Facebook’s Libra Boosts Bitcoin And Other Cryptos

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July 2, 2019

Bitcoin mining USB devices on a large USB hub.

Facebook has officially launched its own cryptocurrency – Libra – and it continues to lift and buoy the crypto universe – starting with Bitcoin.

As per its website, Facebook via the Libra Association announced Libra, a simple global currency and financial infrastructure that can empower billions of people. Libra will be built on a secure, scalable, and reliable blockchain; it will be backed by a reserve of assets designed to give it intrinsic value; and it will be governed by the independent Libra Association, which was formed to manage and evolve this new ecosystem.

“With Libra, we will enable developers and businesses to build new, inclusive financial service products for people all around the world.,” Libra said in a release. “This ecosystem will be underpinned by the Libra Blockchain, a new blockchain that has been built from the ground up to prioritize scalability, security, and reliability, as well as the flexibility required to evolve over time; and the Libra Reserve, a reserve of real assets that will back the Libra currency, providing low volatility, wide global acceptance, and fungibility.

The Libra Association will be responsible for facilitating the development of the Libra Blockchain and managing the Libra Reserve. Members of the Libra Association will consist of geographically distributed and diverse businesses, nonprofit and multilateral organizations, and academic institutions. The initial group of organizations that will work together on finalizing the association’s charter and become “Founding Members” upon its completion are, by industry:

• Payments: Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa

• Technology and marketplaces: Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, Mercado Pago, Spotify AB, Uber Technologies, Inc.

• Telecommunications: Iliad, Vodafone Group

• Blockchain: Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings Limited

• Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures

• Nonprofit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking

“Over the coming months, the association and its members will be recruiting additional members to further diversify and support the network. We will also be raising money in a private placement to help jumpstart the ecosystem and drive adoption. We will also continue engaging with regulators, policymakers, and experts to solicit feedback and ensure that this global financial infrastructure is governed in a way that is reflective of the people it serves. We believe this will be a significant undertaking — and responsibility — and we will continue to work openly and collaboratively as we move toward our goal of launching this new ecosystem in the first half of 2020.”

And as a rising tide lifts all ships, Libra’s official launch has supported and continues to support the main cryptocurrencies such as Bitcoin, lifting it from a dismal 2018 performance to the current rally. Bitcoin currently stands at $9151.15. According to some, the next Bitcoin run is imminent.

Nigel Green, founder and chief executive of deVere Group, said that as Bitcoin has climbed from $8000 just one week ago to almost $10000, said the currency , “Ditched its trademark volatility, Bitcoin has been stuck in no-man’s land for over a week oscillating within a $600 range. But the price of the world’s largest cryptocurrency has surged to the upside.”

Crypto revival?

The continued upward trajectory in the currency, due in part to the Libra announcement, could indicate that Bitcoin is on the verge of the next bull run, Green said.

“Crypto history teaches us that periods of low volatility come directly before extended crypto bull runs. Should Bitcoin experience a new run, we can expect it to deliver a boost to the wider crypto market, with other leading cryptocurrencies such as Ethereum, XRP and Litecoin, rallying too,” Green said.

Christel Quek, Chief Commercial Officer, Co-Founder, BOLT.Global noted that as Bitcoin has hit and moved past $9,000 for the first time since May 2018, is a direct reaction to Libra.

“Investors are scrambling back into crypto assets such as bitcoin and other alternate tokens, over optimism that they are becoming widely accepted and adopted by mainstream entities,” Quek said. ”Facebook’s entry into the crypto space perhaps signifies the biggest network potential for digital currencies, capable of reaching into billions, and therefore indicates an upcoming shift in mainstream finance.”

He added that he is encouraged by the market responses and Facebook’s entry into the crypto currency space.

“This may see further revival and growth of digital tokens this year, as more developments emerge,” he said. “I wouldn’t discount a degree of volatility of course, as hobbyist investors engage in profit taking and perhaps governments attempt to legislate digital finance.”

Nicolas Colas, co-founder of DataTrek, said in a recent feature that given the interest in Libra and Bitcoin, he performed a a quick check-in on his two favorite fundamental indicators for the crypto currency that measure incremental “interest” and “adoption”:

#1: Google search trends, a proxy for potential new users:

• Online interest in bitcoin spiked in mid-May 2019 as it moved quickly from $5,400 at the start of the month to $8,200 on the 15th.

• Since then, the number of global Google users querying for the term “bitcoin” has fallen by 36%.

• That said, Google search interest in bitcoin remains 50% higher than where it was in Q1 2019.

• See the Google Trends chart here: https://trends.google.com/trends/explore?q=bitcoin

#2: Global growth in the number of bitcoin wallets, one measure of adoption (i.e. actually moving money from fiat to crypto currency):

• After averaging 2.8% monthly growth in Q1, the wallet count grew by 5.8% in April and 6.0% in May 2018.

• June has been a little slower at a run rate of 3.1% so far for the month, but still ahead of Q1’s average.

• Also worth noting: the total number of bitcoin wallets has grown by 24% in 2019 and now stands at 39.5 million.

“The upshot here is that bitcoin’s recent move over $9,000 looks to be part of a “grind higher” based on these fundamentals,” Colas said. “So why would bitcoin rally into an announcement of a potentially powerful rival? First, the fact that Facebook et al even want to build a crypto currency validates the idea of a decentralized currency/payment system. Second, and more importantly, for every company that is part of Libra, there are thousands who are not. What technology will they use? Bitcoin is one answer.”

Diversity & Inclusion Q&A: Vinay Kapoor, BNP Paribas

By

Markets Media

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July 2, 2019

In honor of Pride Month, Markets Media caught up with Vinay Kapoor, Americas Head of Diversity and Inclusion at BNP Paribas, to discuss the importance of LGBT Inclusion in the workplace.

Describe your role and responsibilities as Head of Diversity & Inclusion in the Americas for BNP Paribas.

Vinay Kapoor, BNP Paribas

I am responsible for the leadership, development and implementation of the Diversity & Inclusion strategy across the Americas.

To do this, I work closely with HR and senior business leaders to facilitate the integration of D&I into people and business processes and practices. I also partner with multiple stakeholders in the business to ensure alignment to commercial goals, and ultimately to facilitate a wider culture of inclusion.

When was your position created at BNP and what was the rationale behind it?

I joined BNP Paribas in New York as the Americas Head of Diversity & Inclusion in 2017. Prior to this, I occupied the role of UK Territory Head of Diversity & Inclusion, working in London for the bank.

While the Americas position is relatively new, Diversity & Inclusion have always been part of BNP Paribas’ core values. This type of position is no longer a “nice to have” for corporates, but necessary if they want to remain relevant and innovative. The bank wanted to make sure it was attracting and retaining a heavily diverse group of talent to better serve and understand its clients, and to promote various forms of critical thinking and collaboration in general.

Discuss the importance of LGBT Inclusion in the workplace, both generally and specific to Wall Street/BNP Paribas? 

LGBTQ+ people want to be able to be themselves at work. They want to feel comfortable around and supported by their colleagues, and prove more positive and efficient in the workplace when they can, which isn’t surprising. A recent report based on YouGov research found that 35% of LGBT people have hidden their identity at work because they were afraid of discrimination. This number rises to 42% for black, Asian and minority ethnic LGBT staff and 51% for trans staff.

When we make it a priority to include LGBTQ+ people in the workplace and train our LGBTQ+ allies to support them, we’re paving the way for a much more collective and competent workforce, helping our employees to better understand themselves and the people they work with and for on a daily basis.

At BNP Paribas, we’ve hosted numerous Unconscious Bias Leadership Workshops, which have now been rolled out to over 4,000 US-based employees. We fully believe that such trainings will ensure that diversity becomes business as usual, making our employees better leaders and making the bank a more effective leader as a result.

How does diversity and inclusion support business growth for BNP Paribas?

When we become aware of and more sensitive to our colleagues’ differences, both the visible and less obvious, it gives us the opportunity to be more open-minded and to work together more easily. Raising employee engagement globally through these D&I initiatives leads to higher profitability, productivity, and lower turnover.

Just as we embrace modernization in our products and offerings, we need to view talent differently to ensure the bank continues to grow and succeed appropriately.

What do you see for the future of diversity and inclusion initiatives on Wall Street?

There’s still work to be done, of course. I’ve witnessed a significant shift in the diversity and inclusion conversation over the years, with a greater understanding that it’s really about good leadership.

Removing the systemic institutionalized bias found in corporate America and on Wall Street in general will be a long road ahead, most likely to span over the next few generations, but it is happening and the result will be greater awareness of others among us all.

Industry Looks For AI Guidance

By

Rob Daly

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July 2, 2019

Machine learning , artificial intelligence , ai, deep learning blockchain neural network concept. Brain made with shining wireframe above multiple blockchain cpu on circuit board 3d render. — Machine learning , artificial intelligence, ai, deep learning blockchain neural network concept. Brain made with shining wireframe above multiple blockchain cpu on circuit board 3d render.

As Wall Street’s adoption of artificial intelligence speeds up, the call for industry guardrails gets louder.

According to a survey conducted by Broadridge Financial Solutions in May, 84% of firms are at or have moved beyond AI-based proofs-of-concept.

One-in-five of the respondents said that their firms are using the technology in production while slightly more, 29%, are running AI-based pilots.

“AI has the potential to transform capital markets and the capital markets industry radically,” Michael Tae, head of strategy for Broadridge, told Markets Media. “There are opportunities for service improvements, faster front-to-back trade lifecycle processing, risk reduction, and improved cost efficiency.”

Over time, AI may even redraw the map of what is considered the financial sector, R. Jesse McWaters, financial innovation lead, World Economic Forum, testified before the House Financial Services’ Task Force on Artificial Intelligence.

“Small and mid-sized financial institutions that are unable to invest in becoming AI leaders, may instead choose to employ AI capabilities of third parties on an as-a-service basis,” he said. “These seismic shifts in the landscape of financial services create new risks. The enormous complexity of some AI systems challenge the traditional models of regulation and compliance.”

Untested AI technologies

A significant concern put forward during the hearing was that a wide swathe of AI techniques have not gone through a financial crisis and remain untested.

“There as several instances where algorithms implemented by financial firms appeared to act in ways quite unforeseen by their developers, leading to errors and flash crashes,” noted Bonnie Buchanan, the head of School of Finance and Accounting and professor of finance, Surrey Business School, at the University of Surrey, during the hearing.

There is a tendency in the trading world where machine-to-machine interactions result in feedback loops that have had damaging impacts, agreed fellow Congressional witness R. Jesse McWaters, financial innovation lead at the World Economic Forum.

Scenario-based models and continuing standard stress tests should address the issue, he added.

However, one of the most popular AI implementations, machine learning, bring a host of issues with it, according to Douglas Merrill, founder and CEO of ZestFinance and who testified before the task force.

“Machine-learning models are inherently opaque and inherently biased,” he said. “You only know that a machine learning model has made a decision but not why it made that decision. Without knowing why a decision was made leads to bad outcomes.”

Although AI implementations are new for many financial institutions, they do not challenge the fundamental principles of existing regulatory frameworks, according to McWaters.

The Federal Reserve, OCC, and FIDC published guidance on effective models for risk management in 2011, but Congress could encourage the regulators to update their guidance with best practices in machine learning modeling as well as validating, monitoring, and auditing the models, suggested Merrill.

“I’d hope through either Congressional intervention or regulatory intervention we would come to a world in which there would be a language describe what is acceptable before you build a model and agreed upon language at the end of models to show if you do indeed have a bias problem,” he said. “The odds are good that you are going to.”

Broker-Dealers Prep For Institutional Crypto

By

Rob Daly

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July 2, 2019

Bitcoin and cryptocurrency investing concept. — Bangkok, Thailand - May 11, 2018 : Bitcoin and cryptocurrency investing concept - Physical metal Bitcoin coins with global trading exchange market price chart in the background.

Many on Wall Street plan to forgo first mover advantage so that they can prepare for the long game when it comes to cryptocurrencies and digital assets.

Nomura International has seen early demand for cryptocurrency exposure coming from high net worth retail investors and hedge funds that cater to that space, according to Christopher DeWinter, managing director, market structure & strategic investments at Nomura International, who participated in a panel discussion at the recent Crypto Evolved conference in Midtown Manhattan.

The broker-dealer is spending more of its time and resources to serve the growing hedge fund market by having the appropriate processes in place to meet clients’ fiduciary responsibilities, he said.

“There is a lot of pressure from those who invest in these funds,” he said. “The funds, in turn, come to ask for solutions that get it right. They will not come in until they see an ecosystem that is set up and works for them and they can go to their customers and honestly say that they are comfortable with it.”

The overall size and liquidity of the cryptocurrency market, which equates to a small company on the Big Board, remains a significant gating factor for many financial organization from participating fully in the nascent market, according to DeWinter.

“If you are presenting this asset as something you can do and 50% of the user base cannot buy, there is not enough liquidity to support it,” added fellow panelist Maria Adamjee, founder and principal at Megalodon Capital.

In the meantime, some firms may be content having smaller accounts trading $5,000, $50,000, or $100,000 at a clip, but the institutional market will not arrive until clients can trade $1 million at a clip as they do with swaps trade, said DeWinter. “We are focusing on the underlying infrastructure in the hopes as we get more comfortable that the asset is something that you can hold onto and Mt. Gox will not happen again.”

Buyer’s Guide: Collateral Management & OTC Derivatives Processing Solutions 2019

By

Ian Rycott

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July 1, 2019

Buyer’s Guide: Collateral Management & OTC Derivatives Processing Solutions 2019

In 2019, the collateral management and OTC derivatives processing vendor solutions space is dominated by two questions from a Tier I and Tier II investment bank selection process perspective:

· Vendor Selection & Total Cost of Ownership – Which vendor solution is capable of offering a ‘true,’ front-to-back, single-platform experience at an enterprise-wide level, thus negating the need for costly, labour-intensive deployments and implementations of two or more systems? and

· Modularity & Buy-and-Build – From a product or technology architecture perspective, which solution is modular-enough to allow an investment bank to pluck out specific components of a vendor offering that can then be married with existing, in-house built, legacy middle- or back-office systems that are often near-impossible to displace?

https://greyspark.com/report/buyers-guide-collateral-management-otc-derivatives-processing-solutions-2019/

Viewpoint : Brexit : Irina Sonich-Bright

By

Ian Rycott

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June 27, 2019

Be45_FIX_Irina-Sonich-Bright — Irina Sonich-Bright, Credit Suisse & FIX Trading Community

Irina Sonich-Bright, Credit Suisse & FIX Trading Community

PLANNING FOR THE UNKNOWN.

Irina Sonich-Bright* discusses the diversity of the FIX Trading Community and how it addresses the yet undefinable Brexit outcome.

The FIX Trading Community is wonderfully diverse. Its members consisting of buyside, sellside, vendors, exchanges and market operators, working closely with other industry associations such as AFME, BVI, EDMA, IA and ICMA, covering mostly technical issues, but it doesn’t stop there. FIX, renowned for its messaging protocol industry standards, also works on and publishes practical guidelines that affect multiple areas of the trading community.

With a diverse community comes diverse challenges. As a result, for Brexit specifically, the community is focusing on identifying the gaps the other industry associations may not be addressing or, where there is a need for the wider community to agree on a certain implementation. For example, with Brexit the IA and AFME focus on the situation around equivalency, Shares Trading Obligations (STO), and firms’ readiness for Brexit whatever the outcome might be. The FIX Brexit Working Group however, (co-chaired by myself and Dr Anthony Kirby) is going into the weeds and highlighting the impact on the reference data, trade and transaction reporting, and the possible changes to the transparency calculations. In fact, the majority of the Brexit points that the Working Group are addressing now relate to the implementation of the latest regulatory initiative that was rolled out in Europe last year – MiFID II. To that extent, many of the conversations FIX Trading Community members are having right now involve how the ‘tale of two MiFIDs’ will play out, particularly if the industry fails to receive conclusive and unambiguous direction from the regulators on either side of the UK and EU.

The impact on post-trade transparency

As an example, a recent technical question received by the Brexit Working Group was how would firms be able to identify the jurisdiction of a Systematic Internaliser (SI) they are dealing with, as well as the jurisdiction of where the trade was to be reported. Both relate to the complexity of the rules that firms need to be able to consider in order to fulfil their post-trade transparency obligations. In a no-deal Brexit scenario, the reporting of a trade by an SI in the UK no longer means that it fulfils the trade reporting obligations of the SI’s European counterparty, who will also have to report that trade in the EU. However, if the same EU counterparty was dealing with an EU SI – the single EU SI report would be sufficient.

The obligations under Articles 20 and 21 of MiFIR requires EU investment firms to publish transactions for instruments that are traded on a trading venue (TOTV) via an Approved Publication Arrangement (APA). This also applies to over the counter (OTC) transactions involving an EU investment firm and a counterparty established in a third country. In the event of a no-deal Brexit, investment firms established in the UK will no longer be considered EU investment firms but will fall into the category of counterparties established in a third country. As a consequence, EU investment firms are required to make public any OTC transactions with UK counterparties via an APA established in the EU27, as confirmed by ESMA’s public statement on provisions under a no-deal Brexit, 7 March 20191.

Under the temporary transitional power, UK investment firms that do not have a reporting obligation for transactions conducted with an EU27 investment firm before Brexit will not be required to report these transactions to a UK APA for a period of 15 months after Brexit. This was confirmed by the FCA’s statement on various MiFID obligations if the UK leave the EU without an implementation period, 13 March 20192(see Figure 1).

The FIX Global Technical Committee is assessing and identifying possible new FIX Tags to assist in identifying the jurisdiction of an SI and also which jurisdiction region the trades will need to be reported to. This will result in FIX delivering a revised Trade Reporting Guidelines for MiFID with additional BREXIT Tags.

The impact on Shares Trading Obligations (STO)

The initial statement from ESMA on STO3in a hard Brexit scenario, indicated a potentially diverse treatment of STO between the EU and UK. A broker’s smart order router (SOR), tuned in to the provision of best execution, won’t be able to route orders subject to the EU STO to the markets where the price of a stock might be better than on an EU market, and, for the originally selected 14 GB ISINs, to the most liquid markets.

In a more recent statement4released on the 29th of May, ESMA has confirmed that it will not be applying the EU STO restrictions to the 14 GB ISINs after all, but rather restrict EU STO to the EU27 ISINs only.

In response, the FCA has also issued a new statement5, disagreeing with ESMA’s method, because a number of shares with EU27 ISINs have both a listing, as well as their main or only significant centre of market liquidity, on UK markets. As demonstrated in Figure 2 for a subset of stocks traded on LSE. The FCA insisted that reciprocal equivalence is the main way to avoid disruption and suggested that an alternative would be for both the UK and EU STOs to be applied on an EU28 basis for a limited period of time after a no-deal Brexit.

This development has created a need for the industry to agree on a standard of how to communicate electronically what STO should be applicable to their orders. This is specifically relevant for private banks and asset managers who have clients and funds across different jurisdictions. Third-country private banks will need to be able to tell their broker to execute orders originated from EU clients in accordance to the EU STO, whereas the non-EU originated orders won’t have the EU STO trading restrictions.

It is important that we also consider how MiFID and Brexit will affect our global community. Whilst we strive to keep any changes related to MiFID or Brexit implementations of the FIX Protocol and practices restricted to the UK and Europe, some of these changes are also affecting our global members. As an example, the work the Execution Venue Transparency Working Group has been focusing on (e.g. Tag 30, 29 and 851) was originally initiated by the US Buy Side Working Group and has been affected by MiFID II changes. Global vendors who serve UK and EU clients suddenly have to keep separate budgets for their European regulatory initiatives (e.g. reference data, reporting) with FIX Working Groups sometimes being the only channel of sourcing information around upcoming changes to the FIX Protocol standards and practical use guidelines.

With the Brexit delay, the urgency of these changes ceased slightly, however, with less and less confidence in the outcome of what Brexit will look like, the industry is ‘preparing for the worst whilst still hoping for the best’. n

If you are interested in getting involved in FIX Trading Community and the Brexit Working Group, contact: fix@fixtrading.org.

*Irina Sonich-Bright, is Director of Global Execution Services and Head of Product Management at Credit Suisse & co-chair of the FIX Protocol Business Practices, Transparency and Brexit working Group for FIX Trading Community.

Footnotes

1. https://www.esma.europa.eu/sites/default/files/library/esma70-155-7253_public_statement_mifidii_bmr_provisions_under_a_no_deal_brexit.pdf

2. https://www.fca.org.uk/news/statements/statement-various-mifid-obligations-and-benchmarks-regulation-if-uk-leaves-eu-without-implementation

3. https://www.esma.europa.eu/sites/default/files/library/esma70-155-7329_public_statement_trading_obligation_shares.pdf

4. https://www.esma.europa.eu/sites/default/files/library/esma70-154-1204_revised_public_statement_trading_obligation_shares.pdf

5. https://www.fca.org.uk/news/statements/fca-update-share-trading-obligations

©Best Execution 2019
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Viewpoint : Margin optimisation : Jo Burnham

By

Ian Rycott

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June 27, 2019

Be45_OpenGamma_Jo-Burnham_365x478 — Jo Burnham, OpenGamma

MARGIN OPTIMISATION: A KEY DIFFERENTIATOR FOR FIRMS OF ANY SIZE.

Jo Burnham, risk and margining expert at OpenGamma

Margin is something that larger firms are already familiar with. But by the time UMR (Uncleared Margin Rules) Phase V is introduced in September 2020 there will be over 9,000 additional entities in scope to post margin. This will result in a lot more margin being exchanged, and consequently a liquidity squeeze on suitable collateral to cover this margin.

Therefore, margin optimisation – minimising the amount of margin paid – becomes an important requirement not just for a few firms, but for the majority. The lower the margin the less collateral required and, therefore, the less you will be impacted by costs associated with in-demand collateral. And even if you are lucky enough to have access to sufficient collateral, by optimising your margin requirement you will be maximising your return on capital. Whichever way you look at it – margin optimisation is key to increasing capital efficiency.

So that leads to the question ‘How do I optimise my margin?’. The answer depends on the type of firm you are and the products you trade. But there are four key areas to consider:

Multiple clearing brokers
Multiple clearing houses
Bilateral to Bilateral
Bilateral to Cleared

Let’s look at each of these in more detail.

Multiple Clearing Brokers

If you are clearing your business through clearing brokers then you need to make sure that you are making best use of them. By careful allocation of your business between your brokers you can make significant savings on the margin required.

Most CCP algorithms allow offsets between different products. For any algorithm that is based on VaR (Value at Risk) you will naturally get offsets between profits and losses, for example, between different currencies for swaps. And, for scenario-based algorithms like SPAN, then explicit offsets will be allowed between correlated products. You need to make sure that you are correctly allocating positions between brokers to make the most of these offsets.

You also need to consider the liquidity and concentration add-ons included in CCP algorithms. This means that the larger the position the more margin you will pay. Brokers require margin based on the CCP algorithm, so if you split your position between multiple brokers you will have a smaller position at each and therefore significantly lower margin add-ons.

Multiple CCPs

For a large number of centrally cleared products, there is a choice available of where to clear your position. Traders generally take into account any pricing basis between the CCPs and differences in liquidity, but it can also be worth considering the level of margin charged.

Although CCPs are subject to similar regulation in terms of the risk coverage their margin algorithms should provide, there can be surprising differences in the number calculated based on the same portfolio. The collateral that can be used to cover this margin – and the haircuts applied to the collateral – also vary between the CCPs. A CCP that accepts a wider range of collateral may well be worth considering with the inevitable liquidity squeeze on collateral that will result from the introduction of UMR Phase V.

And not to forget cross margin. CCPs that offer clearing of OTC swaps, as well as ETD fixed income products, generally allow margin savings based on offsets between the two product sets. This margin saving should be considered when deciding on where to clear.

Bilateral to Bilateral

UMR creates its own optimisation opportunities. In particular, firms can agree to a regulatory threshold with their counterparties that they would need to reach before posting or receiving margin. So when deciding who to trade with you should make sure that you are making full use of any available thresholds in order to minimise your margin costs. The calculation of margin has a ‘best execution’ impact: an opportunity to optimise your return on capital. Especially when the thresholds can cover your margin for free.

Bilateral to Cleared

Only some products are subject to a clearing obligation. For others – where a CCP offers the service – you have a choice of whether you clear the position or remain bilateral. In terms of margin, the most obvious thing to look at is the difference between the margin required by the CCP and the equivalent margin calculated using SIMM – the method most likely to be used for bilateral margin.

And if you think that remaining bilateral is best, then it might be worth considering the cost of calculating and reconciling SIMM (Standard Initial Margin Model) margin. Unlike the CCP algorithms which take trade details as their input, SIMM requires each counterparty to calculate sensitivities for the bilateral portfolio. The margin is then calculated based on these sensitivities and reconciled between the two counterparties. Here, even a small difference in the sensitivity calculated – for example, by the use of a different option pricing model – can have a significant impact on the margin calculated. This additional operational cost should probably be built in to the execution cost to make sure that you are getting the best return on your capital.

To sum up

It’s a challenging time from a margin perspective, especially with the approaching introduction of UMR Phase V, but from challenges come opportunities. By aiming to optimise your margin, there is an opportunity to differentiate yourself from the rest of the pack. The increase in margin requirements and the subsequent collateral liquidity squeeze is going to make it harder to achieve capital efficiency, so adopt a proactive view to address this and protect your bottom line.

©Best Execution 2019
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Viewpoint : SIX Digital Exchange : Martin Halblaub

By

Ian Rycott

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June 27, 2019

Martin Halblaub, CEO, SIX Digital Exchange (SDX)

THE FUTURE IS DIGITAL.

Martin Halblaub, CEO of the soon to be launched SIX Digital Exchange (SDX), speaks to Best Execution about the Swiss stock exchange’s new venture to provide end-to-end trading, settlement and custody services for digital assets.

What is SDX?

To put it simply, we are launching what will be the financial infrastructure of the future. SDX’s aim is to be the world’s leading exchange for trading digital assets with tokens on the blockchain, where professional investors will be able to access, transfer and store digital assets. We will be providing a fully integrated offering in a model where asset ownership is distributed and one which allows us to leverage technology to unlock value that has not been accessible in legacy market models.

What does SDX offer?

While the relationship between SDX – as the market infrastructure – its members and end investors remains unchanged, the new technology underpinning the infrastructure brings about significant and valuable changes. The most fundamental of these is that trading and settlement will no longer be separated. Instead, they will operate in the same cycle, which we have coined ‘Riskless Trading’.

What we are able to do, is to effectively guarantee that every matched order (or execution) is settled, which is made possible through ‘atomic settlement’ on the SDX system. We’ve called it ‘atomic’ because both the delivery and payment legs of a transaction happen simultaneously, in sub-second timeframes. This makes it a single event on a ledger, where trade execution now equals settlement finality.

Riskless Trading effectively means that there is no need to mitigate risk. Sub-second timeframes means that the capital exposure of days (as in the case of T+2, for example), no longer exists and there is no need for clearing as a function.

SDX’s member banks will be able to settle their trades and other obligations against tokenised CHF within SDX. To facilitate this, SDX would accept CHF payments from member banks in central bank money and issue equivalent tokenised CHF in SDX. The value of tokenised CHF would be pegged 1:1 with CHF at all times.

Are there advantages beyond execution and settlement?

Yes indeed. Take for example asset servicing and custody. Trading today rarely includes details of the beneficial owner and thus after an on-exchange market trade there follow the allocation and reconciliation tasks. The SDX ecosystem design will provide for secure storage of client data, and therefore beneficial owner information can be included on orders and can also be used for asset servicing automation. Of course, the beneficial owner data must be secure data to the relevant member, however, the link between asset and owner in a digital world allows for real-time information at the client holding level. This will also significantly simplify corporate event handling.

How will you support the growth of securitised token and digital asset trading?

SDX is the first exchange that will cover the entire value chain, end-to-end, in a fully regulated environment, and as such we will be setting the basis for the adoption of digital asset trading in the future.

How will the exchange facilitate liquidity on the platform?

It is a core function of any exchange to provide liquidity, and such liquidity will be enabled by associated market makers and liquidity providers. We are actively targeting sell- and buyside market participants as well as market makers to encourage liquidity and price discovery.

What DLT/blockchain model does SDX use and what is the architecture?

SDX has integrated a matching engine at matching point into an opensource Corda layer enhanced by an SDX policy layer. Furthermore SDX is developing proprietary custody and key management solutions to achieve an end-to-end and fully integrated digital asset trading, settlement and custody service.

SDX will operate a network of member nodes that will facilitate the exchange of value between members. Each node will offer a set of services that corresponds to the specific role of the member. Only registered SDX members are allowed to carry out transactions in the SDX network. The integrity and consistency of the network is guaranteed through notary nodes managed by SDX with all the necessary regulatory oversight. The notary is responsible to ensure consistency of transactions and prohibit double spending.

Beyond the core DLT infrastructure, we are also reviewing all aspects of operating a market using a distributed model. This applies to data management and messaging strategies as well as deployment, operations and security controls.

Will SDX support both primary listing and secondary trading?

SDX will provide access to both primary and secondary markets, while the portfolio of products that will be available on SDX is continuously being developed in user groups together with future members of the ecosystem.

What is the product set?

SDX will, stepwise, offer newly issued equity, structured products and debt, followed by funds in token format.

We are setting new standards at the primary market level with Initial Digital Offerings (IDO) in order to clearly differentiate ourselves from the unregulated market of Initial Coin Offerings (ICO) while setting higher quality standards to what today are Security Token Offerings (STO).

SDX will therefore enable regulated institutions to trade quality tokens, which as yet do not exist, in the market in a safe environment.

SDX will develop regulated markets for products which currently are not tradeable at exchanges, such as real estate or art, allowing the efficient transfer and store of value and even enabling fractional ownership.

It will also be possible to tokenise existing securities and to efficiently transfer them on SDX.

What does the future hold?

DLT/blockchain has now reached a level of maturity and performance that enables it to be used for production-ready, enterprise-critical services and this presents a major opportunity for SIX and specifically SDX. As first movers in applying this to financial markets, SDX can help set solid standards for the future of the entire industry.

Video: Women in Finance Awards Asia 2019

By

GlobalTrading

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June 25, 2019

GlobalTrading Journal and Markets Media Group hosted the inaugural Women in Finance Awards Asia on Friday, May 3 in Hong Kong.

#FILS Wednesday Recap

By

Terry Flanagan

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June 25, 2019

Some highlights from the June 19 program at the Fixed Income Leaders Summit in Philadelphia.

Partners needed

Sell-side banks and the biggest electronic trading platforms remain essential partners for institutional fixed income investors, as buy-side efforts to unilaterally boost liquidity have had limited impact.

That’s according to Dan Veiner, Global Head of Fixed Income Trading at BlackRock.

Speaking Wednesday morning at the in Philadelphia, Veiner said about 70% of BlackRock’s trades are electronically processed, though that represents only 20-30% of the firm’s risk.

BlackRock taps big banks for balance sheet, research, risk transformation, and big trades. “The sell side is still extremely relevant for us, not just as liquidity providers, but as partners,” Veiner said.

BlackRock’s linkages to the large established trading platforms are similarly sticky. “Those relationships have become increasingly meaningful,” he said.

The largest request for quote (RFQ) trading platforms help the buy side streamline workflow and scale operations via high-throughput efficiency. This is critical for BlackRock, which has $6.5 trillion in assets and plans for $10 trillion, according to Veiner.

More than half of BlackRock’s trade tickets are generated auto-execution via RFQ trading platforms. “We would have to hire an army of traders” if the platforms went away, Veiner said.

The buy side has attempted to boost fixed income liquidity via standardization, optimizing trading protocols, increasing balance sheet, and increasing the number of liquidity providers, Veiner said. Each initiative may have helped at the margin, but institutions still need help to trade.

Buy-side tech

At least to a certain extent, buy-side institutions can help themselves trade better via improving in-house technology.

At $555 billion asset manager AllianceBernstein, its Abbie chat bot helps with idea generation, and then its ALFA data aggregation and market surveillance tool assesses the liquidity picture for an indicated trade.

Leveraging trading technology to optimize trading processes is about getting people throughout the organization to buy in that there are different ways of doing things, said Jim Switzer, Head of Credit Trading at AB.

With regard to recruitment of personnel to the trading desk, Switzer said AB looks for analytical skills, the ability to write code or at least understand what code can do, and most importantly, the “ability to influence the investment process.”

Optionality

Trading-platform operators are building out their product suites in step with the evolution of fixed income markets.

Liz Kirby, Head of U.S. Rates Strategy at Tradeweb, said her firm’s focus is two-fold: automation and optionality. The latter is about aligning with market participants’ needs and enabling buy side to trade in different ways.

Chris Concannon, Chief Operating Officer at MarketAxess, likened fixed income to a “blank slate” in the early stages of automation., and optionality of trading protocol will be a key factor going forward.

Concannon cited two initiatives that can boost buy-side trading efficiency. One is having the flexibility to choose a liquid bond that has the approximate desired characteristics, rather than homing in on a specific bond and hoping to find liquidity therein.

The other idea is for the buy side to move from holding a ‘resting’ order on its own desk before pushing into the market, to resting the order on a venue with a price shown, at least for part of the order. Concannon noted other markets such as equities and futures work this way.

“I think it’s coming to fixed income,” Concannon said. “At some point the buy side will place an order where the market will see it, and establish a price.”

Portfolio trading

According to a #FILS survey conducted during a panel session, about one-third of institutional fixed income market participants use portfolio trading. That number can be expected to increase, based on indications from panelists and conference delegates who are warming up to the concept.

Portfolio trading entails buying or selling large, customizable baskets of securities, rather than transacting one security at a time.

If done right, the advantage of portfolio trading is obvious — it enables the buy side to effect a substantial transfer of risk in one shot. But the strategy is complex, and while it offers breadth of liquidity, it does not offer depth of liquidity, one FILS panelist said.

Portfolio trading represents about 26% of AllianceBernstein’s notional trading volume, up from zero a couple years ago, Switzer said. Borne from the blueprint of passive ETFs, portfolio trading enables AB to more easily move between cash and synthetic, and/or change the liquidity profile of a portfolio as needed, Switzer added.

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PLANNING FOR THE UNKNOWN.

Irina Sonich-Bright* discusses the diversity of the FIX Trading Community and how it addresses the yet undefinable Brexit outcome.

MARGIN OPTIMISATION: A KEY DIFFERENTIATOR FOR FIRMS OF ANY SIZE.

Jo Burnham, risk and margining expert at OpenGamma

THE FUTURE IS DIGITAL.

Martin Halblaub, CEO of the soon to be launched SIX Digital Exchange (SDX), speaks to Best Execution about the Swiss stock exchange’s new venture to provide end-to-end trading, settlement and custody services for digital assets.

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