Friday, September 11, 2009

AMCF News, trade reporting, PATS, Euroclear, VdM, Asian exchange profitability, HK T+2

G’day All,

Lots of platform developments this week but the Barclays Transaction Reporting issue caught my eye.

I don’t want to comment on the actual process that lead to Barclays getting a fine.
But 2.5 million quid is a might whack for a transgression.
And here I think about materiality, proportionality and proceeds.
First of all I wonder how many of these transaction reports are “used” as opposed to filed.
(Yes, I appreciate this would not have come to light if the reports were not used, but if the reports were being used actively, maybe some of these transgressions would have come to light earlier).
Next, what is the materiality of all these transaction reports, as highlighted by the Reuters story, where fragmentation is cited as a post MiFID issue. (also The Trade story)
Personally, I’m a great believer in transaction reports, but I don’t feel I can stand back and reconcile total transaction reports verses total trades / liquidity claimed by all the various platforms, brokers, pools etc.
Then we have issues with the cost and price of accessing this data (even with the issues of validation, enrichment and quality).
Next, we have a nice white paper by Eurex. I appreciate this is a different asset class, but how effective is the industry at capturing OTC data (obviously there are some self serving conclusions in the paper).
Now, if 2.5 million quid was going to be spent, on researching, qualifying and improving transaction reporting. OK, this is a constructive step to take, and sorry, Barclays just happened to be there on the morning they were handing out tickets.
But I don’t get that feeling. I feel that this is a mighty whack to send a signal “we bite”.
By all means Bite, but use that for the betterment of the markets you serve, not just for the sake of it.

Platforms – headlines speak for themselves.
DirectEdge stays on my radar. I wonder about the common equity investors (Citadel) in DirectEdge and Equiduct.
LSE and Millennium. I didn’t predict that.
I notice PATS in Indonesia – congratulations to them. Anyone know what happened to CapCo (they used to run the CCP there)?

Clearstream – why would you want to drag all that bad publicity back out of the closet? Stop It.
Euroclear – a big win for the users – transparency finally arrives. Imagine charging 4.3p for “netting”. Congratulations to the innovation in the industry that has encouraged some defensive pricing.
LCH deal back in the news. Something has to give.

Van der Moolen. Never nice to see the passing of a great name.
HK moves to T+2 and look at some of those Asian exchanges returns.

For those technology watchers – Photonic Chips are the way to go. (especially if we want to get to 10,000 times faster)
I highly recommend this and found this very informative.

I’ll be at Sibos next week and look forward to meeting as many as I can.
Awful how quickly the agenda fills up. How long till Speed dating is introduced?
As such, there’ll be no news from me next week.

Love old Leonardo – study without desire spoils the memory, and it retains nothing that it takes in.
(few of my teachers would like to share a tale or two with Leo)

Have a great weekend, wherever you are, and don’t forget the nippers.
(Sorry, Boks to lose to the Kiwis at home)



Hungary-based Quote MTF has become the latest trading platform to enter the crowded post-MiFID European securities market.
Full story:

BATS in its first week of inverted pricing for UK securities posted 5.9% market share in the FTSE 100, up roughly 180 basis points (bp) from its average August share of 4.11%. NASDAQ OMX, which also launched a discounted routing fee for UK securities beginning this week, reported no market share change.
Source: BMO Capital Markets Corp.

PRESS RELEASE: Kendall Law Group Announces Shareholder Investigation Into NYFIX, Inc.9/2/09DALLAS -- Kendall Law Group, led by a former federal judge and former US Attorney, announces a shareholder investigation concerning the proposed acquisition of NYFIX, Inc. (Nasdaq:
NYFX) by NYSE Euronext for possible breaches of fiduciary duty by the Board of Directors.

Jobs slashed at NYSE's newest acquisition Nyfix, a maker of trading technology, just sold itself to NYSE Euronext for 95% more than its market value. The bad news is, 40% of its workers will be jobless when the deal closes in the fourth quarter.

Second MTF up for sale
Global exchange group NYSE Euronext is considering the sale of NYFIX’s Millennium and Euro Millennium dark pools

Direct Edge's market share hits new high

Rolet casts doubt over Baikal future amid regulatory scrutiny Baikal, the London Stock Exchange’s proposed “dark pool” venture “might not work” amid regulatory scrutiny over such platforms and the inability of most such structures in Europe to earn profit, Xavier Rolet, LSE chief executive, has said. (Financial Times)
London Stock Exchange CEO Xavier Rolet has admitted the bourse's new pan-European MTF and dark pool, Baikal, "might not work" in the face of growing regulatory scrutiny.
Full story:

Rolet speeds LSE technology revolution Xavier Rolet, chief executive of the London Stock Exchange, has set an ambitious target for scrapping the exchange’s trading system by suggesting a replacement may be confirmed as early as this month. Rolet started a review of the exchange’s technology strategy days after joining the group three months ago. Last week he said the process was nearing a conclusion.
Sri Lankan vendor MillenniumIT has emerged as the surprise favourite to provide the replacement for the London Stock Exchange's TradElect platform.
Full story:
Our customers include:

American Stock Exchange
Bank of Ghana
Botswana Stock Exchange
Capital Markets Authority of Kenya
Central Depository System of Mauritius
Central Securities Depository of Kenya
Colombo Stock Exchange
Dar es Salaam Stock Exchange
London Metal Exchange
Lusaka Stock Exchange
Nairobi Stock Exchange
Perimeter Financial Corporation
Stock Exchange of Mauritius
Securities Depository Agency of Croatia
Uganda Securities Exchange



09/09/2009 11:11:00
Nyse Euronext has agreed to sell a "significant" equity stake in one of the company's two US options exchanges to a consortium of market makers, including BofA Merrill Lynch, Barclays Capital, Citadel Securities, Citi, Goldman Sachs, TD Ameritrade and UBS
More on this story:

Chi-Tech Selects FTEN's Risk Controls for Pan-European Trading ServiceChi-Tech integrates FTEN into MarketPrizm offering to provide risk management as HFT grows ...

Plus Markets says a group of investors from the Middle East has agreed to invest up to £5.5 million for a 19% stake in the UK small and mid-cap exchange.
Full story:


MEXICAN EXCHANGE IN TALKS TO SELL STAKE TO CME GROUP Bolsa Mexicana de Valores is in preliminalry talks to sell a minority stake to Chicago-based derivatives exchange operator CME Group.
Full story:

*** Traiana & CLS

Catalyst: Photonic Chip - ABC TV Science
The science of photonics promises to remove bottlenecks and speed up the entire Internet by sending information with light rather than tardy little - Cached - Similar


Banks agree to route more derivatives through clearinghousesJPMorgan Chase, Barclays, UBS, Citigroup and several other major financial institutions agreed to accelerate their use of central clearinghouses for over-the-counter derivatives. The banks said they will start sending more credit default swaps and interest-rate derivatives through clearinghouses in October and December, respectively. The move comes as regulators in Europe and the US aim to clamp down on the $450 trillion market. Reuters (08 Sep.) , The Wall Street Journal (09 Sep.)

09/09/2009 12:00:00
Europe's second-highest court has upheld a monopoly abuse charge brought by the European Commission against Deutsche Börse's settlement arm Clearstream five years ago.
More on this story:


Euroclear follows MTFs with fee cuts Euroclear, Europe’s largest settlement house, plans to cut the fees it charges for some post-trade services in the UK, in the latest fillip for the country's equity traders, who have seen their costs fall dramatically since the launch of several new trading venues.
FINACIAL NEWS: Euroclear Follows MTFs with Fee Cuts By Tom Fairless9/3/09 Euroclear, Europe’s largest settlement house, plans to cut the fees it charges for some post-trade services in the UK, in the latest fillip for the country's equity traders, who have seen their costs fall dramatically since the launch of several new trading venues.Brussels-based Euroclear said it will reduce the fees it charges investors to offset share trades executed on rival stock markets from November. The company will cut its average trade-netting fee by 58%, from 4.3p to 1.8p per transaction, with some users paying less than 1p.
*** the big win here is transparency, at long last Euroclear will start to let people know how much they actually charge for netting (as opposed to transaction reporting SDRT (stamp duty) or other.

Consortium could gain controlling stake in LCH.ClearnetLCH.Clearnet, one of the most prized post-trade businesses in the world, is in talks to buy out many of its shareholders and possibly give a controlling stake to a consortium of banks and inter-dealer broker Icap, sources said. LCH.Clearnet has been at the centre of an ownership battle for months, and the development is the first indication that a resolution might be in the making. Financial Times (tiered subscription model) (10 Sep.)


BARCLAYS FINED £2.45 MILLION FOR TRANSACTION REPORTING FAILURES The Financial Services Authority (FSA) has fined Barclays Capital Securities and Barclays Bank £2.45m for failing to provide accurate transaction reports to the watchdog and for "serious weaknesses" in systems and controls in relation to transaction reporting.
Full story:

Fragmentation of share-trading data remains issue in EuropeFinancial industry officials in Europe said the Markets in Financial Instruments Directive has opened up opportunities and given investors a greater number of choices, but it has also led to fragmentation of share-trading data. While some market participants said the fragmentation is a serious issue, others said it is a consequence of increased competition. In the US, regulators tackled fragmentation by requiring trading platforms to route prices through a consolidated tape. Europe has no plans for a similar solution. Reuters (08 Sep.)

Markit BOAT to cut pan-European data price

As the European Commission (EC) gathers evidence for its MiFID review, a survey by The TRADE has found that 68% of European buy-side heads consider their clients to be worse off since its implementation, while only 16% think the directive has improved their ability to attain best execution.
Eurex draws up wider plan for OTC derivatives European futures group Eurex has thrown down the gauntlet to international regulators by proposing a blueprint to overhaul the over-the-counter derivatives market.
The 48 page blue print is available here:




11/09/2009 10:54:00
Barclays Capital has taken a minority equity stake in TradeWeb, a provider of online markets owned by Thomson Reuters and a group of dealer-brokers. The size of the stake, nor the amount paid, was disclosed.
More on this story:

Van der Moolen files for bankruptcy in Amsterdam Van der Moolen Holding’s 117-year old history ended on Wednesday after the Dutch brokerage filed for bankruptcy in the Court of Amsterdam following its inability to secure a buyer. (Financial Times)

Read story


IOSCO urges enhanced regulation of securitisation, CDS marketsThe International Organisation of Securities Commissions issued a report that recommends changes to bolster transparency and oversight of the credit default swaps and securitisation markets. IOSCO's recommendations include a requirement that originators or sponsors retain long-term exposure to securitisations. "IOSCO acknowledges that financial innovation will always be a hallmark of a vibrant financial system. However, such innovation need not, and should not, occur at the cost of investor protection and market confidence," said Kathleen Casey of IOSCO. Investment Executive (Canada) (04 Sep.)
*** I agree with “eat what you kill”

OTC regulators face the 'Grand Canyon' of resource gaps US regulators looking at reforming the vast market for over-the-counter derivatives have become the latest to be told they face a funding headache in their bid to bring tougher oversight to a corner of the financial services industry.

09-168AD ASIC seeks comment on credit rating use in disclosure documents
Consultation Paper 117 Consent to quote credit ratings in disclosure documents and PDSs will help guide ASIC’s review of its class order relief to find an appropriate balance between:
making credit ratings available to retail investors;
promoting the accountability of credit rating agencies to investors; and
giving credit rating agencies better control of the use of their ratings.
The consultation paper seeks to obtain more information about:
how important credit ratings are to retail investors;
how common is the use of credit ratings in disclosure documents and advertising to retail investors;
how do credit rating agencies control the use of credit ratings; and
what are the practicalities and costs of requiring and giving consent to cite credit ratings in disclosure documents.


Asias Exchanges Favour Shareholders Over Members
August 30th, 2009
Comments by By
Steve Edge

Recently, the premier bourses of Asia reported their financial results as is prudent for publicly listed companies. Not surprisingly they all reported a decline in revenue in “harsh conditions”. However, they were all profitable. Not only that but gross profit margins were in the mid 70% range akin to a growth company or more precisely a monopoly. What was telling about the financial results was the dividend payout ratio (the percentage of net after tax profit paid to shareholders in the form of a dividend) all stood at 90%. Asia’s exchanges clearly put their shareholders ahead of their Members.

ASX Ltd (FY08/09)Gross profit margin of 74%Net Earnings per share $1.83Dividend per share $1.65

HKEx Ltd (HY09)Gross profit margin of 77%Net Earnings per share $2.05Dividend per share $1.84

SGX Ltd (FY08/09)Gross profit margin of 77%Net Earnings per share $0.29Dividend per share $0.26(All dollar values are quoted in local currency)

Hong Kong Exchanges and Clearing Limited (“HKEx”) unaudited consolidated results for the six months ended 30 June 2009 as follows:

Participantship Opens to Overseas Clearing Houses and Central Depositories
In order to provide an additional and lower cost option to overseas market participants who are holding Hong Kong-listed securities as custodians, and to facilitate more order flow to Hong Kong, overseas clearing houses and central depositories (collectively, “CSDs”) can now apply to become Clearing Agency Participants (“CAPs”) of Hong Kong Securities Clearing Company Limited (“HKSCC”) in respect of those Hong Kong-listed securities. CSDs will manage their accounts in the Central Clearing and Settlement System (“CCASS”) electronically through CCASS terminals installed in their jurisdictions, and they will be subject to Hong Kong laws and the participant agreement to be executed with HKSCC. For due diligence purposes, HKSCC will follow the international practice and require CSDs to submit independent legal opinion on their eligibility, under the laws of their jurisdictions, to become CAPs.

T+2 Finality for Stock Exchange Trades
Securities trades executed on the Stock Exchange are currently settled in CCASS on T+2 while the money settlement is completed in the morning of T+3. HKEx plans to implement T+2 Finality for Stock Exchange Trades to reduce the overnight counterparty risk created by the
settlement time gap. With the support of the Hong Kong Monetary Authority and Hong Kong Interbank Clearing Limited, a model has been proposed to effect money settlement at the end of T+2 so as to bring finality of securities and money settlement for Stock Exchange Trades and Settlement Instructions (“SIs”) on the same business day. HKEx is currently seeking feedback from certain banks and clearing house participants on the proposed model for market consultation around the end of third quarter this year.

An excellent joke (apart from the potential character assassination). The American version is unsurprising, but I thought it funny the Welsh were in on the act with their “Mr Jones”.

It is a portion of an ABC radio interview between a female broadcaster and General Cosgrove who was about to sponsor a Boy Scout Troop visiting his military Headquarters. FEMALE INTERVIEWER:So, General Cosgrove, what things are you going to teach these young boys when they visit your base?GENERAL COSGROVE:We're going to teach them climbing, canoeing, archery and shooting. FEMALE INTERVIEWER: Shooting! That's a bit irresponsible, isn't it?GENERAL COSGROVE:I don't see why, they'll be properly supervised on the rifle range.FEMALE INTERVIEWER:Don't you admit that this is a terribly dangerous activity to be teaching children?GENERAL COSGROVE:I don't see how. We will be teaching them proper rifle discipline before they even touch a firearm. FEMALE INTERVIEWER:But you're equipping them to become violent killers.GENERAL COSGROVE:Well, Ma'am, you're equipped to be a prostitute, but you're not one, are you?

It just all depends on how you look at some things...Judy Wallman, a professional genealogy researcher in southern California, was doing some personal work on her own family tree.
She discovered that Congressman Harry Reid's great-great uncle, Remus Reid, was hanged for horse stealing and train robbery in
Montana in 1889. Both Judy and Harry Reid share this common ancestor.The only known photograph of Remus shows him standing on the gallows in Montana territory:
On the back of the picture Judy obtained during her research is this inscription: 'Remus Reid, horse thief, sent to Montana Territorial
Prison 1885, escaped 1887, robbed the Montana Flyer six times. Caught by Pinkerton detectives, convicted and hanged in 1889.' So Judy recently e-mailed Congressman Harry Reid for information about their great-great uncle.

Believe it or not, Harry Reid's staff sent back the following biographical sketch for her genealogy research: "Remus Reid was a famous cowboy in the Montana Territory ...... His business empire grew to include acquisition of valuable
equestrian assets and intimate dealings with the Montana railroad. Beginning in 1883, he devoted several years of his life to
government service, finally taking leave to resume his dealings with the railroad. In 1887, he was a key player in a vital
investigation run by the renowned Pinkerton Detective Agency. In 1889, Remus passed away during an important civic function
held in his honor when the platform upon which he was standing collapsed."

…and oh what a pleasure to see the Wallabies rise to the occasion. I’d not predicted the win so delighted to be proven wrong. Nice way to mark Robbie Deans (Kiwi coach) 50th.

Study without desire spoils the memory, and it retains nothing that it takes in."
Leonardo Da Vinci, scientist, inventor, author

Without labour nothing prospers."
Sophocles, Greek playwright and philosopher

Lessons on running a smooth settlement system - Financial Times
By Jennifer Hughes
20 August 2009 - Amid the chaos caused by Lehman Brothers’ collapse last year, a single €300m ($427m) missing payment might seem small beer.
But the travails of KfW, the German bank, were the exception that proved how well the currency markets functioned throughout the market turmoil – an example market insiders feel is overlooked by the authorities as they search for solutions to settlement risk elsewhere in the markets.
KfW allowed a €300m payment for a currency swap to go out to Lehman Brothers the day the US behemoth collapsed and never got the dollars it was owed in return.
Settlement risk in the currency markets – trading across borders and round the clock – has long been a high-priority issue for regulators. It was in fact the FX issues caused by the 1974 collapse of a private German bank that gave the problem its colloquial name – Herstatt risk.
Then, Herstatt Bank was paid Deutschmarks in European time but had not paid out the dollars it owed in US trading hours before it closed its doors.
The fact that KfW was almost the only headline-worthy FX settlement issue during the financial crisis underlines the smooth-running of the market and means it has been one less headache for regulators. But as they and politicians seek solutions to some of the trading risks highlighted by the crisis for other over-the-counter markets, currency experts wonder why their model, tested on the biggest market there is, is largely being ignored.
Currency markets have always been a little bit special. Known as a distinct asset class in recent years, FX is considered by regulators to be the most systemically important market because of its central role in the global payments system and because of the staggering sums traded round the world each day.
If the FX market gummed up, the global economy would be affected instantly because without a price, banks would struggle to exchange currencies across borders for even the smallest trade flows.
The market is also the exception that proves the rule whereby all policymakers talk global but often end up acting locally.
Currencies are sovereign, but by their nature they are traded across borders, making the market impossible to oversee on a purely national basis.
The market is made more complicated still by the fact that currencies are often settled in different timezones, meaning one bank could have paid its dollars to a counterparty, but would have to wait perhaps another full day to get, say, its yen in return.
As a result, regulators have worked together and over the years increased the pressure on the industry to solve its settlement risk issues. In 2002 it launched Continuous Linked Settlement, or CLS Bank, the multilateral system owned by a group of banks whereby members settle hundreds of billions worth of transactions each day.
“Spot” FX for immediate settlement is not traded on an exchange, but over-the-counter in bilateral deals. Exchanges are being touted by politicians and regulators as the solution to settlement risk in a range of over-the-counter markets including for credit derivatives, but the spot FX world is a working example of a market that, through CLS, has largely dealt with settlement risk without using an exchange as a central counterparty.
“The fear for the market is that politicians unwittingly draw FX into their deliberations over other over-the-counter asset classes,” says one official.
CLS processes trades in real time for settlement for most of the main banks today, handling about 50 per cent of global FX trading volumes. The system matches both sides of a trade – it does not stand as a central counterparty – and then nets each member bank’s total obligation. If KfW had settled its Lehman trade through CLS, it would have got its €300m back since if CLS can not reconcile both sides of a deal, the funds are returned.
CLS was not always appreciated by the market; almost all banks saw it as a high-cost utility in its early days and had to be bullied into developing the system by central banks who oversaw the whole market. Now, these same players are enthusiastic.
“When they saw counterparties could fail and these risks were not in fact theoretical, the real value of CLS got through. Many people in the industry have now got this risk reduction religion, so to speak,” said Rob Close, chief executive of CLS.
Market insiders are now addressing the risk caused by the growing bottleneck between deal and settlement.
“We’re trading in milliseconds in the front office but we’re only settling that in the back office on a daily basis,” said Zar Amrolia, global head of FX at Deutsche Bank.
A new system due to launch later this year is designed to take care of that by aggregating each trade ticket and settling them in bunches rather than risking that a large number of trades might get delayed in a traffic jam in the back office. This could be done as often as every 30 minutes.
The new platform is a joint venture between Traiana, the ICAP-owned post-trade network operator and CLS. Gil Mandelzis, chief executive of Traiana, thinks the system can be applied to other asset classes – reducing settlement risks and in the process, increasing capacity. “I absolutely think the FX model can in part be applied to other asset classes. It hasn’t been studied enough to see what works,” he says. “We don’t have a silver bullet. We come up with new ideas all the time. But what we have done is not limited to the world of FX.”

Scott Riley
EMCF Business Development

European Multilateral Clearing Facility
8th Floor 50 Bridge Street Sydney Australia 2000
((Off)+61 (0)2 8916 9634 È(Mob): +61 (0)418 117 627

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