Weekly Roundup | 2nd November 2014
In OTC swaps market news, Singapore is considering joining the US and Europe in mandating electronic trading, which would bring a significant Asian market on board with electronic swaps trading. Meanwhile, in the US market, Markit is closing the doors to its CreditCentre pre-trade credit confirmation service. With only Traiana’s CreditLink left to provide pre-trade credit confirmations, some wonder whether having one solitary provider introduces systemic risk issues. In other markets, a startup is applying to the U.S. Commodity Futures Trading Commission to become the first derivatives exchange with bitcoin as the underlying asset to be traded. Also, Tradeweb has officially entered the corporate bond trading space, but rather than rapid adoption of its new services Tradeweb sees the corporate bond market in the process of slow evolution toward electronic trading. See below for details on these stories and more.
Markit to shutter its CreditCentre
Markit is in the process of shutting down its CreditCentre facility, which provides pre-trade confirmations that counterparties are below required credit limits before entering into swaps transactions. Traiana’s CreditLink is the only other facility set up to perform this service. Markit’s service, established three months after Traiana’s, was predicated on the assumption that the industry would quickly move to central limit order book trading. The slower-than-expected adoption of CLOB trading may have contributed to CreditCentre’s trouble gaining traction. Some market participants are questioning whether the existence of only one pre-trade credit confirmation facility raises systemic risk issues.
Greenwich analysis shows ranking of firms by the amount of cleared swaps customer collateral held
A recent blog post by Greenwich Associates’ Kevin McPartland includes a US swaps clearing league table, ranking firms by the amount of cleared swaps customer collateral held in segregation accounts. He cautions though, that the numbers might not be an accurate proxy for market share. Client mix, for example affects the amount of initial margin FCMs are holding – a long list of clients with directional bets would result in higher initial margin held than an FCM whose clients are more diverse. In addition, longer-dated swaps have higher initial margin requirements, so a hedge fund client who trades heavily but maintains a duration near zero will not have to post much initial margin. With those caveats, the top three firms in cleared swaps customer collateral value required to be held in segregation were Credit Suisse with $8.4 billion, Barclays with $6 billion and Citi with $5.6 billion. Incidentally, a completely separate blog post from Greenwich last week explained some of the different SEF fee structures and found that while clients prefer transparent fee models, creative fee structures that encourage trading are expected to grow.
OpenGamma names Beeston chairman and appoints Conde non-executive director
OTC market structure risk management and analytics provider OpenGamma has named MarK Beeston chairman of the board of directors and appointed Cristobal Conde, former CEO of SunGard to its board. Beeston, who has been on the board since 2012, was CEO of ICAP’s post-trade risk business until February of this year, when he left to launch Illuminate Financial Management, for which he is currently CEO. Conde, who is new to OpenGamma’s board, was head of Sungard for 12 years. The former board chairman, Kirk Wylie, who is also one of OpenGamma’s co-founders, will serve as chief innovation officer.
Singapore weighs electronic OTC swaps trading
Singapore is considering moving its OTC derivatives trading to electronic platforms, which would put Singapore OTC swaps markets on course toward reforms like those being implemented in the U.S. and Europe. The G20 countries agreed to work to overhaul the OTC swaps market to improve transparency and oversight back in 2009 in the wake of the financial crisis, but Singapore has so far not pursued the reforms underway in the U.S. and Europe. Market observers have suspected that Singapore did not want to overly-burden its still-developing OTC market. But now the Financial Times is reporting that the Monetary Authority of Singapore is currently studying ways to amend local securities laws to allow the regulator to impose mandatory electronic trading mandates. “We will review the implementation of a trading mandate and will continue to actively engage the industry to better understand the costs and benefits of mandating trading before doing so,” a representative of the regulatory agency told the Financial Times. Before mandatory electronic trading, Singapore will likely first move the market to central clearing.
As Tradeweb enters corporate bond trading, CEO says market reform will require patience
Tradeweb officially launched U.S. investment grade corporate bond trading last week, but CEO Lee Olesky cautioned that the adoption of electronic trading for corporate bonds would likely be a “gradual evolution.” Tradeweb will offer live streaming prices from 30 market makers and well as several electronic request-for-quote protocols. Olesky said that only 15 percent of the U.S. corporate bond market now trades electronically on platforms like MarketAxess and Bloomberg, and that Tradeweb is planning to target that remaining 85 percent.
Startup hopes to launch first regulated options exchange for bitcoin
A startup called LedgerX has submitted applications to the Commodity Futures Trading Commission seeking approval to become the first derivative exchange with bitcoin as the underlying asset to be traded. The company believes a regulated bitcoin exchange would help stabilize the volatility of bitcoin prices, by giving business that accept bitcoin payments or trade bitcoin the ability to hedge bitcoin prices. A hedging mechanism, like derivatives, might also draw more players into the market, the company says. LedgerX has received $4.5 million in venture funding from Lighspeed Venture Partners, Google Ventures and others, according to chief executive Paul Chou. The company has added former CFTC chairman and New York Mercantile Exchange CEO James Newsome to its board as well as Thomas Lewis, who has serves as CEO of Ameritrade and Green Exchange Holdings.
Banks set aside $2.7 billion to settle in FX rigging investigation
Banks have begun setting aside money to settle potential FX rate rigging investigations, with four large banks setting aside up to $2.7 billion over the past week. Several large firms are engaged in settlement talks with regulators, Bloomberg reports, and the set-asides are seen as indications that settlements are near. Royal Bank of Scotland set aside 400 million pounds, ($639 million) on Friday, and HSBC was reportedly planning to set aside the same amount on Nov. 3, though it hadn’t been announced yet as of press time. On Thursday, Barclays set aside 500 million pounds ($799 million) and Citigroup took a $600 million legal charge. All four banks are currently in settlement talks with the U.K. Financial Conduct Authority. About a dozen banks say they are cooperating with investigators and investigations are underway on three continents. U.S. regulators are reportedly in settlement talks as well, with the first U.S. charges expected by the end of the year.