Federal Reserve Vice Chairman Stanley Fischer

Speaking before German Finance Ministry and Bundesbank officials earlier today, Federal Reserve Vice Chairman Stanley Fischer warned his audience that non-bank are less vulnerable than they were during the global financial crisis, but now is not the time to relax.

“Regulation is a ‘cat and mouse’ game,” said Fischer. “Regulators need to respond to existing regulatory gaps and to keep pace with further changes. We hope we will succeed in doing so. But we know that we will never be able to identify in advance all of the threats to stability that are out there.”

The dearth of non-bank data hampers regulators from monitoring the stability of financial institutions and the financial system effectively, he added. “Outside of the banking system, we have only limited information on leverage and maturity transformation rather than precise estimates for all types of non-bank entities.”

However, Fischer has seen an increase in the volume of data that the Fed receives, but the central bank still needs to know the scope and size of hedge-fund and other non-bank activities.

“We need to be alert to changes and trends in the financial system that may pose risks to financial stability, particularly those stemming from areas of the non-bank sector that are not subject to prudential supervision,” he explained.

Fischer cited mutual funds that track the return on leveraged loans, credit default swaps, and other less liquid assets as an example. “These funds offer daily or even intraday liquidity to investors while holding assets that are hard to sell immediately, thus making the funds vulnerable to liquidity risk.”

This maturity transformation remains a key vulnerability as many non-bank financial firms rely on the secured short-term funding markets to finance their activities, according to Fischer.

“Many of the firms that rely on this maturity transformation are highly leveraged and thus more vulnerable to threats to their solvency. The proposed international framework being developed by the Financial Stability Board for margins on securities financing transactions may be an important tool for limiting the pro-cyclicality and sharp deleveraging that can occur in these markets.”

William Goodbody headshot

Bill Goodbody,
BATS Global Markets

Since completing its acquisition of Hotspot institutional foreign-exchange (FX) market earlier this month, BATS Global Markets officials have not let the grass grow under their feet.

The global exchange operator plans to deploy an instance of its Hotspot matching engine in its Slough facilities later this year.

“We plan to move swiftly with this project to meet the demand from European customers,” said Bill Goodbody, senior vice president, foreign exchange at BATS.

The new matching engine will target the currencies that dominate trading during European and Asian market hours while the original matching engine, which is based in northern New Jersey, will continue to support the North American FX market.

BATS has no immediate plans to deploy a third instance of the Hotspot matching engine specifically for the Asian markets.

“We’re focussing on getting Europe really motoring, and then we’ll look to other regions,” said a BATS spokesperson.

BATS first announced its planned $365 million acquisition of Hotspot from KCG Holdings on January 28 and completed the deal on March 13.

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Author Khaled Aly argues that hardware-based decimal-floating-point arithmetic (DFPA) offerings deliver better FPGA performance for low-latency trading than native binary floating-point arithmetic or software-based DFPA.

Via EE Times.

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Start-up electronic fixed-income trading venue operator Electronifie plans a novel way to bring liquidity to its order-driven market for US corporate bonds, which should launch sometime this quarter.

The vendor’s all-to-all platform consists of a displayed limit-order book and a separate non-displayed mid-point match venue for large-block trades in the 1,500 to 1,700 most liquid CUSIPs from the 300 largest distinct issuers, according to company officials.

Electronifie’s limit-order book will display live executable orders from un-named designated market makers ranging from the $200,000-minimum order size to more than $1 million, officials expect.

Of the three designated market markers already signed by the start-up, “one is bulge-bracket dealer; another has electronic-trading encoded in its DNA; and the third is boutique dealer,” says a spokesperson.

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Traders magazine has published a short piece on whether brokerages could meet the 50-millisecond drift window for their server clocks proposed by FINRA.

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