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.

CalPERS outsources investment management system

CalPERS outsources investment management system

The California Public Employees Retirement System (CalPERS), the largest public pension fund in the US, is outsourcing elements of its investment management system across equities and foreign exchange.

In order to streamline its operations, it has migrated to Charles River’s Investment Management Solution Version 9 for equities and foreign exchange.

It is also migrating to a managed service for hosting, application management, FIX connectivity and real-time integrated data.

The move is part of a wider initiative to update CalPERS technology in order to reduce costs.

Janine Guillot, chief operating investment officer at CalPERS, said: “”Adding these services from Charles River is part of our work to update investment technology infrastructure across the organisation and will help us increase the efficiency of our operations and processes. This saves us time and money, which allows us to more effectively work to achieve the outcomes that our members depend on.”

In a statement, Charles River said investment technology increasingly required specialised skills that most buy-side first find difficult to recruit and retain, which was driving many to seek outsourced solutions.

CalPERS has US$241 billion in assets under management and represents 1.6 million active and retired members.

ConvergEx Group’s LiquidPoint Launches iRBM™ and iRBH™

ConvergEx Group’s LiquidPoint Launches iRBM™ and iRBH™


Published on   Jun 05, 2013


New Intraday, Real-Time Risk-Based Portfolio Margining and Risk-Based Haircut Tools

New York, June 5, 2013 – ConvergEx Group, a leading provider of global brokerage and trading-related services, today announced that LiquidPoint has launched iRBM™ to provide real-time TIMS based portfolio margin estimates and iRBH™ to provide real-time TIMS haircut estimates. The new tools offer more effective intraday capital management and help customers bolster their ability to meet minute-by-minute capital monitoring requirements.

iRBM and iRBH are powered by LDB and built on top of the low latency LiquidPoint BLAZE .net architecture. They allow customers to calculate intraday margin and haircut estimates based on current prices, intraday positions and real-time volatilities. This application service architecture ensures that existing LDB users have a seamless experience in running intraday valuations.

“Market movements, volatility swings and positions changes can alter risk profiles significantly,” said Anthony Saliba, chief executive officer of ConvergEx’s LiquidPoint. “By offering intraday calculations, we are empowering risk managers to identify those positions when it matters most – when it happens.”

ConvergEx’s LiquidPoint offers flexible, customizable and comprehensive solutions, specifically designed to meet the diverse needs of institutional options traders.

LDB develops software that assists financial accounting and regulatory reporting staff within the securities industry to calculate and optimize capital charges, including security haircuts and margins, both portfolio margin and FINRA Rule 4210 option margin requirements.

What the ICE/NYSE Merger Means for the Industry courtesy of the TABB Group

With each passing day, the acquisition of NYSE Euronext by ICE seems more likely to receive final approval. Here are 5 ways the deal will impact the capital markets.

February 15, 2013, marked the end of the Hart-Scott-Rodino Act waiting period in the acquisition of NYSE Euronext by IntercontinentalExchange(ICE). With each passing day, the acquisition seems more likely to receive final approval. As we await the next phase of regulatory approval from the SEC, we wanted to share a few thoughts on how we believe the acquisition will impact current clearing, reporting and trading operations, as well as how the two exchanges can benefit from the merger.

1. Need for Physical Trading Floor

The future format of the NYSE trading floor seems to be on the minds of everyone. There are analyst speculations that ICE’s CEO, Jeffrey Sprecher, will close the trading floor, as was done to the New York Board of Trade in 2012 four years after it was acquired by ICE. However, according to interviews, Sprecher has expressed intentions to keep the physical trading floor intact.

[Related: “It May Be ‘Bye-Bye to the Big Board,’ But the NY Times Should Get Its Story Right”]

Both companies have robust electronic trading, and Sprecher has acknowledged the value of NYSE’s legacy in voice brokering. As technology continues to dominate the exchange space, there has been recognition of the value of voice brokering (by which the NYSE is defined). The market has ironically become too complex to rely only on computer-to-computer trading, showing the physical trading floor still provides an intrinsic value in keeping an orderly marketplace.

2. Impact on Clearing

US-based firms that are major players in the derivative space will benefit by having a local trading and clearing venue, through reductions in clearing costs and operational risks. Typically, coordinating multiple back-office processes and reconciliations between the US and UK calls for duplicate efforts, resulting in back-to-back bookings to flatten balance sheets and delays in handling breaks; having the ability to manage these operational processes will make for a more efficient process.

Title VII of the Dodd Frank Act, which requires central clearing for certain derivatives contracts, has limited NYSE’s presence in the US-based interest rate swaps clearing business. Currently, the NYSE has a small presence in the US-based interest rate swap clearing business, due to a lack of access to a central clearinghouse, now mandated by the Dodd-Frank Act. Through the acquisition, NYSE will be able to benefit from ICE’s presence in European fixed income derivative trading and clearing.

3. Impact on Market Participants

Reductions in clearing costs can translate into cost savings for market participants. Just last year, ICE had to increase its trading and clearing fee due to “regulatory burdens,” and with the merger of NYSE Euronext, ICE will also have to compete with other exchanges on transaction costs. Even if fees increase after the merger, market participants would still fare better than if the two companies operated independently. This newly merged exchange will be able to offer a larger array of products and services, so that market participants can look to fewer companies for trading execution and clearing services, thereby decreasing expenses associated with initial client on-boarding.

4. Impact on Reporting

NYSE’s core data products make U.S. market data free and available, using consolidated tapes, giving transparency to last-sales price and quotes. It also sells its non-core data products to analytics traders, researchers and academics. ICE will be able to leverage NYSE’s experience in data reporting, as it looks to setup its own swap data repository (SDR), in order to meet CFTC mandates for real time swap reporting.

[Related: “Commissioner O’Malia Talks Derivatives Reform: Assessing and Improving the Change”]

ICE has already set up a registered SDR — and the ICE Trade Vault, which will offer both recordkeeping and reporting services for credit default swaps. However, as reporting requirements go live for additional asset classes, it will be necessary to offer data recordkeeping and reporting services to these as well. This is where NYSE’s existing core data products can benefit ICE.

5. Benefits in Merging of Exchanges

Although ICE and NYSE’s product offerings differ vastly, the functions of trading, clearing and settlement demands often overlap, and both are registered with the CFTC as designated contract markets. Efficiencies can be gained when these two exchanges tackle the requirements in swaps reporting and recordkeeping, external business conduct rules and documentation standards in this era of heightened standards for SIFI. As regulatory mandates increase the operating costs for exchanges, it is becoming prudent to explore additional mergers.


TMX Atrium has a wide range of customers including venues, buy side, brokers, clearers, ISVs, market data vendors.

TMX Atrium covers a wide range of the financial community.

Venue City Country
Alpha Trading Toronto Canada
BATS Europe London UK
BATS US Weehwken USA
BME Madrid Spain
BOX Secaucus USA
CBOE Secaucus. USA
CNSX Toronto Canada
Borse de Luxembourg Luxembourg Luxembourg
Burgundy. Stockholm Sweden
CHI-X Canada Toronto Canada
CHI-X Europe Slough UK
CME Chicago USA
Deutsche Boerse Frankfurt Germany
Direct Edge Secaucus USA
Equiduct London UK
FX All Weehwken USA
HotSpot Jersey City USA
International Sec Exchange New York USA
LMAX London UK
London Metal Exchange London UK
Match Now Toronto Canada
Montreal Exchange Toronto Canada
Moscow Exchange Moscow Russia
NASDAQ OMX (Nordic) Stockholm Sweden
Oslo Bors London UK
Nordic Growth Markets Stockholm Sweden
NYSE Euronext (Europe) Basildon UK
NYSE Euronext (US) Mahwah USA
Omega ATS Toronto Canada
Pure Trading Toronto Canada
Sigma-X London UK
TOM Stockholm Sweden
TRAD-X London UK
TSX Toronto Canada
Warsaw Stock Exchange Warsaw Poland

Opacity Through Transparency: Why Traditional TCA Needs to Change

Opacity Through Transparency: Why Traditional TCA Needs to Change
Transactional transparency in the US equities market is higher than ever. But as orders are increasingly sliced, venues fragmented, and timescales compressed, we are no closer to providing clarity into our complex execution process.
Unquestionably, the US equities market is more transparent than ever before. Every order is electronically submitted, routed and matched. Each execution has a unique number, timestamp and audit trail. We know exactly what time orders are submitted, when they hit the trading desk, who they were given to, which liquidity pools they were routed to, their execution times, and how these trades eventually were allocated, confirmed, cleared and settled. Each execution increasingly can be analyzed down the microsecond.

While transactional transparency is higher than it has ever been, however, market opacity is murkier than ever. As institutional orders are sliced and diced into fractional executions, the quantity and granularity of transactional data make it increasingly difficult to tell the forest from the leaves. Though every execution has an audit trail, like the fractured Humpty Dumpty, putting all the pieces back together seems increasingly out of reach.

The inability to put together these pieces degrades traders’ ability to understand the market, their executions, who they are trading with, and how (or if) they are being gamed. TCA is not enough

While Transaction Cost Analytical tools initially helped traders better understand their execution quality, increasingly, traditional TCA tools have no ability to solve the complex challenges created by heavily fragmented, message-overloaded, microsecond-based markets. TCA tools were initially developed to help money managers and plan sponsors more easily manage trading costs and the impact of their investment decisions. While traditional TCA solutions were created to analyze data on a quarterly basis, over the past decade they have expanded to leverage daily data to help traders benchmark their performance against a host of market measures, such as volume weighted average price (VWAP), implementation shortfall (IS) targets, and other standard (or, for that matter, customized) benchmarks.

With larger orders being sliced and diced into hundreds or thousands of child orders, and individual child orders being routed to multiple destinations (which then can subsequently route to multiple locations), a single order can spur thousands of electronic messages as child orders ping-pong around the market looking for the other side.

As trading technology becomes faster, and matching engines migrate from milliseconds to microseconds (millionths of a second), even more messages are needed. In addition, the faster the market gets, the more critical and difficult clock synchronization becomes — synchronizing server timestamps across a non-synchronized execution fabric is a complex technical problem.

Message overload, however, is not the real issue. The challenge is, everyplace a message is sent, footprints are left. These footprints can leak valuable information, which can degrade the execution. To reduce market impact, algorithms and routing engines need to be more sensitive to how orders are sliced and where they are sent, and manage the impact of these small child orders on overall execution quality. Eventually we will be at a point where we can measure this impact in real time and adjust one’s routing strategies accordingly.

In this complex world, measuring transaction cost needs to take into consideration venue analysis. Traders must understand not only which algorithms to use, and how each algo should be set, the technology needs to analyze how each algorithm routes, each venue’s order types, and how these order types either protect or expose that trade to various liquidity sources, as trading venues, exchanges, and dark pools each have their own unique footprint.

For buy-side firms, the level of data needed to analyze these issues may be more data than they can either process or, for that matter, even generate. If a firm does not actively trade a significant number of names, there may not be enough information to obtain a composite picture. Given the number of venues and algorithms, even larger firms may not trade through enough brokers, in enough venues, with enough names to get the full picture.

We once imagined that, if machines could be substituted for paper tickets, the information we could glean from automated data would make us all into better traders. However, not unlike the strategy of obfuscation through data overload, the goal of transparency through automation has brought us no closer than before to providing clarity into the opaqueness of our complex execution process.

Victory, unfortunately, always seems one more step away. But that, I guess, is the nature of progress: Simple answers are few, and solutions are always one more broken eggshell away.

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