Technology, Transparency and Choice Drive Buy Side’s Investment in U.S. Options

Technology, Transparency and Choice Drive Buy Side’s Investment in U.S. Options

Volumes in the options market are estimated to increase by more than 5 percent as electronic trading fuels access to the U.S. marketplace.
The U.S. market for exchange-traded options took off during the past decade. The buy side is increasingly looking at options as instruments to hedge risk exposure and generate alpha, according to TABB Group’s recent report on the state of the U.S. options markets. In fact, TABB estimates that volumes will increase by more than 5 percent by year-end, even as market volatility wanes. So what is continuing to fuel growth in the options markets?

[Related: “Buy Side Is Getting Smarter at Trading Options”]

Market transparency and growing adoption of electronic trading technologies are key contributing factors. The changes in regulation and increasing use of electronic trading helped raise volume an average of 21 percent a year from 2000 to 2010 on seven U.S. options exchanges. Today, the options markets are supported by 12 exchanges and electronic venues where traders can access legitimate, reliable prices and order information so they can confidently and quickly execute a trade.

While the increase in trading venues has increased competition and lowered transaction costs for investors, fragmentation has also forced continued investment in technology on both the sell side and buy side. One area of investment on the buy side is platforms that help aggregate liquidity across multiple counterparties and exchanges. To access liquidity and capitalize on momentary market opportunities, institutional investors are adopting electronic platforms that offer integrated pricing monitors, trade analytics, risk monitors, and other tools. For the second year in a row, TABB’s study found Bloomberg Execution Management System (EMSX) is the most popular electronic trading platform for U.S. options. Now, I may be biased, but what I believe this reveals is that options market participants value unparalleled technology and transparency – but they also value choice.

With trading volumes stagnant in the past few years, the buy side has also sought to balance technology and commission spend with necessary efficiency drivers. Especially among hedge funds, the desire for un-conflicted choice has fueled growth in broker-neutral electronic platforms that connect to a broad network of brokers, functionality algorithms and counterparties.

From hedge fund traders looking for an edge, to long-only asset managers that use options to manage risk, electronic trading is fueling access to the U.S. options marketplace. As the industry evolves and trading options becomes even more commonplace for the institutional investor, platforms that offer the buy side choice, access and sophisticated trading tools will succeed along with the market itself.

Regulators urged to adopt principles-based substituted compliance

Regulators urged to adopt principles-based substituted compliance

US regulators need to take a less mechanical approach to determining whether to accept foreign regulatory standards for OTC derivatives trading, according to two industry trade bodies.

Derivatives trade body, the International Swaps and Derivatives Association (ISDA) and US buy-side association, the Investment Company Institute (ICI), both suggest that an overly rigid application of US regulatory standards could have a significant negative effect on markets.

Both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have said they are seeking to apply a form of substituted compliance, where US banks trading abroad would not be subjected to their oversight if there are equivalent OTC derivatives trading rules in those jurisdictions.

In a letter to the SEC this week, ICI’s general counsel, Karrie McMillan, and managing director, Dan Waters, wrote: “we urge the SEC not to apply its substituted compliance framework in an overly mechanical manner that could effectively preclude a substituted compliance determination with respect to a similar foreign regime.”

The ICI is concerned that in some areas, such as the timely reporting of swap trades, foreign regulations could fail to qualify for substituted compliance due to minor technical differences, such as different reporting timeframes or differences in trade information specifications.

“We encourage the SEC to look holistically at the foreign regulatory authority regulatory framework for reporting to determine whether it broadly achieves the G-20 goals of transparency of the derivatives markets,” the letter said.

ISDA has also called for regulators to take a less technical approach to substituted compliance. Instead of focusing on specific regulatory rules developed since the Group of 20 met to agree on international financial regulation in Pittsburg in September 2009, they should focus on whether different regulations achieve the key goals of the G-20.

ISDA said markets should instead focus on a principles-based approach, and identify whether a foreign regulatory regime meets the common principles agreed by the G-20.

“All comparisons should evaluate regulatory regimes against these common principles, rather than requiring identical or element-by-element correspondence of rules,” a statement from ISDA read.

John Bakie

CloudMargin launches cloud-based collateral management tech

CloudMargin launches cloud-based collateral management tech

Source: CloudMargin Limited

CloudMargin Limited, a London-based specialist collateral management software developer, has today launched a new, cost-effective approach to OTC derivatives collateral management for the buy-side.

“Until now, much of the buy-side had been priced out of having a dedicated collateral management platform and had no viable alternative to spreadsheets,” commented Andy Davies, co-founder and CEO of CloudMargin. “I am thrilled that CloudMargin’s innovative approach and use of the latest cloud-computing technology means we can offer a full featured, full-cycle collateral and margin management platform that’s well within the reach of even the smallest buy-side firm.”

CloudMargin supports the full process of collateral and margin management, from storing CSA parameters through calculating and issuing margin calls to handling disputes, selecting eligible collateral and instructing market movements. Real-time reporting and a unique dashboard bring a new level of oversight. Furthermore, CloudMargin cleverly supports the drive towards CCP mandated by Dodd-Frank and EMIR, giving a harmonized view of bilateral and cleared derivatives and a simple yet controlled process.

CloudMargin will be bringing this new approach to a broad spectrum of buy-side firms, from hedge-funds and asset managers, pension fund managers and insurance companies through to corporate treasury departments and energy firms. All of these are seeing collateral volumes rocket and operational complexity soar while at the same time internal and external scrutiny over the collateral process has never been higher.

Even for firms below the threshold for central clearing, regulatory changes under Dodd-Frank and EMIR are stretching manual processes and the use of spreadsheets to breaking point.

CloudMargin gives the buy-side an alternative to spreadsheets so they can finally have a secure, controlled, efficient and cost-effective collateral management operation. 

Reuters – Swaps clients plan US bank exodus


NEW YORK, Aug 12 (IFR) – US banks are at risk of losing overseas swaps market share as European clients have begun making every effort to avoid getting caught up in costly cross-border derivatives rules that were finalised by the CFTC last month, and come into effect this October.

European hedge fund and asset managers are threatening to transfer their swaps trading activities away from branches of US banks and towards European competitor houses to ensure they avoid the reaches of Dodd-Frank, which mandates an array of costly compliance measures, including the central clearing of standardised over-the-counter derivatives.

Many European clients would rather ditch their US bank relationships than bear that cost – just one of the unintended consequences of bad rule-writing according to dealers.

“It’s the one rule that risks the most competitive disadvantage,” said a lawyer at a US dealer. “There’s no way these clients are going to clear with us at this stage.”

Swaps executed by a European client with the foreign branch of a US bank will be required to clear through a central counterparty starting on October 9 – the date that an exemption from compliance with the CFTC’s recently finalised cross-border guidance will expire.

US banks say the deadline is unreasonable and compliance will be near-impossible. And at least one of the CFTC commissioners sympathises.

“My frustration has consistently been with the Commission establishing arbitrary dates that we pluck out of thin air to establish compliance without asking, ‘is this possible?'” said CFTC commissioner Scott O’Malia.

“The cross-border guidance should have required notice and a comment period to find out if the time periods for compliance are adequate. We claim to be having a comment period but I suspect that anyone who does so will have their comments completely ignored.”

Conversely, the October clearing deadline comes two months before the CFTC forces US branches to comply with the rest of the agency’s transaction-level requirements, such as trade execution, documentation, and real-time public reporting.

“The CFTC is asking us to pull a rabbit out of a hat,” said an executive at the London branch of a US bank. “They have offered ‘substituted compliance’ but the European rules are not even done yet. Nobody in their right mind thinks we can demonstrate substituted compliance by the deadline.”



For end-user clients, mandatory clearing can be a costly business. Clients must negotiate and document relationships with clearing houses and clearing member banks, and are required to post initial margin against all swaps that are passed through the system.

The CFTC guidance provides that foreign branches of US banks could apply to substitute their home country compliance for US rules in cases such as these if the rules were considered “comparable and comprehensive”.

It is likely to be the longer-term answer for most European branches of US houses, but the European rules for clearing are not yet finalised, leaving nothing concrete for comparison.

Some banks are moving to plan B, which involves transferring all client relationships from their foreign branches to affiliates – a separate legal entity that would protect European funds from the clearing mandate.

But that would not be easy, considering that firms such as JP Morgan have more than 10,000 clients booked through their UK branches.

“There are a number of impediments; it’s very difficult to move clients to another legal entity. Plus, many of those affiliates have regulators of their own who will raise concerns about wholesale transfers of clients,” said the lawyer.



US banks say they have sent the Commission requests for an extension to the deadline, by way of no-action relief or some other format. Given the Commission’s penchant for issuing no-action relief – the agency has issued more than 100 in connection with Dodd-Frank to date, a pushback of the compliance date seems possible – if not likely.

If history is anything to go by, the CFTC is likely to keep the industry in suspense until the eleventh hour.

“There’s no rhyme or reason for how the no-actions are issued,” said O’Malia. “It creates a confusing ad hoc process that leaves a lot of people trying to understand a lot of moving parts when we are not following the Administrative Procedure Act. We’re using and abusing the no-action relief system.”

The development represents another trough in the often tumultuous process of aligning cross-border implementation of new rules for the OTC derivatives market between Europe and the US.

For the past two years, US banks have been warning that the CFTC’s hurried pace in implementing the rules of Dodd-Frank would put US dealers at a competitive disadvantage.

Just over a year ago, the agency issued proposals that would have forced branches of US banks to comply with all transaction-level requirements in July of this year.

But European entities and US lawmakers levied heavy criticism of CFTC chairman Gary Gensler’s approach to international harmonisation of derivatives rules.

In response, Gensler pledged closer co-ordination with European regulators in a joint statement with the EC’s internal market and services commissioner Michel Barnier just before the original proposals were due to take effect.

The scaled-back proposal reduced the CFTC’s powers in determining whether foreign regulations could be substituted for US rules and issued no-action relief for most requirements until European regulators could catch up.

But the proposal may still have over-reached, according to banks. Whether the US banks are able to move their clients over to affiliates in time or the agency issues a no-action relief remains to be seen, but for the moment banks are facing a significant cross-border dislocation.

Outsourcing model is not the panacea it’s cracked up to be

Outsourcing model is not the panacea it’s cracked up to be

from Financial news, Ben Wright, 29/7/2013

This month, Societe Generale announced a deal that, though relatively unremarked upon at the time, was in its own way as indicative of the state of modern investment banking as anything else the industry has done this year. But it wasn’t a bond launch or an initial public offering or an M&A deal. No, it was an outsourcing deal and it was the bank that was the client.

Best foot forward: but in which direction?  Best foot forward: but in which direction?

The French firm has outsourced its post-trade processing and settlement services to new providers Accenture and Broadridge Financial Solutions. Such deals have been a long time coming and the reasons why they potentially make sense are well rehearsed. Market and regulatory pressures are vastly altering the economics of the investment banking industry; firms have tried to address costs, mostly through reducing bonuses and laying off staff, but this has barely scratched the surface.

Clive Triance, the head of broker-dealer outsourcing at HSBC Securities Services, recently told Financial News that even if a large broker doesn’t enter any new markets or produce any increase in volumes over the next 10 years, its back-office costs will still increase by between 35% and 45%.

Investment banks have long been engaged in a technological arms race in which they have all employed legions of staff to produce very similar systems. Industry estimates suggest that there are around three support or IT staff for every frontline banker or trader.

A report on the outlook for the investment banking industry by Oliver Wyman and Morgan Stanley in April highlighted the need for firms to alter their operating models if they were to get a grip on this ever-escalating cost base. The report’s authors suggested that “linear bank-by-bank cost reduction efforts are unlikely to achieve the cost flexibility needed – the industry has to focus more on reducing the duplication in basic processes by finding or creating third-party providers”.


Several custodians have pitched to be those third-party providers and have set up broker-dealer outsourcing divisions. But so far they have only picked up business from smaller firms. The bigger players will probably remain reluctant – custodians are, after all, also banks and are therefore likely to compete in some areas with the larger brokers. Indeed a number of custodians have recently set up their own broking arms – BNY Mellon went live with one in Europe in April.

Critical mass needed

Hence, no doubt, the decision of Accenture and Broadridge Financial Solutions to enter this space. Presumably other firms will follow suit. How many different solutions emerge and which gain critical mass will be crucially important. Christophe Leblanc, the chief operating officer for Societe Generale Corporate & Investment Banking, made it clear that the main benefits of the outsourcing deal would only be felt “by mutualizing processing activities and costs across multiple institutions”.

One area in which this is clearly true is in the interactions with central counterparties and central securities depositories. These market infrastructure providers, which facilitate securities settlement, have become central to regulatory attempts to bring greater transparency to the market, especially over-the-counter derivatives. They tend to price their services on sliding scales depending on the volume of trades that a broker sends their way. So, by outsourcing these relationships to a third-party provider that pools volumes from a number of clients, brokers would enjoy benefits of scale even if they didn’t have it themselves.


Such deals will result in banks following the example of their own clients: asset managers have for years outsourced non-core functions to custodians so they could focus on what they believe they do best.

But the buyside and the sellside are fundamentally different in this regard. The business models of asset managers are, though not without their challenges, relatively clear cut; those of the banks have rarely in their history been less so. The brokers who outsource their back-office operations are effectively betting that it is these functions that are going to become increasingly commoditised and that it will be in the front office that they can make their mark. It could just as easily turn out to be the other way round.

At JP Morgan’s annual investor day this year, Mike Cavanagh and Daniel Pinto, co-chief executives of the corporate and investment bank, outlined the future of their business. They did so by trying to quantify the financial impact of new regulations. They said these new rules on margin, post-trade transparency and mandatory clearing trading, along with the rise of swap-execution facilities, could take a $1 billion to $2 billion chunk out of JP Morgan’s revenues each year. These are the kind of numbers that have caused banks to finally realise that their world has changed and to at last consider options such as outsourcing.

But in the same presentation Cavanagh and Pinto also highlighted new areas of growth. Some of these too – such as over-the-counter clearing and collateral management, which JP Morgan believes could be worth between $300 million and $500 million a year – reside in the back office. Collateral optimisation and transformation has become a crucial new business line for the bank.

 In other words, new regulations are making some back-office functions too costly but are creating other back-office opportunities. This is a process that remains in flux.

All credit to Societe Generale for adopting a clear strategy, because brave is the firm that is happy to make a bet one way or the other. A few other banks without scale and – even more crucially – without the ambition to achieve scale will no doubt sign up for similar deals. But it’s unlikely to turn into a stampede.


Trade repositories tackle reconciliation issue

High-frequency trading concerns return to the fore

High-frequency trading concerns return to the fore

High-frequency trading has risen to the forefront of hedge fund regulatory concerns, according to a new report.

High-frequency trading concerns return

High-frequency trading concerns return

While the level of regulatory concern remains far from 2011 levels, it has increased since last year, according to the report, which was published yesterday by research firm Tabb Group. The research was based on conversations with 63 head traders of US hedge funds, managing $301 billion in total assets.

The research said: “In light of the public debate and media scrutiny of market structure issues, such as exchange order type disclosure, the hash crash, and early looks at machine readable economic indicators, concerns over high frequency trading have risen. Meanwhile, with initial registration costs in the rearview mirror, compliance costs concerns have dropped off.” (See graph bottom-right)

Top of the list is uncertainty regarding how hedge funds will be treated under mandatory registration with the US Securities and Exchange Commission for managers running $100 million or more, and the implications of Form PF, which requires them to provide information on the hedge funds they run to the Financial Stability Oversight Council, the report found.

Clearstream’s investment funds strategy for Latin America strengthens with Latin Clear joining Vestima

Clearstream’s investment funds strategy for Latin America strengthens with Latin Clear joining Vestima
Latin Clear Panama as central hub for investment funds across Latin America to use Clearstream’s post-trade solution Vestima/ International investors can now gain easy access to Panama-domiciled funds through Clearstream/ Regulatory changes: markets in Latin America open up for offshore funds
17. July 2013
Clearstream: Clearstream has taken an important step in strengthening its ties with Latin American financial markets by signing Latin Clear Panama as the first transfer agent (TA) to join its investment funds platform, Vestima. Accordingly, in the course of July 2013, investment funds domiciled in Panama will be eligible for order routing, settlement and custody at Clearstream.

The Vestima suite of services will bring increased operational efficiency and security benefits to the Latin American financial markets by providing centralised delivery versus payment (DVP) settlement services based on synchronous exchange of cash and securities between fund distributors and transfer agents.

Philippe Seyll, Member of the Executive Board of Clearstream and Head of Investment Funds Services, said the cooperation with Latin Clear and the migration of Panama domiciled funds to Vestima was key in light of the company’s Latin America funds strategy as it allowed international investors to gain easy access to these financial instruments.

“We are pleased to welcome the first TA in Panama, a major domicile for cross-border distribution of investment funds in Latin America, where markets are gradually opening up to offshore funds,” he said. “Our objective is to become a partner of choice for the financial institutions in the region that wish to enhance their investment funds offering.”

Clearstream is headquartered in Luxembourg which has more than EUR 2,500 billion (April 2013) assets under management in investment funds. Luxembourg is the second-largest funds market in the world after the US. Currently, more than 3,800 collective investment schemes are administered in and distributed from the Grand Duchy.

About Clearstream

Clearstream is one of the leading providers of investment funds services globally. It has more than 120,000 investment funds on its Vestima order routing platform and more than 7 million fund settlement instructions are processed every year. The company is also the largest contributor to the standardisation of funds processing worldwide.

Clearstream holds EUR 11.6 trillion in assets under custody making it one of the world’s largest settlement and custody firms for domestic and international securities. As an international central securities depository (ICSD) headquartered in Luxembourg, Clearstream provides the post-trade infrastructure for the Eurobond market and services for securities from 53 domestic markets worldwide. Clearstream’s customers comprise approximately 2,500 financial institutions in more than 110 countries. Its services include the issuance, settlement and custody of securities, as well as investment fund services and global securities financing.

About Latin Clear

Latin Clear is acting as central hub for Latin America as it has established settlement links to other markets in the region, such as Costa Rica, Nicaragua, El Salvador and Venezuela. Access to the Dominican Republic is in progress.

Panama is currently attracting an increasing number of international investors because of its stable government and the size of its financial sector. It is the largest international banking centre in Latin America with more than 150 banks from more than 35 countries and offers easy access to other Latin American markets.

UCITS’ collateral access for clearing “heavily restricted”

UCITS’ collateral access for clearing “heavily restricted”

UCITS funds that are struggling to access collateral to post as margin for cleared OTC derivatives trades should be granted initial margin exemptions for non-cleared bilateral contracts, a European buy-side association insist.

Limits on borrowing, collateral repackaging and use of the repo market by UCITS makes it difficult for them to comply with the European market infrastructure regulation (EMIR), which requires OTC derivatives to be centrally cleared.

The EMIR rules means that buy-side firms will have to post initial and variation margin for the first time, leading market participants to fear a potential collateral shortage when clearing requirements kick in.

Vincent Dessard, regulatory policy advisor at the European Fund and Asset Management Association (EFAMA), said the cumulative impact of OTC reforms would restrict UCITS from having collateral for clearing.

“UCITS funds have to deliver collateral just like any other market participant, but they are the sole market participants that don’t have access to credit capabilities,” he said. “As a result, they are bound to use their own fund assets, leading to a collateral dry out.”

UCITS funds are considered suitable for retail investors and have been established in accordance with successive European Union directives on undertakings for collective investment in transferable securities (UCITS), which can be freely marketed across the member states.

According to statistics provided by Strategic Insight, an Asset International company, UCITS account for 65% of all portfolios across local European and cross-border mutual funds and 79% of assets under management.

The funds have borrowing limits of 10% of net asset value on a temporary basis, and can’t repackage collateral because of restrictions on the use of assets within other sub-funds.

ESMA’s ‘Guidelines on ETFs and other UCITS issues’ released in December last year has also closed the door on the repo market, with regulator stating cash collateral received by a fund could not be used for clearing obligations.

Perry Braithwaite, adviser product regulation at the Investment Management Association (IMA), said as a result, “UCITS funds are heavily restricted in terms of where they are going to get their collateral from”.

“It’s something that we have raised with the European Commission and ESMA, but don’t know what the outcome is going to be.”

Braithwaite said UK-domiciled funds weren’t as affected as others in Europe, as they were less likely to use repos or OTC derivatives.


EFAMA’s Dessard said the association had also been in touch with ESMA and the International Organisation of Securities Commission (IOSCO), which is currently working on margin requirements for non-cleared OTC derivatives trades that are set to be published by late-August.

He is calling for IOSCO to give funds an exemption on posting initial margin for bilateral trades.

“We are very well aware that there will be changes in the market. We do welcome them in terms of safety, but we are very much under the impression that institutions investors, especially funds, were not taken into account with all the rules that are being prepared and set in place.”

Dessard said if nothing were done, asset managers would shift to “streamlined, plain vanilla instruments”.

“They will no longer finance growth in Europe and small and medium enterprise development,” he said.

LSE to launch Luxembourg CSD

LSE to launch Luxembourg CSD

The London Stock Exchange Group is establishing a new central securities depositary in Luxembourg, building on its existing Italian central securities depository and following previously-outlined plans to compete more aggressively in settlement.

LSE to launch Luxembourg CSD

As part of the stock exchange group’s announcement, JP Morgan confirmed that the group will provide it with settlement, custody and asset servicing as part of its international collateral management business.

In June Financial News reported that JP Morgan and the LSE were teaming up as part of a CSD launch.

The new CSD, which builds on the existing infrastructure of the LSE’s Italian CSD Monte Titoli, will be located in Luxembourg. According to a statement, the CSD will “allow the Group to broaden its customer base as it expands its custody and settlement services”.

The CSD will support clients as the European Market Infrastructure Regulation comes into play across the region. Emir will force the majority of over-the-counter derivatives trades to be cleared through a central counterparty. These CCPs are required to hold collateral assets as an insurance policy against any defaults at a securities settlement system – such as a CSD – where possible.


JP Morgan said it will use the LSE as its CSD in its strategy for Emir. The agreement to use the CSD “enhances JP Morgan’s Collateral Management service”, according to a statement.

Speaking during the LSE’s full-year results call in May, chief executive Xavier Rolet, described settlement as the “next frontier” for the industry, and outlined plans to compete more aggressively in this sector.

In May, he told Financial News: “We see an opportunity to go from being a competitive and successful Italian CSD to a eurozone CSD. Monte Titoli has an opportunity to partner with our customers and provide settlement services, and partnership is something we do well.”

Raffaele Jerusalmi, chief executive of Borsa Italiana and director of capital markets at the London Stock Exchange Group, said in a statement: “The Group is well placed to provide a full range of post-trade services to meet the evolving needs of our customers arising from on-going financial regulatory change and the continued focus on operational efficiency.”


Monte Titoli, which is the third-largest CSD in Europe, will drive the growth of the international custody and settlement business at the LSE. It will provide technology, operational services and access to Target2-Securities – the European Central Bank’s pan-European platform, designed to harmonise settlement – for the new CSD. It is expected to launch in the first half of next year.

–write to and follow on Twitter @SophieBaker_FN

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