Image

@Markets

Advances in the Technology of Derivatives Trading and Clearing

Jan 8, 2016
Market Innovation

Sandor Builds Exchange for Bank Loans

Small and mid-sized banks now have an electronic marketplace to lend and borrow short-term funds. Launched in December, the American Financial Exchange will focus on serving the overnight and 30-day borrowing needs of 1,740 community and regional banks in the U.S. This represents institutions that manage between $500 million and $125 billion in assets in a total market of nearly $5 trillion.

AFX is the latest brainchild of Richard Sandor, chairman and CEO of Chicago-based Environmental Financial Products and a driving force behind the development of futures based on interest rates and carbon emissions. CBOE Holdings will host the exchange and Sandor will serve as chairman and CEO.

Currently, small and medium-sized banks arrange their overnight and short-term loans by telephone, according to Sandor. AFX was designed to bring the exchange model of standardization, transparency and a rules-based process to interbank lending while helping to reduce transaction costs through an electronic market.

Beyond adding more transparency and competition into the market, Sandor hopes to introduce a new interest rate benchmark, the American Interbank Offering Rate, or Ameribor. “London has Libor, Europe has Euribor, even China has Chibor, yet there is no interest rate benchmark in the U.S.,” he said.

As the rate will be set based on the outcome of a weekly auction for a 30-day loan, Sandor said that AFX sidesteps the problems with manipulation suffered by the London rate. “We hope that we can get people to have a high degree of confidence because it is competitively determined as opposed to being set by some consensus based on no transactions,” he said.

Small banks’ funding costs don’t always track Libor and other better-known interest rate benchmarks, according to Sandor, who argues that Ameribor will help them eliminate this basis risk. “That’s the real economic driver here,” he explained.

Once auction volume grows beyond $100 million, Sandor predicted that Ameribor will be a reliable measure of actual rates in the market. “I think when we get from $100-500 million traded in each auction we’ll be confident that the rate is effective of the funding costs,” he said.

 

Navigate to Top

Commodity Arbitrage

Sucden Financial Adds Spreader Tool to Trading Platform

Trading Shanghai versus London in the copper market? Sucden Financial wants to help. The London-based broker has added a spread trading functionality to its Star trading platform for futures and options, which was developed in-house. The company said its dynamic spreader tool will make arbitrage in commodity futures markets easier to execute by allowing users to create and trade synthetic spreads within a single exchange or across exchanges. For example, traders can trade the premium between raw and refined sugar on Intercontinental Exchange by simultaneously buying sugar No. 11 futures and selling white sugar futures. To mitigate legging risk, the spreader releases orders in clip sizes that can be set by the trader.

Navigate to Top

Market Data

Interactive Data Adds Energy and Swaps 

Interactive Data, the global financial market data platform recently acquired by Intercontinental Exchange, now includes more data on energy markets and swaps trading.

The company announced a partnership with Platts in November that will enhance the energy data available through its FutureSource service. Platts data on biofuels, carbon emissions, coal, electricity, oil, natural gas, metals, nuclear power, petrochemical, shipping and sugar markets are now available. 

Also in November, IDC announced a partnership with Global Trade Repository Analytics, a recently developed service that collects and aggregates data from the four principal swap data repositories: Bloomberg, CME Group, Depository Trust & Clearing Corporation and Intercontinental Exchange. GTRA was developed by Iason, an Italian company that specializes in providing risk management solutions for derivatives.

Under the terms of the deal, IDC will redistribute GTRA data to its clients, providing them with access to a single source for swap trading data. IDC explained that accessing and collating these data from each of the four SDRs is a time and resource-intensive process, even before the more complex and costly challenge of analyzing and categorizing the data begins. GTRA aggregates and normalizes the data, making it more accessible for trading and regulatory compliance purposes.

Navigate to Top

Capital Optimization

Eurex Clearing Launches Prisma Margin Estimator

Eurex Clearing in November launched its Prisma Margin Estimator, a free service that allows clearing members and their clients to estimate initial margins for futures, options and swaps. The service was designed in collaboration with OpenGamma, an open source risk systems developer, and will run in parallel with the clearinghouse's existing margin calculator. 

One key difference with the existing calculator is that the new service applies the clearinghouse's Prisma margining methodology, which is based on a more advanced approach to estimating risk. The service can estimate margin for existing or hypothetical portfolios of positions and can be used to estimate the potential margin offsets from combining listed and OTC positions. 

Another key difference is that the service is designed to be integrated into a participant's technology infrastructure, rather than running on the clearinghouse's infrastructure. In other words, it allows users to calculate margin without sending trades or positions to external servers or calculation engines. "No confidential information has to leave the building," Eurex Clearing said. 

Eurex Clearing stressed that the new service will help clearing members and their clients in assessing margin requirements as part of their pre-trade analytics and in identifying potential trades that lead to significant margin changes.  

Navigate to Top

MIFID Readiness

Orc Builds Reporting Solutions

The effective date for European Union’s new derivatives rules is more than a year away, but Orc is hard at work developing technology to help traders comply with the Markets in Financial Instruments Directive II and the new Markets in Financial Instruments Regulation. 

Jonas Hansbo, the company’s chief strategy officer, explained that the new rules will have significant implications for any firms with trading activities in the European Union. “Our MiFID II initiative will help ease the regulatory burden on Orc clients so that they can focus on trading and business essentials,” he said. 

For example, MiFID II calls for a significantly increased volume of regulatory reporting and monitoring, resulting in a significantly increased data collection workload. In response, Orc has formed a partnership with OneTick to create new data management and analytics capabilities. 

Orc will integrate these new capabilities in a fully hosted and managed solution called Orc Analyst. This solution will collect and consolidate order and trade data to secure fully compliant reporting and monitoring. Orc Analyst will be compatible with existing trading solutions, including not only the company’s own software but any other system enabled for FIX drop copy of orders and trades in real time. This will enable firms to stay on top of all MiFID II requirements regarding market abuse, reporting and execution quality. 

Navigate to Top

Market Surveillance

CFTC Taps Private Sector for Risk Monitoring Tools 

Two technology vendors, GlobalRisk and Interactive Data, are collaborating on a project to help the Commodity Futures Trading Commission improve its ability to assess and monitor market risk exposures in real time. The CFTC will use software from GlobalRisk to run stress tests and analytics on market data provided by IDC, giving the agency an improved ability to calculate intra-day risk exposure metrics for listed futures and options. 

“When GlobalRisk was awarded this contract, I knew that a project of this scope would require our best real-time risk management software paired with high-quality market data. We found our answer with Interactive Data,” said Steven Probst, chief executive officer and president of GlobalRisk. “We are very pleased to have been chosen to assist the futures industry as it seeks to advance real-time risk management to new levels of real-time transparency,” he added.

GlobalRisk provides risk management software for trading firms, brokers and clearing firms in derivatives markets. Its software works by capturing real-time price and transaction data, combining that with positional data and other data, and then performing stress tests to examine the potential impact of various market moves and volatility shifts on portfolio values. The software also can generate risk alerts based on a number of parameters, including the dollar value of portfolio risk, profit and loss measures, option Greeks, and trade and position quantities. 

Navigate to Top

Trading Technology

Bloomberg Tradebook Updates Futures Trading Capabilities

Bloomberg Tradebook in December announced several upgrades to its multi-broker platform for trading futures. Enhancements include new blotters that enable traders to quickly filter, sort and view data in a range of ways. The company also upgraded its order stitching functionality was also upgraded so that users can automatically combine bundle trades and execute as a single order without having to break up the order post-trade into the separate components.

"The enhancements we’ve made to our Futures ISV platform is one example of how we continually strive to make it easier for traders to move from idea generation to activation," said Glenn Lesko, chief executive officer of Bloomberg Tradebook. "Our Futures ISV platform enables our clients to trade on 35 futures exchanges and with more than 50 brokers across the world—all from a single integrated desktop."

Bloomberg Tradebook is an agency broker that provides direct market access, market insight, independent research and innovative technologies through the Bloomberg Professional service. The company also provides access to a number of futures-specific trading algorithms and other workflow tools. 

Navigate to Top

Trading Technology

Bloomberg Revamps Futures Trading Service

Bloomberg Tradebook in December announced several upgrades to its multi-broker platform for trading futures. Enhancements include new blotters that enable traders to quickly filter, sort and view data in a range of ways. The company also upgraded its order stitching functionality was also upgraded so that users can automatically combine bundle trades and execute as a single order without having to break up the order post-trade into the separate components.

"The enhancements we’ve made to our Futures ISV platform is one example of how we continually strive to make it easier for traders to move from idea generation to activation," said Glenn Lesko, chief executive officer of Bloomberg Tradebook. "Our Futures ISV platform enables our clients to trade on 35 futures exchanges and with more than 50 brokers across the world—all from a single integrated desktop."

Bloomberg Tradebook is an agency broker that provides direct market access, market insight, independent research and innovative technologies through the Bloomberg Professional service. The company also provides access to a number of futures-specific trading algorithms and other workflow tools. 

Navigate to Top

Portfolio Margining

LCH.Clearnet Launches Spider to Cut Rates Risk

LCH.Clearnet is gearing up to launch Spider, a new portfolio margining tool that will reduce margin requirements for interest rate derivatives by looking for offsets between listed and over-the-counter positions. 

The U.K. clearinghouse, which is seeking regulatory approval to launch Spider early in 2016, said the tool can analyze a clearing member’s portfolio and automatically identify combinations of listed and OTC positions that have offsetting risk exposures. The listed positions are then transferred to the OTC portfolio for offsetting. 

LCH.Clearnet’s SwapClear is currently the leading clearing service for OTC interest rate swaps, but lacks a presence in the interest rate futures market. To address that issue, it is working with Nasdaq NLX to include its eligible futures contracts. It also expects to include CurveGlobal, the futures exchange that London Stock Exchange Group expects to launch in the first half of 2016. 

To use Spider, clients need to be clearing-eligible at LCH.Clearnet for both OTC and listed rate trades. Clients also need to ensure that they are using the same clearing member for both products. Behind the scenes, the clearinghouse has created a single default fund with two margin classes. Inclusion in margin class is based on where cleared positions are being margined, with a default waterfall structure in place to reduce exposures between margin classes.

Navigate to Top

Fintech Investing

Deutsche Boerse and Markit Back New Illuminate Fund

Deutsche Boerse and Markit are stepping up their investments in the financial technology sector via a fund established by Illuminate Financial Management, a London-based venture capital fund focused on early-stage fundraising for financial technology companies.

In November, Illuminate announced that the two companies were the lead investors in the new fund, which will focus on providing seed capital for early-stage companies in areas such as compliance, regulation and connectivity. 

“Investing with Illuminate gives us deep insight into technologies and pioneering business models in our space,” Lance Uggla, Markit’s CEO and founder, said in a press release. “We look forward to collaborating with Illuminate to advise investee companies as they refine their business models and define their go-to-market approach.”

Illuminate was founded in 2014 by Mark Beeston, former head of the post-trade risk business of ICAP. The firm’s portfolio includes: CloudMargin, a collateral management solutions company, Open Gamma, an open source risk-systems developer, Duco, a hosted reconciliation services provider, Enso, a provider of data-driven investment and operational insights for hedge funds and prime brokers, and Droit, a provider of trading decision engines for OTC derivatives.

Navigate to Top

Equity Derivatives

CME Expands Basis Trade Facility

CME Group has expanded the range of products covered by its “Basis Trade at Index Close” facility, a move aimed at addressing the needs of institutional investors. 

In November, the exchange added three of its most popular equity index futures to the service: E-mini S&P 500, E-mini Nasdaq-100 and E-mini Dow ($5) Index futures. That complements a range of equity index futures already available for BTIC trading, including sector index futures and several FTSE Russell futures that were listed on CME in October. 

BTIC transactions enable market participants to execute a basis trade relative to the official close for the underlying index. For institutional investors, that results in more efficient cash management, according to CME.

The exchange also moved in November to expand the options for executing BTIC trades. The trades previously could only be executed as block trades, but now nine of the more liquid contracts can also be executed on Globex, the exchange’s electronic trading platform. Nine brokers, including Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs and UBS, are currently listed by CME as market makers for BTIC trades. 

A BTIC transaction is entered into via a basis expressed in discrete index points, where the executed trade price is the total number of index points to be applied to the official close price of the underlying index. In essence, a BTIC transaction provides the ability to trade the future at a price understood to be the theoretical equivalent of the official cash index close with given assumptions on dividends and all-in implied financing to maturity.

Navigate to Top