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Data Analytics Hold Key to Saving the Sell Side

By Matthew Hodgson, Mosaic Smart Data
Originally published on TABB Forum

Regulation is rapidly increasing transparency across financial markets, enhancing audit requirements and ensuring effective market surveillance. However, the mounting cost of compliance continues to squeeze sell-side banks, which have been facing declining FICC revenues and higher capital costs. With the introduction of MiFID II set for January 2017, technology – and particularly data analytics – could hold the key to developing competitive advantage in this new regulatory reality.

Since the financial crisis in 2008, regulation has played a key role in transforming the structure of capital markets and the manner of counterparty interaction. The requirements imposed have enabled regulatory bodies, such as the FCA, FINRA and SEC, to introduce more effective monitoring and superior levels of transparency across foreign exchange (FX), fixed income, equities and commodity markets.

Driven by regulatory change, trading activity has migrated away from opaque voice based markets toward a model based on transparency and risk mitigation on electronic venues, with market participants increasingly required to report and clear trades through CCPs. 

The playing field for sell-side sales and trading teams is shifting permanently from relationship-driven to electronic message-based banking.

While the structural benefits of reform to the financial ecosystem are wholly apparent, however, the cost of compliance for individual firms has increased significantly, with sell-side banks bearing the lion’s share of the burden. As a result, the ability of these institutions to hold trading inventory and operate as liquidity providers has been increasingly constrained by regulatory capital requirements and mounting pressures on fixed costs.

According to the Economist, FICC revenues have fallen by 48% among the world’s largest banks over the four-year period between 2009 and 2013, and the downward trajectory is expected to continue. This has much to do with the desire from the Central Bank community to keep long-term interest rates low through quantitative easing, thus depressing trading activity, but also the weight of regulation. Current industry research indicates that these sell-side institutions will continue to experience fixed income balance sheet declines of between 10%-15% over the next 2 years and as much as 15%-25% out of flow rates.

Facing the Challenge

  • Banks’ FICC revenues have already declined by 48%
  • Cost-to-income ratio (CIR) remains above 70%
  • Fixed income balance sheets set to decline by further 10%-15%

These challenges have arisen as a result of two prominent factors:

  1. A sharp rise in regulatory oversight, with banks now having to post increased regulatory capital to cover potential losses; and
  2. Tighter spreads associated with electronic trading having a detrimental impact on revenue. While this provides enormous benefits for the wider market, this decline in margins has resulted in banks having to turn over their balance sheets at a faster rate, as the cost of warehousing risk has becomes increasingly prohibitive.

Adding to the current concerns, the implementation of MiFID II will further reshape the regulatory landscape, posing new challenges for banks, specifically by changing the way in which bonds, derivatives and ETFs are traded on electronic platforms. While full details are yet to be finalized, proof of best execution is a regulatory certainty, and the new rules will force players to adjust their market models toward a hybrid-agency model. This will be especially relevant for banks that cannot afford the capital costs of maintaining inventory. Clearly, many of the lessons learned from the equity markets will now be applicable to the FICC markets, with specific emphasis on being able to measure execution performance in both a principal and agency environment.

Marching Out of Step

Despite the growth, adoption rates in electronic trading, a key component of financial technology, remains inconsistent, with significant discrepancies between FX, equities and fixed income, as well as across geographical lines. The fixed income market, for example, has transitioned at a slower pace by comparison, with 57% of volume executed electronically in Europe and only 12% in the US in 2014, according to Greenwich Associates. However, sell-side fixed income volume executed electronically continues to increase, as data from Celent demonstrates:

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Observing the US IRS market, which has been directly impacted by Dodd-Frank, in the chart below, it is apparent that the migration to electronic venues can be relatively immediate. In the dealer-to-client market, SEF (electronic) market share rose from ~10% in January 2014 to the current ~60% (March 2015), with further electonification anticipated. The implication for European markets with the upcoming MiFID II implementation in January 2017 is apparent.

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Old Heads. Young Minds

Although a cliché, every cloud has a silver lining, and this could well be the case for FICC markets. The financial crisis and subsequent regulation proved to be extremely important in ushering in the current wave of creativity and fintech innovation, causing banks and other financial institutions to rethink their strategies. Many are coming to the realization that they need to partner with emerging innovators. As such, finance and technology has become synonymous, and data analytics, in particular, is moving to the forefront of efforts to provide new solutions to ongoing market challenges, such as trade reporting, risk management and audit requirements. Moreover, a profound and atomic understanding of client activity and behavior will define winners and losers in the coming years.

With technology front and center in today’s financial marketplace, the debate remains as to how to effectively identify and deploy new technology, leading to the perennial question of: Should we build in-house or purchase from a specialist vendor?

Building in-house solutions has its benefits, but it takes significant time and resources. With budgets and margins under real pressure, many firms are unable to meet this challenge by deploying internal teams to address the overwhelming tidal wave of change. By opting for the latter, banks have been able to cut their time to market by years, quickly and efficiently adhering to new market rules and meeting best practice legislation.

Another significant advantage for banks in outsourcing technology to third-party providers is to keep pace and engage with the rapidly evolving fintech landscape. As a result, they are now looking to technology vendors to bridge the gap and ensure sales and trading teams have access to the best and most competitive tools.

By tapping into fintech clusters such as London and New York, banks are capitalizing on the highly focused and outcome-based delivery of these companies. As a consequence, it is not surprising that global investment in financial technology ventures has more than tripled, from less than US$930 million in 2008, to more than US$2.97 billion in 2013.

Smart Data Is the New Currency

Within the fintech sector, the field of data analytics has quickly become the new opportunity in financial markets. This comes at a time when banks are beginning to recognize the competitive advantage that can be gained from partnering with specialist technology vendors.

However, challenges persist. While electronic trading has generated a torrent of transaction data, the industry currently lacks the necessary processing tools for effective aggregation, standardization and analysis. This has become crucially important to sell-side firms at a time when strategy differentiation by market, client type or geographical region is becoming common practice as a means to achieve unique competitive advantage.

Furthermore, market fragmentation, as a result of the proliferation of electronic venues, has effectively fractured liquidity and trading volumes in some markets, rendering the standardization of trade data more challenging.

Only by gaining control of an abundance of available data and deriving actionable intelligence will banks be able to focus on identifying new opportunities and generate the highest returns in the markets they choose to compete in and be able to navigate the new regulations and operational challenges ahead.

The pace of change in the field of data analytics is rapid. As technology vendors continue to work toward providing easy-to-use tools that can be quickly integrated into existing systems, it is the ability to harness predictive analytics based on historical patterns that remains at the cutting edge. For a FICC-trading bank, this could provide answers to questions such as: Which clients am I anticipating seeing in the market today? Or, What products do I think clients will likely be trading?

The business advantages that can be harnessed by predictive analytics are significant and will act as a differentiating factor in performance. In a recent Harvard Business School article, leading academic and analytics guru Thomas Davenport argued that we are now entering the era of Analytics 3.0, where its predecessors were Business Intelligence (1.0) and Big Data (2.0). Gartner has been predicted that by 2017, firms with predictive analytics in place will be 20% more profitable than those without.

As the FICC trading ecosystem continues to evolve, sell-side institutions must focus on how to apply technology at the intersection of trading, regulatory compliance and operational efficiency to maintain and grow market share within a profitable client universe. The entrepreneurship and financial creativity of yesteryear, which is being restricted by regulatory codes of conduct led by global government agencies, can only be replaced by the granularity of understanding that intelligent data analytics delivers.

In what has become a challenging environment for all, the real question is how quickly the industry can adapt.


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The Decline in Market Liquidity

By Jeremey Cohen-Setton, Bruegel
Originally published on TABB Forum

There has been a plethora of stories in recent months on the apparent decline in trading or market liquidity. But has it really become harder for buyers and sellers to transact without causing sharp price movements?

What’s at stake: There has been a plethora of stories on the apparent decline in trading or market liquidity over the past few months, with a growing number of analysts pointing out that it has become harder for buyers and sellers to transact without causing sharp price movements. While the Fed remains unimpressed with these developments, several commentators have argued that the next crisis might come from an abrupt and dramatic re-rating of stocks and bonds.

The problem with illiquid markets

Robin Wigglesworth writes that Wall Street’s latest obsession is bond market liquidity.  Lael Brainard writes that these concerns are highlighted by several episodes of unusually large intraday price movements that are difficult to ascribe to any particular news event, which suggest a deterioration in the resilience of market liquidity.

Nouriel Roubini writes that investors’ fears started with the “flash crash” of May 2010, when, in a matter of 30 minutes, major US stock indices fell by almost 10%, before recovering rapidly. Then came the “taper tantrum” in the spring of 2013, when US long-term interest rates shot up by 100 basis points after then-Fed Chairman Ben Bernanke hinted at an end to the Fed’s monthly purchases of long-term securities.

Likewise, in October 2014, US Treasury yields plummeted by almost 40 basis points in minutes. The latest episode came in May 2015, when, in the space of a few days, 10-year German bond yields went from five basis points to almost 80. These events have fueled fears that, even very deep and liquid markets – such as US stocks and government bonds in the US and Germany – may not be liquid enough.

Charlie Himmelberg and Bridget Bartlett write that market liquidity is the extent to which investors can execute a fixed trade size within a fixed period of time without moving the price against the trade (which should not be confused with monetary liquidity, access to short-term funding, or liquid assets held on company balance sheets). Steve Strongin writes that one $10 million trade that historically may have taken a day to get done now needs to be split into 20 $500,000 trades that take a week or two to execute. From an investor’s standpoint, that is very uncomfortable because we live in a 24-hour news cycle, so information is flowing much faster, but your ability to execute trades is now much slower. It also means that certain types of investment strategies—such as arbitrage strategies that rely on the ability to quickly identify and act on market dislocations—no longer work nearly as well, if they work at all.

Has liquidity decreased?

In its latest monetary report to Congress, the Federal Reserve writes that despite these increased market discussions, a variety of metrics of liquidity in the nominal Treasury market do not indicate notable deteriorations.

David Keohane writes that measuring liquidity is by necessity slippery — pick your preferred measure of liquidity (bid-ask, price impact, decline in net-dealer inventories) and we are pretty sure we can point you to a problem with it. But the chart below, on growing market size versus declining turnover, is tantalizing.

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Technology, regulations and liquidity

Matt Levine writes that Volcker, capital requirements, etc., drive up the cost of immediacy, but they don’t increase the risk of a crash, because bond dealers were never in the business of buying all the bonds all the way down. Lael Brainard writes that reductions in broker-dealer inventories occurred prior to the passage of the Dodd-Frank Act, suggesting that factors other than regulation may also be contributing. In assessing the role of regulation as a possible contributor to reduced liquidity, it is important to recognize that those regulations were put in place to reduce the concentration of liquidity risk on the balance sheets of the large, highly interconnected institutions that proved to be a major amplifier of financial instability at the height of the crisis.

Nouriel Roubini sees several reasons why the re-rating of stocks and especially bonds can be abrupt and dramatic. First, when high-frequency traders are inactive, equity markets are in fact illiquid, with few transactions. Second, fixed-income assets are illiquid because they’re mostly traded over-the-counter and are held in open-ended funds that allow investors to exit overnight. Before the crisis, banks used to hold large inventories of these assets, thus providing liquidity and smoothing excess price volatility. But, with new regulations punishing such trading (via higher capital charges), banks and other financial institutions have reduced their market-making activity. So in times of surprise that move bond prices and yields, the banks are not present to act as stabilizers.

Lael Brainard writes that a reduction in the resilience of liquidity at times of stress could be significant if it acted as an amplification mechanism, impeded price discovery, or interfered with market functioning. For instance, during episodes of financial turmoil, reduced liquidity can lead to outsized liquidity premiums as well as an amplification of adverse shocks on financial markets, leading prices for financial assets to fall more than they otherwise would. The resulting reductions in asset values could then have second-round effects, as highly leveraged holders of financial assets may be forced to liquidate, pushing asset prices down further and threatening the stability of the financial system.

Robin Wigglesworth writes that scarred by the financial crisis, retail investors gravitated toward the supposed safety of fixed income. But their funds have bought increasingly illiquid bonds while still offering investors the opportunity to pull out whenever they want. If losses spook investors to do that, asset managers will sell bonds in order to pay investors their money back, the type of scenario that can quickly become a fire sale.

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ISDA Reflects on 5-Years of Dodd-Frank, Proposes Fixes

Reflecting on the five-year anniversary of the Dodd-Frank Act, the International Swaps and Derivatives Association (ISDA) issued a briefing note on July 20, 2015, that tracks the progress made since the law’s historic enactment and outlines several outstanding issues that still need attention.

So, what changes have we seen?  Since the CFTC’s clearing mandate went into effect in 2013, a large portion of interest rate derivatives (IRD) and credit default swaps (CDS) are now centrally cleared, with trades executed on SEFs being reported to Swap Data Repositories (SDRs).  For IRD, 76.5% of average daily notional volume was centrally cleared in 2014 and for CDS that number totaled 74.7%, according to ISDA SwapsInfo data. Following made available to trade (MAT) rules  being implemented, in February 2014, more than 50 percent of IRD and 65 percent of CDS index average daily notional volume traded on swap execution facilities (SEFs). In addition, so far, 104 swap dealers have registered with the CFTC. 

While all of these are notable achievements, ISDA notes that are several areas of possible improvement for the implementation of Dodd-Frank:  

  • Cross-border harmonization: Fragmentation of liquidity across geographical lines results in an increase in costs and a more difficulty in unwinding large transactions. To alleviate some of the liquidity issues brought on by differences in U.S. and E.U. regulations, ISDA recommends allowing U.S. counterparties to apply overseas rules when trading outside domestic jurisdictions, if the laws are equivalent.

  • Clearing: Given the rise in importance for central counterparties, more needs to be done to ensure resiliency on issues such as transparency for margin methods, and minimum standards for stress tests.  The CFTC also requested further regulatory input on acceptable recovery tools for central counterparties and conditions for resolution for when problems occur.

  • Commercial end users: Legislative action is needed to make clear that end users who hedge through centralized treasury units (CTUs) in order to net and consolidate their hedging activities are eligible for the clearing exemption. Many CTUs classify as financial entities under Dodd-Frank, subjecting them to clearing requirements.

  • Reporting: Regulators need to identify and agree on what data best enables them to monitor trading conditions.  In addition to developing and then adopting standardized product transaction identifiers and reporting formats, ISDA recommends rescinding Dodd-Frank’s SDR indemnification requirements in order to enable more cross-border data distribution.

  • Capital: Like margin rules, capital rules should also be consistent so no participant is at a disadvantage to its competitors or counterparties in another country.  ISDA believes regulation should be “coherent and appropriate to the risk of a given activity” and that special attention should be given to the financing costs for borrowers and hedging costs for end users.

The agency also recommends further clarification for margin rules achieve consistency and reduce disputes, to targeted modifications of SEF rules to boost trading and expedite cross-border harmonization, provisions that will allow a SEF or a SEF user to petition for the removal of a MAT determination if liquidity conditions change, and mandating  final CFTC registration for swap dealers and major swaps participants to allow regulatory certainty.To read ISDA’s note in full, please click here.

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Why Financial Market Infrastructures Matter

By Luis Carlos Nino, Thomas Murray
Originally published on TABB Forum

For now, the post-trade clearing and settlement infrastructure in Europe is humming along. But the unintended consequences of regulatory change could increase systemic risk rather than reduce it.

In the world of capital markets, the public spotlight has predominantly fallen on pre-trade and trade analysis. The media focuses its attention on the price of shares, the movement of currencies, the possibility of changes to interest rates and the fundamentals of markets, as well as corporate news.

These aspects matter for those making decisions to buy or sell securities and other instruments. In addition, these elements are visible and are perhaps more easily understood by the general public. In any case, it is important to note that public attention has not shifted to the financial market infrastructures (FMIs), because these have been working well, even during times of crisis. They are also less visible and somewhat less exciting to the press and public imagination.

In the mid-term, the post-trade sector will garner more of the spotlight, as it should. This is because, following the 2009 Pittsburgh G20 Summit, the tectonic plates of capital market infrastructures started to shift across the world. On the back of this summit, a series of complex and controversial new pieces of legislation were passed in the United States, the European Union (EU) and elsewhere.  As a result, the landscape of the financial industry has been changing dramatically and will continue to evolve over the coming years.

These changes to the financial environment are aimed at making financial markets less risky and more efficient. With the ostensible goal of minimizing risk and following the G-20 mandate, standardized over-the-counter (OTC) derivatives contracts have to clear through a central counterparty (CCP). In addition, CCPs in the EU must meet specific criteria to ensure they have robust risk management frameworks.

Similarly, and also with the same goal, EU regulators have set specific criteria that central securities depositories (CSDs) must meet. These criteria are aimed at standardizing key elements of settlement and safekeeping. In addition, EU lawmakers have established that both investors and issuers will be free to choose any infrastructure within the EU, as long as it meets EU requirements. This will open the field of competition, driving FMIs to be more efficient. Ultimately, this may benefit investors and issuers.

At least in theory.   

There are, in these regulatory changes, some side effects that must be analyzed and monitored.

First, having CCPs clear OTC derivatives substantially increases the degree of risk concentration in the market. This means CCPs will be more vulnerable and the repercussions to the market in the case of failure would be very serious and difficult to contain.

Secondly, by making CSDs compete with one another, there will be a consolidation process among them. Those CSDs that are expensive or have significant weaknesses in terms of asset servicing capabilities and asset safety, are likely to be absorbed by large groups that can generate economies of scale and are able to provide high quality services to both investors and issuers. Ultimately, this means more commercial concentration, as Europe will go from having more than 20 CSDs, to having just a handful.

All of these elements will be sufficient in diverting the media spotlight towards FMIs. But there is one more element that makes these regulatory changes even more important for investors and financial intermediaries.

Recently enacted EU regulations have imposed a high degree of legal liability on depository banks in terms of monitoring and advising their end clients of the different risks associated with the infrastructures they use. This implies that financial intermediaries should have a thorough understanding of FMIs and be in a position to monitor developments.

These potential changes are of international significance.

The result is that there will be more risk concentration at CSDs and CCPs. Admittedly, there will be opportunities for investors and issuers, if they feel they can benefit from engaging with a different CSD or CCP. For some financial intermediaries, there are new responsibilities to their end clients.

What do these elements have in common? They need to continuously monitor, over the next few years, the evolution of the post-trade space in Europe.

A final thought: As Europe’s infrastructures evolve, they will be doing so in the context of ongoing regulatory and commercial changes in the global financial system. This means a lot of moving parts. 

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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.

7 13a resized 600

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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