TURNING the TIDE Canada’S Stand Against Financial Crises

TURNING THE TIDE Canada’s stand against financial crises

TABLE OF CONTENTS NEW METHODOLOGY for establishing bond futures position limits 12 MX REVIEWS the October 15th Treasury « Mini-Flash Crash » 14 NEW! The CGF Incentive Program 20 News on PRE-TRADE VALIDATION 24 New LIVE approved participants 25 2014 Trading VOLUMES and Open INTEREST 26 2014 RECORDS 28 Upcoming 2015 EVENTS 31

m-x.ca/twitter m-x.ca/facebook m-x.ca/linkedin CADerivatives 2015 / Vol. 1

That very system would serve as the a stop to the convertibility of the US impetus for the Great Depression of dollar into gold, rendering the dollar TURNING THE TIDE the 1930’s, which became worldwide a flat currency and signaling the end news with the US stock market crash of the Bretton Woods system. Known of October 29, 1929. In the preceding as the Nixon Shock, this led to the US Canada’s stand against decade, interest rates had been low and dollar becoming a reserve currency for money in ample supply. The middle many nations, and drove a mass global class had begun investing in the stock transition from fixed to floating rate financial crises market for the first time. Margins weren’t currencies. regulated, so they were at the discretion of the brokers. To ease pressure on In 1973, an oil embargo was called by was escalated by unrestrained issuance speculators, margins were dropped to the Arab members of the Organization of paper money by state banks, over just 25% by October of 1929, exacerbating of the Petroleum Exporting Companies, MICHELLE MACADAM whom regulatory influence had ceased an already volatile situation. The Dow plus Egypt, Syria and Tunisia. It lasted Editor in Chief in 1811 with the fall of the Bank of the Jones Industrial Average fell from 381.17 five months, during which time the price 514 871-7894 [email protected] United States. The Second Bank of the in September of 1929 to just 41.22 in of oil quadrupled to $12 per barrel. The United States was formed in 1816 to get July of 1932. While some countries had First Oil Shock had widespread effects on state banks back under control. Loans started to recover by the mid-1930s, politics and the global economy. While When you’re in a pit, the first were issued sparingly and defaulters others struggled until the end of WWII in oil producing countries benefited greatly, thing to do is to stop digging. zealously pursued. State bank failures 1945. The US stock market wouldn’t fully both financially and geopolitically, — James Ellman and mortgage foreclosures became recover until 1955. oil importing countries were hit with commonplace; unemployment soared. drastic spikes in fuel costs and financial The crisis signaled the transition of recessions. Financial crises are nothing new. The the US from a European offshoot to a world has suffered through them for dynamic economic system that would millennia, as with the Crisis of the Third come to dominate the world. Century which lasted from 234 to 285 AD and nearly wiped out the Roman Empire. They have, however, become increasingly complex over time. In 1944, 730 delegates of all 44 allied The Panic of 1819 arose in the US nations collaborated to develop the from the financial burdens of the Bretton Woods exchange rate system, Napoleonic Wars and the War of 1812. It establishing rules for commercial and financial relations. In 1971, the US put

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It’s a crisis if everybody calls it borrowers defaulted on their loans, the headings: Macroeconomic Policy and The report comprises key principles for a crisis. — Morgan Downey value of the loan investments dissipated. Data Transparency, Financial Regulation Financial Market Infrastructures (FMIs): Over 2007, US home sales dropped more and Supervision, and Institutional and systematically important payment In the wake of the Nixon and First Oil than they had in 25 years. Market Infrastructure. systems, central securities depositories, Shocks, France, Germany, Italy, Japan, securities settlement systems, central the United Kingdom and the United clearing counterparties and trade States formed the Group of Six in 1975, to THE PFMI STANDARDS REPORT repositories. The report also covers the facilitate economic cooperation. A year Falling under Institutional and Market responsibilities of those who regulate, later Canada was welcomed into the fold Infrastructure are the Principles for supervise and oversee FMIs. and the organization became the Group Financial Market Infrastructure (PFMI), of Seven (G7). published in April 2012. Requirements under PFMI are more stringent and specific than those In 1999, the G7 Finance Ministers and At the Pittsburgh Summit in September under the previous standards reports Central Bank Governors founded the 2009, G20 leaders had agreed to (Core principles for systemically Financial Stability Forum (FSF) to enhance By the fall of 2008, banks and insurance reform over the counter markets to important payment systems - CPSS, global financial stability through the companies could no longer cover improve transparency, protect against 2001, Recommendations for securities cooperation of the world’s supervisory the financial commitments they had market abuse and mitigate systemic settlement systems - CPSS-IOSCO, bodies and financial institutions. Later undertaken to be able to finance these risk. As a key tactic, it was agreed that 2001 and Recommendations for central that year, to further promote global subprime mortgages. As the news spread, non-centrally cleared contracts should counterparties - CPSS-IOSCO, 2004). PFMI financial stability, the Group of 20 (G20) the Global Financial Crisis erupted, be subject to higher capital requirements also covers new risk management areas international forum was created by the corroding investor confidence and and that minimum margining and types of FMIs. G7 member countries plus Argentina, sparking a major decline in stock markets requirements should be developed. The Australia, Brazil, China, India, Indonesia, industry wide push for mandatory central worldwide. The crisis revealed significant CCPS Mexico, Russia, Saudi Arabia, South deficiencies in industry practices and in clearing led to the creation of the PFMI Africa, South Korea and Turkey, as well as regulatory and supervisory systems. standards report. One notable enhancement under PFMI the European Union. is the increased emphasis on Central Early in the crisis, G20 leaders called for Clearing Counterparties (CCPs), which act From 1998 to 2006, the price of the the FSF to expand into a mechanism as the counterparty to both buyers and average US house increased by 124%. through which authorities, regulators sellers through the process of novation. The bubble burst in 2006 and the value and financial institutions could heighten As such, CCPs are designed to eliminate of US real estate tumbled. Home loans financial stability. The FSF became the the financial risk of a counterparty were freely given to borrowers who Financial Stability Board (FSB). The FSB defaulting on a transaction. couldn’t afford them, then those loans identified twelve key standards for sound were bundled, overvalued and sold off financial systems, classified under three to unsuspecting investors. When the

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In order to have sufficient assurance that HOW CDCC IS ADDRESSING PFMI 2. Procyclicality 3. Collateral policy they can bear this responsibility, CCPs: The CCP for Canadian derivatives is In this context, procyclicality refers to risk To reflect price movement volatility off the Canadian Derivatives Clearing management processes that are positively the mark-to-market value of securities • enforce minimum standards for Corporation (CDCC). The implementation correlated with market, business or credit being pledged, CDCC uses haircut participation and actively monitor of the first round of CDCC rule changes in cycles, and so may impede financial percentages. A haircut is a percentage by the financial and operational respect of PFMI will take place in March stability. which the value of pledged collateral is health of their members, 2015. reduced for margining purposes. CDCC’s new margining framework • collect and hold sufficient margins incorporates an Exponentially Weighted The enhanced collateral framework will in their accounts to ensure that Read on to learn about some of the specific Moving Average (EWMA) volatility assess the initial haircut for eligible the potential losses of a defaulting CDCC rule changes being enacted. estimator with a 0.99 decay rate and a non-cash collateral on a quarterly basis, member do not cause losses margin floor calibrated with ten years considering market risk, liquidity risk to other members in extreme 1. Concentration risk of data. EWMA estimates next-day and clustering of eligible instruments. but plausible scenarios, and Should a clearing member default, their positions might need to be liquidated. If volatility and measures volatility as For market risk, the procyclicality of • maintain effective, transparent default the positions are relatively large, it may it changes. This replaces the previous haircuts will be limited with an EWMA management processes to manage not be possible to liquidate them within model which considered 20, 90 and volatility estimator, also with a 0.99 exposures and minimize losses. the default close-out periods without 260 day standard deviations. Spikes decay rate and a margin floor calibrated unduly influencing the market. in margin requirements will be greatly with ten years of data. Liquidity risk will CCPs are subject to global performance lessened during stress periods, and the be managed though an EWMA approach standards and must continually prove To limit concentration risk, CDCC will margin floor will inhibit disproportionate for volatility estimation of the bid ask that they comply with PFMI standards. add a set number of liquidation days to leverage during times of low volatility. spread. The clustering approach will use Otherwise, participants using their default close out periods, applicable to up to six buckets for each type of eligible systems will be subject to higher capital incremental positions above a certain collateral. One haircut will be applied for charges. »» For more information on how CDCC threshold. Thresholds will be determined will deal with procyclicality, click here each whole cluster, to the maximum level by the regular trading volume of each While the PFMI standards report provides of initial haircuts from each cluster. product. principles and requirements for CCPs to follow, it leaves the determination of »» For more information on how CDCC how to best fulfill those requirements »» For more information on how CDCC will enhance its collateral policy to the CCPs themselves. As such, the will deal with concentration risk, regarding haircuts, click here measures undertaken by CCPs around the click here world could vary greatly. In fact, few have published self-assessments to date.

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4. Liquidity risk underlying security’s potential future CDCC’s mismatch settlement risk 8. Stress testing (trading and funding) exposure. mitigation will focus on predicting Determining extreme but plausible CDCC will apply minimal close-out exposure from offset providing positions. scenarios is useful when assessing periods to most liquid contracts. »» For more information on how CDCC A margin call specific to mismatch required financial resources. Various Following an empirical analysis, three will deal with wrong-way risk, settlement risk will be executed stress tests must be evaluated under classes of liquidity for futures and four click here immediately following the 1:15 p.m. a wide range of potential scenarios to classes for equity and exchange traded intraday margin run. The margin call will assess the size of the clearing fund and fund options have been identified. The 6. Mismatch settlement risk represent the worst possible exposure to monitor clearing member risk. close-out period for listed derivatives CDCC margin requirements are calculated given potential intraday settlements contracts ranges from two to five days. based on cleared positions. The CDCC testing framework follows on positions held at calculation, without rigorous risk management processes factoring in whether or not the positions and will become more expansive as »» For more information on how CDCC »» For more information on how CDCC are to be settled that day. Such positions market conditions evolve, incorporating will deal with liquidity risk, click here will deal with mismatch settlement could provide margin relief against new extremes as they occur. Risk factor risk, click here positions to be settled at a later date, levels may fluctuate as well; in a low rate 5. Wrong-way risk either as an initial margin offset or as a environment, a small rate movement When credit exposure increases with variation margin credit against the entire 7. Intra-day Variation Margin Risk could have a greater impact on market default risk, the result is wrong-way risk. portfolio. Should a clearing member Intra-day variation margin risk results value than in a high rate environment. As such, it is not always sufficient to settle that day’s position and then go from market volatility or surges in measure counterparty credit quality and into default, however, the risk exposure trading volumes that produce unusually Initial margin is intended to cover transaction exposure independently. could be greater than what had been large variation margin exposures. potential losses in normal market collected at the last margin run. Analytic tools have been developed to conditions. Shortfall is calculated by CDCC will address specific wrong-way risk allow for punctual intra-day margin calls subtracting initial margin from the result ® in two ways. First, SPAN will no longer Mismatch settlement risk is the intraday with real time positions and intraday of an extreme but plausible market be used to calculate margin requirements risk arising from a lag between: market prices. Such margin calls will only condition stress test. CDCC’s clearing for short option positions subject to be performed for members with positions • position settlement that provides fund must reach at least the highest wrong-way risk; rather, the full strike for which CDCC has significant cash shortfall over the last sixty business days. value amount will be charged. Second, a margin offset and the next payment exposures. unsettled item margin requirements will margin requirement calculation, be charged at the full strike value. An »» For more information on how CDCC • credit risk exposure calculation and »» For more information on how CDCC unsettled item margin requirement is will perform stress testing, click here the settlement of collateral deposits will deal with intra-day variation generated when an option is exercised used to cover that exposure, and margin risk, click here or expires at-the-money; it composes the option’s intrinsic value and the • a trade initiation and a new margin requirement calculation.

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9. Collateral eligibility THE WAY FORWARD REFERENCES CDCC may accept collateral types with These rule changes are just the The Crisis of the Third Century group-seven-g7/p32957 significant credit, liquidity or market “The Third Century Crisis of the Roman Empire” by Pat Southern. 2011. BBC. beginning. com (December 30, 2014) The Financial Stability Forum http://www.bbc.co.uk/history/ancient/romans/thirdcenturycrisis_ “Financial Stability Forum” OECD Glossary of Statistical Terms. 2005. Stats. risks so long as risk mitigations, such article_01.shtml oecd.org (December 30, 2014) as higher haircuts, concentration and Moving forward, the operational http://stats.oecd.org/glossary/detail.asp?ID=6203 The Panic of 1819 The Group of 20 diversification limits, are applied. “Panic of 1819” Gale Encyclopedia of U.S. Economic History. 1999. capacity of CDCC clearing members’ “The Group of 20: The premier forum for international economic Encyclopedia.com (December 30, 2014) cooperation” Foreign Affairs, Trade and Development Canada. 2014. will be monitored more heavily and http://www.encyclopedia.com/topic/Panic_of_1819.aspx International.gc.ca (December 30, 2014) To ensure pledged collateral meets http://www.international.gc.ca/g20/index.aspx?lang=eng put under increasing scrutiny. CDCC “The Panic of 1819” Boundless U.S. History Book Concept Version 8. Boundless.com (December 30, 2014) CDCC’s risk tolerance, risk levels will be The Global Financial Crisis will also regularly publicize qualitative https://www.boundless.com/u-s-history/textbooks/298/democracy- “CSI: The Credit Crunch - Central banks have played a starring role” The assessed and appropriate mitigation in-america-1815-1840-12/the-monroe-and-adams-presidency-102/ Economist. 2007. Economist.com (December 30, 2014) assessments on how well it perceives it is the-panic-of-1819-547-3334/ actions enforced. The collateral meeting the PFMI standards. http://www.economist.com/node/9972489 The Great Depression “Crash course: The origins of the financial crisis” The Economist. 2013. framework provides a uniform structure “The Great Depression” 2009. History.com (December 30, 2014) Economist.com (December 30, 2014) http://www.history.com/topics/great-depression for assessing credit, liquidity and market The effort to meet PFMI requirements http://www.economist.com/news/schoolsbrief/21584534-effects-financial- crisis-are-still-being-felt-five-years-article risk, as well as operational capacity. “The Great Depression Was Ended by the End of World War II, Not the Start will continue with default simulations of It” by Peter Ferrara. 2013. Forbes.com (December 30, 2014) “Financial sector compensation and excess risk-taking--a consideration http://www.forbes.com/sites/peterferrara/2013/11/30/the-great-depression- of the issues and policy lessons” by Krishnan Sharma. 2012. UN.org expanding to include more participants was-ended-by-the-end-of-world-war-ii-not-the-start-of-it/ (December 30, 2014) later in 2015. Work on recovery and http://www.un.org/esa/desa/papers/2012/wp115_2012.pdf »» For more information on collateral “The Stock Market Crash of 1929” by B. Taylor, 2006. (December 30, 2014) http://stocks.fundamentalfinance.com/stock-market-crash-of-1929.php eligibility and limits pertaining to resolution is scheduled for 2016, “Global Financial Crisis: Causes of the Crisis” YaleGlobal Online, The MacMillan Centre Yale University. 2013. Yaleglobal.yale.edu “Descent into the depths (1929): The Great Depression Crash of ‘29” liquidity requirements, concentration and segregation models are to be (December 30, 2014) Futurecasts online magazine Vol. 3, No. 3 2001. (December 30, 2014) http://yaleglobal.yale.edu/special_report/728 limits and wrong way risk limits at implemented in 2017, as are industry wide http://www.futurecasts.com/Depression_descent-%2729.html “Financial crisis: timeline” by Patrick Kingsley. 2012. default management simulations. The Nixon Shock CDCC, click here theguardian.com (December 30, 2014) “Nixon and the End of the Bretton Woods System, 1971–1973” http://www.theguardian.com/business/2012/aug/07/ Department of the Historian. 2013. U.S. Department of State History.state. credit-crunch-boom-bust-timeline Canada’s approach to forestalling gov (December 30, 2014) https://history.state.gov/milestones/1969-1976/nixon-shock The Financial Stability Board crises does not begin and end with Our History. About Us. Financialstabilityboard.com (December 30, 2014) The First Oil Shock http://www.financialstabilityboard.org/about/history/ these measures; but they do represent “Oil Embargo, 1973–1974” Department of the Historian. 2013. U.S. Department of State History.state.gov (December 30, 2014) The PFMI Standards Report significant progress. http://history.state.gov/milestones/1969-1976/oil-embargo OTC Derivatives Reforms Progress – Report from the FSB Chairman for the G20 Leaders’ Summit www.financialstabilityboard.org/wp-content/ “How the 1973 oil embargo saved the planet” by Michael L. Ross. 2013. uploads/r_130902a.pdf (September 2, 2013) www.foreignaffairs.com (December 30, 2014) http://www.financialstabilityboard.org/wp-content/uploads/r_130902a. http://www.foreignaffairs.com/articles/140173/michael-l-ross/ pdf?page_moved=1 Everyone involved in, or impacted how-the-1973-oil-embargo-saved-the-planet The Group of Seven by, the Canadian derivatives market “The Group of Seven” by Zachary Laub. 2014. Council on Foreign Relations (December 30, 2014) should now have a much greater http://www.cfr.org/international-organizations-and-alliances/ sense of assurance that, during times of stress, the system will stand its ground.

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While that could prevent excessive positions on the first contract month, MX continuously strives to improve its SEIF EL BAKLY concentration, it also presented serious following the first delivery notice day, market, while fulfilling client needs. Senior Manager, challenges for market participants, could find themselves in excess of the This enhancement to bond futures Fixed Income Derivatives potentially draining market liquidity or limit yet unable to efficiently remedy position limit methodology represents an 514 871-3529 [email protected] even exacerbating disorderly pricing, the situation if they couldn’t find important first step towards those ends. rather than preventing it. a counterparty to help reduce their In the next step, MX strives to enhance position. the position limit methodology for all Since February 13th, at the start of trading Typically, the open interest of the first bond futures delivery months, not just on the day preceding the first delivery contract month decreases dramatically as Liquidity providers could find it the first (spot) month. notice day of the first contract month, the first delivery notice day approaches, impractical to facilitate such orders the position limit of all MX bond futures since the great majority of positions for since they could themselves be at risk These changes to MX position limit is now set at 20% of open interest for that contract month are typically rolled of exceeding the limit from one day to calculation methodology will benefit the that contract month, to a maximum of over. The previous methodology resulted the next. The dramatic daily reduction long-term growth of Canada’s listed bond 5% of the total outstanding amount of in a dynamic limit that would usually of open interest could therefore lead to futures, and the market participants Government of Canada bonds eligible for decrease every day. This daily reduction a decrease in counterparties, increasing trading them. delivery. Once set, the limit is valid for in open interest could cause market the potential for disorderly pricing. There the entire duration of contract delivery. participants who wished to take their was also a risk of operational issues »» To learn more about this initiative, positions to delivery to inadvertently for market participants as the dynamic see Circular 123-14 Previously, a new limit was calculated exceed the prescribed limit. Market limit could lead to an outflow of trading each day, based on daily open interest. participants needing to reduce their activity towards the over-the-counter (OTC) market.

P / 12 P / 13 CADerivatives 2015 / Vol. 1 MX REVIEWS the October 15th treasury « mini-flash crash »

KAREN MCMEEKIN Business Development Manager, Equity Derivatives

514 787-6606 [email protected]

7:00 AM 8:45 AM TREASURY YIELD = 2.20% TREASURY YIELD = 2%

It’s October 15, 2014…North Americans wake to concerns over the weakening Liquidity wanes…by 9:33am, the yield on the 10-year Treasury has economic activity in China and Europe, and worries over the spread of Ebola, plummeted below the two percent level, prompting many to cover pressuring bond yields as investors flock to US treasuries. Not to mention their shorts and buy back US government debt and various the innumerable fund redemptions at PIMCO due to the departure of Bill Gross interest rate futures… that had yet to be re-invested.

7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30

8:29 AM 9:39 AM TREASURY YIELD = 2.16% TREASURY YIELD = 1.86%

NY traders start pushing yield down ahead of economic data… After trading as low as 1.86% (a benchmark yield drop 8:30am…September retail sales are released and confirm the first of 33 bps), sellers resurface to bring the yield back monthly decline since January- discouraging to those who bet above 2%, to 2.06%, and to around 2.15% by 5pm. on the Federal Reserve raising interest rates before 2017, A seven standard deviation break from the intraday biasing the market towards the short side. norm for trading activity on US treasury futures, far exceeding that of the 2008 financial crisis.

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October 15 vs. average trading day (September 17) Liquidity in the 10 year as measured bytotal sizes of orders in 10 levels of depth of book Source: http://www.nanex.net/aqck2/4681.html Source: http://www.nanex.net/aqck2/4681.html

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At the end of the day, almost $1 trillion Canada Bond Futures (CGB), validated HFT in the Treasury market is growing. By the end of January, there were still worth of cash Treasuries did change that liquidity was available on exchange. According to TABB Group LLC, about 60% many “unknowns” haunting the markets, hands, implying there was liquidity Proprietary and high frequency trading of Treasury securities trades are expected such as the persistently depressed available… but at what cost? (HFT) was present throughout the day, to be transacted on electronic platforms European and Chinese economies. Oil especially in the bond futures market by the end of 2016, up from 40% in 2013. prices and economic data (i.e. inflation, Once major players in the Treasury when the banks pulled back, suggesting Of those, 10% were executed by robots consumer confidence) will continue to market, the Canadian banks are now that some practices of high-frequency, with TABB expecting that number to play a role in yield direction. One fact almost sidelined thanks to BASEL low-latency trading helped restore double by year-end. remains clear though, the steady liquidity III and the Volker Rule, which limit liquidity to client flow. Though some high in the BAX and CGB markets will continue excessive risk-taking and ban proprietary frequency traders were takers of liquidity, As the memory of October 15th began to support the need to hedge, to transfer trading. To comply with higher capital most remained and consistently provided to fade, January kicked off with risk from cash to futures, or to adjust requirements under this legislation, markets, rather than perpetuate the new contract highs in the CGBs, as duration. With focus and analysis on the banks with bond trading desks have cut roller coaster. MX even witnessed a rise government bonds began 2015 rallying on yield curve, traders are forecasting future inventories significantly. On October 15th, in the maker-taker ratio amongst some the assumption that depressed oil prices economic growth and exploring trading according to Bloomberg, Scotiabank’s of the more active proprietary and HFT were signalling that inflation would opportunities across these markets. head treasury dealer “realized that he participants, as shown in the table below. hold. The new year brought an additional ran the risk of being stuck with losses MX relies on this liquidity to service client drop in oil prices of 8% in the first week or unwanted inventory if his computers orders, especially when the HFT activity alone, after the 46% decrease over the automatically generated quotes to buy does not significantly increase the course of 2014. The Bank of Canada’s and sell with customers.”1 The solution order-to-trade ratio in a volatile trading (BoC’s) unanticipated quarter percent was to go old-school and pull the plug… environment, instead contributing to a cut in the key overnight lending rate (to executing client orders individually over liquid, transparent and anonymous order 0.75%) emphasized the economic threat the phone. A frightening thought that book. imposed by the oil market collapse. The reiterates how liquidity can disappear in surprise cut took a great deal of resting an instant when relying on the banks’ A random sampling of HFT maker-taker good ‘til cancelled orders out of the book; MX even witnessed a rise in the computer programs to provide market ratios on CGBs: trading opportunities and implied pricing maker-taker ratio amongst some of prices. It may even help explain why pushed January 22nd’s BAX volume to the more active proprietary and HFT participants. yields dropped so quickly that day MAKER TAKER RATIO 340,279 contracts (41,679 short of the without any intervening sellers. Once the OCTOBER 14th OCTOBER 15th 382,058 record set on October 15th , 2014), downward spiral stopped and multiple 0.55 0.61 and the CGB set another contract high sellers entered the market, liquidity was (1.339% effective yield). 0.67 0.70 reestablished. 0.74 0.78 In Montreal, record trading volume 0.60 0.64 on Three-Month Canadian Bankers’ 0.35 0.41 Acceptance Futures (BAX) and heavy 0.90 0.94 trading on Ten-Year Government of 0.47 0.52

1. http://www.bloomberg.com/news/2014-10-26/treasury-liquidity-squeeze-seen-in-dealer-who-shut-off-machine.html P / 18 P / 19 NEW CADerivatives 2015 / Vol. 1

The CGF Incentive Program CGF INCENTIVE PROGRAM

1 CGF 3 CGBs

ALEXANDRE RUGGIERO Manager, Fixed Income Derivatives

514 871-7896 [email protected]

On April 1st, MX will introduce a year- Launched in July 2011, MX’s “Yield Curve TRADE 1 CGF, long incentive program to encourage the Project”, introduced mandated market development of the Five-Year Government makers to provide liquidity on fixed of Canada Bond Futures (CGF) contract. income futures that needed a jump start, namely Three-Month Canadian Bankers’ get a fee waiver Under this program, MX will waive Acceptance Futures, quarterlies five transaction fees on three Ten-Year through nine (BAX Reds) and quarterlies Government of Canada Bond Futures (CGB) nine through 12 (BAX Greens), Two-Year contracts for each CGF contract they trade Government of Canada Bond Futures within the same calendar month. Simply (CGZ) and the CGF. While MX has seen put, for every CGF contract traded, MX significant growth in the BAX Reds and ON 3 CGBs will waive execution fees for three CGB Greens, those efforts have yet to be fully contracts. This waiver is limited to 10,000 reflected in the CGF. CGB contracts per calendar month, per program applicant. LEARN MORE

For every CGF contract traded, MX will waive execution fees for three CGB contracts. This waiver is limited to 10,000 CGB contracts per calendar month, per program applicant. P / 20 P / 21 CADerivatives 2015 / Vol. 1

The CGF showed great promise, setting records for both daily volume and open interest in May 2014. Since then, however, the contract has been unable to maintain or exceed those thresholds. MX is confident that the implementation of this incentive program will help the contract reach its potential.

This incentive program is being implemented in response to client feedback, encouraging CGB traders to trade CGF as well. The program aims to leverage the CGB’s success to increase CGF liquidity and open interest. This could be beneficial for relative value or spread traders who may wish to take a view on Canadian rates steepening or flattening using futures, rather than the underlying cash bond market.

Yield Curve View Strategy Shorter-term Rate Longer-term Rate Flattener Sell Spread Sell Buy Steepener Buy Spread Buy Sell

For example, on January 21, 2015, the Bank of Canada (BoC) took the market by surprise when it unexpectedly cut its key overnight rate by 25 basis points to 0.75%. Shorter- term Canadian rates consequently dropped more than longer-term rates, essentially In the ongoing effort to further develop the CGF market, MX’s partners and market creating a market opportunity for traders who take a view on curve spreads. makers at BMO Nesbitt Burns Inc. and Desjardins Securities Inc. will continue providing liquidity for the CGF market. Jan 2, 2015 Jan 21, 2015 Change Those wishing to participate in this program should complete and submit an CGB - Mid-YTM (%) 1.740 1.418 0.322 application form, available here CGF - Mid-YTM (%) 1.444 1.003 0.441 Spread (BPS) 29.626 41.504 11.878 »» For more information on this program, or to apply for participation, please contact Alexandre Ruggiero, Manager, Fixed Income Derivatives at (514) 871-7896 or [email protected] Suppose a “steepener” was established at the beginning of 2015, whereby the CGF was bought at a Mid-Yield to Maturity (Mid-YTM) of 1.444% and the CGB was sold at a Mid-YTM of 1.740%. Given that shorter-term rates dropped faster than did long- term rates (which is reflected in the futures contract prices and implied yields) a trader MX Trading Records holding the position until the BoC announcement could have profited by 11.878bps. CGB MX achieved a new CGB trading volume record of 2,222,600 contracts for February, surpassing the previous high of 2,199,389 from May 2013.

Options on ETFs On March 16th, MX options on ETFs reached an all-time open interest record of 944,274 contracts, bettering the 934,541 contracts of open interest established on September 19, 2012. Then open interest for options on ETFs grew even further, reaching a new high of 1,001,802 contracts on March 18th.

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Succession Systems is a global provider Jean Pouchet – President PRE-TRADE VALIDATION of compliance and risk management solutions. PTV support is available as a The QJ Risk Management PTV can be stand-alone application or as an integrated accessed through web pages and be component of the TripleCHECK™ platform. installed on a customer’s network as MARK BOURCIER Please contact these vendors to TripleCHECK™ offers fully automated a stand-alone application. The QJ Risk Market Access Manager connect to MX-PTV. pre-trade validation, real-time surveillance Management Solution will enable 514 871-3581 and post-trade reporting compliance participants to apply a variety of risk [email protected] solutions and controls across asset classes checks, trading limits and controls to › in Canada, US and Europe. In addition, the their order flow, and will offer real-time solution allows firms to consolidate across monitoring of open order exposure and MX is pleased to announce that two third-party and proprietary systems for intraday market risk exposure. certified compliance and risk management greater transparency and ability to meet vendors have developed to the pre-trade compliance obligations. validation (PTV) SAIL messages, and are »» For more information, please email »» Participants are invited to review currently in production. [email protected] the PTV presentation here: Compliance and risk management PTV offers participants and clearing http://youtu.be/skJbpV5_NgY best practices require brokers to members the ability to set position limits, enhance the capabilities of their credit controls and maximum order »» For additional information, please systems to be in close contact quantity, while maintaining the message contact [email protected] with execution venues. We are priority and performance demands of happy to support this effort, high-speed traders. facilitate alternative control systems and enhance the sharing of information. — Anthony Masso, President, Succession Systems.

New LIVE approved participants (domestic and foreign) »» For more information, please email [email protected] SINCE JANUARY 2014 SINCE JANUARY 2014, NOT YET LIVE R.J. O’Brien & Credential Securities OFE Trading Associates Canada Inc. Jane Street Sibyl Trading Limited Barak Capital Latour Trading TradeLink Nomura International PLC Wedbush Pace Securities Corp.

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2014 Trading VOLUME and Open INTEREST

TRADING VOLUME 2013 2014 OPEN INTEREST 2013 2014

Short-term interest rate futures BAX 22,578,143 9.13% 24,640,229 667,149 -6,75% 622,094

Short-term interest rate options OBX 588,279 -33.25% 392,661 111,929 -41.25% 65,757

Bond Futures CGZ 79,349 -82.02% 14,269 1,686 -71.95% 473

CGF 276,610 8.83% 301,026 6,079 10.38% 6,710

CGB 13,824,451 8.19% 14,956,206 269,522 48.96% 401,470 Total 14,180,410 7.69% 15,271,501 277,287 47.38% 408,653

Bond Options OGB 4,669 9.87% 5,130 1,435 -58.89% 590

Index Futures

SXF 3,994,992 10.28% 4,405,739 136,352 -2% 133,625

SXM 100,194 -1.42% 98,767 1,229 7.97% 1,327

SCF 406 47.04% 597 0 N/A 3

EMF 0 N/A 3,308 0 N/A 84 Total 4,095,592 10.08% 4,508,411 137,581 -1.85% 135,039

Index Options SXO 511,384 -16.19% 428,590 129,029 -44.92% 71,073

ETF Options 2,905,949 39.86% 4,064,224 311,161 103.03% 631,734

Equity Options 21,335,465 -3.1% 20,674,540 2,693,007 19.12% 3,207,828

USX 6,931 -68.69% 2,170 484 -56.2% 212

Total Futures 40,854,145 8.73% 44,420,141 1,082,017 7.74% 1,165,786

Total Options 25,352,677 0.85% 25,567,315 3,247,045 22.49% 3,997,194

Grand Total 66,206,822 5.71% 69,987,456 4,329,062 18.8% 5,142,980

P / 26 P / 27 CADerivatives 2015 / Vol. 1 2014 RECORDS

CGF BAX ALL PRODUCTS 13,547 2,707,815 5,682,741 OPEN INTEREST TRADING VOLUME OPEN INTEREST MAY 13TH MONTHLY NOV. 20TH

ALL PRODUCTS CGF BAX ALL PRODUCTS 758,731 20,971 382,058 846,803 TRADING VOLUME OPEN INTEREST TRADING VOLUME TRADING VOLUME FEB. 24TH MAY 26TH OCT. 15TH NOV. 24TH

SXO CGB BAX CGF CGB ALL PRODUCTS CGB 101,139 429,577 964,415 20,149 440,939 799,225 610,504 TRADING VOLUME TRADING VOLUME OPEN INTEREST TRADING VOLUME TRADING VOLUME TRADING VOLUME TRADING VOLUME MONTHLY FEB. 24TH MAR. 13TH MAY 26TH AUG. 25TH OCT. 15TH NOV. 24TH

JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER

SXO CGB BAX CGF CGB ALL PRODUCTS CGB 90,513 375,865 866,659 8,170 429,577 758,731 440,939 DEC. 2013 NOV. 25TH 2013 DEC. 4TH 2013 MAY 29TH 2012 FEB. 24TH 2014 FEB. 24TH 2014 AUG. 25TH 2014

ALL PRODUCTS CGF BAX ALL PRODUCTS 701,657 13,547 302,371 799,225 SEPT. 20TH 2012 MAY 13TH 2014 APR. 17TH 2012 OCT. 15TH 2014

CGF BAX ALL PRODUCTS 10,707 2,678,804 5,559,970 NOV. 25TH 2013 JUNE 2011 APR. 18TH 2012

Previous Records

P / 28 P / 29 CADerivatives 2015 / Vol. 1 Montréal Exchange Upcoming 2015 EVENTS TRADETECH 2015 IDX 2015: introduces Weekly Options Paris – April 14th - 15th Annual FIA International Derivatives Expo London – June 9th - 10th Markets Media European Trading Network London – May 14th Looking to profit from a short-term move in a security?

Wanting to take advantage of volatility around economic events and earnings release?

Seeking inexpensive insurance or short term protection to hedge your portfolio?

The Montréal Exchange is now listing weekly options on the most actively traded options classes providing multiple possibilities for investors to implement more specific buying, selling or spreading strategies to profit and compound returns every week of the year!

Weekly options offer many advantages, including: Enhance your knowledge Flexibility Weekly income

Cost-efficiency Portfolio protection

High gamma Risk Management

Canadian Canadian WEEKLY Options

Promotional Informational Contract Video Brochure Specifications

P / 30 P / 31 m-x.ca

Editor in chief Equity Derivatives Fixed Income Derivatives Michelle MacAdam Ron Hochman Joanne Elkaim

Project Manager, Senior Manager, Director, Fixed Financial Markets Equity Derivatives Income Derivatives

514 871-7894 514 871-7882 514 871-7891

[email protected] [email protected] [email protected]

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