Industry viewpoint : FX trading focus : Asian markets

January 12, 2017

FOREX RISING TO THE EAST.

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By Matthew Lempriere, Telstra.

Foreign exchange trading has long been concentrated in the financial hubs of London, New York and Tokyo, but as major western markets face up to structural and macro-economic challenges, turnover is beginning to shift further to Singapore, Hong Kong and Shanghai. Consideration should now be given to the importance of having the necessary infrastructure and connectivity in place in order to capitalise on these movements.

In 2001, the average daily turnover in Foreign Exchange (FX) was $1.2 trillion according to the Bank of International Settlements (BIS) and this has risen to a high of $5.4 trillion in 2013. This significant growth was fuelled by globalisation, currency hedging and speculation.

However, latest figures from 2016 show that daily turnover has declined to $5.1 trillion, representing the first drop in activity in more than 10 years. There are several possible explanations. Firstly, banks were traditionally the greatest source of liquidity in FX trading but stricter financial regulations have forced them to cut back. While other liquidity providers have emerged, they’ve failed to make up the shortfall so far. Then there are macroeconomic factors that have reduced volatility in the FX markets, such as slow economic growth and low interest rates across the globe.

Shift to Asia

Changes are afoot. One of the these is the potential shift of FX trading activity to Asian financial centres like Tokyo, Hong Kong and Singapore. This shouldn’t come as a surprise, as many emerging market currencies are backed by strong fundamentals and Asian financial regulators generally opt for a lighter touch than their western counterparts.

To put this in perspective, London – historically the global FX trading hub given its location and concentration of financial institutions – has seen its share of the FX market fall from 40.8% in 2013 to 37.1% in 2016 according to the BIS. And that is before the possible effects of Brexit kick in.

In contrast, the combined share of Tokyo, Hong Kong and Singapore increased from 15% in 2013 to 21% in 2016. The biggest jump was in Singapore, an up-and-coming player in electronic trading. Meanwhile, the Chinese market share rose from 0.7% in 2013 to 1.1% in 2016 with Shanghai emerging as a possible challenger to the traditional North Asia FX hub of Hong Kong.

Singapore

All three Asian centres – Tokyo, Hong Kong and Singapore – increased their share of FX trading in this year’s survey, but perhaps the most significant was Singapore, where average daily turnover grew from $383 billion in 2013 to $517 billion in 2016, giving it a market share of 7.9%, up from 5.7%. With a well-developed financial centre and strong location to capitalise on South-East Asian flows, Singapore is well-positioned to benefit from a further shift in FX trading to the east. An interesting development is that the Monetary Authority of Singapore (MAS) has recently awarded a grant to Spark Systems, the latest FX trading platform to be launched in Singapore, aimed at making FX trading cheaper and faster in the region.

Hong Kong and China

While Hong Kong has traditionally been the main hub for north Asian FX flows, the rise of China could well see some movement towards Shanghai. The growth of China’s economy and the internationalisation of the renminbi is certainly expected to be one of the most transformative trends in foreign exchange in the years to come. Since 2010, the Chinese government has embarked on a steady process of liberalising its currency for international investment, which has sparked significant interest from financial institutions wanting to carve out market share in the new currency.

Access to liquidity

Banks and investment firms should be aware of these trends and start planning how to take advantage of them. The key thing to remember is that FX trading is bilateral, with no central exchange, so proximity to other market participants is critical. Across the globe FX participants tend to congregate in communities, in established FX data centres. These include Telstra’s data centres, several of which are offered in partnership with the Equinix International Business Exchange (IBX®), which enables firms to share time-sensitive information with partners and gain proximity to the region’s financial exchanges. For the best chance of success new entrants should ensure that their infrastructure and connectivity is integrated with these ecosystems in order to access liquidity and gain market share.

Infrastructure and connectivity

Recognising the importance of these Asian growth opportunities Telstra has taken steps to boost its Asian network with the acquisition of Pacnet, a provider of connectivity, managed services and data centres in the region. This acquisition not only gave Telstra a greater presence in Asia, but also through a joint venture with PBS, a license to provide customers with network and internet data centre services in China. Through its partnership with Equinix, Telstra has made similar data centre investments in the region to provide financial firms with fully managed FX solutions from hardware through to ecosystem hosting and connectivity

Also, in today’s environment, it is often important for banks to be able to move things off their balance sheet, so anything enabling them to operate in the region via an OpEx model, rather than a CapEx one, is positive. Either way, working with an established partner with an existing footprint in Asia is the most sensible approach. That way, a financial firm can feel confident it’s receiving the same standard of service as a Western hub at a reasonable cost, and will give itself the best chance of capitalising on the FX shift to Asia.

To learn more, take a look at “Forex flows to the East” – a Financial Markets Insight from The Realization Group and Telstra and Equinix.

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©BestExecution 2017

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Industry viewpoint : Impact of regulation : SmartStream

Ian Rycott

January 12, 2017

INTRADAY LIQUIDITY MANAGEMENT & REGULATION.

By Christian Schiebl, EVP of Corona Business Unit at SmartStream

From 1st January 2017, large, internationally active banks will have to submit monthly reports to regulators providing evidence that they are managing intraday liquidity positions and risk effectively. Gathering the information needed is complex and time-consuming but technology can assist financial institutions to achieve BCBS 248 reporting goals. Sophisticated new IT systems, he suggests, can also provide institutions with clearer visibility of cash positions and, additionally, have the potential to drive down intraday liquidity management costs, enhancing firms’ competitiveness.

The start of 2017 sees the deadline for meeting the Basel Committee on Banking Supervision’s (BCBS) 248 requirements for reporting intraday liquidity positions. Banks will have to file monthly reports with local regulators in each country and currency in which they operate. This information will allow regulators to check that firms are adhering to the objectives of BCBS 144 (“Principles for Sound Liquidity Risk Management and Supervision”). Financial authorities will, in particular, be keen to see that firms are sticking to the tenets of Principle 8, which sets out the need for banks to actively manage their intraday liquidity positions and risk so as to meet payment and settlement obligations, on a timely basis, under both normal and stressed conditions.

Commentators have raised questions, however, as to whether banks will be ready in time and there are concerns that financial institutions, faced by budgetary constraints and the need to comply with other pressing regulatory demands, are lagging behind with BCBS 248 implementation.

Financial institutions, in the author’s view, are now far better informed about BCBS 248 reporting than at the start of 2016. There is a clear global push towards implementation although the degree of readiness varies across jurisdictions. This is in part due to the fact that certain national financial authorities have chosen to take a tougher line than others. The picture is further complicated as some local regulators have not yet issued final reporting requirements.

Producing BCBS 248 reports is a complex task and financial institutions must gather a large volume of real-time information from clearing systems (in the case of direct participants) or, (in the case of indirect participants), from correspondent banks.

Indirect participants face a particular challenge in that they require time stamped intraday data from correspondent banks. Few correspondent banks currently provide such information, making accurate reporting extremely difficult. Clearly, this state of affairs needs to alter. A switch away from end-of-day to intraday messaging is technically possible: Swift MT 900 and MT 910 confirmations of debit and credit transactions already include an optional timestamp field. Intraday messages are, however, relatively expensive to receive and so customers generally opt for end-of-day messages. If change is to take place, correspondent banks must find a way of providing low cost intraday messaging.

Effective BCBS 248 reporting is greatly assisted by financial institutions having the appropriate IT systems in place. The technology generally in use at banks, however, is not necessarily as helpful as it could be. Liquidity management systems usually operate on an end-of-the-day basis and so firms do not have clear, up-to-the minute visibility of the outflow and inflow of funds. Additionally, they lack centralised tools relying, instead, on separate systems to manage, monitor and report on intraday liquidity.

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Managing intraday liquidity on an end-of-day basis has a number of economic implications for financial institutions. It can leave banks facing gaps in liquidity, obliging them to turn to credit lines and therefore also needing to make use of expensive collateral. Furthermore, it prevents a clear understanding of what the payment of funds actually costs.

In 2014, Raiffeisen Bank International, a long‑term user of SmartStream’s Corona solution, sought to respond proactively to the forthcoming BCBS 248 regulation, even though Austrian regulator, the FMA, had not set a deadline for its reporting requirements. The bank saw this as an opportunity to improve their intraday visibility and gain operational advantage. The bank partnered with SmartStream’s Vienna-based product development team on enhancements to Corona Cash, a collaboration which resulted in the creation of SmartStream’s Corona Cash and Liquidity application.

Other financial institutions have taken advantage of the newly developed technology, too. Banque Saudi Fransi in Saudi Arabia implemented Corona Cash and Liquidity in September 2016, while Dutch financial institution, Bank Mendes Gans, is also set to go live.

Strong interest in the solution is currently being shown by a number of other banks. This, the author believes, is driven by several factors. Firstly, the solution enables efficient regulatory reporting as defined in the Basel III BCBS 248 specification. The solution allows reliable and accurate reports to be produced, using reconciled data, a critical factor given that reports must be submitted to regulators and should be based on “trusted” data.

Secondly, the technology provides a centralised view of cash positions and therefore greatly enhanced visibility of liquidity. Following its recent implementation of Corona Cash and Liquidity, Bank Mendes Gans – which handles 500,000 transactions per month and has a large number of correspondents – is able to monitor all transactions with correspondent banks, in multiple currencies, and in real time.

Clearer visibility of cash positions has an important economic upside: liquidity can be managed more effectively, with far fewer gaps, thereby reducing the use of credit lines and so lessening the need for expensive collateral. Anecdotal evidence from one client indicates that, following its installation of Corona Cash and Liquidity, the bank may eventually be able to reduce its collateral buffer considerably.

A centralised database enables Corona Cash and Liquidity to support not only BCBS 248 reporting but intraday monitoring and management of cash positions. In addition, different teams – each with their own view – can work simultaneously on the same data set. The ability to carry out these activities using one centralised tool removes the need for investment in separate software or infrastructure and minimises the risk that discrepancies arise through the use of multiple systems.

Importantly, Corona Cash and Liquidity is natively multi-tenanted. It provides one global, enterprise-wide view of liquidity but can be used by numerous legal entities. This characteristic has allowed Banque Saudi Fransi, for example, to create both a Centre of Excellence to serve its own operational needs and also to offer a valuable service to corporate clients.

In conclusion, BCBS 248 should not be treated as a box-ticking exercise but should be regarded as an opportunity to gain greater control over intraday liquidity and, in doing so, cut overheads and create economic opportunities. Critically, not having proper visibility of intraday liquidity can have disastrous consequences as the lesson of Lehman Brothers – undone by its inability to control intraday liquidity – so clearly teaches.

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www.smartstream.com

FX trading focus : A sellside perspective : Richard Bibbey & Richard Anthony

Ian Rycott

January 12, 2017

A SELLSIDE POINT OF VIEW.

Best Execution spoke to Richard Bibbey, Managing Director, Global Head of FX Cash Trading, and Richard Anthony, Managing Director, Global Head, FX eRisk and Liquidity Management at HSBC about the state of play in the FX markets.

Richard Bibbey, I read that almost eight years of your career was spent in Australia. Could you please tell me a bit about this experience, the differences in the region and any lessons learnt that you’ve brought over to the UK and Europe?

Richard Bibbey: Although I was based in Australia, I was running a regional business which in Asia generates a huge number of challenges because you had to service clients across multiple jurisdictions. Due to the disparate nature of the geography, there is no regional hub like London in the UK or New York in the US. Instead, there is Sydney as well as Hong Kong, Shanghai, Singapore and Tokyo.

As for lessons learnt, from an FX perspective, we were operating in 24 or 25 markets and it was important to be in constant communication with the other markets and kept abreast of all developments. Also, due to the diversity of the client base there was no ‘one size fits all’ solution and therefore you had to understand the nuances of the clients and make sure that your people could deliver solutions that fit their particular requirements.

In general, how do you think regulation has changed the industry and which rules have been the most important?

Richard Bibbey: At the moment, HSBC and other banks in the UK are involved in the Bank Reform Act which imposes a higher standard of conduct on UK banks and requires the ring-fencing of retail and wholesale banking activities. Dodd Frank and Volcker as well as MiFID II are also important. Sometimes these rules evolve and move fast; that’s why the strategy we have implemented is to have contingency plans and to plan for what we know at the time will happen. We need to ensure that we are ready for the likely eventualities versus having layers of contingency plans in place. One of the most important things to me is that we have the right technology and infrastructure for all cash transactions and the 30 currency algos that we trade.

Richard Anthony: One of our areas of focus is MiFID II where as a bank we have included spot FX. What this has meant is extending our data management systems to capture and analyse the data which is needed to be sent in a report to all our stakeholders.

How successful do you think the FX Global Code will be and what changes do you think the industry will have to make?

Richard Bibbey: I think the Global Code is absolutely the right way for the industry to go. The Foreign Exchange Working Group includes a large number of central bankers, currency managers and other market participants getting round the table to establish a single set of global principles of best practice for FX to operate in. It focuses on important areas such as governance, compliance and execution and encourages the creation of a forum where people can discuss and share information on best practice.

What impact do you think the move to electronic trading is having on the industry?

Richard Anthony: The industry has seen sizeable growth in electronic trading. In 2008, it accounted for around 50% of all trades and today it has grown to 70% to 80% (source: Greenwich Associates). In many ways it is like any other industry that has gone through automation in that it leads to greater efficiencies, and in this case this means distribution of the products and price generation. This is increasingly important in today’s low interest rate environment because it is difficult to generate returns and the improved efficiency is beneficial to our clients.

How has the use of algos developed?

Richard Anthony: The first generation of algos is now looking tired and today there are a number of different flavours including sophisticated algos that are more information and signal based. However, although algos are an important part of the product suite we do not see them overtaking our principal relationships. I don’t think moving to a pure agency model would be in the best interests of our clients because liquidity is not present throughout the day in every instrument. Clients want a greater understanding around their liquidity profiles and the best times to execute orders.

Richard Bibbey: To Richard’s point, principal stands comfortably alongside agency trading. The technology provides greater efficiency but also flexibility which means that we can offer clients a greater degree of choice. I also think that there is a misapprehension that electronification takes away jobs. In fact, the greater efficiency means that people can spend more time speaking to clients, better understanding their needs and creating bespoke solutions.

How has HSBC tightened risk management practices in light of regulation and trading conditions?

Richard Bibbey: Clearly in the Dodd Frank and Volcker world, the approach to risk is different. However, HSBC has put a strong emphasis on its risk management framework and what we have done is repurpose it for the regulatory environment. The knock-on effect though is that big businesses like ourselves have the scope and scale to invest not only for our regulatory responsibilities but also to enhance the business. The result is we are well placed to service clients as we have the access to investment dollars to do both.

The impact of politics on all markets has been pronounced over the past two years. What effect has that had on FX markets?

Richard Bibbey: Obviously politics has become much more important over the last couple of years. Historically, the polls were accurate but today they are more erratic and the chance of an outside surprise has become the new norm. There are also a number of events coming up over the next 12 month such as the French and German elections and these events will be watched closely as they are likely to have an impact on financial markets.

What are your key challenges in the year ahead?

Richard Bibbey: I think there are three big themes – the first one being how the US and China relationship will play out, while the second is whether Trump’s economic policy will deliver growth and a reflation of the yield curve. There is also the uncertainty of what will happen in Europe over the next few years and whether Brexit will be an isolated event or a prediction of things to come.

For HSBC, we have to make sure that we are on top of everything going on in the world but we have an advantage that we are a global bank with local knowledge. This is an extremely valuable currency in today’s uncertain world.

©BestExecution 2017

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Viewpoint : Impact of regulation : Tim Healy

Ian Rycott

January 12, 2017

TIME FOR ACTION.

Tim Healy, Global Marketing and Communications Director, FIX Trading Community

“When a thing has been said and said well, have no scruple. Take it and copy it” – Anatole France, French novelist (1844-1924).

Someone that I have worked with for only a short time but has been actively involved in the industry for many years made a comment about us as an organisation recently. “FIX Trading Community is not an industry trade association, nor a lobbying body for its members. What FIX does do is create, document and advocate standards and best practices to improve market quality and operational efficiency.”

The FIX Trading Community has been proactively engaged in regulatory response for some time now across the globe. The focus on regulatory change has increased immensely over the past 4 years in response to global regulators’ concerns post the financial crisis. FIX does not take a stance on regulation in terms of the pros and the cons on specifics. What it does do is look at how the use of standards can address the challenges brought by new regulation and make sure that they are available to all market participants to use. It does this through a number of working groups and committees focusing on workflows and asset classes and aspects of electronic trading with the aim to provide best practices and guidelines for the industry.

Which brings us to the topic of FIX and MiFID and what it is that the Community is actually working on. I have listened to many of the calls that have occurred over the past 12 months and it has been obvious that there has been a degree of subjectivity on many of the topics that have been discussed. This may well have been down to a lack of clarity in the regulator’s text but also an interpretation of specific detail and definitions. Part of the work that FIX has done, and needed to be done, has been to clarify terminology so that there is an industry consensus as to what specific terms, phrases and words actually mean. That may seem a slightly pointless exercise, but what is a “voided transaction” exactly? Investment Firm A may have a different view than Investment Firm B. Without that clarification and subsequent agreement across the different definitions, moving forward would prove problematic.

The next stage for the Community has been to begin the process of drafting best practices and guidelines. To do this, the working groups have been collating use cases, initially in equities but with a view to expand this to other asset classes. Looking at the work the Best Execution Working Group has performed, it has proved absolutely vital to go through different scenarios to see what reports (RTS 27/28) will be required by the regulators.

Not only what reports, but the level of detail required, the frequency of producing these reports and the tables that must be completed, are being identified and documented by the working group. The granularity and difficulty becomes apparent when looking at Request for Quote Mechanisms, Dark Pools, Voice Trading and Auctions and what is required for each of these different “execution venues”.

I’ve heard a number of people say in the past that MiFID II is essentially requiring investment firms to hold the correct data for their businesses and make that accessible to the regulators in a timely fashion. It is an understandable comment and does serve to highlight a number of the initiatives being worked on. Additionally, the past 18 months has proved that it is essential for FIX to engage with industry associations. A Venn diagram of the investment process would show that FIX and its members are firmly at the heart of things with members of FIX also being affiliated to trade associations.

In other words, what FIX and its members are looking at, so are trade associations and their members. What this has meant is that industry collaboration has increased to the point that joint industry working groups have been formed. The Order Data and Record Keeping Working Group has recently been reinvigorated as it has merged its efforts with Association for Financial Markets in Europe (AFME). Duplication of effort is never a good thing and working together to provide a framework of guidelines for the marketplace makes perfect sense.

Once again, it is a case of reviewing different scenarios – investment firms to venues and vice versa, submitting firm to receiving firm and, again, vice versa. What is needed, how will it be relayed? I hesitate to mention the often-used phrase “big data” but the sheer volume of data is vast when one considers a typical day’s trading.

The first thing to ascertain is what actually triggers “order record-keeping” as defined by ESMA? Incoming client order (not RFQ); provision of firm quote (whether as a response to RFQ or Market Making); internal principal trade (e.g. Hedge or liquidity management) seem to be the consensus view. Work has already been done by a number of the venues to capture the information they are required to, such as identity of the client, LEIs, passport numbers, ID numbers of individuals, identity of trader, etc. So not only is the quantity of data required extensive, there is also a degree of sensitivity around this data and the potential for FIX messages to increase in size significantly, potentially increasing latency.

To address this, the working group is exploring using short codes to represent the data required and then collect a mapping file at the end of the day from the remitting firm. As mentioned, it will also be vital to ensure the security of any personal information. By encrypting the information and storing it securely, the aim is to provide the regulators with workflows that meet their approval. This has received broad approval from the venues that have been involved in the initiative, but there is still more work to be done.

I’ve focused a little on just two of the MiFID Working Groups to try and emphasise the subjectivity, the complexity and the quantity of data but also to highlight the collaborative attitude, which does seem to be perpetuating the market more and more. Work is being done on Reference Data, Microstructure, Transparency, Trade and Transaction Reporting, Clock Synchronisation and Commission Unbundling.

The aim, as I mentioned at the top of the article, is to create efficient processes that will help the market. MiFID II will create significant overheads for investment firms. Those same investment firms, as part of the FIX Trading Community, are working hard as a co-ordinated effort to keep those costs low by creating guidelines and best practices for all to use. Is your investment firm involved in shaping the future of trading?

©BestExecution 2017

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Viewpoint : Impact of regulation : Geoffroy Vander Linden

Ian Rycott

January 12, 2017

IMPACT OF THE MIFID II SI ASSESSMENT DELAY.

Geoffroy Vander Linden, Head of Transparency Solutions, Trax

On 4 November 2016, the European Securities and Markets Authority (ESMA) published a Q&A document outlining their guidance on MiFIR and MiFID II transparency requirements. Of note, ESMA highlighted that data will be made available on 1 August 2018 allowing investment firms to make assessments on their Systematic Internaliser (SI) obligations, requiring compliance by 1 September 2018. Page 13 of the Q&A reads: ESMA will publish the necessary data (EU wide data) for the first time by 1 August 2018 covering a period from 3 January 2018 to 30 June 2018.

Investment firms will have to perform their first assessment and, where appropriate, comply with the systematic internaliser obligations (including notifying their National Competent Authority (NCA)) by 1 September 2018.

As a result of this delay, between the implementation of MiFID II on 3 January 2018 and the start of the SI regime in September 2018, there will not be a requirement for SIs to operate. Some investment firms could in theory volunteer for SI status, yet the likelihood of firms volunteering for this status (especially on non-equity instruments), and thus exposing their firm to pre-trade transparency obligations, is improbable.

Impact on the buyside

This will have a detrimental impact on the buyside as they will have a wider obligation to trade report via an Approved Publication Arrangement (APA) in the first eight months of 2018, once MiFID II takes effect, due to the expected paucity of SIs. Figure 1 demonstrates the buyside obligation to trade report prior to 1 September 2018 when they are the seller in a transaction of an in-scope instrument.

In addition to the greater scope required to trade report prior to the 1 September 2018 assessment period, it is expected that buyside firms will not be able to delegate their reporting obligation in the same way as they currently do today. buyside firms are of course always free to outsource the performance of this activity by way of a specific agreement, but any such agreement cannot serve as a delegation of responsibility for either the obligation to report in the first place, or the liability for failures.

Reference data challenge

MiFID II also requires that SIs report reference data to ESMA on financial instruments that were admitted to trading or that were traded through its system and where the underlying is an instrument traded on a venue. With the delay of the assessment period and without the requirement for SIs for the first eight months of MiFID II, instruments traded through an entity that would otherwise be an SI will not be reported to the ESMA reference database. While Multilateral Trading Facilities (MTFs) will maintain the requirement to report reference data to ESMA, the lack of SI reference data reporting leaves a potential gap in the level of necessary data to be reported to the regulator and hence available to the market.

This means that firms with a reporting obligation will need a comprehensive source of reference data to determine if a particular instrument is in-scope and creates a significant challenge for investment firms as they will still have the obligation to report even without a complete ESMA reference database.

What next?

It’s critical that all buyside firms understand how MiFID II will impact their business and take action to implement the necessary processes to meet their regulatory obligations. Particularly, given the delay to the SI assessment period, the obligation to trade report via an APA will become more onerous on the buyside. buyside firms should connect direct to APAs, to limit their exposure to regulatory compliance risks.

Investment firms will also need to consider their visibility on in-scope instruments based on an accurate reference database. Assessing the eligibility of instruments will require significant internal operational processes, especially as the obligation to report under MiFID II will capture a far broader group of instruments*.

Trax has been working extensively with both buy- and sellside firms to help them prepare for MiFID II and has built a critical mass of industry support. We will register as an APA under MiFID II, offering full pre- and post-trade transparency solutions, a range of tools to assess the liquid status of instruments and firm reporting responsibility as well as real-time monitoring tools. We also have the ability to assist with instrument eligibility based on a real-time cross-asset class reference database of over five million securities.

*As defined by MiFIR Article 26(2), the scope of reportable instruments includes all non-equities, including fixed income and derivatives (both the derivative and its underlying), that are, broadly, listed on a regulated market (RM), Multilateral Trading Facility (MTF) or Organised Trading Facility (OTF) operating within the European Economic Area (EEA).

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Blog : Divided we stand : Lynn Strongin Dodds

Ian Rycott

January 6, 2017

Divided we stand

To begin with we would like to wish a happy New Year to all our readers. There is no doubt that 2017 will be an interesting year with Brexit negotiations on the horizon and a new US administration imminently taking over the mantle at the White House. To date, markets have shrugged off many concerns but it is still early days and difficult to predict how events will unfold or what President Trump’s next tweet might be.

However, there are a few certainties such as a diverging monetary policy with the US Federal Reserve and European Central Bank going in opposite directions on interest rates. The Bank of England has also voted unanimously to keep the UK’s main interest rate at a record low of 0.25% at the end of the year and uncertainty over Brexit may keep them bumping along the bottom.

The other difference is that Trump is looking to loosen the regulatory shackles that were firmly placed on Wall Street in the wake of the financial crisis while Europe marches steadily forward with the phased implementation of the European Market Infrastructure Regulation and impending MiFID II.

There is a reason that many Republicans cheered when Democrat Timothy Massad announced he would be resigning as chairman of the Commodities Futures Trading Commission on 20 January – the day of the Presidential inauguration — and Christopher Giancarlo, the sole Republican commissioner of the CFTC, was mooted as being his successor. Republican lawmakers have refused to boost the agency’s budget above $250m for the past three years and Giancarlo, unlike Massad, is an advocate of a lighter regulatory touch. Two years ago, he published an 89-page white paper entitled “Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank” which is a blueprint for a flexible regulation framework based on existing practices.

One of Giancarlo’s main targets has been the swaps trading requirements which he has repeatedly criticised as being overly prescriptive with significant policy changes buried in footnotes. He believes this has led to global fragmentation and allowed foreign firms to gain an advantage over their US peers.

However, market participants should not expect a complete roll back of the CFTC’s post crisis regulation. The wheels of government not only turn slowly but Giancarlo has also been a proponent of the broad mandates of the swaps markets overhaul including central clearing and reporting trades to repositories. In addition, he has called for the introduction of examinations for swaps traders and brokers.

This may cheer Massad who has tried to advance Dodd Frank despite the lack of resources and funding. However, the harmonisation he worked so hard to achieve especially between the US and European clearinghouses may be put to the test yet again if the CFTC does strike a more relaxed regulatory tone.

Lynn Strongin Dodds

Managing Editor, Best Execution

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Building A Global Firm

GlobalTrading

December 21, 2016

By Eric Böss, Global Head of Trading and Christoph Mast, Global Head of Equity Trading, Allianz Global Investors.
Christoph: Allianz Global Investors historically had a trading setup focussed on equities organised in silos and by regions. Over the last 15 years the system has evolved so that regions are responsible not only for the trading of the portfolio managers in their region, but they are focusing on the time zone trades, regardless of where the portfolio manager sits. For Asian and US portfolio managers, the advantage is that they have a trading desk in the time zone in their respective region. This means they have an increased concentration of specialist traders in a particular stock for their fund, within their region and globally.
The process has been challenging because we had to get both the trading software in place and also ensure that all the rules and regulations of the different regions and countries were fulfilled.
Next we started to broaden the scope of trading to cover all asset classes. Currently we are as involved in trading on the equities side as we are on the fixed income side. There is also a huge trading business on the derivatives side and an FX trading desk focusing on the FX trades of the portfolio managers. Currently, we are in the process of extrapolating the long-established equity global dealing structure for fixed income to the regional trading desks. We have already moved on a global basis with emerging market fixed income trades over the last couple years but we are now working on a structure which will allow us to trade fixed income and derivatives wherever it needs to be traded and for any of our global accounts.
A global setup
Christoph: Allianz Global Investors has 24 traders in Europe, seven traders in the US and 18 in Asia-Pacific trading all asset classes. So there is a strong centralised trading desk in each region. This structure raises many questions, including: how much do each of the desks trade for their own region? How much do they trade for other regions? How big a market participant are we in a particular region? What’s happening as far as flows are concerned? What is the impact on execution quality and the feedback of the portfolio managers? How much is our business focusing on portfolio management centricity? What developments are not only measuring the performance of the traders but also the input of the portfolio managers as far as information flow goes?
Eric: Allianz Global Investors now is a truly global asset manager with operations in all three major time zones, active in most asset classes and running a global trading setup that acts as one platform serving all portfolio managers.
Despite our global reach we firmly believe in regional presence and think there is value in regional trading expertise. Taking for example market micro structure and liquidity, these are very different in for example France and the US. So having a US-based trader for the US and Europe-focused traders in Europe and the same for Asia is something that we still consider is the best way forward for equity markets.
While on the one hand we want to be regional, we do still have to make sure that we are scalable on a global level. The approach we are taking with fixed income trading is very similar, because fixed income markets are regional as well to some extent. But there are parts of it, like the Treasury market and the related derivatives markets which are very much global products where the location of the trader is less relevant. However, other segments like covered bonds, corporates, emerging markets or high yield can be fairly local.
We are currently building on the successful model implemented in equities in terms of our fixed income trading expertise. That is building regional expertise, connecting it in one trading system and at the same time ensuring that we are not getting too granular – avoiding the risk of not being scalable anymore . This is occasionally a difficult balance to strike.
Beyond equities and fixed income there are two more asset classes we trade – FX and derivatives. Derivatives are by definition a group of instruments of their own, so we decided that having derivative specialists within the firm is a valid way to go, especially in an environment where derivatives are used widely.
It is extremely helpful to have people with expertise on the instrument side as well as on the related underlying market side. Derivatives, while many of them trade like equities, are settled completely differently. There are margins involved, different exchange rules, and they fall under different regulations. These are the main reasons why we decided to have specialist derivatives teams trading at least in those regions where there is sufficient trading volume to make that a valid decision. Currently those are the US and Europe.
We also have a FX team in Europe, which is partly due to the fact that Europe is the most multifaceted market in terms of number and complexity of funds. FX is the least regionally specific market, so trading can be located pretty much anywhere which is why we decided to leave it in Europe where most of the client base active in currencies is located.

Bringing The Sell-side To The Buy-side

GlobalTrading

December 21, 2016

With John Christofilos, Vice-President and Head Trader, AGF Investments Inc.
Looking back, my career developed on the trading floors in the financial district of Toronto, Canada. Fresh out of university, I began as an input operator, I was promoted to phone clerk and eventually became a licensed floor trader. I gained experience at Versus Technologies, E*TRADE Institutional and Canaccord Genuity.
As my career evolved, so did technology. It was a pivotal time in the sector as we tried to figure out how technology would impact the business and how the role of the traditional sales trader would change.
I looked at these changes and advancements in technology as an opportunity and transitioned to the upstairs trading desks and started a career on the brokerage side in both sales and trading.
An opportunity to influence change at AGF
In 2013, I made the move to AGF Investments Inc. (AGF). It was a great opportunity to work on the buy-side and I believed I could influence change and leverage my background in electronic and sales trading.
Although AGF had operated a certain way for a long time, they wanted technology to play a bigger role in investment management. I helped them find the best and latest trading desk solutions.
At the same time, the firm knew the methodology of trading was changing and liquidity was becoming more scarce globally, so I helped them understand and utilize all available liquidity pools for their clients and portfolio managers.
In this new role, I wanted to show that the buy-side was as knowledgeable and informed about what is transpiring and changing in our business. Traditionally, brokers have been seen as the keepers of the ‘secret sauce’ when it comes to market structure and order routing. But, today the buy-side is asking questions and have a better understanding of what’s occurring in the market. As well, they have the technology to thrive in this ever-changing landscape.
In essence, what I’ve tried to do is bring a little sell-side to the buy-side. We take care of every order that hits our desk like a sell-side trader would when they receive an order from a client. The only difference is my clients are my portfolio managers and analysts.
A new technology plan
During my first six months at AGF, I was tasked with implementing a new technology plan for the investment management department. I analysed all parts of the trading desk. I noted what was working and suggested what parts needed to improve. Ultimately, it was determined that both our EMS and OMS needed upgrading.
We went through a lengthy process to determine what options best suited AGF, from trading to portfolio management to operations and settlements. Today, we have end-to-end solutions and everything is done electronically.
We also introduced a new TCA process. This helps us monitor every trade that hits our trading desk. We review them at a firm level on a quarterly basis, at a desk level on a monthly basis and at an individual trader level on a weekly basis. I also stay on top of our trades with daily spot checks.
Staying on top of advancements in technology has been a running theme throughout my career. At AGF, we are continually monitoring new developments and conduct a more formal review every 24 months. This timeline allows our technology and operations groups to research enhancements, while still supporting our current infrastructure. Ideally, I would like to create a five-year technology plan, but the landscape is changing too quickly.
With experience, I know how and when to use certain techniques on the trading desk to gain an edge and how to decipher value versus noise. When discarding the noise, we look for what’s useful and how we can use that to achieve the best execution for our clients and for our portfolio managers.
Communicating with the Portfolio Managers
Communications is key at our trading desk. Working in a real time environment, we want to ensure that our portfolio managers and analysts know that we’re on top of the markets at all times.
During my time at AGF, I’ve looked for ways to enhance the way we share information between the trading desk and portfolio management department. My experience has taught me the importance of sharing knowledge. Our job requires us to act quickly and make informed decisions. In order to do this, we need to share information. Collaboration is a must on any desk. We operate as a team and I am proud of the way we communicate.
On the trading desk we rarely tell a portfolio manager or an analyst what stock to buy or sell. What we offer are three things: market intelligence; liquidity intelligence; and stock-specific intelligence. When we get an order, we share with the portfolio manager and/or the analyst what we know about that particular name; where we are in a market, where we are with this name, who’s been trading the name. The relationship between the trading desk and the portfolio manager has to be vibrant and in real-time. We have information on our desk that the portfolio manager may not know. We need to share that information with them to ensure they are part of the process.
When we have an order of any significant size or importance, we discuss it at the trading desk and with the portfolio managers and analysts. We work together to determine the best way to trade each particular order. For example, we ask ourselves: Is it on a block basis or do we do it electronically? Are we looking for facilitation capital or can we just work it in the market? Are we going to use the algorithmic tools or are we going to go to the open market? We also look at nine different pre-trade parameters that allow us to make the most intelligent decisions for our portfolio managers, our analysts and ultimately our end clients who entrust us with their money.
Managing the sell-side
The reality of my job is that we have to make quick decisions. We work in a real-time environment where money is made and lost in seconds. This approach can be unsettling for our partners on the sell-side, but this process works and allows us to trade and execute the most effectively.
If you look at our currency, which is our commission dollars, we want to spend every single dollar most efficiently. We want to pay brokers for the value and services they provide. The relationship must be professional and reciprocal from both sides.
At AGF, we have a formalised broker voting system that is used by our traders, portfolio managers and analysts. Our broker list had 125 brokers in 2013 and it is now down to 75 brokers globally. Ultimately, we’d like to take that to 50 and reward our best performing brokers for their service. Our process is dynamic, which allows me to have open conversations with our partners about their success or failure during a given voting period.
I consider the relationship with our broker-dealers as a long-term partnership that both sides have to work at constantly. The partnership is more attuned to a marathon than a sprint.
Today, the sell-side and buy-side have the same technological solutions. The days of the buy-side being disadvantaged because of a lack of content are long gone. If you look at the brokers that support us and help us, they all have fully functioning technology experts that update us on a regular basis to any regulatory or market structure changes.
It’s a very delicate balance on the sell-side, however, if they figure out what the buy-side is looking for and adjust to support it they’ve got a winning formula.
Buy-side partnerships
In Canada we have an organisation called the Buy-side Investment Managers Association (BIMA). It is comprised of 25 of the largest money managers in Canada and meets twice a year to discuss regulatory changes and market structure. Our discussion points are summarized and shared with regulators and the exchanges. This dialogue has given the buy-side a powerful voice and both the regulators and exchanges are spending more time listening, interacting and building a partnership that benefits the industry as a whole.
As the industry changes, we’ve had to be more proactive on both the trading and regulatory side and make an effort to interact with regulators, exchanges and brokers.
Over the course of my career, I’ve learned that development goals vary at each organisation. It really depends on the philosophy of the firm and is often shaped by the Chief Investment Officer (CIO). At AGF, our approach is balanced and thoughtful, supported by many years of industry experience.
At AGF, we are evolving and growing as a firm. From my trading desk to the office of our CIO Kevin McCreadie, this means staying on top of the latest trading, regulatory, market structure and technology developments to continually add value for our clients.
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