Friday, October 31, 2008

CDS, DTCC, LSE, Subprime....blogspot!

G’day All,

Well after Sibos I was told to set up a more accessible blog spot.
I have tried to do this and will hopefully update this a bit more over the week-end (ya gotta start somewhere).

I liked the Xtracker report. Be interested on comments about the validity and scope of data. (Chi-X in 2nd place)
CDS: CDS is the CCP flavour of the month. How about they award the global CDS contract to the first 2 CCPs they agree to co-operate on interoperability in that asset class. (confession – not an original idea of mine).
Brussels: another 200 pages of CCP recommendations – these I will read. And the Code extends to derivatives. It had to happen. How can a CCP concentrate risk if they are only looking at the equity piece? Exchange fees in derivatives also need a shake up and we know the importance of CCPs in liberalising competitive forces.
JSE: A first I read this as a liquidity event for NZX, now I guess they want to Go for Growth. (Euronexters will geddit).
LSE: Clara is off to spend some cash, just maybe not as much as she had at the time of the Nasdaq bid. Baikal..resurfases? Moscow…sunk (I wonder if that prudent call would have been made pre-competition)
NYSE: Finally announces the specialists will go. When is the floor closing? I mean, denial or what?
Subprime: JPM contracts start to feel the back pocket bite (one of the reasons for blogging this is so I can see when I first said the madness would subdue when we as tax payers started to feel the consequences). My other sentiment is Oh what a wicked web we weave, when first we plan to deceive. Now we begin to see the fallout, conditions and unintended consequences of the various un-coordinated bail out plans. E.g. NCB guarantee funds for depositors and short selling (exemptions, exclusions, clarifications).

I have also added some comments on the DTCC announcement.
Just for good orders sake I better mention these are my comments and thoughts. They may be right or wrong. I hold them out as my own view and I am happy to be corrected. Where I write abridged that is because…well, you can guess. Anyway, migrating towards a google blog may allow more freedom of expression.

Letter to Bank Manager
Dear Sir,
In view of current developments in the banking market, if one of my cheques is returned marked "insufficient funds",does that refer to me or to you?
Yours Faithfully,

This is news I know you will all be happy to hear. Shaz has arranged cable TV for me, so I’ll be watching the rugby again (or a recording of it subject to kids approval) this w/end.

Last weekend Daniel was a star and did 20kms and all 7 bridges of:

Good week-end all,

And if you get a chance – hit, god knows what will happen!

On an FAQ please s
ee separate posting:
Liquidity Shift, LSE & Symbology

The overall top 5 execution venues for equities for the Q3 08 as processed by Xtrakter were as follows; in first place was NYSE Euronext (Paris) with 17.44%, in second place was Chi-X Europe Limited with 12.21% and in third place was Deustche Kassenverein with 8.95%, in fourth place was the LSE with 6.91% and in fifth place was the Electronic Share Market with 6.26% of the total Xtrakter share. However OTC remained the preferred method of execution for Xtrakter clients during this period.

IntercontinentalExchange is to acquire The Clearing Corporation of Chicago as it gears up for the launch of a central counterparty clearing system for the credit default swaps market in conjunction with nine global dealers.
More on this story:


Exchanges must submit CDS plans to Federal Reserve by Friday
Major exchanges vying for a role in a possible clearinghouse for credit default swaps must present their proposal to the Federal Reserve by Friday, a New York Fed spokesman said on Tuesday. The $55 trillion market, criticised as a major contributor to the current financial crisis, is heading for much tighter regulation and a number of exchanges are trying to get a piece of the action.

CME swaps clearinghouse could be up and running by January
CME Group’s planned clearinghouse for credit default swaps will be ready to go at the end of this week—and can begin operating after it gets regulatory approvals and completes testing with trading firms, CME managing director Tim Doar said today.

Peterffy Says CME Group Credit Swap Plan Puts Billions at Risk
Electronic trading pioneer Thomas Peterffy says a plan by CME Group Inc. to guarantee credit- default swaps could put his entire $4 billion company at risk. CME Group's proposal to use its existing clearinghouse to clear swaps would require exchange members such as Peterffy's Interactive Brokers Group Inc. to bail out a failed trader. Those companies have put up $101 billion to guarantee the futures and options now cleared by CME. ``It would be a great mistake,'' said Peterffy, 64, a Hungarian immigrant whose company executes 14 percent of the world's equity options. ``Mixing the two types of funds will jeopardize the entire financial system'' set up to guarantee futures trades, he said.

The CME CDS piece is interesting to me.
I also think there are other issues:
We are not only worried about the CDS of today, we also need to ‘backload’ all the existing CDS business that is out there.
Every man and his dog wants to offer a service for this stuff now.
Margin offsets and economies of scale are great….but you can never offset Lehman Inc against Lehman Ltd or Lehman Exotic Vehicle NV etc. All the time they are separate legal entities there is no netting. You can only net by legal entity not group.
In my view the number of defence layers a CCP can have could be 20. But if they are paper thin you just knock through them in rapid succession. If an FCMs own capital (level 3) is 2myn – bang, you knock that layer out in a heartbeat. In default funds it is size and certainty that count. Some people like insurance. I’m not keen on it. In the event of a default you want cash in 24hrs. Not a defined trigger event, that is published in the Lloyds gazette (or similar) and only once verified by an auditor funds are funds released etc. In default, show me the money…now.
LCH.Clearnet to it’s full credit managed the Lehman default across a broad spectrum of products and asset classes. Nevertheless, I do worry about the contagion risk to other clearing members that may not even be involved or clearing CDS’s just because they have been sucked into the same default fund.
I also worry about people following regulatory priority in order to gain favour in the topic of the moment rather than customer priority.


EC to scrutinise exchange-traded derivatives clearingThe European Commission is set to open a consultation on post-trade issues in exchange-traded derivatives, in a move that could possibly lead to the break up of exchanges control over futures clearing.

From financial crisis to recovery: A European framework for action
The Commission has approved a communication contributing to the ongoing debate inside the EU and with international partners on how best to respond to the current crisis and its aftermath. On 26 November the Commission will propose a more detailed EU recovery framework.
The text of the communication- Press pack: Financial Crisis - Europe's response

UK Financial Stability Review The Report analyses the turmoil and the actions taken by the UK authorities and other countries. “We need a fundamental re-think of how to manage systemic risk internationally", Deputy Governor Sir John Gieve said.
The Financial Stability Report* is published half-yearly by Bank staff under the guidance of the Bank’s Financial Stability Board. It aims to identify the major downside risks to the UK financial system and thereby help financial firms, authorities and the wider public in managing and preparing for these risks.

AMF working paper: Block Trades, Fragmentation and the MiFIDThe paper presents a study of the reasons that prompt fragmentation in market infrastructure in response to differing investor requirements and the foreseeable consequences for the quality and efficiency of that infrastructure.

The Johannesburg Stock Exchange has made a R173 million bid for the Bond Exchange of South Africa (Besa)
More on this story:

Rand 173myn sounds a lot, I think it is about 10 million quid, so 2.2 mill for the Kiwis to fund AXE in Aust.


LSE HIRES HEADHUNTERS TO FIND FURSE SUCCESSOR The London Stock Exchange has hired a headhunter to find a replacement for chief executive Clara Furse, who has fended off a string of hostile takeovers during her eight year tenure at the LSE helm.
Full story:

The London Stock Exchange moved a step closer to ending the uncertainty surrounding its proposals to launch a dark pool for pan-European equities trading by naming former Lehman staffer John Wilson as chief executive of Baikal.
Full story:

LSE ditches Moscow plansThe London Stock Exchange has abandoned a plan to open an office in Moscow after the financial crisis wiped out the prospects for Russian equity issuance for at least 12 months.

NYSE ABOLISHES SPECIALISTS AS BATS CIRCLES The New York Stock Exchange is to banish the privileged position of specialist firms on the trading floor as it bids to keep pace with competitors operating on faster automated platforms.
Full story:

JPMORGAN MOVES TO CUT IT CONTRACTOR BILLS JPMorgan has written to IT contractors demanding they take a 15% pay cut by the end of the month or face termination.
Full story:

22/10/2008 11:06:00
Nasdaq OMX is to launch a new energy and carbon trading unit after completing the acquisition of Nordic power exchange Nord Pool's clearing, international derivatives and consulting subsidiaries.
More on this story:


Turquoise CEO blasts rival's "untenable" pricing

The Online Finance 30: Optimistic on TechnologyDespite the turmoil in world markets, leading executives in the realm of financial technology and e-finance share a remarkably optimistic outlook. The innovators on Institutional Investor’s ninth annual Online Finance 30 list are investing in technology, racking up profits and rewarding shareholders.

EXCHANGE NEWS DIRECT: Equiduct Trading's VBBO Is Now Available From Bloomberg 10/29/08On 31st October, Bloomberg will introduce coverage of Equiduct's European Volume-weighted Best Bid and Offer (VBBO), the first Pan European consolidated view of equity prices in the post MiFID trading environment.Users of the data will be able to see the only accurate consolidated, volume-weighted best bid and offer for liquid stocks traded in France, Germany, Benelux and the UK across all markets including both incumbent exchanges and new MTFs such as Turquoise, Chi-X and Nasdaq OMX. Users will also benefit from the superior performance of the Bloomberg system.Artur Fischer, Co-CEO Börse Berlin Equiduct Trading comments: "With the entry of new MTFs into the European execution venue space the market is becoming increasingly fragmented. Market participants will have increasing difficulty keeping up with the volume of market data available and the costs of accessing, interpreting and storing it. By using our VBBO market participants will can see a European Consolidated Tape and maintain a real-time market overview."The launch of the VBBO on the Bloomberg platform is the latest step of a set of products being launched by Equiduct which also includes PartnerEx, a tailored B-to-B Product to provide guaranteed Best Ex and an ultra low cost, low latency Hybrid trading platform.

(see also comments on DTCC / LCH).

1. The merger in 2003 valued each half LCH / Clearnet at 600myn euros apiece. With a purchase price of 739 myn that is a loss of value of 461 million in the 5 years of the merger.

2. Customers will in any case 'pay' for the merger out of LCH.Clearnet profits during the course of the next 3 years (why clear your business through LCH for the next 3 years just to pay yourself back through inflated fees?)
3. After this, the rebate model ala NYSE Euronext, will be introduced across the group.
4. rebate issues (abridged).
5. Now LCH, Clearnet, EuroCCP and DTCC should all be interoperable (as part of the same group).
6. (abridged)
7. If approved the ‘vested interest’ argument of Europe should dissipate. (i.e. I want to interoperate with LCH because I own a stake in it).
8. I expect the transatlantic volume discount argument will continue
9. EMCF / NCC will have a similar value proposition, just commercial
10. (abridged) merger will certainly be a distraction to their business (and customer focus).
11. EuroCCP will become the equity CCP of the group.
12. This is a US (i.e. non-European) inspired solution. I feel Europeans would still like to use a home grown solution.
13. I fear DTCC will be more focussed on delivering regulatory inspired solutions like clearing the CDS market than servicing the daily needs of European customers.
14. (abridged) service in fixed income clearing which was for the customers and liked.
15. The merged entity will be 2,800 US staff plus 900 European staff. You still need a lot of volume to pay for that.
16. Where does this leave European interoperability? Who is left to dance (abridged) & what do customers want?

NYSE Euronext to rival brokers with new serviceThe world’s largest exchange NYSE Euronext has launched a trading service aimed at smaller firms, including hedge funds and asset managers, stepping further into the traditional territory of its larger sellside customers. The launch comes as its hometown rival, Nasdaq OMX, also launched a service provided by the largest banks and brokers.
This is an interesting story. A) TradeCheck aims to assist in best execution…and will connect to other (non-Euronext) destinations I assume if there is customer demand…umm Isn’t this best execution?)
B) LSE claim they are going to charge Citigroup double for routing trades (from Nasdaq OMX)? Is that true…or should I say, can that be true?


GLOBAL INVESTOR: European Trading on the Precipice of Change
By Staff October 2008

Recent launches of electronic trading venues such as Chi-X Europe, Turquoise and Nasdaq OMX are set to make dramatic changes to the European equity trading marketplace. That was the consensus among delegates at Sibos, the annual financial services conference held in Vienna.Three electronic trading venues, or multilateral trading facilities (MTFs) are up and trading, and two more are set to launch before the year end, raising questions about the future of existing exchanges, the upshot of liquidity fragmentation, competition and consolidation, and potential complexity in the post-trade environment.Market sources agree that the old guard is giving way to the new. Electronic trading venues are challenging national exchanges because they offer faster, more flexible trading with lower execution costs than their traditional counterparts."Alternative networks are proliferating. In the short term, the landscape will look more complex and its difficult to see what the end game will look like. But the longer term picture is that the European marketplace is undergoing a staged process of consolidation," says Andrew Gelb, head of securities and fund services, EMEA at Citi.Post-trade spaceThe slew of MTF launches will also affect the post-trade space. The traditional structure of national exchanges, central counterparties clearing houses (CCPs) and central securities depositories (CSDs), intermediated by agent banks is changing. The cross-border MTFs are partnering with cross-boarder central clearing counterparties, while EU regulation is prompting central securities depositories to move up the value chain into custodian territory. Tomas Kindler, managing director of Link Up Markets, a joint venture by seven CSDs, says: "MTFs and their cross-border CCPs contribute to fragment the market, which is cascading down the value chain and increasing complexity in the post-trade environment. This is an important time. There are many new developments, creating new opportunities."But whatever the differing views on how the landscape will look in the future, the market is unanimous that the changes in both the trade and post-trade environments are a boon to the fund management industry because of the cost benefits. Kevin Rideout, global head of financial institutions client and sales management for infrastructures, Citi, points out that execution costs at MTFs like Chi-X and Turquoise are many times cheaper than at some incumbent exchanges, despite recent price reductions. CCPs have cut their rates too, from 50 cents to 2 – 3 cents in some cases. "Fund managers are putting pressure on their brokers to flow those execution cost savings through to them," he says. But he adds: "However, liquidity remains king and this still largely remains on the traditional exchanges."Jez Bezant, head of retail structured products at Aviva Investors, explains that with smart order routing (SOR) technology, which searches all venues for best execution, MTFs also raise the chances of finding better trading prices. Broker dealers are arming themselves with intelligent SORs that look for best execution trades across MTFs and traditional exchanges. Bezant also speculates that electronic trading and SORs could enable some managers to side-step brokers altogether if they are prepared to make the technology spend to connect themselves.By the end of September, three MTFs were active in the European marketplace. Chi-X, which is majority owned by Instinet, along with 14 other institutions, was the first to launch in April 2007. Turquoise, backed by nine of the world's largest banks launched in August of this year was second and Nasdaq OMX Europe, launched in September 2008 was the last to launch.BATS Europe, Equiduct and one to be created by NYSE Euronext are all scheduled to launch by the end of November. The LSE is set to launch its alternative venue, Baikal, named after the world's deepest lake, in the first quarter next year. Deutsche Börse has also announced that it is contemplating a launch.SurvivalBut with so many entrants into the market, competition will be fierce. Each venue will need trading volumes to generate revenue but liquidity is finite and, because liquidity generates liquidity, those that corner market share early stand a better chance of survival. Peter Randall, chief executive, Chi-X says: "More venues will launch than expected but marginally less will survive than expected."Chi-X's chances of survival look good. After only 18 months of trading, the venue is the fourth largest exchange in Europe by volume, according to August data (see Best Execution, page 39). Given the difficult trading environment over the past year, that level of market capture is no mean feat and is a powerful testament to the role of MTF's in the future. In September, Chi-X had a 15% market share of all FTSE 100 stock trades alone and an average five basis point improvement across all European markets; yet supports a team of only 27."Traditional exchanges say that Chi-X is simply encouraging new volumes into the market rather than taking market share. We agree with that to a certain extent but we also believe that the numbers speak for themselves," says Chi-X's Randall. He adds that Chi-X's success is not simply because of the technology. "We've succeeded where many previous attempts to launch alternative exchanges have failed," he says.If Chi-X has brought new volumes to Europe, it's because of its strategy to move volume for low costs at speed, a facility that suits fast-trading hedge funds very well. Richard Balarkas, chief executive of broker Instinet Europe, explains that this cheaper, faster model is ushering in high volume trading strategies popular in the US, such as statistical arbitrage and quantitative strategies, which are more cost-sensitive thanks to the amount and speed they aim to trade.Liquidity warThe other two operational venues are also trying to win the liquidity war by promoting key differentiators. Turquoise is marketing both dark pool and transparent central order book capabilities. Dark pools allow traders to find trade matches anonymously, enabling institutions to trade huge volumes without affecting prices on the wider market.Aviva Investors' Bezant explains that this service is better suited to index funds, which are more interested in moving large blocks of stock with minimal market interference, but which are less time-sensitive than hedge funds.Nasdaq OMX hopes to attract liquidity by offering subsidies to traders that post liquidity and to high volume traders on its traditional exchanges in the US and Scandinavia. If a trade does not find a match, it will forward the trade onto other MTFs until it finds a match, thereby guaranteeing a successful trade. Nasdaq OMX hopes to gain a 5% market share by the end of the year and a 20% share in the long term, a spokesman said.What will become of the traditional exchanges as MTFs proliferate? Scott Riley, director at Chi-X, believes that they still have a role to play in the listing of new stock and capital issuances. Others, like Randall, think that the traditional exchanges will simply adapt. Ten years ago Nasdaq and NYSE faced similar challenges yet they are still the primary exchanges in the US.Anthony Attia, executive director, head of business change management at NYSE Euronext, points out that exchanges are adopting trading tools like SORs and dark pools, as well as partnering or forming their own MTFs. LSE is set to launch Baikal, its own dark pool, in November and Deutsche Börse has recently announced its interest in developing an alternative trading venue.LegacyBut if exchanges have seemed slow to respond, it is because of a legacy mindset, says Randall. "They've been able to do what they liked for so long. Equally there's a strong sense of nationalism surrounding national exchanges that prevents change," he says.The inevitable fragmentation of the marketplace is also another concern for market commentators as each MTF struggles for market share. Yet Eli Lederman, chief executive at Turquoise, points out that Europe was already fragmented, each country having its own exchange and infrastructure, but that now, MTFs are countering fragmentation at the trading end.Randall observes that the cross border trading capabilities that MTFs provide are in line with the pan-European, sector-focused way that traders see the market. Traditional exchanges only offer a country-focused trading solution. Others point out that SORs are the key to unlocking the fragmentation problem because they are programmed to source trades across all trading venues.But with new players in the market operating new technologies, market fragmentation could present new risks particularly in the post-trade segment. Citi's Gelb observes that the landscape is becoming more complex as CSDs begin to provide services that were once the preserve of agent banks. Link Up Markets is a joint venture among European CSDs that will allow them to effect cross border settlement. Target2Securities, a pan-European single settlement platform, will further incentivise CSDs to encroach onto agent bank territory.However, despite the potential opacity and complexity that such changes could bring, service providers remain bullish. "MiFID and the 2006 Code of Conduct will promote transparency, and the market is more aware of pricing and component costs than ever," says Gelb.

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