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 event...it’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!
Scott. s.riley.mail@gmail.com

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. http://www.ft.com/cms/s/0/41f4d2ec-4a9f-11e2-9650-00144feab49a.html#ixzz2Fj8i0A9p
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. http://www.londonstockexchange.com/about-the-exchange/year-book/year-book-2012.htm

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. http://www.telegraph.co.uk/finance/markets/9746396/LSE-may-cut-offer-for-LCH.Clearnet-by-180m.html
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. http://www.finextra.com/News/Announcement.aspx?pressreleaseid=47878&goback=%2Egde_2026241_member_198154416
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. http://myinvestorcircle.com/news/ccp-interoperability-consultation-paper-pipeline?goback=%2Egde_2026241_member_196871630
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. http://www.oslobors.no/ob_eng/Oslo-Boers/About-us/Press-room/Press-releases

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. http://www.ftseglobalmarkets.com/news/cme-clearing-europe-expands-its-metals-offering.html?goback=%2Egde_2026241_member_196934720
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. http://www.thetradenews.com/news/Asset_Classes/Derivatives/ICSD_row_threatens_European_collateral.aspx
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 http://uk.news.yahoo.com/wall-street-finds-foreign-detour-around-u-derivatives-211144120--sector.html?.tsrc=yahoo
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). http://www.dtcc.com/news/press/releases/2012/cme_statement.php

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. http://www.theaustralian.com.au/business/financial-services/macquarie-gains-in-broker-battle/story-fn91wd6x-1226539976523

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. http://www.reuters.com/article/2012/12/13/us-newedge-restructuring-idUSBRE8BC15W20121213
RWC 2015 Draw http://www.rugbyworldcup.com/

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. http://www.businessinsider.com/mary-meeker-2012-internet-trends-year-end-update-2012-12

Thursday, December 13, 2012

Securitisation, collateral and....coming in from the cold!

G'day All,

Busy days relocating to the UK and getting the feet back on the ground. I used to "push" the blog out to those on my MS Outlook distribution list, however I have now migrated over to Android (in an attempt to be more mobile). So if you are picking this up (via LinkedIn or a web site feed), please let me know if I need to update or amend my distribution list.

Am I missing the ocean swimming? Absolutely! In the meanwhile I've taken up running in London. First couple of attempts were alright...then the temperature started to drop and I'd get back from a run with my fingers curled into a claw...which would leave me stabbing the key at the door trying to get in. Since then I've invested in a pair of "running" gloves. (coincidentally I notice these gloves work just as well when I break into a walk!)

As for London, it’s amazing how much is going on. The big trends I notice are in the clearing infrastructure space and the collateral securitisation space. The transformation and mobilisation of collateral will be the next big industry challenge.

In the clearing space I think this will play out more about the liquidity of capital (e.g. CME / Euroclear story) rather than the eligible collateral criteria (e.g. Nasdaq story).

As expected, LCH looks to extend the swapclear franchise down under. I still don't anticipate this initiative will extend to Aussie equities (primarily due to wallet size of the Aussie market).

There has been some debate about the Royal hoax call from Aussie radio station 2dayFM. Obviously despicable. Personally I think the DJs should at least face some sort of serious charge…even manslaughter. Then they can hold out their defence that they couldn’t have reasonably expected a life to be lost. That fact that these DJs have now ‘disappeared’ to avoid any public backlash irks me. They were all too quick to gloat about their success.
Someone in the UK mentioned the Samaritans had said that suicide was a culmination of events, not usually with a single trigger. I haven’t seen the story and I don’t think it is any type of defence. I can just imagine the crescendo of events from tweets to broadsheets.
My brother mentioned that hoaxes and pranks have long been banned in the mining industry. Simple…there is always a fall guy (person).
The other view I resonate with is that these DJs don’t have the skills and abilities to entertain the audience with their own wit…so they resort to ridiculing others (and the tragedy being the best hoaxes are taken up by the most trusting…which is kinda what you want from a hospital).
I’m delighted to be boycotting anything to do with:     
(Channel 7, 2day FM, Triple M etc.) 

Enough of a rant! Wishing one and all the festive cheer of the season (and right now, that means retail madness).

Enjoy the jingles and sing alone….just ignore Aussie DJs!



Bursa Malaysia has selected Nasdaq OMX's X-Stream Inet technology to power its securities market trading.
Full story: http://www.finextra.com/News/FullStory.aspx?newsitemid=24373

Nasdaq OMX will buy a 25% stake in The Order Machine and acquire an option for an additional 25.1%.
Smart Execution has helped TOM secure a market share of approximately 15 percent for single stock options in the Netherlands. The Netherlands is one of the most developed options markets in Europe with a trading volume of 75 million contracts in 2011.
NASDAQ OMX will act as market operator for TOM, and will provide a Genium Inet based trading platform in London, according to an 8 year contract the two firms have signed. The partnership also builds on TOM's current usage of NASDAQ OMX-powered market technology, specifically, Marketplace for Hire (M4H), which is a multi-market, multi-asset marketplace solution for trading.

The Australian Securities and Investment Commission (Asic) has selected First Derivatives to design, build and host a new market surveillance system.


Stock, options and futures exchanges own 60 percent of recognised CCPs, said the report. “This ownership structure makes CCP activity part of the strategic direction of the exchange itself; decisions made at the exchange level trickle down as opposed to CCP decisionstrickling up.”
Boards of industry representatives or outside parties run the remaining 40 percent.

Dealers were also pleased to see the paper clarify the treatment of bilateral exposures to a CCP. A member's own cleared exposures will attract a weight of 2%, but the bank will not have to apply the sameweight to trades it has cleared on behalf of clients unless it also guarantees clients against losses in the event of a CCP default. Most do not – meaning client clearing portfolios will not be bundled in with a member firm's own trades when calculating capital for trade exposure to a CCP.
Clearing members do still have to treat client trades as bilateral exposures, and calculate capital accordingly – including Basel III's credit value adjustment (CVA) charge for derivatives counterparty risk. Those exposures will be mitigated by the initial and variation margin clients post to their clearing firm, but dealers had worried the costs could still stack up. The new rules reduce that effect by allowing clearing members to assume a defaulting client's positions can be closed out in five days rather than 10, as is the case for uncleared trades.

NEW YORK, November 27, 2012 – The International Swaps and Derivatives Association, Inc. (ISDA), today published an analysis of initial margin (IM) requirements for non-centrally cleared OTC derivativesunder current regulatory proposals.

Useful comments on this press release at:

Four of Australia's five domestic banks have submitted letters of intent to use LCH.Clearnet's SwapClear to clear interest rate swaps.

NASDAQ OMX Derivatives Markets is making a number of changes to its list of eligible collateral,

Euroclear Bank and CME Clearing Europe have signed an agreement to help mutual clients fulfil their collateral obligations to meet initial margin requirements at CME Clearing Europe...


A new rule on extreme trading will take effect as part of a welter of regulatory changes through to June 2014, by which time all high-frequency trading offices in Australia must have "kill switches" installed to prevent rogue algorithmic trades disrupting the market.
The rules include a requirement, to come in force from June, that brokers must demonstrate a "meaningful price improvement" before they can conduct a trade away from the public or "lit" market.

The Communication, was presented by its President at a press conference on 28 November 2012 as "the Commission's contribution to the report of the 'four presidents' on the next steps for economic and monetary union." It provides the Commission's vision for a strong and stable architecture in the financial, fiscal, economic and political domains of the currency union.

Section 1 provides background information on the EMU,
Section 2 looks at the measures that have been taken so far to deal with the crisis in the eurozone,
Section 3 puts forward proposals the Commission thinks necessary for a deep and genuine EMU and
Section 4 considers questions of democratic legitimacy and accountability that arise in the context of a more integrated currency union.

1.27 However we are deeply concerned about the possible implications for the UK of what is proposed. In addition to the issue of a threat to the single market for financial services, already exemplified by the current Banking Union proposals….

- “there will be many more big capital and securities markets in the world because they are needed for economic development which is powering ahead in Asia, parts of Latin America and beginning also in Africa…. Brazil, India, China, Indonesia, Singapore, Hong Kong, Russia, Turkey and Mexico to name a few will have much bigger markets than today.”
- “all the fast growing regions of the world fully realize that they cannot rely on the international banking system to support their economic development ambitions.”
- “banks will be permanently restrained in the future with much higher levels of capital and lower leverage.”
- “These trends taken together, mean a major global expansion of market based financing and securities markets is going to happen – replicating in many ways the U.S financial model.”

Glenn Stevens
Governor, RBA


UBS 'rogue trader' Adoboli found guilty of one count of fraud

(I though the trial would be in the Square Mile...but it's just on the other side of the river Thames)


We’re getting a new Euro!
(No images until 10th Jan)

The number of Euronotes in circulation has doubled in a decade...

Friday, October 19, 2012

Another week in London….and the seasons are changing.
Already the evenings are closing in.

One thing I’m trying to do at the moment is work out the best way to back up my contacts. I’m an open source fan, so that puts me in the Android camp (and a little bit in Apple denial). I do like my smartphone and how seamlessly Gmail, contacts and calendar synchronise. Then there is the added benefit of Google providing this blogspot.
Previously I had mentioned that Microsoft is relaunching Hotmail under the @outlook suffix. (I’ve taken the alias scott_riley@outlook.com). What I do like about Outlook is it seamlessly integrates with LinkedIn.
For those of you that are LinkedIn fans I recommend an outlook account just for the benefit of synchronising all those LinkedIn contacts.

I was also asked by The Trade to write a short piece on Competition in Australian Clearing. Extract of that is below…not sure when it will be published and in which medium. I think in the next week or so.

The Burgundy acquisition, like Turquoise, I assume is a polite dividend to the founders on exit. Just as interesting is the switch to Millennium from Cinnober.
Good luck to Spain-X. I like the white label concept of QuoteMTF in terms of cost efficiency. I think PAVE might have some interesting thoughts on Spanish liquidity.

Have a great week-end all…and don’t be held hostage by the weather.



Oslo Bors acquires Swedish neighbour Burgundy

Established in 2008 by a consortium of Swedish banks and brokerages as a corrective to the dominance of Nasdaq OMX, Burgundy currently commands a turnover of approximately $2 billion in Swedish share trading, a fraction of the $33 billion claimed by its bigger rival.
Under the deal, Oslo Børs will scrap Burgundy's Cinnober-based trading platform and migrate the exchange to the London Stock Exchange's Millennium system. Oslo is moving to Millennium next month and Burgundy will follow some time in 2013.

Capital Partners Group reaches agreement with QuoteMTF to launch a Spanish trading venue/Spain-X.com
European equity trading venue Quote MTF and London-based investment bank Capital Partners have outlined plans to enter the Spanish market.
In February, an MTF, called Pave, that had planned to take on the BME, was forced to put its launch on ice, citing "the very challenging market and harsh financial environment in Europe, especially in Spain".


‘‘This shows how dysfunctional this organization is, to have this event unfold this way,’’ Whalen said. ‘‘They should have told us yesterday, unless they didn’t know.’’
Since joining the bank in December 2007, Pandit has made at least $56.4 million, according to data compiled for The Associated Press by Equilar, an executive pay research firm.
That includes salary, bonuses, benefits and perks and stock awards. Pandit also made about $165 million from a buyout of his ownership stake in Old Lane Partners, a hedge fund he founded that was acquired by Citi.


GP Receptionists.
I just don’t understand why GP receptionists are universally obnoxious.
Totally agree with this post:
Me (exasperated – bad service always winds me up): “It is not an emergency. I am not actually dying just yet, which would be an emergency and I probably would not be chatting to you on the phone about it quite so casually, but the pain in my right knee tells me that it is urgent because it will only get worse. I know because it has happened before.”
Receptionist (feeling offended because she thinks that I have shouted at her): “You can either have a regular appointment and it is three weeks. Or, if it is an emergency, you can come in today. Better still, go to casualty.”

Why is swimming the channel so hard?


Competitive Clearing in Australia
Joining the game.
So far in this “Asian Century” it appears that competition in market infrastructure has been more aggressively pursued in the Western economies of the US, Europe and Canada. That position is now changing in Asia with various forms of market infrastructure competition starting to take shape in locations including Australia, Japan and India.
Materiality, proportionality and suitability.
Much has been made about the relative success of competition in trading in Australia. One issue it raises is the question of materiality. There is a vast difference in the “wallet size” of the Australian market versus some of the other economies where competition has become a feature of the local market.  As the incumbent exchange, the ASX in their 2012 annual report for Equity (cash) secondary markets discloses gross revenues of A$36 million in trading, A$46 million in clearing and A$42 million in settlement. To make a meaningful business case in any of these segments of the transaction value chain you need to acquire either significant market share from the incumbent or have a compelling case that you are going to substantially grow the market.
Another way to make the business case for competition more compelling is by expanding the range of products. The recent news of LCH.Clearnet applying to provide clearing services has increased speculation in this area. The SwapClear product caters for a growing need (if not regulatory demand) of participants. It is noted the clearing economics and participants in the OTC market are very different to those of the equity market.
Progress to date
As a fast to market solution Chi-X Australia announced it would use the services of ASX clearing. Chi-X Australia signed up for a 5 year term in Oct 2011 on a non-exclusive basis to use ASX’s clearing services. So, although Chi-X Australia is free to use any clearing service provider (incumbent or new entrant), they are committed to paying ASX an annual clearing access fee of A$275,000 until 2016.
One way the exchange sector has responded to new entrants is through consolidation. At the end of 2010 SGX and ASX announced a proposed deal valuing ASX at A$8.4 billion. This deal was subsequently abandoned however a joint regulatory review of the Australian post trade structure was triggered by the Council of Financial Regulators. This review has highlighted the issues between a local “bricks and mortar” operation and that of an off shore operator. What peace of mind would Australian regulators have in the event of a foreign operated central counterparty managing exposures in the event of a default? Which sovereign state would take priority?
Incumbent position
ASX is certainly not resting on their laurels. Just as they positioned themselves for the advent of trading competition they are already doing so in the clearing space. The structure of clearing fees has already been reviewed and new fees introduced (e.g. the Chess 156 message). Although this move may be “revenue neutral” today, it already begins to raise a cautionary flag in terms of structural barriers to entry and a level playing field.

So, does Australia need competition in clearing? Quite simply, Yes, it does. However any competitive offering will need to take into consideration the context of the various “drivers” that are shaping the local market. These include:
·         Wallet Size: business model, scope of services (OTC derivatives, equities etc.) and pricing
·         Ownership and Governance: Australian locals, International majors etc.
·         Barriers to entry: Government policy settings
·         Incumbent responses:  Changes (not necessarily improvements) inspired by the threat of competition.
The final irony, is that if the ASX does want to take a more active role in regional and international consolidation, evidence of a more robust domestic competitive framework could be exactly the sort of catalyst required to provide regulators and policy setters with the peace of mind to allow this to happen.

Friday, October 12, 2012

London!...They're all at it, decouple location, LME...Iron Ore

G’day All!

This blog posting coming from London....and directly from my Google account.
I’m getting ready for a New Years Resolution to migrate away from dependency on Outlook contacts onto something more virtual and portable…and for now that is gmail.
So, for those that are picking this up via the blogspot or LinkedIn just send me an email if you want to rejoin the blog roll or list of people whom I “push” the blog out to on a Friday night.

Lots, as ever, going on in Europe. And as ever not enough time to cover it all.

NYSE, where Patrick Birley left this week, along with CME and Nasdaq all doing their thing.
I put the Singapore story in just because of the stupidity of it. The trading center of a commodity needs to have nothing to do with delivery points. I love the fact that Cork in Ireland used to be the epi-centre of the butter market. Today, Liverpool, UK (of Beatles fame) is the world centre for cotton trading. I see about as many cotton fields in the UK as I do open cut mines (think LME).
The LME numbers are eye-watering. 2.2byn for a 12myn profit business. Ouch.
And Greece loses a little of its effervescence.
I put the LiquidNet story under policy. Just because it continues to show the negative HFT sentiment that is still being fuelled out in the market.

In the Aussie markets there is a perception that all is well. Yes, a commodity boom covers over many ills. A lot of attention is placed on the FX and interest rates but not a lot of focus on the Iron Ore price which I think is a great bell weather for the nation. If China catches a cold (or find alternate supplies for their commodities), Australia will get a strong bout of pneumonia. All was rosey in the land down under and the Aussie battler is not battling too hard when iron ore is over $150/tonne. If iron ore drops below $100 it’ll be the banks that are battling.

Have a great week-end all!



CME Europe Limited (CMEEL) application to become a Recognised Investment Exchange (RIE) under section 287 of the Financial Services and Markets Act 2000
CME Europe Limited (CMEEL) has made an application to the Financial Services Authority (FSA) to become a Recognised Investment Exchange (RIE) under section 287 of the Financial Services and Markets Act 2000.
CMEEL is a UK subsidiary of the Chicago Mercantile Exchange Inc. (CME Inc.) which proposes to establish a London-based derivatives exchange offering foreign exchange (FX) derivatives and expanding into other asset classes over time. CMEEL expects to launch the exchange in mid-2013.

Nasdaq’s U.K. Derivatives Platform Seeks 10% Market Share
Nandini Sukumar - Bloomberg
Nasdaq OMX Group Inc. (NDAQ), which is setting up a derivatives trading system in London to compete with Europe’s two biggest futures exchanges, will seek more than 10 percent market share in its first year of operation.
“Success is at least 10 percent,” Nasdaq Chief Executive Officer Robert Greifeld said in an interview in London yesterday

Singapore Good Place for Water Derivatives Exchange
Singapore would be a natural setting for a water derivatives exchange and it’s in country’s interest to set one up, the Straits Times reported, citing carbon-trading pioneer 
Richard Sandor.

Bucking the trend, LME looks at expanding floor trading
floor supporters hope that the new owner - the Hong Kong Exchanges and Clearing Ltd (HKSE) (0388.HK) - will attract ring-dealing members from China. For its part, the HKSE is eager to boost income after it paid $2.2 billion to beat out IntercontinentalExchange (ICE.N) to buy the LME, a steep premium for a market that turned in a profit of $12 million last year.

Greece's biggest company, Coca Cola Hellenic, is leaving the country
"The Greek bourse is losing a very good company and the London Stock Exchange is gaining a very important group," said Hatzidakis. "It's very bad news for the Greek economy and bourse."
For brokers on the stock exchange, losing a stock that made up 8 percent of daily turnover this year will be unwelcome - especially since total volumes are down by half since last year.


Analysis: Commodity exchange battleground switches to "swaps"
Ann Saphir | Reuters
Chicago-based giant 
CME Group Inc. has lost ground in the estimated $1.2 billion-a-year business of guaranteeing over-the-counter swaps to arch-rivalIntercontinentalExchange Inc. in recent years, company data show, as the Atlanta-based upstart offered cutting-edge trade technology

trueEX to Use CME Clearing to Power Swaps Execution
Press Release
trueEX, LLC, an electronic execution platform for the global interest rate swaps (IRS) market, announced today that it has executed a clearing agreement with CME Clearing. trueEX provides execution and processing services as a CFTC-regulated Designated Contract Market (DCM) for the global IRS market.

CFTC Staff Responds to Frequently Asked Questions on the Reporting of Cleared Swaps
Today, Commodity Futures Trading Commission (CFTC) staff is responding to frequently asked questions from market participants and other interested parties on the reporting of cleared swaps as required under part 45 of the Commission’s regulations.


Swap Transparency Hailed by Gensler as Rules Begin Oct. 12
JPMorgan Chase & Co., Goldman Sachs Group Inc. and the $648 trillion swaps market will enter a new era of transparency when Dodd-Frank Act regulations for dealers begin taking effect tomorrow.
Liquidnet in talks to expand European partnerships
In recent months, regulatory focus on high-frequency traders has intensified, with both US and European exchanges mulling tighter controls over the activity.
Merrin said: "With every regulator grappling with how to deal with high-frequency trading, we view ourselves as exchanges' instant solution to that problem. We are HFT-free and provide access to the largest pool of institutional liquidity money."


The lore of ore
The most important commodity after oil deserves more attention than it gets

This is more plausible but is still pretty rosy. My own view is that the global zombie will shuffle forward so long as Europe fails to abandon its fiscal suicide pact so I see 2013 steel output as flat. Hence, an average iron ore price of $110 is more likely in the first half and then falling again in the second. Same for metallurgic coal. Australian production expansion will need further rationalisation in both.
There is also a potted history of iron ore at The Economist today but it is surprisingly free of useful data and hence its conclusions are pretty useless.

Crowdfunding site Kickstarter will launch in the UK at the end of the month, providing a platform for Brits to raise funds for projects.
Full story: http://www.finextra.com/News/Fullstory.aspx?newsitemid=24162