risks of side effects and was likely to offer people additional protection given that the Covid-19 vaccines all aim at the same spike protein on the coronavirus.

“We think that this approach will work,” she said. “There is no reason to expect any particular side effects with mixed dosing but it would be good to study the immune response it creates.” 

Peter English, a retired Public Health England consultant in communicable disease control, said it was “reasonable” to use other vaccines, particularly in younger patients, until the risk of blood clots caused by the AstraZeneca vaccine has been clarified.

“If we are to achieve vaccine-induced herd immunity [not just through masks and social distancing] a high uptake of vaccination will be required in the groups most likely to spread the virus, not just in those most at risk if infected,” he said, noting vaccine mixing and matching has been done for other diseases. 

Trials studying a combination of vaccines, including AstraZeneca’s and Russia’s Sputnik V shots, are under way.



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