ICE-NYSE the Makings of a Merger $339,994,460,891,567 * Isn’T Just a Big Number

Futurization of Swaps | OTC Clearing in Japan | Complex Order Functionality

decemberjanuary 2011 2013 | | v21.n12 v23.n1

ICE-NYSE The Makings of a Merger $339,994,460,891,567 * isn’t just a big number.

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TRIM: 8.375 in. x 10.75 in. BLEED: 8.625 in. x 11 in. PRINTS: 4-CP FIA International Futures Industry Conference Things Happen March 12-15, 2013 at Boca Boca Raton Resort & Club

1976 The first FIA International Futures Industry Conference is held in 1978 The first Commodity Futures Trading Commission Chairman Innisbrook. The conference moves to the Boca Raton Hotel and Club in 1979 William T. Bagley delivers his first major address to the futures industry. where it remains for the next 32 years with the exception of one year in Miami (1980) when the hotel is under renovation. 1985 Robert Rubin, Goldman Sachs, predicts that the futures industry could suffer “if stock index futures trading at some point really upends trading on the New York Stock Exchange … it will resurrect the 1983 John Damgard’s first Boca as president latent view of futures activity as socially useless speculation and that of the Futures Industry Association. will cause us a lot of trouble in the regulatory arena.”

1989 Chicago Board of Trade unveils 1993 CME Chairman Jack Sandner puts forth a plan to “Aurora”, an electronic trading system that create a financial super agency to replace the Commodity tries to simulate the pit on a trading screen; Futures Trading Commission and the Securities and traders will use a pointing device known as Exchange Commission. a “mouse”.

1996 International futures regulators from 14 jurisdictions sign a 1995 Two weeks after the demise of Barings Bank, FIA assembles a panel Declaration on Cooperation and Supervision of International Futures on the crisis and establishes FIA Global Task Force on Financial Integrity to Exchanges and Clearing Organizations—49 international foreign make recommendations that would enhance the protection of the assets of futures exchanges and clearing organizations from 18 countries sign a market participants. complementary memorandum of understanding. This enables regulators and exchanges post-Barings to share information on the participants in their markets. 1998 After a 12-hour bargaining session, CBOT and CME officials announce a plan to combine their clearing systems. This deal ultimately fails to 1999 Alan Greenspan addresses Boca materialize and it isn’t until early 2004 when the CBOT moves its clearing delegates via satellite transmission (and from the Board of Trade Clearing Corporation to the CME clearinghouse. again in 2007 after he retires).

2000 Boca delegates strike out when President Clinton calls U.S. Treasury Secretary Larry Summers back to Washington to sign a gun 2005 FIA introduces the control bill before he can deliver the keynote address at the international Futures Hall of Fame and exchange breakfast. John Henry, a long-time friend of the FIA, steps up to inducts 55 members. the plate to take his place—a home run.

2009 OTC clearing comes to Boca and along with it 2007 Boca delegates wake up to the news new delegates with expertise in the over-the-counter world. that IntercontinentalExchange President Jeff Sprecher is challenging the CME bid for the 2011 CME Group announces that it will launch its London-based clearing- Chicago Board of Trade. house. Rumors of a tie-up between ICE and Nasdaq OMX circulate.

2012 FIA welcomes Walt Lukken 2011 FIA announces it will extend its mission to include cleared swaps. as its new President and CEO.

2013 Anything can happen. Don’t miss it. Register at www.futuresindustry.org/boca january 2013 | v23.n1

features

I CE-NYSE: 28 The Makings of a Merger In this latest in our series of CEO-to-CEO interviews, Jeff Sprecher, the chief executive of IntercontinentalExchange, discusses how the merger agreement with NYSE Euronext came about and his strategic vision for ICE. | By Walt Lukken on the cover Futurization: Jeff Sprecher (left), chairman 33 dodd-Frank Drives Swaps-to-Futures Migration and chief executive officer of IntercontinentalExchange, Inc. As the new regulatory regime created by the Dodd-Frank Act has taken shape, some and Duncan Niederauer (right), over-the-counter market participants have grown alarmed by the complexity and cost of chief executive officer of compliance and have turned instead to the futures markets in search of a simpler and NYSE Euronext, at the more cost-effective alternative to cleared swaps. | By Will Acworth New York Stock Exchange on December 20, 2012 Futures Industry Moves Forward 38 with Enhanced Customer Protections Since the collapses of MF Global and Peregrine Financial, the futures industry has made significant progress to better protect customer funds with a series of actions to improve transparency and strengthen internal controls. | By Joanne Morrison OTC Clearing in Japan: 41 Solid Start for Interest Rate Swaps Japan has a relatively small share of the global interest rate swaps market compared to the U.S. and Europe, but it has taken the lead in implementing the G20 requirement for central clearing. | By Thomas Treadwell OTC Clearing: 47 Volume Trends in IRS and CDS At major clearinghouses, the volume of central clearing of over-the-counter derivatives rebounded strongly in November and October, after a modest decline in the late summer months. | By Dan Mannetti Simple Agenda for Complex Options 50 As complex orders become increasingly popular, a number of exchanges have developed separate order books for complex orders as well as new functionalities to improve the odds of filling complex orders. In addition, a number of firms provide tools for aggregating liquidity across multiple exchanges. | By Rachel Koning Beals

4 Futures Industry | www.futuresindustry.com Eurex Reappraisal, FI Mag_Jan22_Futures Industry Magazine 08.01.13 13:08 Seite 1

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The information published in this publication is for general information purposes only. It is not intended to constitute investment advice nor is it intended for solicitation purposes. Eurex is not responsible for any errors or omissions contained in this publication. Before trading, persons should consider the risks involved and the legal requirements of the relevant jurisdiction. Not all products mentioned in this publication are currently available for offer or sale to, or trading by, United States persons. Korea Exchange, KRX, KOSPI and KOSPI 200 are registered trademarks of Korea Exchange Inc. BSE and SENSEX are trademarks/service marks of Bombay Stock Exchange (BSE). january 2013 | v23.n1

Page 57 @Markets FUTURES INDUSTRY (ISSN #10656855 ) is published bi-monthly, except July and August by the FUTURES INDUSTRY ASSOCIATION, 2001 Pennsylvania Avenue N.W., Suite 600, Washington, D.C. 20006-1823; (202) 466-5460. Subscriptions are $24 Domestic and $32 Interna tional, and are included as part of the member dues. Periodicals postage paid at the Washington, DC and additional mailing offices. Postmaster: Send address changes to Futures Industry, 2001 Pennsylvania Avenue N.W., Suite 600, Washington, D.C. 20006-1823. Copyright 2013 by the Futures Industry Association.

Materials contained herein may not be reproduced 10 President’s Message 52 Washington Watch for general distribution, advertising or promotional purposes without the expressed consent of the FIA. By Walt Lukken The statements of fact and opinion in signed articles 57 @Markets are the sole responsibility of the authors, and do not 12 Trading Volume necessarily reflect the positions of the officers, mem- • CBOE Launches Variance Futures bers or staff of FIA, nor the employers of the authors. • Nasdaq OMX Buys Stake in Dutch 22 News Briefs Futures Industry • Eurex Launches Interest Rate Trading Venue Editor-in-Chief Editor Mary Ann Burns Will Acworth Swaps Clearing • NYSE Liffe’s Bclear Adds Fixed Deputy Editor Assistant Editor • LCH.Clearnet Expands Clearing Income Futures Joanne Morrison Tracy Wahler to Australia • RTS Bolsters APAC Presence Futures Industry Editorial • CME Launches Swap Data 61 Expo Scrapbook Advisory Board Reporting Service Russell Abramson, Bank of America Merrill Lynch Arthur Bell, Arthur Bell Certified Public Accountants • FOA Expands Netting 64 Prominent People Galen Burghardt, Newedge USA Opinion Library Christopher Culp, Lexecon Kevin Foley, Katten Muchin Rosenman LLP Michael Gorham, Illinois Institute of Technology Anthony Leitner, A J Leitner and Associates, LLC Terrence Martell, Baruch College John Munro, ION Trading Gerry Perez, Interactive Brokers Group Leslie Sutphen, Newedge USA Barbara Wierzynski, Futures Industry Association

The Futures Industry Association is the international trade organization for the futures industry. Its mem bership includes more than 28 of the largest futures commission merchants. FIA estimates that its mem bers are responsible for more than 90% of all public 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 boca 2013 2001 Pennsylvania Avenue N.W., Suite 600 Washington, D.C. 20006-1823 Registration is open for the International Futures Industry Conference Phone: (312) 636-2919 Fax: (202) 772-3075 being held March 12-15 in Boca Raton, Florida. For more details, see E-mail: [email protected] Web: www.futuresindustry.org page 20 or visit www.futuresindustry.org/boca.

06 Futures Industry | www.futuresindustry.com

the

The Futures Industry Association, Inc.

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

08 Futures Industry | www.futuresindustry.com

president’s

A Wish List for 2013

s we begin 2013, it is a good time to look ahead and reflect • That we all spend less time in meetings and on conference calls on how our industry will evolve in the future. I will leave it to and more time with our families and friends at beaches and sport- A others to peer into their crystal balls and predict what lies ing events; and ahead. Instead I offer my personal “wish list” of things that I hope come true this year: • That I find time to exercise and work off the “Dodd-Frank Fifteen.”

• That we succeed in educating the public and policymakers on As we roll into the New Year, Washington readies itself for the the benefits of the listed and cleared derivatives markets and the new Congress, new faces in the President’s administration, and value our industry provides for our customers and the economy; what is shaping up to be a huge fight over the debt ceiling. Here at FIA, we are staying on course and concentrating on the policy • That the tremendous efforts our industry has made over the last issues that directly affect our members and our customers. We will 12 months to strengthen customer protections are recognized and continue to focus on the CFTC regulatory agenda as we enter the appreciated by our customers, our regulators and the public at final stages of Dodd-Frank implementation, and we are gearing up large; for reauthorization of the Commodity Exchange Act, which runs in five-year cycles and is due to expire in September. This will require • That we move beyond the uncertainties of regulatory reform and Congress to pass legislation reauthorizing the statute and we can refocus our energies on innovation, competition and growth; expect many hearings in the months ahead as lawmakers consider changes to the governing law of the futures industry. At the same • That trading activity rebounds in both the futures and the swaps time, we will be looking outward, working with you to provide a fo- markets as investors and hedgers return to the markets; rum for discussing the business, regulatory and technology trends that are dramatically reshaping our industry. • That our regulators succeed in achieving cross-border harmoni- zation and coordination and preventing our markets from devolving As much as I desire my wish list to include a normalizing of the along regional lines; pace of change and degree of uncertainty in our industry, it is looking more and more likely that 2013 will be as busy and demanding • That our industry leaders and volunteers keep up their enthusi- as last year. Dare I say that this is the “new normal”? Now more asm and support for FIA initiatives because they are the backbone than ever FIA will strive to serve as your guide and ally in navigating of this association; the difficult times ahead.

• That we avoid “fiscal cliffs” in Washington or any other type of political cliff for that matter and we get back to an era of pragmatic problem-solving aimed at economic growth;

• That we continue to contribute our time and money to those less fortunate than ourselves—in particular those futures industry causes such as the Greater Chicago Food Depository, Futures Cares, Futures for Kids, and the relief efforts of Hurricane Sandy;

• That I refrain from shamelessly promoting FIA, such as our host- Walt Lukken ing the new and improved Bürgenstock International Derivatives President Conference in Geneva, Switzerland on Sept. 25-27 with the SFOA;

10 Futures Industry | www.futuresindustry.com

Global Futures and Options Volume Based on the number of contracts traded and/or cleared at 84 exchanges worldwide

Jan-Oct 2011 Jan-Oct 2012 % Change Futures 10,372,245,544 9,237,477,984 -10.9% Options 10,882,208,113 8,674,940,683 -20.3% Total 21,254,453,657 17,912,418,667 -15.7%

Global Futures and Options Volume by Category Based on the number of contracts traded and/or cleared at 84 exchanges worldwide

Category Jan-Oct 2011 Jan-Oct 2012 % Change 30.4% Individual Equities Individual Equities 5,984,972,416 5,453,858,414 -8.9% 29.3% Equity Indices 7,131,189,564 5,246,906,365 -26.4% Equity Indices Interest Rate 3,031,725,148 2,524,619,571 -16.7% 14.1% Foreign Currency 2,757,474,761 1,994,345,671 -27.7% Interest Rate

Agriculture 860,310,710 1,047,568,727 21.8% 11.1% Energy 690,832,839 742,250,370 7.4% Foreign Currency Non-Precious Metals 344,202,749 447,733,045 30.1% 5.8% Agriculture Precious Metals 276,400,297 267,006,046 -3.4% 4.1% Energy Other 177,345,173 188,130,458 6.1% 4.0% Metals Total 21,254,453,657 17,912,418,667 -15.7% 1.1% Other Note: 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 84 exchanges worldwide

Region Jan-Oct 2011 Jan-Oct 2012 % Change 35.5% Asia Pacific Asia Pacific 8,361,518,113 6,364,400,484 -23.9% 33.8% North America 7,009,892,772 6,053,691,438 -13.6% North America Europe 4,256,486,920 3,748,407,021 -11.9% Latin America 1,337,097,924 1,494,991,665 11.8%

Other 289,457,928 250,928,059 -13.3% 20.9% Europe

Total 21,254,453,657 17,912,418,667 -15.7% 8.3% Latin America Note: Location of exchanges is determined by country of registration. Other consists of exchanges in Dubai, Israel, South Africa, and Turkey. 1.4% Other

12 Futures Industry | www.futuresindustry.com Top 30 Derivatives Exchanges Ranked by number of contracts traded and/or cleared Jan-Oct 2012 Annual Oct 2012 Annual Rank Exchange Volume % Change Open Interest % Change 1 CME Group 2,465,178,657 -15.3% 80,842,956 -10.7% 2 Eurex * 1,975,677,773 -18.7% 111,955,262 -12.8% 3 Korea Exchange 1,712,260,857 -49.0% 2,853,728 -40.7% 4 National Stock Exchange of India 1,652,906,877 -10.6% 183,396 -18.8% 5 NYSE Euronext * 1,630,889,280 -16.3% 64,313,862 -11.0% 6 BM&FBovespa 1,410,574,147 12.8% 62,130,548 26.0% 7 CBOE Holdings * 964,407,682 -8.3% 381,393 171.1% 8 Nasdaq OMX * 924,210,789 -15.6% 8,181,524 2.9% 9 Moscow Exchange 896,224,868 -0.2% 5,044,587 17.3% 10 Multi Commodity Exchange of India 807,710,541 -20.7% 2,158,706 36.2% 11 Dalian Commodity Exchange 503,883,654 117.2% 2,962,891 69.2% 12 IntercontinentalExchange ** 371,553,894 14.2% 73,128,103 865.6% 13 Shanghai Futures Exchange 289,311,527 22.7% 1,465,133 26.6% 14 Zhengzhou Commodity Exchange 278,873,337 -22.8% 1,166,624 23.2% 15 ASX Group 218,028,468 15.9% 17,681,921 11.2% 16 BSE 193,634,967 84,161.3% 99,755 3,700.2% 17 TMX Group * 181,189,554 7.0% 4,613,583 15.2% 18 Osaka Securities Exchange 167,678,498 0.5% 4,493,611 32.6% 19 London Metal Exchange 132,928,514 10.4% 2,013,710 -11.8% 20 JSE South Africa 128,962,446 -5.7% 1,528,790 -89.2% 21 Taiwan Futures Exchange 126,385,996 -18.4% 1,326,515 19.9% 22 BATS Exchange * 107,609,711 -17.2% N/A N/A 23 Hong Kong Exchanges and Clearing 99,697,546 -16.9% 6,958,159 -16.1% 24 China Financial Futures Exchange 78,389,470 100.4% 94,016 127.0% 25 Singapore Exchange 65,348,236 6.6% 2,336,943 66.2% 26 London Stock Exchange Group 60,166,377 -20.2% 13,029,896 -30.6% 27 Tokyo Financial Exchange 57,608,921 -54.3% 1,229,194 -18.5% 28 MEFF 56,957,820 6.0% 15,300,559 6.5% 29 Tel-Aviv Stock Exchange 55,833,660 -31.5% 687,216 6.6% 30 Turkish Derivatives Exchange 53,332,133 -13.7% 327,644 7.8%

* Open interest for these exchanges does not include options traded in the U.S. and cleared by OCC. ** Includes OTC products converted to futures on Oct. 15

Futures Industry | January 2013 13 Exchange Groups Futures and options volume broken down by subsidiary exchanges Volume Volume % Open Interest Open Interest % Exchange Jan-Oct 2011 Jan-Oct 2012 Change Oct 2011 Oct 2012 Change ASX 99,323,915 132,112,412 33.0% 13,509,393 15,362,092 13.7% ASX 24 88,864,116 85,916,056 -3.3% 2,385,874 2,319,829 -2.8% ASX Group 188,188,031 218,028,468 15.9% 15,895,267 17,681,921 11.2% Bolsa de Valores de São Paulo 688,520,247 807,920,388 17.3% 16,810,375 15,679,098 -6.7% Bolsa de Mercadorias & Futuros 562,068,081 602,653,759 7.2% 32,505,374 46,451,450 42.9% BM&FBovespa 1,250,588,328 1,410,574,147 12.8% 49,315,749 62,130,548 26.0% Chicago Board Options Exchange 997,385,458 903,762,368 -9.4% N/A N/A N/A C2 Exchange 44,099,973 41,943,759 -4.9% N/A N/A N/A CBOE Futures Exchange 10,568,658 18,701,555 77.0% 140,662 381,393 171.1% CBOE Group 1,052,054,089 964,407,682 -8.3% 140,662 381,393 171.1% Chicago Mercantile Exchange 1,551,567,759 1,222,526,887 -21.2% 37,266,047 31,399,918 -15.7% Chicago Board of Trade 894,484,844 798,774,578 -10.7% 14,171,939 15,253,203 7.6% New York Mercantile Exchange 463,482,164 443,877,192 -4.2% 39,060,940 34,189,835 -12.5% CME Group 2,909,534,767 2,465,178,657 -15.3% 90,498,926 80,842,956 -10.7% Eurex 1,760,296,601 1,445,320,162 -17.9% 128,329,975 111,955,262 -12.8% International Securities Exchange 670,460,787 530,357,611 -20.9% N/A N/A N/A Eurex 2,430,757,388 1,975,677,773 -18.7% 128,329,975 111,955,262 -12.8% ICE Futures Europe 228,795,594 239,936,981 4.9% 4,327,690 7,225,127 67.0% ICE Futures U.S. 92,431,951 127,276,288 37.7% 3,030,502 3,037,047 0.2% ICE Futures Canada 3,946,661 4,318,967 9.4% 161,393 182,288 12.9% Chicago Climate Futures Exchange 76,936 21,658 -71.8% 54,071 0 -100.0% IntercontinentalExchange * 325,251,142 371,553,894 14.2% 7,573,656 73,128,103 865.6% * Includes OTC products converted to futures on Oct. 15 MCX-SX 747,590,644 480,314,318 -35.8% 1,086,575 1,283,145 18.1% Multi Commodity Exchange of India 271,504,861 327,396,223 20.6% 498,077 875,561 75.8% Multi Commodity Exchange of India 1,019,095,505 807,710,541 -20.7% 1,584,652 2,158,706 36.2% Nasdaq OMX PHLX 830,509,308 656,414,898 -21.0% N/A N/A N/A Nasdaq Options Market (U.S.) 166,783,586 168,226,827 0.9% N/A N/A N/A Nasdaq OMX (Nordic markets) 97,466,107 90,127,607 -7.5% 7,730,093 8,135,715 5.2% Nasdaq OMX BX Options N/A 8,198,224 N/A N/A N/A N/A Nasdaq OMX Commodities 701,379 726,318 3.6% 116,532 45,333 -61.1% Nasdaq OMX Futures Exchange (U.S.) N/A 516,915 N/A N/A 476 N/A Nasdaq OMX 1,095,460,380 924,210,789 -15.6% 7,846,625 8,181,524 4.3% NYSE Liffe Europe 988,820,815 801,860,801 -18.9% 71,404,056 63,195,425 -11.5% NYSE Amex Options 525,234,092 472,287,091 -10.1% N/A N/A N/A NYSE Arca Options 416,424,269 340,504,426 -18.2% N/A N/A N/A NYSE Liffe U.S. 17,068,461 16,236,962 -4.9% 886,664 1,118,437 26.1% NYSE Euronext 1,947,547,637 1,630,889,280 -16.3% 72,290,720 64,313,862 -11.0% Note: Open interest for U.S. equity options is held at OCC rather than at the exchanges.

14 Futures Industry || www.futuresindustry.com Top 20 Agricultural Futures & Options Contracts Rank Contract Contract Size Jan-Oct 2011 Jan-Oct 2012 % Change 1 Soy Meal Futures, DCE 10 tonnes 42,194,237 269,911,671 539.7% 2 White Sugar Futures, ZCE 10 tonnes 110,241,341 123,915,140 12.4% 3 Rubber Futures, SHFE 5 tons 80,396,357 64,823,205 -19.4% 4 Corn Futures, CBOT 5,000 bushels 66,946,233 63,424,066 -5.3% 5 Soy Oil Futures, DCE 10 tonnes 49,049,058 52,979,172 8.0% 6 Soybean Futures, CBOT 5,000 bushels 38,216,694 45,132,657 18.1% 7 Corn Futures, DCE 5,000 bushels 22,439,911 34,473,505 53.6% 8 No. 1 Soybean Futures, DCE 10 tonnes 21,963,065 33,924,643 54.5% 9 Palm Oil Futures, DCE 10 tonnes 18,995,267 27,258,726 43.5% 10 Sugar #11 Futures, ICE Futures U.S. 112,000 pounds 22,238,031 24,067,249 8.2% 11 Strong Gluten Wheat Futures, ZCE 10 tonnes 7,173,404 23,625,742 229.4% 12 Corn Options on Futures, CBOT 5,000 bushels 25,152,950 23,342,101 -7.2% 13 Wheat Futures, CBOT 5,000 bushels 20,879,596 23,170,485 11.0% 14 Soybean Oil Futures, CBOT 60,000 pounds 19,992,812 22,774,571 13.9% 15 Cotton No. 1 Futures, ZCE 5 tonnes 136,812,724 19,293,566 -85.9% 16 Soybean Options on Futures, CBOT 5,000 bushels 11,450,007 16,028,900 40.0% 17 Soybean Meal Futures, CBOT 100 short tons 14,111,688 15,516,597 10.0% 18 Live Cattle Futures, CME 40,000 pounds 11,519,147 11,930,223 3.6% 19 Lean Hogs Futures, CME 40,000 pounds 8,503,893 9,852,408 15.9% 20 Refined Soy Oil Futures, NCDEX 10 tonnes 4,383,933 7,197,740 64.2%

Top 20 Energy Futures & Options Contracts Rank Contract Contract Size Jan-Oct 2011 Jan-Oct 2012 % Change 1 Brent Crude Futures, ICE Futures Europe 1,000 barrels 111,684,716 126,875,149 13.6% 2 Light, Sweet Crude Oil Futures, Nymex 1,000 barrels 151,433,549 120,952,176 -20.1% 3 Henry Hub Natural Gas Futures, Nymex 10,000 MMBTU 64,868,958 82,161,688 26.7% 4 Gasoil Futures, ICE Futures Europe 100 tonnes 55,889,301 55,367,270 -0.9% 5 Crude Oil Futures, MCX 100 barrels 44,547,741 47,919,501 7.6% 6 NY Harbor RBOB Gasoline Futures, Nymex 42,000 gal 26,125,335 31,579,526 20.9% 7 No. 2 Heating Oil Futures, Nymex 42,000 gal 26,148,237 30,733,550 17.5% 8 WTI Crude Oil Futures, ICE Futures Europe 1,000 barrels 44,957,456 28,379,650 -36.9% 9 Light, Sweet Crude Oil Opt. on Futures, Nymex 1,000 barrels 31,916,141 27,894,107 -12.6% 10 Natural Gas Futures, MCX 1,250 MMBTU 7,463,502 23,379,782 213.3% 11 Natural Gas European-Style Options, Nymex 10,000 MMBTU 19,832,148 21,877,685 10.3% 12 U.S. Oil Fund ETF Options * N/A 24,940,426 18,560,624 -25.6% 13 Henry Hub Natural Gas Swap Futures, Nymex 2,500 MMBTU 16,935,080 16,360,396 -3.4% 14 U.S. Natural Gas Fund ETF Options * N/A 11,478,737 10,968,479 -4.4% 15 Brent Crude Oil Futures, Moscow Exchange 10 barrels 17,352,367 10,045,116 -42.1% 16 Brent Crude Oil Options, ICE Futures Europe 1,000 barrels 1,781,842 7,588,374 325.9% 17 Natural Gas Penultimate Swap Fut., Nymex 2,500 MMBTU 5,986,335 7,238,247 20.9% 18 EUA Futures, ICE Futures Europe 1,000 EUAs 4,438,833 5,109,514 15.1% 19 UK Nat. Gas Fut. (Seasons), ICE Futures Europe 1,000 therms/day 2,259,480 2,764,770 22.4% 20 Crude Oil 1 Month CSO Options, Nymex 1,000 barrels 2,614,660 2,668,965 2.1% * Traded on multiple U.S. options exchanges

Futures Industry | January 2013 15 Top 20 Equity Index Futures & Options Contracts Rank Contract Index Multiplier Jan-Oct 2011 Jan-Oct 2012 % Change 1 Kospi 200 Options, Korea Exchange * 500,000 Korean won 3,140,818,598 1,491,340,328 -52.5% 2 S&P CNX Nifty Options, NSE India 50 Indian rupees 701,858,270 682,089,699 -2.8% 3 SPDR S&P 500 ETF Options ** N/A 613,817,277 479,232,250 -21.9% 4 E-mini S&P 500 Futures, CME 50 U.S. dollars 522,925,797 397,318,726 -24.0% 5 RTS Futures, Moscow Exchange 2 U.S. dollars 304,360,023 278,792,356 -8.4% 6 Euro Stoxx 50 Futures, Eurex 10 euros 347,628,543 274,292,308 -21.1% 7 Euro Stoxx 50 Options, Eurex 10 euros 311,123,815 248,420,700 -20.2% 8 S&P 500 Options (SPX) Options, CBOE 100 U.S. dollars 166,765,838 142,611,792 -14.5% 9 Sensex Options, BSE 15 Indian rupees 20,610 127,565,440 618,849.2% 10 Nikkei 225 Mini Futures, OSE 100 yen 100,897,766 107,135,032 6.2% 11 iShares Russell 2000 ETF Options ** N/A 146,612,691 104,233,057 -28.9% 12 Powershares QQQ ETF Options ** N/A 120,068,541 96,885,655 -19.3% 13 CBOE Volatility (VIX) Options, CBOE 100 U.S. dollars 86,167,494 90,121,238 4.6% 14 Taiex Options, Taifex 50 New Taiwan dollars 107,467,694 85,626,313 -20.3% 15 CSI 300 Futures, CFFEX 300 Chinese RMB 39,107,160 78,389,470 100.4% 16 S&P CNX Nifty Futures, NSE India 50 Indian rupees 102,170,701 71,369,924 -30.1% 17 BSE 100 Options, BSE *** 50 Indian rupees N/A 57,051,234 N/A 18 Kospi 200 Futures, Korea Exchange 500,000 Korean won 74,010,485 54,474,565 -26.4% 19 E-mini Nasdaq 100 Futures, CME 20 U.S. dollars 64,532,463 52,179,401 -19.1% 20 iShares MSCI Emerging Markets ETF Options ** N/A 61,281,376 52,144,571 -14.9% * Multiplier changed from 100,000 won for series listed from March onwards. ** Traded on multiple U.S. options exchanges *** Began trading in August 2012

Top 20 Foreign Exchange Futures & Options Contracts Rank Contract Contract Size Jan-Oct 2011 Jan-Oct 2012 % Change 1 U.S. Dollar/Indian Rupee Futures, NSE India 1,000 USD 611,556,531 506,591,496 -17.2% 2 U.S. Dollar/Indian Rupee Futures, MCX-SX 1,000 USD 708,078,059 464,781,756 -34.4% 3 U.S. Dollar/Russian Ruble Fut., Moscow Exchange 1,000 USD 164,838,100 303,988,330 84.4% 4 U.S. Dollar/Indian Rupee Options, NSE India 1,000 USD 216,777,555 170,914,991 -21.2% 5 U.S. Dollar Futures, BM&F 50,000 USD 72,739,432 71,494,505 -1.7% 6 Euro FX Futures, CME 125,000 Euro 72,260,033 57,686,199 -20.2% 7 U.S. Dollar Futures, Korea Exchange 10,000 USD 58,068,010 46,043,427 -20.7% 8 U.S. Dollar Futures, Rofex 1,000 USD 44,605,070 43,738,308 -1.9% 9 Australian Dollar Futures, CME 100,000 AUD 25,690,215 28,322,146 10.2% 10 Euro/U.S. Dollar Futures, Moscow Exchange 1,000 Euro 40,343,167 27,173,586 -32.6% 11 British Pound Futures, CME 62,500 GBP 24,958,834 22,071,808 -11.6% 12 Canadian Dollar Futures, CME 100,000 CAD 19,269,492 19,800,806 2.8% 13 Japanese Yen Futures, CME 12,500,000 Yen 25,433,212 18,692,379 -26.5% 14 Australian Dollar/Japanese Yen Futures, TFX 10,000 Euro 36,014,787 14,584,325 -59.5% 15 Euro/Japanese Yen Futures, TFX 10,000 AUD 22,857,510 14,453,943 -36.8% 16 U.S. Dollar Futures, Turkdex 1,000 USD 13,118,508 9,600,994 -26.8% 17 Mexican Peso Futures, CME 500,000 MXP 7,702,190 9,471,309 23.0% 18 Swiss Franc Futures, CME 125,000 CHF 9,187,808 8,707,228 -5.2% 19 Euro/Indian Rupee Futures, MCX-SX 1,000 Euro 27,625,638 8,391,860 -69.6% 20 Mexican Peso/U.S. Dollar Futures, Mexder 10,000 USD 5,838,015 8,220,310 40.8%

16 Futures Industry || www.futuresindustry.com Top 20 Interest Rate Futures & Options Contracts Rank Contract Contract Size Jan-Oct 2011 Jan-Oct 2012 % Change 1 Eurodollar Futures, CME 1,000,000 USD 495,925,079 373,229,055 -24.7% 2 One Day Inter-Bank Deposit Futures, BM&F 100,000 Real 270,747,431 289,639,197 7.0% 3 10 Year Treasury Note Futures, CBOT 100,000 USD 276,437,017 226,204,922 -18.2% 4 Euro-Bund Futures, Eurex 100,000 Euro 206,757,724 158,467,364 -23.4% 5 3 Month Euribor Futures, Liffe U.K. 1,000,000 Euro 210,883,748 151,378,969 -28.2% 6 5 Year Treasury Note Futures, CBOT 100,000 USD 147,512,655 110,824,838 -24.9% 7 3 Month Sterling Futures, Liffe U.K. 500,000 GBP 102,392,375 99,752,417 -2.6% 8 IDI Index Options, BM&F 1 Real 85,950,843 95,634,065 11.3% 9 Euro-Bobl Futures, Eurex 100,000 Euro 125,135,965 91,962,996 -26.5% 10 Eurodollar Mid-Curve Options on Futures, CME 1,000,000 USD 82,062,407 81,073,305 -1.2% 11 Euro-Schatz Futures, Eurex 100,000 Euro 146,321,519 81,016,832 -44.6% 12 30 Year Treasury Bond Futures, CBOT 100,000 USD 78,310,987 77,104,790 -1.5% 13 3 Month Euribor Options, Liffe U.K. 1,000,000 Euro 105,448,918 63,681,684 -39.6% 14 10 Year Treasury Note Opt. on Fut., CBOT 100,000 USD 43,985,883 47,286,210 7.5% 15 Eurodollar Options on Futures, CME 1,000,000 USD 84,230,664 46,499,012 -44.8% 16 2 Year Treasury Note Futures, CBOT 200,000 USD 63,408,375 45,365,925 -28.5% 17 3 Year Treasury Bond Futures, ASX 24 100,000 AUD 36,280,437 37,453,641 3.2% 18 Euro-Bund Options on Futures, Eurex 100,000 Euro 30,504,791 35,887,754 17.6% 19 Long Gilt Futures, Liffe U.K. 100,000 GBP 29,005,976 31,199,226 7.6% 20 3 Year Treasury Bond Fut., Korea Exchange 100 million KRW 29,791,187 26,037,579 -12.6%

Top 20 Metals Futures & Options Contracts Rank Contract Contract Size Jan-Oct 2011 Jan-Oct 2012 % Change 1 Steel Rebar Futures, SHFE 10 tonnes 61,391,327 131,568,373 114.3% 2 Copper Futures, SHFE 5 tonnes 30,775,616 50,760,823 64.9% 3 High Grade Primary Aluminum Futures, LME 25 tonnes 48,030,862 49,156,983 2.3% 4 SPDR Gold Shares ETF Options * N/A 64,790,552 45,134,583 -30.3% 5 Silver MIC Futures, MCX 1 kilogram 35,151,127 43,931,485 25.0% 6 Comex Gold Futures, Nymex 100 ounces 42,168,399 36,875,640 -12.6% 7 Gold Petal Futures, MCX ** 1 gram 17,880,307 31,155,630 74.2% 8 Silver M Futures, MCX 5 kilograms 39,224,210 30,872,757 -21.3% 9 Copper Grade A Futures, LME 25 tonnes 28,540,760 30,258,044 6.0% 10 iShares Silver Trust ETF Options * N/A 73,333,365 29,928,931 -59.2% 11 Copper Futures, MCX 1 tonne 27,129,518 28,698,306 5.8% 12 Special High Grade Zinc Futures, LME 25 tonnes 18,127,351 24,390,633 34.6% 13 Gold M Futures, MCX 100 grams 20,840,700 18,530,012 -11.1% 14 Zinc Futures, SHFE 5 tonnes 46,345,295 18,445,896 -60.2% 15 Copper Mini Futures, MCX *** 250 kilograms N/A 15,705,292 N/A 16 Silver Futures, SHFE **** 15 kilograms N/A 15,190,102 N/A 17 Silver Futures, MCX 30 kilograms 21,239,289 14,546,591 -31.5% 18 Comex Copper Futures, Nymex 25,000 pounds 10,444,132 13,840,414 32.5% 19 Nickel Futures, MCX 250 kilograms 12,150,644 13,025,992 7.2% 20 Standard Lead Futures, LME 25 tonnes 9,135,669 11,685,535 27.9% * Traded on multiple U.S. options exchanges ** Began trading in April 2011 *** Began trading in February 2012 **** Began trading in May 2012

Futures Industry | January 2013 17 Top 30 Futures Commission Merchants in the U.S. Based on Value of Customer Segregated Funds Held for Trading in U.S. Futures Markets Rank Company Name October 2011 October 2012 % Change 1 Goldman Sachs & Co. 20,346,497,796 20,463,532,750 0.6% 2 J.P. Morgan Securities LLC 19,170,979,010 18,100,941,197 -5.6% 3 Newedge USA LLC 20,833,983,459 17,082,323,664 -18.0% 4 Deutsche Bank Securities Inc. 15,136,579,003 14,757,500,778 -2.5% 5 UBS Securities LLC 9,445,467,218 8,644,856,793 -8.5% 6 Citigroup Global Markets Inc. 10,148,689,984 8,354,106,120 -17.7% 7 Merrill Lynch Pierce Fenner & Smith 9,365,678,809 7,715,747,991 -17.6% 8 Morgan Stanley & Co LLC 5,169,696,486 7,403,703,176 43.2% 9 Barclays Capital Inc. 5,705,209,090 6,229,871,294 9.2% 10 Credit Suisse Securities (USA) LLC 6,243,488,159 5,909,602,923 -5.3% 11 R.J. O’Brien & Associates LLC 2,576,684,829 3,939,099,756 52.9% 12 ADM Investor Services Inc. 2,486,620,013 3,045,484,856 22.5% 13 Jefferies Bache LLC 2,999,526,000 2,768,273,000 -7.7% 14 ABN Amro Clearing Chicago LLC 2,107,076,881 2,713,216,974 28.8% 15 BNP Paribas Prime Brokerage Inc. 1,397,505,939 1,949,579,449 39.5% 16 Interactive Brokers LLC 641,683,621 1,765,864,122 175.2% 17 Mizuho Securities USA Inc. 1,190,472,913 1,763,587,937 48.1% 18 FCStone LLC 1,293,351,455 1,677,471,833 29.7% 19 Rosenthal Collins Group LLC 1,372,387,305 1,667,184,154 21.5% 20 RBS Securities Inc. 2,411,857,477 1,516,125,176 -37.1% 21 Merrill Lynch Professional Clearing Corp 791,273,963 955,716,720 20.8% 22 Macquarie Futures USA LLC 823,515,435 944,879,265 14.7% 23 McVean Trading & Investments LLC 853,285,791 939,952,550 10.2% 24 HSBC Securities USA Inc. 857,990,476 905,062,904 5.5% 25 Goldman Sachs Execution & Clearing LP 1,143,170,340 744,550,989 -34.9% 26 Morgan Stanley Smith Barney LLC 586,487,438 717,457,116 22.3% 27 RBC Capital Markets LLC 460,524,480 693,208,923 50.5% 28 Vision Financial Markets LLC 331,504,313 662,619,285 99.9% 29 J.P. Morgan Clearing Corp. 650,292,326 656,382,405 0.9% 30 Timber Hill LLC 680,012,588 639,416,323 -6.0% Total Customer Funds Held by All FCMs 153,021,487,145 150,352,192,105 -1.7%

* Previously registered as Prudential Bache Commodities LLC Note: Ranking based on the total amount of funds that futures commission merchants are required to segregate on behalf of customers trading on a U.S. futures exchange. FCMs owned by the same holding company have not been consolidated.

Source: Commodity Futures Trading Commission

18 Futures Industry || www.futuresindustry.com FIA/FOA Internati onal Derivati ves Expo 25-26 June 2013 The Brewery, Chiswell Street, London EC1

Mark Your Diary! The Futures Industry Association and the Futures and Options Association are pleased to present the sixth Annual International Derivatives Expo. Last year’s event boasted more than 40 exhibits showcasing the latest in products and technology for the derivatives industry, plus 30+ sessions with high-pro le speakers, information-packed workshops, and endless networking opportunities. Contact Toni Vitale Chan, [email protected], ph +1.312.636.2919 or Bernadette Connolly, [email protected], ph +44 [0]20.7090.1334 for information on becoming a sponsor or exhibitor. More informati on at www.idw.org.uk

Customer Segregated Funds Jan 2006 to Oct 2012

200

150

100 Note: Ranking based on the total amount of funds that futures commission merchants are required to segregate on behalf of customers trading on a U.S. futures market. FCMs owned by the same holding company have not been consolidated.

50 Jul Jul Jul Jul Jul Nov Nov Nov Nov Nov Nov Sep Sep Sep Sep Sep Sep Sep Mar Mar Mar Mar Mar Mar Mar July July May May May May May May May Jan 2012 Jan 2011 Jan 2010 Jan 2009 Jan 2008 Jan 2007 Jan 2006

Source: Commodity Futures Trading Commission Futures Industry | January 2013 19

Join senior managers from brokerage firms and exchanges, money managers and international regulators. Last year, more than 1,000 decision makers, innovators and policymakers from 30 countries gathered to share information, exchange ideas, discuss trends and network with peers.

Boca 2012 Fast Facts • More than 1,000 professionals attended from all over the world • Nearly 30% of the attendees came from outside the U.S. • Representatives from 39 brokerage firms • Representatives from 61 international exchanges and clearing organizations • 26 members of the press • 30 countries represented: Argentina, Australia, Brazil, Canada, China, Colombia, Ethiopia, France, Germany, India, Indonesia, Ireland, Italy, Japan, Korea, Mexico, Netherlands, Norway, Poland, Qatar, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Turkey, United Kingdom

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Exchange Leaders Oppose chief scientific adviser. The study, which is index swaps and single currency basis Basel III Capital Standards based on work from 150 experts and spon- swaps—across four currencies—euro, U.S. for Listed Derivatives sored by the U.K. government’s Foresight dollar, British pound and Swiss franc. Later The World Federation of Exchanges, program, said liquidity has improved, trans- this year, Eurex plans to make several im- representing 59 stock, futures and options action costs have fallen, and market prices provements, including product and currency exchanges and associated clearinghouses, have become more efficient as a result of expansion, portfolio margining across listed urged international regulatory bodies to computer trading. The study also found no and OTC business, and collateral transfor- modify capital standards to “appropri- direct evidence that high frequency trading mation for buy-side variation margin. ately reflect the liquidity and efficiency of has increased volatility in financial markets A key feature of the new service is the exchange-traded derivatives markets.” In a or market abuse. The study did find, how- customer protection scheme. Eurex is Nov. 27 letter to the Financial Stability Board ever, that computer-based trading can lead providing the buy side with two ways to and other policy organizations, WFE raised to market instability and periodic illiquidity connect to the service—as a “registered concerns about an interim capital standards in certain circumstances, and suggests customer” or as an agent customer of the proposal from the Basel Committee on actions to limit future market disturbances. clearing member. In the case of registered Banking Supervision (Basel III) that would These include implementation of accurate, customers, client margin is held in individual apply a five-day margin period or risk stan- high resolution, synchronized timestamps accounts rather than pooled together in an dard to exchange-traded derivatives. “This as a key means for helping analyze financial omnibus account. Eurex also is exploring may force exchange users (e.g. manufac- markets, and better surveillance of finan- the potential for introducing an omnibus net turers, food producers, employee pension cial markets through the development of segregation model for clients subject to U.K. funds, and investors) to either discontinue software for automated forensic analysis of regulatory requirements. critical hedging practices or move activ- market events. ASX and LCH.Clearnet Target ity to the less transparent OTC derivatives Eurex Launches IRS Clearing Swap Clearing in Australia market,” WFE stated in the letter. In related news, Terry Duffy, executive Eurex began clearing interest rate swaps ASX and LCH.Clearnet are set for head- chairman and president of CME Group, in November through its EurexOTC Clear to-head competition in the provision of warned against the Basel III capital rules at service. The launch was supported by a clearing for the Australian over-the-counter a Congressional hearing on Nov. 29. “CME group of five banks—Barclays, Citigroup derivatives market. ASX announced in De- Group’s concern is that Basel III’s ‘one size Global Markets, Credit Suisse, Deutsche cember that it has signed up seven banks fits all’ rules for capital charges based on Bank and J.P. Morgan—that worked with to help develop a new clearing service the risk of cleared derivatives is at odds with Eurex to develop the new service. In addi- for interest rate swaps, and added that it the objectives of Dodd-Frank and the G20 tion, Basler Kantonalbank, Commerzbank, expects to deliver the first phase, dealer- mandates, which aim to reduce systemic HSBC, Royal Bank of Scotland and UBS to-dealer clearing, by mid-2013. LCH. risk and increase transparency,” said Duffy joined the service for production start on Clearnet already offers clearing for interest in prepared testimony before the House Nov. 13. Eurex said that BNP Paribas, Gold- rate swaps, but announced in December subcommittees on financial institutions and man Sachs, Morgan Stanly, Nomura and that it will apply for an Australian clearing consumer credit. “If clearinghouses properly Nord/LB are preparing to join the service as and settlement facility license during the first set margins for liquid derivatives to cover clearing members. Société Générale joined quarter of 2013 to make its service more one or two-day risk while banking regulators in late December. attractive to local market participants. LCH. impose a capital charge based on five days, Although all 10 clearing members active on Clearnet also said that four major domestic banks and ultimately their customers will be the service at launch have submitted trades banks have submitted letters of intent to use burdened with increased costs from unwar- for clearing, the real test of the service will the company’s service. LCH.Clearnet has ranted capital requirements,” said Duffy. come later this year. Eurex noted that manda- the advantage of being the leading global tory clearing is expected to start in Europe clearinghouse for interest rate swaps. The U.K. Publishes Foresight in the second half of 2013, and said the U.K. clearinghouse currently clears approxi- Study on Computer Trading participation of the clearing firms in the launch mately half of the global interest rate swap Computer-based trading can have ben- will help pave the way for the onboarding of market, and as of mid-December, it had eficial effects on liquidity, transaction costs buy-side clients ahead of the mandate. cleared AUD $3.9 trillion (USD $4.1 trillion) and the efficiency of market prices, accord- Initially the service covers four types in Australian dollar denominated interest ing to a report on computer trading pub- of standardized contracts—interest rate rate swaps. On the other hand, ASX officials lished on Oct. 23 by the U.K. government’s swaps, forward rate agreements, overnight said their offering will have the advantage of

22 Futures Industry | www.futuresindustry.com operating onshore in local time, subject to a counterparty default. Key advantages set-off against the clearinghouse in case of local regulatory oversight, and will have the are the ability to rely on netting opinions its default, and whether cash and non-cash potential for cross-margining with ASX 24’s to reduce the amount of capital that must collateral posted with a clearinghouse would interest rate futures market. be held against derivatives exposures, and be treated as bankruptcy-remote in the case to recognize contractual close-out netting of the insolvency of that clearinghouse. The CME Launches Swap Data arrangements as effective credit risk mitiga- FOA noted that the clearinghouse opinions Reporting Service tion tools. The FOA noted that the ability to will be of value to any clearing member CME Group announced on Nov. 21 that hold capital against net, rather than gross, subject to Basel III capital standards or the Commodity Futures Trading Com- exposures is particularly significant with the anyone who wants comfort that they can mission has provisionally approved CME implementation of the Basel III rules, which net and set-off their exposures in the event Repository Service as a data repository for will increase general capital requirements of a clearinghouse’s insolvency. All opinions credit, interest rate, commodity and foreign and introduce capital charges for clearing- will be available to FOA members and non- exchange swaps. To date, two other swap house exposures. members on a subscription basis. data repositories—DTCC Data Reposi- The expanded service, which the London- tory and ICE Trade Vault—have received based association calls its Netting Analyser SFOA and FIA to Jointly provisional registration from the CFTC. The Library, was produced in conjunction with Host the 2013 Bürgenstock CFTC is separately seeking comment on a the law firm of Clifford Chance and consists Derivatives Conference rule proposed by CME that would require all of three types of legal opinions: close-out FIA and the Swiss Futures and Options swaps cleared through CME to be reported netting opinions, collateral opinions and Association have signed a memorandum to CME’s trade repository rather than an clearinghouse opinions. The netting and of understanding to jointly host the annual unaffiliated repository. collateral part of the library will cover a wide Bürgenstock derivatives conference in Swit- After receiving the provisional registration, range of counterparty types in 75 and 77 zerland. The conference, which has a long CME withdrew a lawsuit it had filed earlier jurisdictions, respectively. The counterparty history of attracting distinguished speak- in November challenging the agency’s rules types covered by the opinions vary from juris- ers and participants from the economic, requiring clearinghouses to report informa- diction to jurisdiction but include companies, academic and political worlds, will be held tion about cleared swaps transactions to individuals, partnerships, investment funds, at the InterContinental Hotel and Resort in unaffiliated swap data repositories. CME’s pension funds, trusts, charitable bodies, Geneva from Sept. 25 to Sept. 27. suit drew attention from the Depository Trust banks, investment firms, insurers, sovereign/ “We at SFOA are thrilled about the and Clearing Corporation, which filed a mo- government entities and several others. The upcoming co-operation with FIA in the tion in Federal Court defending the CFTC’s netting and collateral opinions are based on organization of the Bürgenstock Conference swap data repository rules. standard FOA terms of business provisions, 2013,” said Otto Nägeli, chairman of SFOA. In a related matter, the CFTC on Nov. which are based on the principal-to-principal “Based on the wealth of expertise and expe- 28 withdrew parts of a “Frequently Asked model for clearing rather than the agency rience in the United States and Switzerland Questions” document that describes how model used in the U.S. respectively, we will build on a strong brand trade price and volume information should The FOA noted that its existing library of with joint forces.” be submitted to swap data repositories as netting opinions will be superseded by the “FIA and SFOA have a relationship that required under the Dodd-Frank Act. The new service, and so all of existing netting dates back more than 30 years,” said Walt CFTC said that certain matters that were opinions will be replaced by new opinions. Lukken, president and chief executive officer covered in the questions and answers, The FOA will also provide subscribers with of FIA. “Geneva is a natural choice for launch- such as which party to a trade has the summaries of all of the legal opinions. These ing this new partnership, given its central authority to select the SDR, are now being are intended to assist members by providing location, its history as a financial center, and considered as part of the agency’s review short, succinct answers to the key ques- its well-established trading community.” of the CME rule. tions covered by the opinions. The clearinghouse opinions, which are FIA’s Lukken Urges FOA Expands Netting Opinion new to the service, cover 47 clearing- Regulators to Focus on Library to 77 Jurisdictions houses in 28 jurisdictions. The FOA said Key Goals of G20 Reforms The Futures and Options Association these opinions will cover exchange-traded U.S. regulators implementing Dodd- has expanded and updated its library of derivatives and in some cases cleared Frank reforms should focus on the key netting opinions to provide more legal OTC derivatives as well. The opinions will priorities the G20 sought to address in certainty to market participants in case of address the effectiveness of netting and the wake of the financial crisis-reducing

Futures Industry | January 2013 23 newsbriefs

systemic risk and bringing greater transpar- FIA Coordinates Industry storm, the futures exchanges closed their ency to the over-the-counter derivatives Response to Hurricane Sandy equity and fixed income futures markets to markets, said FIA President Walt Lukken in Shortly before Hurricane Sandy hit the be in sync with the securities markets. a Nov. 7 speech at a conference organized East Coast of the U.S., the FIA began a FIA also held daily calls so that the futures by the Federal Reserve Bank of Chicago. series of conference calls to coordinate exchanges could brief the clearing member “As we have moved into the implementa- the industry response. The calls began on firms on the status of their markets and tion phase of the reforms, the agenda has Sunday, Oct. 28, and provided a forum for provide essential information for the continu- expanded beyond these priorities,” Lukken U.S. securities and futures exchanges to ity of business operations. Since Septem- said. “Those additional objectives are taking coordinate the closing of certain equity and ber 2011, FIA has been organizing annual away time and resources from the goals of fixed income markets in light of the flooding, disaster recovery tests to allow clearing firms the G20, and that is making the implemen- power outages, and other problems affect- to test connectivity from their back-up sites. tation process considerably more compli- ing firms in the greater New York metropoli- By coincidence, this year’s disaster recovery cated and burdensome for both the agency tan area. While many of the U.S. commodity test was held on Saturday Oct. 27, two days and the industry it regulates.” futures markets stayed open throughout the before Hurricane Sandy came onshore.

EU Trade Associations Publish Handbook to Help Member Firms Implement Regulatory Change By Anthony Belchambers, chief executive, Futures and Options Association irms across the European Union are confronted with implementing Given that many parts of the regulatory agenda are still not yet in final Fwhat many view as the most complex and costly regulatory and mar- form, the handbook will be revised and updated over the next several years. ket change agenda for decades. It will impact IT systems and controls, As it stands now, the handbook covers EMIR and the supporting technical customer documentation, business lines and strategies, and it will involve standards issued by European Securities and Markets Authority. KPMG is every aspect of a financial services business from the board down to line developing guidance, action points and checklists covering some of the managers, compliance, risk and legal departments and most front-office, more difficult areas of EMIR implementation, including the clearing obliga- mid-office and back-office processes. tion, the intra-group exemption, portability and segregation, reporting and In response, four EU trade associations have banded together to develop record keeping, and issues facing non-financial counterparties. a web-based implementation handbook that would cover the entirety of Looking forward, Clifford Chance is preparing to incorporate draft ver- the post-crisis EU regulatory change agenda. That agenda includes the sions of MiFID and MiFIR into the handbook while negotiations among European Markets Infrastructure Regulation, the Market and Financial European policymakers continue on these two sets of rules. This section of Instruments Regulation and Directive, the Market Abuse Regulation and the handbook will be subject to a continuous process of updating through Directive and the market integrity rules of the Regulation on Energy Market 2013 and even into 2014 in order to incorporate the anticipated flow of Integrity and Transparency. MiFID/MiFIR technical standards from ESMA. The four associations—the Association of Private Client and Investment MAR and the relevant parts of REMIT are likely to be included in the Managers, the European Federation of Energy Traders, the Futures and handbook early in 2013, although here again there are continuing negotia- Options Association and the Wholesale Market Brokers Association—have tions over the final content of the legislation. retained Clifford Chance and KPMG to draft the handbook, which will be A Dodd-Frank Annex is being developed to cover the implementation made available to the associations’ members at no cost. The handbook challenges for EU firms impacted by the cross-border aspects of U.S. swaps is intended to serve as an aid to firms as they seek to come into practical regulation. Since not all the members of the participating associations will compliance with a multitude of new market and client-facing rules, require- be affected by Dodd-Frank, the Annex will be made available to firms on a ments and processes on a timely and comprehensive basis. separate subscription basis. In addition to covering the overarching articles of legislation and the Last but not least, a specialist annex covering derivatives, which will go supporting technical standards and guidance, the handbook will pro- into significantly greater detail surrounding some of the more ambiguous vide heat maps designed to help firms prioritize their implementation and difficult areas of implementation, will be added early in the first quarter programs as well as legal and operational checklists, action points and of 2013. guidance. In addition, the handbook will be supported by periodic imple- Further information can be obtained from the Handbook Secretariat, mentation workshops. which is based at the FOA in London.

24 Futures Industry | www.futuresindustry.com FIA New York Expo April 10-11, 2013 Hilton New York (opening recepion on April 10)

MARK YOUR CALENDAR! 200 fi rms + 600 professionals + 35 exhibits = so many networking opportunities Join us for the second NY Expo at a new location: Hilton New York! Sessions will explore topics related to mandatory clearing, rising margin requirements, LSOC with excess, reporting requirements, Basle capital requirements, banking and collateral, customer protection rules, block trading, setting limits on give ups and bunched orders, allocation of bunched orders, risk management best practices for trading fi rms, execution brokers and clearing fi rms, and electronic trading of OTC derivatives. Contact Toni Vitale Chan at 312.636.2919 or [email protected] for sponsorship and exhibiting opportunities. www.futuresindustry.org/nyexpo

The 2012 testing was conducted capital requirements and foreign partici- CME Consolidates Position among major U.S. and international pants, are intended to ensure a “consis- in Wheat Futures futures exchanges, clearinghouses and tent regulatory approach” for futures and In December, CME Group completed futures commission merchants. Among options that trade on FEX, a company its acquisition of the Kansas City Board of those participating were 18 futures that is seeking a license to operate a Trade, another milestone in the exchange’s exchange and clearinghouses, 68 FCMs derivatives exchange in competition strategy for consolidating the U.S. grain and 46 trading firms, representing 85% of with ASX 24. The amendments also futures market. The acquisition of the overall futures exchange volume world- are intended to address “the increasing exchange brings together the KCBT hard wide. Results from this test showed that prevalence and impact” of proprietary red winter contract, a benchmark for a the industry is capable of successfully trading firms and ensure appropriate risk higher quality type of wheat used to make orchestrating an industry-wide disaster management for these types of trading breads, and the CME’s CBOT soft red recovery with limited delays. accounts, ASIC said. winter wheat futures, which is the most In the second measure, ASIC published actively traded wheat contract in the world. Australia Revamps new market integrity rules on Nov. 21 to The only remaining U.S. wheat contracts not Market Integrity Rules address risks related to the growth of controlled by CME are the Minneapolis Grain The Australian Securities and Invest- automated trading. Although these rules Exchange’s hard red spring wheat futures ments Commission in November announced mainly apply to cash equity markets, a and options. two measures to address concerns about provision requiring volatility controls to While trading of KCBT’s hard red winter the impact of market structure changes on prevent extreme price movements will wheat futures had been available through market integrity. apply to the SPI 200 index futures start- CME’s Globex electronic trading platform On Nov. 14, ASIC released a con- ing in May 2014. ASIC also established a before the acquisition, the deal paves the sultation paper proposing amendments taskforce to review the impact of high- way to consolidate clearing operations at to the market integrity rules for futures frequency trading on market quality and CME. The acquisition also means that and options trading. The amendments, consider whether new rules or guidance members can now take advantage of im- which include rules on risk management, are needed. The task force is due to re- plied functionality on Globex to trade the supervisory policies and procedures, port in March 2013. KCBT-CBOT wheat futures spread more

Futures Industry | January 2013 25 FIA Law & Compliance Division Presents: Conference on the Regulation of Futures, newsbriefs Derivatives and OTC Products May 8-10, 2013 efficiently. “This will allow you to capitalize trix360, which will then make the data institutional investors, investing in deriva- Marriott Waterfront l Baltimore, Maryland on the price differentials inherent in the two available to the self-regulatory organizations. tives in TFEX via brokers which also are classes of wheat by executing this popular NFA said it expects to implement the new DIPF members,” said Kesara Manchusree, spread as a single trade, rather than by system in phases, starting with banks and TFEX managing director. Protection is pro- legging into each individual contract,” CME later adding other types of depositories such vided to investors when any DIPF member www.futuresindustry.org/lc l 202.466.5460 said in a Dec. 3 notice. “This is just the be- as clearing FCMs, money market accounts broker is adjudicated as being bankrupt or ginning of the new products and enhance- and broker-dealers. any member broker of DIPF fails to comply ments we plan to provide.” NFA also has begun collecting addi- with an arbitration ruling requiring them to Over the next six months, trading on the tional information from futures commission return assets or compensate for the price KCBT trading floor will continue as CME be- merchants and posting that information on of assets to investors. Currently, there are REGISTRATION gins integrating the two exchanges. Clearing its online BASIC system, a key step in giving 33 TFEX member brokers with mentioned will be integrated on April 15, according to a customers the tools they need to monitor investors as their customers. Brokers be- MEMBERS OF THE FIA L&C DIVISION 2013* CME notice released on Dec. 19. the assets they deposit with their brokers. gan applying to be a fund member on Nov Through April 18 ...... $650 The new service provides the public with 15 and will pay a monthly fee beginning in NFA, CME Build access to specific information about an January 2013. After April 18 ...... $750 Electronic System to FCM such as firm’s adjusted net capital, *For those who have already renewed their Division membership for 2013. Monitor Customer Funds the amount of funds held in segregated and SGX Amends Clearing Rules National Futures Association, the self- secured accounts, and the types of invest- Singapore Exchange on Oct. 25 MEMBERS OF THE FIA* regulatory organization for the U.S. futures ments that the FCM is making with those proposed a series of rule changes aimed industry, and CME Group are building an customer funds. at making its clearing and settlement Through April 18 ...... $700 automated system for the daily monitor- Financial information included on an processes more transparent. The amend- After April 18 ...... $800 ing of all customer segregated funds and FCM’s BASIC page includes three reports: ments cover topics such as margins and customer secured amounts held by futures the FCM capital report, FCM customer collateral provided to the clearinghouse, *Price includes one-year membership in the FIA Law & Compliance Division. commission merchants at banks and other segregated funds report and the FCM actions to be taken to manage the default NON-MEMBERS OF THE FIA depositories. In a letter submitted to the customer secured amount funds report. The of a clearing member, processes by which Commodity Futures Trading Commission FCM capital report shows the most recent customers can have their trades settled Through April 18 ...... $850 on Nov. 27, NFA explained that this ap- month’s information on adjusted net capital during such an event, and trust arrange- After April 18 ...... $950 proach would be less cumbersome than required net capital and excess net capital. ments for collateral. SGX is also proposing attempting to monitor each account manu- The FCM customer segregated funds report amendments to derivatives clearing rules FEDERAL GOVERNMENT REGULATORS AND FULL-TIME STUDENTS ...... $225 ally, given the number of FCMs and the and FCM customer secured amount funds and futures trading rules to clarify the number of bank accounts maintained by report each show the total funds held in point at which trades are novated and the Registration will be open by February 1, 2013. For sponsorship and exhibit information, contact each FCM. The new system will allow NFA segregated accounts, excess segregated process of novation. Toni Vitale Chan at [email protected] or 312.636.2919. and CME to run an automated comparison funds, the percentage of segregated funds of the balances in customer segregated that are held in cash and each of the invest- SPONSORS (as of 1-10-13) and secured amount accounts at the ments permitted under CFTC regulations depositories with the daily reports they and whether the FCM held any funds at a receive from FCMs and then quickly identify depository that is an affiliate of the FCM dur- any discrepancies. ing the prior month. As part of this project, NFA and CME have contracted with AlphaMetrix360, a Thailand’s TFEX Establishes subsidiary of AlphaMetrix Group, to ag- Investor Protection Fund gregate the data on customer segregated Thailand Futures Exchange announced and secured amount accounts. AlphaMetrix on Nov. 14 it has established a derivatives Group is a privately held company based investor protection fund, contributing initial in Chicago that provides data aggregation capital of THB 50 million (USD $1.6 million) services to the alternative investment com- with a target that the fund will reach THB munity. NFA has changed its rules to require 100 million (USD $3.3 million) within the all FCMs to instruct their depositories to next four years. “The DIPF fund aims to report the balances in customer segregated boost confidence of Thai retail investors and secured amount accounts to AlphaMe- and domestic corporations, which are not

26 Futures Industry | www.futuresindustry.com FIA Law & Compliance Division Presents: Conference on the Regulation of Futures, Derivatives and OTC Products May 8-10, 2013 Marriott Waterfront l Baltimore, Maryland

www.futuresindustry.org/lc l 202.466.5460

REGISTRATION MEMBERS OF THE FIA L&C DIVISION 2013* Through April 18 ...... $650 After April 18 ...... $750 *For those who have already renewed their Division membership for 2013. MEMBERS OF THE FIA* Through April 18 ...... $700 After April 18 ...... $800 *Price includes one-year membership in the FIA Law & Compliance Division. NON-MEMBERS OF THE FIA Through April 18 ...... $850 After April 18 ...... $950 FEDERAL GOVERNMENT REGULATORS AND FULL-TIME STUDENTS ...... $225 Registration will be open by February 1, 2013. For sponsorship and exhibit information, contact Toni Vitale Chan at [email protected] or 312.636.2919.

SPONSORS (as of 1-10-13) ICE-NYSE The Makings of a Merger

By Walt Lukken

An interview with Jeff Sprecher

28 Futures Industry | www.futuresindustry.com In just over a decade, IntercontinentalExchange has grown from a start-up venture focused on the U.S. power and natural gas market to a multinational organization active in almost every asset class and a dynamic force for change in the global derivatives markets. Along the way, ICE bought the International Petroleum Exchange, the New York Board of Trade, the Winnipeg Commodity Exchange, The Clearing Corp., and the Climate Exchange, combining them and integrating them into an ever- larger complex of markets and clearinghouses. The latest deal, its most ambitious yet, is to acquire NYSE Euronext, the parent company of the New York Stock Exchange, the icon of the U.S. equity markets, and Liffe, Europe’s second largest futures exchange. The proposed merger, which is subject to regulatory and shareholder approval, would make ICE a major force in the interest rate sector and the cash equities markets. In this interview, Jeff Sprecher, the chairman and chief executive officer of ICE, talks with Walt Lukken, the president and chief executive officer of Futures Industry Association, about how the merger came about and his strategic vision for ICE. This is the latest in a series of CEO-to-CEO interviews published in Futures Industry, with the most recent being interviews with Phupinder Gill of CME Group and Michael Bodson of Depository Trust and Clearing Corp. in the October issue. l

LUKKEN: Thanks for taking the time to dling in his Deutsche Börse deal, which was so we had a lot of our management team, talk with us, Jeff. Can you tell us a little bit incredibly gracious on his part. bankers and others who were involved. And about how the merger came about and the So we’ve continued to talk. One thing similarly, NYSE Euronext, having had a sequence of your negotiations? led to another and over time it led to de- failed attempt to merge in the past, needed SPRECHER: Sure. Duncan Niederauer tailed conversations over whether we should due diligence on us and to work with advi- [CEO of NYSE Euronext] and I have been merge the companies. sors to ensure the deal was in a position to friendly for years and we’ve chatted from pass regulatory muster. time to time on how we might be able to LUKKEN: I think a lot of people were work together and share ideas on where amazed that this deal was kept secret in a LUKKEN: You’ve been interested in Liffe we’re trying to take our two companies. So world that seems to leak everything. How and its interest rates franchise for quite the fact that Duncan and I have been dia- did you manage to keep such a big an- awhile now. How does Liffe fit into your loguing is not something new. nouncement under wraps for so long? strategic vision within ICE and how does As you may recall, ICE teamed up with SPRECHER: We were surprised our- the European rates business fit into what Nasdaq in 2011 and tried to acquire NYSE selves, because by the end of our deal you’re doing? Euronext during its proposed merger with there were a lot of people that were work- SPRECHER: As we looked at rates prod- Deutsche Börse. After we failed and a pe- ing on it. In fact, the night before we ucts—and we looked at them for years— riod of time went by, Duncan sent me an made the announcement it did leak that there was not an obvious way for us to email after one of our quarterly earnings we were talking, but that was after the enter the trading, clearing or services busi- calls, and basically said good call, nice quar- markets had closed and it really had no ness around them. We always felt that we ter, or something of that ilk. I saw that as a impact on the deal. needed to have a bigger anchor if we wanted sign that he was reconnecting with me, and NYSE Euronext is a complicated com- to move into those spaces. That was our rea- that our relationship had survived my med- pany. We needed to conduct due diligence, soning behind earlier attempts to buy the

Futures Industry | January 2013 29 ICE Interview

Chicago Board of Trade, and that was our either combine them or make a determina- ket and having a proper model to do that. reasoning behind our partnership with Nas- tion whether they still fit. ICE is a growth Back then it was taken for granted that we daq to buy Liffe and now, obviously, this company and we’re owned by growth inves- would just demand cash or cash equivalent is the ultimate approach. I do think that tors and we tend to move quickly and use collateral, and cash equivalent collateral some of the more mature financial services technology in that regard. But I do think tended to mean sovereign debt. But today, spaces are moving towards more clearing, that equities trading in the U.S. has been after having a European crisis, sovereign more standardization, and more post-trade negatively impacted by the market structure debt is not necessarily worth 100 cents on services that can be provided by exchanges, evolution and there’s now at least a dialogue the dollar when used as collateral. In ad- and I wanted to play a role in that. as to how that market structure could be dition to marking positions to market, we changed to improve the experience for in- have to mark the collateral to market. The LUKKEN: What hurdles remain before dividual investors and for companies that treasury functions that exist within clear- this deal goes final from a regulatory or want to tap capital markets. I think it’s a inghouses are as important as the position shareholder standpoint? good time to be a part of that debate and to risk management functions. I think having SPRECHER: Well, both groups of share- drive improvements in the markets as part large collateral pools that you can mark to holders have to vote to approve the deal, of the NYSE. market, with a very holistic treasury that and then there are many regulatory approv- can move substitute collateral in and out, als. There are U.S. antitrust approvals and LUKKEN: When NYSE Euronext was in is going to be what attracts capital and us- European antitrust approvals, and then in- the deal with Deutsche Börse, there was ers to the clearinghouse. In that regard, scale dividual regulators that oversee each of the a lot of concern about the name and the will matter in making the mandate to move exchanges and clearinghouses. So there will branding of the company. Do you have to clearing possible for our customers, and be a pretty robust vetting of this transaction any general thoughts about the branding that’s really one of the benefits of our clear- by a lot of regulators. of this icon? ing agreement. SPRECHER: No, we didn’t focus on it LUKKEN: It sounds like you will get as we both have strong brands so we don’t LUKKEN: You mentioned earlier the com- your first introduction to the College of need to recreate the wheel. Secondly, we re- plexity and global nature of NYSE Euron- Regulators in Europe that oversees NYSE ally want to consider how stakeholders view ext. I imagine that this must be the biggest Euronext. Euronext as a standalone company. Besides integration challenge of all the companies SPRECHER: Actually it will be my sec- that, it is a very good company. I think it’s you’ve bought. How do you see that integra- ond introduction, because I went and in- underappreciated in part because of the way tion process going forward, with different troduced myself when we made the unso- it’s organized right now under NYSE Eu- headquarters, different cultures, and differ- licited attempt to buy Liffe the first time. ronext. But if other people don’t feel that ent mindsets? As you know, ICE has an interest in ex- way, and Euronext stays part of the group, SPRECHER: We are very focused on what ploring whether or not we should spin out then that somewhat colors our thinking on we want to create. We believe we can inno- all or part of Euronext. As a minimum, a how we’ll go to market. vate and grow the rates business with prod- partial listing would give Euronext a cur- There are certainly a lot of strong brands uct development and clearing for custom- rency and would organize the company as a in this collection that we’re talking about. ers. It’s positive to bring another player into potential standalone continental European NYSE is the most recognized brand, but the rates markets amid the two currently exchange with regained independence. Part the combination of Liffe and ICE’s clear- dominant rates exchanges. There’s a valu- of our conversations, as we go through these ing and commodity infrastructure in Lon- able listings and market data business em- regulatory approvals, will be with the broad don also creates a major European force, I bedded, and an opportunity to strengthen stakeholder group in continental Europe. would think. the equity market structure. And there are many other unique options within the port- LUKKEN: In the U.S., will you keep the LUKKEN: Coming out of the financial cri- folio that may or may not have value. That’s equities listing and the equities trading sis, people are very worried about capital ef- why we have to step back and do a portfolio business? ficiency and collateral efficiency. When you analysis and think about which businesses SPRECHER: Yes, we’ve stated that com- put NYSE Euronext and ICE together, you and projects are attractive or if they don’t fit mitment from day one. There are many have an interesting collection, as you put it, well with us, who would they fit well with. assets within the equities business that we of strategic assets. Is capital efficiency and We have an opportunity to not just smash believe can generate significant value. While collateral efficiency part of the reason for two companies together, but to be thought- equities, along with rates, are at a low point combining these assets, where maybe you ful in the way we’re organized. I mentioned cyclically, these are inherently important can gain some offsets and put all this col- Euronext, but there may be other oppor- businesses to our customers. And we’ve seen lateral in one place, versus scattered around tunities to do that where we make it easier several incidents this year where the NYSE’s Europe and the U.S.? for investors to understand this combined markets and floor have proven their value. SPRECHER: Absolutely. What’s interest- company. I’m an engineer by education and Clearly we’ve announced synergies to right- ing about the clearing business is that in over the last few months I’ve been focused size the expense base. As for other parts of 2008, when we started our first large clear- on thinking about the best way to engineer the business, our plan is, as a group, to go inghouse from scratch, the business was a combined company. Duncan and I have through every business that we have, and very much about marking positions to mar- a very good relationship so we’ve had a lot

30 Futures Industry | www.futuresindustry.com of opportunity to chat about how we might lar around contracts to the point that they they were already futures. go about this. It’s going well. We’re coming could be put in clearinghouses. Since the That’s a bit different than most other up with a lot of ideas and plans, and our launch of our company, those contracts OTC markets. Most other OTC markets two teams are working well together. People have always been listed on a widely dis- are not as standardized and, in fact, are in both of our teams see better opportunity tributed central limit order book. We also highly customized in terms of the tenors for the business combined, and they have had more and more regulation introduced and contract terms. Other OTC markets been very willing to get to know each other for those markets. We were the first com- could follow what we’ve done, but it’s go- quickly and exchange ideas. pany to put OTC contracts in large trader ing to take time for the markets to evolve reports. We were the first company to put in the same way that energy evolved. En- LUKKEN: I want to talk about subjects position limits on OTC contracts. So as the ergy had the collapse of Enron in 2001. It outside the merger as well. And one big one market evolved over 12 years, there was very had its Lehman event. It was post-Enron is the futurization of swaps. Can you walk little distinction between the ways those that people wanted standardization and us through the strategy of why you did what markets were operating and what would be clearing. It was the financial crisis that you did in October, with converting your traditional regulated futures. In October, drove financial markets to follow the same energy swaps to futures, and whether you we just took the last step of a 12-year pro- path, but there needs to be a recognition see this as a larger trend in our industry? cess due to the overwhelming customer de- that it took several years for the commod- SPRECHER: First of all, what we did was mand for the certainty of regulated futures ity markets to go through that process. We as a result of a very unique circumstance. markets. I think that step would have been were able to speed that process through the ICE started in the year 2000 with the idea taken without Dodd-Frank because a lot introduction of clearing, and in CDS, we of standardizing and organizing the energy of our customers were, for all intents and are supporting the move to clearing, more OTC markets. Over a period of 12 years, purposes, trading them and accounting for transparency in the swaps market, and a we standardized the terms and the vernacu- them and putting oversight on them as if futures product.

Futures and Options Markets Operated by IntercontinentalExchange and NYSE Euronext Measured by Volume of Contracts Traded in 2012

ICE NYSE Euronext

Energy Liffe Equities

Amex Options

ICE Futures U.S. Liffe ICE Futures Europe Agricultural

ArcaOptions Liffe Interest Rates Financial

ICE Futures Canada Liffe U.S. Liffe Commodities

Source: IntercontinentalExchange Source: NYSE Euronext

Futures Industry | January 2013 31 ICE Interview

LUKKEN: Before the crisis, if you had gone rewarded. There’s always going to be a need ingly incumbent on us to take our business to the Commodity Futures Trading Com- for customer service as well as the techni- to them. mission and told them that you were con- cal service that FCMs provide. It’s a much We have made a pretty big commitment sidering converting your swaps to futures more complicated regulatory environment, inside Brazil. In the area of commodities, and putting them through central clearing globally. Those FCMs that can help guide Brazil is a big natural resource country to be- and all the rules for futures, it would have their customers and provide real customer gin with, so it makes sense. We already have been well received, even applauded. Now, service will be rewarded as well. But simply the coffee market and sugar market at ICE however, I get a sense that the CFTC is a bit taking customer collateral and co-opting it Futures U.S., which gives us the relation- skeptical about this. What would you say to and using it internally, those days are num- ships that helped us to extend down there. them about this? bered. In a zero-interest rate environment, Similarly, Brazil is opening up its financial SPRECHER: I can’t say that they were investing collateral is a challenging business. markets and increasingly using more debt skeptical, but there has been a lot of regula- instruments. That’s why we made an invest- tory work in the past few years resulting in ment in Cetip and licensed and built a bond a lot of change. Obviously regulated futures platform for Cetip. are accepted around the world and have We have a very big commitment in Sin- been for over a century. They have the high- gapore, which we use as our Asian base. We est standard of regulation that we know in do a limited amount of business in China the markets that we’re serving. The regula- based on local laws, but we enjoy a lot of tors know that better than anybody. support from major Chinese companies The people who are the most uncomfort- Those FCMs that that meet us in Singapore or in London. We able with this process are in businesses that continue to spend time in China and wait were more opaque and with less transpar- can help guide their for the right opportunity inside the borders. ency available. I hope that as the CFTC examines this that it will actually ask the customers and provide LUKKEN: On a personal note, you men- end-user customers. It was solely due to cus- tioned your background as a chemical engi- tomer demand to put more regulation and real customer service neer. You began your career building power more standardization on the energy swaps plants in California. Has this background market that led us to this decision. Not a will be rewarded as helped you in becoming a deal maker in single one of our customers did not want our industry? Do you approach things dif- their trades to move into a regulated futures well. But simply taking ferently as a result of having an engineering environment. I don’t know what other evi- background in your career path? dence you need that the true end-users and customer collateral SPRECHER: Most of the senior manage- the true holders of risk really desire stan- ment at ICE have never traded or never dardization, simplification, and good regu- and co-opting it and worked at an exchange. That has forced us lation that they understand. to ask a lot of questions of our customers. using it internally, It embedded a style of business inside the LUKKEN: What is your view on the im- company of asking questions and not mak- pact of Dodd-Frank and the increasing cost those days are ing a lot of assumptions. I’m an engineer, of regulation on the traditional business and Chuck Vice, our president, is also an model for futures commission merchants? numbered. engineer. I think we approach problem- SPRECHER: Certainly there is pressure solving like engineers and try to figure out following the crisis on the financial services what’s the most efficient way. All through industry, and we are sensitive to that be- ’’ the history of our company, we’ve always cause we are impacted by global reform in LUKKEN: Can you give us some insights had a buy-versus-build attitude. If we can all of our businesses. Most large FCMs are on your strategy for South America and build something and organically find our affiliated with banks. What I see is that the Asia, and how you see growth happening in way into a business, we prefer that. If we FCM model is going to become an exten- those regions? don’t believe we can do that, in any mean- sion of their lending and banking business. SPRECHER: ICE has been a big ben- ingful way, then we prefer to do an acqui- Clearing is going to demand high-quality eficiary of non-Western growth over the sition or joint venture or some other way collateral. Customers will be looking to last few years because we’ve been in the of levering off of other people’s expertise banks to lend them that collateral against commodity space, particularly oil which and footprint. That kind of approach—stay their corporate assets. In that regard, I think is priced in dollars, and we’ve had global close to your customers and then try to it will be a very good business, because companies come to us in order to hedge solve their problems, either buy it or build many banks in the heyday of pre-Lehman and meet their risk management needs. But it—has really just been the formula we’ve had large prime brokerage businesses where as emerging markets become more sophis- used here. they were able to factor customer credit, ticated, they really want to do business in ...... and that kind of lending, the ability to look their own time zone and with their own Walt Lukken is the president and chief execu- at customer risk and lend against it, will be bankruptcy regime. That means it’s increas- tive officer of Futures Industry Association.

32 Futures Industry | www.futuresindustry.com Futurization: Dodd-Frank Drives Swaps-to-Futures Migration

By Will Acworth

In the last several months, a new trend has taken shape in the migration of the U.S. over-the-counter derivatives markets towards electronic trading and central clearing. As the regulatory regime created by the Dodd-Frank Act has taken shape, some market participants have grown alarmed by the complexity and cost of compliance and have turned instead to the futures markets in search of a simpler and more cost-effective alternative to cleared swaps. In energy, a large part of the North American natural gas and electric power market was converted from swaps to futures almost overnight in mid-October, while in the interest rate sector, two exchanges—CME Group and Eris Exchange—have begun offering futures contracts designed to replicate plain vanilla interest rate swaps.

he trend is expected to widen in the The main driving force in energy, according Policymakers in Washington have taken coming months. IntercontinentalEx- to exchange officials, was a desire by market notice. The Commodity Futures Trading T change plans to offer credit index participants to avoid certain Dodd-Frank rules, Commission is planning to hold a public futures in the first quarter, and Singapore notably swap dealer registration, swap report- meeting in the coming weeks to examine the Exchange plans to list a set of commodity fu- ing requirements, and the extra-territorial im- trend and consider its implications for sev- tures that will be economically equivalent to pact of U.S. regulation. In interest rates, the eral pending rules that will affect the trading the commodity swaps that it clears through new swap futures have only just begun trading, of both swaps and futures. That meeting is its AsiaClear facility. In the case of SGX, the but it appears that significantly lower margin likely to focus on the energy markets, where exchange has made it clear that the “futur- requirements will be the biggest attraction. In the “flight to futures” effect has been most ization” of its swaps is aimed at addressing credit, ICE cites the potential for attracting new noticeable. It will also focus on the com- the needs of market participants affected by participants to the credit default swaps market plaints of inter-dealer brokers and others Dodd-Frank, a sign that the impact of the and restoring some of the volume lost since the that the new regulatory regime has unfairly trend is extending beyond the U.S. collapse of Lehman Brothers. tilted the playing field against swap market

Futures Industry | January 2013 33 Futurization

participants. One hot topic will be the rules might affect the success or failure of SEFs. ing and risk management needs in the for swap execution facilities, a new type of Hanging in the balance are several im- energy and commodity space, allowing venue created by Dodd-Frank. The CFTC portant rules related to trading that will af- them to operate in a highly regulated has not yet finalized its SEF rules, and a fect the choice between swaps and futures. regime that they know and understand,” number of companies are eager to register The CFTC is now considering a package of Jeff Sprecher, ICE’s chief executive offi- as SEFs and establish their trading facilities proposed Dodd-Frank rules that will de- cer, said in a Nov. 5 conference call with in competition with futures exchanges and termine how swaps are traded on swap ex- analysts and investors. the new swap futures contracts. ecution facilities and the ability of futures In the case of ICE, approximately 800 exchanges to set block trade thresholds. energy contracts that previously traded Complaints about The package also includes rules relating to as over-the-counter swaps were listed Regulatory Arbitrage the “made available for trade” provision in on ICE’s futures exchanges in London At a Congressional hearing in December, the Dodd-Frank Act as well as a proposed and New York and made available for a coalition of interdealer brokers and swap amendment to Core Principle 9 that would trading on Oct. 15. The existing open trading venues complained that the unequal affect the amount of trading that futures ex- interest was converted into futures over playing field created by the CFTC’s Dodd- changes can conduct through off-exchange the weekend of Oct. 13-14, and ICE’s Frank rules is “threatening to strangle” the mechanisms such as block trades and ex- customers are now trading these prod- U.S. swap market in favor of the futures change-for-swaps. ucts as futures.

After nearly two and a half years of rulemaking, the CFTC’s cumulative approach to swaps regulation has imposed such high costs on the industry that the U.S. swaps market is on the verge of becoming too costly and too regulated—particularly as compared with futures—to be a viable means for end-users to hedge and manage their financing risk.

Excerpt from a statement by a coalition of interdealer brokers and swap trading venues market. The hearing was organized by Rep- Measuring the scale of the transition resentative Scott Garrett (R-N.J.), the chair- CME and ICE is difficult because ICE does not disclose man of the capital markets subcommittee of Futurize Energy Swaps the volume of trading in its OTC mar- the House Financial Services Committee. The starting gun for the futurization kets. The statistics for its futures markets “After nearly two and a half years of rule- trend came in mid-October, when CME show, however, that a significant amount making, the CFTC’s cumulative approach and ICE, the two leading markets for en- of trading has taken place in the new swap to swaps regulation has imposed such high ergy swaps in North America, changed the futures since the conversion. From mid- costs on the industry that the U.S. swaps way their markets operate just ahead of a October to the end of December, the ex- market is on the verge of becoming too key regulatory deadline. According to offi- change recorded volume of 59.6 million costly and too regulated—particularly as cials at both exchanges, many participants natural gas futures and options and 29.2 compared with futures—to be a viable in the energy swaps market, especially com- million power futures and options—all of means for end-users to hedge and man- mercial participants, were worried about which had been traded as OTC swaps and age their financing risk,” said the coalition, the impact of new rules that were set to take options prior to Oct. 15. which includes firms such as Bloomberg, effect on Oct. 12. In particular, they did not In the case of CME, the change mainly GFI Group, ICAP, Parity Energy, Thomson want to be classified as swap dealers, which affected the method of trading, with a large Reuters, Tradeweb and Tradition. would require them to comply with a host percentage of its Clearport volume executed At the request of CFTC Commissioner of regulatory requirements that go with via block trade rather than traded off-ex- Scott O’Malia, the CFTC is planning to swap dealer status. The exchanges also com- change and then submitted for clearing via hold a staff roundtable discussion in late mented that a number of non-U.S. market the exchange-for-swaps mechanism. Ap- January or early February on the futurization participants were worried about the extra- proximately 500 contracts were relisted as trend. O’Malia, a Republican who worked in territorial effect of the new swaps rules, and futures and made available for trading on the energy sector before joining the agency, preferred the familiarity of the futures regu- CME’s Globex platform. No conversion of said in a November speech that such a dis- latory environment. open interest was necessary because Clear- cussion would help in understanding why “Given the complexity of the new port transactions have been converted into firms opted to move out of the energy swaps swaps regulation regime in the United futures via the clearing process since the fa- market in October. He also said a roundtable States, customers uniformly agreed that cility was launched 12 years ago. would help the agency examine how its rules futures markets best served their hedg- Initially CME’s volume was affected by

34 Futures Industry | www.futuresindustry.com confusion about the regulatory status of its Citi, Credit Suisse, Goldman Sachs and Mor- open interest had risen to 6,275 contracts. contracts. CME Executive Chairman Terry gan Stanley all agreed to act as liquidity pro- Volume slowed over the end-of-year holi- Duffy commented on Oct. 25 that Clearport viders, and more than a dozen banks signed days, but interest is expected to pick up as volume dropped off in the two weeks after up to provide execution for block trades. market participants become more familiar Oct. 12, falling from 400,000 to 250,000 At expiration, the contracts settle with with the new contracts and consider their contracts per day. He noted, however, that physical delivery of the underlying swap. merits relative to cleared OTC swaps. volumes began coming back as market par- In effect, the CME contract is the equiva- ticipants adjusted to the change and in re- lent of a forward-starting swap that initially Morgan Stanley sponse to regulatory relief provided by the trades as a future but can be converted into Backs Eris Swap Futures CFTC that gave brokers and traders more a cleared swap at expiration. The contracts While CME’s launch attracted consider- time to comply with the new regulations. come in four benchmark maturities—2, 5, able attention in the interest rate markets, One issue affecting both exchanges is 10 and 30 years—and have standardized market participants are also taking an inter- that these trades are now subject to tradi- quarterly dates and fixed rates. est in a start-up called Eris Exchange. Eris tional futures rules and regulations such as One key feature of the new contract is was established in 2010 by five Chicago position limits and block trade rules. Sev- that the margin requirement is based on trading firms in anticipation of the migra- eral exchange officials and industry execu- a two-day value-at-risk methodology. The tion of the over-the-counter swaps market tives noted that many of the trades that pre- margin for cleared swaps, in contrast, is to electronic trading and central clearing.

One issue affecting both exchanges is that these trades are now subject to traditional futures rules and regulations such as position limits and block trade rules. Several exchange officials and industry executives noted that many of the trades that previously were done over the counter are now being executed as block trades. viously were done over the counter are now based on a five-day value-at-risk method- Eris offers two types of contracts: stan- being executed as block trades. While that ology. According to CME, that equates dards, which are forward-starting contracts gives the firms involved in the trade more to a significant reduction in margin re- with pre-determined rates and dates; and flexibility on how the trade is negotiated, quirements for equivalent positions, in flex contracts, which can be defined with it means that the firms must comply with some cases more than 60%. CME also any start or end date and offer more flex- certain restrictions set by the exchanges. offers margin reductions for customers ibility on rates. A key feature of both types For example, block trades must be above that have offsetting positions in other of contracts is that they include “price a minimum size threshold, and the trades interest rate products. Currently the de- alignment interest,” which is designed to are reported to the larger market within a liverable swap futures can benefit from replicate the interest payments on collat- short period of time, usually 5-15 minutes portfolio margining with other futures, eral posted against a swap. According to after the trade details are submitted to the notably Treasury and Eurodollar futures, Eris, this allows its contracts to replicate exchange. There are also restrictions on but CME expects that by June they can the cash flows on an interest rate swap in trading while a block is being negotiated, be combined with cleared OTC interest a much more precise way than traditional which could be problematic in relatively il- rate swaps as well. interest rate futures. liquid markets. Some users may be reluctant to use the Eris won a key vote of confidence in De- new swap futures out of concern that the cember, when Morgan Stanley said it would Healthy Start for CME lack of customization will create account- make an equity investment in the exchange Interest Rate Swap Futures ing issues. Several market participants com- and act as a market-maker for its interest Meanwhile, in the interest rate sector, all mented that corporate hedgers need a nearly rate swap futures. The bank also will take eyes are on CME’s new deliverable interest exact match to their interest rate exposure a seat on the exchange’s board of directors rate swap futures. In contrast to the energy in order to qualify for hedge accounting. as part of the deal, the terms of which were markets, the goal here was not to convert Using a standardized contract may be less not disclosed. In announcing the agree- existing contracts but rather to offer a new expensive in terms of margin, but a mis- ment, Morgan Stanley said that it believes alternative. CME developed the contract in match on duration would lead to unwanted Eris and its contracts will provide the firm’s close consultation with leading institutions on gains and losses in financial results. clients with “flexible alternatives” to tradi- both the buy-side and the sell-side, and when In the first two weeks after the Dec. 3 tional OTC interest rate swaps. it launched the contract in early December, it launch, 19,748 contracts were traded, in- Eris also has succeeded in winning over had strong support from major swap dealers. cluding one block trade of 2,000 trades, and several major clearing firms. The exchange

Futures Industry | January 2013 35 Futurization

recently listed Barclays and Citi, two big can and European corporate credit de- SGX Futurizes players in OTC swaps clearing, as clear- fault swap indices as the basis for the Commodity Swaps ing members, joining ABN Amro, Bank new futures contracts. Starting in February, Singapore Ex- of America Merrill Lynch, BNP Paribas, During a Nov. 5 conference call with change plans to modify its AsiaClear service BNY Mellon, Newedge and State Street. investors, ICE officials conceded that to provide its customers the choice of clear- The standard interest rate swap futures, credit futures have been launched before ing OTC transactions as swaps or futures. which were rolled out in December, have without success but said the prospects for SGX officials said the move will help in- significantly lower margin requirements credit futures are better now than ever be- ternational customers that are impacted by than cleared interest rate swaps. The mar- fore. Sprecher said one reason is that vol- the new regulatory environment for OTC gin requirements are based on a two-day ume in the CDS market has been shrink- derivatives. liquidation horizon, versus five days for ing since the collapse of Lehman and “We are committed to helping our cus- cleared swaps, and Eris estimates that this tomers throughout Asia, Europe and the will reduce margins by 40% to 80%. That U.S. navigate the complexity of rapidly is an important issue for institutional in- evolving risk management and regulatory vestors that will be looking for ways to re- requirements,” Michael Syn, the exchange’s duce their need for collateral when manda- head of derivatives, said in a Jan. 10 state- tory clearing takes effect in the U.S. later ment. “Customers using our unique SGX this year. AsiaClear service are free to choose transac- The flex contracts, on the other hand, tion modes which best fit their needs while have five-day VaR margins, the same as During a Nov. 5 clearing through a single venue.” cleared swaps. The advantage is that they SGX has provided clearing for bilateral can be tailored to the terms desired by conference call with trades in certain commodity swaps via a customer. That is a key issue for cor- AsiaClear for a number of years. Much like porate hedgers that need to make sure investors, ICE officials the Clearport facility developed by CME, that their derivatives exactly offset their contracts are not traded on the exchange interest rate risk in order to qualify for conceded that credit but instead submitted to SGX for clearing. hedge accounting. It has been especially successful in the iron Eris officials say their contracts also futures have been ore market, with a market share estimated will be attractive to firms that trade at around 90%. Last year it cleared 108.9 spreads between different types of interest launched before million tonnes of iron ore swaps, more than rate products. Eris announced in Decem- double the previous year. ber that it is working with Trading Tech- without success but The exchange plans to start with 12 fu- nologies, a software vendor widely used in tures contracts based on iron ore, freight the futures industry, to make its contracts said the prospects for rates, fuel oil, kerosene and certain other available via TT’s trading platforms dur- oil products. The contract specifications ing the first quarter. Eris officials high- credit futures are better are similar to the corresponding swaps, the lighted the potential to use TT’s auto- settlement prices and expiry dates are the spreader tool to trade “invoice spreads,” now than ever same, and the risk management treatment i.e., a trade that combines interest rate is the same once the products have been swaps with Treasury futures of a similar before. cleared. size and tenor. This type of trade is often ...... used by hedge funds to express views on Will Acworth is editor of Futures Industry the direction of swap spreads, according market participants view the introduction magazine. to Mike Riddle, chief operating officer at of CDS futures as a way to increase par- Eris. Speaking with potential users dur- ticipation in the market. ing a December webinar co-hosted with “We have seen where a well-designed TT, Riddle said invoice spreads currently futures contract helps stimulate growth account for 10% to 20% of the trading in underlying markets,” Sprecher com- activity in the U.S. dollar-denominated mented. “We’re spending a lot of time with interest rate swap market. major dealers and with major buy-side participants and we’re laying out a num- ICE to Launch Credit Futures ber of different alternatives that we have in In the credit sector, ICE is prepar- mind on how we could evolve and unfold ing to launch CDS index futures in the market. So we’re getting a lot of bal- the first quarter. The exchange signed anced input from the client base, and there a licensing agreement in October with is definitely interest and excitement about Markit that will allow the exchange to putting a product out there that will help use Markit’s benchmark North Ameri- grow volumes.”

36 Futures Industry | www.futuresindustry.com 34 th Bürgenstock THE GLOBAL FORUM FOR DERIVATIVES MARKETS September 25-27, 2013 • InterContinental Hotel Geneva, Switzerland

Welcome to Bürgenstock! The Swiss Futures and Options Association and the Futures Industry Association are pleased to announce the Global Forum for Derivatives Markets, September 25-27, 2013, at the InterContinental Hotel in Geneva. Also known as the Bürgenstock meeting, now in its fourth decade, the forum has a long history of attracting distinguished speakers and prominent names from the economic, academic and political worlds for high- level debate and discussion. The conference has proven to be an ideal forum for encouraging closer cooperation among market participants and international regulators.

To learn about sponsorship and exhibit opportunities, contact Toni Vitale Chan at [email protected]; tel +1.312.636.2919 or Carol Gregoir at [email protected] ; tel +41.22.860.2103.

Bookmark www.burgenstock.org for details! Futures Industry Moves Forward with Enhanced Customer Protections By Joanne Morrison

Since the collapses of MF Global and Peregrine Financial, the futures industry has made significant progress to better protect customer funds with a series of actions that have led to better transparency and internal controls. Many of the recommendations are in line with initiatives recommended by an FIA task force early in 2012.

ne goal has been to provide custom- lators and self-regulators the ability to elec- Group, to aggregate the data on customer ers with more information. Clearing tronically monitor the whereabouts of cus- segregated and secured amount accounts. Ofirms and self-regulatory organiza- tomer funds and collateral. AlphaMetrix Group is a privately held com- tions have implemented a number of changes For example, in late November, National pany based in Chicago that provides data to bring about improved transparency re- Futures Association and CME Group began aggregation services to the alternative in- garding the safety of customer segregated building an automated system for the daily vestment community. funds. In addition, new controls have been monitoring of all customer segregated funds The new system will allow NFA and implemented on the movement and place- and customer secured amounts held by fu- CME to run an automated comparison of ment of customer segregated funds. tures commission merchants. As part of this the balances in customer segregated and se- Many of the improvements involve the project, NFA and CME contracted with Al- cured accounts at the depositories with the use of technology to allow customers, regu- phaMetrix360, a subsidiary of AlphaMetrix daily reports they receive from FCMs and

38 Futures Industry | www.futuresindustry.com Futures Industry then quickly identify any discrepancies. Daily Reporting rules require all FCMs to file daily reports NFA said it expects to implement the new and Other Safeguards on customer segregated funds to their des- system in phases, starting with banks and Another key step is enhanced report- ignated self-regulatory organizations. Since later adding other types of depositories such ing by FCMs. For example, new industry May, CME has received more than 16,000 Moves Forward with as clearing FCMs, money market accounts and broker-dealers. NFA initially expected that monitoring FCM compliance through view-only Futures Industry to Study online access to customer segregated and secured amount bank accounts would be Feasibility of Insurance Regime done manually. “It became clear that it is possible In December, the Futures Industry Association, together with CME Group, the Institute to implement quickly an automated for Financial Markets and National Futures Association, agreed to launch a study into the Enhanced feasibility of adopting an insurance regime for the U.S. futures industry. This initiative is system via a third-party vendor for the daily monitoring of all customer seg- the latest in a series of industry initiatives to enhance customer protections. regated and secured amount accounts To conduct the insurance study, the four sponsoring organizations selected a team of held in banks, without relying upon experts brought together by Compass Lexecon under the leadership of Dr. Christopher direct, on-line access functionalities,” Culp, an expert in derivatives, risk management, insurance and clearing. The study, which NFA said in a letter to the Commodity is slated for completion in the spring, will examine various models for providing insurance Futures Trading Commission. in the futures industry and will assess a range of variables for each model. Customer NFA also has begun collecting addi- Since the collapse of MF Global, there have been calls from many policymakers, tional information from FCMs and post- customer groups and even the trustee managing the MF Global bankruptcy to establish ing that information on its online Basic some form of insurance protection in the U.S. futures markets. For example, Bart Chilton, system, a key step in giving customers a commissioner at the Commodity Futures Trading Commission, has called for the es- the tools they need to monitor the assets tablishment of protection similar to what is available to securities customers through the they deposit with their brokers. The new Securities Investor Protection Corporation fund. service provides the public with access There are many questions, however, related to the costs and feasibility of various Protections to specific information about an FCM, alternatives and the amount of losses such a scheme would cover. For that reason, such as the firm’s adjusted net capital, the the study will examine whether such a plan should be optional, privately funded, or amount of funds held in segregated and government-backed. secured accounts, and the types of invest- One approach being considered by the study is a plan being circulated by the Com- ments that the FCM is making with those modity Customer Coalition, a not-for-profit advocacy group for commodity customers. Its customer funds. plan would establish optional insurance through a captive insurance company that would Financial information included on an be funded and owned by an association of firms operating in the futures industry. FCM’s Basic page will include three re- “Industry constituents are very interested, but they want to see more on pricing,” said ports: the FCM capital report, FCM cus- John Roe, co-founder of the coalition. His coalition intends to survey FCMs, introducing tomer segregated funds report and the brokers, commodity trading advisers and commodity pool operators to determine if there FCM customer secured amount funds are enough willing participants to warrant moving ahead. report. The FCM capital report will show Another approach recommended by CFTC Commissioner Chilton would be for Con- the most recent month’s information on gress to establish the same type of insurance coverage currently available in the securi- adjusted net capital, required net capital ties markets through the Securities Investor Protection Corporation. and excess net capital. The FCM cus- According to Diane Klemme, a vice president with the introducing brokerage firm Grain tomer segregated funds report and FCM Service who testified before Congress last fall on behalf of the National Grain and Feed customer secured amount funds report Association, there is broad interest among agricultural customers in some form of insur- will each show the total funds held in seg- ance in order to maintain bank financing. regated accounts, excess segregated funds, “People recognize that if you want safety that may come at a cost,” said Klemme, who the percentage of segregated funds that works with mid-sized agricultural brokers. In an interview during the FIA’s Futures and are held in cash and each of the invest- Options Expo in October, Klemme said that insurance should be considered but called for ments permitted under CFTC regulations practical solutions. “The devil is in the details, so we always have to make sure that we and whether the FCM held any funds at a analyze and make sure we set up a program that is really workable, not one that we think depository that is an affiliate of the FCM is workable.”—Joanne Morrison during the prior month.

Futures Industry | January 2013 39 Customer Protections

of these reports, according to the exchange. The CFTC proposal also contains sev- erly segregated and secured at all times and CME also requires bi-monthly reports eral other measures developed in consul- to cover margin deficiencies in customers’ showing where and how customer funds are tation with the industry. Those measures trading accounts.” invested. It has received 1,000 of these re- include giving SROs and the CFTC the The proposed rules also include provi- ports since July. In addition, there are more ability to verify customer balances by sions designed to create better internal con- frequent spot-checks. viewing an FCM’s bank and custodial trols within an FCM with respect to the Another critical safeguard put in place accounts for customer funds at any time maintenance and control of excess funds in is the so-called Corzine rule, which re- without having to go through the FCM. segregated accounts. The proposals would requires the chief executive officer or chief The measures also include providing risk quire FCMs to maintain written policies and financial officer to be accountable for any disclosures to customers, enhancing FCM procedures governing the maintenance of ex- disbursements over 25% of a firm’s excess internal controls, setting standards for cess funds in customer segregated and Part segregated funds. This was built upon an FCM audits and examinations, requiring 30 secured accounts. In addition, they would FIA recommendation released earlier this FCMs to provide funding to cover margin require FCMs to obtain the pre-approval of year (See “Seg Funds Revisited” Industry deficits, instituting a liquidity requirement management prior to the withdrawal of 25% Response to Peregrine and MF Global for FCMs, and implementing a “more ef- or more of the excess funds held in segregated Collapses” in the September 2012 issue of fective early warning system” to detect or secured accounts if the withdrawals were Futures Industry). problems at an FCM. not for the benefit of the FCMs’ customers.

Another critical safeguard put in place is the so-called Corzine rule, which requires the chief executive officer or chief financial officer to be accountable for any disbursements over 25% of a firm’s excess segregated funds.

CFTC to Finalize Customer In line with the initiatives recommended They would require FCMs to adopt Protection Rules by FIA in February, the CFTC proposals policies and procedures on supervision and At the federal level, the CFTC on Oct. would require FCMs and designated clear- risk management of customer funds; they 22 issued for public comment a package of ing organizations to provide the CFTC and would require FCMs to provide potential proposed customer protection rules. The designated SROs with read-only direct elec- customers with additional disclosures ad- proposals include new regulations as well as tronic access to bank and custodial accounts dressing firm-specific risks; and they would amendments to existing regulations. holding customer funds. enhance the standards for the self-regula- CFTC Chairman Gary Gensler ex- The proposed rules would amend Part tory examinations of member FCMs. It plained that the proposal builds on 30 of the regulations to require FCMs to is expected to take several months before customer protections established earlier hold sufficient funds in securities accounts the CFTC finalizes the proposed rules. this year by NFA. Under the CFTC pro- to meet their total obligations to both U.S.- The CFTC issued them for public com- posal, the NFA rules would be incor- domiciled and foreign-domiciled custom- ment and set a mid-January deadline for porated into the CFTC regulations so ers trading on foreign contract markets, responses. Already there have been several that they can be directly enforced by the computed under the net liquidating equity requests from industry participants, in- CFTC, Gensler said. Those rules tighten method, doing away with a provision allow- cluding FIA, for more time to review the the requirements for secured funds and ing FCMs to use an alternative method for proposal. “This is a complex rulemaking, tighten the controls on excess funds, foreign secured funds accounts. which affects not only futures commission among other things. The proposed rules would prohibit merchants, both clearing and non-clear- “It is the direct result of significant in- FCMs from holding any positions in Part ing, but also their affiliates, their deposito- put from the public and market partici- 30 secured accounts other than customers’ ries and, most important, their customers,” pants that the CFTC gathered throughout foreign futures and option positions and as- FIA wrote in a Dec. 28 letter to the CFTC. the year, working with the FIA, the Na- sociated margin collateral. In addition, the The CFTC agreed to extend the comment tional Futures Association and the self- proposed rules would require FCMs to hold period. regulatory organizations,” Gensler said in sufficient proprietary funds in segregated ...... a Nov. 1 speech at the FIA’s Futures and accounts and Part 30 secured accounts “to Joanne Morrison is deputy editor of Futures Options Expo. reasonably ensure that the firms are prop- Industry magazine.

40 Futures Industry | www.futuresindustry.com OTC Clearing In JAPAN: Solid Start for Interest Rate Swaps

By Thomas Treadwell

While Japan has a relatively small share of the global interest rate swaps market compared to the U.S. and Europe, it has taken the lead in implementing the G20 requirement for central clearing. Since November, large domestic financial institutions have been required to submit certain yen-denominated interest rate swaps to a licensed clearinghouse. More than 30 firms have signed up to clear yen IRS at the Japan Securities Clearing Corp., the only clearinghouse currently licensed for domestic clearing, and the volume of trades cleared at the JSCC has been rising rapidly. In this article, Thomas Treadwell, Citi’s head of OTC clearing in Asia-Pacific, provides an update on the adoption of clearing in the Japanese swaps market.

t the Pittsburgh G20 Summit of and the U.S., Japan was the first to actually 2010. Japan’s Financial Services Agency 2009, leaders committed that all implement that mandate. subsequently finalized regulations, setting a Astandardized over-the-counter de- Japan has a rich heritage in market struc- November 2012 deadline for certain Japa- rivative contracts should be traded on ex- ture innovation. In fact, Japan became one nese entities to begin clearing certain types changes or electronic trading platforms, of the first countries to start trading com- of interest rate and credit default swaps. where appropriate, and cleared through modity futures with the establishment of According to data published by the central counterparties by the end of 2012 the “Dojima Rice Exchange” in Osaka in Bank of Japan, Japan’s interest rate swap at the latest. 1697. Over three centuries later, the Gov- market had USD $35.69 trillion in no- Regulators around the world are working ernment of Japan became the first country tional value outstanding at the end of June diligently to put the final touches on rules to pass laws requiring central clearing of 2012. Although Japan accounts for only requiring central clearing. Though there has OTC derivatives by amending the Finan- 7% of the global market for interest rate been significant focus on efforts in Europe cial Instruments and Exchange Act in May swaps, it is by far the largest interest rate

Futures Industry | January 2013 41 Japan OTC Clearing swaps market in the Asia-Pacific region. dex. The rules establish that these products Addressing Clearing The institutions in this market include must be cleared at the following central Member Concerns the “mega” banks, regional banks, trust clearinghouses: Since the launch of interest rate swaps banks, asset managers, pension funds, ■■iTraxx Japan CDS—a licensed Japanese clearing, the service has seen solid participa- hedge funds and insurance companies. CCP; tion from both domestic and foreign institu- ■■Yen-denominated interest rate swaps—a tions. Thirty-two entities have signed up to Inter-Dealer Solution licensed Japanese CCP, or a foreign CCP clear IRS, including 21 dealers and 11 “en- Japan’s clearing mandate specifically that is licensed by the JFSA, or a foreign trustors,” firms that are affiliated with those covers large domestic financial institutions CCP which is not licensed by the JFSA dealers. A key factor in this success was the that are registered under FIEA as “Financial but has established a linkage with a li- many months of negotiations and consulta- Institution Business Operators” or “Regis- censed Japanese CCP with JFSA approval. tions between market participants and the tered Financial Institutions” and that are To date, only the JSCC meets these re- JSCC on the design of the clearing platform. members of licensed clearinghouses such quirements. Although roughly 20% of the One of the most important issues for as the JSCC. The clearing requirement ap- yen-denominated interest rate swaps market clearing members was establishing a limit on plies to these entities when transacting in is cleared today at clearinghouses outside their liabilities to the clearinghouse in case yen-denominated interest rate swaps and Japan, in the new regulatory regime those of a default. To avoid becoming insolvent or credit derivatives with other institutions in CCPs will require further licenses from the stopping service, a CCP needs the ability to those two categories. JFSA in order to clear OTC derivatives for call for additional resources from its clear- In practical terms, this means that the institutions subject to the JFSA clearing re- ing members in order to cover any losses in clearing mandate is limited at present to quirements. a default scenario. Depending on the struc- dealer-to-dealer transactions. The JSCC is JSCC went live with its inter-dealer clear- ture of the CCP’s assessment power, this in discussion with market participants to ing models for the iTraxx Japan CDS in July could be considered an unlimited liability have a client clearing platform in place in 2012 and yen-denominated interest rate to the CCP. This causes issues for interna- the future, which will provide an onshore swaps in October 2012. As of Dec. 18, the tional dealers that may be required by their solution for firms that are not clearing most current data available at the time of pub- home regulators to cap all liabilities. members or affiliated with clearing mem- lication, more than 6,400 interest rate swaps A CCP’s financial safeguards package bers of JSCC. worth 59.8 trillion yen (USD $712 billion) starts with strict membership require- The new clearing mandate currently ap- in gross notional valuehad been cleared since ments to ensure that all members are ad- plies to two types of swaps: plain vanilla launch. The volume is likely to continue to in- equately capitalized and contain the oper- yen-denominated interest rate swaps that crease when the JSCC widens its product of- ational and technical expertise to support reference the yen Libor rate and credit de- fering to include Tibor-based swaps, which is ongoing business and default manage- fault swaps based on the iTraxx Japan in- currently scheduled for the first quarter. ment. The CCP mitigates counterparty

IRS Clearing Participants IRS Clearing Entrustors* The Bank of Tokyo-Mitsubishi UFJ, Ltd. Bank of America N.A. Barclays Bank PLC Merrill Lynch Capital Services Inc. BNP Paribas Merrill Lynch International Citigroup Global Markets Japan Inc. Merrill Lynch International Bank Limited Credit Suisse Securities (Japan) Limited (Affiliates of Merrill Lynch Japan Securities Co., Ltd.) Daiwa Securities Co. Ltd. Deutsche Bank AG Credit Suisse International Goldman Sachs Japan Co., Ltd. (Affiliates of Credit Suisse Securities (Japan) Limited) JPMorgan Securities Japan Co., Ltd. Merrill Lynch Japan Securities Co., Ltd. JPMorgan Chase Bank N.A. Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (Affiliates of JPMorgan Securities Japan Co., Ltd.) Mizuho Corporate Bank, Ltd. Morgan Stanley MUFG Securities Co., Ltd. Mizuho Bank, Ltd. Nomura Securities Co., Ltd. Mizuho Securities Co., Ltd. Resona Bank, Limited Mizuho Trust & Banking Co., Ltd. The Royal Bank of Scotland plc (Affiliates of Mizuho Corporate Bank, Ltd.) SMBC Nikko Securities Inc. Société Générale Morgan Stanley & Co. International plc Sumitomo Mitsui Banking Corporation Morgan Stanley Capital Services LLC Sumitomo Mitsui Trust Bank, Limited (Affiliates of Morgan Stanley MUFG Securities Co., Ltd.) UBS AG Source: Japan Securities Clearing Corp. *Clear through affiliated clearing participant.

42 Futures Industry | www.futuresindustry.com Your Seat Is Waiting!

FIA Conferences & Expositions 2013

March 12-15, 2013 Boca 2013 m FIA International Futures Industry Conference Boca Raton Resort and Club • Boca Raton, Florida

April 10-11, 2013 FIA New York Expo m Hilton New York

May 8-10, 2013 FIA Law & Compliance Division Conference on the m Regulation of Futures, Derivatives and OTC Products Marriott Waterfront • Baltimore, Maryland

June 25-26, 2013 IDX—FIA/FOA International Derivatives Expo m The Brewery • London, United Kingdom

September 25-27, 2013 Bürgenstock—SFOA/FIA Global Forum for Derivatives Markets m InterContinental Hotel • Geneva, Switzerland

November 5-7, 2013 Expo 2013—FIA Futures & Options Expo m Hilton • Chicago, Illinois

December 4-6, 2013 FIA Asia Derivatives Conference m Venue TBD • Singapore

For conference sponsorship and exhibit sales, contact Toni Vitale Chan +1.312.636.2919 or [email protected]

For general FIA inquiries, call +1.202.466.5460 Japan OTC Clearing

credit risk by collecting initial margin, also be governed by that local law. Con- variation margin and default fund contri- versely, international counterparts trading butions. CCP margin models will be held these products would likely have much of to international standards in order to be their activity governed by overseas laws such considered for the qualified CCP recogni- as U.S. or U.K. laws. tion set by global regulators. To address this issue, the JSCC deter- In a clearing broker default scenario, the mined to accept U.K. law as a governing CCP default management team—which law for certain aspects of existing CDS is made up of clearing member representa- trades. This allows participants to con- tives—will go through a detailed default tinue to rely on the legal code with which management process that includes the hedg- they are most familiar, which is especially ing and liquidation of the defaulted clearing important for products such as credit de- members cleared contracts. The CCP finan- fault swaps that are closely linked to local cial safeguards package will be used towards bankruptcy laws. the liquidation in the order prescribed by the CCP default waterfall. As CCPs and clearing Need for Client Clearing Solution members are likely to be systemically impor- In Japan today, the only live OTC clear- tant institutions, the efficient liquidation and ing solution is the JSCC’s inter-dealer clear- continuity of market activity is a fundamen- ing offering. Clients that want to centrally tal principle throughout the default man- clear their trades cannot access this ser- agement process. The challenge becomes to vice unless they are affiliated with clearing design a model that ensures there are always members. In a global market that is rapidly adequate resources available to offset the full moving to central clearing and higher capi- portfolio liquidation. Some key areas of fo- tal charges for bilateral trades, this quickly cus that the CCP uses to address these pos- becomes a problem. Market-makers are fac- sible shortfalls are as follows: toring the cost of capital charges into their ■■The ability of the CCP to call for addi- pricing for bilateral trades, creating a mate- tional assessments from its clearing mem- rial incentive for clients to seek out clearing. bers once resources have been exhausted. The JSCC is now consulting with the ■■The number of times the clearing mem- industry on the design of a client clearing ber is required to replenish its default platform and is tentatively aiming to offer fund contributions within a specified this service in the third quarter of 2013. In time period. the meantime, some market participants ■■The compulsory termination of all existing want the option to use international clear- cleared transactions between the CCP and inghouses that currently offer client clearing members in the case of a failed auction. solutions for yen-denominated interest rate ■■The limitation on the exit of clearing mem- swaps. This would allow clients to receive bers during default settlement period. more competitive pricing for their cleared After multiple industry sessions and de- trades as well as the additional protections tailed analysis, the JSCC developed a solu- of portability and segregation provided by tion that satisfied most stakeholder require- clearing. Regulatory action will be required ments. This solution is basically in line with for this to happen, however. international standards and uses a combina- The Japanese regulators have been pro- tion of resources that include the defaulted actively working with global regulators member’s collateral, CCP contributions, and market participants to understand the guarantee fund contributions, clearing challenges and concerns of central clearing member assessments and haircutting of and have made great progress in meeting variation margin, all in a sequenced order to the G20 commitment. The JSCC has been get a capped liability. thoughtful in its approach, balancing the Another key topic was the potential con- need to comply with the very highest global flict in governing laws. In today’s global standards with the restrictions placed upon OTC market, it is a common occurrence foreign clearing members. From a commer- for counterparts from different ends of the cial standpoint, it is still very early days and earth to transact with each other. CCPs thus we are likely to see the impacts from li- tend to reside in one location, and thus are quidity and netting as the models evolve. generally governed by the local law of that ...... jurisdiction. Domestic market participants Thomas Treadwell is Asia-Pacific head of and clearing members who trade much of derivatives clearing in the prime finance divi- their volumes in that jurisdiction would sion of Citi. He is based in Singapore.

44 Futures Industry | www.futuresindustry.com l

Thank You to the Sponsors, Partners & Supporters of FIA Futures Cares 2012 Together We Raised $1.6 Million over the last ﬁ ve years to beneﬁ t the Greater Chicago Food Depository www.futuresindustry.org/futurescares

Gold “Porterhouse” Sponsors

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Bronze “Rib Eye” Sponsors ABN AMRO Clearing Chicago LLC • Allston Trading • Bank of America Merril Lynch Cadwalader, Wickersham & Taft • Chicago Board Options Exchange • Citadel • DRW Trading Group Environmental Financial Products, LLC • Eurex • FIA Futures Services Division • FIA Law & Compliance Division FIA Technology Services • Fidessa • G.H. Financials • IMC Financial Markets • JPMorgan Katten Muchin Rosenman LLP • Knight Capital • Marquette Partners, L.P. • Mizuho Securities USA Inc. • Nico Trading NYSE Liffe & NYSE Liffe US • Options Clearing Corporation • Optiver US • Mr. Peter Johnson • Pioneer Futures Inc. R. J. O’Brien & Associates, LLC • Rosenthal Collins Group, LLC • RSM McGladrey, Inc. • Sapient Global Markets SunGard • Trading Technologies • Traiana • UBS Exchange Traded Derivatives

The Chicago Private Dining Steakhouse Group OTC Clearing: Volume Trends in IRS and CDS By Dan Mannetti

t major clearinghouses, the volume of CME Group experienced a surge in the seen several swings in the past 15 months. central clearing of over-the-counter volume of interest rate swaps and credit de- At ICE Clear Credit, index swaps and Aderivatives rebounded strongly in fault swaps cleared in October. More than single name swaps cleared comprise a November and October. LCH.Clearnet once $40 billion was cleared in credit default nearly 50-50 split. At ICE Clear Europe, again led the charge in clearing interest rate swaps, the second-highest monthly total the disparity is much greater, with the vol- swaps, with volumes surpassing $39 trillion all-time for the clearinghouse. Open inter- ume of single name swaps cleared amount- and $37 trillion in October and November, est has steadily increased each of the past 15 ing to twice as much as that of index swaps. respectively. This included record high vol- months, approaching $600 billion in inter- October saw the highest volume for credit umes of dealer-to-dealer clearing in October, est rate swaps and $50 billion in credit de- default swaps since March, with over $630 as well as dealer-to-customer clearing and fault swaps in November. This contrasts to billion cleared. open interest in November. Euro- and U.S. the movement of credit default swap open ...... dollar-denominated IRS accounted for more interest at ICE’s clearinghouses (ICE Clear Dan Mannetti is an associate relationship than 75% of the total volume cleared. Credit and ICE Clear Europe), which has manager with FIA Tech.

OTC Clearing—LCH.Clearnet

Cleared Interest Rate Swaps Cleared IRS Volume by Currency Volume and Open Interest (in trillions USD) (as of Dec. 2012)

40 400 Dealer-Dealer Dealer-Client Open Interest EUR USD 43.1% 32.0% 35 350

30 300

25 250 Open Interest

20 200 Volume

15 150

10 100

5 50 Other GBP 6.3% 9.4% 0 0 JPY 9.2% Jul-12 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12May-12 Jun-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12

Source: LCH.Clearnet

Futures Industry | January 2013 47 OTC Clearing

OTC Clearing—CME Group

Cleared Interest Rate Swaps Cleared IRS Volume by Currency Volume and Open Interest (in billions USD) (as of Dec. 2012)

180 675 USD EUR Volume Open Interest 62.2% 18.2% 160 600

140 525

120 450 Open Interest 100 375

Volume 80 300

60 225

40 150

20 75

0 0 OTHER GBP 5.3 7.5% JPY Jul-12 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12May-12 Jun-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 6.9%

Cleared Credit Default Swaps CDS by Type Volume and Open Interest (in billions USD) (as of Dec. 2012)

60 60 High Yield Volume Open Interest 15%

50 50

40 40 Open Interest

30 30 Volume

20 20

10 10

Investment Grade 0 0 85%

Jul-12 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12May-12 Jun-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12

Source: CME Group

48 Futures Industry | www.futuresindustry.com OTC Clearing—ICE Clear U.S. and ICE Clear Europe

Cleared Credit Default Swaps at ICE Clear U.S. ICE Clear Credit Volume and Open Interest (in billions USD) Cleared CDS by Type (as of Dec. 2012) 800 1000 Volume Open Interest Single Name 700 950 Swaps 54.6% 600 900

500 850 Open Interest

400 800 Volume

300 750

200 700

Index 100 650 Swaps 45.4% 0 600

Jul-12 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12May-12 Jun-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12

Cleared Credit Default Swaps at ICE Clear Europe ICE Clear Europe Volume and Open Interest (in billions USD) Cleared CDS by Type (as of Dec. 2012) 800 1000 Volume Open Interest Single Name 700 950 Swaps 67.8% 600 900

500 850 Open Interest

400 800 Volume

300 750

200 700

Index 100 650 Swaps 32.2% 0 600

Jul-12 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12May-12 Jun-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12

Source: IntercontinentalExchange

Futures Industry | January 2013 49 Simple Agenda for Complex Options

By Rachel Koning Beals

The International Securities Exchange formed an unusual partnership in September that indicates the growing interest in improving the way complex orders are traded in the U.S options market, with more use of technology to aggregate liquidity and automate execution.

The exchange announced on Sept. 20 a collar that limits downside in the underly- One side effect of this trend is that it that it will provide marketing and user ing security and caps potential upside. Oth- helped fuel TD Ameritrade’s purchase of support for Spread Crawler, an electronic ers aim to earn income in a low-interest- online brokerage platform thinkorswim trading tool developed by MEB Options, rate climate with covered calls. Straddles, and Charles Schwab’s acquisition of option- a Chicago-based options broker. The tool strangles, buy-writes, butterfly spreads are sXpress. These smaller firms were pioneers is designed to simplify the process for ex- all increasingly popular multi-leg strategies in bringing multi-leg spread trading to ecuting complex orders by scanning spread among skilled options investors. their customers and the larger firms wanted order book data across six U.S. options ex- Because complex orders often involve that toe-hold without having to build from changes and automatically alerting its users four parts or more, it is challenging to ex- scratch, said industry insiders. whenever an open order fits that end-user’s ecute the entire trade simultaneously. To ad- pre-defined preferences. dress that problem, a number of exchanges Decade of Change Historically that type of trade was ex- have developed separate order books for ISE and the Chicago Board Options ecuted manually on exchange floors or by complex orders as well as new functional- Exchange are generally viewed as leaders in phone, but increasingly brokers, exchanges ities to improve the odds of filling complex complex order volume, according to several and technology firms are offering tools that orders. brokers interviewed for this article. Four automate the process. That in turn is bring- In addition, a number of firms provide other exchanges operate complex order ing more volume to the exchanges. ISE of- tools for aggregating liquidity across multi- books: CBOE’s C2 platform, NYSE Eu- ficials say complex orders now account for ple exchanges. Jim Michuda, chief executive ronext’s Amex and Arca, and Nasdaq OMX 40% of the exchange’s volume, and point to officer of Wolverine Execution Services, ex- PHLX. Brokers typically use complex order a number of technological improvements as plained that there is no inter-market linkage books for small orders of no more than 20 factors in encouraging that type of trading. for spreads. Like a number of other firms or 30 contracts, while sending larger orders in this field, WEX offers routing technol- to exchange floors. Challenges for Traders ogy that helps customers respond to offers The CBOE, which first opened its Complex orders are difficult to value let and post their own offers across multiple COBWeb in 2005, has seen complex order alone trade, but they are popular with retail exchanges. In effect, these firms are using business grow significantly over the years. and institutional investors who are pursu- technology to replicate what in-the-flesh Although the exchange would not provide ing certain trading strategies. Some lean on brokers used to do—shop around each part a complex order book volume breakdown, spreads to hedge stock moves, perhaps with of a complex trade until filled. an executive with MEB Options said the

50 Futures Industry | www.futuresindustry.com business has grown enormously. “A few every two seconds that it remains unfilled. Exchanges Mirroring years ago, I saw 250,000 to maybe 500,000, WEX offers software called “Spread Brokerages complex orders a day on the CBOE and Agent” that is designed for institutional The exchanges are also getting in the now it’s upwards of 7 million a day,” said investors that trade options spreads and enhancement game. Earlier this year, ISE Jason Stamer, MEB’s director of business options-equity spreads. It reveals the mul- launched implied order functionality for development. titude of backstops and data flow necessary its complex order book, syncing interac- ISE first offered electronic complex or- to ensure spread-trade management: syn- tion between the complex order book and ders in 2002. At that time, a spread order thetic market-making; safeguards against its regular order book, which it says has lived entirely on its own, sitting on a virtual exceeding user-defined position limits by tightened spreads. The new functionality bulletin board and broadcast to exchange working the spread and the reverse spread displays liquidity from ISE’s complex order members for any takers, with no interaction simultaneously; spread entrance and egress book on the regular order book published with the regular order book and no involve- points; leg slip adjustment; and cleaning to the Options Price Reporting Authority. ment by professional liquidity providers, up open positions. An implied order is automatically created according to Boris Ilyevsky, ISE’s managing if the limit price of a multi-legged order director. ISE began “legging in” complex or- can match or improve the ISE bid or offer ders in 2004, a move urged by online bro- when another leg of the complex order is kerages such as optionsXpress. paired against a resting order or quote. For Stitching the Market Together the system to generate an implied order, the net price of the multi-legged order must be Complex options strategies include mul- satisfied when both legs are filled on the tiple strike prices and expirations, which A few years ago, regular book. can make it difficult for them to be estab- “For the first time, a multi-leg order is lished as a single position simultaneously. I saw 250,000 to not just sitting on the book, but a spread Investors lean on “legging” or trading each order that is mid-market gets implied into position individually to help them poten- maybe 500,000, the individual legs and leans on the oppos- tially squeeze out better prices, but that can ing quote,” said ISE’s Ilyevsky. Of total out- add to transaction costs and one missed fill complex orders right complex order volume, seven percent on one leg can sink the whole transaction. of daily transactions are now done via im- That encourages retail online brokerages to a day on the plied orders, Ilyevsky said. “The implied or- feature complex orders through the ease of der mechanism increases the fill rate for the a single ticket. CBOE and now end customer. Without it, that mid-market Peter Bottini, vice president of trading at order may have sat there.” optionsXpress, said complex orders account it’s upwards of At Amex Options, about 250,000 con- for over a third of the firm’s options trading tracts per day, or 5% of its total options business. And those customers want faster, 7 million a day. volume, went through its complex order easier execution, and a higher fill percent- book last fall, up from about 1% at the age. Last August the firm introduced a new jason stamer, MEB Options beginning of 2012. Amy Farnstrom, head order type called “walk limit” to address ’’ of product strategy for U.S. options at that demand. The order type works with NYSE Euronext, said the exchange ex- trades with two to four legs, including call MEB’s Stamer explained that his firm’s pects to begin offering in the first quarter spreads, put spreads, straddles, strangles, Spread Crawler tool does not require soft- the ability to handle complex orders with calendar spreads, and diagonals. The advan- ware, just a regular instant message account. one leg being comprised of a stock. Farn- tage for traders is that it automatically mod- Stamer added that the ability to customize strom said Amex and Arca’s linkage with ifies spread orders to obtain better pricing. the filters within the tool is emblematic of the New York Stock Exchange will give How does it work? The walk limit de- the increasing sophistication of spread trad- those platforms an advantage over other faults its starting price at the midpoint ers and the need to compete with the speed U.S. options exchanges because of easier between bid and ask, then gradually steps of algorithms. Users can filter with param- order flow between the options side and toward the national best bid or offer bid or eters dictated by over 25 strategies or by the stock side under the same umbrella. ask price (depending on whether it’s a debit specific symbol or industry group, by strike or credit spread) every two seconds. A walk price, expiration date, and edge. Views can ...... limit order will not fill the order outside the be arranged by strategy or leg-by-leg detail. Rachel Koning Beals is a Chicago-based original spread’s NBBO bid or ask. The pro- Customers include hedge funds, market freelance writer. cess will take a maximum of 11 steps, can- makers, inter-dealer brokers, and invest- celing and replacing the original limit order ment banks.

Futures Industry | January 2013 51 Washington

International Regulators from U.S. rules if they are subject to “working through” any situations where Attempt to Coordinate comparable rules applied by home country U.S. laws come in conflict with the laws in Derivatives Reforms regulators, but some foreign regulators have another jurisdiction. Officials from Australia, Brazil, the Euro- expressed a number of concerns about the pean Union, Hong Kong, Japan, Ontario, CFTC’s approach. CFTC Partially Delays Quebec, Singapore, Switzerland and the The clash over how to regulate cross- Cross-Border Application United States met in New York on Nov. 28 border trading came into public view at a of Swap Rules to discuss their efforts to implement the Congressional hearing on Dec. 13. High- The Commodity Futures Trading Com- G20 reforms of the OTC derivatives market. level officials from Europe and Japan told mission approved a final exemptive order The meeting was the latest in a series of U.S. lawmakers that they have serious con- on Dec. 21 that provides time-limited relief high-level dialogues aimed at harmonizing cerns about the extraterritorial impact of the from the cross-border application of certain policies and avoiding potential conflicts, in- CFTC’s rules. The officials emphasized the swaps-related rules drafted by the CFTC un- consistencies, and duplicative requirements need for more cooperation among regula- der the Dodd-Frank Act. The order, which will within their respective contemplated rules. tors to avoid regulatory arbitrage and urged expire on July 12, 2013, was issued shortly After the meeting, the regulators issued the CFTC to delay compliance with certain before the Dec. 31 deadline for firms to regis- a joint statement on Dec. 4 highlighting the rules, notably registration requirements for ter as swap dealers. The CFTC said the order need for action in three main areas: 1) de- foreign swap dealers. was intended “to foster an orderly phase-in veloping “concrete and practical solutions” In addition, Steven Maijoor, the chairman to the new swaps regulatory regime and to with respect to any conflicting application of of the European Securities and Markets provide market participants greater certainty rules; 2) identifying “inconsistent or duplica- Authority, submitted a written statement regarding their obligations with respect to tive requirements” and attempting to reduce for the hearing. Maijoor identified several cross-border swap activities.” the regulatory burdens associated with areas where there are substantial differences The order provides an interim definition of such requirements; and 3) identifying gaps between U.S. and EU rules. For example, “U.S. person” that is significantly narrower and reducing the potential for regulatory registration of foreign entities such as swap in scope than previously proposed, and also arbitrage. The regulators also said that they dealers is required under U.S. rules even clarifies the rules for determining if a foreign agreed to consult with each other before if those entities are already authorized as firm should be classified as a swap dealer making final determinations on which deriva- investment firms or banks under EU rules. or a major swap participant. For example, tives will be subject to mandatory clearing Maijoor urged U.S. regulators to rely as the order clarifies that until July 12 a foreign requirements, and agreed to consider pro- much as possible on equivalent require- entity will not have to include, when calculat- viding “appropriate transitional implementa- ments in EU law rather than imposing U.S. ing whether its swap activity has exceeded tion periods” for entities in jurisdictions that requirements when non-U.S. entities are the CFTC’s thresholds, any swaps where are implementing comparable reforms. The dealing with U.S. persons. the counterparty is a non-U.S. person or a regulators agreed to hold their next meeting CFTC Chairman Gary Gensler explained foreign branch of a U.S. swap dealer. The in Brussels in early 2013. his position at a separate hearing on Dec. order also clarifies that a foreign entity will Despite the dialogue, international regula- 12. Gensler stressed that the CFTC is talk- not have to include any swaps where the tors have not yet reached agreement on ing with other regulators on cross-border swap was entered into by a U.S. affiliate how to resolve these issues. Much of the swaps activity and said “great progress” of that foreign entity or an affiliated central disagreement comes from the fact that the has been made on establishing an “aligned booking entity. Commodity Futures Trading Commission approach” to reform. He explained that the Additionally, the order permits non-U.S. is farther ahead than most other regulators CFTC supports the substituted compliance persons that have registered with the CFTC in terms of finalizing the derivatives reforms approach for foreign swap dealers, but as a swap dealer or MSP to delay compli- and is proposing to require many non-U.S. reiterated his view that foreign firms should ance with certain entity-level requirements swap dealers to register in the U.S. and have to register with the CFTC if they en- adopted under Dodd-Frank, and provides comply with its rules. The CFTC has said gage in more than a certain amount of swap relief from certain transaction-level require- it will support “substituted compliance,” dealing activity with U.S. persons. Gensler ments to both registered non-U.S. persons meaning that foreign firms will be exempted also said that the CFTC is committed to and the foreign branches of U.S.-based

52 Futures Industry | www.futuresindustry.com swap dealers and MSPs. The order also volume of swap transactions, just as it has double down on its no-justification-needed seeks public comment on the definition of benefitted from transparency for decades in stance by appealing the district court’s rul- “U.S. person,” the definition of a foreign the securities and futures markets,” CFTC ing,” said O’Malia. branch, and the aggregation requirements Chairman Gary Gensler commented in a In addition to appealing the court deci- for foreign persons. Comments must be statement issued on Jan. 2. “The public sion, the CFTC is drafting a new version of received 30 days after the order is published also will benefit as swap dealers now will the position limit rule. At a Congressional in the Federal Register. be subject to common-sense standards for hearing in December, Gensler confirmed CFTC Commissioner Jill Sommers, sales practices, recordkeeping and business that the agency is planning to re-propose who voted against the CFTC order, said conduct rules that will help lower risk to the the rule, but did not offer any details on the CFTC’s approach was unnecessarily rest of the economy.” what it might contain. The CFTC’s posi- complex and said the agency should have Additional reporting of swap trans- tion limit rule was struck down by the U.S. issued broader relief until there is more clar- actions will be phased in over the next District Court for the District of Columbia ity about the new regulatory regime. Som- several months. For example, in February in September. Plaintiffs in the case are the mers also urged the agency to “listen to the swap dealer reporting will begin for foreign International Swaps and Derivatives As- concerns being raised by regulators around exchange, equity and physical commodity sociation and the Securities Industry and the world” and adopt a “more reasonable swaps. All other market participants that Financial Markets Association. approach” when it finalizes its cross-border are required to report their transactions are guidance. CFTC Chairman Gary Gensler required to begin reporting in April. Mutual Funds to Appeal Ruling defended his approach, saying that the final on CFTC Registration Rules order will support “an orderly transition” to CFTC Sets Clearing Deadlines The Investment Company Institute is full compliance and will provide time for the The Commodity Futures Trading Com- seeking to reverse a court ruling that upheld CFTC to work with foreign regulators as they mission on Nov. 28 voted 5-0 to issue new regulations issued by the Commodity implement comparable requirements. rules defining the first batch of swaps that Futures Trading Commission that require The CFTC’s action came a day after a must be cleared by registered derivatives mutual funds that use a certain amount of group of Democratic and Republican House clearing organizations. The rules specify commodity futures, options and swaps to lawmakers submitted a letter to the CFTC four types of interest rate swaps and two register with the agency as commodity pool on Dec. 20 raising concerns over the agen- types of credit default swaps that must be operators and comply with certain reporting cy’s lack of coordination with foreign regula- cleared. The rules also specify the dates requirements. The ICI, a U.S. trade associa- tors. “With our economy facing an uncertain by which these products must be cleared. tion that represents mutual funds and other future, we can ill afford to implement reforms Swap dealers and private funds active types of investment companies, joined with without a good faith attempt to cooperate in the swaps market will be required to the U.S. Chamber of Commerce in filing a with the international community so we do comply with the clearing mandate begin- lawsuit in April against the CFTC require- not negatively impact global markets,” the ning on March 11. Accounts managed by ments, which were issued in February as lawmakers said. third-party investment managers as well as amendments to CFTC Rule 4.5. The two ERISA pension plans, will have until Sept. plaintiffs claimed that the CFTC failed to CFTC Proclaims Launch of 9 to comply. All other financial institutions adequately consider the costs and benefits Real-Time Swap Reporting, must comply by June 10. of the rule and argued that the registra- Swap Dealer Registration tion requirements were unnecessary and The Commodity Futures Trading Com- CFTC to Appeal Court Ruling redundant because these funds are already mission announced that two key goals on Position Limits Rule registered with the Securities and Exchange of the Dodd-Frank Act—real-time public The Commodity Futures Trading Com- Commission. On Dec. 12, the U.S. District reporting of swap transactions and swap mission has decided to appeal a federal Court for the District of Columbia rejected dealer registration—became a reality on court decision that overturned the agency’s those arguments and upheld the CFTC’s Dec. 31. The CFTC announced that 65 final rule on position limits. “I believe it is amendments. On Dec. 27, the ICI and the banks and other entities were provision- critically important that these position limits Chamber of Commerce filed a notice of ally registered as swap dealers as of Dec. be established as Congress required,” said appeal with the District Court. “We believe 31, and added that these entities began CFTC Chairman Gary Gensler. Republican the District Court decision is deeply flawed reporting interest rate and credit index swap Commissioners Jill Sommers and Scott and will clearly harm the many shareholders transactions to swap data repositories as of O’Malia voted against appealing the court of registered funds that will bear the costs of that date. decision. “Regrettably, instead of taking the overlapping regulation by two agencies,” ICI “With these historic reforms, the public, opportunity to revise its flawed reading of President and Chief Executive Officer Paul for the first time, can see the price and the statute, the Commission has decided to Schott Stevens said in a statement.

Futures Industry | January 2013 53 Washington

House Subcommittee the CFTC; however the evidence found in the to comment on the proposal, and added Releases MF Global Report MF Global case is symptomatic of regulatory that he would like to see a “comprehensive The House Subcommittee on Oversight inefficiencies,” the report concluded. technological solution” to improve the ability and Investigations, a subcommittee of to monitor money flows. the House Financial Services Committee, CFTC Proposes Protections The comment period for the proposed released a staff report on Nov. 15 on its for Customer Funds rules closed on Jan. 14. investigation into the collapse of MF Global In an effort to address the problems and the loss of customer funds entrusted exposed by the failures of MF Global and CFTC Provides FCMs to the firm. The 100-page report chronicled Peregrine Financial Group, the Commodity with Limited Relief on the demise of MF Global in considerable Futures Trading Commission on Oct. 22 Annual Report Requirement detail, based on a series of hearings as well issued for public comment a package of The Commodity Futures Trading Com- as the firm’s financial statements and e-mail proposed customer protection rules. The mission’s division of swap dealer and communications. The report focused in proposals, which were originally sched- intermediary oversight issued a no-action particular on the movements in customer uled for release in September, include new letter on Dec. 10 that provides certain funds during the firm’s final days and offered regulations as well as amendments to futures commission merchants with limited several recommendations for regulatory and existing regulations. relief surrounding the requirement that chief legislative reforms. CFTC Chairman Gary Gensler explained compliance officers of such FCMs prepare The report, which was drafted by staff that the proposal builds on customer and submit an annual report, pursuant to of Representative Randy Neugebauer protections established earlier this year by Commission Regulation 3.3. (R-Texas), who chairs the subcommittee, the National Futures Association, the U.S. The relief provided in the no-action letter was especially critical of former MF Global futures industry’s self-regulatory organiza- is applicable to all FCMs that: (1) were reg- chief executive Jon Corzine for dramatically tion. Under the CFTC proposal, the NFA istered with the CFTC as of June 4, 2012; changing the firm’s business model without rules would be incorporated into the CFTC and (2) are currently regulated by a U.S. pru- fully understanding the risks. “The risks regulations so that they can be directly dential regulator or registered with the U.S. associated with the firm’s repo-to-maturity enforced by the CFTC, Gensler said. Those Securities and Exchange Commission. portfolio were exacerbated by the lack of rules tighten the requirements for secured The no-action letter enumerates the sub- internal controls and an atmosphere that funds and tighten the controls on excess jects that must be addressed in the annual Corzine created, in which nobody could funds, among other things. report of a covered firm for the fiscal year challenge his decisions,” the report stated. It The CFTC proposal also contains several that ends on or before March 31, 2013. The recommended that Congress enact legisla- other measures developed in consultation letter also provides relief concerning the cer- tion imposing civil liability for shortfalls of with the industry. Those measures include tification that a chief compliance officer must customer funds on the officers and directors giving SROs and the CFTC the ability to execute with respect to the annual report who sign a futures commission merchant’s verify customer balances by viewing an and established the deadline for furnishing a financial statements or who authorize trans- FCM’s bank and custodial accounts for copy of the annual report to the CFTC. fers from customer segregated accounts. customer funds at any time without having The relief was granted in response to a The report also criticized regulators for to go through the FCM. The measures also Nov. 20 request from the Futures Indus- failing to share critical information about include increasing risk disclosures to cus- try Association on behalf of its member the firm with each other and for focusing tomers, enhancing FCM internal controls, FCMs. Under Dodd-Frank, every FCM on their jurisdictional interests rather htan setting standards for FCM audits and exami- must designate a chief compliance officer. the firm as a whole. The report stated that nations, requiring FCMs to provide funding The CFTC’s Regulation 3.3 requires that a there was no “meaningful communication” to cover margin deficits, instituting a liquidity chief compliance officer must prepare and between the Securities and Exchange Com- requirement for FCMs, and implementing sign an annual report that includes, among mission and the Commodity Futures Trading a “more effective early warning system” to other things, a description of the FCM’s Commission until the week before the com- detect problems at an FCM. compliance policies and procedures and an pany’s bankruptcy. “When these regulators Although the CFTC proposal was ap- assessment of the effectiveness of those finally tried to coordinate, it was disorga- proved unanimously, CFTC Commissioner policies and procedures. nized and haphazard,” the report said. Jill Sommers said in a statement that she In requesting no-action relief, FIA noted The report therefore recommended that will look to comments from the industry that the CCOs of covered firms will have the SEC and CFTC streamline their opera- for guidance on whether the benefits of difficulty preparing and furnishing to the tions or merge into a single financial regula- the proposed rules outweigh the costs. CFTC an annual report that meets all of the tory agency. “The MF Global case alone does Commissioner Scott O’Malia also issued a requirements of CFTC Regulation 3.3 within not necessitate the merger of the SEC and statement encouraging industry participants the deadline. Many CCOs will have occu-

54 Futures Industry | www.futuresindustry.com pied that position for just a few months prior tion of a transaction in a commodity interest commodity interest, whether communicated to the time they will be required to prepare or cash commodity. The rule amends CFTC by telephone, voicemail, mobile device, or the first annual report, given that many cov- regulations 1.35(a) and 1.31 to conform them other digital or electronic media. Under the ered firms had not previously designated a to recordkeeping requirements for swap rule, these records must be kept for one CCO, the FIA said. FIA also noted that many dealers and major swap participants under year. Records of written communications new requirements for covered firms have the Dodd-Frank Wall Street Reform and must be retained for five years and readily recently become effective, which will require Consumer Protection Act. available for the first two years. covered firms to expend additional time to Under the final rule, oral communications Those firms required to retain such develop and test new procedures and con- that lead to a transaction in a commodity in- records have a year from when the rules are trols to comply with such new requirements. terest will have to be recorded and retained. published in the Federal Register to comply Furthermore, FIA noted that the policies The CFTC said rules do not pertain to cash with the new recordkeeping requirements. and procedures of covered firms will need to commodity transactions and the records are change in order to address the possible new required only from certain market partici- mix of products and customers as well as pants who are registered or required to be changes to clearinghouse rulebooks. registered with the CFTC. The final rule amends regulation 1.35(a) CFTC Approves Rule Requiring to require that FCMs, IBs with aggregate Firms to Maintain Records of gross revenue exceeding $5 million over Telephone Conversations the preceding three years, retail foreign The Commodity Futures Trading Commis- exchange dealers and certain members sion on Dec. 17 approved unanimously a rule of designated contract markets or swap that requires futures commission merchants, execution facilities to record all oral commu- certain introducing brokers, retail foreign nications. These market participants will be exchange dealers and certain members of required to record quotes, solicitations, bids, designated contract markets to record and offers, instructions, trading, and prices, that retain communications related to the execu- lead to the execution of a transaction in a

Futures Industry | January 2013 55 Thank you to the Sponsors & Partners 2012 of Expo 2012