Friday, June 26, 2015

Benchmarks, Global Warming and Swimming to the Isle of Wight

The FCA has published their Monthly Regulation Round Up.
It's a good way to remain abreast of what's up.
You can subscribe here:

A couple of issues of note:

Fair and Effective Markets Review (FEMR).
FEMR made a number of findings and published 21 recommendations designed to ensure that wholesale Fixed Income, Currency and Commodity (FICC) markets are fair and effective.

The final findings are now available (from the BoE).


Well, first there was one: Libor
...and what a kerfuffle that made with the "Wheatley Review"

...and then there were some standards...
IOSCO Standards for Financial Benchmarks.

...and then there were 7 more to add to the fold...

The benchmarks being brought into scope are:
Sterling Overnight Index Average (SONIA)
Repurchase Overnight Index Average (RONIA)
ISDAFIX (soon to be renamed the ICE Swap Rate)
WM/Reuters (WMR) London 4pm Closing Spot Rate
London Gold Fixing (soon to be replaced by the LBMA Gold Price)
LBMA Silver Price
ICE Brent Index

I think all of the above are fairly familiar....but for me, I was not aware of the State Street tie in with WMR. 
The WM Company (WM being World Markets, interestingly, a State Street business.):

Now for those of us familiar with the closing price process (Mark to Market, margining etc.) the importance of all the above makes sense. However, with the renewed interest in this sector it does highlight further potential conflicts of interest. Hence...

FCA's CP15/18: Fair, reasonable and non-discriminatory access to regulated benchmarks

Then of course, with all ths happening at the UK level...whats going on at the EU level?
More here:

This is 'dangerous' stuff. What is in scope and what is out of scope? To make matters worse there doesn't appear to be consensus between the Parliament / Council and Commission.

In conclusion it leaves me wondering 2 things:
1. Regulators want "Champagne Benchmarks" whilst the industry has a "Beer Budget". Great benchmarks, committees, supporting data and process etc all comes at a cost....which leads to;
2. Have we lost sight of the golden goose? Somewhere in here there is a fine line between "materiality and proportionality". Sure, asset managers / users need great benchmarks...but if the operational risks and responsibilities and not to mention the regulatory risks deter contributors...have we really improved the quality and robustness of a benchmark? Sometimes a Mini is perfectly adequate to travel from A to B. We don't always need a Rolls Royce (as nice as that may be).

Anyway, enough about Benchmarks for today. Obviously always interested for any thoughts and feedback on the topic. My interest is now that we've arrived here, where is this segment going and how will it get there?

A little bit of surfing...
I enjoyed this...I started with Global Warming but found myself drawn in...

Minimum wage / Base salary.
I like what this CEO has done in terms of addressing the "minimum wage" debate.
The article doesn't actually say what the lowest salary is, but it does say about 30 people can see a pay rise upto the new 70K as a minimum salary level.
No science to support it, but lets say 30 people on average get a lift of 25K (some more, some less). At a cost of 750K, and lets allow some loading, so say 1 myn, that looks like a worthwhile gesture and investment. I can think of a lot of other projects that wouldn't get as good a return for a 1myn investment.
The problem is, we still don't account for things like intellectual capital, employee churn etc. The 'soft' metrics are still not measured in hard dollar or operational risk terms.

...and finally...
After International Derivatives Week ( I was tempted to do a little swim for a good cause.  crossing from one land mass (UK) to another (The Isle of Wight).

Sea Temperature (circa a toasty 17.5 degrees)

Any feedback always welcome.

Have a great week-end one and all!


Friday, June 5, 2015

Back to blogging, Flash Boys, Order Handling, Order Types...and Knowledge a system, not a goal.


G'day All,

Well, it's been a while between drinks, oops, blog posts, but time to start collecting some thoughts again.

Old news now, but I did want to put some thoughts down about flash boys.
First of all, I do not want to recommend the book. I would hate to encourage anyone to buy the book as I don't think it is meaningful enough to advance the debate around best market practice and the role of HFT.

Sure, there are parts of it that are a good read but I do think it is a wasted opportunity to have added some real perspective to the debate.

For me there are 2 stories going on in the book. One about market access and low latency and then another story about enforcing proprietary rights, sometimes over open source code. I feel throughout the book Lewis fails to take the time to distill and demark the issues he is trying to address. E.g. Software and Hardware are often bundled together. It just leaves me feeling this book was rushed to press prematurely.  

Lets set aside the sad story of Sergey Aleynikov. That leaves a tale of HFT.
The story of building Spread Networks line from Chicago to New Jersey is nice, but nothing new. To me it is no different to a toll road. We all use them. We know we have the option not to, but sometimes, lets say time is money. But again, is this so different from having a line of sight from the old trading booth onto the pit floor?

By the middle of the book we start to get into the detail of order handling and order types...and it is here that Lewis, in my view, fails to go deep enough or to clarify the issues he is trying to address.

For example...what is front running? Lewis implies all HFTs, by virtue of having access to technical infrastructure, front run the market.  

"In common usage there are at least two meanings to the term. One common meaning is as shorthand for "front-running demand," which is what happens when someone tries to figure out whether your mutual fund or your pension fund is buying or selling stock, realizes that it will change supply-and-demand dynamics for the stock, affecting the price, and front-runs that demand to profit.

Imagine if someone made a reasonable guess you needed milk, raced ahead of you to the only store in town to buy up all the milk before you got there, and then offered to sell you milk at a higher price than the store sold it to him; this is one example of front-running demand, just as described in "Flash Boys." (It's also called "trading ahead.") Another common meaning is "front-running a customer order," a type of insider trading, where a stock broker believes his own customer's order will change supply-and-demand and tries to profit from that"
By In the markets Published on

The next bit that I thought could have been just as useful was a deeper exploration into order types. Again, we just get a scratching of the surface with a bit of fear mongering thrown in. Hardly advances the cause.

I did however find this run down of order types more useful:

I am often amazed at the quality of analysis done by the people at Nanex.
This paper specifically investigates exploratory trading that attempts to determine whether the bid/ask spread is about to shift up or down a level.

The last part of the book is just a slavish devoted sales pitch for the IEX exchange and their business model. Looks like Mr Lewis took the bait: hook, line and sinker.

Their story here:

So, my takeaway is that regulatory scrutiny around equity execution is not going to fade away. I think it will remain front and center for the coming years and the regulatory lasso will probably tighten under the guise of harsher interpretation of 'best execution'.

TR14/13 - Best execution and payment for order flow.

Right, enough of a Flash Boys rant.

A few other snippets below. More to follow.

In terms of logisitics, I will post this blog (obviously) at:
I will also post it on the LinkedIn Group CCP Clearing Houses.
I will also try and "push" this out via my contacts list.

If you would like to be included...please just ping me a note.
If you'd like to be excluded...sorry for the spam and please just ping me a note.

...and for  bit of fun, I recently did this (Fat Boy Slim and Zoe Ball observed)..
A spot of charity fun on the 'beach' (?)...the Brighton Big Balls run.

Whatever your pleasure...have a great week-end.



EFAMA has today published a response to the second FSB/IOSCO consultation on the assessment methodologies for identifying non-bank, non-insurer (NBNI) globally systemically important financial institutions (G-SIFIs).
*** I'm not so comfortable with extending the net over Asset Managers.

Building a Capital Markets Union.

EU REFORM A view from TheCityUK

I did used to like Scott Adams and Dilbert very much. Now I think some of the material is not so fresh. That said, he does still hit the nail on the head. I notice he has also started blogging. I enjoyed this post:

In terms of my practical application I see knowledge and learning as a system, not a goal. We all travel various paths in our careers. It is how you transfer your skills and knowledge across disciplines and how we learn to communicate in the right context with other practitioners that is part of the fun of the journey.

The opposite of talking isn't listening.
The opposite of talking is waiting.
- Fran Lebowitz.

Tuesday, January 15, 2013

Dark Bats Asia and Brazil, SGX, LCH and portfolios....and viruses

Happy New Year one and all.

Over Xmas I managed to pick up two viruses. I got some trojan virus on the PC. Missing LPK.dll file error. The great thing about migrating to android and using the cloud meant that I just did a PC restore (basically reformat) and everything then sychronised back to the versions I’d saved in ‘the cloud’. Easy peasy.
The other virus was a bit more personal, the good old Xmas virus known as the Sydney12 or as fondly reported in the local UK press, the “down (ch)under”...
Ya gotta laugh.

The BATS story highlights the frustration so many participants have on signing up to exchange rule books. One rule for brokers and customers...a whole different set of rules for SROs. Of course BATS is doing everything right, self disclosure and embracing compensation but it highlights just another aspect of the evolving markets and the imperfect nature of them.

Dark pools will again come under scrutiny in 2013. The buy side every wary of HFT and different platforms (MarketBourse, AX Trading) trying to come up with solutions to preserve quality whilst facilitating liquidity. All variations on the generic lit market, price / time priority model.

Good luck to Direct Edge Brazil. Personally I don’t feel new platforms can successfully compete in new jurisdictions unless they compete further along the value chain (i.e. include clearing). That said, Chi-X Global continues to persevere..and make inroads. (Market Share graph included on web site posting).

Some ambitious forecasts for Asian ATSs. Asia is such a different set of cases I don’t think you can be generic. Different wallet sizes (size of market), domestic market practices, vested interests etc.

Which leads onto suitability and the SGX story. Great that new regulatory standards are being “imported” but what is this doing to the dynamics of the existing participants. Capital rules are great...but if you don’t have equivalence in legal certainty and finality how effective are the measures you’re trying to import?

Bravo BNY...every success with the CSD status. I think the step should reap them big rewards...and the industry should benefit too.

Portfolio margining...of course great, but it’s about what is in the portfolio (eligibility). I think the clever money is in clearing what eligible products where. You’re never going to capture all business in one place, so the best you can hope for is to optimize positions / correlations for the most ‘efficient’ margin call. Too many red herrings in portfolio margining.

I think this is reflected in the LCH shift away from a “portfolio” approach to their default funds. I don’t want my default contributions caught up (not returned) in some other asset classes troubles.

I need more brevity. Hence some quotes on the topic to remind me!

Have a great week all.



BATS addresses "system issue" that led to pricing problem
BATS Global Markets said a "system issue" let some trades occur at less than or equal to the national best bid and offer price during the past four years, violating Securities and Exchange Commission rules. BATS discovered the issue internally.
The Bats announcement comes amid a securities industry debate about benefits afforded to exchanges in their role as self-regulatory organizations. According to its rules, Bats’s aggregate liability to its customers is limited to $500,000 per calendar month when the exchange makes a mistake in the normal course of business.

Mackay targets 2013 launch of MarketBourse
The core idea behind MarketBourse is to let traders share trading information in circles of other market participants they select, similar to choosing friends on social networking platforms. The functionality would allow members to minimise market impact by selecting who they trade with.

Buy-side head calls for regulatory action on dark pools
Complexity and diversity is making US dark pools a minefield for buy-side traders, creating suspicions on how brokers internalise orders

AX engages with corporates to facilitate block trades
US alternative trading system AX Trading has launched a new tool letting sellers of large blocks of shares trade directly with the buy-side via an investment bank sponsor.
The DirectAX initiative gives corporate clients, private equity firms and venture capital firms access to institutional investors via their sell-side partners, with the aim of improving block trading opportunities. Sellers have the ability to set a minimum size and price threshold for their orders

Direct Edge to file for Brazil launch within weeks
US exchange operator Direct Edge expects to lodge a formal application to launch an equity trading venue in Brazil in the coming weeks, but admits its success will depend on clearing interoperability.
...given the cost and complexity associated with building separate post-trade services in the country, the launch of the new platform will depend on the willingness of BM&F Bovespa to let Direct Edge use the domestic clearing house that the incumbent exchange owns

Asian ATSs to grab nearly a quarter of market share by 2014
"We have seen the emergence of alternative trading platforms in the Asia-Pacific over the last few years, but the region's market share penetration has been remarkably unassuming, especially when compared with the significant penetration that multilateral trading facility Chi-X Europe has had in the European equities market in a relatively short period of time,"


Bank of New York Mellon gains regulatory approval  for  CSD status
Bank of New York Mellon will offer a central securities depository in Belgium after gaining regulatory approval. With CSD status, BNY Mellon will be able to help institutional investors access collateral to comply with margin obligations.

Regulators OK portfolio-based margining on some CDS at ICE
The Commodity Futures Trading Commission followed the Securities and Exchange Commission's precedent in allowing investors to offset some types of credit-derivatives trades within IntercontinentalExchange's clearinghouse.

LCH.Clearnet has implemented formal loss allocation arrangements for its RepoClear service
In the event of a RepoClear member default, where exceptional losses are incurred in excess of the financial resources available, loss allocation ensures the ongoing operation of other LCH.Clearnet clearing services by introducing a further level of protection to the default waterfall.

Watch the OTC Market in real-time
For the first time in recorded history you can now watch OTC trades occur in “real time” via the DTCC Swap Data Repository, based in the US. The website provides anonymised data snapshots of market activity for Credit and Rates trades, plus a “real-time” ticker showing trade events being reported

CME and DTCC disagree over data destinations
CME Group and Depository Trust & Clearing continue to disagree over who gets to share data required by regulators and recently made available to the public. Because CME is a clearinghouse in addition to a data repository, it says that it should be permitted to record its own proprietary swaps. DTCC says such an arrangement violates transparency rules

Singapore Exchange tightens risk management
Singapore Exchange says it has allocated more funds to its two clearinghouses and has increased transparency in a general tightening of its risk management. The moves may clear the way for banks in the U.S. and Europe under new regulatory requirements to be members of SGX's clearinghouses

Global capital, local liquidity and the Basel Committe
“This perceived misdirection in regulation creates difficulties for EM CCPs as well as some absurdities. The primary complaint is the impact that requiring a large default fund has on a market with a small concentration of banks. This concentration allows the CCP to have an in-depth understanding of its major counterparties and track risk differently than some of their developed world peers. When CCPs respond to broad brush-stroke mandates for risk management or to regulators newly concerned about CCP balance sheets, CCP management becomes occupied with explaining how their local realities differ from the Basel test case scenarios.” We tend to agree with their arguments.


Authorities obtain more time to review EMIR
The European Parliament and the Council of the EU have been granted a one-month delay, until Feb. 19, to examine rules within legislation on over-the-counter derivatives. Lawmakers had noted that "adoption of the delegated regulations shortly before Parliament's winter recess made it impossible for Parliament to exercise its scrutiny rights within that period." The rules were developed by the European Securities and Markets Authority and the European Banking Authority in support of the European Market Infrastructure Regulation


Memory is a complicated thing, a relative to truth, but not its twin."
--Barbara Kingsolver,
American novelist, essayist and poet

If any man will draw up his case, and put his name at the foot of the first page, I will give him an immediate reply. Where he compels me to turn over the sheet, he must wait my leisure. ~Lord Sandwich

Therefore, since brevity is the soul of wit,
And tediousness the limbs and outward flourishes,
I will be brief.
~William Shakespeare, Hamlet

Brevity is the soul of lingerie. ~Dorothy Parker

Any philosophy that can be put in a nutshell belongs there. ~Branch Rickey

What a difference a letter makes!
When setting up Chi-X in Europe we had many ‘mantras’. It’s a process not an’s evolution not revolution...but I think this one is also very good. Change requires steadfast commitment (and belief!) to the cause. Yes, change requires revolution, but without resolution change can be pretty rudderless and pointless.

Real change requires revolution...
Real change requires resolution...

From the same artist I also enjoyed this thought:
Life is what you fake it!
If change is too hard, start faking it...and slowly but surely providence will take over and what you’re faking may well become reality.


The Fight Over The $1 Trillion Coin

Friday, December 21, 2012

ICE, non binding...and a very merry festive season.

G'day and the very best of the festive season to one and all.

The ICE / NYSE story takes the cake this week. I've only had a look at the headlines but I can't see much on the clearing impact of the deal. Given how well established ICE Clear is I would expect this to put plans for NYSE Euronext derivatives clearing on hold.

Again, deals are structured around the growth sectors. LSE looking at Swapclear and ICE at derivatives. Poor old equities, must be feeling unloved (or at the very least commoditised). Funny thing is, I'm bullish on equities as an oversold asset class.

The essential part of the ASX announcement for OTC plans is...Non-binding.

I’ve also had calls from a couple of agents and one firm that are looking for a mid level clearing “experts”. If you know anyone that is looking to continue in the Clearing field just drop me a line (and or CV) and I’ll simply forward your details to the interested parties. No promises or rewards, just happy to act as a mailbox router.

Anyway, enough from me.
Have a very merry festive season….and amongst all the cheer…have a glass of water too!

ICE agrees NYSE Euronext takeover IntercontinentalExchange has agreed to buy NYSE Euronext, its 208-year-old rival, in an $8.2bn deal that will make the energy and commodities bourse one of the world’s largest derivatives markets operators.
London Stock Exchange Group 2012 Yearbook The Yearbook explores the breadth of ourdiversified business, from raising capital through to trading, technology and market data. It also includes insightful, opinion-led articles on subjects such as regulation, financial education and the wider role of capital markets.

LSE may cut offer for LCH.Clearnet by £180m The London Stock Exchange is haggling to change the terms of its agreed €463m (£376m) acquisition of a majority stake in the clearing house LCH.Clearnet, reportedly seeking to reduce the buy-out price by as much €200m.
ASX recruits seven domestic and international banks for OTC clearing initiative ASX announces that seven domestic and international banks in Australia have signed non-binding commitments to help develop ASX's new OTC Interest Rate Derivatives Clearing Service.
CCP interoperability consultation paper in the pipeline ESMA (European Securities Markets Authority) has confirmed that the consultation paper is expected to be released on December 20. The December 20 date is dependent on approval being sealed at an internal ESMA board meeting on December 18. ESMA could not release any further details on the consultation paper other than to confirm it will cover interoperability.
Oslo Børs VPS Holding: Agreement to sell Oslo Clearing to SIX group Oslo Børs VPS Holding has agreed to sell 100% of Oslo Clearing to Swiss SIX group at a price of approximately NOK 180 million, assuming freely available cash or book equity to amount to about NOK 120 millions.

CME Clearing Europe expands its metals offering CME Clearing Europe, has added two new over-the-counter (OTC) iron ore contracts for clearing. This expansion of products is in line with CME Clearing Europe's commitment to helping customers manage their risk associated with China's construction industry. These new products build on CME Group's virtual steel mill suite of products.
ICSD row threatens European collateral GC Pooling baskets are currently traded and cleared through Eurex but only the assets held by Clearstream, the international central securities depository (ICSD) owned by Eurex’s parent firm Deutsche Börse Group, can be used for these transactions.
Wall Street finds a foreign detour around U.S. derivatives rules
"What banks are looking at is: can they put their business with non-U.S. counterparties through a London entity, and will the regulators in the UK accept all the business coming through those entities?" said Mark Austen, chief executive of the Asia Securities Industry & Financial Markets Association. Lawyers say the answer may be yes, for now - at least until foreign regulators, also mindful of avoiding another financial crisis, catch up with Washington and impose similar rules. Gareth Old, a lawyer at Clifford Chance in New York, said the CFTC had made it clear that any swaps traded with the foreign affiliate of a U.S. bank would not count toward the $8 billion "de minimis" threshold for identifying a swap dealer. "This is a very, very important exclusion. It means that non-U.S. financial institutions can continue to trade with at least a unit of a U.S. bank ... without running the risk of being a U.S. person," Old said
New York, NY, November 29, 2012 -- The U.S. Commodity Futures Trading Commission’s (“CFTC”) rules and interpretations of the Dodd Frank Act have made it clear for nearly a year that clearinghouses must provide open access and that data repositories cannot bundle other services as the CME Group Inc. (“CME”) proposes. In fact, the CME is proposing that as a condition for using their clearing services, market participants must agree to report their trade data to the clearinghouse's own captive swap data repository (SDR).

Macquarie gains in broker battle The survey highlighted yet another fall in the average size of commissions paid per institution, with the figure declining for a sixth year in a row to just $4.8 million. The average commission has now fallen 66 per cent since 2008, when average commissions topped $10.9m.

Broker Newedge says may split execution, clearing (Reuters) - French broker Newedge, owned by Credit Agricole (CAGR.PA) and Societe Generale (SOGN.PA), said it was considering a split of its asset execution and clearing businesses as part of a wider restructuring aimed at making it more competitive. The derivatives specialist, which has been up for sale for the past year, also plans to "simplify" its activities and geographical reach to focus on core strengths.
RWC 2015 Draw

6 Simple Rituals To Reach Your Potential Every Day
Drink a glass of water when you wake up. Your body loses water while you sleep, so you’re naturally dehydrated in the morning.
2. Define your top 3.. What’s your "Top 3" today?
3. The 50/10 Rule. Solo-task and do more faster by working in 50/10 increments. Use a timer to work for 50 minutes on only one important task with 10 minute breaks in between.
4. Move and sweat daily. Regular movement keeps us healthy and alert.
5. Express gratitude. Gratitude fosters happiness.
6. Reflect daily. Bring closure to your day through 10 minutes of reflection.
An asset heavy life consumes - space, time and money.