We fire a bunch of questions at Berenberg’s global head of electronic trading and distribution to get a heads up on the lack of European liquidity in European markets, how algos are evolving in response – and why collaboration is key.
What is the state of the liquidity landscape in Europe in 2024?
In short, concerning. There are numerous macroeconomic factors affecting both the attractiveness and competitiveness of capital markets in Europe. At the forefront, a lack of on-exchange liquidity, in part due to increased internalisation and the usage of bilateral liquidity arrangements, is having a significant impact on liquidity discovery and price formation. While these arrangements satisfy approximately 20% of the buy-side’s liquidity needs, the unintended consequences on the remaining 80% is increased trade implementation costs. While it may be naïve to expect altruism, perhaps it’s time for all participants – buy-side, sell-side, and exchanges – to acknowledge that we may very well be the creators of the problems we are trying to solve.
It also begs the question of whether disintermediation, where liquidity providers interact directly with buy-side firms bilaterally, is a net benefit to investors or disproportionally contributes to a decline in accessible liquidity in multilateral venues resulting in increased trading costs. Collaboration on future innovations should aim at providing long term sustainable liquidity channels which can be accessed by all market participants in a manner that promotes the growth of Europe’s capital markets.
Industry standards for algo development – where next?
Algorithmic innovation continues to be contingent on broker and algo selection being meritocratic. Meritocracy incentivises brokers to compete with one another to build cutting edge solutions for the buy-side. An ecosystem whereby commissions get concentrated to a handful of brokers will only reduce the number of participants, and along with it the technology investment.
The next phase of algorithmic development will focus less on providing specific out-of-the -box strategies, and more on a holistic understanding of client objectives and prevailing market dynamics to determine the optimal execution strategy. This will include automating the selection of multiple algorithmic strategies and tactical behaviours during an order’s lifecycle to achieve trading benchmarks. Enhanced signalling frameworks focused on using relativity and correlation to determine optimal price levels, continue to be a key area of differentiation.
Trading benchmarks – single or multi-factor analysis?
Adjusting for market conditions and trade difficulties remains crucial in establishing the effectiveness of algorithms in achieving trading benchmarks.
Whether its measuring VWAP as a % of spread or adjusting implementation shortfall (IS) performance for expected costs and broader market moves, accounting for these factors is critical to achieving consistency of outcomes over time. Separating broader market conditions and exogenous factors is a pre-requisite to accurately evaluate algorithmic and broker performance.
Top tips for traders
The lack of liquidity in European markets is leading to more pronounced signalling and greater market impact. Optimal lit participation rates in Europe have nearly halved over the last 12 months. It is very important that traders optimise their current liquidity seeking and participation-based strategies to account for these changes in the market microstructure.
Understanding timing risk and opportunity cost on low average daily volume (ADV) orders is pivotal to improving trade performance. Stretching smaller orders unnecessarily over the day can lead to wider standard deviations of performance, often resulting in smaller sets of underperforming orders disproportionately increasing benchmark slippage.
Bob Stewart, executive director, institutional trade processing, DTCC
Pre-trade and post-trade fintech Saphyre is to work with DTCC to deliver a T+1 settlement solution.
Saphyre plans to link its Ready-To-Trade solution with data from DTCC’s ALERT to help increase transparency, efficiency, and straight-through processing across the institutional trading industry.
Bob Stewart, executive director, institutional trade processing, DTCC
Bob Stewart, DTCC executive director of institutional trade processing, said: “With the U.S.’s move to T+1 settlement fast approaching, we are pleased to collaborate with Saphyre to bring solutions to the global financial industry.
“Connecting client reference data through a link between Saphyre’s Ready-To-Trade solution and data from DTCC’s ALERT provides users with an end-to-end approach as they work toward creating operational efficiencies to successfully achieve accelerated settlement, enabling them to solve discrepancies that could potentially delay settlement.”
Ready-To-Trade subscribers will be able to query the status of critical standing settlement instructions (SSIs) reference data for all accounts, across all parties and across electronic systems directly from the Saphyre platform. The SSI status query can be done at the point of account opening or at any time during the trade lifecycle. The SSI status information for trade permissions will be available via DTCC’s ALERT API.
Saphyre’s platform enables buy-sides, sell-sides, custodians, fund administrators, asset owners, electronic trading platforms, and order management systems to onboard, and update, their client accounts before trading and throughout their lifecycle.
The US Commodity Futures Trading Commission (CFTC) has named its first chief artificial intelligence officer (CAIO).
Ted Kaouk, who currently serves as the agency’s chief data officer (CDO) and director of the division of data, will be responsible for developing the CFTC’s enterprise data and AI strategy.
CFTC chair Rostin Behnam said: “Enhanced data analytics and artificial intelligence have the potential to transform the CFTC’s long-term capabilities for oversight, surveillance, and enforcement in the derivatives markets.
CFTC CAIO Ted Kaouk
“As one of my top priorities, the CFTC has been deeply engaged in efforts to deploy an enterprise data and artificial intelligence strategy to modernise staff skillsets, instil a data-driven culture, and begin to leverage the efficiencies of AI as an innovative financial markets regulator.”
Before joining the CFTC in December 2023, Kaouk served as the CDO and responsible official for AI at the Office of Personnel Management (OPM), where he was responsible for developing the agency’s first federal government-wide human capital data strategy and data products.
Prior to joining OPM, Kaouk was the CDO at the US Department of Agriculture, where he was responsible for establishing the agency’s first enterprise data analytics and AI platform.
Philip Bille, head of buy side dealing and market structure, Degroof Petercam.
Philip Bille, head of buy side dealing and market structure, Degroof Petercam.
Degroof Petercam’s head of buy side dealing and market structure explores the ESG journey, what it means for traders’ careers and wellbeing, and why firms can no longer ignore the issue.
What are the challenges when trying to integrate something so new into established processes?
Initially, the image of a traditional trading floor may seem very far away from an ESG driven setup. A few ‘cliché’ examples: Energy consumption, large trading floors, lights, air conditioning, many screens, big data centres. Additionally, long working hours without flexibility are not aligned with wellbeing concepts and is not the best in class in terms of gender diversity. And what about business travel, jumping on planes for short trips?
So yes, ESG at first may sound like a controversial topic and not something one needs to consider regarding trading activity. However, there are plenty of opportunities to integrate ESG topics and criteria in a trading setup. It is only logical. More and more asset managers are well engaged in their ESG journey, and the same goes for financial institutions. Hence, trading floors or trading activities need to start their ESG journey since they are part of a larger organisation moving this way – and fast.
Challenges always exist when you try to integrate something new into established processes. The same applies to ESG integration into trading activities.
What is impeding progress in integrating ESG frameworks into trading processes?
It is more a combination of factors rather than a few individual concerns. On the one hand, it is something new, and it may not seem straightforward at first. Culture needs to evolve in this direction, and this takes time. You also have several external constraints. Technology and big data sit at the centre of trading activity, and this is often perceived as a hurdle. It is important to mention the opening hours of European exchanges. They are on average open two hours longer than the US market, for a fraction of the turnover, and with a high concentration of volume on the close. Reducing those market hours to an international standard would facilitate the integration of several ESG topics. The most obvious positive impacts are around mobility, wellbeing and diversity.
What progress has been made?
The biggest achievement so far is awareness. And this is already a major step. In other words, this means that the journey has started and that ESG is now effectively part of the roadmap. The speed of ESG integration still varies a lot across trading firms, but those topics are no longer ignored. Gradually, you are hearing more about the need for green data centres, new governance, the impact on recruitment processes and some wellbeing drivers, a change in travel habits, paper consumption, and much more. The best proof of progress is that ESG is now top of the agenda during leading trading conferences and present in discussions among the different actors.
The industry is ensuring ESG is higher on its agenda and is seeking to improve business practices. Beyond regulatory obligations, the pace of change is driven by the demands of shareholders, customers, employees and other key stakeholders.
What will the benefits be to firms that integrate ESG into their trading processes?
Firms will be better places to work, and this will have a positive impact on society. One clear benefit will be on the recruitment side, with higher diversity making teams stronger. Since I expect ESG to become an essential selection criterion, firms with a strong ESG footprint will stand out and be among the winners of tomorrow. And rapidly, firms will also realise that this ESG journey is an important asset to their trading activities.
In a few years’ time, we will look back and collectively wonder why this journey didn’t start earlier and we will realise that most perceived hurdles were not that difficult to overcome after all.
What technologies are firms utilising to implement ESG frameworks into their trading processes?
I do not think we should focus on technologies to implement ESG frameworks into trading processes. The ESG journey is much broader, and success will depend on the ability to act on various fronts.
Following the government’s white paper, regulators including the Financial Conduct Authority (FCA), the Bank of England and the Prudential Regulation Authority (PRA) each confirmed a principles-based approach for the UK financial sector in relation to AI, suggesting that regulated entities are unlikely to be bound by prescriptive rules governing the use of AI in the near-term.
On 29 March the UK government launched a “pro-innovation” white paper intended to “turbocharge” economic growth through a clear and “proportionate” regulatory approach that allows AI to flourish.
“Instead of creating cumbersome rules applying to all AI technologies, our framework ensures that regulatory measures are proportionate to context and outcomes, by focusing on the use of AI rather than the technology itself,” said the paper, which also stressed the importance of close international cooperation.
The government has engaged extensively in industry debate around the application of AI in all areas, and as part of its consultation response, called upon regulators in key sectors to outline their strategic approach by the end of April 2024, including an explanation of their current AI framework and any plans they have to ensure the correct structures are in place going forward to manage and regulate its use.
Jessica Rusu, FCA
In response, the FCA last week published an AI update outlining its approach.
“Financial services are already at the forefront of digitisation and AI could significantly
transform the way these firms serve their customers and clients – in both retail and wholesale financial markets,” said chief data, information and intelligence officer Jessica Rusu, who stressed that: “The FCA is a technology-agnostic, principles-based and outcomes-focused regulator.” A variety of TechSprints, regulatory sandboxes and other FCA innovation services have already been implemented to prove access to a suite of tools to collaborate and develop proof of concepts, including providing access to high-quality synthetic data.
“Data and digital plays a key role in the FCA strategy,” added Rusu. This includes
a new FCA digital hub in Leeds, while the regulator has also recently recruited over 75 data scientists. “We are exploring how we can use AI in the pursuit of our objectives. It has already transformed the speed with which we can monitor and tackle scam websites, money laundering and sanctions breaches, as well as supporting the work of the Supervision Hub,” said Rusu.
In the same week, the Bank of England and the Prudential Regulation Authority (PRA) also published a letter addressed to the secretary of state for science, innovation and technology, Michelle Donelan MP; and the economic secretary to the treasury and city minister, Bim Afolami MP, setting out their own approach to AI in the financial markets.
“AI/ML are rapidly developing technologies with the potential to enhance the financial services sector in the UK and globally,” emphasised the letter, adding that both authorities have spent the past few years working on a plan to safely adopt and regulate these new tools.
“AI/ML is already being widely adopted in many parts of the financial sector to improve firms’ operational efficiency, better detect fraud and money laundering, and enhance data and analytics capabilities,” confirmed the letter. “We have engaged extensively – and will continue to do so – with the tech sector, academia, and financial services firms to keep up with the rapid pace of technological change.”
Sam Woods, Bank of England
Both the Bank of England and the PRA stressed that their focus is to understand how to support the safe and responsible adoption of AI/ML in financial services from both a macro-financial and prudential perspective, given the potential benefits – including driving innovation – that AI/ML could bring to firms.
“Our core principles, rules, and regulations do not usually mandate or prohibit specific technologies,” they said. “However, technology-agnostic does not mean technology-blind.”
All three UK regulators have been exploring the implications of the use of AI in financial services for several years now: including an initial Bank of England paper on better understanding the adoption and use of ML in financial services published in 2019, with a follow-up in 2022. From 2020 to 2022, the Bank and the FCA ran the AI Public-Private Forum (AIPPF) examining the challenges of using AI/ML within financial services, as well as opening a dialogue between the public and private sectors on the topic. In 2022, the Bank, PRA, and FCA published a further paper seeking views on whether the existing regulatory framework was sufficient to address the risks and harms associated with AI, while in October 2023 the Bank published another feedback statement summarising respondents’ views to its discussion paper.
In December 2023 the UK’s Financial Policy Committee (FPC) was briefed on the continued adoption of AI/ML in financial services and the potential financial stability implications, and committed to considering these potential risks in 2024. The Bank is also about to launch the third instalment of its ‘ML in UK financial services’ survey, and will work with the Digital Regulation Cooperation Forum (DRCF) on selected AI/ML projects – for example, conducting joint research to better understand cross-sector adoption of generative AI technology.
“Given the rapid pace of innovation and widespread use cases, we are also undertaking deeper analysis on the potential financial stability implications of AI/ML over the course of this year,” said the deputy governors Sam Woods and Sarah Breeden.
“Both the FCA and BoE/PRA Updates indicate that they welcome the government’s principles-based, technology-agnostic and sector-led approach to regulating AI,” commented law firm Hogan Lovells. “Many businesses that operate in the financial sector – including financial services firms and technology providers – will welcome the principles-based approach favoured by the regulators and will be happy that they will not need to prepare for a prescriptive new suite of regulations in relation to IT systems that rely on AI components.”
Syed Ali, managing director for product development, change management and delivery, DTCC
In the constantly shifting regulatory landscape, firms must constantly adapt to remain compliant and maintain a competitive edge. EMIR Refit in Europe and T+1 in North America are two of the biggest headlines of 2024, with the former going live on 29 April and the latter set for 27 May in Canada and 28 May in the US. But how is the industry coping with the preparation – and the implementation?
T+1 has been a long time coming, and to date there have been numerous concerns around how to prepare for the shift.
However, David Smith, managing director and capital markets practice lead at Broadridge, reassured Global Trading this week that “with 26 days remaining until T+1 go-live, many firms have said that they are ready for the transition on May 28th, 2024.”
Where preparations are not fully in place, Broadridge suggested, firms should focus on the elements of the transition that they can control, structuring teams to more efficiently manage exceptions when they arise.
One sector expected to be hit hard by the shortened settlement cycle is ETFs, which Brown Brothers Harriman addressed in a recent report. The firm drew attention to the potential increase in settlement fails, mismatches in European and Asian secondary market trading and enhanced pressure on securities lending programmes that the shift could bring, advising firms to analyse their ETF order settlement and portfolio trading workflows and timings.
Speaking to Global Trading on the topic, Jeff Sardinha, head of ETF solutions for the Americas at State Street, commented: “One area of concern from the industry ETF perspective is essentially trying to prepare for the unknown. Has there been enough communication to industry participants? Will all of the custodian, clients and counterparties be ready? Will there be a need for day 2 changes based on day 1 issues that may arise? How will the broader ETF ecosystem react to the change, and what will the costs look like on day 1 versus day 100?”
Resource management has also emerged as a focus area, according to Broadridge Capital Markets, with increased pressure requiring collaboration and communication.
Broadridge advises that companies send teams to each satellite in their processing chains in order to fully understand and recognise how each component is connected. Compliance departments should also be engaged in looking for practical solutions before the go-live, it added, stating that this – along with communication between the buy and sell side – has been a crucial part of problem-solving processes thus far.
Smith went on to advise: “As the industry enters its final weeks of preparation, market participants should be focused on completing their T+1 implementation plans and ensuring all necessary resources are in place for a smooth transition. This includes thoroughly testing all systems and processes, training staff on the new procedures, and communicating any changes to clients and counterparties. It’s also important to have a contingency plan in place in case of any unexpected issues that may arise during the go-live period.”
In Europe, EMIR Refit is the latest large-scale regulation to go live, coming into force on 29 April. The regulation aims to improve transparency, standardisation and data quality in derivatives markets, a goal that DTCC expects it to achieve. Speaking to Global Trading, Syed Ali, managing director for product development, change management and delivery at DTCC, stated: “The EU EMIR Refit marks a significant step towards a more transparent and resilient derivatives market, with greater standardisation of data fields and formats as well as better data aggregation and risk analysis across the system.”
Standardisation should help to reduce the complexities associated with cross-border transactions and regulatory reporting, which in turn could improve market integrity and investor protections. “At the same time, broader adoption of standard data reporting formats also means increased interoperability and efficiency of data exchange, reducing errors and speeding up processing times within the financial ecosystem,” said DTCC.
“We anticipate steady progress as the industry navigates these regulatory changes,” Ali continued, but warned that “the coming months will continue to challenge firms”.
“Even though the EU EMIR Refit is now live, the previous reporting regime, EMIR-UK, will remain on the prior regime until this September. We expect that the 180-day adjustment periods will help firms to address most new reconciliation issues, ultimately improving consistency in matching rates over time,” he concluded.
Appital Insights has fully integrated with FactSet Portware EMS, allowing the latter’s buy-side clients to access Appital Insights liquidity. Appital CEO Mark Badyra spoke to Global Trading to share more about the partnership.
Speaking to Global Trading, Mark Badyra, CEO of Appital, explained the motivation behind the project. “The integration enables asset managers using FactSet’s Portware EMS to access Appital Insights liquidity via their existing execution management system. This is very much a client-driven development; buy-side firms have been asking for this functionality to be part of their daily workflows.”
FactSet Portware EMS has recently added a Live Watchlist functionality to its platform, allowing buy-side firms to determine the viability of executing larger ADV orders without alerting the market.
This complements Appital Insights’s offering, which allows buy-side institutions to gain feedback on the likelihood of a successful bookbuild without alerting others in the market or risking price erosion. Traders and portfolio managers can also use the platform to gain passive exposure in chosen equities, with consideration to minimum ADV ambitions and pricing thresholds.
Large or illiquid equity trades can then be executed using Appital Turquoise BookBuilder.
“We expect Appital platform liquidity to increase as a result [of the integration],” Badyra concluded.
Average daily equities trading on European main markets and MTFs rose by 14% between Q4 2023 and Q1 2024 according to a recent publication for the Association for Financial Markets in Europe (AFME), with LSE and Frankfurt leading the pack. Despite this increase, however, a 6% drop was seen YoY.
Turnover ratio rose to 110% after H2 2023’s record low of 100%. AFME stated that there has been a “pronounced deterioration in market liquidity” since 2018, with turnover ratio falling from approximately 150% to between 100 and 110% over the previous year.
European primary markets are currently facing a liquidity crisis, with initiatives including to address this including the EU Listing Act.
Further research from bigxyt noted that 74% of total addressable liquidity in Q1 came from on-venue trading, slightly above the approximate 70% that AFME has seen since 2018.
Equity capital raising on European exchanges reached €29.5 billion in Q1, increasing by 4% quarter-on-quarter. Secondary markets contributed most significantly to this figure, raising €23 billion over the quarter, but saw an increase of just €0.3 billion from the end of 2023.
Initial public offerings (IPOs) raised just €5 billion in Q1 2024, but recorded a 387% YoY increase. While this is a significant increase, AFME notes that since 2010 the quarterly average has been €8 billion.
Junior exchanges, defined as venues with “less onerous listing requirements” that facilitate capital raising by small to medium enterprises and younger companies, issued €0.5 billion in enquiry capital over Q1 2024. This is the lowest quarterly value recorded since Q1 2009, AFME stated.
The London Stock Exchange led Europe’s equity capital raising pack, reporting €7.2 billion in the first quarter, followed by Frankfurt Stock Exchange-Prime with €4.1 billion. The Paris Stock Exchange and Borsa Italiana both reported €3.2 billion over the year so far.
AFME’s report also considers the double volume cap mechanism, which aims to limit equity trading under the reference price waiver and the negotiated transaction waiver on EU venues. There has been a slight decline in the number of instruments suspended under the mechanism, the report states, with the number suspended at the TV hitting its lowest point since August 2021.
In our latest regulatory round-up, we see multiple global efforts from a number of regulators and agencies as they look to shore up regulation around AI, introduce new global standards to support orderly resolution of a CCP, and progress further on margin transparency. More locally, we see Australia’s stock exchange publish a white paper on the mooted move to T+1 settlement, ESMA consult on technical standards for joint examination teams under DORA, and Abu Dhabi move to enhance blockchain security standards.
CFTC approves final rules on swap confirmation requirements for SEFs
CFTC updates rules on large trader reporting for futures and options
ASX publishes industry whitepaper on T+1 settlement
HKEX hosts Asia’s first spot virtual asset ETFs
ESMA proposes changes to ELTIF Technical Standards
ESAs consult on technical standards for joint examination teams under DORA
Abu Dhabi Global Market partners Hacken Forge to boost blockchain security
FIA cautions CFTC on regulation of AI
FIA calls on international regulators to continue progress on margin transparency
AFME and UK Finance respond to HM Treasury’s PISCES consultation
FSB introduces new global standards to support orderly resolution of a CCP
Americas
CFTC approves final rules on swap confirmation requirements for SEFs
The Commodity Futures Trading Commission (CFTC) has approved final rules to amend its swap execution facility (SEF) regulations related to uncleared swap confirmations.
The amendments enable SEFs to incorporate terms of underlying, previously negotiated agreements between the counterparties by reference in an uncleared swap confirmation without being required to obtain such underlying, previously negotiated agreements.
The rules also require such confirmation to take place “as soon as technologically practicable” after the execution of the swap transaction on the SEF for both cleared and uncleared swap transactions.
CFTC updates rules on large trader reporting for futures and options
The Commodity Futures Trading Commission (CFTC) has approved final rules to amend its large trading reporting regulations for futures and options.
The regulations require futures commission merchants, clearing members, foreign brokers, and reporting firms to report to the CFTC position information for the largest futures and options traders.
The new rules replace the data elements currently in the CFTC’s regulations with an appendix specifying applicable data elements. The final rules also specify the form and manner for reporting. In addition, the final rules remove the outdated 80-character data submission standard in the CFTC’s regulations. That standard will be replaced by a FIXML standard.
Vince McGonagle, director of the division of market oversight, said “These amendments will modernize the CFTC’s large trader position reporting and align it with other reporting structures set out in the CFTC’s regulations.”
APAC
ASX releases white paper on T+1 settlement
The Australian Stock Exchange (ASX) has released a white paper designed to spark discussion on the potential move from T+2 to T+1 settlement in Australia.
The white paper outlines how Australia’s unique market structure, size, time zone, investment flows, and trading activity necessitates careful industry consideration of the risks, benefits, and costs of transitioning to T+1.
ASX group executive, securities and payments, Clive Triance, said: “ASX has a critical role to play in facilitating the discussion on whether shortening the settlement cycle promotes the interest of the Australian market as a whole.
“In putting together this whitepaper, we recognise there are various factors that will impact a decision to transition to T+1. This includes the type of service an entity provides, its own project pipeline, the cost and resourcing involved, along with potential implementation risks. Of course, this is weighed up against the potential benefit of a prompt implementation through harmonisation of settlement and funding cycles with other leading global markets.”
The publication of the whitepaper follows the establishment of the T+1 Working Group that was formed by the ASX Business Committee in December 2023.
HKEX hosts Asia’s first spot virtual asset ETFs
Hong Kong Exchanges and Clearing (HKEX) has begun listing Asia’s first Spot Virtual Asset (VA) ETFs.
HKEX head of equities product development, Brian Roberts, said: “The introduction of Spot VA ETFs in Hong Kong is the latest exciting addition to HKEX’s diverse and vibrant ETP ecosystem, providing investors with access to a new asset class. Following the success of VA Futures ETFs, the listing of Asia’s first spot VA ETFs will further enhance the product diversity and liquidity of the Hong Kong ETP market. We look forward to continuing working closely with our stakeholders with a view to launching more products to our international marketplace.”
EMEA
FCA seeks secondary markets committee members
The UK’s Financial Conduct Authority (FCA) is seeking market participants to join its secondary markets advisory committee.
Established in 2022, the committee supports the regulator’s work in wholesale secondary markets for equities, derivatives, fixed income and commodity derivatives. The regulator is looking to expand the numbers of members to 25, in order to represent the different types of firms active in wholesale markets.
ESMA proposes changes to ELTIF Technical Standards
The European Securities and Markets Authority (ESMA) has responded to the European Commission request for amendments to the European long-term investment fund (ELTIF) Technical Standards (RTS).
ESMA has suggested there should be a limited number of changes to find the right balance between protecting retail investors and contributing to the capital market union objectives.
On the RTS on redemption policy, and specifically on the calibration of the requirements relating to redemptions and liquidity management tools, ESMA acknowledged there should be an appropriate balance between protection of retail investors and financial stability related objectives and the fact that ELTIFs should make an important contribution to the capital market union objectives. However, in view of the Commission’s comments, ESMA proposes striking that balance slightly differently from the European Commission.
ESAs consult on technical standards for joint examination teams under DORA
The European Supervisory Authorities (EBA, EIOPA and ESMA) have launched a public consultation on the draft Regulatory Technical Standards (RTS) on the conduct of oversight activities in relation to the joint examination teams under the Digital Operational Resilience Act (DORA).
The primary goal of the draft RTS is to lay out criteria for determining the composition of the joint examination teams – ensuring a balanced participation of staff members from the ESAs and from the relevant competent authorities – as well as the designation of the members, their tasks, and working arrangements.
These draft RTS aim at ensuring maximum efficiency and effectiveness regarding the functioning of the joint examination teams, given their central role in the daily oversight of critical ICT third-party service providers (CTPPs). The proposed technical standards take into account the high technical complexity of the oversight activities and the scarce availability of the expertise needed to perform them. The DORA and the related RTS will apply from 17 January 2025.
Abu Dhabi Global Market partners Hacken Forge to boost blockchain security
Abu Dhabi Global Market (ADGM) and Hacken, a blockchain security auditing firm, have signed a Memorandum of Understanding (MoU) to collaborate on new benchmarks for blockchain security and compliance.
ADGM’s Registration Authority (RA) will collaborate with Hacken on developing security standards and on-chain monitoring solutions in relation to ADGM’s DLT Foundations framework.
Dyma Budorin, CEO of Hacken, said: “Our experience in working with public sectors, such as our audits for the European Blockchain Services Infrastructure and our cooperation with government entities, provides a solid foundation for this partnership. Together, we are setting a new global standard for blockchain security and compliance.”
Global
FIA cautions CFTC on regulation of AI
FIA has welcomed the CFTC’s decision to seek feedback on the uses of artificial intelligence in derivatives markets from the public before determining whether additional regulation is needed.
FIA urged the CFTC to take a “technology-neutral” approach and focus on “outcomes and use cases” rather than the technology itself.
FIA also urged the CFTC to consider the applicability of its existing rules and regulations before presupposing that new, AI-specific regulations are needed.
“In many instances, existing CFTC rules and guidance provide the controls and oversight needed for the CFTC to promote and protect the integrity and resilience of our markets,” the letter said.
FIA calls on international regulators to continue progress on margin transparency
FIA has written to international standard-setting bodies urging further progress on efforts to increase the resilience of global derivatives markets in times of stress.
The letter was submitted in response to a consultation on initial margin requirements in centrally cleared derivatives markets that was issued in January by the Basel Committee on Banking Supervision (BCBS), the Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO).
The FIA response expressed strong support for the proposed requirements for increased transparency into the process used by central counterparties to set IM requirements, saying it will give clearing members and their clients more ability to prepare for margin calls and thereby reduce liquidity risk in financial markets.
Jacqueline Mesa, global head of policy, FIA
“We strongly support the proposed requirements on CCPs to provide additional disclosures and margin simulation tools,” said Jacqueline Mesa, global head of policy, FIA.
AFME and UK Finance respond to HM Treasury’s PISCES consultation
The Association for Financial Markets in Europe (AFME) and UK Finance have responded to the consultation by HM Treasury on the Private Intermittent Securities and Capital Exchange System (“PISCES”), suggesting the overall positioning of PISCES to be “clearly expressed and agreed” before further granular rules are proposed.
Both associations state a “sandbox” environment is suitable for initially testing PISCES and; it will be critical to offer companies and their shareholders flexibility on PISCES in respect of auction structure, pricing parameters, settlement procedures, disclosure, confidentiality of disclosures and intermediation; and it would be helpful to establish parameters for the form and content of the platform’s disclosure requirements so that there is broad agreement at the outset.
Gary Simmons, managing director, high yield and equity capital markets, AFME, said: “We … welcome the proposal to establish a platform that is intended to provide liquidity for private capital markets. We have seen this market grow substantially in recent years and we welcome the recognition of its growing role in the capital markets ecosystem and desire to support the needs of private companies.”
FSB introduces new global standard to support orderly resolution of a CCP
The Financial Stability Board (FSB) has published a report on financial resources and tools for CCP resolution.
The FSB has developed a global standard for financial resources and tools to facilitate the orderly resolution of systemically important CCPs with two expectations: Resolution authorities of systemically important CCPs should have access to a set of resolution-specific resources and tools, in addition to recovery resources and tools where these are available to the resolution authority; and jurisdictions should make their approach to calibrating the resolution-specific resources and tools in the toolbox transparent.
The FSB said it will monitor implementation for CCPs that are systemically important in more than one jurisdiction through the FSB’s regular monitoring tools. The findings will be aggregated and published in the FSB’s annual Resolution Report.
If the company’s trading desk was a film set, Eric Böss would be its director. The global head of trading at Allianz Global Investors (AllianzGI) has a passion for obscure cinema, and in this issue’s cover interview he explores the intersection between art and reality – and the ongoing metaphor between movies and the markets. With Global Trading editor Laurie McAughtry also a horror movie fanatic (what are the chances?) the conversation fell down some interesting rabbit holes…
“Being a head trader is a little like being a director of a movie because you’re running a set, with a complex cast of characters – and you always have the producer keeping an eye on you. Who’s the producer? The portfolio manager and the clients, of course – they want results, in time, and error free. Growing up in the 80s, I wasn’t able to watch all the scary movies that were released back then, but I’ve made up for it since,” says Böss.
“You mustn’t be afraid to dream a little bigger, darling” – Inception, 2010
So how did a mountain-biking fan with a passion for movies fall into trading in the first place? Entirely by accident, because he was not sure which path to pursue when he left school. “In the 2020s, I probably would have travelled for a year doing things that are fun but don’t pay bills. Back in Germany in the early 90s, doing a two-year apprenticeship in a bank sounded like a smart idea.”
Although Böss had many other interests, including history, chemistry, and literature, his story started with a bank apprenticeship in his hometown of Frankfurt, which led to asset management… and he never left.
Böss traded derivatives for almost 20 years, almost to the day, before being asked to take on the role of head of trading in 2016. “I always joke that this is probably the shortest CV in the industry.”
But two decades of derivatives gave him a wealth of experience and a deep pool of diversity to draw on. “I get bored quickly, but this industry keeps you on your toes. Most of the jobs that I looked at when I was younger wouldn’t have kept me interested for 30 years like this one.
“Derivatives are usually an area which leads to interesting careers because they don’t really have a home. In the 90s especially, they were seen as a little exotic, as if we were doing black magic. Nowadays they are much more mainstream. But when we were first building it out, it was an opportunity to explore all the underlying asset classes and markets – it offered me the broadest range available in trading, which is what kept me engaged.”
“The saddest journey in the world is the one that follows a precise itinerary” – Guillermo del Toro
“In a way, some parts of my career have to some extent been driven by chance – or you could call it lucky coincidence. I had touch points with every asset class over 20 years, which is what, to some extend, led me to running trading across all assets now.”
It could have gone a very different way though. “Many crucial decisions don’t look crucial when you take them. In the aftermath though, they crystallise into crossroads,” says Böss, who at one point considered leaving trading to move into portfolio management or to the sell-side. Both decisions would have led to very different career paths, but Böss does not regret his decision.
“Small decisions can make a big difference, even if you don’t think so at the time. I think people who are successful frequently boast about how good they are and how well they planned things when actually, many careers have points where it’s all about luck – when it’s not in your hands any longer, it’s just an illusion of control.”
“Pay no attention to that man behind the curtain” – The Wizard of Oz, 1939
So how does the movie metaphor play into all this? Right from the start, there is of course a clear comparison between the move from analogue to digital in films, and the move from pit to electronic in trading, which started with FX in the 1980s.
“Movies are over 100 years old now, and they’ve come a long way – from silent, black and white, to colour, to Technicolor and CinemaScope. In the 80s, they started to use videos instead of celluloid, which changed everything. You could shoot a movie with a hand camera.”
For example, Quintin Dupieux, a French film-maker and electronic musician, shot his first film (the 2010 horror-comedy Rubber, about a homicidal car tyre) entirely on a Canon 5D DSLR.
“The technology might have changed, but they are still movies. It’s the same with trading. We’re doing exactly the same now with algorithms as we used to do in the pit trading days, trying not to be run over. Totally different toolkits, exactly the same game. It’s still a movie.”
“You’re gonna need a bigger boat” – Jaws, 1975
These days, Böss runs a team of 37 traders globally including 20 in Frankfurt, ten in Hong Kong, two in London and four in New York. His approach to trading has always been a focus on communication and technology – “in that order”.
“The link between portfolio managers and traders must be as close as humanly possible. The traders need to represent and understand what a PM wants – and that means data and communication. And that communication is the base for our contribution to alpha generation.”
As the director, it is crucial to manage the set and the cast – and it can be a challenge to curate all the different personalities on set. Böss’s team has a wide variety of passions and interests that he strongly believes contributes to its success. From wine-tasting and horse-racing to endurance running, mountain biking and mountain guiding, it is the mix that works.
“It’s about diversity of mind,” he says. “You need certain ratios. You need a healthy gender balance, you want a good age split, you want different educational and regional backgrounds and so on, but it’s all as a percentage of your overall team. You’re not just starting with a blank piece of paper and when you’re hiring someone, you don’t just run through a list. It’s about what works within the wider cast.”
It is also important to have a pipeline. “It’s like choosing a restaurant when you’re already hungry. That’s the worst time. You need to plan strategically, and then hire when you have the opportunity.”
“People don’t change. Times do” – John Wick, 2014
Back in 1995 when the trading desk was set up, the structure was by asset class: with different teams for equities, fixed income, currency and money markets, and derivatives. It was a classic split with regional focus – and until three years ago, that was how it stayed. But things are changing.
The big move is the disbanding of his dedicated derivatives team, moving the traders back to sit within individual asset classes. “Derivatives are so much more mainstream now. PMs don’t think about cash or derivatives, they think in terms of portfolio construction and risk factors – what’s my duration, what’s my exposure, and how do I manage my portfolio with these factors? The good trader should understand the dynamics of futures and swaps as well as she understands the underlying market.”
That brings up the theme of constant learning rather than siloing expertise into different areas – something Böss feels strongly about. “Across all asset classes, we have a very ‘bottom-up’ house with a lot of different strategies that the traders have to serve, so even though we’re a larger firm on a global basis, I can’t go full specialist and frankly do not want to either. I want the asset class experts to cross-fertilise, which is why we’ve always had all our traders in each region in one big room, which allows for the best possible communication and means they’re surrounded by different influences and have an optimal position to trade interconnected markets.”
At the end of the day, the trading team has to work for the investment strategies that it serves, and Böss believes his team can make a genuine contribution to alpha generation. AllianzGI is an active asset manager – it doesn’t run passive money. And while some of its strategies are very low turnover, others are nimbler, some are concentrated, others broadly diversified with hundreds of portfolio lines. “Trading does make a difference there,” he says. “The math behind it is pretty simple. If you’re turning over a billion and you can squeeze out one basis point in better execution, you’ve already moved the needle. Traders have to be able to make a difference. Yes, sometimes our strategies are about cost optimisation more than about alpha catching, but there are still a significant number of occasions where it does make a difference.”
It all comes down to strategy, in Böss’s eyes – and he plans his strategies up to three and even five years in advance, in parity with the PMs. “We don’t need to reinvent the wheel because we already know how to trade,” he explains. “Most asset classes are already trading electronically, so we’ve got a set of tools which work very well. It’s how you use them that makes the difference. We’re like the wheels on a car. Yes, the PMs might be the engine but if their wheels are flat, they will have a hard time to perform. And to stick with that analogy: Traders can help to pick the right wheels for a particular race.”
“Everybody is afraid of the unknown” – Wes Craven
On an even higher level, as head of trading Böss has to understand the regulatory environment so that he can position his desk to work with all the different regulators that govern the firm. Combine that with internal accountability and external stakeholders, the demographics of the existing trading team where some have just started in the business while others already traded for decades, and it all comes back to the team structure he creates. The director and the cast.
“We need to bring in the right skill sets and, especially, enable more people to focus on technology. But we also need people who know what to do with that technology, we need traders. Movie-making, just like trading, involves a lot of preparation and coordination. But you never fully know what’s going to happen, and then you have to adapt.”
Böss jokingly compares it to Werner Herzog’s 1982 adventure epic Fitzcarraldo, with Klaus Kinski in the main role – a film beset by a series of misfortunes (one of which ended up with the crew manually hauling a 320-ton steamship up a steep hill, resulting in three injuries), Kinski and Herzog getting at each other’s throats almost literally, and indigenous Amazonians attacking the set.
“Psychological safety for my team to do their job in a very stressful environment is paramount,” he says. “They need the right attitude, training, the right equipment and the right support.”
“We imagine a future… and our imaginings horrify us” – Oppenheimer, 2023
As head of desk, however, it is important to maintain perspective. “When you’re running a trading team of this size in an organisation as large as ours, if you’re too deep in the weeds then you’re doing something wrong. We have to position trading strategically for the longer term.”
Given that AllianzGI is a global asset manager with a very strong European footprint, the firm has a lot of skin in the game when it comes to the future of Europe’s capital markets – and right now, Böss is not feeling optimistic.
“We run a lot of European assets and the fact is that European equity turnover is getting lower and lower, especially in comparison to the US. European companies are just not listing in Europe anymore. We need to urgently look at what can be done on the regulatory side to support our markets because currently, Europe’s equity markets are home to great companies, but stuck in a vicious cycle of lower turnover, fewer IPOs and a less transparent market structure than the US, which is not helping the capital markets union nor the financial industry. No one wants to be the person to stand up and say it, but people are getting frustrated.”
It is like the dominance of the US in the world of cinema, suggests Böss, except the other way round. These days, cinema is branching out and expanding into diverse regional market – no longer is Hollywood the centre of the movie universe. “You’ve got Bollywood, which is the biggest in the world now. You’ve got Nollywood (Nigeria, the world’s faster-growing film industry), which is already bigger than Hollywood. You’ve got Netflix, which is taking regional productions global.”
By comparison, the US remains the largest capital market in the world, with a virtuous cycle where liquidity begets liquidity partly due to its large retail base and more capital backed retirement system. So how do we stem this bleeding out of liquidity from Europe?
“The biggest problem is that we don’t just have one European capital market, we have 27 of them. Most market regulations are handed down to national competent authorities, and that makes them harder to access and much less transparent. We still don’t have a consolidated tape, though that may finally come to pass in two years, which means that if you’re an outside observer, it’s very difficult even to know what’s being traded in Europe. Capital mobilisation is another big issue, and the retail investor situation currently has a lot of upside, given its low share of trading volumes. Our politicians could perhaps take a lesson from the Nordics, which had a very successful shift towards a system supporting private savings in capital markets.”
“Cinema is a medium that can translate ideas” – David Lynch
Looking to the future, Böss believes that how a desk can handle data will be crucial to its survival. Part of his current rebuild is the creation of a new tech team to do exactly that – moving a current trader to run a dedicated team on the trading floor to support and build out trading technology to underpin the evolution of the desk.
“Again, it’s like the switch from analogue to digital. What we’re seeing now is behavioural change – similar to when we introduced Excel and Office into our workflows back in the 90s. The technology we’re seeing now has been around for years, but it is becoming increasingly commoditised and easier to use, so not doing so would quickly become a competitive disadvantage.
“Data science and large language models are to some extent buzzwords, but both technologies have huge potential, and we try to deploy them where it makes sense. In many cases the economics do not add up since either the data or the tools are too expensive, but one can’t ignore those technologies, it is part of preparing for the future or just evolution if you will.
“I think in ten years we could see the same number of traders but ten times the volumes managed by them, so we need to be able to effectively process ever larger quantities of trades without compromising quality. What traders will need to be able to do so, is use new toolkits to make decisions.
“Once equipped with the right technology, human traders will still be better than just AI alone. Films like The Matrix and Ghost in the Shell immediately come to mind – androids beat robots any time.”
“Why don’t we wait here a little while and see what happens?” – The Thing, 1982
Over the last three decades, Böss has seen a lot of things (and we’re not just talking about movies). So what has he learned?
“Capital markets are ultimately more art than science. We do a lot of math but those are just models used to represent the reality around us. That’s why computers are still not the best investors. Markets are constantly changing based on the society that interacts with it. My job allows me to observe and analyse all those developments, just through the lens of what they do with their money, how they invest and consume. Does it get more interesting than that?
“It’s very similar to a director looking through the lens of a camera. After 30 years of watching horror movies, I thought I was pretty hard to shock – but I could be wrong.”
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