A Roundup of Key Business, Technology and Regulatory Developments

Jan 8, 2016



Efforts are underway in Europe and the U.S. to strengthen industry protections against attacks on computer systems. Regulators in both regions are developing new standards for exchanges and clearinghouses, which are seen as critical to the operational security of financial markets.  

Meanwhile, at the international level, the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions published a joint consultative report on "cyber resilience for financial market infrastructures." The report seeks public feedback on a set of proposed guidelines for financial market infrastructures to enhance their cyber resilience. The guidance covers five primary risk management categories: governance; identification; protection; detection; and response and recovery.  

Greg Medcraft, the chairman of IOSCO, commented that the development of this guidance reflects "an urgency" among regulators to address the increasing risks that cyber threats pose to financial stability. "Cyber resilience cannot be achieved by individual institutions alone in our highly interconnected financial sector. The broader ecosystem needs to work in unison," Medcraft said. "We hope to collaborate with all stakeholders to meaningfully enhance the cyber resilience of our financial system as we refine these proposals and later implement them."

In Europe, the European Parliament and Council Presidency reached an informal agreement on the Network and Information Security Directive at the beginning of December. The new directive, which has been in discussion for nearly three years, will require operators of essential services in the banking, financial markets (trading venues and central counterparties), energy, transport, healthcare, water supply and digital infrastructure sectors to take appropriate security measures and to notify serious incidents to the relevant national authorities.  

Additionally, each Member State will have to designate one or more national authorities to deal with cyber matters, set out a national cybersecurity strategy, and cooperate with other EU countries. Once the agreement has been officially approved by the Council and the Parliament, Member States will have 21 months to adopt the necessary national provisions and a further six months to identify their essential services operators.

In the U.S., the Commodity Futures Trading Commission is taking the lead in setting standards for financial market infrastructures. On Dec. 16, the CFTC issued proposed rules establishing cybersecurity testing and system safeguard requirements for market infrastructure providers such as exchanges, clearinghouses and swap data repositories. The CFTC also issued an advanced rulemaking to determine how certain aspects of the cybersecurity proposals should apply to swap execution facilities.  The proposals call for cybersecurity testing in several areas. These include vulnerability testing conducted at least quarterly, internal and external penetration testing, security incident response plan testing, enterprise technology risk assessments conducted at least annually, and controls testing at least once every two years. Controls testing is expected to be the most challenging as most organizations do not have formal controls testing in place, according to PricewaterhouseCoopers.

"The proposed rule that we are issuing today is an important step toward enhancing the protections in our markets," said CFTC Chairman Tim Massad. "It builds on our core principles, which already require clearinghouses to focus on system safeguards, by setting standards consistent with best practices. It requires robust testing of cyber protections, setting forth the types of testing that must be conducted, the frequency of testing and whether tests should be conducted by independent parties. In addition, it enhances standards for incident response planning and enterprise technology risk assessments," he said.

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Leverage Ratio

Mark Carney, Governor of the Bank of England, raised concerns about the impact that the Basel III leverage ratio calculation for segregated customer margin will have on client clearing.  

Speaking during an appearance before the European Parliament's committee on economic and monetary affairs, Carney warned that if the leverage ratio calculation restricts the willingness of clearing firms to provide clearing services, "then we are not getting the full benefits of the system." He asserted that this issue should be a top concern when implementing the new capital standards.  

"There are few unintended consequences of regulation at the international level. This is one that does need to be considered and we will be considering it through the appropriate Basel processes," Carney said in response to a question posed by Committee Member Kay Swinburne.  

In related news, U.S. regulators expressed conflicting views on the leverage ratio issue at a Congressional hearing on Dec. 8. Tim Massad, the chairman of the Commodity Futures Trading Commission, stated that the Basel Committee should reconsider the treatment of customer collateral and recognize that it reduces a clearing firm's exposure to a clearinghouse. In contrast, two senior banking regulators defended the current treatment and emphasized the importance of maintaining strong capital ratios.

The comments from the U.S. regulators came in response to questions from Representative Frank Lucas, a Republican from Oklahoma, who warned that the current treatment would reduce the number of firms available to clear trades for agricultural, energy and other commodity end-users.


Concerns over Leverage Ratio Calculation in Basel III Capital Requirements from MarketVoice on Vimeo.

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Big Data

In October, Intercontinental Exchange agreed to acquire Interactive Data for $5.2 billion, making it the third-largest data provider in global markets.  

Interactive Data, based in Bedford Mass, is one of the world's leading providers of financial data, serving more than 5,000 banks, hedge funds, asset managers and other customers. The company provides pricing, reference data and trading solutions, and has an expertise in "evaluated pricing" for securities such as bonds and swaps that are thinly traded and hard to value.

“Interactive Data is a cornerstone in ICE’s strategy to provide more data and valuation services to our customers around the world,” Jeff Sprecher, ICE Chairman and CEO, said in a statement after the deal closed. “This acquisition strengthens our expertise and ability to meet the rising global demand for financial data and analysis. We look forward to building on their track record of growth, while delivering strong value to our shareholders by leveraging our experience in integration, technology and markets.”

In a November conference call with ICE shareholders, Sprecher said buying IDC will help the company target several broader trends that are affecting a wide range of markets. These include "the increasing need for more information to optimize capital efficiency" as a result of new rules that require more capital on bank balance sheets and collateral on all risk positions. In addition, as markets fragment in response to new regulations, Sprecher said he expects there will an increasing demand for valuation services provided by companies like IDC. 


Jeff Sprecher, Chairman and CEO Intercontinental Exchange from MarketVoice on Vimeo.

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IDB Consolidation

ICAP in November entered into an £1.1 billion ($1.63 USD) agreement to sell its brokerage business to Tullett Prebon. Although ICAP will retain some ownership of the combined company, the move marks a decisive shift away from ICAP's origins as a voice broker. Going forward, the company will focus primarily on two main lines of business: post-trade services and electronic markets.  

The new ICAP will look more like a markets infrastructure company like CME Group or Deutsche Boerse than a conventional inter-dealer broker. The company will operate two large electronic markets, EBS and BrokerTec, and will provide various post trade processing and risk management services through subsidiaries such as Traiana, TriOptima and Reset. The new ICAP also will retain Euclid Opportunities, which functions like an internal venture capital fund and owns small stakes in several emerging financial technology companies.

“ICAP NewCo will emerge from this Transaction as a pure post-trade services and electronic trading group," commented Michael Spencer, ICAP's chief executive. Spencer added that this deal is the "next natural step" in the company's evolution, and will position the company "to capitalize on the increasing demand for electronic and post trade products and 

The merged brokerage business will rank as the largest player in the broking of derivatives and other financial products, with more than 5,000 staff and leading positions in a wide range of financial products. John Phizackerley, CEO of Tullett Prebon, said the deal will deliver "significant cost synergies" and gives the company "greater client and product coverage and a stronger global footprint." 

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Uncleared Swaps

The Commodity Futures Trading Commission on Dec. 16 approved a final rule setting margin requirements for uncleared swap transactions. The final rule will be phased in beginning with initial margin requirements taking effect between September 2016 and September 2020, depending on the size of the participants. The rule also requires daily variation margin for trades among swap dealers, major swap dealers and financial end-users that have more than $8 billion in gross notional exposure. The rule applies to companies that are registered with the CFTC as swap dealers or major swap participants but are not subject to regulation by prudential regulators such as the Federal Reserve, the Office of the Comptroller of the Currency, or the Federal Deposit Insurance Corporation. Those regulators in October approved similar requirements for the companies under their supervision.

The CFTC rule was approved by a vote of 2-1, with Chairman Tim Massad and Commissioner Chris Giancarlo voting in favor and Commissioner Sharon Bowen voting against. Bowen explained that she opposed a provision in the rule that exempts swap transactions between affiliated companies from initial margin requirements. She noted that this provision is not consistent with margin rules set by prudential bank regulators as well as international standards and warned that it could become a "loophole" in the protections against a swap dealer default.  

Massad defended the exemption as a "sensible" approach to the risk posed by these trades and explained that the final rule contains an "anti-evasion standard" to prevent inter-affiliate transactions from being used to avoid the margin requirements. "Inter-affiliate transactions are not outward-facing and thus do not increase the overall risk exposure of the consolidated enterprise to third parties," he said. "Imposing the same third-party transaction standards on these internal activities of consolidated entities is likely to significantly increase costs to end-users without any commensurate benefit."


CFTC Commissioner Sharon Bowen on Margin for Uncleared Swaps from MarketVoice on Vimeo.

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Market Transparency

The Commodity Futures Trading Commission on Dec. 22 asked for public comment on draft technical specifications for how swap trades are reported. The CFTC said the effort is intended to improve the quality of swap transaction data and ensure that the data it receives are "accurate, consistent and timely."

The request for comment seeks public input on 80 questions on 120 "data elements" and sets a deadline of Feb. 22 for responses. The data elements include information about transaction counterparty, price, clearing, product, periodic reporting, orders, package transactions, options, additional fixed payments, notional amount, events, rates and foreign exchange. The technical specifications for these data elements include descriptions, allowable values and formats, and focus primarily on three asset classes: interest rate, credit and foreign exchange.

The CFTC noted that some of these swap data elements are already reportable under Part 45 and related provisions of the Commission's regulations, but others are not. The CFTC explained that it views these additional data elements as having the potential to assist the agency in fulfilling its regulatory mandates, including "systemic risk mitigation, market monitoring and market abuse prevention." 


Tim Massad Keynote Address at FIA Expo 2015 from MarketVoice on Vimeo.

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