Advances in the Technology of Derivatives Trading and Clearing

Jun 8, 2016
Outsourcing Risk Management

JPX Taps Cinnober for Stress-Testing, Back Testing and VaR

The Japan Exchange Group is using Cinnober's risk management product as its new risk management solution and expects it will be rolled out later this year. The system is based on a customized module built on Cinnober’s TRADExpress RealTime Clearing platform. It will provide JPX with a mix of cross-asset risk monitoring, sophisticated stress testing, back testing and value at risk assessments. 

The risk management system covers JPX’s entire market, including equities, bonds, futures and options. JPX already tapped Cinnober to install its TRADExpress clearing platform for the group’s listed derivatives market, which is operated by the Osaka Exchange and cleared by the Japanese Securities Clearing Corporation. 

The twin deals with Cinnober are one more vindication of the strategic turn the Stockholm developer made during the financial crisis. “Before Lehman, clearing technology was based on batch-oriented systems, file transfers and extremely old technology, but when we started, we decided to use our trading technology because we sensed that for clearing in the future, there would be a requirement for extremely fast calculations of risk,” said Nils-Robert Persson, Cinnober's chairman.

In addition to JPX, other Cinnober clearing clients include the Australian Securities Exchange, JSE Limited and Brazil's BM&F Bovespa. Persson said Cinnober is also beginning to focus on adding investment banks. “We still haven’t decided exactly how we will enter that market," he said, adding that developing business in this area may be done jointly with another firm.

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Cultivating Fintech

Deutsche Boerse Invites Startups to Frankfurt 

Fintech startups yearning to breathe rent-free have a new option: Deutsche Boerse is now making fully-equipped rooms available to up-and-coming fintech companies in Frankfurt, Germany, in conjunction with an initiative of the German state of Hesse. 

Beyond real estate, entrepreneurs will also receive on-site support from employees of the Deutsche Boerse Venture Network to help them find financing, build a network and acquire customers. 

More than 60 young companies and 150 national and international investors belong to the venture network. Benefits include introductions to investors and training in working with capital markets.

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Voice Technology

A Crescendo Builds in Voice Communication Investments

J.P. Morgan Chase, ICAP and Barclays see a silver lining ahead for the New York voice communications startup Cloud9. In April, they announced that they had invested in the startup, which has a widely-used cloud-based voice trading platform.

The firm started up two years ago and already keeps 2,000 traders at 350 firms in 21 countries connected. The system is built in the Web Realtime Communication API and is supported by Amazon’s cloud infrastructure. Cloud9 officials estimate the firm's technology could save banks as much as $1 billion a year by moving away from traditional communications systems and telecom services.

In line with other financial technology needs, voice communication infrastructure is migrating increasingly to the cloud. “Soft turrets are clearly the direction of travel for the industry and their security capabilities and compliance functionality are continually improving,” said Sean Charlton, head of voice at Barclays. 

ICAP already uses Cloud9 within its energy teams and J.P. Morgan is working towards implementing Cloud9 this year. Barclays is also reviewing opportunities to use Cloud9 to address cost and technological challenges related to voice trading.

Cloud9 isn’t the only company making advances with digital voice systems. For example, the London- and Chicago-based Green Key Technologies is testing a voice quote capture tool that is intended to help banks and inter-dealer brokers overcome the challenge of new requirements that will soon take effect under the European Union’s Markets in Financial Instruments Directive II. 

Green Key Technologies’ cloud-based, encrypted Voice over Internet Protocol software, GreenKey, replicates the functionality of legacy hardware turrets and T1 lines at a much lower cost, according to GreenKey executives. The company has also announced a new instant messenger aggregator designed to make it much easier for financial market firms to comply with the latest U.S. Commodity Futures Trading Commission rules, which now require instant messaging and chat room conversations to be saved as part of the trading firm’s systemic record.

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Exchange Fee Management

CME, Duco Collaborate on Member Firm Fee Control System

CME Group and Duco Technologies, a global fintech provider, announced in March an agreement designed to help clearing and trading firms manage fee control processes.

As part of the agreement, later this year CME will offer Duco's reconciliation service to its nearly 350 member firms. The system will allow members to simplify processes around fee structures, without having to invest in infrastructure or IT resources. 

“We already have a number of FCM customers using Duco Cube for a wide range of reconciliation and workflow tasks. This partnership will go a long way to help CME Group member firms further improve a crucial element of the trade cycle, paving the way for other data control opportunities,” says Patrick Thornton-Smith, chief marketing officer at Duco.

Duco Cube is designed to keep firms’ back-office systems aligned with CME Group’s pricing components, eliminating manual work and enhancing accuracy between parties.

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Clearinghouse Technology

ASX Chooses Nasdaq to Support Its Post-Trade Technology Overhaul

The Australian Securities Exchange in March announced that it would replace its existing equities and equity options clearing systems with Nasdaq's Genium INET. The move reflects the exchange operator's commitment to consolidate its post-trade platforms, as it already uses Nasdaq's technology for futures clearing.

ASX also went live with Nasdaq's post-trade risk management solution, Sentinel Risk Management. The first phase of this solution, the default management component, is now in operation, and once fully implemented, this platform will provide ASX with a single, real-time risk management system across both of its clearinghouses and all asset classes. 

ASX executives said that moving to Nasdaq systems is not a retreat from the exchange operator's previously announced blockchain investments. “As we’ve said, the potential of blockchain will be explored in parallel to operating our normal post-trade services, including rationalizing platforms and improving efficiencies for customers,” said spokesman Matthew Gibbs in an email. “Moreover, this is about clearing, whereas distributed ledger technology (blockchain) has the potential to transform settlement processes, mainly.”

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High Speed Data

MayStreet Introduces Cloud-Based Data Management Service

Traders now have a new way to collect raw market data and translate it into the formats they need for research and compliance: a cloud-based service introduced in April by MayStreet, a New York startup. 

The cloud-based data-as-a-service system for U.S. equities, options and futures markets is intended to fill the need for both buy-side and sell-side firms to collect high-precision data from each liquidity node in the network and translate and analyze it in a cloud-based computational resource, executives say. 

MayStreet was co-founded by Patrick Flannery, chief executive officer and a former technology specialist of Sumo Capital, and Michael Lehr, chief operating officer, who was most recently with Organic Motion, a software development firm, where he was software architect, principal engineer and VP of Engineering. 

"Our primary goal has been to build foundational tools that would exist in any top-tier high-frequency or marketing-making firm, making them readily available as fast-time-to-market, affordable, modular products,” said Flannery. 

The service is intended to reduce cost, complexity and the infrastructure needed to operate a high-frequency trading company.  

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Options Connectivity

Bloomberg Users Gain Direct Access to CBOE

Users of Bloomberg’s Execution Management System can now send, execute and confirm orders electronically with CBOE floor brokers and other users of CBOE’s PULSe trader workstation.

The direct connection announced in March gives 17,000+ Bloomberg EMSX subscribers direct access to the CBOE PULSe community, creating greater efficiency in trade execution and compliance management, according to CBOE executives. 

The PULSe Execution Management System offers connectivity to CBOE, C2 Options Exchange and CBOE Futures Exchange, as well as other equity and options exchanges in a single platform. Other features include Rule 15c3-5 risk controls, 12-leg complex orders, specialized index trading tickets, and CBOE extended trading hours access.

In addition, EMSX users will have electronic access to the open outcry liquidity in CBOE’s SPX and VIX options, according to Andy Lowenthal, CBOE senior vice president of business development.

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Operational Efficiency

LCH Enhances Clearing Services 

LCH is rolling out a number of enhancements to its clearing services over the coming months that are aimed at enhancing collateral protections and operational efficiencies for its customers.

The U.K. clearinghouse currently offers a range of customer protection options for non-U.S. clients and plans to introduce another option, CustodialSeg, for clients that want a higher level of protection and control. This type of account not only segregates client positions and assets from all other clients, but also allows clients to directly deliver collateral to the clearinghouse. According to LCH, CustodialSeg minimizes "transit risk" of collateral movements and enables a client to continue to deliver margin even after a clearing member default. 

LCH also is working to enhance the process of transferring client positions. John Horkan, head of SwapClear North America, said the clearinghouse is working to make the process of moving positions from one clearing broker to another more efficient by improving its ability to process a large number of positions and accounts on an intraday basis.

Another example of improved efficiency is the introduction of what LCH calls a "clearing broker allocation API." This is aimed at addressing a demand from clearing brokers that handle bunched orders on behalf of their clients. The clearinghouse is introducing a new functionality that will allow clearing brokers to send allocations directly to LCH, rather than relying on the trading venue or a middleware provider.  

LCH also has implemented a new option to the way that variation margin on cleared swaps is characterized. Under its new rules, which have already taken effect for dealers, variation margin paid to the clearinghouse can be characterized as a "settlement payment" from a legal perspective rather than as collateral, in line with the standard practice in futures markets. The change in treatment has the potential to reduce the capital charges for members and, pending regulatory approval, will also benefit futures commission merchants and clients. To provide more flexibility, LCH is working on a system change that will give clearing firms the option to use this method more selectively, rather than applying it to the member’s entire portfolio of cleared positions. 

Also coming soon is the launch of LCH's portfolio margining service called Spider, which will allow SwapClear to reduce the margin on cleared swap positions by offsetting listed futures and swaps positions. Once approved by regulators, the service will be available for eligible futures contracts traded on NLX, the London-based exchange operated by Nasdaq. Later in the year LCH expects to add CurveGlobal, the new interest rate futures exchange set up by LCH's parent, London Stock Exchange Group. Initially the service will be limited to short-term interest rate futures denominated in pounds sterling and euros. The second phase will cover long term interest rate futures such as long gilts, bund, bobl and schatz futures. 

The service will work by automatically transferring eligible futures positions into a SwapClear account whenever there are sufficient offsets on initial margin. The combined portfolio will be margined using LCH's PAIRS methodology, which is a VaR-based system that uses 10 years of market data to run historical simulations and a seven-day close-out period for calculating losses from a client default (five days for members). 

Last but not least, LCH is expanding the range of swap markets that it serves. Earlier this year it announced approvals from regulators in Japan and Singapore that will allow it to offer its clearing services to local banks and other entities in those jurisdictions. In the case of Japan, LCH was the first overseas clearinghouse to receive a license to offer clearing of interest rate swaps directly to Japanese banks, rather than their international subsidiaries. 

Next up is Mexico. Horkan said customers in the U.S. are asking for LCH to support the clearing of interest rate swaps denominated in Mexican pesos. LCH is now seeking regulatory approval for this expansion, which would bring the number of currencies covered by SwapClear to 18. 

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Data Acquisition

ICE Buys S&P Pricing Units

Intercontinental Exchange in March announced plans to acquire two data businesses from McGraw Hill: Standard & Poor’s Securities Evaluations, a provider of fixed income pricing, and Credit Market Analysis, a business that provides independent data for the over-the-counter markets.

The acquisition will enable ICE to offer its customers additional data and valuation services. “With rising demand for independent data in the global fixed income and credit markets, this transaction will support the need for innovation and increased risk management and valuation services,” said ICE Chairman and CEO Jeffrey Sprecher.

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