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5 Trends Resulting from the Regulatory-Driven Changes to the Markets

By Sol Steinberg, OTC Partners
Originally published on TABB Forum

The biggest regulatory reforms in decades have resulted in major changes in how financial products are traded, settled, collateralized and reported. While the changes have brought about challenges, they also have ushered in opportunities for both buy-side and sell-side firms. But changing business models will need to be supported by corresponding changes to business processes and systems.

The financial markets have undergone dramatic change. While some of this is the result of natural evolution, much of the change can be directly attributed to post-crisis regulation. The combination of the Dodd-Frank Act, EMIR, MiFID II and Basel III signify the biggest regulatory changes in decades. These reforms resulted in major changes in how financial products are traded, settled, collateralized and reported, resulting in deep structural changes to the markets.

1. Sell-Side Exits Bring New Buy-Side Business Opportunities

Under these new regulatory conditions, sell-side institutions have faced the biggest changes to how they do business. The bulk of the new regime is focused on monitoring global, systemic risk in financial systems, and the sell-side acts as the global network for financial transactions. Sell-side firms’ interconnectedness makes them a linchpin, and also requires that they make the greatest reforms.

This change can create new business opportunities for technology providers and third-party risk managers willing to help put those reforms in place. On the buy side, as certain business lines become uneconomic for sell-side players, hedge funds and others can step in to do those transactions.

2. Quest for Higher Yield

On the investor side, new regulations, coupled with slow economic growth and central bank intervention, are making yield hard to come by.  As investors consider their options, alternative investments are gaining ground. These investments are riskier, and sometimes more exotic, but promise the returns investors are hoping for. 

However, as investors shift over to actively managed funds, they will need best-of-breed analytics and new technologies to effectively monitor and risk manage their portfolios. As they adopt these technologies in-house, investors also demand the same of the managers they invest with. In order to adapt, managers will have to be able to show how they actively monitor investments through enhanced disclosures and other technology enabled analytics.

3. Technology Transforms Margin Challenges into Opportunities

Taken together, all of this will require funds to make a significant investment in operations. To be profitable, firms will need to select execution platforms based on independent comparison of cost of funding margins, over the life of trades. Regulation-imposed changes in market practices call for sophisticated analytics and superior operational capabilities.

Successful models ensure profitability by factoring in all costs of executing trades, including value adjustments for counterparty risk, costs of funding margins (initial and variation), as well as cost of capital. Better operational capabilities ensure consistent analysis across the organization and more efficient business processing.

In the past, managing margin requirements was a reactive task, performed at the end of the trading cycle, and done within administrative and back-office operations, usually manually. Today, the buy side is turning to new technology to give firms a complete, front-to-back view of their global collateral assets to allow them to assess multiple sourcing and funding options in real time.

4. Technology Trends

Leading investment managers are examining integrated front-to-back systems that provide a complete solution for analytics, trading and risk. The trend is to optimize and streamline the entire workflow, to ensure greater trade transparency and enterprise-wide reporting.

Characteristics of these systems include:

  • A single technology solution for analytics, trade capture and enterprise risk control, with coupling between front-, middle- and back-office functions.

  • Straight-through processing that starts from trade execution all the way through to central clearing.

  • Independent margin calculation and swaps portfolio pricing tools.

  • Reconciliation tools that account for margin call discrepancies, either at the CCP or clearing intermediary level or both.

  • Transaction Cost Analysis (TCA) tools that can incorporate data from the trading process as well as integrating back office data into the trading process.

5. Systems Rethink

Improvements in the technology available to fund managers are enabling this kind of total systems rethink within organizations.  In order to take full advantage of this enhanced technology, the buy side will have to take into account these key considerations:

  • Cross-asset, multi-strategy support

  • Integrated analytics, trading and risk platform

  • Robust risk management and control

  • Operational efficiency

  • Business intelligence and transparent reporting infrastructure

  • State-of-the-art technology

  • Low total cost of ownership (TCO)


The credit crisis, and the regulatory response it spawned, have fundamentally reshaped financial markets. While the changes have brought about challenges, they have also ushered in opportunities. Buy-side firms should look to re-architect their processes and technology infrastructure, with a goal to strengthen risk control and oversight, enhance transparency, and improve efficiency of front-to-back office control functions.

Changing business models will need to be supported by corresponding changes to business processes and systems. As with every major structural change, organizations that can understand and implement these new realities quickly will benefit the most.  However, funds shouldn’t rush toward the newest technology without having clear goals in place that align the interest of the firm with the interests of investors and regulators. Looking closely at the key considerations outlined above will help to ensure that any change fits within the organization’s broader goals.


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Swap Data Risk Rising – Q&A with DTCC’s Marisol Collazo

Marisol Collazo knows a thing or two about data quality.  As the CEO of DTCC’s Data Repository, she’s responsible for warehousing trade data and related information from over 5,000 clients representing about 100,000 accounts around the globe, in the Americas, Asia and Europe.  So, when she said she was worried about the potential systemic risks that could arise from the current manner in which data is reported to swap data repositories (SDRs), it got our attention.

We spoke with Collazo about the current state of swap data reporting, to get her views on what she notes is a lack of global harmonization on data reporting standards, which could create systemic risk.

DerivAlert: Could you tell us a bit about DTCC’s role in swap data reporting?

Marisol Collazo: DTCC has been aggregating and standardizing swaps data since long before it was ever required by Dodd-Frank.  We launched our Trade Information Warehouse for credit derivatives in 2003 and by the time of the financial crisis, we already had 99% of the world’s credit derivatives swaps trade data accounted for.  In fact, this data was used following the collapse of Lehman Brothers to quickly establish the firm’s exposure to the credit default swap market.  Original estimates were as high as $400 billion notional, but our Trade Information Warehouse records proved it was actually $5.2 billion, which helped to calm financial markets.

Now, post Dodd-Frank, our role is to collect swaps data for all asset classes prescribed by regulation for thousands of institutions worldwide. Essentially, we enable market participants to report trade information and provide this data to regulators and the public to create market transparency.

DA: What’s changed from when you were collecting data for the Trade Information Warehouse and now that you are collecting data as an SDR under Dodd-Frank?

MC: The biggest difference is that when we were collecting data for the Trade Information Warehouse, the trades were standardized and payment processing was facilitated from matched records, so there was absolute certainty that the data was accurate. Today, under Dodd-Frank, the required reporting fields and scope of products is broader and doesn’t necessarily tie into existing market structure. It’s a much more fragmented process due to regional differences and absence of standards. Unlike the Trade Information Warehouse, which is self-policing when it comes to accuracy, as money moves on matched records, in the new scenario we’re collecting data but don’t have the information to determine if it’s correct or otherwise. The only people who can be relied on to ensure the information is accurate are the contributing entities themselves. 

DA: Can you give us a scenario in which this lack of a system of checks-and-balances could become a problem?

MC: When we talk about data quality, we have to first start with a definition.  All data quality initiatives have two parts: 1) standards and validation, and 2) accuracy of content.  We have part one covered under Dodd-Frank as it relates to some fields.  There are standards that have emerged to support reporting, such as FpML, LEIs (Legal Entity Identifiers), ISDA product taxonomies, and trade IDs (also known as Unique Swap Identifiers), that allow the marketplace to quickly identify the data field and the value of the trade, and if it all checks out, we accept the record and move on.  But you also need the second part.  It is still possible today to provide a valid LEI, but have an incorrect counterparty name, or provide the right values and still give the wrong notional outstanding. There is no external information available to validate that data, which can only be confirmed by the counterparties to the trade.

DA: So, what’s the solution?

MC: Data quality needs to be everyone’s responsibility. Right now, the SEC places the responsibility for data accuracy predominately with the trade repository, which cannot possibly know if all of the data is accurate. So there’s an inherent problem in the current process.  Regulators need to support and promote global standards to enable market participants and trade repositories to establish stronger validation controls, which will allow data providers to implement standards and validations in their systems to support data quality.  Further, regulators should be conscious of the market structure that delivers data to the repository, and promote policies that will enable repositories to leverage this information.  Firms can then leverage market structure providers and reconcile data to the data repository to ensure accuracy.

We are focused on a foundational requirement that those submitting data and global regulators take responsibility for data quality, and develop a harmonized set of rules to standardize that process worldwide. 

To get this moving, we issued a proposal to CPMI IOSCO suggesting that we harmonize approximately 30 data fields across global trade repository providers, essentially creating a global data dictionary.  We believe it is important to focus on 30 core fields first, which address foundational data like the economics of the trade, the underlying entity, etc. We can then move on to dealing with jurisdictional data and other technicalities that have historically held up efforts to harmonize reporting.

DA: What’s been the response to your proposal?

MC: The industry is generally supportive of this approach.  ISDA and 11 trade associations have come out in support of data quality, suggesting a similar, simplified approach to data reporting as well.   However, the fact is that right now, this issue is still unresolved and – as a result – we are not meeting the G20 goals on trade repositories when it comes to global market transparency and the identification of systemic risk.

Increasingly, we’re starting to see that the practical sides of this issue are outweighing the political, however, and I’m optimistic that we’re going to start seeing progress soon.

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The Evolution of the Markets: It’s Not Just About Regulation

By George Bollenbacher, Capital Markets Advisors
Originally published on TABB Forum

Much has been written about the impact of regulation on the fixed income and derivatives markets, but market forces also are transforming the space. How are the fixed income and derivatives markets evolving, what is driving the changes, and how can the buy side cope?

Ever since the passage of the Dodd-Frank Act and EMIR, and with the looming implementation of MiFIR/MiFID, there has been a lot of press coverage of the impact various regulations have had on the performance and adequacy of markets, particularly the fixed income and derivatives markets. To mention a few recent items: an op-ed by Michael S. Piwowar and J. Christopher Giancarlo, of the SEC and CFTC, respectively, entitled “Banking Regulators Heighten Financial Market Risk”; an opinion pieceby BlackRock, entitled “Addressing Market Liquidity”; and a joint regulatory report on the Treasury market spike of Oct. 15, 2014. With all these voices, and others, raised about the state of the markets, perhaps we need to take a clear, and hopefully unbiased, look at how the fixed income and derivatives markets are evolving, what the causes are, and how the buy side, in particular, can cope.

In order to get the picture, let’s separate the influences into regulatory and market, the latter referring to the market for services as opposed to the financial markets.

Regulatory Influences

The first thing we need to look at is specific regulatory changes and their impacts, starting with the lowest impacts and working our way up.

Reporting – Here, aside from the obvious discontinuity between the US and Europe, the bulk of the effort will be borne by the dealers. European buy-siders do need to make sure someone is reporting for them, and, since they remain responsible for the reporting quality, that the reports are accurate. The accuracy requirement may be the bigger of the two, since the quality of reporting has been very bad worldwide, and the EU regulators are making noises about cracking down on bad reporting. European buy-siders who delegate their reporting to their trading counterparties may need to winnow down their trading stable to those firms that can be trusted to report for them properly.

Trading Venues – In this area we face acronym overload, with SEFs, DCMs, MTFs, OTFs, and SIs. The US has had the first experience with mandatory exchange trading of OTC derivatives (is that term now an oxymoron?), so it’s worth looking at the US experience. The first thing we see is that exchange trading is anything but mandatory, even where it’s mandatory. SEF trading as a percentage of overall MAT trading is about 50%, largely because it is laughably easy to trade non-MAT versions of MAT swaps, as well as using the exclusions for block and end-user trades. The second observation of note is the bifurcation of the SEF markets into dealer-to-customer (D2C) and dealer-to-dealer (D2D) specialties, in much the same way the old OTC market worked. Plus ca change? In all, the much-heralded era of exchange trading of swaps is a long way from reality.

Clearing – In many ways, this regulatory change has the biggest direct impact on the buy side. One major result is the concentration of risk. Where a large buy-sider could spread its risk across many counterparties, it now must accept one or two CCPs as counterparties. Everyone, at this point, is aware of the worldwide concerns with the potential failure of a CCP. There is, however, a second, perhaps more unsettling, impact of required clearing: opacity. Most buy-siders interact with a CCP through a FCM, which means that CCPs have no idea who their ultimate credit risk is. Since both CCPs and FCMs are in a competitive business, and since one way to compete is on risk, the ultimate impact of mandatory clearing on the market may be that everyone is carrying a loaded pistol in a dark room.

Capital and Liquidity – Finally, the capital and liquidity requirements being implemented under Basel III have rewritten the rules for almost every aspect of the capital markets. The rapid comprehension within banks of the meaning of “denominator creep” has already prompted them to scale back many of their capital markets services, from trading to clearing. Although much of the public’s attention has been focused on Dodd-Frank, the deepest and longest-lasting regulatory impact will probably be from Basel III.

Market Forces

While the regulatory forces above have been gestating, another set of influences has been at work – changes in the markets themselves. Let’s look at those now.

Costs and Spreads – Long before the great recession and any resulting legislation, the natural forces of increased competition and efficiency were at work. These two inevitable trends are universal, impacting every market, even those as disparate as energy and mobile technology. In the capital markets, the trends are evidenced by the use of technology across every part of the trading cycle, and by the pricing pressures that competition brings. In other words, automated trading, narrow spreads, fragmented markets, and some reductions in the liquidity of non-standard products.

Low Volatility and Trading Volume – This phenomenon is not a natural force, but a result of the seemingly unending quantitative easing of the various central banks as a result of the great recession. As these central banks inject money through the mechanism of purchasing bonds, they artificially drain the markets of tradable securities and keep price volatility artificially low. This artificial situation may have masked a serious problem, namely …

Attrition of Market-Making – Both of the previous forces have the entirely predictable impact of reducing the incentives to make markets, so it shouldn’t surprise us that the bond and derivatives markets are moving inexorably away from a principal to an agency structure. This is not a complete change, of course, and increased volatilities and volumes may return principal trading to its former levels; but that process won’t be simple or painless. Buy-siders will have to go through some unpleasant market experiences before the trading banks come back in force, if they ever do.

Evolution at Work

So where are all these forces taking us, especially from the buy-side view?

Total Cost of Ownership – Everyone is becoming aware that trading decisions are being heavily influenced by a series of things that happen after the trade is done. If I have to clear this trade, which is the most efficient CCP? Will the choice of CCP affect my price? Whom can I trust to report for me? When I want to get out of this position, will there be enough market liquidity to accommodate me? Which clearing agent will be the best choice over the long run?

Embracing the Agency Model – Years ago the equity markets were entirely agency, and the fixed income markets were entirely principal. Now the world, while not exactly turned on its head, looks decidedly different. Fixed income buy-siders are having to understand how a bond or swap trade gets done on an agency basis, whether one must become a member of a venue or use a broker in order to trade, and who bears the cost of a trade that can’t be cleared. As clearing agents fall by the wayside, trading agents rise out of the mist.

Manufacturing Liquidity – As Basel III forces banks to re-examine their market-making commitment, other firms, such as the principal trading firms (PTFs) identified in the joint regulatory report, have stepped to the fore. In fact, the report indicates that, during the Oct. 15, 2014, Treasury spike, the PTFs stayed in the market while the primary dealers stepped back, if only momentarily. We will probably see liquidity come from other sources than the dealer banks, including possibly unguaranteed affiliates, as we have been seeing in the swaps market. To be sure, manufacturing anything has its costs, and we should expect to see the costs of trading rise somewhat as the need for liquidity intensifies.

Closing Out Positions – In the swaps market particularly, the cost of maintaining back-to-back positions has been recognized as prohibitive. Dealers have already begun their efforts to close out positions as soon as they lay them off, and we should expect this practice to accelerate. This will have two main impacts:

  1. Because standardized contracts are much easier to compress, we should see a pronounced price advantage to buy-siders for using them. For those who have non-standard hedging needs, this will introduce basis risk; but that is something that the futures market has dealt with for decades, so the buy side should be able to manage it.
  2. As dealers exit swaps positions ASAP after executing the customer’s order, this will leave CCPs with a portfolio of positions with only the buy side and non-traditional players. Whether anybody in that business knows how to deal with that kind of swaps market, which, after all, has been the futures model for years, remains to be seen.

Evolution has always been a messy business, of course. Some species become extinct, others unexpectedly rise to dominance, and the whole process has been called survival of the fittest. I guess there’s no reason why the financial markets should be any different.


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Just How Illiquid Is the Market Right Now?

In her speech at the Salzburg Global Forum on Finance in a Changing World, Federal Reserve Governor Lael Brainard pushed back against the notion that the bond market faces a dearth of liquidity. She acknowledged that a true lack of liquidity would be damaging but notes that the concerns cannot be not seen in available evidence, such as bid-ask spreads or turnover. Besides determining the specific level of liquidity, Brainard highlights the importance of ascertaining the factors impacting this level:

  • Regulation: Some reduction in liquidity might result from regulation, but broker-dealer inventories were being reduced before Dodd-Frank, and not all inventories are used for market making

  • Electronic execution: High frequency trading fits well with Treasury trading and might mean greater market concentration in the future, leading to less flexibility in periods of greater volatility, and fewer firms might have necessary technology to keep up

  • Risk: The financial crisis may have caused firms to reassess their risk tolerance for some market-making activities

  • Asset managers: Daily redemptions could increase significantly during times of market stress, intensifying liquidity constraints, and not enough is known about how bond bunds will react during a crisis

Brainard closes by stating that conditions warrant further research and the Federal Reserve Board will be monitoring the situation accordingly.

Her full speech can be accessed here.  

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June 2015 Review -- Clients Start Trading CME-LCH Basis

By Chris Barnes, Clarus 
Originally published on Clarus Financial Technology blog

A typical month in swaps? Far from it! These were the highlights:

  • A record ever month for SEF trading.

  • A big increase in client flows.

  • The data suggests that some clients used the IMM roll to trade the CME-LCH basis, in particular on Tradeweb.

  • Bloomberg saw some huge compression flows in MAC-dated swaps after the IMM roll.

  • Consolidation of the year to date rankings in the Dealer-to-Dealer market.


SDRView shows record volumes on-SEF as measured on a DV01 basis YTD during June. By extension, we can therefore say these are all-time record on-SEF volumes.

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This month also saw a large amount of block activity, with the highest number of block trades so far this year.

Over two thousand of these blocks were transacted on-SEF. What this means is thatSEFView shows an even higher total volume traded in June as this reporting is not capped by the block thresholds:

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This is therefore the first time we have seen over $1.5bn in DV01 trade in a single month. And remember that is only for USD Swaps. So yes, IMM rolls distort the June figures, but that’s still a landmark month.


If we look at these same June figures, but from a percentage share perspective, we see that the Dealer to Customer platforms (BSEFand Tradeweb) killed it this month:

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A few points on the chart:

  • June was the first time this year that the D2C market accounted for over 60% of market share in USD Swaps.

  • We saw a spike in D2C market share in March as well – another IMM roll month.

This last point raised a couple of questions for me:

  • Do people prefer to roll positions electronically on these platforms, and hence they attract an outsized market share in IMM roll months?

  • We know that some customers have limited access to the dealer to dealer platforms. Are these customers also mainly trading IMM swaps? Do we therefore see them rolling large directional swaps every 3 months on the Dealer to Client platforms?

With these thoughts in mind, I went digging into our data sources to look at the roll in a number of different ways.


As per previous rolls, there are different ways of looking at this. To estimate volumes, we can take all swaps traded out of the June IMM date and match these with September IMM dated swaps of a corresponding tenor. We can either do this on an aggregate basis, or incorporate time-stamps and do so on a trade-by-trade basis. This latter approach allows us to identify the least risky roll approach as there is no meaningful market exposure, but is possibly over-reliant on (accurate) time-stamps. For USD swaps, it is worth considering the difference between the two approaches.

Using SDRView Pro, we see the following notional amounts of IMM-dated USD swaps traded before the roll:

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If we match June 15 volumes with the same tenors traded for Sep 15 (i.e. green with green, yellow with yellow etc. on the chart above), we estimate the following activity in DV01 terms:

  • $28.74m DV01 of June 15 exposures were rolled into matching maturity Sep 15 exposures.

  • Therefore, when we consider the reported total DV01 volumes, we need to subtract $57.5m (double the roll volume) to be able to make a fair comparison with non-IMM months.

  • We include all trade types, such as compression, list, spreads and butterflies.

  • Of the $28.74m rolled, we identify over $22.6m traded on-SEF.

  • This analysis implies nearly 80% of IMM roll activity was transacted on-SEF.

If we repeat the analysis on a trade-by-trade basis via the SDRView Pro, we find a lower number – of around $17.83m. Remember this is inherently reliant on time-stamp accuracy, and given the large number of block trades we see this month, we are not surprised that a “riskless” timestamp-based measurement yields a lower number.

Nonetheless, neither measurement method yields a number that would significantly alter the picture for June when we are talking about a total market of $1.5bn in DV01.


We can also use SEFView to look at the IMM roll activity on a venue-by-venue basis. I did this to try and answer the following questions:

  • Why did Tradeweb and Bloomberg have an even larger spike in market share this month – was it related to roll activity?

  • Did the CME-LCH Basis volumes we saw from May drop-off the Dealer to Dealer SEFs and hence reduce their market share metrics?

With those two questions in mind, I noticed a potential “pattern” on the Tradeweb reports. Take June 8th MAC activity as an example:

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Two things struck me about this trade-list:

  • The CME MAC swaps tend to have a Jun 15 start date.

  • The LCH MAC swaps tend to have a Sep 15 start date.

  • There is an uncanny match up of maturities by CCP. If a 5y CME MAC traded, the 5y at LCH also tended to trade.

So I wondered if this was just luck? Had I stumbled upon a particular day or flow in the market? So I went about looking at Tradeweb trade records for June and looking at their IMM & MAC activity. What I found was somewhat surprising:

  • Total CME June 15 dated MAC activity: $23.3m DV01

  • Total CME September 15 dated MAC activity: $5.88m

And conversely for LCH:

  • Total LCH June 15 dated MAC activity: $0.57m

  • Total LCH September 15 dated MAC activity: $19.22m

Interest  piqued, I thought about trying to find the exact rolls – matching CME MAC trades for like-tenor CME MAC trades on the same day. And the same for LCH. Amazingly, I found very few of these trades. Instead, we see evidence in the data of cross-CCP rolls – e.g. trading June 15 5 year MAC at CME versus trading Sep-15 5 year MAC at LCH.

The sizes involved with these trades are significant:

  • Total IMM rolls identified on Tradeweb are nearly $25m in DV01. This is equivalent to $47.4bn in notional.

  • Of this total, $16.3m in DV01 looks like a switch from CME to LCH positions. In notional terms, this equates to $24bn.


So does all of this mean that clients have been using the opportunity of the IMM roll to transfer positions from one clearing house to another? Maybe. Our data isn’t conclusive – and we have found this pattern because we went looking for it. But the evidence within the data is pretty compelling, building on Amir’s observations last week regards CME and LCH volumes in June.

Additionally, $24bn of CME-LCH basis would put Tradeweb at the top of the tree in terms of volumes traded. For example, even when we assume that all CME swaps traded at Tradition are due to CME-LCH basis trades, we find a notional traded of $17bn for the whole month of June. Remember that in May we estimated Trads enjoyed a 57% market share in the fledgling CME-LCH Basis swap market.

We can use that Tradition data point to assume volumes in the basis have remained strong in the Dealer to Dealer space as well. $17bn would be a high-water mark for Trads in terms of total basis traded in a month, adding more weight behind the idea that customers have used the IMM roll to transact basis trades – the hedging of which has ended up in the dealer-to-dealer market.


If this were a typical IMM roll month, I would argue that we should strip out the IMM roll activity from market share figures to give a more accurate representation of liquidity per venue. However, given the analysis above, it increasingly looks to us that the IMM roll this time was not such a “riskless” transaction. Indeed, many accounts may not have seen this particular roll as a simple portfolio maintenance exercise. Therefore, whilst we will strip out Compression figures as always, I will leave the IMM roll volumes in for this month.

Feel free to contact us and let us know if you think that is a fair assumption to make.

For Q215, DV01 volumes across USD, EUR and GBP Swaps are shown below per venue, with Compression volumes stripped out as per our previous assumptions.

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  • Tradeweb had a big increase in market share for June at 26% versus 22% year to date.

  • Bloomberg and Tradition maintained their market shares around 30% and 15% respectively.

  • The fact that Bloomberg don’t show the same increase as Tradeweb in market share this month suggests that either they did not see similar MAC flows or;

  • Something else is going on. Bloomberg saw a HUGE jump in Compression volumes of more than ten times May 2015 figures. Do they count some of the IMM roll activity as Compression on their reports? This seems unlikely, as virtually all of this activity occurred after the roll date.

  • Some huge size Compression trades are included in the Bloomberg report. All of them look suspiciously like MAC trades, and yet are not reported as such by Bloomberg. Very strange. But just have a quick look at the sizes we are talking about – $15m in DV01 for some trades!Bloomberg Compression

  • Sadly, Bloomberg do not identify whether the trade is done at CME or LCH.

  • This huge increase in Compression activity at Bloomberg needs to be monitored. It may alter our assumptions about Tradeweb compression volumes. To help the market, we would like all venues to follow the TrueEx and Bloomberg lead and separate Compression volumes from vanilla transactions.

  • TrueEx continued to record impressive volumes in the Compression space, even in the face of this increased competition from Bloomberg. Volumes were generally flat month-on-month, meaning they are consolidating their gains made year-to-date.

  • One last word on the CME-LCH switches that we identified at Tradeweb. It is possible that these were done as part of their Compression offering as well. Should we therefore also strip these volumes out from their market share? Answers on a post-cardplease!

  • Finally, in the Dealer to Dealer space, our numbers show that Tradition just managed to grab the number one spot from ICAP this month, leaving them level-pegging at 15% market share each on a YTD basis.

  • Tulletts are still in third place, although they did not enjoy a good June compared to their peers. BGC/GFI are in fourth with a 5% market share this year.


All of this happened before the Greece “no” vote, which we assume will lead to continued volatility during July.

Our comprehensive sources of data have revealed a number of interesting lines of investigation this month which just go to show the importance of having a holistic view of the markets. It is transparency like this that lets us demystify what is going on. That can only be a good thing during times of market stress.

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The 3 Changes Necessary in the Trade Reporting Landscape

By Miles Reucroft, Thomas Murray
Originally published on TABB Forum

A number of issues with the trade reporting mandate in Europe has led some to call for a global aggregator for all trade repository data. While there is logic behind the idea, would not solve all of the problems that exist within trade reporting. Here are three steps that would result in a much more functional trade reporting landscape for Europe.

It is no surprise that there have been a number of issues with the trade reporting mandate in Europe. In implementing the G20 financial reform program, EMIR (the European Market Infrastructure Regulation) called for both sides of a transaction to be reported and a complex data field to be completed, with no uniformity of creation behind the identifiers that are crucial to identifying and matching trades.

Speaking recently, Patrick Pearson, head of the financial markets infrastructure unit at the European Commission, commented that there is merit in the notion of introducing a global aggregator for all trade repository data. The idea has some logic, but would not solve all of the problems that exist within trade reporting.

“The reason that people are looking toward an aggregator solution is the lack of pairing between the trade repositories,” says Daniel Jude, COO of CME’s European Trade Repository. “If there is one global trade repository, the aggregation is simple. But that does not remove the problems that exist with pairing. The problem comes from clients not generating the UTI [Unique Trade Identifier] correctly. Not every CCP [clearing house] provides a UTI, only the algorithm to create it.”

This is a point that has caused concern among the trade repositories. Since the trade repository landscape is a competitive one, one counterparty to a trade might be reporting to one trade repository, while the other could be reporting to another. Those reports then need to be paired before the data that is being collected is useful to the regulator, ESMA (the European Securities and Markets Authority).

If the reports are not paired, then the data has little use to ESMA, since it is neutered in its aim of shining a light of transparency into the opaque world of derivatives trading. “Even if you had a single trade repository, receiving both sides of the report, if the clients do not have the correct UTIs and LEIs [Legal Entity Identifiers], then the trades will never pair,” adds Jude.

“The lack of a global LEI is another key issue here,” he continues. “In some jurisdictions sole traders are still allowed to use client codes, which are very difficult, if not impossible, to start pairing, as they are free-format text. A global aggregator would not solve this.

“One thing that could, with a global aggregator, is single-sided reporting. This would remove the need to pair trade reports, if that is indeed the reason for introducing an aggregator.”

This is another topic that was touched on by Pearson recently. In the US, the mandate was introduced with single-sided reporting, so there have been no issues with pairing the reports across the three Swap Data Repositories (US lexicon for trade repository) that exist there, one of which is CME.

A move to harmonize the regulatory regimes like this would also make it easier for regulators to take a global view of what is going on, although regulatory equivalence in regards to trade reporting has been far more easily achieved than it has with regards to central clearing rules.

Jude also feels that the trade reporting mandate in Europe could be simplified with the removal of Exchange Traded Derivatives from its purview. “There are levels of transparency and risk mitigation that exchanges and clearing houses already undertake,” he reasons. “Further on from this, we believe that all CCPs should provide UTIs to clients. This would vastly improve the pairing process as there would be a consistency to the data. If you had single-sided reporting, then you would remove the need for pairing, but then you would also lose the depth of the data, so I can see why ESMA has requested dual-sided reporting.”

The third key issue that Jude identifies during our conversation is the need for porting rules to be put in place, making it easier for clients to switch their trade repository. In the maelstrom that followed the February 12, 2014, go-live date for the mandate, a number of market participants were left dissatisfied with their trade repository solution and sought to change their providers.

Due to a lack of porting within the rules, this was not an activity that could be easily undertaken. “It has been quite a problematic mandate,” says Jude. “Many clients signed up with trade repositories are now looking to move, but the lack of portability has really stifled that. We have spoken to ESMA about this and are hoping for porting to be introduced. This will be a good change in the industry, since clients will be able to move trade repository and continue reporting in the same way.”

With porting looking likely to be sorted imminently – proposals are with ESMA and a paper on the issue is expected in the coming weeks – the industry can then turn its focus to the outstanding issue of UTIs and their generation and, latterly, the inclusion of ETDs within the mandate.

Once these outstanding issues are resolved, CME believes that we will be left with a much more functional trade reporting landscape for Europe.

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Dodd-Frank: What Works, What Doesn’t and What Can Be Done About It?

The five-year anniversary of the Dodd-Frank Act has inspired a number of industry experts  to revisit the law’s impacts on the financial industry.  The latest of these is a blog post from  Stephen Cecchetti, Professor of International Economics at the Brandeis International Business School and Kermit Schoenholtz, Professor of Management Practice in the Department of Economics at New York University’s Stern School of Business. Both professors describe Dodd-Frank as a mixed success and acknowledge that Dodd-Frank has limited some risk in the financial system, but worry the regulation does not address larger problems. They write:

“Together, these changes are making the financial system more resilient, but the system is still far from safe. And the reforms will not reduce the likelihood of the next crisis to an acceptably low level…From the start, DF has contained critical holes and created mechanisms that reinforced poor incentives. It is also overloaded with costly regulations that were unlikely to make the system safer, even if fully implemented. And, because it is so complex, full implementation remains a long way from complete – even as we mark its fifth birthday.”

Six of the key components the professors say are missing from Dodd-Frank are:

  • a streamlining of the regulatory structure

  • a restructuring of the government-sponsored enterprises (GSEs)

  • a reform of systemically important markets (like money market mutual funds and repo)

  • effective pricing of government guarantees

  • a resolution mechanism that promotes proper incentives; and

  • a shift to regulation by economic function rather than legal form

The full post from Professors Cecchetti and Schoenholtz can be read here.

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Platform Proliferation: Déjà Vu All Over Again?

By Anthony J. Perotta, TABB Group
Originally published on TABB Forum

We’ve borne witness to this scene before – necessity stirring the entrepreneurial zeal of electronic trading innovators. Many platforms stepped forward; few survived. Back then, the market’s message was clear: Solve a problem, or die trying. Given that the current issue facing everyone may be rooted in market structure, today’s innovators have their work cut out for them.

The development of the internet ushered in many innovations. In financial markets, the technology paved the way for the proliferation of electronic trading and the rise of platforms. For fixed income, in particular, more than 85 alternative trading systems (ATS) and electronic communication networks (ECN) were introduced, utilizing both multi-dealer (MDP) and single-dealer (SDP) concepts servicing institutional dealers and investors.

As quickly as these entrepreneurial ventures arose, many were eradicated in a few short years, leaving a core group of participants to solidify franchises that persist through today. Many of the platforms that avoided the purge did so by solving a clear and obvious problem – a seemingly important requirement when wanting to perpetuate a business. Platforms wanting to garner favor with investors are wise to be particularly focused on this salient point.

Many things have developed out of the wake of the financial crisis, but the one persistently capturing the attention of market participants and the media is the dearth of liquidity. As such, alternative sources of liquidity have become all the rage. This has precipitated a renaissance of sorts in the electronic trading space across fixed income markets.

In the U.S. corporate bond market, liquidity issues have been exacerbated by the changing regulatory environment, the growing weight of assets under management (AuM), the reduction in on-demand trading that dealers provide, and the inherent lack of homogeneity. The days of immediacy (at least, for larger trades) and the unabated use of dealer balance sheet are seemingly gone. Investor appetite is being satiated by a relentless flow of new issues. But illiquidity still pervades 98.5% of the secondary market. The ratio of dealer liquidity (as defined by the capital large banks commit to secondary market-making in IG and HY markets) has fallen from 2.3% to just above 1.2%, a 48% decline.  

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Execution venues are busy introducing trading protocols purporting to solve the problem. MarketAxess currently owns most of the electronic market share (about 15% of the total market), but the solution it provided in 2002 (the list-based, electronic request-for-quote, or “e-RFQ”) facilitates cash flow trades requiring immediacy. These tend to be odd-lots (TABB estimates the average e-RFQ to be approximately $480K). The real problem beguiling the market is the inability to move off-the-run issues (approximately 24,000 outstanding CUSIPs) for notional trade sizes greater than $2 million.

It has taken several years to get new platforms to the deployment stage, but competition finally is developing. Imbedded institutional fixed income platforms such as Tradeweb and Bloomberg are now being joined by upstarts such as TruMid, Electronifie, and Bondcube. Retail ATSs such as KCG Bondpoint and TMC Bonds are diversifying their models, offering connectivity to large asset managers. Established equity trading venues such as Liquidnet and ITG are also getting into the game, as are European platforms including MTS/ In total, there are almost two dozen trading platforms or electronic models servicing the corporate bond landscape, jockeying for market share.

Skepticism abounds. Adoption has been slow. Asset managers are eager to consider alternatives, but their behavior remains mired in the past. We often hear the narrative, “market structure is changing.” But the reality is that market structure remains stubbornly intact. Voice-driven trading is still the primary modus operandi for larger and bespoke trades, and e-RFQ is the protocol dominating odd-lot trading.

There is an undercurrent that ultimately might pave the way for structural change – the market is subconsciously migrating to an order-driven model. Our research indicates “riskless principal” (often incorrectly termed “agency”) trading has risen dramatically over the past year. We estimate that approximately 30%-40% of investment-grade and as much as 70% of high-yield trades are executed following the receipt of an order. While dealers are eschewing execution and inventory risk, they remain intimately involved in the process of risk transfer as the critical link facilitating distribution, protecting information leakage, and providing pricing data. As the corporate bond market starts to resemble an exercise in archaeology, dealers represent those armed with picks, shovels, and toothbrushes.

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Electronic trading venues believe they are the efficient answer to the laborious “dig”; many aspire to become the agents of risk transfer for investors. MarketAxess has launched “Open Trading,” which allows investors to anonymously reveal their indications of interest (IOI) to the entire market. The platform endeavors to use its vast connectivity as a substitute for the search and distribution process that dealers have traditionally provided. The company reported that 9% of all U.S. trades utilize the protocol, but there are undoubtedly questions to be answered. For instance, what happens when an investor tests the market with an anonymous IOI and finds no takers? Do they have the luxury of asking for and receiving immediacy from dealers (who presumably have nowhere to go with the bonds, since their clients have all passed)? The evolution toward new trading behaviors and protocols is undoubtedly going to be filled with interesting challenges.

In reality, the “problems” plaguing the corporate bond market today are not as pronounced as the narrative would have us believe. Large asset managers report they are acclimating to illiquidity by altering their trading and investment strategies. Inflows find their way into new issues, and dealers are providing bids (or can source bids from other investors) when selling is required. The fear is in the unknown – what happens when rates rise and the demand to invest in bonds starts to fade? Will there be an orderly exit, or a rush to the exit? Large investors are quick to acknowledge the market is more vulnerable to extreme volatility and price dislocation.

The proliferation of platforms is a healthy and constructive development for the market. Competition, even if only in the ideas being put forth, ultimately spurs innovation. The key to any of these platforms succeeding lies in whether they can identify a problem and remediate it. Given the issue facing everyone may be rooted in market structure, these firms have their work cut out for them. History has shown runways get short quickly in this world. Solve a problem, or die trying.


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Data Tsunami to Drive Increase in Compliance Costs

By Shagun Bali, TABB Group
Originally published on TABB Forum

A cross-organizational, proactive approach to risk and compliance functions will transform regulatory necessity into a definitive business advantage. But institutions simply do not have the systems or control of data they need to make complex analytics an integral part of workflow or enable information to pass back and forth within different functions. As a result, TABB Group forecasts global compliance market spend will rise as much as 8% in 2015, reaching $2.6 billion.

The institutional capital markets are dealing with the aftermath of one of the most aggressive periods of regulatory intervention since the Great Depression. The costs and consequences of non-compliance within financial services are greater than ever before. In addition, the industry is going through tough times with thinner margins, all-time low volumes and low investor confidence. As a result, firms are dealing with new realities: Do more with less and adhere to stricter regulations. Existing legacy processes and technology across the front, middle and back office do not help meet these goals. Traditional risk and compliance data management techniques have largely failed to meet internal expectations and regulatory requirements.

As regulations continue to toughen, compliance departments will face challenges in terms of managing large volumes of data and the increasing costs associated with storing, retrieving, analyzing and producing that data in a consistent, unified and efficient manner. Governance, risk management and compliance (GRC) regulations have made it imperative for all functions and businesses within financial institutions to share information more readily and rapidly in order to meet regulatory requirements and support and improve investment decision-making as a whole.

The cost of compliance and the corresponding failure to maintain a compliant institution is going up. TABB Group forecasts global compliance market spend will rise 7.5% to 8% in 2015, reaching $2.592 billion from $2.430 billion in 2014, and growing at a similar pace for 2016. FINRA and SEC data also support the argument that the cost of compliance and compliance failure is on the rise. FINRA fines are at their highest levels since 2007/2008, and FINRA regulatory fees are near all-time high levels (see chart, below).

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Source: FINRA / TABB Group; SEC/TABB Group

For the effective aggregation of data, institutions need to streamline their application portfolios, standardize and normalize data more effectively, and ensure the rapid integration and sharing of data across systems. With a holistic view of data, the ability to harness synergies across the reporting requirements under new regulations offers tremendous opportunities. A cross-organizational, proactive approach to risk and compliance functions will transform regulatory necessity into a definitive business advantage. However, institutions simply do not have the systems or control of data they need to make complex analytics an integral part of workflow or enable information to pass back and forth within different functions.

Having said that, enterprise-wide compliance requires a push from top management. Visionary leaders need to introduce a new and efficient architectural paradigm that enables a holistic and unified view of internal and external data. Executives need to push the idea of working with vendors and automating parts of the compliance process. This will help save money and time for the institution as a whole.

The vendor solutions overall point to an increasingly dynamic and innovative GRC market. AxiomSL is aggressively working across the globe to help its clients automate regulatory reporting that would ease the burden on compliance departments. Bloomberg Vault is leading the market for trade reconstruction required to comply with CFTC rules. BWise has created a process-based approach for deploying the GRC platform that saves time and effort. NICE Actimize has created a differentiated offering for communications surveillance and voice analytics that are required to comply with the Dodd-Frank Act in the US. Protegent is helping its clients meet regulatory pressure by analyzing internal and structured data sets before they make the leap to analyzing external data sources.

Vendors still have much further to go to integrate with internal and external data sources, as well as to make ”social” a truly central part of the compliance reporting. Stronger analytics offerings related to risk management and alpha generation are also increasingly important to financial institutions, moving beyond the simple reporting functions of the past to robust visualization and true functionality related to ”Big Data.” These, along with more flexible deployment models and institution-specific workflow design, have presented clear opportunities for vendors to distinguish themselves.

Investments are inevitable for the infrastructure necessary to meet the distinct regulatory challenges associated with trade reconstruction (integrating structured and unstructured data). Those that make the real-time analysis and exchange of data part of their everyday workflow across the front-, middle- and back-office functions will be primed for both compliance and profitable growth.  The sooner IT leaders act to address these challenges, the more successful they will be in meeting the compliance and data management requirements of this new era.

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Chairman Massad Preps for 5-Year Anniversary of Dodd-Frank with Series of Updates on CFTC Progress

CFTC Chairman Timothy Massad has been talking anniversaries in a series of recent speeches.  Using the upcoming five-year anniversary of Dodd-Frank and his own one-year tenure at the CFTC as a springboard, Massad offered progress reports on his agency’s achievements over the last few years. 

Speaking last week before the Global Exchange and Brokerage Conference and this week at the FIA International Derivatives Conference, Massad highlighted the key areas where he will continue to focus in the months and years ahead.

Following were some of the key topics he addressed: 

  • Central clearing of standardized swaps

    • Ensuring the strength and security of clearinghouses themselves through recovery and resolution planning is a top priority

    • Cross-border recognition of clearinghouses with Europe has yet to be resolved but can be done without market disruption

  • Oversight of the largest market participants

    • The next step in the effort to de-risk swap dealers is to review swap dealer de minimis thresholds; the CFTC is seeking public comment

    • Margin requirements for uncleared swaps is another major area of focus, both for transactions with other swap dealers and with financial institutions

  • Regular reporting

    • All transactions, cleared or uncleared, must be reported to swap data repositories (SDRs), and this will be an international effort

  • Transparent trading

    • Trading on Swap Execution Facilities (SEFs) is happening, but more work can be done specifically in the areas of simplifying trade confirmations, reporting obligations and the made-available-to-trade determination process

    • Cross-border harmonization is also an issue in this area

  • Responding to changes in the market

    • Electronic and automated trading now represents the majority of trading, with “well over 50 percent of trading in U.S. financial markets,” and in futures markets, it’s over 70 percent

    • Rise of this type of trading has brought benefits like more efficient execution and lower spreads, but it has changed the nature of regulatory responsibilities; CFTC is currently considering potential registration requirement for algorithmic trading

Access Massad’s full speeches here

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