Asia's Race to OTC Clearing

Kospi 200 Options | Dodd-Frank Timing Guide | Tech Firm Merger Wave

decemberjune 2011 2012 | | v21.n12 v22.n3

Asia’s Race to OTC Clearing “E x per ience” is an overused buzzword. Until there’s a default.

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DATE: 2.15.12 PROJECT: LCH.Clearnet SwapClear Ad: FIA, March Issue

TRIM: 8.375 in. x 10.75 in. BLEED: 8.625 in. x 11 in. PRINTS: 4-CP june 2012 | v22.n3

| Tech Firm Merger Wave v21.n12 v22.n3 Dodd-Frank Timing Guide june 2012 | | | december 2011 “E x per ience” Kospi 200 Options

Asia’s Race to OTC Clearing is an overused features The Race for OTC Clearing in Asia 22 In part two of our series on OTC clearing in Asia, we look at developments in Australia, Korea and India. | By Will Acworth buzzword. Customer Protections for Cleared Swaps:

28 A Q&A with Vanguard William Thum, a principal at Vanguard, discusses several issues related to the protection of Until there’s customer funds. | By Will Acworth Swap Reporting Clearing & Trading: 34 A Timing Guide The CFTC has finalized several Dodd-Frank rules and has released a proposed timetable for finalizing the rest. This article provides an update on the potential timing schedule for a default. new swap reporting, clearing and trading requirements for swap market participants. | By Annette Nazareth and Gabriel Rosenberg

Boca Scrapbook Page 50 SwapClear is the only clearing service to have successfully handled an OTC interest rate swap default. When the worst happens, you need the best on your side. swapclear.com

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Futures Industry | June 2012 03

DATE: 2.15.12 PROJECT: LCH.Clearnet SwapClear Ad: FIA, March Issue

TRIM: 8.375 in. x 10.75 in. BLEED: 8.625 in. x 11 in. PRINTS: 4-CP 35.5% Asia Pacific june 2012 | v22.n3 Page 10 35.1% North America Global futures and options volume FUTURES INDUSTRY (ISSN #10656855 ) is by region published bi-monthly, except July and August by 19.2% Europe the FUTURES INDUSTRY ASSOCIATION, 2001 8.6% Pennsylvania Avenue N.W., Suite 600, Washington, Latin America D.C. 20006-1823; (202) 466-5460. Subscriptions are $24 Domestic and $32 Interna 1.6% Other tional, and are included as part of the member dues. Periodicals postage paid at the Washington, DC and additional mailing offices. Postmaster: Send address departments changes to Futures Industry, 2001 Pennsylvania Avenue N.W., Suite 600, Washington, D.C. 20006-1823. Copyright 2012 by the Futures 08 President’s Message 42 Washington Watch Industry Association. By Walt Lukken CFTC Moves Ahead with Materials contained herein may not be reproduced Dodd-Frank Rulemakings for general distribution, advertising or promotional 10 Trading Volume As the Dodd-Frank Act nears its purposes without the expressed consent of the FIA. The statements of fact and opinion in signed articles 16 News Briefs second anniversary, the Commodity are the sole responsibility of the authors, and do not Futures Trading Commission has necessarily reflect the positions of the officers, mem- • NFA’s customer safeguards bers or staff of FIA, nor the employers of the authors. made significant progress in finalizing • Options industry criticizes Futures Industry new tax rule a wide set of new rules for the deal- Editor-in-Chief Editor • and more ing, trading, clearing and reporting of Mary Ann Burns Will Acworth over-the-counter derivatives. Deputy Editor Assistant Editor Joanne Morrison Tracy Wahler 37 Product Profile By Will Acworth and Re-engineering the Joanne Morrison Futures Industry Editorial Kospi 200 Options Market Advisory Board Russell Abramson, J.P. Morgan The Kospi 200 stock index options has 45 @Markets Arthur Bell, Arthur Bell Certified Public Accountants been the most heavily traded deriva- • Second Brazilian Deal for ICE Galen Burghardt, Newedge USA • New OTC Energy Trading Christopher Culp, Lexecon tives contract in the world for the last Kevin Foley, Katten Muchin Rosenman LLP decade, but that’s about to change. Platform in Europe Diane Garnick • DTCC Hits Key Milestones in Michael Gorham, Illinois Institute of Technology By Nick Ronalds Anthony Leitner, A J Leitner and Associates, LLC OTC Reporting Terrence Martell, Baruch College • Mexico’s BMV Rolls Out John Munro, ION Trading 39 Tech Talk Gerry Perez, Interactive Brokers Group Boom Time for New Trading Engine Leslie Sutphen, Newedge USA Financial Technolgy M&A • and more Barbara Wierzynski, Futures Industry Association The merger wave among exchanges has subsided, but further down the 50 Boca Scrapbook food chain there have been at least 70 The Futures Industry Association is the international 53 Prominent People trade organization for the futures industry. Its mem trading technology deals over the past bership includes more than 28 of the largest futures year and more are on the way. commission merchants. FIA estimates that its mem bers are responsible for more than 90% of all public By Bennett Voyles customer business executed on U.S. contract markets. FIA membership also includes more than 30 international futures and options exchanges and clearinghouses in North and South America, Europe, Africa, Asia and Australia, plus banks, law and accounting firms, money managers, end users, and service providers with an interest in the derivatives industry.

@Markets is a registered trademark of the Futures Industry Association.

membership info & Advertising Rates Toni Vitale Chan Futures Industry Association 2001 Pennsylvania Avenue N.W., Suite 600 Washington, D.C. 20006-1823 Phone: (312) 636-2919 Fax: (202) 772-3075 E-mail: [email protected] Web: www.futuresindustry.org

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The Futures Industry Association, Inc.

Walt Lukken President and CEO Barbara Wierzynski Board of Directors Executive Vice President and General Counsel officers n George E. Crapple n Jerome Kemp n William Sexton Mary Ann Burns n Michael C. Dawley Co-Chairman and Global Head of Exchange Chief Executive Officer Executive Vice President, Industry Relations Co-Chief Executive Officer Traded Derivatives Sales Newedge USA LLC Managing Director, Guy Sheetz Millburn Ridgefield Corporation and Clearing Co-Head of Futures and n Donald R. Wilson, Jr. Senior Vice President, Derivatives Clearing Services Fredrik Gentzel Citigroup Global Chief Executive Officer Markets Limited Chief Financial Officer and Chief Operating Goldman, Sachs & Co. Managing Director, DRW Trading Group Officer Chairman Global Head of n Andy Milnes Jeremy Wright Listed Derivatives Tracy Wahler n Peter G. Johnson Head of Supply and Trading, Global Head of Futures Deutsche Bank AG Vice President of Communications Managing Director, Global Oil Americas and Options Markets Global Head of Futures, n Richard B. Gorelick BP Corporation The Royal Bank of Scotland plc Maria Banks OTC Clearing and Chief Executive Officer North America, Inc. Accounting Assistant n Alice Patricia White FX Prime Brokerage RGM Advisors LLC n David S. Mitchell Adoncia Boykins Bank of America Merrill Lynch n Michael Yarian n Arthur W. Hahn Partner Director Member Services Managing Diretor, Vice Chairman Partner Fried, Frank, Harris, Shriver & Head of Futures and Steven Bradbury n Najib Lamhaouar Katten Muchin Rosenman LLP Jacobson LLP OTC Derivative Clearing Senior Accountant Global Head of Reinhardt Olsen n Christopher K. Hehmeyer Barclays Capital Inc. Michael Cho OTC Clearing and ETD Managing Member Managing Director HSBC Securities (USA) Inc. Senior Accountant HTG Capital North America, and Gary Herman Secretary Partners LLC Head of ETD UBS Securities LLC special advisers Controller n Gerald F. Corcoran n M. Clark Hutchison, III Richard Berliand Mary Kincheloe Chairman and Global Head of n Emily Portney Management Consultant Communications Assistant Chief Executive Officer Listed Derivatives Managing Director, R.J. O’Brien & Associates LLC Morgan Stanley Global Head of John M. Damgard Linda Leerdam Treasurer Futures and Options Senior Adviser Receptionist n Jeffrey D. Jennings J.P. Morgan Securities LLC Futures Industry Association Managing Director, Roselia Marmolejos board members n Kenneth M. Raisler Gary DeWaal Patrice Blanc Global Head of Listed Derivatives Administrative Assistant Credit Suisse Securities (USA) Partner Senior Managing Director and President Sullivan & Cromwell LLP Steve Proctor LLC Global General Counsel Futures Brokerage Division Newedge Group Technology Coordinator n Edward J. Rosen Jefferies & Co. Sanjay Kannambadi Partner Damon Roberts and Chief Executive Officer Chief Executive Officer and Cleary Gottlieb Meetings Coordinator Jefferies Bache LLC Global Head Steen & Hamilton LLP Marsha Saunders n Philippe Buhannic BNY Mellon Clearing LLC Manager, Meetings and Events Chairman and n Michael R. Schaefer Chief Executive Officer Mindy Serin TradingScreen Inc. eCommunications Coordinator Toby Taylor n Executive Committee Member n Associate Member Director n Public Director Executive Assistant and Office Manager Beth Thompson FIA Chapters and Divisions Presidents/Chairmen Law & Compliance Division Coordinator fia asia fia european information law & compliance Paul S. Davies principal traders technology Maria Chiodi Goldman Sachs association Greg Wood Credit Suisse Futures Pte Ltd. Remco Lenterman Deutsche Bank Securities Inc. Securities (USA) LLC IMC Trading B.V. fia chicago japan chapter fia principal Bill Metzger futures services Mitch Fulscher traders group HM Consulting Vincent Mattera Chairman Donald R. Wilson, Jr. BMO Capital Markets Shozo Ohta DRW Trading Group Tokyo Financial Exchange President

06 Futures Industry | www.futuresindustry.com

president’s

Japan Conference Encouraging Dialogue oining FIA as president and chief executive officer is both tre- cumulative costs of Dodd-Frank force consolidation of FCMs in order mendously exciting and extremely daunting. Exciting because to remain profitable—or, still worse, cause firms to shutter their doors in cooperation with FIA and FIA Asia J we stand at an extraordinarily dynamic moment in the history of permanently—our industry and economy will suffer greatly. Ironically, this this industry. Daunting because that very dynamism puts enormous consolidation would concentrate a higher level of risk among fewer firms, 25-26 July 2012 l Palace Hotel Tokyo demands on all of us…and I follow in the footsteps of John Dam- directly contradicting one of the core goals of the financial reforms. gard, the man who led FIA for the last 30 years. As many of us head to London for the FIA/FOA International Program & Registration: www.futuresindustry.org/japan In the three months since I joined the organization, I have visited Derivatives Expo in late June, we are reminded of the global nature of with many member companies and I expect to visit many more in this business and the importance of cross-border coordination among the months to come. When I came aboard, I set a goal—to listen regulators. As this magazine goes to press, the CFTC is very close to to as many members of the association and industry as possible so issuing guidance on how it plans to apply Dodd-Frank to transactions Japan Rising that I can better understand your concerns and meet your needs. that take place beyond the borders of the U.S. I hope that the CFTC The FIA Japan Chapter is pleased to announce that a compelling international conference will be held in Tokyo As an industry association, we are only as strong as our member- will hold true to its traditional practice of mutual recognition, based on on July 25-26. This major event, organized by FIA Japan with the cooperation of FIA and FIA Asia, will focus on ship. At a time of historic regulatory change, we clearly have an the principle that foreign regulators should be judged by whether their the vital developments currently taking place in Japan’s ﬁ nancial markets. important role to fill, but I want to be certain that we hear from all regulation is “comparable” to U.S. regulation rather than identical. I sides of the industry as we advocate on your behalf. know that market participants and regulators around the world are Session Topics (subject to change) My top priority remains tackling the serious concerns raised by watching this issue very closely. FIA and FIA Asia—along with our Japan Exchanges Presentations (TSE, OSE, TFX, TOCOM) • FSA Keynote Speaker MF Global and the weaknesses in our system of customer protec- partner in Europe the FOA—are looking forward to a constructive tions that were exposed by that firm’s insolvency. FIA has been dialogue with the CFTC when this guidance is released. Keynote Address: Masaaki Shirakawa, Governor, Bank of Japan working diligently to address this issue, including issuing in March The futures business has faced challenges in the past and has al- Regulatory Reform - Presentations by FSA and METI • TSE & OSE - Merger and Future Strategy initial recommendations for improving customer funds protec- ways risen to the occasion. I am confident that we can do so again TFX and TOCOM - Strategies for Growth • ATP Developments - Japan and Asia • Japan Inbound and tions and a frequently asked questions document to provide more but it will require that we work together. I cannot think of a time in Outbound Business Developing • Developments and Views from Outside Japan: Americas, Europe, and Asia information on customer protections. We are pleased to see that a the past where the interests of the industry—the FCMs, exchanges, OTC Markets and Clearing - Japan and Asia • High-Frequency Trader and Hedge Fund Perspectives: number of our recommendations are already being implemented by clearinghouses, asset managers and customers—have been more Plans and Requirements for Asia • FX Markets - Expansion in Asia the industry’s self-regulatory organizations. As the facts continue to aligned. Our industry will need this strength in numbers and diversity come to light about MF Global in the days and weeks ahead, I fully as we face the challenges ahead. expect that there will be more recommendations. I look forward to In closing, I want to thank John Damgard for all his years of Host Sponsors working with Congress and the Commodity Futures Trading Com- service to the industry. He built a wonderful organization with a tre- mission to make sure that we restore industry confidence in the mendous staff and I am excited by this opportunity to stand on the protections for the funds entrusted to us by our customers. shoulders of this industry giant. I look forward to introducing myself As we head into the home stretch of Dodd-Frank implementa- to many of you in the coming weeks and most importantly listening tion, we must remain engaged with the outstanding regulatory to your ideas and thoughts about the industry and the FIA. proposals that lie ahead. During my near 20 years in Washington, I have learned that you cannot guarantee good decisions by poli- cymakers, but you can guarantee informed decisions. While many Gold Sponsors of us are feeling fatigued during this time of enormous change, we must continue to make our voices heard. Only then can regulators promulgate rules that take into account the legal and operational realities of our industry. Without speaking up, we may find ourselves faced with a situation where the cure is worse than the disease. Many of us agree that central clearing will go a long way toward Silver Sponsor Sponsor reducing the overall level of risk in the derivatives markets, but regulators must be careful not to create new risks in the process or make the business so expensive that we lose the benefits of competition. If the Walt Lukken President Media Sponsors

08 Futures Industry | www.futuresindustry.com Japan Conference

in cooperation with FIA and FIA Asia 25-26 July 2012 l Palace Hotel Tokyo Program & Registration: www.futuresindustry.org/japan

Japan Rising The FIA Japan Chapter is pleased to announce that a compelling international conference will be held in Tokyo on July 25-26. This major event, organized by FIA Japan with the cooperation of FIA and FIA Asia, will focus on the vital developments currently taking place in Japan’s ﬁ nancial markets.

Session Topics (subject to change) Japan Exchanges Presentations (TSE, OSE, TFX, TOCOM) • FSA Keynote Speaker Keynote Address: Masaaki Shirakawa, Governor, Bank of Japan Regulatory Reform - Presentations by FSA and METI • TSE & OSE - Merger and Future Strategy TFX and TOCOM - Strategies for Growth • ATP Developments - Japan and Asia • Japan Inbound and Outbound Business Developing • Developments and Views from Outside Japan: Americas, Europe, and Asia OTC Markets and Clearing - Japan and Asia • High-Frequency Trader and Hedge Fund Perspectives: Plans and Requirements for Asia • FX Markets - Expansion in Asia

Host Sponsors

Gold Sponsors

Silver Sponsor Sponsor

Media Sponsors Global Futures and Options Volume Based on the number of contracts traded and/or cleared at 76 exchanges worldwide

Jan-Mar 2011 Jan-Mar 2012 % Change Futures 2,843,837,424 2,519,447,124 -11.4% Options 3,236,853,746 2,837,190,579 -12.3% Total 6,080,691,170 5,356,637,703 -11.9%

Global Futures and Options Volume by Category Based on the number of contracts traded and/or cleared at 76 exchanges worldwide

Category Jan-Mar 2011 Jan-Mar 2012 % Change 31.7% Equity Indexes Equity Indexes 2,075,118,977 1,696,342,493 -18.3% 31.1% Individual Equities 1,733,285,094 1,667,932,968 -3.8% Individual Equities Interest Rate 935,926,148 782,134,493 -16.4% 14.6% Foreign Currency 672,074,688 551,447,355 -17.9% Interest Rate

Energy 218,929,952 211,714,631 -3.3% 10.3% Agriculture 255,934,426 205,719,243 -19.6% Foreign Currency Non-Precious Metals 97,051,984 113,590,605 17.0% 4.0% Energy Precious Metals 53,784,183 85,069,820 58.2% 3.8% Agriculture Other 38,585,718 42,686,095 10.6% 3.7% Metals Total 6,080,691,170 5,356,637,703 -11.9% 0.8% Other Note: Energy includes contracts based on emissions. Other includes contracts based on commodity indices, credit, fertilizer, housing, inflation, lumber, plastics and weather.

Global Futures and Options Volume by Region Based on the number of contracts traded and/or cleared at 76 exchanges worldwide

Region Jan-Mar 2012 Jan-Mar 2012 % Change 35.5% Asia Pacific Asia Pacific 2,347,967,834 1,902,768,325 -19.0% 35.1% North America 2,060,645,826 1,881,365,531 -8.7% North America Europe 1,176,880,333 1,029,483,114 -12.5% Latin America 404,669,605 458,171,295 13.2%

Other 90,527,572 84,849,438 -6.3% 19.2% Europe

Total 6,080,691,170 5,356,637,703 -11.9% 8.6% Latin America Note: Location of exchanges is determined by country of registration. Other consists of exchanges in Dubai, Israel, South Africa, and Turkey. 1.6% Other

10 Futures Industry | www.futuresindustry.com Top 30 Derivatives Exchanges Ranked by number of contracts traded and/or cleared Jan-Mar 2012 Annual Mar 2012 Annual % Rank Exchange Volume % Change Open Interest Change 1 CME Group 763,084,221 -10.8% 89,682,716 -4.3% 2 Korea Exchange 715,724,212 -29.6% 4,588,314 -27.7% 3 Eurex 575,315,240 -16.3% 109,548,005 -4.4% 4 National Stock Exchange of India 489,009,140 -4.3% 6,303,528 -37.3% 5 NYSE Euronext 479,598,654 -16.2% 58,781,799 -16.5% 6 BM&FBovespa 421,278,540 9.4% 47,170,884 -10.2% 7 CBOE Group 302,667,534 -3.9% 19,084,691 4.5% 8 Nasdaq OMX 302,182,568 -10.7% 7,237,355 -2.0% 9 Multi Commodity Exchange of India 244,792,611 -12.9% 1,477,428 38.3% 10 MICEX-RTS 215,843,310 4.7% 4,054,757 8.0% 11 IntercontinentalExchange 96,466,729 -2.5% 8,274,652 13.7% 12 Shanghai Futures Exchange 67,780,672 7.5% 979,221 0.9% 13 Dalian Commodity Exchange 64,821,741 4.1% 1,989,953 31.5% 14 ASX Group 60,562,058 106.7% 14,642,001 255.8% 15 TMX Group 55,276,152 19.6% 4,946,320 27.3% 16 Osaka Securities Exchange 50,697,434 -15.5% 4,263,993 16.5% 17 Zhengzhou Commodity Exchange 45,901,809 -53.9% 1,010,008 5.1% 18 JSE South Africa 44,655,525 -2.0% 14,894,839 9.9% 19 London Metal Exchange 40,787,863 17.8% 1,942,520 -6.4% 20 Taiwan Futures Exchange 37,470,834 -19.9% 907,960 -32.3% 21 Hong Kong Exchanges & Clearing 30,106,876 -10.4% 5,861,532 -10.1% 22 BATS Exchange* 29,044,468 16.7% N/A N/A 23 Mexican Derivatives Exchange 23,788,148 128.1% 8,894,764 -65.1% 24 London Stock Exchange Group 21,148,972 7.1% 12,856,073 -20.1% 25 China Financial Futures Exchange 20,477,024 73.7% 64,137 71.3% 26 Tokyo Financial Exchange 20,247,589 -48.4% 1,113,091 -33.2% 27 Singapore Exchange 18,963,522 0.4% 1,626,801 49.8% 28 Turkish Derivatives Exchange 18,689,617 3.4% 322,868 -5.4% 29 Mercado Español de Futuros y Opciones Financieros 18,534,542 -4.2% 13,389,171 8.2% 30 Tel-Aviv Stock Exchange 17,030,151 -29.6% 573,010 -37.3%

* Open interest for the options traded on BATS is held at the OCC.

Futures Industry | June 2012 11 Exchange Groups Futures and options volume broken down by subsidiary exchanges Volume Volume % Open Interest Open Interest % Exchange Jan-Mar 2011 Jan-Mar 2012 Change Mar 2011 Mar 2012 Change ASX * 5,602,073 36,620,202 553.7% 1,768,636 12,632,833 614.3% ASX 24 23,703,177 23,941,856 1.0% 2,346,176 2,009,168 -14.4% ASX Group 29,305,250 60,562,058 106.7% 4,114,812 14,642,001 255.8% * data not adjusted for change in multiplier for single stock options

Bolsa de Valores de São Paulo 214,963,037 256,672,643 19.4% 10,925,991 15,255,477 39.6% Bolsa de Mercadorias & Futuros 170,103,297 164,605,897 -3.2% 41,630,613 31,915,407 -23.3% BM&FBovespa 385,066,334 421,278,540 9.4% 52,556,604 47,170,884 -10.2%

Chicago Board Options Exchange 302,336,237 284,768,127 -5.8% 18,078,306 18,731,184 3.6% C2 Exchange 10,073,531 13,775,820 36.8% N/A N/A N/A CBOE Futures Exchange 2,635,826 4,123,587 56.4% 184,533 297,891 61.4% CBOE Group 315,045,594 302,667,534 -3.9% 18,262,839 19,084,691 4.5%

Chicago Mercantile Exchange 444,464,636 379,259,300 -14.7% 36,906,269 34,949,072 -5.3% Chicago Board of Trade 265,283,714 238,897,626 -9.9% 16,345,118 15,117,208 -7.5% New York Mercantile Exchange 145,693,328 144,927,295 -0.5% 40,491,254 39,616,436 -2.2% CME Group 855,441,678 763,084,221 -10.8% 93,742,641 89,682,716 -4.3%

Eurex 489,769,840 409,021,213 -16.5% 114,565,826 109,544,541 -4.4% International Securities Exchange 197,651,465 166,294,027 -15.9% N/A N/A N/A Eurex 687,421,305 575,315,240 -16.3% 114,572,609 109,548,005 -4.4%

ICE Futures Europe 71,428,702 69,477,970 -2.7% 3,909,627 5,128,618 31.2% ICE Futures U.S. 26,308,504 25,434,329 -3.3% 3,095,151 2,909,051 -6.0% ICE Futures Canada 1,203,995 1,532,772 27.3% 210,537 236,983 12.6% Chicago Climate Futures Exchange 36,463 21,658 -40.6% 59,499 - -100.0% IntercontinentalExchange * 98,977,664 96,466,729 -2.5% 7,274,814 8,274,652 13.7% * does not include OTC transactions

MCX-SX 223,442,996 143,639,165 -35.7% 794,788 844,086 6.2% Multi Commodity Exchange of India 57,491,824 101,153,446 75.9% 273,364 633,342 131.7% Multi Commodity Exchange of India 280,934,820 244,792,611 -12.9% 1,068,152 1,477,428 38.3%

Nasdaq OMX PHLX 253,206,247 220,052,712 -13.1% 87,268 68,204 -21.8% Nasdaq Options Market (U.S.) 55,792,601 51,401,971 -7.9% N/A N/A N/A Nasdaq OMX (Nordic markets) 29,183,902 30,428,005 4.3% 7,165,205 7,031,290 -1.9% Nasdaq OMX Commodities 230,302 299,880 30.2% 130,806 137,861 5.4% Nasdaq OMX 338,413,052 302,182,568 -10.7% 7,383,279 7,237,355 -2.0%

NYSE Liffe Europe 296,528,786 216,595,302 -27.0% 70,354,353 57,727,258 -17.9% NYSE Amex Options 150,054,919 145,464,384 -3.1% N/A N/A N/A NYSE Arca Options 124,198,362 111,377,656 -10.3% N/A N/A N/A NYSE Liffe U.S. 1,344,528 6,161,312 358.3% 43,943 1,052,955 2296.2% NYSE Euronext 572,126,595 479,598,654 -16.2% 70,437,262 58,781,799 -16.5%

12 Futures Industry | www.futuresindustry.com Top 20 Agricultural Futures & Options Contracts Rank Contract Contract Size Jan-Mar 2011 Jan-Mar 2012 % Change 1 Rubber Futures, SHFE 5 tons 21,042,287 25,855,417 22.9% 2 Corn Futures, CBOT 5,000 bushels 21,006,497 20,121,969 -4.2% 3 Soy Meal Futures, DCE 10 tonnes 11,726,109 16,372,120 39.6% 4 White Sugar Futures, ZCE 10 tonnes 27,217,109 14,030,274 -48.5% 5 Soybean Futures, CBOT 5,000 bushels 12,056,060 12,101,301 0.4% 6 Soy Oil Futures, DCE 10 tonnes 14,530,170 9,933,156 -31.6% 7 Corn Futures, DCE 10 tonnes 8,840,476 8,945,924 1.2% 8 Sugar #11 Futures, ICE Futures U.S. 50 long tons 7,297,551 7,080,440 -3.0% 9 Wheat Futures, CBOT 5,000 bushels 6,384,864 6,536,101 2.4% 10 Strong Gluten Wheat Futures, ZCE 10 tonnes 4,803,921 5,971,725 24.3% 11 Soybean Oil Futures, CBOT 60,000 lbs 6,241,692 5,911,547 -5.3% 12 Corn Options, CBOT 5,000 bushels 7,101,338 5,837,031 -17.8% 13 Soybean Meal Futures, CBOT 100 tons 4,028,730 4,212,159 4.6% 14 Cotton No. 1 Futures, ZCE 5 tonnes 42,104,846 4,079,119 -90.3% 15 No. 1 Soybean Futures, DCE 10 tonnes 5,716,048 3,901,968 -31.7% 16 Live Cattle Futures, CME 40,000 lbs 3,624,238 3,774,840 4.2% 17 Palm Oil Futures, DCE 10 tonnes 5,830,232 3,753,715 -35.6% 18 Soybean Options, CBOT 5,000 bushels 3,485,168 3,513,176 0.8% 19 Lean Hogs Futures, CME 40,000 lbs 2,465,274 2,717,162 10.2% 20 Rapeseed/Mustard Seed Futures, NCDEX 10 tonnes 766,366 2,326,743 203.6%

Top 20 Energy Futures & Options Contracts Rank Contract Contract Size Jan-Mar 2011 Jan-Mar 2012 % Change 1 Light, Sweet Crude Oil Futures, Nymex 1,000 barrels 51,380,478 40,540,619 -21.1% 2 Brent Crude Oil Futures, ICE Futures Europe 1,000 barrels 32,759,312 35,486,663 8.3% 3 Natural Gas Futures, Nymex 10,000 MMBTU 19,875,836 24,849,967 25.0% 4 Gasoil Futures, ICE Futures Europe 100 tonnes 17,667,466 16,770,887 -5.1% 5 Crude Oil Futures, MCX 100 barrels 12,091,098 10,848,042 -10.3% 6 WTI Crude Oil Futures, ICE Futures Europe 1,000 barrels 16,687,785 9,626,956 -42.3% 7 No. 2 Heating Oil Futures, Nymex 42,000 gal 7,951,564 9,306,172 17.0% 8 NY Harbor RBOB Gasoline Futures, Nymex 42,000 gal 6,932,145 9,223,327 33.1% 9 Natural Gas European-Style Options, Nymex 10,000 MMBTU 6,519,127 8,485,413 30.2% 10 Light, Sweet Crude Oil Options, Nymex 1,000 barrels 10,554,939 7,865,704 -25.5% 11 Henry Hub Natural Gas Swap Futures, Nymex 2,500 MMBTU 5,535,683 7,114,124 28.5% 12 Natural Gas Futures, MCX 1,250 MMBTU 2,686,810 5,792,952 115.6% 13 U.S. Oil Fund ETF Options * N/A 9,587,504 5,792,941 -39.6% 14 U.S. Natural Gas Fund ETF Options * N/A 5,216,385 3,830,270 -26.6% 15 Natural Gas Penultimate Swap Futures, Nymex 2,500 MMBTU 2,018,211 3,083,401 52.8% 16 Brent Crude Oil Futures, MICEX-RTS 10 barrels 4,357,995 1,925,887 -55.8% 17 EUA Futures, ICE Futures Europe 1,000 EUAs 1,174,761 1,471,075 25.2% 18 Brent Crude Oil Options, ICE Futures Europe 1,000 barrels 393,340 1,421,905 261.5% 19 UK Natural Gas (Seasons) Fut., ICE Futures Europe 1,000 therms/day 831,390 1,344,570 61.7% 20 Crude Oil 1-Mnth Calendar Spread Opt., Nymex 1,000 barrels 924,616 1,161,915 25.7% * Traded on multiple U.S. options exchanges

Futures Industry | June 2012 13 Top 20 Equity Index Futures & Options Contracts Rank Contract Index Multiplier Jan-Mar 2011 Jan-Mar 2012 % Change 1 Kospi 200 Options, KRX 100,000 Korean won * 960,439,249 658,200,192 -31.5% 2 S&P CNX Nifty Options, NSE India 100 Indian rupees 214,680,806 206,737,773 -3.7% 3 SPDR S&P 500 ETF Options ** N/A 138,568,368 139,155,897 0.4% 4 E-mini S&P 500 Futures, CME 50 U.S. Dollars 135,456,122 111,385,339 -17.8% 5 RTS Futures, Micex-RTS 2 U.S. Dollars 66,247,942 77,173,251 16.5% 6 Euro Stoxx 50 Futures, Eurex 10 Euros 94,757,810 77,091,110 -18.6% 7 Euro Stoxx 50 Options, Eurex 10 Euros 79,652,933 75,539,560 -5.2% 8 S&P 500 Options, CBOE 100 U.S. Dollars 41,322,687 40,967,605 -0.9% 9 iShares Russell 2000 ETF Options ** N/A 36,853,913 31,482,799 -14.6% 10 Nikkei 225 Mini Futures, OSE 100 Yen 35,171,507 31,190,649 -11.3% 11 Powershares QQQ ETF Options ** N/A 30,668,577 29,087,979 -5.2% 12 VIX Options, CBOE 100 U.S. Dollars 25,634,632 26,554,069 3.6% 13 S&P CNX Nifty Options, NSE India 100 Indian rupees 36,229,940 26,289,181 -27.4% 14 Taiex Options, Taifex 50 New Taiwan dollars 34,355,081 25,548,162 -25.6% 15 CSI 300 Futures, CFFEX 300 Chinese renminbi 11,789,513 20,477,024 73.7% 16 iShares MSCI Emerging Markets Index ** N/A 18,826,688 18,147,303 -3.6% 17 Financial Select Sector SPDR ETF Options ** N/A 16,157,420 17,421,505 7.8% 18 KOSPI 200 Futures, KRX 500,000 Korean won 21,420,194 15,629,281 -27.0% 19 Dax Options, Eurex 5 Euros 18,743,011 14,822,038 -20.9% 20 TA-25 Options, TASE 100 New Israeli shekels 20,682,546 14,730,599 -28.8% * Multiplier changed to 500,000 won during March for new series ** Traded on multiple U.S. options exchanges

Top 20 Foreign Exchange Futures & Options Contracts Rank Contract Contract Size Jan-Mar 2011 Jan-Mar 2012 % Change 1 U.S. Dollar/Indian Rupee Futures, MCX-SX 1,000 USD 215,237,086 139,085,045 -35.4% 2 U.S. Dollar/Indian Rupee Futures, NSE India 1,000 USD 159,993,230 138,416,873 -13.5% 3 U.S. Dollar/Russian Ruble Futures, Micex-RTS 1,000 USD 29,187,432 52,930,578 81.3% 4 U.S. Dollar/Indian Rupee Options, NSE India 1,000 USD 31,142,982 50,308,014 61.5% 5 U.S. Dollar Futures, BM&F 50,000 USD 16,633,169 23,793,003 43.0% 6 Euro FX Futures, CME 125,000 Euro 21,292,359 17,650,572 -17.1% 7 U.S. Dollar Futures, KRX 10,000 USD 14,712,718 13,889,216 -5.6% 8 U.S. Dollar Futures, ROFEX 1,000 USD 8,812,383 12,720,547 44.3% 9 Euro/U.S. Dollar Futures, Micex-RTS 1,000 Euro 9,325,589 8,643,203 -7.3% 10 Australian Dollar Futures, CME 100,000 AUD 6,598,697 8,010,529 21.4% 11 British Pound Futures, CME 62,500 GBP 7,972,584 6,144,091 -22.9% 12 Japanese Yen Futures, CME 12,500,000 Yen 8,878,749 5,827,633 -34.4% 13 Canadian Dollar Futures, CME 100,000 CAD 5,125,876 5,434,948 6.0% 14 Euro/Japanese Yen Futures, TFX 10,000 Euro 6,287,544 5,258,077 -16.4% 15 Australian Dollar/Japanese Yen Futures, TFX 10,000 AUD 10,248,490 5,102,370 -50.2% 16 U.S. Dollar Futures, Turkdex 1,000 USD 2,904,249 3,345,511 15.2% 17 U.S. Dollar/Japanese Yen Futures, TFX 10,000 USD 9,310,148 2,894,432 -68.9% 18 EUR/Indian Rupee Futures, MCX-SX 1,000 Euro 5,508,088 2,746,814 -50.1% 19 Mexican Peso Futures, CME 500,000 Pesos 2,145,524 2,675,680 24.7% 20 U.S. Dollar Options, BM&F 50,000 USD 2,643,048 2,570,253 -2.8%

14 Futures Industry | www.futuresindustry.com Top 20 Interest Rate Futures & Options Contracts Rank Contract Contract Size Jan-Mar 2011 Jan-Mar 2012 % Change 1 Eurodollar Futures, CME 1,000,000 USD 156,207,410 126,261,488 -19.2% 2 One Day Inter-Bank Deposit Futures, BM&F 100,000 Real 83,118,036 79,929,342 -3.8% 3 10 Year Treasury Note Futures, CBOT 100,000 USD 79,292,763 70,071,332 -11.6% 4 Euro-Bund Futures, Eurex 100,000 Euro 59,137,105 46,791,765 -20.9% 5 3 Month Euribor Futures, Liffe U.K. 1,000,000 Euro 71,121,258 46,218,595 -35.0% 6 5 Year Treasury Note Futures, CBOT 100,000 USD 43,656,623 36,054,961 -17.4% 7 Eurodollar Mid-Curve Options, CME 1,000,000 USD 26,890,289 29,570,862 10.0% 8 Euro-Schatz Futures, Eurex 100,000 Euro 46,160,288 27,497,213 -40.4% 9 Euro-Bobl Futures, Eurex 100,000 Euro 38,414,630 27,190,727 -29.2% 10 3 Month Sterling Options, Liffe U.K. 500,000 GBP 38,915,326 26,928,110 -30.8% 11 3 Month Euribor Options, Liffe U.K. 1,000,000 Euro 29,871,734 24,666,630 -17.4% 12 30 Year Treasury Bond Futures, CBOT 100,000 USD 22,647,348 22,101,472 -2.4% 13 Eurodollar Options, CME 1,000,000 USD 20,750,676 20,726,156 -0.1% 14 IDI Index Options on Futures, BM&F 1 Real 34,440,417 20,356,563 -40.9% 15 TIIE 28 Futures, Mexder 100,000 MXN 4,504,093 19,061,564 323.2% 16 10 Year Treasury Note Options, CBOT 100,000 USD 14,210,562 14,574,185 2.6% 17 2 Year Treasury Note Futures, CBOT 200,000 USD 20,610,997 14,103,994 -31.6% 18 Euro-Bund Options, Eurex 100,000 Euro 7,327,814 10,570,524 44.3% 19 3 Year Treasury Bond Futures, ASX 24 100,000 AUD 9,888,218 10,424,619 5.4% 20 Long Gilt Futures, Liffe U.K. 100,000 GBP 8,047,719 9,526,620 18.4%

Top 20 Metals Futures & Options Contracts Rank Contract Contract Size Jan-Mar 2011 Jan-Mar 2012 % Change 1 Steel Rebar Futures, SHFE 10 tonnes 17,579,304 16,221,412 -7.7% 2 Copper Futures, SHFE 5 tonnes 7,586,239 15,689,303 106.8% 3 High Grade Primary Aluminum Futures, LME 25 tonnes 13,281,492 15,474,184 16.5% 4 Silver MIC Futures, MCX * 1 kilogram 1,949,110 14,760,348 657.3% 5 SPDR Gold Shares ETF Options ** N/A 15,063,190 13,935,245 -7.5% 6 Gold Petal Futures, MCX *** 1 gram N/A 13,127,207 N/A 7 Comex Gold Futures, Nymex 100 oz 11,977,343 12,513,728 4.5% 8 Silver M Futures, MCX 5 kilograms 8,307,611 10,237,962 23.2% 9 iShares Silver Trust ETF Options ** N/A 13,390,405 9,571,574 -28.5% 10 Copper - Grade A Futures, LME 25 tonnes 8,929,580 9,204,412 3.1% 11 Copper Futures, MCX 1 tonne 7,586,239 9,095,915 19.9% 12 Zinc Futures, SHFE 5 tonnes 15,484,595 7,609,879 -50.9% 13 Special High Grade Zinc Futures, LME 25 tonnes 4,886,714 7,265,123 48.7% 14 Gold M Futures, MCX 100 gram 3,201,794 5,963,119 86.2% 15 Silver Futures, MCX 30 kilograms 6,043,868 4,668,271 -22.8% 16 Copper Mini Futures, MCX **** 250 kilograms N/A 4,443,053 N/A 17 Nickel Futures, MCX 250 kilograms 3,654,994 3,938,502 7.8% 18 Comex Copper Futures, Nymex 25,000 lbs 2,789,166 3,926,961 40.8% 19 Standard Lead Futures, LME 25 tonnes 2,524,653 3,585,762 42.0% 20 Comex Silver Futures, Nymex 5,000 oz 4,790,094 3,425,703 -28.5% * Began trading in February 2011 ** Traded on multiple U.S. options exchanges *** Began trading in April 2011 **** Began trading in February 2012

Futures Industry | June 2012 15 newsbriefs

NFA Proposes New Safeguards provide certain financial and operational ment companies such as mutual funds and for Customer Funds information on a monthly or semi-monthly exchange-traded funds. In their complaint, The National Futures Association pro- basis. NFA said it plans to make some of which was filed on April 17 with the U.S. posed new financial requirements intended this information publicly available on its District Court for the District of Colum- to strengthen regulations regarding the website. bia, the two organizations charged that treatment and monitoring of customer seg- the CFTC’s amendment of Rule 4.5 was CME Requires Daily Reporting regated funds held by futures commission “arbitrary and capricious” and claimed of Segregated Funds Balances merchants. The proposed requirements, that the CFTC violated the Administrative which were announced on May 29, place On May 1, CME Group began requir- Procedure Act as well as the Commodity new restrictions on the withdrawal of cusing all futures commission merchants to Exchange Act. The two organizations said tomer funds from segregated accounts and file daily statements for customer funds the rules were adopted “without satisfying require additional disclosure by FCMs. The in segregated, secured and sequestered the agency’s obligation to weigh the costs new requirements also apply to customer accounts by 12:00 noon each day. These or benefits of the rule” and add an unnec- secured amounts held in foreign futures and statements must be signed by each firm’s essary and redundant layer of regulation options accounts. The proposed require- chief executive officer or chief financial on top of the existing rules imposed on ments are now pending approval from the officer or their designated representative. investment companies by the Securities Commodity Futures Trading Commission. CME also announced its plans to perform and Exchange Commission. “These new requirements will help begin “limited reviews” of the daily statements “on the process of restoring public confidence in a surprise basis.” U.S. Options Industry the financial integrity of customer segre- “Customer segregation is the cornerstone Criticizes New Tax Rules gated funds,” said NFA President Dan Roth. of the futures industry, and it is critical to U.S. options industry representatives “Making this information available to the ensure the protections afforded under seg- cautioned that rules proposed by the public will give investors a better picture of regation are as strong as they can be for our Internal Revenue Service to implement a the financial standing of the FCM with which market participants,” CME said in an advisory dividend withholding tax on foreign options they are conducting business.” notice explaining the new requirements. traders will disrupt markets and drive away Under the proposed rules, all FCMs CME added that it is working with the business from foreign investors. The IRS must have written policies and procedures industry to adopt “further improvements” to proposed the rules in connection with the regarding the maintenance of the firm’s customer protections and determine “best Foreign Account Tax Compliance Act, a law residual interest in its customer segregated practices” for internal controls and proce- enacted in 2010 intended to combat tax funds. These policies and procedures must dures over customer assets. For example, evasion by foreign investors in U.S. markets. target an amount either by percentage or CME said disbursements of customer funds Options industry representatives warn dollars that the FCM seeks to maintain as its that exceed 25% of excess funds will have that the rules, which could take effect at the residual interest in those accounts. to be pre-approved in writing by a firm’s beginning of 2013, would drive away busi- The proposed rules restrict the amount of chief executive officer, chief financial officer ness from U.S. markets because they would funds an FCM can withdraw from customer or designated principal. In addition, clearing discourage non-U.S. investors from engag- segregated funds account to 25% unless the members will be required to file bi-monthly ing in a wide range of routine transactions. firm’s chief executive officer, chief financial reports on how customer funds are invested In a comment letter submitted to the IRS officer or other defined principal pre-approves and where those funds are held. on April 6, the U.S. Securities Market Coali- the transaction in writing. In addition, the CME said the bi-monthly investment tion, a group that includes all of the U.S. FCM must immediately notify NFA in writing reporting requirement will take effect on July options exchanges and the Options Clearing of that disbursement, disclose the amount of 1, with the first report due on July 15. Corporation, cautioned that the proposed the withdrawal, provide the reason for with- regulations would preclude non-U.S. Mutual Funds Challenge drawal, and confirm that a qualified individual persons from entering into a wide range of CFTC Rulemaking pre-approved the disbursement in writing. options transactions. “The proposed regula- The FCM also must disclose in its notice The Investment Company Institute, a tions would have a disruptive effect on the to NFA the amount of the remaining total trade association that represents the U.S. option markets,” the group wrote. “They residual interest in the customer segregated mutual fund industry, joined with the U.S. would impose withholding tax on dividends funds accounts and provide a representation Chamber of Commerce in filing a legal and would effectively preclude foreign per- that the FCM remains in compliance with challenge against the Commodity Futures sons from using these trading strategies.” segregation requirements. Trading Commission’s final rule imposing The industry coalition also cautioned The NFA rules also call for FCMs to certain regulations on registered invest- that in order to comply with the proposed

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Eurex Exchange is a member of Eurex Group. newsbriefs regulations, broker/dealers will have to incur priced $3 per share or less. form joint venture futures brokerages, with substantial systems costs. “The Coalition is The second initiative approved by the an investment ceiling of up to 49%, 2) the concerned that some broker/dealers may SEC updates existing market-wide circuit investment ceiling in joint venture securities decide not to permit foreign customers to breakers that when triggered halt trading brokerages will be raised from 33% to 49%, trade on U.S. options exchanges rather than all exchange-listed securities throughout and 3) the investment quota for QFIIs will be incur these systems costs.” the U.S. markets. The changes lower the raised from $30 billion to $80 billion. The Chicago Board Options Exchange, percentage of a market decline required to In 2007 the Chinese government allowed also part of the coalition, filed separate trigger a halt and shorten the amount of time three futures brokerage joint ventures to be comments as well, estimating that foreign that trading is halted. In addition, the circuit established through its special trade agree- participants account for 15% to 20% of trad- breakers will use the S&P 500 index rather ment with Hong Kong and Macau. Since ing volume on U.S. options exchanges. “The than the Dow Jones Industrial Average as then no new joint ventures in futures broker- proposed regulations would lead directly to a the pricing reference to measure a market age have been allowed. A Treasury spokes- reduction in this trading volume,” the CBOE decline. person confirmed that the new commitment warned. The exchange also said that the opens the market to foreign investors from proposed regulation would impose U.S. with- New Standards for Financial any country and permits those investors to holding tax on many options transactions, Market Infrastructures take up to a 49% equity stake. In addition, such as spreads, “that have nothing to do Two international groups of market any existing joint ventures that have less with avoiding withholding tax on dividends.” regulators—the Committee on Payment than 49% foreign equity ownership will be and Settlement Systems and the Technical allowed to increase the foreign equity own- SEC Approves Measure Committee of the International Organiza- ership to 49%. To Limit Volatility tion of Securities Commissions—published The Securities and Exchange Com- a joint report on April 16 titled “Principles Australia Looks to Industry mission announced on June 1 that it has for Financial Market Infrastructures.” The to Lead Derivatives Revamp approved two proposals submitted by the report is intended to serve as an important Australia’s Council of Financial Regulators national securities exchanges and the Finan- benchmark for regulatory standards around issued a consultation paper on April 14 on cial Industry Regulatory Authority that are the world. The report outlines 24 high-level the implementation of G-20 commitments designed to address extraordinary volatility principles for the proper management and on OTC derivatives in Australia. In contrast in individual securities and the broader stock operation of financial market infrastructures to the approach being taken in many other markets. The changes will be implemented such as clearinghouses and trade reposito- jurisdictions, the Australian regulators said by Feb. 4, 2013. ries. These principles cover such issues as that “industry-led solutions” should be the “In today’s complex electronic markets, segregation and portability, credit and liquid- preferred route to increasing the use of cen- we need an automated and appropriately ity risk management, governance, financial tralized infrastructure within the Australian calibrated way to pause or limit trading if resources and access requirements. CPSS OTC derivatives market. But they added that prices move too far too fast,” said SEC and IOSCO said their members will strive if progress fails to keep pace with interna- Chairman Mary Schapiro. to adopt the new standards by the end of tional developments, regulators should have The “limit up-limit down” mechanism 2012. Financial market infrastructures are the ability to mandate trading, clearing and prevents trades in individual listed equity se- expected to observe the standards as soon reporting obligations. curities from occurring outside of a specified as possible. “Broadly, the Council considers that it is price band, which would be set at a per- preferable for an increased uptake in central- centage level above and below the average China Eases Rules on Foreign ized arrangements for OTC derivatives to price of the security over the immediately Investment in Brokerage Firms be an industry-led initiative, with additional preceding five-minute period. This replaces The U.S. Treasury Department an- impetus coming from some changes to the existing single-stock circuit breakers ap- nounced on May 4 that the Chinese govern- incentives,” the regulators said in a report to proved by the SEC on a pilot basis after the ment has made several new commitments the government explaining their views. “How- May 6, 2010 market events. For more liquid to open its financial markets to foreign firms ever, to ensure that desired outcomes are securities—those in the S&P 500 Index, as part of its program to reform the financial reached in acceptable timeframes, a capacity Russell 1000 Index, and certain exchange- sector. The commitments were discussed to mandate certain obligations should also be traded products—the level will be 5%, during the fourth meeting of the U.S.-China available, though any such decision should and for other listed securities the level will strategic and economic dialogue in Beijing. only be made after thorough consultation.” be 10%. The percentages will be doubled Of particular interest to firms in the The paper expressed the regulators’ ex- during the opening and closing periods and futures industry are the following three com- pectation that economic factors, combined broader price bands will apply to securities mitments: 1) foreign firms will be allowed to with capital charges and margin require-

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Partners BOX l Citadel l Penson newsbriefs ments on uncleared derivatives, will drive the and the requirements for clearinghouses. and deployment of trading applications and adoption of central clearing. The consulta- The technical standards will set the details technology infrastructure is a complex and tion paper also proposed to allow the use of the new rules and address such issues dynamic process,” said Remco Lenterman, of clearinghouses and trade repositories as the timeline for implementing mandatory chairman of the FIA EPTA. “Proper applica- located offshore, rather than requiring the clearing; the application across different as- tion of these best practices will reinforce use of domestic entities. set classes and different types of counter- the role of our member firms as responsible parties; the process for determining which market participants. We are committed to CFTC Technology Panel contracts should be subject to manda- business practices that are consistent with Examines HFT and Swap Risks tory clearing; and the financial resources relevant regulatory obligations and risk man- On March 29, the Commodity Futures of clearinghouses. Verena Ross, ESMA’s agement requirements.” Trading Commission’s Technology Advi- executive director, announced on May 24 sory Committee held an all-day meeting to that ESMA plans to publish a consultation Penson Sells FCM discuss a range of topics including high- paper in June with the proposed texts of Business to Knight Capital frequency trading and credit checks in the these standards, hold a public hearing on Knight Capital Group will pay $5 million cleared swap markets. the standards in July, and deliver the stan- to acquire the futures clearing business of Scott O’Malia, the CFTC commissioner dards to the European Commission by the Penson Financial Services, the two compa- who chairs the Technology Advisory Com- end of September. Ross said the expecta- nies announced on May 29. Knight Capital mittee, announced the formation of a new tion is that the Commission will endorse the said the deal will fill a “strategic gap” in its subcommittee that will examine different standards by the end of the year so that the client offering by adding futures to the range types of HFT and their effects on futures European Union can meet the G-20 com- of products that it offers. The acquisi- markets and then report back to the full mitments on central clearing. tion, which is subject to closing conditions committee on what actions the CFTC and regulatory approvals, is expected to should take to strengthen its oversight. The FIA Issues Order Handling be completed in the second quarter of subcommittee consists of representatives Recommendations for 2012. Upon the close of the acquisition, from principal trading firms, customer-facing Executing Brokers the futures clearing business will operate intermediaries, exchanges, service providers The FIA on March 14 issued order han- as a division of Knight Execution & Clear- and academia, under the leadership of An- dling risk management recommendations ing Services, a broker-dealer that provides drei Kirilenko, the CFTC’s chief economist. for executing brokers. The report docu- electronic trading, clearing and settlement The Technology Advisory Committee ments both current practice and emerging services for a wide range of U.S. equities also discussed credit checks in the cleared technologies in order to respond to regula- and equity options markets. As of March swaps market. Participants discussed a tory concerns about algorithmic trading. 31, Penson had $561 million in segregated range of solutions for conducting customer The recommendations were developed by customer funds. Penson expects to transfer credit checks on over-the-counter deriva- experts from executing firms and represent client assets within one day of the close. tives transactions conducted through swap the latest in a series of recommendations A Knight Capital spokeswoman confirmed execution facilities. Much of the discussion developed by FIA members for trading firms, that John Streich, chief executive officer of centered on whether these trades should brokers and exchanges. Penson Futures, would remain with the unit. pass through credit filters before or immediately after execution. In addition, panelists FIA PTG and FIA EPTA Marex Spectron Expands discussed the challenges in applying credit Issue Software Guidelines Professional Trader Division limits to customers trading in a marketplace The FIA Principal Traders Group and the Schneider Trading Associates will sell its that will likely have multiple execution and FIA European Traders Association on March clearing business to Marex Spectron, the clearing platforms. 14 issued a set of recommendations to two companies announced on May 10. After assist trading firms in establishing internal the deal closes, STA will focus on its broker- ESMA Sets Timetable for procedures, processes and controls for the age business, which provides services for OTC Clearing Standards development, testing and deployment of independent brokers and brokerage groups. The European Securities and Markets trading software. These best practices were Marex Spectron, which plans to merge the Authority has set a September deadline for developed by representatives from a dozen STA clearing business with its professional the drafting of technical standards for the FIA PTG and FIA EPTA member firms and are trader services group, said the combined implementation of the European Markets the latest in a series of best practices recom- group will service more than 1,100 profes- Infrastructure Regulation, which establishes mendations developed by FIA members for sional traders generating more than 200 a new regulatory framework for the reporting trading firms, brokers and exchanges. million contracts in volume annually. The and clearing of over-the-counter derivatives “Managing the development, testing London-based company also said it plans to

20 Futures Industry | www.futuresindustry.com integrate the technology infrastructure de- iaries received notices from the FSOC that has now added 10 international banks veloped by STA into its Easyscreen platform. they would be designated as systemically as members: Bank of America Merrill Sonny Schneider, founder and chief execu- important financial market utilities. DTCC Lynch, Barclays, Citigroup, Credit Suisse, tive officer of STA, will join Marex Spectron said it had no disagreement with the pro- Deutsche Bank, Goldman Sachs, HSBC, as chairman of its Pro-Trader division. He posed designations. J.P. Morgan, Morgan Stanley and UBS. will work with John Lowrey, global head of CDSClear currently clears 129 contracts electronic trading and DMA services, to sup- CME Expands Trading Hours based on European credit default indices. port the development of Marex Spectron’s for Grain and Oilseed Contracts LCH.Clearnet said European single-name global electronic offering. CME Group, responding to competition CDS will be introduced later this year with from IntercontinentalExchange, expanded offsets against CDS index products, subject ICE Applies Circuit Breakers to the trading hours for its grain and oilseed to regulatory approval. CDSClear is also Commodity Futures futures and options contracts. The move actively working towards delivery of an inter- ICE Futures U.S. and ICE Futures Europe came after ICE began offering a competing national client clearing service later this year, implemented “interval price limits” for their set of agricultural contracts and made them including a U.S. offering. commodity futures contracts during March available for electronic trading 22 hours per “We are working hard on building our and April. Under the new policy, the ex- day. CME expanded its hours for elec- client offering and are keen to engage with changes will briefly apply a limit on the range tronic trading to 21 from 17 hours per day. clients globally and gain their input into its of price moves if triggered by an extreme CME also decided to eliminate a tradition development,” said Charlie Longden, chief price move in the preceding 15 seconds. of delaying the opening of floor trading on executive officer of CDSClear. Longden “IPL functionality acts as a temporary circuit the days when the U.S. Agriculture Depart- joined the company in December from breaker feature on the electronic platform ment releases market-moving reports. CME Markit, where he was managing director of to diminish the likelihood and extent of initially sought to expand electronic hours fixed income, with a mandate to broaden the short-term price spikes or aberrant market to 22 hours a day to match the ICE trading service to international users. moves,” the exchanges said. “While it is hours, but amid concerns from commer- designed to be in force throughout each cial users CME agreed to scale back its trading day, it is expected that the protec- extended trading hour plan by one hour. tions will be actively triggered only in the case of extreme price moves over very short EU Lawmakers Approve periods of time.” Financial Transaction Tax During a plenary session on May 23, the FSOC Designates European Parliament adopted the European Clearinghouses as Commission’s proposal for a financial trans- “Systemically Important” action tax. In a press release, the European CME Group, IntercontinentalExchange’s Parliament said the proposed tax, approved ICE Clear Credit, and the Options Clearing by a vote of 487 to 152, “should be better Corporation were notified by the Financial designed to capture more traders and make Stability Oversight Council in letters sent out evasion unprofitable.” The proposed EU- in late May that regulators plan to designate wide tax is subject to review and potential these derivatives clearinghouses as systemi- veto by member states and faces strong op- cally important financial market utilities. Such position from countries such as the U.K. a designation will put them under tighter government oversight. The clearinghouses LCH.Clearnet Expands CDS have 60 days to seek a waiver before the Clearing beyond France notices take effect. Officials at ICE said LCH.Clearnet S.A., the Paris-based they do not plan to seek a waiver from the subsidiary of LCH.Clearnet Group, an- designation. CME confirmed receiving a nounced on May 15 that it is expanding notice from FSOC but would not comment CDSClear, the clearing service that it beyond that. OCC previously has indicated offers for credit default swaps. The CDS it is willing to accept such a designation. In offering was first launched in 2010 with a related development, the Depository Trust just four French banks as members— and Clearing Corporation confirmed that BNP Paribas, Credit Agricole, Natixis three of its clearing and settlement subsid- and Société Générale. LCH.Clearnet

Futures Industry | June 2012 21 The Race for OTC Clearing in

The race is on. Clearinghouses are scrambling to roll out clearing services for over-the-counter derivatives. Clients are poring over the details of various Asia offerings, analyzing default structures, calculating By Will Acworth margin requirements, and testing the operational details. While the vast majority of OTC trades are still conducted bilaterally, in recent months the number of trades that have been submitted to clearinghouses has picked up noticeably.

22 Futures Industry | www.futuresindustry.com hree clearinghouses—LCH.Clear- Korea has drafted laws that will mandate begins central clearing, they expect the net, CME Group and Singapore clearing through an onshore clearinghouse, “network externalities” of clearing will TExchange—have already launched but a snag in the legislative process has de- make it likely that the practice will spread. clearing services for interest rate swaps in layed the Korea Exchange’s plans to launch What explains the decision to avoid a various Asian currencies and are begin- clearing for Korean won-denominated in- mandate, at least for now? For one thing, ning to see meaningful volumes of cleared terest rate swaps. And in India, there is no the regulators recognized that the Austra- trades. LCH.Clearnet continues to be well mandate for clearing as of yet, but the local lian OTC derivatives market is relatively ahead of the rest, thanks to its long head government securities clearinghouse is de- small and very cross-border in nature. start and strong dealer support, but CME’s veloping plans to offer clearing for interest Both of those characteristics would pose a addition of Japanese yen and Australian rate swaps denominated in rupees. “challenge” to the success of any domestic dollar swaps this spring immediately at- regulatory initiative, they said. The regu- tracted some business, and SGX continues Australia: lators also recognized that the transition to see meaningful increases in the volume Industry-Led Solutions to central clearing will require significant of interest rate swaps that it clears. In contrast to the approach taken in changes to market practices and organiza- Meanwhile a large number of other most other jurisdictions around the world, tional structures. For example, a host of clearinghouses in the region are prepar- the Australian regulators have agreed to changes to legal and operational arrange- ing to offer clearing for OTC interest let the market take the lead in driving the ments will be needed, and larger amounts rate swaps, the largest segment of the adoption of central clearing. In a consulta- of collateral have to be posted and received. overall market. Clearinghouses in Ja- For this reason, it makes sense to pan, Hong Kong, Korea, Australia, In- give financial institutions sufficient time dia and China are at various stages of to make the necessary adjustments, readiness, with Japan, Hong Kong and they said. “Allowing time for the work- Korea the closest to launch. through of changed price signals will per- This is proving to be no simple proj- mit the financial system to reconfigure ect, however. Several clearinghouses have itself in an organic way, with scope for been forced to delay the timetable for regulatory guidance or intervention as their plans, either because the necessary necessary.” changes to local laws have not been final- Despite the market-friendly approach, ized or because the financial and opera- It’s a very open the regulators have not ruled out in- tional details are still being worked out troducing a mandate at a later stage, in consultation with the financial insti- market, and we said cautioned Dale Rayner, a lawyer in the tutions that might become their clearing Sydney office of Clifford Chance. The members. to the regulators that government is in the process of drafting a In fact, in some jurisdictions, the lo- legislative framework that will authorize cal clearing solution may not be available it is very important the Australian Securities and Investment until well after the year-end deadline set Commission to require clearing and is by the Group of 20 leaders in November to avoid fragmenting now assessing feedback from market 2009. All of the signatories to that agree- participants. “The regulators have taken ment—including a number of countries liquidity and tiering the view that market forces will drive the in the Asia-Pacific region—pledged to re- adoption of clearing among Australian quire clearing for all standardized OTC the market. financial institutions, but they want to derivatives by the end of 2012, a goal retain the ability to mandate a solution that has proven to be difficult to achieve david love, if the pace of change is not sufficient,” even in the U.S. and Europe. Australian Financial Markets Association Rayner said. In a previous article, Futures Industry Extensive consultation with local and described progress towards OTC clearing international financial institutions played in Japan, Singapore and Hong Kong (see a key role in the regulators’ decision to “OTC Clearing in Asia: Under Construc- tion paper released on April 14, Australia’s adopt this approach, according to David tion” in the March 2012 issue). This article Council of Financial Regulators said that Love, director, policy and international covers three more jurisdictions: Australia, “industry-led solutions” should be the pre- affairs at the Australian Financial Markets Korea and India. Each of the three is tak- ferred route. The regulators explained that Association. Love said that although the ing a different approach, highlighting the financial institutions will have powerful Australian regulators are committed to the fragmented nature of the clearing land- economic incentives to move their OTC objectives of the G-20 derivatives reforms, scape in Asia-Pacific. Australia is relying trades into clearinghouses. they realized that the reforms should be on market forces to drive the adoption For example, new capital charges and carefully calibrated to the specific context of clearing, at least for now. Two global margin requirements for uncleared deriva- of the Australian OTC market. clearinghouses—LCH.Clearnet and CME tives will send a “price signal” to all market One of the key features of that market Group—are already clearing trades for participants, especially the larger market is that swaps are traded on a global basis. Australian financial institutions, and the participants, the regulators said. And once Large international banks are major play- domestic exchange may also enter the race. a critical mass of large market participants ers in the Australian market, and trades

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that originate in Australia may be booked “All the major Australian banks accept with Australian counterparties during lo- in London, New York or Hong Kong. “It’s that they have to clear,” Love said. “They cal hours. The significance, Mahoney ex- a very open market, and we said to the are closely monitoring the implementa- plained, is that this shows trades can be regulators that it is very important to avoid tion of the Dodd-Frank Act, and they also executed and cleared at any time around fragmenting liquidity and tiering the mar- recognize that Basel 3 is coming down the the globe. “It doesn’t matter where the ket,” he said. track.” He added that Australian banks clearinghouse is located,” he said. “All you Still another factor is that the market is raise approximately 50% of their capital need is the technology to route the trades beginning to offer better pricing for coun- offshore and then use swaps to convert and process the trades for clearing.” terparties willing to clear their swaps. One the proceeds into Australian dollars. As a LCH.Clearnet offers clearing for the bank executive said swap desks are start- result, there is a good chance that some widest range of Australian dollar interest ing to use two pricing curves, with better of their swap transactions with offshore rate swaps, including zero coupon swaps, terms for cleared than for uncleared trades. counterparties will come under the man- single currency basis swaps and com- This reflects the capital costs anticipated datory clearing requirements of Dodd- pounding swaps, and is prepared to ac- for uncleared derivatives, he explained, Frank, especially if the CFTC takes an cept for clearing swaps with maturities of adding that clients are weighing this price expansive interpretation of its application up to 30 years. As of May 31, the notional differential against the costs of funding the to non-U.S. entities. value of the outstanding amount of cleared market requirements. swaps was A$ 3,473 billion (US$ 3,452 Love noted that the major dealers in Global Clearing billion), and it has been estimated that the Australian market—both local and In fact, a number of local banks and LCH.Clearnet is clearing approximately international—are anticipating that they other financial institutions have already half of the dealer-to-dealer market for Aus- will be subject to the clearing mandate in begun to clear their trades. Officials at sev- tralian dollar interest rate swaps. Dodd-Frank as well as the higher capital eral international clearing firms said they CME joined the race only recently, add- requirements that will be established un- have clients in Australia who have gone live ing Australian dollar interest rate swaps der the Basel 3 standards. Cross-currency at both LCH.Clearnet and CME and have to its clearing offering in mid-April. Even swaps are a big business, and several major cleared swaps denominated in U.S. dollars so, the Chicago-based clearinghouse has Australian banks have entered into client and euros as well as Australian dollars. found some success, particularly with the clearing relationships with members of the Steve Mahoney, global head of OTC buy-side. As of May 31, the notional value main global clearinghouses such as LCH. clearing at Credit Suisse, said that his of the outstanding positions was A$ 1 bil- Clearnet and CME Group. bank has cleared several interest rate swaps lion (US$ 994 million), and CME officials

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said that the majority of those positions in using both clearinghouses. A number of whether it could be economically viable.” were dealer-to-client trades. In contrast, factors drive the decision on which to use, ASX has not formally announced the LCH.Clearnet’s total included just A$ including existing relationships and famil- details of its plans, but several industry 497.5 million (US$ 494.5 million) in no- iarity with the legal environment. Looking sources said the exchange has formed a tional value of dealer-to-client trades. ahead, cross-margining will be a key issue working group with industry representa- “We continue to see more and more affecting the choice of clearinghouse, ac- tives to explore how the clearing solution interest in clearing from a broad range cording to Credit Suisse’s Mahoney. would work. The expectation is that the of market participants in Asia, in par- “That’s the battleground for clear- service will be provided by the clearing- ticular banks and asset managers,” said inghouses around the world,” he com- house now used for the exchange’s futures Laurent Paulhac, head of OTC products mented. “Capital efficiency is on every market, but it will be backed by a stand- and services at CME. Paulhac added that client’s wish list. The more you can bring alone default fund. Cross-margining with the addition of Australian dollar and products together and cross-margin them, futures is a key objective; ASX has the Japanese yen swaps to its offering had a the more it will resemble what they pay largest fixed income futures market in the noticeable impact. today, with one margin call across a whole Asia-Pacific region, with annual turnover “When we added the two Asian cur- portfolio of positions.” in fiscal 2011 of more than A$ 45.18 tril- rencies in April, we originally thought lion (US$ 44.91 trillion) in notional value. that U.S. institutions would be the main A Local Solution? The industry sources also said ASX is clients, but as the volume picked up, But what about ASX? As the operator consulting with the Singapore Exchange, we discovered that institutions in Aus- of Australia’s futures market, ASX can offer which already offers clearing for interest tralia and Japan were also interested. So substantial margin offsets between interest rate swaps and non-deliverable forwards. we geared up our infrastructure in those rate futures and interest rate swaps. ASX SGX has signed up nearly a dozen banks time zones and made the necessary adjust- officials have spoken publicly about their for its OTC derivatives clearing service ments so that our services would easily be interest in offering a domestic clearing so- and has cleared S$ 264.6 billion (US$ 207 consumable by clients in the Asia-Pacific lution, but AFMA’s Love said it’s not clear billion) in notional value of interest rates region as well as Europe.” that there is enough demand to support swaps since the launch of the service in These are still early days. Only a small the cost of building such a service. “There November 2010. SGX’s offering is limited number of Australian financial institutions is ongoing discussion about a possible lo- to dealer-to-dealer trades, however, and have actually begun clearing. But officials cal clearing solution, but questions remain the exchange’s futures market does not of- at several banks said clients are interested about how it would work in practice and fer the same potential for cross-margining.

Futures Industry | June 2012 25 Asia Clearing

Meanwhile ASX is pushing ahead with a development in the exchange’s deriva- amendments are a high priority for the more limited project—offering clearing for tives market division, explained that the government, which wants to meet the OTC equity derivatives. The new service potential market for its clearing service G-20 schedule, but warned that there con- gives users the flexibility to specify matu- consists of the 79 banks and securities tinues to be opposition to other provisions rity, type of option, exercise price and ex- firms that are licensed to act as dealers of the legislation that will encourage the ercise type. In addition, the positions can in OTC derivatives. The membership re- creation of investment banks. They pre- be offset with the exchange’s listed options, quirements have not been finalized yet, he dicted that even the new KRX timetable, and trades can be entered into with one said, but KRX is studying the examples which envisions the launch of clearing counterparty and exited via another. set by CME and SGX. KRX also is talk- services in November or December of this The equity derivatives offering comes ing to Markit, the platform that many of year, may prove to be too optimistic. at a good time, according to Ian Nissen, Paget Dare Bryan, a partner in the Citi’s head of futures, OTC clearing and Hong Kong office of Clifford Chance, prime finance sales for Australia and New added that there is another issue that Zealand. “There’s been a pick-up in the needs to be addressed. It’s not completely use of options strategies among invest- clear, he said, how the rules and the law ment managers that are looking to im- will permit client clearing “portability,” prove their returns,” he explained. “By meaning the transfer of positions and booking more of their options positions assets from one clearing member to an- into clearinghouses, they can reduce their other in case of a default of that clearing counterparty risk and free up their bal- member. That raises the concern that a ance sheet for the really tailored OTC The securities transfer might fail to work as expected or products,” he added. be challenged in court. Phase one, which was launched in firms are not major This is especially an issue for banks us- May, covers options on 19 stocks as well ing client clearing, he added, because it as the S&P ASX 200 index, the main players today, but would affect the capital charge on their benchmark for the Australian equity cleared positions. Basel 3 proposals offer market. Phase two, which is scheduled with clearing they will very low capital charges for risk exposures for early next year, will cover all classes of to clearinghouses, but only if it is highly options listed on the exchange and will be able to become likely that positions can be ported to an- cover options expiring as far out as four other clearing member in case of default. years. more active. Otherwise the exposure has to be treated as a risk exposure to the clearing member, Korea: December Target rather than the clearinghouse. jae-joon lim, Korea Exchange As a member of the G-20, Korea has Lim emphasized, however, that cen- been very focused on meeting the time- tral clearing ultimately should result in table for derivatives reforms. The govern- more participation in the Korean swap ment has drafted the legislation neces- market, rather than less. Currently the sary to amend the local laws and provide market is dominated by banks, but legal certainty for the clearing of OTC by reducing counterparty credit risk, derivatives. In contrast to the Australian the large international dealers use to pro- clearing will increase the volume traded approach, the Korean government intends cess their OTC trades, so that trades con- by securities firms. “The securities firms to require all dealers in swaps, including firmed on this platform can be routed to are not major players today, but with branches of foreign banks, to clear their the KRX clearinghouse. clearing they will be able to become trades, and has designated the Korea Ex- Initially the goal was to launch the ser- more active,” he predicted. change to serve as the clearinghouse for the vice in July, but the timetable has been de- Korean OTC market. layed by a snag in the legislative process. India: Cautious Approach Last December KRX officials circulated The Financial Services Commission, Ko- In some respects, India is farther ahead white papers outlining their plans to offer rea’s markets regulator, submitted amend- than either Australia or Korea in the imple- clearing, including clearing rules and oper- ments to the National Assembly last year mentation of the G-20 reforms. The Re- ational procedures. The exchange intends that will lay the legal foundation for the serve Bank of India, the country’s central to start with plain vanilla fixed-for-floating clearing service. Those amendments were bank and the principal regulator of India’s interest rate swaps denominated in Korean part of a larger package of financial reform OTC derivatives markets, began imple- won, with a maturity of up to 10 years. measures that bogged down in disputes menting a trade reporting requirement for The clearing service will be supported by over other, unrelated issues, according to interest rate swaps and forward rate agree- a default fund supported by contributions several lawyers familiar with the status of ments in August 2007, well in advance of from clearing members as well as the “set- the legislation. the financial crisis that prompted the G-20 tlement reserve fund” that draws on the KRX expects that the legislation will reforms. In March 2012, the central bank exchange’s own financial resources. be reintroduced by September, Lim said. extended that reporting requirement to Jae-Joon Lim, a director of business Other sources agreed the clearing-related cover all interest rate and foreign exchange

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derivatives, and expanded the scope to in- CCIL expects that the 20 banks that are post-trade processing and settlement for a clude not only interbank trades but also the most active participants in the market wide range of other financial instruments, client trades. will be the most likely to join the service, including OTC derivatives. The repository for these trade reports— at least during the initial stages, Roy said. In March, CCIL conducted its second the Clearing Corporation of India—is Clearing will be limited to members, so portfolio compression exercise for inter- now developing a plan to offer clearing there will be no provision for porting client est rate swaps. The purpose was to reduce for these trades. CCIL was established in trades to another clearing member. the overall notional value and the number 2001 at the instigation of central bank for The original target for launch was June, of outstanding contracts by identifying the purpose of improving trade processing but Roy said this had to be put off after economically redundant trades for early and reducing settlement risk in the govern- the RBI decided to take a closer look at the termination, freeing up capital for market ment securities market. Since then it has details of the clearing service to make sure participants and reducing the overall level expanded into the settlement of foreign that they were in line with international of risk. CCIL said 21 banks participated exchange trades and a wider range of mar- standards. In particular, the central bank in the exercise, including several large for- ket infrastructure services. CCIL’s primary is examining the “principles for financial eign banks, and more than 17,000 trades owners are the leading Indian banks, but market infrastructures” that were set out were terminated, leading to a reduction foreign banks are also represented in the in April by the Committee on Payment in notional value of 8.954 trillion rupees ownership structure. and Settlement Systems, an organization (US$ 162.6 billion). Siddhartha Roy, CCIL’s chief risk officer, representing central banks, and the Inter- ...... said the company is preparing to launch national Organization of Securities Com- Will Acworth is the editor of Futures Industry clearing for interest rate swaps. Initially missions. These principles are designed to magazine. the service will target rupee-denominated ensure international convergence among overnight index swaps that reference the the many central clearing solutions emerg- Mumbai Interbank Offered Rate, a widely ing around the world, and regulators are used overnight money market index. This expected to begin implementing the stan- type of swap accounts for the bulk of the dards this year. interest rate swap market in India, accord- Although CCIL does not provide clearing to the data collected by CCIL through ing services for exchange-traded futures its repository. and options, it does have experience in

Futures Industry | June 2012 27 Customer Protections for Cleared Swaps: A Q&A with Vanguard By Will Acworth

vanguard is a registered investment adviser based in Valley Forge, Pennsylvania, with more than $1.8 trillion in assets under management. Vanguard has been a vocal supporter of many of the proposed derivatives market reforms including enhanced regulatory oversight and requiring the central clearing of standardized swaps. William Thum is a principal in Vanguard’s legal department and is responsible for derivatives legal support including coverage of fixed income and equities trading, negotiation of derivatives trading agreements, and legal analysis of derivatives regulatory reform. He is also heavily involved with industry initiatives to establish new market architecture and standard clearing documentation. Before joining Vanguard in 2010, he was a partner at the law firm of Fried Frank and head of derivatives documentation, Americas, at Morgan Stanley. In this interview, Thum discusses several issues related to the protection of customer funds. He offers his views on the “LSOC” model approved earlier this year by the Commodity Futures Trading Commission to safeguard margin for cleared swaps. He also comments on several regulatory initiatives to strengthen customer fund protections, including the amendments to Rule 1.25 that the Commodity Futures Trading Commission adopted in December and the recommendations that the Futures Industry Association’s MF Global task force issued in March. He cautions, however, that customers cannot rely entirely on regulations to protect their funds. Regular due diligence is also essential, and he suggests several questions that institutional investors should ask their futures commission merchants.

28 Futures Industry | www.futuresindustry.com FI: You have been very involved in the rule- clearing member, you can largely mitigate FI: In a custodial arrangement, the margin making process at the Commodity Futures some of these risks. can’t be invested by the dealer and there- Trading Commission, especially with re- fore you have a degree of protection against spect to the rules around the clearing of FI: What risk mitigation techniques have what you have described as investment risk. swaps. Let’s start by talking about the kinds you been using up to now in the OTC bi- But if the dealer can’t invest those funds on of risks that you see in these rules. lateral world? your behalf, doesn’t that create an opportu- THUM: Swaps clearing presents two main THUM: Well, Vanguard has a suite of SEC- nity cost for the customer? benefits. First of all, it substantially miti- registered mutual funds, some of which en- THUM: That’s right. When the collateral is gates credit risk related to your dealer, or the ter into over-the-counter derivatives trades, held outside of the dealer by a custodian, possibility your dealer will default and fail and in accordance with the ‘40 Act, mutual that impacts the pricing of deals. It becomes to perform under the swap. As the principal fund assets must be held by a custodian. more expensive to do the trades in that the to the trade is the clearinghouse, you can Our derivatives are backed by full bilateral dealer cannot benefit from holding the col- derive significant comfort from the risk mu- collateral arrangements where collateral is lateral and using it in its business. In addi- tualization across all of the clearinghouse’s pledged either by the fund or by its dealer tion, there are expenses related to setting up members. Secondly, it facilitates the easy to secure obligations arising under the de- and maintaining the custodial relationship. transfer, or porting, of live positions from a rivatives transactions. Consistent with the But remember, I’m speaking about SEC- failing clearing member to a strong clearing ’40 Act mandate, those pledged assets are registered mutual funds, where the fund’s member. This is a significant benefit com- held by the fund’s custodian in a segregated pledged assets must be held by a third-party pared to the over-the-counter world where control account. So if the pledgor defaults, custodian. Other market participants, such positions are terminated upon a dealer’s de- the secured party has access to the pledged as hedge funds, typically do transfer their fault and you have to enter into new trades assets securing the obligation. We have also collateral directly to the dealer and that col- with a new dealer. negotiated what I’ll call “pledgor access lateral is held and invested by the dealer Given the importance of the ability to provisions” whereby if the secured party raising the prospect of dealer risk related to

We have been very attentive to any risk that might impact our ability to move trades to a relatively strong clearing member.’’ port and thereby maintain open positions, defaults, the pledgor can easily recover the any collateral in excess of the market value we have been very attentive to any risk that pledged assets from the custodian. of the derivatives. might impact our ability to move trades to a The use of a custodian to hold the The main point is that there are a num- relatively strong clearing member. pledged assets protects a fund from a whole ber of risk mitigation techniques that have Other risks presented by individual clear- host of risks that the dealer presents. The been developed in the over-the-counter de- ing members are certainly important, but assets are not held by the dealer, they’re not rivatives world. Those techniques are, for hopefully they are of lesser consequence. The commingled with other customers’ funds, the most part, set up for each account and first is fellow customer risk, or the possibil- they’re not invested by the dealer, and involve negotiation of bespoke documenta- ity that your clearing member fails due to there’s no risk of fraud because the dealer tion. There’s no market standard documen- its inability to meet the margin obligations has no access to these assets in the ordinary tation for the custodial relationships. There of one of its other customers. The second is course of trading. are costs associated with holding the collat- investment risk, where the investments made While the custodial structure eliminates eral this way. And while many of the risks by your clearing member decline and it can- risks otherwise presented if the dealer held presented in the over-the-counter world not replenish the margin pool. Finally, there the collateral, there are, of course, other are addressed through these practices, they is operational or fraud risk, where your clear- risks. For example, there remains credit risk don’t eliminate all risks. In fact, some new ing member fails to properly segregate your to the dealer with respect to market gains or risks are introduced when you have a custo- margin from its assets. losses that arise between the time that collat- dial third party involved. In thinking about the CFTC’s rules and eral is last posted to you and the time you’re how they address clearing member risks, I able to liquidate the collateral and apply the FI: Let’s talk about LSOC. This is a new put them into three categories. There are proceeds. Conceivably you could be under- type of clearing model that the CFTC has the risks that are fully addressed by the secured depending on the extent to which mandated for cleared swaps starting this fall. regulatory structure surrounding cleared the market has moved in the interim and What are the key details of the LSOC rules? swaps. Then there are the risks that are the market value exceeds the pledged assets. THUM: There are a couple that stand out. Of only partially addressed by the regulatory In addition, while having a custodian hold course, the main rule, 22.15, clarifies that structure. And finally there are the risks assets on your behalf insulates you from risk one customer’s margin can’t be used to cover that need to be mitigated by your own due to your dealer, you are presented with a de- a fellow customer’s default. This is a signifi- diligence. In other words, not all clearing gree of risk related to the custodian itself in cant point of departure from the futures members are created equal, and if you per- the event the custodian commits fraud or model where the clearinghouse has access to form a regular due diligence review of your becomes insolvent. the entire pool of customer margin in the

Futures Industry | June 2012 29 Consumer Protections event one customer fails and the clearing collect additional margin prior to arranging without the need to post additional mar- member also fails in its obligation to make the transfer of solvent customer’s positions. gin is significantly enhanced. up any margin shortfall. That’s the most Given that portability, and not trade ter- critical point in the LSOC rules. There’s also mination, is a major benefit of the central FI: So the clearinghouse would have posi- a related rule, 22.13(c)(2), which says that clearing, a system that effectively preserves tion-level information for each customer? when a customer posts additional margin to the margin value for each customer and THUM: That’s right. In addition, under the clearing member above and beyond the makes it available to support trades that are LSOC, the clearinghouse collects margin clearinghouse minimum requirement, that ported to a new clearing member is a sig- on a gross basis related to the risk presented margin also receives full protection and may nificant improvement. by each individual customer rather than on not be used by the clearinghouse to meet a net basis across the risk presented by all any other customer’s default. So you not FI: There are some other requirements that of a clearing member’s customers. Gross only have your core margin protected, you address record keeping and disclosure. Can margin requirements also help to ensure the also have any excess margin protected from you talk about those and the value that clearinghouse will hold adequate margin fellow customer risk. those provide to you as a customer of this for the porting of customer positions in the Another area of the rule making ad- industry? event of the failure of a clearing member. dresses margin that is posted to the clearing- THUM: That’s where it’s important that we house by a clearing member, either specifi- don’t just think about the LSOC rule as sim- FI: Has your firm had any experience cally with respect to an individual customer ply mitigating fellow customer risk. There is with LSOC? or overall as a cushion to address margin also important language in the LSOC rule THUM: Well, we certainly have been in con- transfers on a daily basis. Rule 22.2(e) clari- that serves to mitigate the risk that a clearing versation with clearing members and each fies the extent to which LSOC treatment, or member is not maintaining adequate segre- of the different clearinghouses as we assess full protection from fellow customer risk, is gation or is somehow making use of margin the appropriate selection to be used by also provided to this excess margin posted in an inappropriate manner. That language the Vanguard funds. In so doing, we have by the clearing member. is in rules 22.11(c) and 22.11(e). considered the various models for holding

Given that portability, and not trade termination, is a major benefit of the central clearing, a system that effectively preserves the margin value for each customer and makes it available to support trades that are ported to a new clearing member is a significant improvement.

FI: What are the pros and cons of LSOC First of all, the clearing member must margin and protecting margin for cleared from your perspective? provide the clearinghouse with daily re- swaps. What has always seemed’’ to us to THUM: Well, LSOC is effective in largely insu- cords of its customers, their positions, be the system that makes the most sense is lating each individual customer from the risk and their margin. And then the clear- where a clearinghouse has a regular window presented by fellow customers of a common inghouse is tasked with confirming that into the trades that are put on by individual clearing member. The margin transferred by such reports are accurate, complete, and customers and the risks presented by those each customer to the clearing member, while timely. So this is effectively a full disclo- specific trades, and collects margin on a held in a commingled, omnibus account, is sure by the clearing member to the clear- gross basis from each customer. In other fully segregated from the margin posted by inghouse of who the customers are, what words, a system where each customer “pays any of the clearing member’s other customers. their positions are, and how much the its own freight” in terms of the relative risk In the event another customer fails to meet a margin has been posted with respect to that it and its trades present to the system. margin call, neither the clearing member, nor each customer and their positions. So that helped to guide our own thought indeed the clearinghouse can use the margin Mandating this window into the clear- process in our support for the LSOC model posted by the other solvent customers to sat- ing member’s business will undoubtedly over time. isfy the margin shortfall. enhance the discipline of the clearing The futures model has always appeared Getting back to one of the primary ob- member in maintaining full segregation to us to be less desirable. That model looks jectives mentioned at the outset, a critical and robust record keeping. It also will at exposure on a net basis across all cus- benefit, of course, is that all of that margin provide the clearinghouse with accurate, tomers, with the apparent expectation that is then available for the solvent customers to complete and timely information so that if there could be access to the margin of non- help facilitate the prompt transfer of their something goes wrong with a customer, or defaulting customers to satisfy defaults by a positions to a new solvent clearing member. even with the clearing member, the clear- defaulting customer. In effect, we came to If the clearinghouse had access to all cus- inghouse will know who the clients are, perceive that those customers with conser- tomer margin to meet the needs of a failed what their trades are, and what margin has vative trading strategies and approaches and customer, less margin would be available been posted for those trades. Armed with robust credit parameters are subsidizing the for porting which could either be delayed this information, the ability to efficiently customers with lower credit qualities and or derailed as the clearinghouse needed to port trades to a new clearing member more aggressive trading strategies.

30 Futures Industry | www.futuresindustry.com FI: How do you address the argument that level of protection to be applied to variation best approach to develop a cumbersome and the futures model has, in fact, worked? Even margin. So we feel that this area would ben- expensive system to fully eliminate that incre- if you are right that futures customers are efit from clarification from the CFTC. mental risk? We think that, through a combi- exposed to fellow customer risk, in practice Another issue relates to this idea of excess nation of related rule-making and a customer’s the clearinghouses have never tapped one margin posted by clearing members at the own due diligence, the relatively small level of customer’s assets to cover a default by an- clearinghouse. It’s clear that excess margin incremental risk can largely be mitigated. other customer. posted by customers receives full protec- FI: There have been some proposals put out THUM: We certainly have not had the fel- tion from fellow customer risk under the by the FIA and other organizations about low customer risk issue tested, to a large LSOC rules. The question is, what about how to improve customer protections. extent, in the futures world. One could ar- excess margin posted by a clearing member What do you see as the most critical ele- gue, though, that the type of trading in the to either supplement an individual cus- ments of those recommendations? futures world presents less risk to the system tomer’s margin or as an overall buffer for all THUM: I think the FIA has done a great than trading in the cleared swaps world. customers of that clearing member? That’s job in crafting a set of best practices that In the cleared swaps world, we see a much another area where it appears there may really can go a long way to filling any per- broader range of trade types, with each type be some divergent views among the clear- ceived gaps in addressing the kind of in- traded at a much lower level of frequency. inghouses and, again, we think that there cremental risk not addressed by the LSOC This lower liquidity also raises the possibil- should be an effort made to see if clarifica- rule. Requiring daily reporting of clearing ity of greater volatility, so the risks that an tion of the rule would help to minimize any member segregation calculations to the individual customer can present to the over- unintended ambiguity on this topic. self-regulatory organization is a key best all model could be significantly greater in practice that should be implemented on a the cleared swaps world. FI: As you know, the CFTC has made some uniform basis. The twice monthly report- So it is particularly important in the amendments to Rule 1.25, which sets limits ing of clearing member compliance with cleared swaps world that each individual on how FCMs invest customer funds. What the Rule 1.25 investment limitation is customer pays its own freight with respect is your view of those amendments? also very important, as is an annual clear-

What has always seemed to us to be the system that makes the most sense is where a clearinghouse has a regular window into the trades that are put on by individual customers and the risks presented by those specific trades. to its relative risk, as I said before. We also THUM: This relates to the investment risk ing member certification that there are no see that, going forward, it’s compelling that I talked’’ about at the outset. The ques- material weaknesses in a clearing member’s for the futures model to be reconsidered tion is, to what extent are customers ex- controls relating to capital computations and ideally have the LSOC approach ap- posed to the investments of customer mar- and protection of customer funds. These ply to the futures world. The benefit, of gin made by a clearing member? In other are all critical ways that some of that incre- course, is not only will every customer words, the risk that the clearing member mental risk can be addressed. be paying its own freight, but also, when makes poor investments, there are signifi- There’s also an added discipline that is you have a harmonization of the models cant losses, and the clearing member fails the natural byproduct of greater transpar- used between futures and cleared swaps, and is unable to supplement the margin ac- ency into clearing member practices. These you then open the door to the possibility count to address those losses. In amending best practices really create an environment for portfolio margining and greater mar- Rule 1.25, the CFTC narrowed the range of where the clearing members—not just indi- gin efficiency across your futures and your investment options that a clearing member vidual clearing members but across all clear- cleared swaps trading. is permitted to make. We see this as a sig- ing members—consistently apply much nificant step forward in terms of mitigating more robust practices. FI: You have made some comments at indus- investment risk overall. So those who ques- try conferences about the need for clarification the extent to which investment risk has FI: The Federal Home Loan Banks filed a tion on certain issues covered by the LSOC been addressed by the LSOC rules should comment letter with the CFTC suggesting rules. Can you give us some examples? gain some comfort from the recent changes that some of this information should be THUM: It seems to us that, while the LSOC to Rule 1.25. made public. What is your take on that? rules make it very clear how a customer’s Certainly we could eliminate all invest- THUM: I think it’s a great idea. The main initial margin is protected, how the rule ment risk by having the margin held in a thrust of that comment letter is that as soon relates to variation margin could benefit third-party account or certain other more as the regulatory organization gets the re- from further clarification. Our understand- novel approaches that have been suggested. port from the clearing member, the results ing is that the largest three clearinghouses The critical question is what is the incremental of the report should be made available im- may have different interpretations of what level of risk? How can that incremental level mediately on the appropriate web site so is required under LSOC with respect to the of risk be most efficiently mitigated? Is the that customers have a regular window into

Futures Industry | June 2012 31 Consumer Protections the health and best practices of their clear- When you limit the flow of information members delegate their responsibilities to ing members. Having more transparency with respect to a failure to meet regulatory clearers in other jurisdictions. You could can only enhance the level of discipline of obligations, especially rules meant to pro- ask your clearing member for the list of each clearing member, and it will better en- tect customer assets, the customers are the clearers that it uses in specific jurisdictions able individual customers to assess clear- ones that are bearing that risk. Not having and perform due diligence on the clearers ing members against its own risk tolerance that information in a timely way effectively on that list. Then make sure that you’re levels as it contemplates whether to main- serves to compromise the credibility of the comfortable with those firms, or limit the tain its trading portfolio with a particular system for the customers to make their in- range of instruments that you are trading clearing member. And if the risks exceed vestment choices. so that there is no need to rely on unac- those tolerance levels, it allows the custom- ceptable delegated clearers. ers time to make the decision to move to a FI: One of the themes that you brought up The idea here is that each customer clearing member that is acting within their several times is the need for customers to needs to bear some level of responsibility tolerance thresholds. do due diligence on the FCMs that they for performing regular due diligence on its are planning to use for their cleared swaps. clearing members, in coming up with its FI: The CFTC currently publishes some What kinds of things should customers be risk tolerance levels, and then deciding on FCM financial data on its web site on a looking at as they do their due diligence whether or not a particular clearing mem- monthly basis. Is that information helpful on FCMs? ber should continue to serve in that role or, to you? THUM: This gets back to the point I made indeed, if positions should move to a new THUM: I think it’s helpful, but I think a lot early on, that not all clearing members are clearing member. can happen within the course of a month. created equally. While they may offer similar The recommendations in the FHLB letter services, the way they handle the risk inher- FI: One last question. What happens if a that resonate the most with us are, first, ent in their operating model can be very dif- customer doesn’t have tens of billions or that the daily clearing member reporting ferent. Customers have the right to ask their hundreds of billions of dollars in assets un- I think the FIA has done a great job in crafting a set of best practices that really can go a long way to filling any perceived gaps in addressing the kind of incremental risk not addressed by the LSOC rule. of segregation calculations should be pub’’- clearing members how they are performing der management? Do you think that the lished immediately on the web site; second, against a customer’s risk tolerance levels. relatively smaller funds or organizations will if there’s a notice of a breach of segregation For example, what is the clearing member’s have the same ability to conduct that due by a clearing member, that should imme- capitalization level? Is it capitalized at the diligence and to obtain that kind of infor- diately be made available on the web site; CFTC minimum level or at some multiple mation from FCMs as the large organiza- and third, that the results of any stress test thereof? When you talk to different clearing tions such as yours? should be published on the web site. members, you will find there is a fair diver- THUM: I think that’s where the FIA’s pro- The more information that is avail- gence in capitalization. posal comes in. While a large fund family able, the more it will enhance the prac- In terms of investment risk, there are can make these sorts of due diligence in- tices of the clearing members and pro- some clearing members that limit invest- quiries as an inherent part of its own audit vide the customers with information to ments to only the most liquid and less process, all market participants would ben- be able to assess their clearing members volatile range of investments within the efit greatly from requirements for clearing against their risk tolerance expectations overall pool that they’re permitted to members to make a more robust disclosure and decide if they need to best protect make. So if you were to ask them what to the regulators and for the regulators to their customer assets by moving them to investments they make and have that promptly make that information available a new clearing member. dialogue on a consistent basis, you may to the market. find that some clearing members are more ...... FI: Should there be any kind of lag or delay conservative in their investments, whereas Will Acworth is the editor of Futures Industry of these reports in order to prevent them others, perhaps to achieve a greater re- magazine. from having some kind of market impact? turn, invest across the whole spectrum al- THUM: No, I think at the end of the day you lowed under Rule 1.25. have to consider who bears the risk of an And, of course, there’s the history of inadequate flow of information. The funds their compliance with asset segregation which we manage represent the investments rules. Have they consistently met their re- of a broad range of the public that are fo- quirements under the segregation rules or cusing on retirement, children’s education, have there been gaps from time to time? and meeting their future hopes and dreams. The last area would be how clearing

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By Annette Nazareth and Gabriel Rosenberg

In the November 2011 issue of Futures Industry, we discussed the significant uncertainty around the timing of Dodd-Frank swap market reforms and the problems that this uncertainty raised for swap market participants. Seven months later, the timeline is gradually becoming clearer.

he CFTC has finalized several Dodd- Frank rules and has released a pro- Tposed timetable for finalizing the rest. CFTC Proposed Timing of In this article, we provide an update on how Key Reporting, Clearing and Trading Rules the CFTC’s proposed and final rules, along with Commissioner Scott O’Malia’s draft June and July 2012 rule schedule, create a preliminary sched- Swap Product Definitions ule of swap reporting, clearing and trading requirements for swap market participants. Clearing End-User Exemption Reporting Clearing Phase-In To enhance regulators’ visibility into the Mandatory Clearing Determination Proposal swap markets, Dodd-Frank mandates that swap information be reported to swap data SEF Core Principles repositories. To promote public transpar- DCM/SEF “Made Available to Trade” Determinations ency, a subset of this reported information, including swap price and size, must be dis- Mandatory Trading Phase-In seminated to the public in real-time. Fall 2012 The CFTC finalized its swap reporting rules on December 20, 2011. These rules, Block Trades following the statute, place the primary re- DCM/SEF/DCO Conflicts of Interest and Governance porting burden on CFTC-registered swap dealers and major swap participants or any Margin Requirements for Non-Banks swap execution facility or designated contract market on which the swap is traded.

34 Futures Industry | www.futuresindustry.com When neither party to a swap is a swap minimis thresholds—will need to identify that are required to be cleared are expected dealer or major swap participant, then one swaps they enter into with non-SDs/MSPs to be liquid interest rate and index credit of the parties will need to report the trade. and ensure they have arrangements or sys- default swaps. The CFTC’s rules phase in reporting re- tems in place to report those swaps. In September 2011, the CFTC pro- quirements by type of market participant posed a rule that would phase in compli- and type of swap. SDs and MSPs will need Clearing ance with mandatory clearing determina- to start reporting credit and interest rate To decrease counterparty credit risk in tions by three tiers of market participants. swap transactions as of the day that they are the swap markets, Dodd-Frank requires This rule, which is scheduled to be final- required to register with the CFTC. We ex- central clearing for swaps. The central ized in June, would require clearing of a pect this registration date to be in the third counterparty will collect initial and varia- swap between two entities that are SDs, quarter of 2012. Ninety days later—likely tion margin from swap counterparties and MSPs or “active funds” within 90 days in the fourth quarter of 2012—swap deal- ensure its own financial stability through of a CFTC determination that the swap ers and MSPs will need to start reporting all guaranty funds and risk management pro- has to be cleared. If the rule is finalized other swaps. Ninety days after that—likely cedures. Commercial end users will be as proposed, we would expect these first in the first quarter of 2013—other market eligible for an exemption from the clearing swap clearing requirements to become participants will need to report to SDRs requirements for any swap entered into to effective in the first quarter of 2013. Fi- swaps they enter into with non-SD/MSP hedge or mitigate commercial risk, subject nancial end users, other than third-party counterparties. to meeting a number of obligations around managed subaccounts, would have 180 Between now and the required reporting making that election. days to comply, while commercial end us- dates, market participants will need to es- The CFTC’s proposed rule schedule sug- ers and third-party managed subaccounts tablish connections to SDRs and the opera- gests that in June the agency will begin pro- would have 270 days. This would place tional and technological capability to collect posing specific swaps that must be cleared. the first clearing requirements for these swap information and report it. Many SDs Consistent with Dodd-Frank, the schedule groups in the second and third quarter of and MSPs, for whom these requirements indicates that the CFTC will review the 2013, respectively. will become effective first, have already proposal and related public comments for In advance of clearing compliance, mar- started the process. By 2013, end users— 90 days. As a result, we expect the first man- ket participants will need to ensure they including those that function as dealers in datory clearing requirements to be finalized have access to a clearinghouse. For all but particular markets but fall below the SD de in September or October. The first swaps the biggest market participants, this will

Estimated Reporting, Clearing and Trading Timeline Estimated Reporting, Clearing and Trading Deadline

SDs/MSPs: SDs/MSPs: All Other Credit and Interest All Other Market Rate Swaps Swaps Participants

Reporting

Swaps Swaps Swaps Involving Between Involving Non-Financial End SDs/MSPs/ Financial Users or Third- Active Funds End Users Party Subaccounts Mandatory Clearing

Swaps Swaps Swaps Involving Between Involving Non-Financial End SDs/MSPs/ Financial Users or Third- Mandatory Active Funds End Users Party Subaccounts DCM/SEF Training

2Q 3Q 4Q 1Q 2Q 3Q 2012 2012 2012 2013 2013 2013

Futures Industry | June 2012 35 Timing Guide require developing a relationship with one approval and meet other CFTC require- no DCM or SEF makes the swap “available or more clearinghouse members, each of ments before clearing requirements are for trading.” The CFTC has proposed rules which will need to be a registered futures phased in. governing SEFs and the “available for trad- commission merchant. Commercial end ing” determination. Both are scheduled to users will need to consider whether or not DCM/SEF Trading be finalized in July. to avail themselves of the commercial end To promote pre-trade price transparency, The CFTC’s September 2011 phase-in user exception from the clearing require- Dodd-Frank requires that all cleared swaps proposal would link the timing of manda- ment and, if so, will need to obtain board must be executed on a DCM or SEF, unless tory DCM or SEF trading to the timing of the clearing requirements. Market participants would not be required to trade Cross-Border Impact of Title VII a swap on a DCM or SEF until the date they are required to clear the swap or 30 Looming large in the background of any discussion of Title VII timing days after the swap is “made available for and preparedness is the question of the cross-border reach of Dodd- trading,” whichever comes later. As a re- Frank’s derivatives provisions. Section 722 of the statute provides that sult, DCM and SEF trading is unlikely to Title VII’s provisions relating to swaps do not apply to “activities outside begin before the first or second quarter of the United States” unless the activities in question: (1) “have a direct 2013 for trades between SDs, MSPs and and significant connection with activities in, or effect on, commerce of active funds; the second or third quarter of the United States” or (2) are evasive. These vague criteria are not fur- 2013 for trades involving financial end us- ther defined, leaving market participants unsure as to how cross-border ers; and the third or fourth quarter of 2014 transactions will be treated, including for the reporting, clearing and trad- for trades involving commercial end users ing requirements. For example, will a swap entered into between a New and third-party subaccounts. York branch of a non-U.S. bank and a non-U.S. counterparty need to be In advance of these compliance dates, cleared at a CFTC-registered or recognized clearinghouse? What about market participants will need to ensure a swap entered into between an offshore branch of a U.S. bank and a they have access to SEFs or DCMs, either non-U.S. counterparty? directly or through a market intermedi- Market participants have needed to plan for Title VII compliance ary. Market participants will also need to without answers to these questions. Slowly, details of the CFTC’s likely monitor which swaps are “made available approach have started to emerge. In a carefully crafted speech on May to trade” and choose whether to use these 21, Chairman Gensler outlined “key elements” of a possible CFTC cross- standardized swaps or, instead, opt for border approach. These include that: more customized bilateral swaps that do ■■in determining whether a non-U.S. entity is a swap dealer, the CFTC not need to be traded on SEFs or DCMs will consider the entity’s “U.S.-facing swap activity,” a term which he but may be subject to higher margin and did not define; capital requirements. ■■transactions with overseas branches of persons or entities operat- ...... ing in the United States and transactions with overseas affiliates that Annette Nazareth is a partner, and Gabriel are guaranteed by a U.S. entity or “operating as conduits for a U.S. Rosenberg is an associate, at Davis Polk & entity’s swap activity” will be considered “U.S.-facing transactions”; Wardwell. They work in the law firm’s financial ■■Title VII swap requirements will be divided into “entity-level” (e.g., institutions group. capital, risk management and recordkeeping) and “transaction-level” (e.g., clearing, margin, real-time public reporting, trade execution and sales practices); ■■the CFTC may defer to comparable home-country regulation on entity-level requirements for overseas swap dealers; and ■■transaction-level requirements will apply to all “U.S.-facing transactions,” but may not apply to transactions between overseas swap dealer (including a foreign swap dealer that is an affiliate of a U.S. person) and non-U.S. counterparties not guaranteed by or operating as conduits for U.S. entities, such as a swap between a non-U.S. swap dealer and a non-U.S. insurance company that is not guaranteed by a U.S. person. The CFTC’s proposed rulemaking schedule lists two cross-border releases for June—proposed cross-border guidance and proposed cross- border relief. It is unclear exactly what these proposals will say or when exactly they will be released. Until then, market participants will be left planning for compliance with the reporting, clearing, trading and other elements of Dodd-Frank derivatives reform without a clear picture of the impact on their cross-border activities.—Annette Nazareth and Gabriel Rosenberg

36 Futures Industry | www.futuresindustry.com profile

Re-Engineering the Kospi 200 Options Market By Nick Ronalds

he Kospi 200 stock index options has noteworthy, rising from under 10% in 2001 investors had gained 1.3 trillion won during been the most heavily traded deriva- to more than a third in 2011. the same period. Ttives contract in the world for the last This year, retail traders made up 28.8% “The huge losses inflicted on individual 10 years, but that’s about to change. The of the Kospi 200 option market in April, ac- investors, and the fact that the losses Korea Exchange this year is changing the cording to data posted on the KRX website. continue, show that it is necessary to size of the contract by making a five-fold in- Foreign entities accounted for 42.3% of vol- control individual investors’ derivatives crease in the multiplier. The reason? Regula- ume in April, and Korean institutions made trading at a reasonable level,” the KCMI tors want to discourage retail speculation in up the remainder. paper recommended. these options. That concern has not gone unnoticed That’s quite a change for this contract, by the government. The Financial Services which has long enjoyed tremendous popu- Commission, the primary markets regulator larity among Korean investors. The contract in Korea, has taken a number of actions in was listed in July 1997 and by 2002 it had the last year or so to discourage excessive surpassed all the major stock index con- retail speculation in derivatives. When KRX tracts in Europe and North America in terms This year, retail announced the change in the multiplier in of trading activity. January, the exchange explained that the One key to its success is the relatively traders made up FSC wanted the exchange “to address the small size of the contract. With a multiplier issues related to the excessive speculation of just 100,000 won ($85), it doesn’t cost 28.8% of the Kospi and high participation of retail investors in that much for investors to buy a handful the derivatives market.” of options on the index, which is the main 200 option market The change began taking effect on benchmark for the Korean stock market. March 9, when the September 2012 Another key to its success was the in April, according to contract was listed for trading with the new widespread access to the internet in Korea, multiplier of 500,000 won (equivalent to which encouraged vibrant competition data posted on the $425), which is the same size as the Kospi among Korean brokers to offer online trad- 200 futures. Every time a nearby contract ing services to retail investors. A raft of web- KRX website. expired, the newly added contract will have sites sprang up with market analysis and the new multiplier until the old multiplier is research designed to make it easier for what extinguished. Since KRX lists four contracts one observer called “a nation of cyber trad- Information Disadvantage’’ at a time, three serial months and the next ers” to trade the Kospi 200 options. (See The increasing institutionalization of the quarterly, the process will be complete when “The World’s Biggest Equity Index Deriva- Korean market has been supported by the the June contract expires on June 15. tive,” Futures Industry, November 2002.) exchange, but it also prompted some local During the early years, retail participation observers to comment that retail investors Effect on Volume in the Kospi 200 options volume accounted were suffering from “information disadvan- One certain effect of the increase in the for approximately two-thirds of the entire tages” compared to domestic and foreign contract size will be a nominal decrease in market, an exceptionally high level relative to institutions. This issue came to the fore- the number of contracts traded. If the value most other large futures and options market. front as it became clear that retail investors of trading stays unchanged, the Kospi 200 Since 2002, however, the character of the generally were losing money in their trading option volume will drop 80% to one-fifth market has gradually changed, with more of Kospi options. In a May 2011 working of its previous volume. For example, the participation by institutional players such as paper, the Korean Capital Market Institute, Kospi option traded 3.67 billion contracts in domestic securities firms and institutional a local think-tank, cited one estimate that all of 2011; assuming the new multiplier investors as well as foreign banks, and for- Korean retail investors had lost 1.7 trillion and the same notional value, the volume eign trading firms. The increase in trading by won in options trading from 2002 to 2005, would have been 734 million contracts. non-Korean companies has been especially while domestic securities firms and foreign Even with the adjustment for size, that

Futures Industry | June 2012 37 profile

is still a huge amount of trading activity, volume could bounce back above its prior mission introduced a series of measures to but it would have knocked the contract level after the market has time to adjust. cool it off, starting with mandatory minimum out of first place in the FIA’s 2011 global Gyun Jun, an analyst for Samsung Se- account balances. Restrictions on liquidity volume ranking. Interestingly, it appears curities, commented in a recent report that providers in March of this year has pulled that another Asian equity index option, the the increased size could result in a widening ELW trading down over 65% since they went Nifty index option traded on the National of the bid-ask spread, a reduction in market into effect. Since Kospi futures and options Stock Exchange of India, could become the depth, and a drop in “noise traders” in the are often used as a hedge for warrant issues new number one this year. More than 868 second half of the year. On the other hand, and as one leg of an active spread strategy, million Nifty options were traded last year. he sees a silver lining for the futures con- the reduction in ELW trading has weighed In the first quarter of this year the Kospi 200 tracts because both contracts now have the heavily on the Kospi market. options still outranked the Nifty options in Clearing and exchange fees for the terms of volume, but that was before the Kospi option remain unchanged. Both were new multiplier took effect. assessed on a notional value basis prior to What is less certain is whether the larger the switchover and still are. Similarly, Korean size will cause the overall value of the mar- brokerage is generally based on a notional ket to shrink. Chris Price, managing director value, so no impact on incentives seems of AsiaEx, a financial consultancy, said many likely from that quarter. Interestingly, the brokers in Korea are worried that lower The Financial Services exchange’s trading fee on Kospi futures and turnover from the larger contract size could single stock futures was cut 20% on May 2. widen spreads and reduce market depth, Commission, the hampering pricing efficiency. But Kevin Lee, Faster Access managing director for Newedge in Korea, primary markets While the change in contract size may has a more upbeat view. lead to lower retail volumes, other changes “In the short term, the notional value regulator in Korea, being made by the exchange could lead to could decline more than proportionally to more participation from automated trading the change in multiplier,” Lee told Futures has taken a number firms. On June 4, KRX opened a proxim- Industry. “But I think the notional value will ity hosting center in Busan, the exchange’s return to the status quo quickly.” He pre- of actions in the headquarters, that will provide faster access dicted that over the long term the contract to the KRX markets than the existing point of last year or so to access in Seoul. A number of trading firms discourage excessive and service providers have already set up A Decade at the Top shop in the new facility to take advantage retail speculation in of the faster connection. On the other hand, Annual volume in the Kospi 200 Options market data continues to come out of Seoul, Year Volume derivatives. which means the latency gains from moving 1997 4,528,424 servers to Busan are partially offset by having to route the data from Seoul to Busan. 1998 32,310,812 same multiplier. “All things considered,’’ we Whatever the ultimate impact on the 1999 79,936,658 expect pricing efficiency in index options to volume, for the Kospi 200 options to stand 2000 193,829,070 deteriorate,” he says, “but the parity in the at the pinnacle of listed derivatives for over 2001 823,289,608 multipliers in the futures and options con- a decade is a singular achievement. Even if tracts should improve liquidity and market it first drops a place or two in the rankings 2002 1,889,823,786 impact in the futures.” it will doubtless continue jostling for the top 2003 2,837,724,953 spots for years to come, a magnet for trad- 2004 2,521,557,274 Less Hedging ers and institutional investors alike. 2005 2,535,201,692 The change in multiplier comes at a time when trading volume is down considerably Nick Ronalds is a senior adviser to FIA Asia 2006 2,414,422,952 from last year. As of the end of April, year- and a consultant on Asian markets. 2007 2,709,844,077 to-date volume was down by 30% from the 2008 2,766,474,404 same period in 2011. The decline has been 2009 2,920,990,655 largely driven by a major contraction in the 2010 3,525,898,562 equity-linked warrant market, according to market participants. The ELW market was so 2011 3,671,662,258 hot last year that the Financial Services Com-

38 Futures Industry | www.futuresindustry.com tech Boom Times for Financial Technology M&A By Bennett Voyles

he merger wave among exchanges has costing them a million, million and a half Clearing Corporation that is widely used in subsided, but further down the food a year, versus going out and licensing the other over-the-counter markets. Tchain smaller companies are being software just like an end user would for a “We have been working with the FX gobbled up right and left. fraction of that cost?” industry since October 2010 to provide a Worldwide, there have been at least 70 Another driver has been timing; invest- complete trade processing solution for mar- trading technology deals in the past year, ment bankers say some of the smaller com- ket participants,” Jeff Gooch, the chief ex- according to data from FT Partners, a San panies are now more willing to sell out. ecutive officer of MarkitServ, said when the Francisco investment bank focused on fi- “The industry has been shaken up a lot and deal was announced. “Logicscope’s comple- nancial sector transactions. And more are a lot of smaller companies have suffered as a mentary technology and comprehensive on the way, according to Steve McLaughlin, result,” said McLaughlin. “I think over the product suite will enable us to offer the the firm’s managing partner. course of time price expectations have come same standards of trade processing, connec- “I think the pipeline is good. I think down as well as optimism about market re- tivity and compliance to FX market partici- you’ll continue to see the same trend for the covery in volume, so that has led to some pants that we currently offer for credit, rates next couple of years,” McLaughlin said. M&A activity.” and equity derivatives.” One driver is technology; advances in Venture capital cycles are also driving some In March, Markit announced a new ser- electronic trading have created demand for of the action. Investments in financial tech- vice that highlighted the value of the Logic- a host of specialized technologies for linking nology companies that might have been sold scope acquisition. Market participants that traders to markets as well as greater inter- between 2007 and 2010 were delayed until need to submit FX trades for central clear- est in outsourcing connectivity to service now because of market conditions, McLaugh- ing are now able to use MarkitServ as a sin- providers. Another is regulation; the global lin commented. “People were holding out gle point of access to CME Group, LCH. derivatives reform is forcing market par- until a pretty good moment in time,” he said. Clearnet and SGX. That type of “middle- ticipants to overhaul their trade processing “Pent-up sellers are now picking 2012 or 2013 ware” solution solves the need for market systems and establish connectivity to new as the time they want to get out.” participants to meet clearing requirements trading venues and clearing platforms. Looking through the list of recent deals, without having to build their own connec- Many of the recent deals involved a several interesting themes emerge. tions to each clearinghouse. merger between two specialized technology companies. In other cases, smaller compa- Getting into a New Asset Class Leveraging Technology nies with niche expertise are merging with Markit’s acquisition of Logicscope is an After European antitrust regulators frus- larger companies able to offer a more com- example of a deal that helped the acquirer trated its bid to combine with Deutsche plete end-to-end solution. extend its expertise into a new asset class— Boerse, NYSE Euronext redoubled its in- “Some of these smaller providers need and capitalize on the global changes to vestment in technology services, an alter- to become part of a bigger solution,” said derivatives markets. Logicscope has a well- native path for growth that focuses less on Adam Honoré, director of research for Bos- established niche in the foreign exchange where the liquidity is going and more on ton-based Aite Group. He added that he markets as a provider of trade processing how it gets there. spends a lot of his time arranging partner- technology and connectivity. Its principal So far, the strategy seems to be working. ships between vendors that want to knit to- product is TradeSTP, a system that consoli- Technology services have been the fast-grow- gether a more comprehensive solution. This dates and routes trade messages to end-using segment of NYSE Euronext over the past in turn will lead to more mergers down the ers. The system is connected to a wide range five years. Revenues from such services as co- line, he predicted. of execution venues, including not only the location and software licenses have climbed Case in point—feed handlers for mar- multilateral platforms such as EBS and FX- from $130 million in 2007 to $358 million ket data. Honoré explained that it does not All but also a long list of the major dealers, in 2011, accelerated by acquisitions such as make sense for companies that specialize and its clients include more than 400 finan- its purchase of Wombat, a data service pro- in building trading systems to write their cial institutions that trade FX. vider, in 2008 and NYFIX, an electronic own applications for receiving and process- When Markit announced the deal last trading services provider, in 2009. ing the market data feed for every trading September, the company said it wanted to In its latest move, NYSE Euronext in Feb- venue. Instead, it makes more economic use Logicscope’s platform to accelerate its ruary purchased a 25% share in Fixnetix, an sense to outsource that function, he said. plans to extend its trade processing services IT outsourcing service that supports ultra- “Why should an execution management into foreign exchange markets. Those ser- low latency trading, market data process- vendor continue to build and support all its vices are provided through MarkitServ, a ing and real-time risk management. NYSE own feed handlers,” he commented, “if it’s joint venture with the Depository Trust and Euronext reportedly paid £17.5 million

Futures Industry | June 2012 39 tech

($27.5 million) for the stake and also received the option to buy the rest of Fixnetix Financial Technology M&A at any time over the next three years. Selected transactions announced since January 2011 that have involved exchanges, trading firms and other companies involved in the trading and clearing of securities and derivatives At the announcement, NYSE Euronext said the deal would make it possible for the Date Transaction Summary company to augment the IT services now 5/29/12 Knight Capital Group buys Penson Futures for $5 million. available through its NYSE Technologies 5/10/12 Marex Spectron buys clearing business from Schneider Trading Associates and division. For its part, Fixnetix said the deal merges it into its professional trader services group. would allow it to extend its U.S. coverage and expand into Asia. For both companies, the 5/9/12 Markit buys Cadis, a company specializing in enterprise data management. partnership allows them to capitalize on the 5/2/12 Equinex, a global data center services provider, buys Asia Tone, a Hong Kong- growing desire in the trading community for based data center provider, for $230.5 million. integrated end-to-end technical solutions. 5/2/12 Tullett Prebon buys Elevation, an equities and equity derivatives broker based in “Acquiring this strategic interest in New York. Fixnetix allows us to better leverage our 4/30/12 Maple Group Acquisition Corp., a consortium of Canadian financial institutions and combined technology presence to reach pension funds, offers to buy Alpha Trading Systems, an alternative trading plat- more customers in more locations,” Mi- form, for C$175 million and Canadian Depository for Securities for C$167.5 million chael Geltzeiler, group executive vice presi- as part of a renewed offer for TMX Group. dent and chief financial officer of NYSE Eu- 4/25/12 Nasdaq OMX buys NOS Clearing, a Norwegian commodity clearinghouse, for NOK ronext, said when the deal was announced. 230 million ($40.4 million). Thinking Global 4/3/12 S&P Capital IQ, a division of The McGraw-Hill Companies, acquires QuantHouse, a One of the biggest financial technology provider of market data and trading solutions. deals this year was the $230.5 million pur- 3/9/12 London Stock Exchange Group offers to buy majority stake in LCH.Clearnet for chase of Asia Tone by Equinix. Both com- €463 million ($607 million) in cash. panies are providers of network and co-lo- 3/9/12 IMC Financial Markets buys 9.99% stake in TOM, a Dutch company that combines cation services, and many of their clients are a multilateral trading facility with smart order routing to other trading venues for financial institutions and trading firms that European equities and equity options. need high-capacity, low-latency connec- 3/6/12 Sun Trading, a Chicago-based proprietary trading firm, announces acquisition of tions to market venues. Through this deal, Endeavor Trading, a Chicago-based proprietary trading firm. Equinix gained data centers in Hong Kong, 2/21/12 CME Group and Oman Investment increase their stakes in the Dubai Mercantile Singapore and Shanghai, bringing its global Exchange. network to 104 data centers in 38 markets 2/16/12 NYSE Euronext buys 25% of Fixnetix, a U.K. company that provides low-latency and strengthening its presence in three of market data, risk controls and other technology services, with option to buy the Asia’s leading financial centers. remainder within three years. Although Equinix serves a wide range of industry sectors, financial services are a 2/7/12 Brady, a supplier of trading and risk management solutions for energy, metals and major focus. Equinix positions itself as the soft commodities, acquires Navita Systems, a Norwegian provider of software and services to the energy and commodity trading community, for NOK 150 million host for a “high-performance global trading ($25.1 million). ecosystem” that allows traders to optimize their connectivity to clearing firms, market 1/31/12 Nordic Capital, a private equity fund, acquires Orc Group, a trading technology venues and other service providers. provider, for SEK 2,021 million ($293 million). 12/19/11 INTL FCStone buys TRX Futures, a soft commodities broker based in London. Regulation Is 12/12/11 Virtu buys NYSE Amex floor operations business from Cohen Capital. a Growth Industry 12/12/11 London Stock Exchange Group buys 50% of FTSE International from Pearson for Just in time to meet the massive new £450 million ($705 million) in cash, giving LSEG 100% ownership and control. data-collection requirements of Dodd- Frank, Basel III and Solvency II, Markit an- 11/30/11 Getco buys NYSE floor operations business from Bank of America Merrill Lynch. nounced a deal in May to purchase Cadis, 11/29/11 TMX Group agrees to acquire Razor Risk Technologies, an Australian provider of a financial data management company credit risk software, for $9.9 million in cash. founded in 2007. Cadis’ enterprise data 11/28/11 ION Trading, a provider of trading technology that is partly owned by the private management platform consolidates data equity firm TA Associates, offers to acquire the remainder of the shares in software from multiple sources within a centralized vendor Patsystems that it does not already own. hub, providing users with reliable, transpar- 11/22/11 Tokyo Stock Exchange agrees to acquire Osaka Securities Exchange for approxi- ent and auditable data. mately $1.2 billion. “Data management is top of just about

40 Futures Industry | www.futuresindustry.com every financial institution’s agenda; the scale Financial Technology M&A and complexity of the data they are managing have never been greater,” Lance Uggla, Selected transactions announced since January 2011 that have involved exchanges, trading firms and other companies involved in the trading and clearing of securities and derivatives Markit’s chief executive officer, said at the Date Transaction Summary announcement of the sale. “Data is increas- 11/22/11 FFastFill agrees to acquire WTD Consulting, a Chicago-based firm that provides ingly at the heart of financial institutions,” technology consulting and software solutions, for $12 million. added Daniel Simpson, the chief executive officer of Cadis. “By combining our exper- 9/21/11 Markit buys Logicscope, a provider of post-trade services for foreign exchange trading. tise with Markit’s distribution and customer network, we will be able to help more firms 8/3/11 FFastFill acquires Spread Intelligence, a London-based provider of spread trading meet increased regulatory pressures and risk tools, for £1.5 million ($2.37 million) in cash and shares. management demands.” 8/1/11 NYSE Euronext announces agreement to buy Metabit, a Tokyo-based market access firm. Clicks Like Bricks 7/21/11 Patsystems agrees to acquire Mixit, a U.S.-based vendor of trading systems for While most of these deals highlight equities and options, for $20.2 million. the value of technology, two of the most 7/14/11 Getco buys Automat, a London-based proprietary trading firm. technologically advanced firms are moving in the opposite direction. In the last 12 7/14/11 IntercontinentalExchange announces acquisition of 12.4% stake in Brazil’s Cetip months, Getco and Virtu Financial, both for approximately $515 million in cash. of which are masters in the use of low- 6/10/11 Maple Group Acquisition Corp., a consortium of Canadian financial insitutions, an- latency trading technology and automated nounces plan to acquire TMX Group for $3.6 billion. market making, have expanded their floor 6/7/11 Deutsche Boerse acquires SIX Group’s 50% stake in Eurex for $862.5 million in trading businesses. cash and equity. In November, Bank of America Merrill 5/31/11 Virtu Financial merges with Madison Tyler Holdings, a market-maker and elec- Lynch sold its floor trading business at the tronic trading firm, and secures funding from Silver Lake, a private equity firm. New York Stock Exchange to Getco, and in 5/27/11 Deutsche Boerse acquires Kingsbury International, a U.S.-based business and December, Virtu made a similar deal with economic consulting firm. Cohen Capital to buy its floor trading business on NYSE Amex. 5/22/11 Correlix, a provider of latency management services, secures $9 million in financing from several private equity funds including Blumberg Capital and Vernon & In Getco’s case, the deal meant that the Park. firm took over “designated market maker” assignments for dozens of stocks that trade 5/4/11 Colt Group, a U.K. telecommunications company majority-owned by Fidelity, ac- on the NYSE floor. All told, Getco is the quires majority stake in MarketPrizm, a company that provides low-latency market DMM for approximately 650 companies data and order entry infrastructure that is controlled by Instinet. and a total of 850 securities at the NYSE. 4/7/11 Jefferies Group buys Bache Global Commodities from Prudential Financial for $430 What prompted Getco to go against million. the tide and buy into a business that still 3/22/11 Marex Group buys Spectron Group for £94.5 million ($154 million). involves human beings engaged in manual 3/21/11 Standard Chartered buys 3% stake in United Stock Exchange of India. processes? Quite simply, Getco intends to use its advanced trading technology to sup- 3/21/11 Charles Schwab buys optionsXpress for $1 billion. ply more competitive prices to the NYSE 2/25/11 Cinnober Financial Technology, a Swedish software trading company, buys 3% floor, attracting more business there and stake in U.K-based FFastFill. boosting its profile among potential buyers 2/25/11 IntercontinentalExchange buys Ballista Securities, a registered broker/dealer that of its trading services. offers an electronic platform for the execution of block-sized and complex multi- “We viewed the acquisition of the Bank of leg options transactions. America DMM as a further extension of our 2/23/11 Eurex buys majority stake in European Energy Exchange. core market making business,” said Getco 2/15/11 Deutsche Boerse and NYSE Euronext announce proposed merger. The exchanges spokeswoman Sophie Sohn. “The NYSE ex- terminate agreement one year later after a decision by the European Commission change model provides a unique value proposi- to block the proposed merger. tion for U.S. listed companies and allows tech- 2/9/11 London Stock Exchange Group and TMX Group announce proposed merger. LSE nology focused firms like Getco to integrate terminates its offer in June 2011. the best aspects of electronic markets with the benefits of a human trader’s perspective.” 2/3/11 Micex Group buys majority stake in RTS Group.

Source: Financial Technology Partners, company filings. Bennett Voyles is a freelance journalist.

Futures Industry | June 2012 41 Washington

CFTC Moves Ahead with Dodd-Frank Rulemakings By Will Acworth and Joanne Morrison

s the Dodd-Frank Act nears its second anniversary, the Com- entity-level, such as capital, risk management and recordkeeping. modity Futures Trading Commission has made significant Other requirements would be considered transaction-level, such A progress in finalizing a wide set of new rules for the dealing, as clearing, margin, real-time public reporting, trade execution and trading, clearing and reporting of over-the-counter derivatives. sales practices. The entity-level requirements would apply to all reg- As of early May, the CFTC had hosted 27 public meetings to vote istered swap dealers, but in certain circumstances overseas swap on rulemakings as well as 18 public roundtables to examine certain dealers could comply with these requirements through what Gensler issues related to those rulemakings. The agency had finalized 33 called “substituted compliance.” rulemakings, leaving fewer than 20 rules on the drawing board. During March, April and May, the agency approved joint rules Position Limit Aggregation with the Securities and Exchange Commission that define what On May 19, the CFTC voted unanimously to issue a notice of pro- constitutes a dealer and a major swap participant. The CFTC also posed rulemaking that would modify the agency’s position limit rules finalized a rule that updates and extends the core principles ap- as they relate to the requirements for aggregating positions among af- plicable to designated contract markets; it finalized rules on the filiated entities. The proposal effectively raises the ownership threshold recordkeeping and reporting requirements for historical swaps; it for requiring that positions between affiliated entities be aggregated. adopted a package of clearing rules; and it is in the final stages The agency’s action came after a group of commercial energy firms of drafting guidance on how Dodd-Frank regulations will apply to petitioned the CFTC for relief from the position limit rules. The FIA in a activities outside of the U.S. March 26 letter to the CFTC expressed its support for those petitions. “We are on schedule to complete the remaining reforms this Under the proposal, if the ownership interest is less than 10%, a firm year,” CFTC Chairman Gary Gensler told the Senate Banking Com- would not be required to aggregate positions with those of the affiliated mittee on May 22. entity. The proposal would permit any person with a 10% to 50% own- Gensler added that the recently reported trading losses at J.P. ership or equity interest in an entity to disaggregate the owned entity’s Morgan’s London-based affiliate should serve a reminder about the positions, provided there are protections and firewalls in place to ensure importance of cross-border application of Dodd-Frank regulations. “I trading decisions are made independently of one another. If the owner- think it’s a good reminder that risk in London can come back here,” ship interest exceeds 50%, the entity must always aggregate positions he told the Senate committee. Mary Schapiro, chairman of the SEC, with those of the owned entity, even if there is a lack of knowledge of, agreed. “What we need to do is take what happened at J.P. Morgan and control over, the trading of the owned entity. and view it through the lens of these criteria and see how that helps The CFTC’s proposed rulemaking also expands the exemp- to inform the rulemaking going forward.” tion from aggregation requirements to include ownership interest acquired through market-making activities of an affiliated broker- Cross-Border Application of Dodd-Frank dealer and allows commodity pools structured as limited liability In a May 21 speech to the Financial Industry Regulatory Authority, companies to rely on the exemption from aggregation for indepen- Gensler outlined how the CFTC plans to apply Dodd-Frank regula- dent account controllers. tions to activity outside of the U.S. For example, foreign entities that transact in more than a de minimis level of U.S. facing swap dealing Swap Dealer Definitions activity would be required to register under the CFTC’s swap dealer The CFTC and the SEC on April 18 approved final rules setting registration rules. Gensler added that the CFTC will release guidance out official definitions for swap dealer, major swap participant, and addressing what it means to be a U.S.-facing transaction. eligible swap participant. The joint rules—critical to the implementa- “I believe this must include transactions not only with per- tion of dozens of other Dodd-Frank rulemakings intended for the sons or entities operating in the United States, but also with their over-the-counter markets—were approved at separate meetings overseas branches,” Gensler said. He added that this must also held by the two agencies. include transactions with overseas affiliates that are guaranteed by The SEC’s entity definitions apply to firms that trade security- a U.S. entity as well as the overseas affiliates operating as conduits based swaps such as single-name credit default swaps. The for a U.S. entity’s swap activity. CFTC’s rules cover swaps in all other asset classes such as inter- The guidance will include a tiered approach for requirements for est rates, commodities and foreign exchange as well as swaps overseas swap dealers. Some requirements would be considered based on broad-based credit and equity indices.

42 Futures Industry | www.futuresindustry.com CFTC staff estimated that roughly 125 firms will be captured strikes the appropriate balance between our regulatory interests under the swap dealer definition and six firms will be classified as and the burdens associated with regulation,” she said. CFTC staff major swap participants. explained that this provision cannot be finalized until the conform- The final entity definition rules include a number of provisions ing amendments are finalized to include swaps in existing regula- designed to exempt commercial hedgers and end users from having tions. In addition, although these firms will not be included in the to register as swap dealers. Representative Frank Lucas (R-Okla.), swap dealer definition, they will be subject to certain requirements chairman of the House Agriculture Committee, issued a statement in Part 23 of the CFTC’s rules, which establish duties for swap shortly after the CFTC meeting expressing support for that ap- dealers and major swap participants. These include requirements proach. “From what I can tell today, there were improvements made relating to the establishment of risk management procedures and to the final rule that will reduce the negative impact on end users out the monitoring of position limits. in the countryside,” said Lucas. • Hedging Transactions Excluded Staff at both agencies explained that the dealer definitions Embedded in the CFTC’s definition rules is an “interim final include firms that hold themselves out as dealers in swaps, make a rule” that excludes swaps used for hedging transactions in a market in swaps, regularly enter into swaps with counterparties as physical marketing channel. This part of the rules will take ef- an ordinary course of business, or engage in activity causing them fect along with the rest of the rules, but is considered “interim” to be “commonly known” as dealers or market makers in swaps. because the CFTC is continuing to ask for feedback from the • Thresholds industry. This includes transactions that qualify as a bona fide Both sets of rules contain de minimus thresholds. Firms will be hedge under Commodity Exchange Act rules, trades that qualify excluded from the dealer definitions if the value of their swap posi- for hedging transactions under Financial Accounting Standards tions falls below those thresholds. The CFTC threshold starts at a Board rules and Government Accounting Standards Board rules, gross notional amount of $8 billion over a 12-month period. This and transactions that are used to reduce risk. threshold will be reduced to $3 billion after five years, unless the CFTC determines that market conditions justify setting a different CFTC Approves DCM Core Principles threshold. The rules require the CFTC to conduct a review of the The CFTC on May 10 approved a final rule that updates and market after two and a half years and only after that review has extends the core principles applicable to designated contract markets. been conducted can it adjust the threshold. The final rule was approved by a vote of 5-0, with several commission- When the CFTC proposed the entity definitions in December ers commenting favorably on the rule’s adoption of a flexible approach 2010, its proposed threshold was set at $100 million. Although to compliance. Gensler said that the final rule contains a mixture of the final threshold is much higher and therefore excludes a larger rules, guidance and acceptable practices, and suggested that this pro- number of firms from the definitions, Gensler defended this deci- vides exchanges with “flexibility” in how they comply with the core prin- sion. “The $3 billion threshold in the rule represents $12 million a ciples. Sommers, who voted against the rule when it was first proposed trading day, with the phase-in of $8 billion representing $32 million in December 2010, said she was pleased that the final rule pulled back notional per trading day. Putting this in perspective, the interest from the “overly prescriptive” details in the proposed rule. rate swap market transacts, on average, over $500 billion notional The CFTC did not act, however, on one of the most controversial per day. As further reference, this year the futures markets for provisions in the original proposal—the so-called 85% rule. Under crude oil traded, on average, $65 billion of notional per day.” this provision, at least 85% of the volume in an exchange-traded fu- The SEC set the same thresholds for credit default swaps. tures or options contract would have to trade in the central market. However, the de minimus threshold for all other security-based If more than 15% of the volume is executed through block trades, swaps is initially set at $400 million, falling to $150 million after five exchange-for-swaps or other off-exchange facilities, that contract years. SEC staff said the thresholds for security-based swaps are would have to be traded on a swap execution facility rather than a lower to reflect the smaller size of these markets. DCO. Gensler said during the meeting that the agency has decided Under both sets of rules, a much lower threshold is set to address this issue as part of the SEF rulemaking, which he said is for firms trading with “special entities” such as pension funds due to be considered this summer. and municipalities. That threshold is set at just $25 million in During the discussion of the DCM core principles, Gensler said notional value. the final rule addresses the potential that market participants might • Proprietary Trading Firms Excluded distort prices for certain cash-settled contracts that are based on The final rules include provisions that exclude firms that trade for third-party indices by manipulating the underlying index. He cited their own account from the swap dealer definition so long as they ex- as examples the Libor interest rate published by the British Bankers ecute their trades on swap execution facilities and DCMs and submit Association and energy market indices published by price report- all of their trades for clearing. These firms are required to register with ing agencies such as Platt’s. CFTC staff explained that the final rule the CFTC in the existing “floor trader” category. requires DCMs to verify that the mechanism used by price reporting CFTC Commissioner Jill Sommers applauded this provision in agencies to compile prices is not susceptible to manipulation, and the rules. “Because the Commission has an interest in these trad- that they can obtain information about the market participants that ers and their market activity, requiring registration as a floor trader provide information to price reporting agencies.

Futures Industry | June 2012 43 Washington

CFTC Approves Rules on Clearing The rules also establish the time frame for a swap dealer, Documentation, Timing of Acceptance major swap participant, FCM, swap execution facility and DCO to The CFTC on March 20 approved a package of rules cover- submit swaps to a DCO for clearing. Swaps that are required to ing four topics: clearing documentation, timing of acceptance for be cleared must be submitted for clearing to a DCO “as soon as clearing, allocation of bunched orders, and clearing member risk technologically practicable” after execution but no later than the management requirements. close of business on the day of execution. The CFTC set a deadline of Oct. 1 for futures commission These rules also establish procedures for handling orders for merchants, DCOs and designated clearing organizations to come multiple clients that are bunched together as a single trade. The into compliance with these new rules. For swap dealers, major rules would allow bunched orders for swaps executed as a block swap participants, and swap execution facilities, the rules will trade to be immediately accepted for clearing and then allocated become effective on either Oct. 1 or the date when the CFTC into individual accounts later in the day. finalizes entity definitions and other related rulemakings, which- • Clearing Member Risk Management Rules ever comes later. These rules require swap dealers, major swap participants and This package of rulemakings, which was dubbed “the plumbing FCMs that are clearing members to establish credit and mar- of plumbing” by Gensler, was approved by a 4-to-1 vote. ket risk-based limits based on position size, order size, margin CFTC Commissioner Scott O’Malia voted against the rules. Al- requirements or similar factors. The rules also require firms to use though he praised the staff for taking a flexible, principles-based ap- automated means to screen orders for compliance with risk- proach, he criticized the agency for inadequate cost-benefit analysis based limits, monitor adherence to risk-based limits intra-day and and for failing to develop a schedule that integrates these rules with overnight, and conduct stress tests of all positions in the proprietary other rulemakings. “I know the Commission is capable of much account and all positions in any customer account that could post more. The question remains, however, if we will ever slow down our material risk to the FCM at least once a week. In addition, firms are rulemaking machine to do the actual work.” required to evaluate their ability to meet variation margin require- Sommers voted in favor of the rules but stressed the need for ments in cash at least once a week, evaluate their ability to liquidate flexibility in the timing of compliance. During the discussion of the positions cleared in an “orderly manner, estimate at least monthly rules, CFTC staff emphasized that the rules are not prescriptive and the cost of liquidation, and test all lines of credit at least annually. noted that firms unable to come into compliance because of tech- “It is really a list of best practices without being too prescrip- nological factors could request more time and other relief. tive,” said Gensler. He also noted that the CFTC’s work in this • Customer Clearing Documentation Rules area was based in part on risk management best practices rec- The customer clearing documentation rules prohibit tri-party ommended by the FIA. agreements between customers and swap dealers, major swap Cost-Benefit Analysis dealers and FCMs that are clearing members and DCOs. The rule prevents agreements that would: a) disclose to an FCM, swap During the May 10 meeting, Gensler revealed that the CFTC dealer or major swap participant the identity of a customer’s recently signed a memorandum of understanding with the Office original executing counterparty; b) restrict the size of the position of Management and Budget, an arm of the White House, that will a customer may take with any individual counterparty apart from strengthen the CFTC’s ability to conduct cost-benefit analyses. an overall credit limit for all positions held by the customer at the The MOU will allow a member of staff from the Office of Informa- FCM; c) limit the number of counterparties with whom a customer tion and Regulatory Affairs, a division of OMB, to provide “technical may enter into a trade; d) impair a customer’s access to execution assistance” to the CFTC’s rule-making process, starting with the of a trade on terms that have a “reasonable relationship” to the products definition that is close to being finalized with the SEC. best terms available; or e) prevent compliance with specified time Final Rules on Commodity Options frames for acceptance of trades into clearing. • Time Frames for Submission The CFTC separately approved on April 18 final rules on com- and Acceptance for Clearing Rules modity options by unanimous vote.The Dodd-Frank Act included The rules require a clearing member, or the DCO acting on its commodity options within the statutory definition of swap and the behalf, to accept or reject each trade submitted for clearing as CFTC’s final rule brings these transactions under the same regula- quickly as would be “technologically practicable” if fully auto- tions that apply to swaps. The final rules include an interim final mated systems were used. The goal of this rule is to minimize rule providing an exemption for certain commodity options that are the amount of time between submission of a trade for clearing physically delivered. CFTC staff noted that although these so-called and the acceptance or rejection of that trade. CFTC staff said the trade options are exempt from the swap definition and related rules, timing standard requires action in a matter of milliseconds or sec- they are still subject to position limits, reporting and recordkeeping onds and at most a few minutes but “not hours or days.” CFTC requirements, and anti-fraud and anti-manipulation rules. staff emphasized that the agency is not requiring automated trade processing nor does the agency prescribe a particular method for Will Acworth is editor and Joanne Morrison is deputy editor trade processing. of Futures Industry.

44 Futures Industry | www.futuresindustry.com in trading technology and Cetip will be responsible for developing the product strategy and promoting the new platform. To cement the deal, ICE acquired 31.6 million shares of Cetip common stock CME Launches Side-By-Side for approximately $512 million in cash. That makes ICE the single Trading for Listed and OTC Markets largest shareholder in Cetip, which was established in 1988 and CME Group on May 22 announced the launch of CME Direct, demutualized in 2008. an online application that offers side-by-side access to CME listed ICE officials said the strategy behind this deal is similar to the futures and over-the-counter markets. CME said the new service will plans for its BRIX platform, which was developed in partnership with aggregate bids and offers into a single book, eliminating the need for a local company that is a large player in Brazil’s energy markets. multiple trading screens. CME also said the service is fully integrated According to Sprecher, the BRIX platform has 100 firms enrolled with ConfirmHub and ClearPort and offers electronic processing of less than a year after launch. “We went into a market that was not trades and straight-through submission to CME Clearing. developed at all and helped to organize standard contracts, stan- The service, which is designed to operate directly from an dard trading agreements, and now electronic transparency,” said internet browser, initially will target energy markets, namely the Sprecher. “It gives us some confidence as we work with Cetip on a exchange’s benchmark futures on crude oil, natural gas and refined similar vein in the fixed income and bond markets that we, hope- products as well as certain OTC oil swaps. Quotes for the OTC fully, will see similar success, particularly given that Cetip was a fixed products will be provided by inter-dealer brokers and can be traded income bank and dealer consortium.” via electronic and voice. As of the launch date, three firms had For Cetip, ICE’s experience with operating a trading platform in signed up to provide liquidity to CME Direct users—Marex Spec- the credit default swaps market was attractive because Brazil’s fixed tron, Tradition Financial Services and Tullett Prebon—and CME said income markets have similar liquidity characteristics. “A major rea- several other brokers are testing the system. son for this partnership is ICE’s demonstrated ability to successfully “By combining brokered OTC markets with CME Group’s clearing deliver liquidity and pricing transparency in other less liquid markets, and STP platforms—ClearPort and ConfirmHub—CME Direct offers similar to the scenario we currently have with our local corporate the first global, fully automated front-to-back-office platform for trad- debt,” Louis Fernando Fleury, chief executive officer of Cetip, said in ing CME listed and OTC energy products,” Michel Everaert, CME’s an April 26 statement announcing the partnership. managing director of OTC solutions, said in a statement. “CME Direct is a big step forward for markets to comply with current and anticipated market regulations, including those proposed under the Dodd-Frank Act and MiFID that call for more transparency, automated trading, data reporting and clearing in OTC markets.” Griffin Markets to Launch European OTC Energy Trading Platform Using ICE Technology Griffin Markets Group, a newly formed London-based energy trading platform provider, announced on April 25 that it plans to launch a multi-lateral trading facility for the European over-the- counter energy markets. The platform will launch with OTC gas, electronic and coal contracts, pending approval by the Financial Services Authority. The platform will offer pre-trade counterparty credit manage- ICE Signs Second Brazilian Deal ment and post-trade processing and settlement for both bilat- IntercontinentalExchange is expanding its presence in Brazil with eral and centrally cleared transactions. The platform will rely on plans to launch a bond platform in partnership with Cetip S.A., a Bra- technology from IntercontinentalExchange but will be “agnostic” on zilian central depository and custody provider. The partnership, which connectivity to clearinghouses, said Nick Jackson, a spokesman is slated for launch in the second half of this year, comes less than a for the new platform. year after ICE launched its BRIX platform for trading Brazilian electric The platform is intended for larger institutional customer and end- power. “We have high hopes for Brazil, and it’s been a very good users such as commodity-based utilities, banks and hedge funds. emerging market for us,” said Jeff Sprecher, chief executive officer of Prices and quotes will be posted electronically, while traditional voice ICE, during a May 2 conference call with investors and analysts. broking will be available for less liquid markets such as gas, power, Under the terms of the partnership, ICE will provide the expertise coal and emissions options.

Futures Industry | June 2012 45 ICE officials said they view this partnership as having the potential to follow the same track as the European Climate Ex- change. ECX relied on ICE’s technology platform and ultimately was acquired by ICE. “If we can find entrepreneurs that are more likely to be successful building a business than ICE alone, we back them with our technology under terms that are consistent with our long-term goals and our long-term revenue model,” Jeffrey Sprecher, ICE’s chief execu- ISE Introduces Implied Order Functionality tive officer, explained in a May 2 conference call with investors and International Securities Exchange on May 3 introduced implied analysts. “This idea of providing entrepreneurs with technology for order functionality, making it the first U.S. equity options exchange start-up initiatives follows, for example, the successful use of this to offer this technology for multi-legged orders. The new functionality strategy providing technology for the European Climate Exchange, eliminates the manual process for executing the stock legs of stock- which we acquired in 2010, and which for years has been one of option orders and will enhance the execution of multi-legged strategy our fastest growing businesses.” orders by enabling greater interaction of the complex order book Griffin’s chief executive officer, Andrew Stephens, was the former with the regular order book. The result will be an increased fill rate for chief executive officer of energy trading firm Spectron Group, which multi-legged strategy orders as well as tighter spreads and increased was merged into Marex Financial in 2011. Partnering with Stephens liquidity on the regular order book, according to the exchange. on the new platform are Simon Davidson, who was formerly the “The launch of implied orders is a milestone accomplishment for chief information officer at Spectron, and Andrew Strickland, who ISE and will deliver measurable improvements in the execution qual- introduced ICAP’s electronic trading in the European power markets. ity of both our complex and regular order books,” said Gary Katz,

Half of OTC Interest Rate Trades Are Cleared

DTCC Hits Key Milestones 49.8% in OTC Derivatives Reporting Dealer vs. CCP As new reporting requirements for over-the-counter deriva- 29.2% tives are set to be implemented by U.S. and global regulators, the Dealer vs. Non-Dealer Depository Trust and Clearing Corporation has launched swap data repositories in two additional asset classes. In April DTCC began accepting trades submitted to its trade repository for commodity derivatives in partnership with the European Federation of Energy 21.0% Traders. The repository accepts a full range of commodity swaps, Dealer vs. Dealer both physical and financial, and will be ready for Dodd-Frank Act reporting prior to Oct. 14, when all OTC commodity derivatives must Swaps Account for the Bulk be reported to a trade repository if they are subject to the Commod- of the OTC Interest Rate Market ity Futures Trading Commission’s jurisdiction. In May DTCC began testing on its new global trade repository for foreign exchange transactions, which is expected to be in full production by the fourth quarter of this year. The first phase of operation included testing for data submission of primary economic 81.5% Swaps terms, confirmation data and snapshot reporting of FX forwards, swaps and derivatives by firms. DTCC plans to publish aggregated data on OTC FX trades. DTCC also has begun publishing data from its repository for interest rate derivatives, meeting the regulatory demand for greater 10.9% Forwards transparency into that market. In May DTCC began publishing 5.4% Swaptions weekly reports on interest rate swaps that include aggregated, anonymous positions data for all interest rate products, with break- 2.2% Options downs by currency, maturity, sub-product and an indicator identify- Source: DTCC Weekly Snapshot as of May 11, 2012 ing whether the product is cleared or uncleared. in notional amounts of aggregate positions reported to repository

46 Futures Industry | www.futuresindustry.com ISE’s president and chief executive officer. The new functionality displays liquidity from ISE’s complex order book on the regular order book published to the Options Price Reporting Authority. An implied order is automatically created if the limit price of a multi-legged order can match or improve the ISE bid or offer when each leg of the order is paired against a resting order HKEX Invests USD $380 Million or quote. For the system to generate an implied order, the net price in Technology Initiatives of the multi-legged order must be satisfied when both legs are filled Hong Kong Exchanges and Clearing Limited in late March an- on the regular book. nounced its new technology program called “HKEX Orion.” The Separately, in April ISE launched a fully managed historical tick program includes a series of technology initiatives that will be imple- database that offers full OPRA data including all quotes and trades mented over the next three years at a total cost of HKD $3 billion for all exchanges, U.S. equities level one data, pre-computed (USD $380 million). implied volatilities and Greeks, full corporate action histories and Among the first scheduled upgrades is a HKD $750 million (USD ISE open/close trade data. ISE said this hosted solution is ideal for, $97 million) hosting service to be launched at the end of this year among other things, full tick or time interval back-testing, validating that will allow participants to co-locate their systems next to HKEX’s algorithms and pre/post-trade analysis. core platforms to provide low-latency access. The network latency target through the hosting service network is below 50 microseconds compared to the current 1.5 milliseconds (1,500 microseconds). Other initiatives include a 2012 upgrade to the exchange’s SDNet network to improve its capacity and performance and the Deutsche Börse Launches Algo Trading Tool introduction in 2013 of new market data services. Deutsche Börse in May launched AlphaFlash Traders, an So far, 22 firms have signed up as “founding members” for automated event-driven trading application building upon the the hosting facility at its new data center, including ABN Amro machine-readable news feed service that it launched in 2010. The Clearing, BT Radianz, Fixnetix, KVH, RTS Realtime Systems and new application will allow market participants to configure trading Thomson Reuters. parameters and set up automatic trading strategies based on a range of macroeconomic information available from the AlphaFlash news feed. The drag-and-drop system is intended for a broader range of users than those who subscribe to the algo news feed. It will allow traders to establish multiple automated trading strategies based on RTS Targets Chinese Traders machine-readable news from 300 global macroeconomic indica- RTS Realtime Systems Group, a provider of trading technology, tors as well as U.S. and international treasury auction data. “We’ve announced on May 28 that it has established connectivity to the created this program to allow individual professional traders to trade China Financial Futures Exchange, the Dalian Commodities Ex- around economic events, when in the past they might not have change, the Shanghai Futures Exchange and the Zhengzhou Com- been able to do so,” said Clint Rhea, chief operating officer of Need modities Exchange, allowing clients in China to deploy its Tango to Know News, a division of the exchange operator’s market data algorithmic trading technology for trading on these four exchanges. and analytics business unit that is involved in the new service. “There is a growing demand throughout the Chinese institutional Currently this program is available to customers using Trading investor and trading community to provide traders with customized Technologies’ X_Trader Pro platform, but it is being adapted for algorithmic strategies,” Andy Woodhouse, the company’s managing other execution platforms. “We are working with some other provid- director for Asia Pacific, said in a statement. “RTD Tango will let sellers,” said Rhea, adding that it will not be a long turnaround time to side firms build customizable algorithms for their buy-side clients, expand the offering to other platforms. which will operate on domestic markets and manage high volumes Deutsche Börse first launched its algo news feed in of order flow.” April 2010. It was the first joint product of the exchange operator’s market data and analytics segment in partnership with its two wholly-owned news services, Need to Know News and Market News International. In May, Deutsche Börse announced that its algo news feed is available in CME Group’s co-location facility located in the Chicago suburbs, providing traders with machine-readable trading signals for integration into their algorithms. The news data feed is also available at another location in Chicago, New Jersey, Washington, D.C., Frankfurt, London, Sydney, London, Tokyo and Singapore.

Futures Industry | June 2012 47 SGX Offers Straight-Through Mexico’s BMV Rolls out New Trading Engine Link for OTC Trades Mexico’s Bolsa Mexicana de Valores has been testing a new Singapore Exchange’s AsiaClear announced in April that it is system that will bring all of its asset classes into the same trading now able to link over-the-counter brokerage systems directly to its engine. The new technology will be launched in stages, beginning OTC trade registration system. SGX said the OTC brokerage com- with equities in June. Futures and options listed on the Mexican De- munity will benefit from the link, which allows trades matched in a rivatives Exchange are set to come onto the new engine in October, broker’s system to flow straight through to the exchange’s trade according to Jorge Alegria, chief executive officer of Mexder and registration system. “Customers will gain from an improvement in senior vice president of markets and information at BMV. operational efficiency and a reduction in errors,” SGX said in an “Testing is going very well. As you may imagine, there are several April 18 press release. So far three brokers—Mercari, Tradex and stages in the project that are all equally important,” Alegria said. The Trayport—have linked their systems to the trade registration sys- new platform will include some order functionalities that are tailored tem, and two others—Baltex and Cleartrade—are in the process of for algorithmic trading such as immediate or cancel order func- establishing connectivity. tionality. On the other hand, the new technology will also cater to larger institutional traders, allowing institutions to trade large blocks without affecting the price. The most critical aspect of the technology upgrade is that all of the exchange operator’s markets will be on the same trading engine. “It is going to be very efficient to have everything under the same Montreal Exchange Builds New trading engine. We have three trading engines today, one for equi- Functionalities for Strategy Trades ties, one for futures and one for options,” Alegria said. The Montreal Exchange on May 14 launched new functionalities Once everything is on the same trading engine, market partici- for its futures market. Approved participants will be able to create pants will be able to buy a stock and sell a call option against the customized strategies such as spread trades and submit them to stock in the same order with minimum latency and safer execution, the market. In addition, implied pricing was activated on inter-group he added. strategies, allowing the strategy order books to interact with liquidity Since March the exchange operator has been testing the new in the underlying legs of the strategy. “These functionalities provide technology in the equities market with the broker-dealer community. market participants with a new price discovery mechanism as well “So far the results are very encouraging,” said Alegria. “So far we are as reduced execution risk for multi-legged strategies, enhancing around 100 microseconds roundtrip,” he said, adding that capacity MX’s service offering for the futures trading community,” the com- testing is around 200,000 messages, but the platform can handle pany said in a May 14 notice. even more than that.

MGEX and CME Partner on Wheat Spread Trading MGEX has introduced a single-click functionality for trading spreads between hard red spring wheat futures traded on the Min- neapolis Grain Exchange and soft red winter wheat futures contracts traded on the Chicago Board of Trade. Beginning with the May 20 trading session, MGEX and CBOT market participants have had single-click spread trading on the CME Globex trading platform, making it easier for traders to manage the risk of legging the spread. “The Globex matching engine will match both of those legs and the transaction will not be executed until both sides of those legs are matched,” said Rita Maloney, a spokeswoman for MGEX.

48 Futures Industry | www.futuresindustry.com Fixnetix Partners with ICAP Adds Index Futures Rolls NovaSparks to Accelerate Market Data to Electronic Trading Platform Fixnetix, a technology company that provides market data, trad- ICAP has enhanced its electronic trading system for European ing and risk controls, is adding low-latency market data processing equity derivatives, adding the ability to execute rolls in European to its range of services. The company announced in April that it has equity index futures. In a May 28 announcement, the interdealer formed a partnership with NovaSparks, a company that specializes broker said the new offering covers futures based on several leading in ultra-fast feed handlers. Fixnetix clients will now be able to use European indices, including the Dax, Euro Stoxx and FTSE indices, technology from NovaSparks to process market data at speeds as and plans to add other indices in the future. The recently launched fast as 740 nanoseconds. trading system, called iLinked, offers dealers the option of trans- Novasparks uses a matrix of FPGA chips to process market acting electronically or using a voice broker and was developed in data, an approach that the two companies claim is faster than response to the demand for electronic trading in over-the-counter software-based solutions. NovaSparks currently offers feed handlers markets. “We have seen strong customer demand for iLinked since for CME Group and Eurex as well as a number of equity exchanges, its launch in March this year and already have 25 participating firms,” and is rolling out feed handlers for other exchanges in Europe and Garry Steward, ICAP’s head of equity derivatives in Europe, said in a North America. statement. “The addition of futures rolls to the platform today is the The partnership allows Fixnetix to combine the NovaSparks result of customer demand and the continuing need to bring OTC feed handlers with its own systems for low-latency execution and liquidity onto an orderly and transparent electronic platform.” risk controls, which also rely on FPGA technology. Fixnetix has established connections to 33 co-location and proximity hosting centers across Europe and the U.S., and recently began extending its network in Asia. Fixnetix says its iX-eCute service can apply 20 customizable pre-trade risk controls in fractions of microseconds, making it one of the fastest trading solutions on offer. “We’re matching the checks at the same speed at which people Orc Integrates with want to execute the trades,” said Bob Fuller, chief administrative of- NYSE Liffe’s Cscreen Platform ficer at Fixnetix and chairman of the MiFID IT subgroup, a regulatory Technology and service provider Orc has integrated its trad- advisory body that focuses on IT issues. He explained that using a ing products with Cscreen, NYSE Liffe’s pre-trading price discov- PFGA chip is faster than a software program. “You bypass going ery platform, to give traders a more efficient way to interact with through the customer’s operating system,” he said. indications of interest for both equity and index derivatives from Fuller added that demand for high-speed risk controls has inter-dealer brokers. The integration provides Orc users with a way risen as regulators look more closely at high-frequency trading to combine their activities in the over-the-counter equity derivatives and apply new risk management requirements to firms that pro- markets with their screen trading in listed derivatives and benefit vide direct market access. “It’s now going out to big broking firms from an aggregated view of both markets. that wish to control the trading of their DMA folks and we can do “The integration with Cscreen is a natural extension of our all of that in nanoseconds.” electronic trading solutions allowing firms to more efficiently manage their OTC trading flows,” said Jon Freebody, vice president of sales at Orc. “As markets and regulations evolve, providing a tighter integration between OTC trading and electronic trading will allow firms to continue to grow their businesses.” Cscreen is an electronic tool for OTC equity derivatives that Spain’s Meff Cuts Latency by 110 Microseconds allows brokers to publish indications of interest for a wide range Spain’s BME, the parent company of Meff, will offer co-location of equity derivatives based on individual stocks as well as indices. services in the fourth quarter to all of its members after expand- There is no automatic matching and all trades are finalized over the ing its communications infrastructure and IT systems in its data phone, but Cscreen users can submit their trades directly to Bclear processing center in Madrid. The co-location service, which will for processing and clearing. More than 40 brokers are active on the provide access to the group’s futures and options markets as well Cscreen service, including AFS, BGC, Exane, GFI, JB Drax Honore, as its cash equities markets, is located within the BME data center. Link, Mint, Newedge, TFS and Tullet Prebon. During April, the BME officials said the move from the existing proximity data center, service had an average of 1,314 users per day and an average of which is located 10.5 kilometers away, will reduce latency by about 8,671 orders were entered per day. 110 microseconds.

Futures Industry | June 2012 49 BOCA

CFTC Chairman Gary Gensler “Improving the cost benefit analysis done by the discusses the Dodd-Frank Exchange leaders discuss collateral CFTC has been a goal of mine,” Rep. K. Michael agenda over coming months protection, OTC clearing and new Conaway (R-Tex) said in his keynote address at the ICE Energy Breakfast business plans during the Exchange Leaders Meet the Press panel

50 Futures Industry | www.futuresindustry.com Futures industry leaders discuss ways to better protect customer funds

FIA President and CEO Walt Lukken is joined by John Damgard, former FIA President, at a press conference

Political Analyst Charlie Cook discusses election year issues at the BRICS Exchange Alliance Washington Outlook Breakfast

At a special tribute for John Damgard’s 30 years of service as president of the FIA, staff launch a campaign to elect him as the next president of the U.S.

Futures Industry | June 2012 51 Thank you! To our sponsors and exhibitors

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The Senate confirmed the nomina- was named deputy director in the division Hong Kong’s Securities and Futures tions of Jerome Powell, a former private of trading and markets. He has been a Commission announced that Bénédicte equity executive, and Jeremy Stein, an member of Schapiro’s staff since March Nolens was appointed as senior director of economics professor at Harvard Univer- 2010. James McNamara was named to risk and strategy to oversee the newly es- sity, to serve as members of the Federal the newly created position of managing ex- tablished risk and strategy unit. Prior to join- Reserve’s Board of Governors. ecutive of the SEC’s division of trading and ing the SFC, she was a managing director The Senate also markets. He is currently an assistant director and head of compliance for the Asia-Pacific confirmed the in the SEC’s office of financial management. region at Credit Suisse. nomination of Mary John Miller as the Hector Sants, chief Nancy Schnabel has taken a position Treasury Department’s executive of the U.K.’s as an attorney in the banking supervision undersecretary for Financial Services and markets division at the Federal Reserve domestic finance. She Authority, will leave his Bank of New York. Most recently she was will be responsible for developing and post at the end of special counsel and policy advisor at the coordinating Treasury’s policies and June. Upon his Commodity Futures Trading Commission for guidance related to financial institutions, departure, Andrew Commissioner Scott O’Malia. federal debt financing, financial regulation Bailey will take over as head of the pruden- and capital markets. Since 2010, Miller has tial business unit. Martin Wheatley will Robert Colby was served as assistant secretary for financial remain the head of the conduct business unit named chief legal markets. The Senate also confirmed and will serve as the future chief executive officer for the Financial Alastair MacLennon Fitzpayne as officer of the Financial Conduct Authority. Industry Regulatory Treasury’s assistant secretary for legislative Authority. Colby was affairs. Fitzpayne has served as Treasury’s Masamichi Kono was appointed as most recently a partner deputy chief of staff since January 2009. chairman of the International Organization at Davis Polk & The Senate also confirmedA dam of Securities Commissions’ board. Kono Wardwell. Prior to that he was deputy Sieminski to be the administrator for the is the vice commissioner for international director of the division of trading and Energy Information Administration. Sieminski affairs at Japan’s Financial Services Agency markets at the Securities and Exchange previously was chief energy economist at and has served as chairman of the IOSCO Commission. Colby succeeded T. Grant Deutsche Bank in New York. technical committee since 2011. The IOSCO Callery, general counsel at FINRA, who is board also appointed two vice chairs: Vedat retiring in October, and Marc Menchel, The Securities and Exchange Commis- Akgiray, chairman of the Capital Markets general counsel for regulation, who left for sion named George Canellos as deputy Board of Turkey, and Ethiopis Tafara, private practice. director of the division of enforcement. director of the U.S. Securities and Exchange He was serving as director of the SEC’s Commission’s international affairs division. Phupinder Gill took New York regional office. In additionDiane In addition, the IOSCO board elected Greg the helm as chief Blizzard was named associate director for Medcraft, chairman of the Australian Secu- executive officer of regulatory policy and investment adviser rities and Investment Commission, to take CME Group after regulation in the division of investment over as chairman after Kono steps down Craig Donohue management. She filled the vacancy cre- from the position in March 2013. retired from the ated when Robert Plaze was promoted position after the to deputy director of the division. Blizzard The Autorité des Marchés Financiers, company’s May 23 shareholder meeting. has been a member of the SEC’s division of France’s principal financial markets regula- As part of the company’s succession plan, investment management for 12 years. Erica tor, appointed Philippe Guillot as executive the board appointed Terrence Duffy to Williams was named the agency’s deputy director of the markets directorate, a new an expanded role as executive chairman chief of staff. She has been a member of entity formed by the AMF in 2011 to moni- and president. SEC Chairman Mary Schapiro’s staff tor the markets, infrastructure and market CME Group named Susan Schultz since February 2011 focusing on enforce- stakeholders. Guillot was previously head of to the newly created position of executive ment and regulatory issues. James Burns trading at Crédit Agricole Cheuvreux. director and counsel to Terry Duffy. With

Futures Industry | June 2012 53 prominent

more than 30 years of legal and regula- FIA Elects Directors and Officers tory experience in the derivatives industry, Schultz most recently served as managing The Futures Industry Association elected 17 directors to its board of directors at the director, group deputy general counsel and association’s annual meeting in March in Boca Raton, Fla. After the election, the following chief operating officer of the LCA division of officers were elected by the new board:Michael Dawley, managing director, co-head of Newedge Group. She began her career with futures and derivatives clearing services, Goldman Sachs, was re-elected as chairman; the Chicago Mercantile Exchange. Addition- Peter Johnson, managing director, global head of futures, OTC clearing and FX prime ally, Linda Rich, senior managing director, brokerage, Bank of America Merrill Lynch, was re-elected as vice chairman; Najib Lamha- government relations and legislative affairs, ouar, global head of exchange-traded derivatives and OTC clearing, global markets, HSBC was appointed to CME’s management Securities (USA) Inc., was re-elected as secretary; and Gerald Corcoran, chairman and team. Rich also reports to Duffy. chief executive officer, R.J. O’Brien & Associates, Inc., was elected as treasurer. CME also named Izumi Kazuhara as executive director, head of Japan. He is Eight directors were elected for two-year terms in the regular member category: Pa- based in Tokyo and reports to Julien Le trice Blanc, president, futures brokerage division, Jefferies & Company, and chief execu- Noble, CME Group managing director, tive officer, Jefferies Bache;Gerald Corcoran; Michael Dawley; Sanjay Kannambadi, head of Asia Pacific. Kazuhara has extensive chief executive officer and global head, BNY Mellon Clearing; Najib Lamhaouar; Rein- experience in the exchanges sector and de- hardt Olsen, managing director, North American head of exchange-traded derivatives, rivatives industry, having previously worked UBS Securities; William Sexton, chief executive officer,N ewedge USA; and Michael at both NYSE Euronext and Eurex. Yarian, managing director, head of futures and OTC derivative clearing, Barclays Capital. Four directors were elected to fill the remainder of two-year terms expiring in 2013 in LCH.Clearnet the regular member category: Fredrik Gentzel, managing director, global head of listed appointed Dennis derivatives, Deutsche Bank AG; Jerome Kemp, global head of exchange-traded deriva- McLaughlin as group tives sales and clearing, Citigroup Global Markets; Emily Portney, managing director, chief risk officer, global head of futures and options, J.P. Morgan Securities; and Jeremy Wright, global reporting to Ian Axe, head of futures and options markets, The Royal Bank of Scotland plc. group chief executive officer. He was Five directors were elected for two-year terms in the associate member category: previously at AON, where he was the CEO Richard Gorelick, chief executive officer, RGM Advisors;A rthur Hahn, partner, Katten for innovation and analytics. Prior to that, Muchin Rosenman; David Mitchell, partner, Fried, Frank, Harris, Shriver & Jacobson; he was global head of capital and balance Kenneth Raisler, partner, Sullivan & Cromwell; and Donald Wilson, Jr., chief executive sheet management at Merrill Lynch. LCH. officer, DRW Trading Group. Clearnet also appointed Magnus Spen- cer as group general counsel. Spencer Michael Schaefer and Alice Patricia White were elected as public directors. In most recently was Europe, the Middle addition, the new board re-appointed the following individuals as special advisers to the East and Africa general counsel at board: Richard Berliand, management consultant; and Gary DeWaal,senior managing Barclays Capital. director and global general counsel, Newedge Group. Singapore Exchange announced a The board also appointed John Damgard, the association’s former president, as se- new organizational structure that became nior adviser to the board. Additionally, Gerald Corcoran was appointed chairman of FIA effective in May. Under the new structure, Technology Services, a subsidiary of the FIA that supports electronic execution of give-up Magnus Bocker, chief executive officer, agreements and execution brokerage payments. assumed direct responsibility for the listings and sales and clients business unit. The Institute for Financial Markets, the non-profit educational and training affiliate of the Muthukrishnan Ramaswami, president, FIA, elected several new members to its board of trustees: Micah Green, a partner at the is in charge of the other four business units law firm of Patton Boggs;J ohn Damgard; and Vassilis Vergotis, executive vice presi- including the derivatives, market data and dent and head of business development, Americas, Eurex. In addition, the IFM’s board of access, post-trade and securities units. trustees also re-elected Peter Borish, chief executive officer, Touradji Capital Manage- Gan Seow Ann, co-president, has re- ment, as chairman, and Patricia Foshée as president. signed from his position but will remain with SGX as an adviser. The FIA also announced that Bill Herder was appointed as executive director of FIA Additionally, SGX appointed Christine Asia. He is based in Singapore. Nick Ronalds, who has led FIA Asia since 2007, will Lie as the exchange’s chief represen- serve as a senior adviser to FIA Asia, focusing on the association’s activities in China. tative in Beijing. She replaced Lloyd Loh. Lie previously was in charge of the

54 Futures Industry | www.futuresindustry.com exchange’s listings business with Chinese ASX’s board of directors elected Roderic International Securities Exchange companies. She joined the exchange in Holiday-Smith, the former head of Chicago announced that Sylvain Mirochnikoff November from Hong Kong Exchanges Research and Trading, as chairman. Holli- was elected to its board of directors for a and Clearing. day-Smith was appointed a director of ASX one-year term. Mirochnikoff is managing in July 2006. Prior to the merger of ASX and director of the institutional equity division Garry Jones, NYSE Euronext’s global the Sydney Futures Exchange in July 2006 for Morgan Stanley. head of derivatives, will step down at the end he was chairman of SFE Corporation Lim- of June following a management restructur- ited from 1998. Earlier in his career he spent Gary Anderson was ing that eliminated his position. Jones joined 11 years in Chicago, first as chief executive named the chief Liffe in 2007 and was named global head of officer of Chicago Research and Trading, executive officer of the derivatives for NYSE Euronext in 2009. and then as president of NationsBanc-CRT. Dubai Gold and Stanley Young, chief executive officer of He succeeded David Gonski, who re- Commodities Ex- NYSE Technologies also resigned following signed in March to take up an appointment change. He brings 30 the restructuring. as the chairman of Australia’s Future Fund years of experience in Alan Whiting succeeded Hugh Board of Guardians. major investment banks. Most recently he Freedberg as non-executive chairman of was at Triniti Financial Group, a trading NYSE Liffe’s global derivatives business. New York Portfolio services firm for day traders of which he is a Freedberg, who served as chief executive Clearing appointed founding partner. officer of NYSE Liffe from 1998 to 2009, Alexander “Sandy” retired from the post. Whiting was head Broderick as chief The board of directors of BSE, formerly of financial regulation at the U.K. Treasury executive officer. known as the Bombay Stock Exchange, ap- from 1992 to 1997 and executive director Broderick joined pointed Ashishkumar Chauhan as interim at the London Metal Exchange from 1997 NYPC from Société chief executive officer of the exchange. He to 2004. Générale, where he was head of British succeeded Madhu Kannan, who left the In addition, NYSE Euronext hired Peter pound derivatives and bond trading. He exchange to take a position at Tata Group. Leukert as chief information officer. He is replaced interim chief Murray Pozmanter Chauhan currently serves as the deputy leading NYSE Euronext’s global IT opera- of DTCC. Broderick was involved in the chief executive officer of the exchange. tions and reports to Dominique Cerutti, development of LCH.Clearnet SwapClear the company’s president and deputy chief and served as chairman of the Hong Kong Exchanges and Clearing executive officer. Leukert previously was OTCDerivNet Board. appointed Stephen Marzo as chief financial CIO of Commerzbank, in charge of all officer andHenry Ingrouille as chief admin- applications and IT infrastructure as well CBOE Holdings appointed Alexandra istrative officer. Marzo, who has spent most as co-leader of the integration of Dresdner Albright to the newly created role of chief of his career working in Asia, was most Bank into Commerzbank. Prior to that, compliance officer. Albright reports to recently group chief financial officer at the he was a partner at McKinsey. Leukert Edward Tilly, president and chief operating Noble Group. Ingrouille was most recently replaced Steve Rubinow, who left the officer and to the regulatory oversight com- managing director and head of Asian opera- company to join FXall. mittees of the CBOE exchanges. Albright tions for Morgan Stanley. previously served as an attorney for Kirkland HKEx also announced the names of The Depository Trust & Ellis in Chicago. Prior to that, she served individuals serving on its derivatives and and Clearing Corpora- in senior legal positions with the Securities clearing consultative panels. On the deriva- tion announced that its and Exchange Commission. tives panel, the four new members named board of directors CBOE also announced that Margaret were Yam Pui Lo of Haitong International elected Michael Williams was promoted to the new role Futures, Stephane Ritz of BNP Paribas Bodson as president of deputy chief regulatory officer. She will Securities (Asia), Kai Leung Wan of Glory and chief executive continue to report to Timothy Thompson, Sky Global Markets and Pek Yen Yap officer of the company, effective July 1. chief regulatory officer and senior vice presi- of IMC Asia Pacific. The two individuals Bodson is currently the chief operating dent, regulatory services division. re-elected to the derivatives panel were officer and will succeedDonald Donahue, Lap Tak Chan of TG Securities and Toby who will retire at the end of July. Joseph Corcoran was named first vice Lawson of Newedge Financial Hong Kong. In addition, Michael Dunn, former com- president and head of government relations On the clearing panel, four new members missioner at the Commodity Futures Trading for the OCC. Corcoran was previously at were named: Chi Ming Chan of Celestial Commission, was appointed chairman of NYSE Euronext, where he served as chief Commodities, Oliver Goh of Citigroup DTCC’s U.S. swap data repository. Dunn counsel in NYSE Regulation and the office Global Markets Asia, Wong Si Ching Lau reports to Bodson. of legal and governmental affairs. of HSBC Broking Securities (Hong Kong)

Futures Industry | June 2012 55 prominent

and James Taylor of Newedge Financial the bank’s London-based fixed income, Marc Lorin was appointed deputy head of Hong Kong. In addition, Shun Wai Chan currencies and commodities team. She origination and structuring of Americas. of BOCI Securities was re-elected to the will report to Brooks Stevens, who heads Newedge also appointed Jeff Pollack clearing panel. fixed-income futures and options as well as as chief financial officer for the Americas, The board of directors of Hong Kong OTC clearing for Europe, the Middle East based in New York. He was most recently Exchanges and Clearing Limited appointed and Africa, and to Bob Burke, global head serving as CFO and chief operating officer Chow Chung Kong as non-executive of OTC derivatives clearing services in New for Mizuho Securities USA. He reports to chairman, subject to the approval of Hong York. Page previously worked at Royal Bank Isabelle Fandard, Newedge’s global CFO Kong’s chief executive. His initial term is for of Scotland as director of OTC clearing in and Antoine Babule, chief administration two years. He replaced Ronald Arculli, the bank’s London office. officer for the Americas. who stepped down after a maximum con- secutive six years as chairman. Arculli will Greg Wood joined Deutsche Bank as the Brian Daly joined remain on the board of directors. Chow pre- product manager of client algorithms span- Royal Bank of Scotland viously was chief executive officer of Hong ning the firm’s foreign exchange and futures as head of futures and Kong’s subway operator MTR Corp. and options businesses. He is based in New options sales for York and reports to Jason Shell, head of FX Europe, the Middle David Mengle was trading for North America Paul Maley, head East and Africa. Daly named senior risk of listed derivatives for the Americas, and previously was head of advisor, OTC deriva- globally to Cameron Mouat, head of algo prime services for Europe at MF Global. Prior tives at the National execution. Wood was previously at Credit to that, he was at Morgan Stanley as Futures Association, Suisse as the U.S. head of business develop- managing director and European product the self-regulatory ment for its AES futures unit. manager for listed derivatives. organization for the Additionally, Ed Allen joined the bank U.S. futures industry. Mengle previously was as head of dbClear sales in Europe. He is BATS Chi-X Europe, an electronic a consultant for the Federal Reserve Bank of based in London and reports to Chris Han- trading platform that has become Eu- Chicago. Before that he was head of sen, Deutsche Bank’s global head of over- rope’s most active venue for equities research for the International Swaps and the-counter clearing sales and European trading, has stepped up its plans to enter Derivatives Association. head of futures sales. dbClear is the firm’s the European derivatives markets and client clearing service platform that was promoted futures industry veteran Guy Morgan Stanley promoted Joseph Sar- established in 2009. Allen was previously Simpkin to head of business develop- cona as global co-head of listed derivatives at Bank of America Merrill Lynch, where he ment and said he will focus on bringing within the bank’s electronic trading division, was director of OTC clearing for Europe, the more competition into the European based in New York. He was previously Middle East and Africa. index and derivatives markets. Simp- head of electronic trading for Asia, exclud- kin, who reports to Mark Hemsley, the ing Japan. Sarcona reports to Andrew Vincent Mattera was named director, company’s chief executive officer, held Silverman and Bill Neuberger, global co- listed derivatives operations at BMO Capital senior business development roles at heads of electronic trading. The firm named Markets in New York. His responsibilities MF Global, LCH.Clearnet and NYSE Liffe Gabriel Butler to fill Sarcona’s position in include futures clearing and agency equity before joining BATS Chi-X Europe in May Hong Kong. Butler was previously head of options operations. Mattera, who also 2010. BATS Chi-X Europe currently has electronic trading sales at Bank of America serves as the president of the FIA’s Futures a market share of approximately 25% in Merrill Lynch. Services Division in New York, previously European equities, making it the largest was regional head of futures clearing at equities trading platform in Europe. Andy Coyne was appointed as chief HSBC Securities. executive officer of ICAP’s post-trade Citigroup named Hiro Matsuki, a mem- processing unit, Traiana. Based in London, Newedge named James Sheker- ber of its prime finance team in Japan, to Coyne reports to Gil Mandelzis, a founder demian as head of origination and structur- lead the origination of new clearing business of Traiana who moved to the newly created ing for its alternative investment solutions in Japan for both listed and OTC derivatives. role as executive chairman. Coyne was division in the Europe, Middle East and Af- Matsuki will be responsible for providing previously at Citi, where he was head of FX rica region. He reports to Jonathan Gane, hedge funds and other Japanese clients prime and ecommerce products. global head of origination and structuring. with access to central clearing in the U.S., Shekerdemian was previously at J.P. Mor- Europe and Japan. Samantha Page will join Bank of gan. In addition, Charles Hill was named America Merrill Lynch in July as director of deputy head of origination and structuring ICAP appointed Gil Mandelzis chief futures, options and OTC clearing within for Europe, the Middle East and Africa. executive officer of EBS, reporting to

56 Futures Industry | www.futuresindustry.com Michael Spencer, the company’s chief Grossman, who retired after 16 years with Rosenblatt Securities, an institutional executive. He replaced David Rutter, the company. ADMIS also named Dennis brokerage based in New York, hired who has left the company. Separately, Harding as vice president, information a four-person options sales and trad- ICAP announced that it has expanded its systems. Harding was previously director of ing team. The group is headed by Gary soft commodities team with the acquisi- application systems at the firm. Wishnow, previously head of options tion of a cotton brokerage in New York led sales and trading at FBN Securities. Earlier by Vincent Pepe, Louis Barbera and Société Générale Corporate and Invest- in his career, he was vice president of Marco Degennaro. ment Banking created an energy and natural institutional sales and trading at Louis resources business line that is co-headed Capital Markets, a market maker at Knight BGC Partners appointed Michael by Federico Turegano and Jonathan Financial Products and a broker at ICAP. Riffice as managing director and head of Whitehead. In addition, within the global He will report to Joe Gawronski, the futures and options, Americas. Riffice is markets division of the bank, Whitehead was firm’s president and chief operating officer. based in New York and reports to Jean- appointed head of commodities markets and The team also consists of Steven Wil- Pierre Aubin, executive managing director François Combes and Jean-François liams, previously of Ramius Capital, who and global head listed products and struc- Maurey were appointed deputies. Tureg- will be the chief derivatives and exchange- tured solutions. Riffice has held senior roles ano was previously global head of natural traded product strategist for Rosenblatt, at a number of financial services firms and resources financing. Whitehead, who joined Fabian Amezaga, who previously was most recently worked in the inter-dealer SG CIB in May 2011, was previously head of co-head of the crude oil options book at broker sector. commodity sales and structuring for Europe, Citigroup Derivatives Markets, and Mat- Middle East and Africa at Barclays Capital. thew Stoeber from FBN. INTL FCStone’s board of directors elected John Radziwill as chairman and R.J. O’Brien & Associates, Inc. hired Pete Anderson as vice-chairman. Anderson Mark Sachs as executive vice president, In Memoriam is serving in a joint capacity as president and sales and marketing. His responsibilities vice-chairman until his retirement in October. include creating and implementing new The FIA was saddened to hear that Radziwill has served on the board since services for the firm’s private client division, Richard Ruzika passed away on May December 2002. which has been servicing thousands of 7. He had been with Goldman Sachs for new accounts transferred from MF Global 30 years where he primarily traded com- BNP Paribas announced three appoint- in early November. He is also responsible modities. Before retiring in 2011, he was ments to its commodity derivatives busi- for launching new branding efforts com- a partner and head of the firm’s Global ness. John Bills was named managing pany-wide as well as partnering with other Situations Group. director, commodity structured origination members of RJO management to enhance Americas, reporting to Simon Dent, head sales strategy for the firm. Sachs previously The FIA was also saddened to hear of structured origination. Bills was previously served as president of Lind-Waldock, a retail that Michael A. Milano passed away with Credit Agricole. Chris Zammit was futures brokerage firm owned by MF Global. on March 29. Milano had a long career appointed director of commodity deriva- in the New York commodity markets. tives power trading and reports to Dora Borje Ekholm was named interim He became a member of the New Sung, head of U.S. energy commodity chairman of Nasdaq OMX’s board of York Mercantile Exchange in 1971 and trading. Zammit was most recently at J.P. directors, following the retirement of worked as an independent floor trader Morgan. Mike Collens was named director, H. Furlong Baldwin. for over 30 years. natural gas trader in Calgary and reports to Bruce Bianchini, head of energy trading in Christopher Nagy is The FIA was also saddened to hear Canada. Collens was previously at Société launching KOR of the passing of Fred “Fritz” Guth, a Générale Energy in Calgary. Trading, a consult- World War II marine veteran and CBOT ing firm to help member since June 1954. ADM Investor services broker dealers, appointed Kurt advisers, special The FIA was also saddened to hear Johnson as vice interest groups and that John “Jay” Finnegan, passed president, business investors with information to help them away on May 7. He was a former director development. He will navigate the changing market structure of Bear Stearns and a former member also continue to serve environment. Nagy worked for TD of the Chicago Board of Trade and the as president of the Ameritrade for more than 13 years and Chicago Mercantile Exchange. firm’s wholly-owned subsidiary, Archer helped build its order-routing and Financial Services. Johnson succeeded Ron market data infrastructure.

Futures Industry | June 2012 57 prominent

Infinium Capital Management promoted Fidessa Group appointed David Polen England, succeeds William Dudley, Scott Rose to chief executive officer. He as head of business development. He president of the Federal Reserve Bank previously was head of trading, including reports to Mark Ames, chief executive of- of New York, who has been the CPSS both market making and algorithmic trading. ficer of Fidessa’s U.S. business. Polen has chairman since May 2009. Charles Whitman, one of Infinium’s founders worked at Fidessa for 13 years in positions and the previous CEO, assumed the newly throughout the company. Wells Fargo named Yvette Hollings- created role of chairman, overseeing a variety worth as its chief compliance officer, suc- of new initiatives for the firm. Prior to joining Michael Loesch, a ceeding Tim Marrinan, who announced Infinium, Rose was the co-founder and invest- former senior staffer at his retirement in 2011. Hollingsworth was ment manager at Fox River Partners. Before the Securities and most recently managing director and global that he held senior roles at Citadel, where he Exchange Commis- head of operations compliance and financial was responsible for the launch of the firm’s sion, was named a crimes compliance and risk management at equity options market-making business and partner at the law firm Barclays. the development of its energy businesses. of Fulbright and Jawor- ski working with the firm’s energy and Cinnober Financial Technology, the Gonzalo Chocano, securities litigation enforcement practice Stockholm-based provider of technology to formerly global head of groups. Before joining the law firm in 2009, exchanges, appointed Javier Tordable as futures and derivatives he worked at the Commodity Futures chief executive officer. Tordable previously clearing services at Trading Commission as chief of staff under worked at several exchanges and trad- Bank of America Merrill then-acting Chairman Walter Lukken. ing companies, including Deutsche Börse, Lynch, joined Storm- Before that he worked at the SEC for seven Eurex and MTS. Most recently he led the ef- Harbour, an indepen- years, including a stint as counsel to the fort to establish a multilateral trading facility dent financial firm that advises financial chairman and a supervisor in the agency’s in Spain called Pave. Per-Anders Häll- institutions and corporations. Chocano is a enforcement division. Bedman, who has been acting CEO since principal and managing director based in the November 2011, will return to his position of London office, with responsibility for client The Commodity Futures Floor Brokers deputy CEO. coverage and relationships in Spain across and Traders Association re-elected George sales and trading, structuring and advisory, Gero as chairman of the board, Fred FX Alliance, a leading electronic platform and capital markets. Schoenhut as vice chairman, Stephen for foreign exchange trading, hired Steve Ardizzone as president, Madeline Boyd Rubinow as chief information officer. He is Getco hired Vipin Sood to oversee com- as executive vice president, Frank Siciliano responsible for leading global technology pliance at Getco’s Europe Automat division. as vice president, Jan Willem Van derDor- operations for the company, which recently He is based in the company’s London office. pel as vice president, David Greenberg concluded an initial public offering of shares. Sood previously worked at Citadel Asset as vice president and John McNamara as For the past six years, Rubinow was chief Management. vice president. information officer of NYSE Euronext, where he led the technology integration of NYSE Keith Andrew joined Knight Capital’s The International Swaps and Derivatives and Euronext following their merger. Before market-making business in London. He Association elected 13 directors at its 27th that he was chief technology officer of Archi- was previously head of electronic foreign annual general meeting in Chicago. Three pelago Holdings. At FXall, Rubinow replaced exchange trading at Morgan Stanley. new directors were elected to the board: Kevin Lupowitz, who joined the company Elie El Hayek, managing director and in March 2011 from Liquidnet. Campbell and Co. appointed Steven member of the global markets executive Schneider as chief administrative officer. committee, HSBC Bank; Fujio Nishio, chief KVH Co appointed Edward Higase Most recently he was chief financial officer manager, derivatives trading global markets as president, chief executive officer and for Ironwood Global in New York. sales and trading, Bank of Tokyo Mitsubishi; representative director. He succeeded and Richard Prager, managing director Richard Warley, who became a member of Trading Technologies appointed Rick and head of global trading at BlackRock. the board of directors. Higase most recently Lane as executive vice president and chief served as managing director and executive technology officer. This will be his second The Bank for International Settle- vice president of Global Crossing’s Europe, stint at the company; he first joined the ments announced that Paul Tucker Middle East and Africa businesses. company in 2010 when TT acquired a was appointed chairman of the com- company he co-founded. Most recently he mittee on payment and settlement worked at Google as a product manager on systems. Tucker, who is deputy gov- display ad servicing technology. ernor, financial stability at the Bank of

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