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Category 2′s Mad Dash to June Finish Line

May 8, 2013 in Regulations, Risk | Permalink

There are only 33 days left before all the firms that the US Commodity Futures Trading Commission (CFTC) designated as Category-2 entities must central clear the majority of their over-the-counter (OTC) swaps trades and the next four or five weeks and it looks like it will be hellish for more than half of them.

Do not expect anyone working to meet this deadline to attend your Memorial Day barbecue or expect them to have any thoughts on summer blockbusters that opened before June 11.

According industry research firm Celent, 48% of buy-side firms are still looking for clearing or collateral management partners, 24% are almost ready to meet the deadline and 28% are ready to clear trades and handle the new collateral requirements, according to data from the firm’s latest research report Maximizing Collateral Advantage.

Celent analysts interviewed more than 25 Tier-1 (30%), Tier-2 (33%) and Tier-3 (37%) buy-side firms based in Europe (33 %), North America (33%) and Asia (26%) for this study.

A Celent analyst shared these findings during an industry round table on strategic margin management, which Omgeo and DerivSource hosted yesterday.

Although the numbers sounds dire, one round-table attendee estimated that although Category 2 has more members than Category 1 or Category 3 but that those firms trade swaps only three or four times a year. He added that the market already clears most of the OTC swaps volume and has since March 11, when Category 1′s swaps dealers, major swaps participants and active funds began meeting their mandatory clearing obligations.

I’m much better at citing sources usually, but I needed to promise not to quote or identify participants or attendees directly to attend this no-press industry event.

Panelists and attendees also questioned the conventional wisdom that an estimated 2,000 counterparties will need to clear trades. Many thought the figure was closer to 600 and that 2,000 might have referred to sub-accounts, but not financial institutions or legal vehicles.

By the wee hours of June 11, most buy-side organizations will know how well they prepared for the CFTC deadline when the first margin calls start arriving. Those who did a good job of taking into account the added clearing and affirmation expenses will be fine. Those who had not are going to have some real uncomfortable conversations with their supervisors.

If you are in London and want to benchmark your firm’s preparedness against that of your industry colleagues, Omgeo and DerivSource will host the same event locally on May 23. It’s worth a look.

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Alpha Vision Eyes Automated Market Color

January 31, 2013 in Risk, Trading | Permalink

Quietly last quarter, execution management system provider Portware launched its Alpha Vision automated algorithmic strategy optimizer platform.

So far six yet un-named asset managers, two hedge funds and two pension funds are using the new system to develop and execute trading strategies using third-party trading algorithms available to the respective firms.

Once a trader enters a parent order, Alpha Vision analyzes the firm’s historical trade database, or a generic one database provided by Portware, to find similar executions. Then it develops a trading strategy based on this data using 45 different factors in its decision-making process.

Once the trader accepts the strategy, Alpha Vision executes and monitors the strategy’s performance. After each child order transacts, that performance data is fed back into the system to hone the strategy further. If a change is necessary, the platform tweaks the strategy while duly logging those changes.

To prevent the strategy from spiraling out of control if the markets take an unexpected turn, the platform knows when to stop trading and alerts the user. The trader then can instruct the system to develop a new strategy base on the new market conditions and execute the outstanding order against it.

According to Portware CEO Alfred Eskender, Alpha Vision’s early adopters saw the platform updating its trading strategy on average 42 times compared to the typical four tweaks that a human trader might make after the commencing an execution strategy. This difference in strategy monitoring has translated into a 17-basis point improvement in executions done via the platform, he claims.

The offering might sound like a “trading desk in a box,” but Portware officials are quick to refer to it as “more of a co-pilot than a pilot.”

Although the system may not replace the trader, the performance improvements it provides just might alter some commission-sharing agreements as research brokers could use it to improve their executions and attract more direct client order flow, say vendor officials.

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Will Swaps Futures Kill the SEFs?

December 5, 2012 in Current Events, Regulations, Risk, Trading | Permalink

That was the question that I put to TeraExchange CEO Christian Martin, whose firm plans to register as a swaps execution facility (SEF) once regulators complete the SEF-operating rules.

His short answer is “no,” but you can check out his reasoning in a recent profile article that I wrote for The Trade USA.

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Will Kill Switches Drive T+0?

November 21, 2012 in Current Events, Regulations, Risk, Trading | Permalink

The US cash equities market might reach same-day trade guarantees if the US Securities and Exchange Commission (SEC) follows suggestions of the industry working group formed to address to exchange-based kill switches.

The working group, which consists of the major self-regulatory organizations (SROs) , leading market makers, The Financial Industry Regulatory Authority (FINRA) and the Depository Trust & Clearing Corp. (DTCC)’ submitted a comment letter to the SEC before its October 2 Market Technology Roundtable proposing an interesting new role for the DTCC’s National Securities Clearing Corp. (NSCC).

The letter’s authors recommend that the SEC review and decide on two proposals made by NSCC in the in 2006 and 2008. The first proposal, which the NSCC submitted to the SEC, would have locked-in cash-, next-day, seller’s option and equity trades submitted by SROs and qualified special representatives (QSRs) processed by the NSCC’s Continuous Net Settlement (CNS) System.

The second proposal would let the NSCC’ provide trade guarantees on trade date after “comparison for non-locked-in trades or validation for locked-in trades.” According to the DTCC’s statement at the time, it planned to submit a rule proposal change in the first quarter of 2009, but I cannot find the filing.

It makes sense since the NSCC has a holistic view of what trades occurs on all the equity market centers and kill switches will need to make their decisions based on all of a broker’s trades no matter where the broker executes them.

An alternative method would have market centers share each of its member’s transactions among other market centers, which could easily lead to information leakage.

However, how much will firms need to invest in their middle and back offices to deal with the shorter trade guarantee window?

I don’t know.

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SEFCON III: Still Waiting

November 14, 2012 in Current Events, Regulations, Risk, Trading | Permalink

 

Why post a clip from director Peter Hunt’s 1972 movie version of 1776 in a blog post about yesterday’s SEFCON III conference hosted by Wholesale Markets Brokers’ Association (WMBA)?

I could not think of a more appropriate cultural reference that reflects the industry’s frustration and anticipation to have the Dodd-Frank rule making done and dusted. Besides, it’s a great movie that you should watch in its entirety anyway.

The original SEFCON 2010 conference was supposed to be a one-shot deal that brought interdealer brokers together to discuss implementing Dodd-Frank’s Title VII.

At the end of last year’s SEFCON II conference everyone hoped that regulators would finalize all the rules by SEFCON III.

Well, everyone was highly over-optimistic on that one. You could hear the audience roll its eyes as one moderator asked his panel what topics everyone would be discussing at SEFCON VIII.

The event’s speakers and attendees are some of the smartest people on Wall Street, but the answers to too many questions were “We just don’t know yet.”

I chalk it up to poor timing. The US Commodities and Futures Commission (CFTC) and Securities and Exchange Commission (SEC) finalized a number of new rules over the past 12 months, but they are far from finalizing all of Dodd-Frank’s rules.

At least there was a lot of novel discussions on swaps “futurizaton,” thanks to recent actions by the CME Group and the IntercontinentalExchange. Few people thought that the trend would go beyond the energy market, since energy swaps were originally look-a-likes for energy futures.

CFTC Commissioner Scott O’Malia, who moderated one panel, shared on piece of good news when he acknowledge that the CFTC staff recently finished work on the latest five rules, but couldn’t share the details yet. Fellow CFTC Commissioner Bart Chilton, also in attendance, shared his optimistic view on the pace of rule making given its scope.

The audience even heard from two members of the US House of Representatives’ Committee on Financial Services, Scott Garret (NJ5-R) and Jim Himes (Conn4-D), who promised bipartisan effort to clarify Congressional intent for Dodd-Frank.

However, I expect a slowdown in rule making during the lame duck session of Congress as both parties try to avoid taking the US over the fiscal cliff.

After they accomplish that, hopefully, President Obama needs to appoint a new CFTC chairman as Gary Gensler’s terms ends on January 20, 2013.

No one knows how long the confirmation process for the new chairman will take, which means the CFTC could be without its tie-breaking vote for months and further hampering rule making.

I really hope I’m wrong on this one.

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