Seg Funds Revisited “E X Per Ience” Is an Overused Buzzword

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Interviews with CME and DTCC CEOs | U.S. Options Exchanges Proliferate SEPTEMBER 2012 | v22.n4

Seg Funds Revisited “E x per ience” is an overused buzzword. Until there’s a default.

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U.S. Options Exchanges Proliferate| v22.n4 | SEPTEMBER 2012 “E x per ience” Interviews with CME and DTCC CEOs

is an overused features Seg Funds Revisited: Seg FundS 20 Industry Response to Peregrine ReviSited and MF Global Collapses buzzword. The collapse of Peregrine Financial Group in July, coming on the heels of MF Global’s collapse last October, has galvanized an industry-wide self-examination. | By Joanne Morrison CEO to CEO: Until there’s 26 Interview with CME’s Phupinder Gill In this interview, Walt Lukkentalks to Phupinder Gill about his priorities as head of CME. | By Walt Lukken CEO to CEO: a default. 30 Interview with DTCC’s Michael Bodson Walt Lukken talks to Michael Bodson, president and chief executive officer of the Depository Trust & Clearing Corporation. | By Walt Lukken Getting Crowded in Here: 34 U.S. Options Exchanges Continue to Proliferate For the last decade or so, the U.S. equity options business has been characterized by an exceptionally high level of competition among exchanges. While some observers expected that the forces of competition eventually would lead to consolidation, the opposite has SwapClear is the only clearing service to have successfully turned out to be the case. | By Rachel Koning Beals handled an OTC interest rate swap default. When the worst Portfolio Margining: happens, you need the best on your side. 40 U.S. Options Exchanges Continue to Proliferate Eurex Clearing plans to introduce a new risk methodology for calculating initial margin swapclear.com for both listed and over-the-counter derivatives called Eurex Clearing Prisma. | By Thomas Book and Dmitrij Senko, Eurex Clearing

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Futures Industry | September 2012 03

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

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End-of-Month Open Interest 1.0 Monthly Volume september 2012 v22.n4 0.8 |

0.6 Page 54 In millions of contracts 0.4 ICE Brent Options FUTURES INDUSTRY (ISSN #10656855 ) is Jan. 2010 - 0.2 published bi-monthly, except July and August by the FUTURES INDUSTRY ASSOCIATION, 2001 Jun. 2012 0 Pennsylvania Avenue N.W., Suite 600, Washington, Jan 2010Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2011Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2012Feb Mar Apr May Jun 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 2012 by the Futures 08 President’s Message 58 @Markets Industry Association. By Walt Lukken • ICE Revamps IM Materials contained herein may not be reproduced Trading Tool for general distribution, advertising or promotional 10 Trading Volume • Nasdaq OMX to Launch purposes without the expressed consent of the FIA. The statements of fact and opinion in signed articles 16 News Briefs London-Based Interest Rate are the sole responsibility of the authors, and do not Derivatives Platform necessarily reflect the positions of the officers, mem- • ICE to Transition Cleared Energy bers or staff of FIA, nor the employers of the authors. • Tokyo Grain Exchange Swaps to Futures Futures Industry • Margin Requirements for Winds Down Editor-in-Chief Editor Uncleared Swaps Mary Ann Burns Will Acworth 61 Prominent People Deputy Editor Assistant Editor • SEC Approves Consolidated Joanne Morrison Tracy Wahler Audit Trail Plan Futures Industry Editorial Advisory Board 53 Product Profile Russell Abramson, J.P. Morgan Benchmark Shift Drives Arthur Bell, Arthur Bell Certified Public Accountants ICE Brent Options Surge Galen Burghardt, Newedge USA Christopher Culp, Lexecon By John Parry Kevin Foley, Katten Muchin Rosenman LLP Diane Garnick Washington Watch Michael Gorham, Illinois Institute of Technology 55 Anthony Leitner, A J Leitner and Associates, LLC CFTC Moves Ahead with Key Terrence Martell, Baruch College Dodd-Frank Rulemaking John Munro, ION Trading Gerry Perez, Interactive Brokers Group By Will Acworth and Leslie Sutphen, Newedge USA Joanne Morrison 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 2001 Pennsylvania Avenue N.W., Suite 600 Washington, D.C. 20006-1823 Phone: (312) 636-2919 Fax: (202) 772-3075 E-mail: [email protected] Web: www.futuresindustry.org

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The Futures Industry Association, Inc.

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

06 Futures Industry | www.futuresindustry.com

president’s

ucker-punched. That’s how many in the industry felt in July in this area and I am pleased to see that many of our recommen- with the revelation that Peregrine Financial Group had de- dations are now written into the rulebooks of the self-regulatory S frauded customers of over $200 million during a twenty-year organizations that are responsible for auditing and examining FCMs. period of time. Coming on the heels of the MF Global collapse, We will continue to work with the CFTC and SROs to strengthen these events have been a huge blow—not only for the farmers, the oversight process and eliminate any gaps and weaknesses that ranchers, and customers who rely on these markets to manage might create an opportunity for fraud or misuse of customer funds. risk—but also the many hardworking and honest people in the FIA also supports giving regulators the ability to electronically futures industry who have devoted their lives to the integrity of these review and confirm at any time an FCM’s customer segregated bal- markets and now feel betrayed by these events. The outrage in the ances and over time, to use this authority to create an automated industry remains palpable. confirmation system that will provide regulators with timely informa- The industry took considerable pride that the regulated futures tion that customer funds are secure. FIA participated in the recent markets had come through the financial crisis with relatively few CFTC Technology Advisory Committee meeting that discussed problems. As I mentioned in my testimony before the Senate and such technology solutions and there are several viable technology House Agriculture Committees last month, tragically, we can no systems worthy of near-term consideration. longer make this claim. These events are a stark reminder that we There are many suggestions on the table for more far-reaching must never lose sight of the most fundamental and basic purpose of reforms, such as the creation of an insurance fund, the transfer our regulatory system: protecting customer funds. of customer assets to third-party custodians or clearinghouses, I am pleased to see that James Giddens, the trustee in the MF bankruptcy changes and the introduction of individual account Global bankruptcy, has made real progress in recovering customer segregation. All of these deserve full evaluation but will likely require funds. More than 80% of the segregated domestic funds have been changes to the law. With little time on the legislative calendar and returned to customers and now more is being freed up for distribu- the Presidential election looming, I do not expect to see any legislation to customers through an agreement with CME. However, we tive activity on Capitol Hill this year beyond emergency measures. are still a long way from 100%. I encourage the trustees in both Next year, however, the CFTC will have to be re-authorized and bankruptcies to move as quickly as possible to recover customer members of Congress will return to Washington wanting to know funds and return them to their rightful owners. whether reforms are necessary to address the problems exposed I am encouraged by the efforts the industry is making to bet- by MF Global and Peregrine. Now is the time for us to fully consider ter protect customer funds. Many of the initiatives FIA released in which of these reforms deserve consideration and to thoroughly February are being put in place so that customers can have more examine the costs and benefits associated with each, so that we will information about their segregated fund balances and know where be in a position next year to provide Congress with well-informed their money and collateral is being invested or held. advice on the various options for reform. Under the guidance of an FIA taskforce, we pulled together a se- There is no easy solution—no magic bullet—that will bring back ries of specific recommendations that will disclose more information the lost trust from these incidents. Instead, it’s going to take time to the public and strengthen internal controls over how customer and hard work across the industry to implement these improve- funds are protected. ments to earn back the public’s trust. Customers deserve better and One key objective in our recommendations is to provide tools FIA is wholly committed to winning back their confidence by ensur- to our customers that will allow them to monitor the health of their ing they have the highest degree of protections going forward. FCMs. FIA supports the creation of an “FCM Information Portal” that will centrally house firm-specific financial information regarding FCMs so customers can more readily access material information when evaluating an FCM. Some large customers already have access to this information. Now we are attempting to “level the playing field” by putting it in the hands of every customer, so that all customers can make smart decisions on which firm to trust with their funds. Justice Brandeis was right...sunlight is the best disinfectant. Greater transparency will strengthen market discipline and align the incentives for FCMs to meet the highest standards for safety and soundness. Another key part of our recommendations is focused on the in- Walt Lukken ternal controls of FCMs, particularly the handling of customer funds. President We have called on the regulators to establish new requirements

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Eurex Exchange is a member of Eurex Group. Global Futures and Options Volume Based on the number of contracts traded and/or cleared at 84 exchanges worldwide

Jan-Jun 2011 Jan-Jun 2012 % Change Futures 5,996,398,463 5,465,477,858 -8.9% Options 6,397,917,930 5,661,789,242 -11.5% Total 12,394,316,393 11,127,267,100 -10.2%

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

Category Jan-Jun 2011 Jan-Jun 2012 % Change 32.1% Equity Indices Equity Indices 4,166,481,794 3,566,358,850 -14.4% 30.7% Individual Equities 3,525,872,425 3,420,930,755 -3.0% Individual Equities Interest Rate 1,843,968,880 1,584,855,448 -14.1% 14.2% Currency 1,512,635,471 1,141,085,644 -24.6% Interest Rate

Agriculture 529,576,846 511,882,635 -3.3% 10.3% Energy 416,252,799 420,004,466 0.9% Foreign Currency Non-Precious Metals 190,371,974 229,038,432 20.3% 4.6% Agriculture Precious Metals 127,417,649 169,167,723 32.8% 3.8% Energy Other 81,738,555 83,943,147 2.7% 3.6% Metals Total 12,394,316,393 11,127,267,100 -10.2% 0.8% 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-Jun 2012 Jan-Jun 2012 % Change 35.6% Asia Pacific Asia Pacific 4,909,038,061 3,962,018,831 -19.3% 33.8% North America 4,043,189,515 3,758,914,807 -7.0% North America Europe 2,497,515,554 2,323,888,790 -7.0% Latin America 774,958,531 924,686,291 19.3%

Other 169,614,732 157,758,381 -7.0% 20.9% Europe

Total 12,394,316,393 11,127,267,100 -10.2% 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

10 Futures Industry | www.futuresindustry.com Top 30 Derivatives Exchanges Ranked by number of contracts traded and/or cleared Jan-Jun 2012 Annual Jun 2012 Annual % Rank Exchange Volume % Change Open Interest Change 1 CME Group 1,555,139,920 -8.9% 83,589,621 -11.2% 2 Korea Exchange 1,393,952,642 -34.4% 2,293,859 -58.9% 3 Eurex* 1,262,493,530 -11.1% 104,187,387 -2.9% 4 NYSE Euronext* 1,025,021,760 -12.2% 63,449,651 -5.2% 5 National Stock Exchange of India 971,832,759 -7.2% 7,395,605 -27.4% 6 BM&FBovespa 865,563,928 19.1% 55,043,813 -0.5% 7 CBOE Group* 605,315,992 1.7% 318,623 45.0% 8 Nasdaq OMX* 567,972,994 -13.0% 6,962,641 -12.8% 9 Micex-RTS 506,115,520 10.6% 3,309,858 -11.4% 10 Multi Commodity Exchange of India 489,311,649 -13.8% 2,067,715 41.4% 11 IntercontinentalExchange 197,611,922 3.3% 8,975,624 30.2% 12 Dalian Commodity Exchange 196,095,577 58.3% 2,716,805 34.2% 13 Shanghai Futures Exchange 131,695,498 2.5% 1,321,637 30.3% 14 ASX Group 128,915,327 45.4% 15,004,385 -12.6% 15 Zhengzhou Commodity Exchange 125,199,955 -42.5% 1,544,388 42.1% 16 TMX Group* 114,481,179 28.3% 4,627,241 6.1% 17 Osaka Securities Exchange 103,080,701 3.7% 997,667 -66.6% 18 BSE India 97,381,942 433,633.9% 84,988 223,552.6% 19 JSE South Africa 85,578,477 -3.7% 13,888,009 2.8% 20 London Metal Exchange 79,564,146 16.0% 1,931,816 0.4% 21 Taiwan Futures Exchange 78,308,074 -14.7% 850,125 -39.4% 22 BATS Exchange* 61,901,050 -4.8% N/A N/A 23 Hong Kong Exchanges & Clearing 60,690,720 -6.5% 6,114,843 -2.5% 24 London Stock Exchange Group 41,011,882 -12.3% 9,467,552 -39.9% 25 China Financial Futures Exchange 40,886,068 85.8% 72,718 95.6% 26 Singapore Exchange 38,781,772 11.3% 1,539,577 34.2% 27 Tokyo Financial Exchange 38,391,403 -51.3% 1,168,123 -28.9% 28 Mercado Español de Futuros y Opciones Financieros 36,868,195 1.2% 12,903,692 2.0% 29 Turkish Derivatives Exchange 35,868,238 4.8% 258,212 4.1% 30 Tel-Aviv Stock Exchange 35,641,473 -22.8% 560,602 -33.5%

* Open interest for these exchanges does not include options traded in the U.S. and cleared by OCC.

Futures Industry | September 2012 11 Exchange Groups Futures and options volume broken down by subsidiary exchanges Volume Volume % Open Interest Open Interest % Exchange Jan-Jun 2011 Jan-Jun 2012 Change Jun 2011 Jun 2012 Change ASX 36,450,187 77,281,097 112.0% 14,341,163 12,874,142 -10.2% ASX 24 52,221,010 51,634,230 -1.1% 2,818,862 2,130,243 -24.4% ASX Group 88,671,197 128,915,327 45.4% 17,160,025 15,004,385 -12.6%

Bolsa de Valores de São Paulo 393,892,307 494,667,576 25.6% 11,992,411 14,380,868 19.9% Bolsa de Mercadorias & Futuros 332,674,771 370,896,352 11.5% 43,326,247 40,662,945 -6.1% BM&FBovespa 726,567,078 865,563,928 19.1% 55,318,658 55,043,813 -0.5%

Chicago Board Options Exchange 567,396,003 568,207,587 0.1% N/A N/A N/A C2 Exchange 22,120,393 27,101,607 22.5% N/A N/A N/A CBOE Futures Exchange 5,690,374 10,006,798 75.9% 219,784 318,623 45.0% CBOE Group 595,206,770 605,315,992 1.7% 219,784 318,623 45.0%

Chicago Mercantile Exchange 887,578,218 773,485,043 -12.9% 38,473,503 31,609,146 -17.8% Chicago Board of Trade 538,402,329 501,726,899 -6.8% 15,673,341 13,844,793 -11.7% New York Mercantile Exchange 281,772,560 279,927,978 -0.7% 39,941,135 38,135,682 -4.5% CME Group 1,707,753,107 1,555,139,920 -8.9% 94,087,979 83,589,621 -11.2%

Eurex 1,043,507,791 930,531,156 -10.8% 107,278,153 104,187,387 -2.9% International Securities Exchange 377,380,680 331,962,374 -12.0% N/A N/A N/A Eurex 1,420,888,471 1,262,493,530 -11.1% 107,278,153 104,187,387 -2.9%

ICE Futures Europe 135,108,621 140,208,037 3.8% 3,984,206 5,929,206 48.8% ICE Futures U.S. 53,747,631 54,507,525 1.4% 2,685,535 2,793,206 4.0% ICE Futures Canada 2,399,952 2,874,702 19.8% 165,301 253,212 53.2% Chicago Climate Futures Exchange 51,268 21,658 -57.8% 58,834 0 -100.0% IntercontinentalExchange * 191,307,472 197,611,922 3.3% 6,893,876 8,975,624 30.2% * does not include OTC transactions

MCX-SX 439,868,523 289,878,238 -34.1% 1,061,923 1,363,878 28.4% Multi Commodity Exchange of India 127,765,100 199,433,411 56.1% 400,024 703,837 75.9% Multi Commodity Exchange of India 567,633,623 489,311,649 -13.8% 1,461,947 2,067,715 41.4%

Nasdaq OMX PHLX 495,564,739 406,587,414 -18.0% N/A N/A N/A Nasdaq Options Market (U.S.) 101,188,866 103,768,064 2.5% N/A N/A N/A Nasdaq OMX (Nordic markets) 55,678,520 57,149,475 2.6% 7,864,243 6,838,579 -13.0% Nasdaq OMX Commodities 414,030 468,041 13.0% 120,280 124,062 3.1% Nasdaq OMX 652,846,155 567,972,994 -13.0% 7,984,523 6,962,641 -12.8%

NYSE Liffe Europe 630,050,938 509,776,844 -19.1% 66,271,211 62,369,374 -5.9% NYSE Amex Options 295,988,134 293,678,957 -0.8% N/A N/A N/A NYSE Arca Options 234,460,839 210,635,387 -10.2% N/A N/A N/A NYSE Liffe U.S. 7,286,604 10,930,572 50.0% 656,331 1,080,277 64.6% NYSE Euronext 1,167,786,515 1,025,021,760 -12.2% 66,927,542 63,449,651 -5.2%

Note: Open interest for U.S. equity options is held at OCC rather than at the exchanges.

12 Futures Industry | www.futuresindustry.com Top 20 Agricultural Futures & Options Contracts Rank Contract Contract Size Jan-Jun 2011 Jan-Jun 2012 % Change 1 Soy Meal Futures, DCE 10 tonnes 21,392,478 87,074,820 307.0% 2 White Sugar Futures, ZCE 10 tonnes 57,275,902 49,607,061 -13.4% 3 Corn Futures, CBOT 5,000 bushels 44,038,055 41,729,419 -5.2% 4 Rubber Futures, SHFE 5 tons 47,730,375 39,047,252 -18.2% 5 Soybean Futures, CBOT 5,000 bushels 22,812,629 26,860,038 17.7% 6 Soy Oil Futures, DCE 10 tonnes 28,623,584 26,191,827 -8.5% 7 Corn Futures, DCE 5,000 bushels 15,523,481 21,292,160 37.2% 8 Sugar #11 Futures, ICE Futures U.S. 50 long tons 14,734,811 15,248,103 3.5% 9 Wheat Futures, CBOT 5,000 bushels 13,813,800 15,014,953 8.7% 10 Strong Gluten Wheat Futures, ZCE 10 tonnes 5,941,048 14,279,410 140.4% 11 Soybean Oil Futures, CBOT 60,000 lbs 12,558,859 13,823,168 10.1% 12 Corn Options on Futures, CBOT 5,000 bushels 14,444,373 13,119,806 -9.2% 13 Cotton No. 1 Futures, ZCE 5 tonnes 103,279,560 12,751,979 -87.7% 14 Palm Oil Futures, DCE 10 tonnes 11,203,148 11,163,425 -0.4% 15 No. 1 Soybean Futures, DCE 10 tonnes 10,942,155 9,948,702 -9.1% 16 Soybean Meal Futures, CBOT 100 short tons 8,358,954 9,419,983 12.7% 17 Soybean Options on Futures, CBOT 5,000 bushels 6,311,762 8,469,394 34.2% 18 Live Cattle Futures, CME 40,000 lbs 6,943,320 7,376,931 6.2% 19 Lean Hogs Futures, CME 40,000 lbs 4,998,841 6,102,032 22.1% 20 Refined Soya Oil Futures, NCDEX 10 tonnes 517,194 4,144,399 701.3%

Top 20 Energy Futures & Options Contracts Rank Contract Contract Size Jan-Jun 2011 Jan-Jun 2012 % Change 1 Light, Sweet Crude Oil Futures, Nymex 1,000 barrels 94,410,889 76,162,764 -19.3% 2 Brent Crude Oil Futures, ICE Futures Europe 1,000 barrels 65,314,014 74,973,756 14.8% 3 Natural Gas Futures, Nymex 10,000 MMBTU 39,082,452 49,638,103 27.0% 4 Gasoil Futures, ICE Futures Europe 100 tonnes 32,239,489 32,070,087 -0.5% 5 Crude Oil Futures, MCX 100 barrels 23,493,813 24,106,900 2.6% 6 NY Harbor RBOB Gasoline Futures, Nymex 42,000 gal 15,635,616 19,377,777 23.9% 7 No. 2 Heating Oil Futures, Nymex 42,000 gal 15,428,659 18,086,111 17.2% 8 WTI Crude Oil Futures, ICE Futures Europe 1,000 barrels 28,995,412 17,574,685 -39.4% 9 Light, Sweet Crude Oil Options, Nymex 1,000 barrels 20,010,250 16,917,065 -15.5% 10 Natural Gas European-Style Options, Nymex 10,000 MMBTU 12,454,029 15,309,589 22.9% 11 Natural Gas Futures, MCX 1,250 MMBTU 4,531,277 12,266,709 170.7% 12 Henry Hub Natural Gas Swap Futures, Nymex 2,500 MMBTU 10,602,315 11,918,991 12.4% 13 U.S. Oil Fund ETF Options * N/A 17,336,725 11,093,564 -36.0% 14 U.S. Natural Gas Fund ETF Options * N/A 8,331,225 6,898,718 -17.2% 15 Natural Gas Penultimate Swap Fut., Nymex 2,500 MMBTU 3,609,071 5,096,462 41.2% 16 Brent Crude Oil Futures, Micex-RTS 10 barrels 11,135,686 4,877,554 -56.2% 17 Brent Crude Oil Options, ICE Futures Europe 1,000 barrels 896,110 3,855,403 330.2% 18 EUA Futures, ICE Futures Europe 1,000 EUAs 2,495,755 2,826,064 13.2% 19 Crude Oil 1 Mnth Cal. Spread Opt., Nymex 1,000 barrels 1,654,696 2,147,624 29.8% 20 UK Natural Gas (Seasons) Fut., ICE Fut. Europe 1,000 therms/day 1,308,840 1,938,150 48.1% * Traded on multiple U.S. options exchanges

Futures Industry | September 2012 13 Top 20 Equity Index Futures & Options Contracts Rank Contract Index Multiplier Jan-Jun 2011 Jan-Jun 2012 % Change 1 Kospi 200 Options, KRX * 100,000 Korean won 2,008,082,595 1,265,215,495 -37.0% 2 S&P CNX Nifty Options, NSE India 100 Indian rupees 403,222,935 422,225,379 4.7% 3 SPDR S&P 500 ETF Options ** N/A 288,117,455 301,292,178 4.6% 4 E-mini S&P 500 Futures, CME 50 U.S. Dollars 270,461,007 249,730,377 -7.7% 5 Euro Stoxx 50 Futures, Eurex 10 Euros 183,401,694 175,401,268 -4.4% 6 RTS Futures, Micex-RTS 2 U.S. Dollars 153,328,205 169,447,648 10.5% 7 Euro Stoxx 50 Options, Eurex 10 Euros 152,150,133 154,594,357 1.6% 8 Sensex Options, BSE 15 Indian rupees 3,348 89,688,041 26,787.5% 9 S&P 500 Options, CBOE 100 U.S. Dollars 83,754,830 87,566,887 4.6% 10 iShares Russell 2000 ETF Options ** N/A 75,352,463 68,814,525 -8.7% 11 Nikkei 225 Mini Futures, OSE 100 Yen 58,154,889 65,047,175 11.9% 12 Powershares QQQ ETF Options ** N/A 62,785,085 64,737,654 3.1% 13 VIX Options, CBOE 100 U.S. Dollars 47,676,557 53,527,562 12.3% 14 Taiex Options, Taifex 50 New Taiwan dollars 65,940,124 52,913,228 -19.8% 15 S&P CNX Nifty Futures, NSE India 100 Indian rupees 61,853,355 48,567,536 -21.5% 16 CSI 300 Futures, CFFEX 300 Chinese renminbi 22,000,202 40,886,068 85.8% 17 iShares MSCI Emerging Markets Index ** N/A 36,319,356 34,581,174 -4.8% 18 Kospi 200 Futures, KRX 100,000 Korean won 41,278,694 32,526,689 -21.2% 19 E-mini Nasdaq 100 Futures, CME 20 U.S. Dollars 35,523,400 32,150,601 -9.5% 20 TA-25 Options, TASE 100 New Israeli shekels 39,586,927 31,138,674 -21.3% * Multiplier changed to 500,000 won during March for new series ** Traded on multiple U.S. options exchanges

Top 20 Foreign Exchange Futures & Options Contracts Rank Contract Contract Size Jan-Jun 2011 Jan-Jun 2012 % Change 1 U.S. Dollar/Indian Rupee Futures, NSE 1,000 USD 350,701,314 287,477,400 -18.0% 2 U.S. Dollar/Indian Rupee Futures, MCX-SX 1,000 USD 419,768,829 280,530,825 -33.2% 3 U.S. Dollar/Russian Ruble Futures, Micex-RTS 1,000 USD 74,847,134 144,563,646 93.1% 4 U.S. Dollar/Indian Rupee Options, NSE 1,000 USD 100,430,496 83,906,780 -16.5% 5 U.S. Dollar Futures, BM&F 50,000 USD 39,727,520 47,980,203 20.8% 6 Euro FX Futures, CME 125,000 Euro 41,907,217 36,190,641 -13.6% 7 U.S. Dollar Futures, KRX 10,000 USD 32,209,140 28,963,940 -10.1% 8 U.S. Dollar Futures, Rofex 1,000 USD 21,799,950 27,085,056 24.2% 9 Australian Dollar Futures, CME 100,000 AUD 13,680,279 17,372,814 27.0% 10 Euro/U.S. Dollar Futures, Micex-RTS 1,000 Euro 20,701,866 15,651,645 -24.4% 11 British Pound Futures, CME 62,500 GBP 15,404,087 13,208,434 -14.3% 12 Canadian Dollar Futures, CME 100,000 CAD 10,686,211 12,054,902 12.8% 13 Japanese Yen Futures, CME 12,500,000 Yen 16,178,368 11,438,239 -29.3% 14 Australian Dollar/Japanese Yen Futures, TFX 10,000 Euro 22,632,050 10,187,882 -55.0% 15 Euro/Japanese Yen Futures, TFX 10,000 AUD 14,098,876 9,610,189 -31.8% 16 U.S. Dollar Futures, TURKDEX 1,000 USD 6,072,310 6,690,342 10.2% 17 Mexican Peso Futures, CME 500,000 Pesos 4,382,502 5,887,195 34.3% 18 Swiss Franc Futures, CME 1,000 Euro 5,970,958 5,530,357 -7.4% 19 Euro/Indian Rupee Futures, MCX-SX 500,000 Pesos 14,070,759 5,389,329 -61.7% 20 U.S. Dollar Options, BM&F 50,000 USD 6,270,243 5,137,347 -18.1%

14 Futures Industry | www.futuresindustry.com Top 20 Interest Rate Futures & Options Contracts Rank Contract Contract Size Jan-Jun 2011 Jan-Jun 2012 % Change 1 Eurodollar Futures, CME 1,000,000 USD 314,671,103 238,019,219 -24.4% 2 One Day Inter-Bank Deposit Futures, BM&F 100,000 Real 154,061,339 175,386,808 13.8% 3 10 Year Treasury Note Futures, CBOT 100,000 USD 162,502,559 147,070,139 -9.5% 4 Euro-Bund Futures, Eurex 100,000 Euro 123,087,847 98,499,621 -20.0% 5 3 Month Euribor Futures, Liffe U.K. 1,000,000 Euro 130,156,043 90,041,253 -30.8% 6 5 Year Treasury Note Futures, CBOT 100,000 USD 89,512,255 70,248,450 -21.5% 7 3 Month Sterling Futures, Liffe U.K. 500,000 GBP 68,697,659 62,819,062 -8.6% 8 IDI Index Options on Futures, BM&F 1 Real 61,600,391 59,479,786 -3.4% 9 Euro-Bobl Futures, Eurex 100,000 Euro 78,435,579 56,764,588 -27.6% 10 Euro-Schatz Futures, Eurex 100,000 Euro 92,022,512 52,941,880 -42.5% 11 Eurodollar Mid-Curve Options, CME 1,000,000 USD 49,118,862 51,283,741 4.4% 12 30 Year Treasury Bond Futures, CBOT 100,000 USD 45,765,439 48,379,074 5.7% 13 3 Month Euribor Options, Liffe U.K. 1,000,000 Euro 52,038,128 44,026,421 -15.4% 14 Eurodollar Options, CME 1,000,000 USD 45,888,708 35,917,337 -21.7% 15 10 Year Treasury Note Options, CBOT 100,000 USD 27,531,229 29,008,751 5.4% 16 2 Year Treasury Note Futures, CBOT 200,000 USD 41,309,294 28,047,638 -32.1% 17 TIIE 28 Futures, Mexder 100,000 MXN 15,080,946 22,043,245 46.2% 18 3 Year Treasury Bond Futures, ASX 24 100,000 AUD 21,166,935 22,003,929 4.0% 19 Euro-Bund Options, Eurex 100,000 Euro 14,174,132 21,432,983 51.2% 20 Long Gilt Futures, Liffe U.K. 100,000 GBP 16,570,577 18,829,629 13.6%

Top 20 Metals Futures & Options Contracts Rank Contract Contract Size Jan-Jun 2011 Jan-Jun 2012 % Change 1 Steel Rebar Futures, SHFE 10 tonnes 36,501,970 35,523,052 -2.7% 2 Copper Futures, SHFE 5 tonnes 11,896,560 33,059,951 177.9% 3 High Grade Primary Aluminum Futures, LME 25 tonnes 26,590,515 29,300,978 10.2% 4 Silver MIC Futures, MCX * 1 kilogram 12,600,201 28,576,679 126.8% 5 SPDR Gold Shares ETF Options ** N/A 32,458,119 27,911,459 -14.0% 6 Comex Gold Futures, Nymex 100 oz 23,156,697 23,741,592 2.5% 7 Gold Petal Futures, MCX *** 1 gram 1,503,371 23,273,365 1448.1% 8 Silver M Futures, MCX 5 kilograms 20,929,594 19,878,538 -5.0% 9 Copper - Grade A Futures, LME 25 tonnes 16,451,110 18,964,384 15.3% 10 Copper Futures, MCX 1 tonne 15,084,610 18,863,202 25.0% 11 iShares Silver Trust ETF Options ** N/A 51,107,439 18,429,183 -63.9% 12 Special High Grade Zinc Futures, LME 25 tonnes 10,423,424 13,960,212 33.9% 13 Zinc Futures, SHFE 5 tonnes 26,818,783 12,663,893 -52.8% 14 Gold M Futures, MCX 100 gram 6,857,485 11,876,794 73.2% 15 Copper Mini Futures, MCX **** 250 kilograms 0 9,639,631 N/A 16 Silver Futures, MCX 30 kilograms 12,825,889 9,204,643 -28.2% 17 Copper Futures, Nymex 25,000 lbs 5,954,455 8,976,844 50.8% 18 Nickel Futures, MCX 250 kilograms 7,060,023 7,547,460 6.9% 19 Silver Futures, Nymex 5,000 oz 12,034,701 7,094,764 -41.0% 20 Standard Lead Futures, LME 25 tonnes 5,324,349 6,966,632 30.8% * Began trading in February 2011 ** Traded on multiple U.S. options exchanges *** Began trading in April 2011 **** Began trading in February 2012

Futures Industry | September 2012 15 newsbriefs

ICE to Transition Cleared Energy these policies will increase the cost and at ICE Clear Europe, which was approved Swaps to Futures in January complexity for swaps market participants, by the Commodity Futures Trading Com- IntercontinentalExchange will convert both in absolute terms and relative to that mission as a regulated derivatives clearing all of its cleared energy swaps into eco- of futures market participants,” said Chuck organization in 2010. Execution and clear- nomically equivalent futures and options Vice, president and chief operating officer. ing fees, minimum commission and view- contracts in January and will list them for “We anticipate a seamless transition that will only fees, and margin methodology and trading on its futures exchanges in London largely preserve existing methods of trans- rates will not change for these products, and New York, the Atlanta-based company acting in ICE’s markets.” ICE said. announced on July 30. The shift comes in Swaps based on North American natural “We believe the benefits to customers response to new regulatory requirements gas, electric power, environmental products are many. For example, a participant that that ICE believes will make traditional futures and natural gas liquids will be listed on a trades swaps will be required to report each and options more attractive. new energy division of ICE Futures U.S. in swap to a swap data repository, a new “Based upon our extensive analysis of New York. Oil, freight and iron ore swaps and untested reporting regime, whereas new swap rules and consultations with a will be listed on ICE Futures Europe in the same participant executing economi- wide variety of customers, we believe that London. All products will continue to clear cally equivalent futures contracts will report under the existing futures reporting systems and regime,” ICE said in a July 30 notice to market participants. “Furthermore, most BOJ’s Shirakawa Sees Key Role participants that trade a notional value of for Futures Industry in Risk Transfer swaps above a certain threshold could be Japan’s futures industry should seek out new opportunities to meet the “unfulfilled classified as “Swaps Dealers” or “Major needs of the Japanese economy” by leveraging its strengths in price discovery and risk Swap Participants” by the CFTC, and as a transfer, Masaaki Shirakawa, governor of the Bank of Japan, said in a July 26 speech at a result could bear the burden of registration conference sponsored by FIA Japan. and new bank-like regulation, while a partici- Shirakawa warned that the futures market in Japan is “falling behind” the rest of the pant trading economically equivalent futures world, which he said is “unfortunate” given that the industry’s roots go back to the early contracts will be subject to futures oversight, 18th century. He also warned that the public is skeptical of the industry’s value to society which has been in effect for decades.” and hostile towards speculation. He therefore urged the industry to “reflect on its original The transition from swaps to futures is purpose” of providing protection against volatile prices and find ways to encourage non- subject to approvals from the Commodity speculative activity. Futures Trading Commission and Financial The industry could pursue opportunities in two areas in particular, he said. One area is Services Authority. ICE said it will continue to in types of risks that are not yet addressed by a traded market, such as longevity risks, operate an electronic execution platform for which is a key issue for Japan given its aging population. Another opportunity is in terms bilateral energy swaps. This unit, currently of “leveraging the advantages” of the futures market structure such as transparent pricing, an exempt commercial market, will register he said. He pointed to the controversy over the setting of Libor, and suggested that prices as a swap execution facility. determined on futures exchanges could become benchmarks for related economic activity. “We are now in a period of great changes,” Shirakawa told the conference. “Considering State Street Study: Dodd-Frank that a period of change is a period of opportunities, I believe that the industry could poten- Reforms Weigh on Buy-Side tially accelerate its growth by satisfying the unfulfilled needs of the Japanese economy.” Margin requirements are the top focus as Shirakawa also discussed Japan’s progress in meeting the Group of 20 commitments buy-side firms prepare to comply with the for central clearing, noting that credit default swaps clearing in Japan began in July 2011 derivatives reforms in Dodd-Frank, accord- and yen interest rate swaps will begin in October. Although this migration to central clearing to a survey of buy-side firms conducted ing has many benefits, it will have negative effects, he said, specifically the concentration by Tabb Group and sponsored by State of risk in clearinghouses. Street. The majority of respondents in the For this reason, central banks such as the BOJ will need to exercise stronger oversight study said they expect the migration of over- and supervision of clearinghouses and may require higher “contingency buffers” in the the-counter markets into central clearing- form of margin requirements, loss absorption pools or paid-in capital. houses will drive margin and collateral costs The BOJ also wants clearinghouses and other financial market infrastructures improve significantly higher. According to the study, their liquidity management arrangements, Shirakawa said. He warned that an account at 52% of respondents believe liquidity will the central bank that is used for settling accounts should not be confused with “automatic drop when key Dodd-Frank regulations are central bank liquidity in times of stress.” adopted, 38% believe there will be a collat-

16 Futures Industry | www.futuresindustry.com eral shortage and 31% foresee an increase therefore are not likely to take effect until the would have three sections. Form 102A would in trading and pricing errors. summer of 2013 at the earliest. be used to identify position-based special ac- “The buy-side supports the idea of trans- Draft technical standards were issued for counts. Form 102B would be used to provide parent markets and the entry of new partici- public comment on June 25. They include ownership and control information on volume pants to compete in a marketplace tradition- standards for the regulation of over-the- threshold accounts. Form 102S would be ally dominated by a few key players,” said counter derivatives, central clearinghouse used to provide information on swap ac- Clifford Lewis, executive vice president and and trade repositories in another step counts with reportable positions. A new Form head of State Street’s eExchange business. toward implementing the European Market 71 would require reporting of certain omnibus “However, the process of transformation is Infrastructure Regulation. The standards account information. challenging and it dominates the buy-side’s define the framework for the application of thinking. They see a long road ahead before the clearing obligation, specify risk mitigation FIA Issues Model Disclosure there will be collateral-efficient clearing solu- techniques for uncleared OTC derivatives, Form to Assist FCMs in tions, competitive electronic execution and lay down the requirements for end-user Complying with Internal increased volumes that mitigate concerns exemptions, provide business conduct Conflict Rules about liquidity.” standards for clearinghouses, specify which FIA issued a model disclosure form to information must be reported to trade help futures commission merchants comply International Regulators repositories, and establish that trade reposi- with internal conflict rules that came into Propose Margin Requirements tory data be available to regulators. effect on Aug. 3. The memo addresses for Uncleared Swaps Separately, the European Banking Au- requirements under Regulation 1.71, a The Basel Committee on Banking Super- thority on June 15 issued a consultation on Commodity Futures Trading Commission vision and the International Organization of the draft regulatory technical standards on rule that establishes information barriers be- Securities Commissions issued a consulta- the capital requirements for central coun- tween FCMs and affiliated swap dealers and tive paper on July 6 that proposes a set of terparties. These draft standards set out major swap participants and requires FCMs high-level principles on margining practices provisions for collecting margin, maintaining to disclose to their customers conflicts of and treatment of collateral as well as margin a pre-funded default fund and maintaining interest in the provision of trade execution requirements for non-centrally-cleared de- dedicated resources to cover losses upon or clearing services. The new disclosure rivatives. The regulators said the proposal is the default of a clearing member. The draft and conflict of rules were initially set to take designed to achieve “global consistency for standards also require additional capital effect in early June but were delayed in margin requirements” and prevent regulatory to mitigate the market risk, credit risk and response to concerns raised by FIA and the arbitrage. Comments should be submitted counterparty credit risk arising from non- National Introducing Brokers Association. by Sept. 28. covered activities, and also for operational risk arising from all activities of a central SEC Approves Rule Requiring EU Regulators Move Ahead counterparty. Consolidated Audit Trail Plan with OTC Derivatives Reforms The Securities and Exchange Commis- The European Union published the final CFTC Republishes Proposed sion on July 11 approved a final rule requir- text of the European Market Infrastruc- Rule on Account Ownership ing the national securities exchanges and ture Regulation in the Official Journal. The and Control Information the Financial Industry Regulatory Authority to regulation, which became effective Aug. 16, The Commodity Futures Trading Com- establish a market-wide consolidated audit establishes a new regulatory framework for mission in late June withdrew proposed trail. Under the rule, exchanges and FINRA derivatives clearing and trade reporting as rules for collecting account ownership and are required to submit with 270 days a new well as new standards for clearinghouses. control data for trading accounts active on plan for the central database that would However, many of the provisions can- U.S. futures exchanges and issued a new collect and identify every order, cancella- not take effect until the relevant technical proposal that reflects comments from the FIA tion, modification and trade execution for standards are adopted. The European and other groups. The CFTC’s new proposed exchange-listed equities and equity options Securities and Markets Authority is expected rule expands existing large-trader reporting across all U.S. markets. The SEC said this to transmit its draft technical standards to rules to identify “volume threshold accounts” consolidated audit trail will increase the data the European Commission by the end of in futures, options, and swaps. The new available to regulators investigating illegal September. The Commission will then need proposed rule also revises the existing Form activities such as insider trading and market to finalize and publish the level 2 measures 102 which is currently used by clearing firms manipulation, and it will significantly improve before the end of 2012. The first clearing to provide the CFTC with information about the ability to reconstruct broad-based mar- obligations for over-the-counter derivatives the account controller. The revised Form 102 ket events in an accurate and timely manner.

Futures Industry | September 2012 17 newsbriefs

Hong Kong’s SFC Overhauls electronic trading,” the consultation paper In a separate but related action, the Hong Regulatory Framework for said. “Similar to other major markets, we have Kong Exchanges and Clearing has decided Electronic Trading observed an increased use of arrangements that it will not apply to the Commodity The increasing use of automated trading that are commonly described as direct market Futures Trading Commission for permission in Hong Kong has prompted the Securi- access, as well as the use of complex trading to continue providing direct market access ties and Futures Commission to rethink its algorithms in the conduct of trades and the from the U.S. Since 2000 HKEX has relied regulatory standards for electronic trading. implementation of trading strategies.” on a CFTC no-action letter permitting the On July 24, the SFC began a public consul- Key elements of the proposals include: exchange to place electronic trading termi- tation on proposals to enhance the regula- 1) general requirements on all forms of nals in the U.S., much like a number of other tory framework for all forms of electronic electronic trading with respect to responsibil- foreign exchanges that sought to encourage trading, including direct market access and ity for orders, management and supervision, more U.S. customers to trade their products. automated trading. The SFC said it wants adequacy of systems and record-keeping; The Dodd-Frank Act ended that practice, to provide a “more coherent and compre- 2) specific requirements on the provision of however, by requiring all foreign boards of hensive” regulatory framework for electronic internet trading and direct market access ser- trade to register with the CFTC if they wanted trading and provide market participants with vices, including the requirement that interme- to offer direct market access to U.S. custom- “clarity” on standards for internal controls diaries put in place effective risk management ers. In a July 11 circular, HKEX informed its and risk management in electronic trading of and supervisory controls to monitor orders; members that it did not intend to register securities and futures. and 3) specific requirements on algorithmic with the CFTC under the new rules and said “In recent years, technological develop- trading related to testing, user qualification members must cease to rely on the provi- ments have led to the proliferation of automated and risk management controls. sions of the 2000 no-action letter by Aug. 20.

IDX Gala Raises £130,000 for Charity FIA and FOA hosted their fifth annual gala dinner at the end of Thanks to generous sponsorship from ABN Amro, CME this year’s IDX conference in London, raising £130,000 from the Group, GH Financial, LCH.Clearnet, RTS, Trading Technologies industry in aid of Futures For Kids. The charity has now raised and Traiana, all the proceeds from the dinner went directly to more than £1.5 million since its formation several years ago for a FFK. Further funds were raised through a raffle, silent and live growing number of children’s charities in the U.K. and elsewhere in auctions, and the SEB piggy banks distributed on tables through- the world. out the event. This year’s gala attracted over 500 guests, including not only The dinner marks the latest in a series of fund-raising events futures industry professionals, but also representatives from gov- for FFK, including the annual Quiz Night, the Golf Day, and the ernment and the City of London. Walk to Work. In its second year, the Walk to Work brought together nearly 100 individuals from the futures and options industry, joined by members of the foreign exchange trading community, to walk some 35 miles into central London in one day. Such endeavours have helped FFK continue its distribution of funds to a range of charities both in the U.K. and in other parts of the world, some for long-term support, others with one- off donations. Since its inception, FFK has supported the following charities: EveryChild, Demelza Children’s Hospice, Fairbridge, HopeHIV, Living and Loving, Whizz Kidz, Variety—The Children’s Char- ity, The Bicycle Helmet Initiative Trust, The PACE Centre.

18 Futures Industry | www.futuresindustry.com FIA EPTA Acts to Preserve CFTC Designates DTCC-SWIFT CFTC Approves ICE Trade Vault Market Integrity as Legal Entity Identifier Provider as Swap Data Repository FIA European Principal Traders Associa- The Commodity Futures Trading Com- IntercontinentalExchange announced on tion published a report on July 25 called mission announced on July 24 that it has June 28 that the Commodity Futures Trad- Market Integrity Framework: Best Practices designated DTCC-SWIFT as the provider ing Commission has provisionally approved to Preserve Market Integrity. The report of interim legal entity identifiers to be used ICE Trade Vault as a swap data repository recommends a set of best practices to by registered entities and swap counterpar- for a range of asset classes including com- help principal trading firms prevent market ties to comply with the agency’s swap data modities, interest rate swaps, credit default manipulation and reduce risks. The recom- reporting regulations. LEIs, to be known as swaps and foreign exchange. The approval mendations build upon existing European CFTC interim compliant identifiers or CICIs is provisional until the CFTC completes regulation and provide guidance to principal until establishment of a global LEI system, its final rulemakings on swap data reposi- trading firms as they establish their internal are essential tools for aggregation of deriva- tory regulations. ICE said its repository, the policies, procedures and codes of conduct. tives data, the CFTC said. The CFTC is also first to receive provisional registration from “Technological progress has transformed participating in an international process, the CFTC, will initially focus on commodity the trading landscape in recent years. These coordinated by the Financial Stability Board, markets. changes have brought substantial efficien- to establish governance principles and cies and other benefits to the market, but reference data requirements and implement ISDA Updates FpML to they have also introduced new sources of a global LEI system. Once the global LEI Meet New Reporting and risks to the markets,” FIA EPTA chairman system is implemented and operational, the Clearing Requirements Remco Lenterman said. “We’ve therefore CFTC anticipates that the interim identifier The International Swaps and Derivatives drafted these best practices to help firms will transition into the global LEI. Association published in August its recom- prevent market manipulation and manage mendation for version 5.3 of the Financial risks. Market manipulation is not only morally NYPC Opens Cross-Margining products Markup Language, the industry reprehensible, but also carries a hefty price to “Market Professionals” standard electronic language for the trad- tag for the market, in particular for those that New York Portfolio Clearing announced ing and processing of over-the-counter are providers of liquidity,” Lenterman said. in August that it has expanded its “one-pot” derivatives and complex products. The new cross-margining platform to a larger pool of version of the FpML protocol covers the SGX Revises market participants after receiving approval from Commodity Futures Trading Commission’s Clearinghouse Rules the Commodity Futures Trading Commission requirements for reporting trades to swap Singapore Exchange has revised its and the Securities and Exchange Commission. data repositories and for real-time reporting clearinghouse rules to strengthen its default The clearinghouse said the cross-margining purposes. The recommendation for FpML management framework to protect its platform is now available for “market profession- version 5.3 also includes enhanced support derivatives market against systemically de- als,” meaning members of designated contract for clearing messages and additional sup- stabilizing events such as multiple member markets that trade for their own account. Previ- port for a variety of commodity products defaults. SGX said it made the changes ously the platform was limited to the proprietary and processes, including the commodity in anticipation of the expanded scope of accounts of firms that are members of NYPC as large trade reporting requirements devel- its clearing business, which now includes well as the FICC division of the Depository Trust oped by the commodity reporting working interest rate swaps and non-deliverable and Clearing Corporation. group. foreign exchange forwards, and to address NYPC, which is a joint venture of NYSE ISDA also published the first work- the needs of its members. Among other Euronext and DTCC, also announced that its ing draft of version 5.4, which will provide things, the enhancements provide a way open interest has reached one million con- added support for collateral allocation mes- for a clearing member to limit its liabilities in tracts. NYPC clears interest rate futures traded sages and non-public execution report mes- case several defaults occur in quick succes- on NYSE Liffe U.S. and provides margin off- sages as well as added support for certain sion. The enhancements, which took effect sets for certain fixed income securities cleared types of derivatives, including equity swaps, in August, also include various clarifications by DTCC. In the next few months, NYPC physically settled base metals forwards and and refinements to its powers in managing plans to add futures on the DTCC’s GCF options, and environmental and weather a default, including clarifying its authority to repo index, NYSE Liffe U.S.’s newest interest swaps and options. The final recommen- transfer and manage customer positions rate futures contract, to the cross-margining dation for 5.4 is scheduled for release in and margins from a defaulted clearing mem- program, and in 2013 it plans to add interest September. ber to a non-defaulting clearing member. rate swaps cleared by LCH.Clearnet.

Futures Industry | September 2012 19 Seg Funds Revisited: Industry Response to Peregrine and MF Global Collapses

By Joanne Morrison

The collapse of

Peregrine Financial Group

in July, coming on

the heels of MF Global’s

collapse last October,

has galvanized an

industry-wide

self-examination.

20 Futures Industry | www.futuresindustry.com n both cases, the bankruptcy process re- ture Committee on Aug. 1. worked as a county attorney before coming vealed a significant shortfall in customer FIA members are now working with to the Senate. I money, something that had never hap- other segments of the industry on a series CFTC Chairman Gary Gensler testified pened before in the history of the U.S. futures of additional recommendations that will be before both committees and outlined the industry. The two incidents struck a major presented to the Commodity Futures Trad- steps being taken to improve the monitor- blow to confidence in the ability of the in- ing Commission. One important goal is to ing of futures commission merchants and dustry to properly handle customer funds and provide greater transparency into the finan- customer funds held in segregated accounts. raised serious concerns about the effectiveness cial health of futures commission merchants The CFTC chairman explained that the self- of the industry’s self-regulatory system. through the disclosure of key metrics such regulatory organizations are the “front-line” So far, lawmakers in Washington have as capital and leverage. Another important regulators in charge of examining firms and not attempted to legislate a solution. In- recommendation is to build a system that reviewing independent audits while the stead, the initiative for change has come will provide “independent verification” so CFTC’s job is to oversee the examination from within the industry, with a wide range that customers can be confident that the process. Gensler agreed on the importance of ideas being talked about as possible so- money in segregated customer accounts is of getting new protections in place and esti- lutions. These include electronic verifica- actually there. mated that they could be implemented over tion of customer balances, stronger internal While it will take some time to imple- the next few months. “The system clearly controls, the creation of an insurance fund, ment these recommendations, no changes to failed to protect Peregrine’s customers, and I the use of third-party custody accounts, and the laws will be needed. Other proposals will believe we all must do better,” Gensler said. providing customers with more visibility require legislation, however. These include Some lawmakers asked whether the into the handling of customer funds. changes to the bankruptcy code and the cre- CFTC is focusing too much of its attention Although both collapses revealed weak- ation of an insurance fund. Although some and resources on implementing Dodd-Frank nesses in the segregation of customer funds, believe that legislative action could take place regulations. Gensler agreed that his agency is there are important differences in the types before the end of the current session at year- stretched as it moves forward with the large of weaknesses they revealed. At Peregrine, it end, others say that any legislative proposals number of rulemakings mandated by the was a case of misappropriation of funds that are more likely to be taken up next year, after Dodd-Frank Act, but he reassured members went undetected by auditors and regulators the elections have taken place. that the CFTC is also giving serious atten- for years. Russell Wasendorf Sr., the firm’s tion to the customer protection regime. founder, asserted in a note found after his Regulators Under This comment was countered, however, attempted suicide that he had been engaged Fire on Capitol Hill by Jill Sommers, the Republican commis- in an elaborate fraud for nearly 20 years, The House and Senate agriculture com- sioner at the CFTC in charge of the MF misleading auditors by forging bank state- mittees both recently held hearings to ex- Global investigation, who said the agency ments and other documents. amine the two failures. At both hearings, could be moving faster. “I do believe that we At MF Global, it was only when the lawmakers questioned how these failures identified many of the enhancements that company was desperately seeking a sale to could have taken place under the watch of we could have made to the futures industry another futures commission merchant that regulators. In the case of MF Global, the six months ago. So the changes that are be- the shortfall in customer funds was discov- primary self-regulatory organization was fore us now are changes that we could have ered. Regulators and bankruptcy liquida- CME Group; in the case of Peregrine, it implemented months ago,” she told the tors are still working to pinpoint exactly was the National Futures Association. In Senate Agriculture Committee on Aug. 1. what led to the shortfall, but according to both cases, the Commodity Futures Trading the bankruptcy trustee, the shortfall was Commission was responsible for ensuring FIA Recommendations driven by a “perfect storm” of weak internal that the self-regulatory organizations were Many of the safeguards that are now be- controls, inadequate systems, disorganized doing their jobs properly. ing adopted by firms and SROs are in line record-keeping, and a desperate need for “The question remains, who’s minding with the initial recommendations released additional funds to meet margin calls on the store? There are some in this town who in February by the FIA’s Futures Markets the firm’s proprietary trades. would argue that we need more regulations, Financial Integrity Task Force. The Futures Industry Association has but the fact remains that new regulations These recommendations called on FCMs been at the forefront of industry responses. mean nothing when regulators are not en- to adopt and document internal control In February, it unveiled a number of specific forcing the existing rules on the books,” said policies and procedures relating to the pro- recommendations for tougher internal con- Representative Frank Lucas (R-Okla.), the tection of customer funds and maintain a trols at firms and increased transparency for chairman of the House Agriculture Com- clear separation of duties among individuals customer and regulators. Many of these safe- mittee, at a July 25 hearing. responsible for compliance with customer guards already have been adopted by the in- Democrats expressed similar views, ex- funds segregation. The recommendations dustry and enforced by new rules, but more pressing bafflement that the CFTC and the also called for enhanced recordkeeping must be done in the wake of the Peregrine NFA missed the fraudulent activity at Per- and reporting, including transmitting daily debacle, according to Walt Lukken, the FIA’s egrine for two decades even though there customer segregation balances. The recom- president and chief executive officer. was a series of red flags at the firm. “You can mendations also require chief financial of- “We have two instances in less than a have all the books with all the laws in them, ficers or other senior officers to authorize in year when segregation was breached and but if you don’t enforce them, sometimes it writing and promptly notify the designated customer funds are missing. That is unac- is worse than not having them at all,” said SRO whenever an FCM seeks to withdraw ceptable,” Lukken told the Senate Agricul- Senator Amy Klobuchar (D-Minn), who more than 25% of its excess funds from the

Futures Industry | September 2012 21 Seg Funds Revisited 28-30 November 2012 Mark Holloway of Goldman Sachs and Alessandro Cocco of JP Morgan participate in a Roundtable Discussion at the CFTC St. Regis Singapore www.futuresindustry.org/asia

The FIA Asia Derivatives Conference is unique to similar events because of its high-quality delegates, program, and exhibitors. Five-hundred and fi fty senior delegates from 22 countries and more than 150 fi rms attend this annual event. Executive-level and other senior managers comprise 76% of the delegate list, making FIA Asia the place to network in the Asia-Pacifi c region.

Platinum Sponsors customer segregated accounts in any day. condition of their FCM. Fourth, FIA calls said in a statement. The FIA also released a “frequently asked on FCMs to publicly certify that they are Also in July, the CFTC approved a set questions” document prepared by members in compliance with the initial recommenda- of requirements drafted by the SROs that of the association’s Law and Compliance tions that the FIA issued in February. will tighten internal controls and provide Division. The document was designed to be “Many individual firms have already be- better and more frequent information on Sponsors used by FCMs to help their customers bet- gun to make efforts to implement changes the handling of customer funds. These new ter understand the provisions of the Com- and disclose more information in response safeguards include requiring FCMs to file modity Exchange Act and the rules of the to this crisis of confidence, but this effort daily segregation and secured reports and Commodity Futures Trading Commission must be industry-wide and FIA is commit- bi-monthly reports detailing how customer that relate to customer protections. It con- ted to leading that effort,” Lukken said dur- funds are invested and where they are held, tains 30 questions and answers addressing ing the Chicago speech. performing more frequent spot checks to the basics of segregation, collateral manage- Meanwhile the industry’s SROs are mov- monitor FCM compliance, and requir- ment and investments, capital requirements ing in parallel to implement a broad range ing a principal of an FCM to approve any and other issues. of new rules and requirements. On July disbursement that exceeds 25% of “excess The next step came in July, when FIA’s 17, the SROs unanimously agreed to im- funds,” meaning the firm’s own money in Partners Lukken announced a four-part transparency mediately begin the process of confirming customer accounts. initiative during a speech to members of the the balances of customer segregated bank FIA Chicago division. Lukken said the plan accounts for all FCMs using a web-based Electronic Access to calls for providing regulators with the abil- electronic confirmation process. Addition- Segregated Accounts ity to electronically review and confirm cus- ally, the SRO committee said it would set There is broad agreement among indus- tomer segregated balances at any FCM at rules requiring that all FCMs provide their try representatives that regulators and SROs any time. Second, FIA supports creating an DSRO with direct online access to the bank should have direct electronic access to view automated confirmation process for segre- accounts that hold the FCM’s customer seg- customer segregated funds accounts. Imple- Exhibitors gated funds that will provide regulators with regated and secured funds. menting this idea may be more complicated timely information that customer funds “Any bank depository that fails to pro- than people realize, however. Cinnober • CME Group • CQG, Inc. • Equinix • Eurex • Horizon Software • IntercontinentalExchange are secure. Third, FIA is exploring ways to vide electronic online access will not be con- At a July 26 meeting of the CFTC’s Korea Exchange • Korea Investment & Securities Co., Ltd. • LCH. Clearnet • Newedge Group • Omgeo Pte Ltd • Orc Software create an “information portal” to centrally sidered an acceptable depository for holding Technology Advisory Committee, panel- Phillip Futures Pte Ltd • RTS Realtime Systems • Singapore Exchange • Singapore Mercantile Exchange house information about FCMs so that customer segregated and secured funds, un- ists cautioned that there are technical chal- Thailand Futures Exchange • Tokyo Commodity Exchange (TOCOM) • Tokyo Financial Exchange Inc. customers can better evaluate the financial der the added recommendations,” the NFA lenges in accessing information from certain Tokyo Stock Exchange, Inc. • Trading Technologies International, Inc. • Turkish Derivatives Exchange • ULLINK

22 Futures Industry | www.futuresindustry.com as of August 8, 2012 28-30 November 2012 St. Regis Singapore www.futuresindustry.org/asia

Platinum Sponsors

Sponsors

Partners

Exhibitors Cinnober • CME Group • CQG, Inc. • Equinix • Eurex • Horizon Software • IntercontinentalExchange Korea Exchange • Korea Investment & Securities Co., Ltd. • LCH. Clearnet • Newedge Group • Omgeo Pte Ltd • Orc Software Phillip Futures Pte Ltd • RTS Realtime Systems • Singapore Exchange • Singapore Mercantile Exchange Thailand Futures Exchange • Tokyo Commodity Exchange (TOCOM) • Tokyo Financial Exchange Inc. Tokyo Stock Exchange, Inc. • Trading Technologies International, Inc. • Turkish Derivatives Exchange • ULLINK

as of August 8, 2012 Seg Funds Revisited accounts. Accounts at banks and clearing- holding, the custodial locations where the handle their money. We also will continue houses will be the easiest to access, but there collateral is being held, and a breakdown of to find new ways to provide transparency are challenges in obtaining information how the collateral is being invested. Perkins and contribute to industry solutions.” from custodial accounts, they said. There said that the bank is working on the next are even more challenges with 30.7 secured phase of the project, which will focus on Calls for Insurance accounts holding funds for foreign futures independently validating the balances held While much of the attention has focused and options because they would have to be at clearinghouses as well as more frequent on strengthening existing protections, some verified through foreign affiliates. As a re- updates to the information. He declined to have called for more fundamental reforms, sult, it may take more time to build a tech- go into detail but commented that the bank such as creating an insurance fund that nology solution that will cover these foreign views this effort to provide transparency as a would protect futures customers in case their secured accounts. key feature of Citi’s clearing services. FCM fails. One model is the fund managed Gerry Corcoran, chairman and chief “It’s critically important to have mini- by the Securities Investor Protection Cor- executive officer of R.J. O’Brien & Associ- mum regulatory standards for transparency poration, which guarantees customer se- ates, provided participants with a detailed into the handling of customer funds, but curities investments up to $500,000 in the look at an RJO customer segregated funds we hope the regulators allow ample room event a brokerage firm collapses. statement to illustrate those areas that will James Giddens, the trustee handling the be easier to provide verification of funds as MF Global bankruptcy, has been a strong well as those areas that will take more time proponent of establishing an insurance to implement. Corcoran said that RJO has fund. At the Aug. 1 Senate hearing, he ex- up to 70 different accounts with banks, car- plained that the vast majority of MF Glob- rying brokers and exchanges in the U.S. al’s customers held relatively small accounts and abroad, and he estimated that industry- At a time when and could have been made whole if an in- wide verification would require access to surance fund had been in place. He also more than 1,000 accounts. people are nervous told lawmakers that the process of transfer- Chris Hehmeyer, chairman of the board ring customer accounts out of a failed FCM of the National Futures Association, ex- about too-big- would be much smoother if there were such plained that the NFA plans to build a sys- a fund, since it would eliminate the need to tem that will verify account information to-fail, putting in hold back some funds to cover a shortfall. by the next trading day, commonly known “It’s a cumbersome process even to as T+1. While this will not capture every place government collect funds that demonstrably belong movement of funds in real-time, it should to customers,” Giddens said. “Nothing serve as a sufficient deterrent to fraudsters, guarantees is works quite as it is described when you’re industry representatives told the CFTC. in a bankruptcy.” “It will never be 100% bulletproof, but the something we have Some end-users have supported the in- knowledge that you will be caught at the surance idea. For example, the National end-of-the-day true-up will be a deterrent,” to consider. Grain and Feed Association, a trade group said Chuck Vice, president and chief oper- that represents agricultural interests, has ating officer of IntercontinentalExchange. Walt Lukken, FIA proposed making insurance available on an optional basis for any market participant Individual Firms Take Action for FCMs to differentiate themselves and willing to pay for it. Diana Klemme, an ag- Even as the industry-wide initiatives ultimately compete on transparency,” said ricultural hedging expert who testified on are moving forward, individual firms are Perkins. “There’s a commercial incentive to behalf of the NGFA, told the Senate com- rolling out their own responses to the con- be more transparent than the next guy.” mittee that her clients would be willing to cerns raised by the collapses of MF Global Rosenthal Collins Group is another ex- pay for insurance through a transaction fee. and Peregrine. ample. On July 17, the FCM began posting “My customers would pay for it right now,” One example is Citi. The bank, which op- on its website daily reports describing its in- she told the Senate Agriculture Committee. erates one of the largest FCMs in the world, vestment of customer segregated funds. The details have not been fleshed out, launched a “transparency portal” in July that “RCG is determined to go above and however. Some have suggested that the best gives customers online access to details about beyond what is required of us to provide way forward would be to extend SIPC cov- how their futures and swaps collateral is in- our customers with reassurance that we erage to include futures. Others have called vested and where their funds are being held. are investing their funds wisely,” said Scott for the formation of a separate fund just for The transparency portal is within the bank’s Gordon, the firm’s chief executive officer. futures. Another key issue is funding; there Velocity platform, which provides a single “Unquestionably, the events of the last 10 is no consensus yet on who should pay and point of access to Citi’s research, analytics, months have undermined the confidence how much. execution and post-trade services. of market participants in an industry which Bart Chilton, a Democratic commis- Christopher Perkins, global head of serves a vital role in the global economy. sioner at the CFTC who strongly sup- OTC clearing at Citi, explained that clients While we can’t singlehandedly restore that ports the insurance idea, issued a proposal can now view the total amount of futures confidence, we can do our part to ensure on Aug. 9 with some concrete details. His and cleared OTC collateral that Citi is that customers feel confident in how we proposal calls on Congress to create a SIPC-

24 Futures Industry | www.futuresindustry.com like insurance fund called the Futures Inves- that no customer has ever lost a penny as willing to pay the necessary costs, and has tor and Customer Protection Corporation the result of a clearing member default.” suggested launching a “pilot program” to with up to $2.5 billion in assets. The fund- Whatever the approach, the cost of fund- test the idea. ing would come from a fee paid by FCMs ing such a scheme will be a critical issue. The Another proposal under discussion equivalent to 0.5% of annual gross revenues cost will depend on many issues, including is tri-party custody. In this model, cus- from their futures business. Coverage of loss the structure of the fund, the cost of ad- tomer funds would be held by a custodial would be limited to $250,000 in futures ministration, and the amount of coverage. bank rather than the FCM, and the FCM liquidation value and cash. Equally important is the source of funding; would have access to these funds only for “By drawing on an existing blueprint, the options include transaction fees, mem- the purpose of meeting margin obligations. the creation of FICPC would be a relatively ber firm assessments, and private insurance. Proponents of this model say that it would simple task for legislators and FICPC ad- Terry Duffy, executive chairman and provide greater protection from fraud or ministrators,” Chilton said. “This would help president of CME Group, warned that the misuse by the FCM, but customers are less remedy the present crisis of confidence in the SIPC model, which depends on funding sure. At the CFTC staff roundtable on Aug. futures markets in the wake of the fall of Per- from securities dealers, would not work as 9, several customer representatives pointed egrine Financial Group and MF Global.” well in the futures market. “We do not have out that in the event of a shortfall in the The agency’s chairman is more cautious, a payment-for-order-flow model in the fu- customer funds, customers who opted for however. While not rejecting the insurance tures industry. We have a central limit, tri-party custody would still be subject to a idea, Gensler has stressed initiatives that can open, transparent book for all to see. And pro-rata distribution of any losses. The only be put into effect without requiring changes I think that’s a completely big, huge dif- way to fully protect against loss would be to to the law. “I think we need to focus in on ference when you talk about who’s going make the use of tri-party custody accounts our rules and ensure … the self-regulatory to fund these type of insurance programs,” mandatory across all customers, they said. function works better,” he told the Senate Duffy said. Agriculture Committee on Aug. 1. FIA’s Lukken suggested that the next step Stay Focused on the Basics Gensler also is wary of the potential should be an in-depth analysis of the prac- At an Aug. 9 roundtable discussion held costs, saying that the costs and benefits tical aspects of establishing an insurance by CFTC staff, customer representatives of establishing an insurance fund would fund. “There are serious costs that may go urged the industry to stay focused on the have to be weighed before the idea could with these insurance programs that we have basics—ensuring that customer money is be implemented. to consider. Coverage, actuarial soundness exactly where it is supposed to be. That re- An alternative approach would be to and also potentially, a lot of these insurance quires not only new rules and regulations create an industry-funded “liquidity facil- programs have a government guarantee be- but also a higher standard for checking to ity” that would focus on covering shortfalls hind them,” he told the Senate committee. make sure that those rules and regulations in customer property and ensuring that “At a time when people are nervous about are actually followed. customer accounts are transferred quickly too-big-to-fail, putting in place government “While it’s very important to focus on to other brokers. This proposal has been guarantees is something we have to seri- the process and that the rules being im- put forward by the Commodity Customer ously consider.” posed by the regulatory bodies (as well as Coalition, a group formed after the col- the self-denominated rules by each entity) lapse of MF Global to represent custom- Alternatives to Segregation are being followed, I think given what we’ve ers of the failed FCM. The facility in effect Instead of establishing an insurance seen as well as the expectation by end-users, would “step into the shoes” of the failed fund, CME has raised the possibility of is that the standard of care has to be confirm’s customers, enter the bankruptcy having customer funds held at the clear- siderably higher in terms of ensuring that proceedings in their place, and pursue inghouse rather than the FCM. Recogniz- the money is where it’s supposed to be,” said their claims for recovery of missing funds. ing that this would remove a key source of William De Leon, global head of portfolio In this way the facility would recover revenues for FCMs, CME has emphasized risk management at PIMCO. whatever funds were used to support the that it will protect the FCM business model While there are many questions that customer account transfer process. by collecting the interest on the customer still remain about potential new safe- In testimony before the Senate Agricul- funds and passing that to the FCMs. CME guards, industry representatives and regu- ture Committee on Aug. 1, John Roe, an has not yet disclosed how this model will lators have vowed to continue working to introducing broker and co-founder of the work, however. help restore confidence. CCC, explained that there is a Canadian Another option under discussion is “full “There is no easy solution—no magic model for this idea. When MF Global col- segregation,” meaning that each customer’s bullet—that will bring back the trust lost in lapsed, the Canadian Investor Protection positions and collateral would be held in a these past weeks. Instead, it’s going to take Fund provided a 20% guarantee on the cus- separate account, rather than pooled with a lot of hard work across the whole industry tomer property at the firm’s Canadian sub- other customers. The CFTC considered this to implement a host of improvements as to sidiary. That covered a 20% shortfall in the idea when it designed the account structure how FCMs conduct their business and how customer accounts and cleared the way for for cleared swaps, and rejected it in favor of their conduct is examined and audited by the transfer of more than 7,000 accounts of the “legally separated operationally com- the regulators,” said Lukken. MF Global Canada to new brokers. As a re- mingled” model. Nevertheless, the NGFA ...... sult, he told the committee, “Canada’s com- has proposed allowing full segregation as a Joanne Morrison is the deputy editor of modity customers can still make the claim voluntary option, available to any customer Futures Industry.

Futures Industry | September 2012 25 CEO to CEO: Interview with CME’s Phupinder Gill By Walt Lukken

On March 12, CME announced that Phupinder Gill would serve as the company’s next chief executive officer. Gill joined the Chicago Mercantile Exchange in 1988 and held a number of increasingly senior positions, serving as head of the clearinghouse from 2000 to 2003 and as chief operating officer from 2004 onwards. He succeeded Craig Donohue, who retired in May. In this interview, Walt Lukken, the new president and chief executive officer of the FIA, talks to Gill about his priorities as head of CME. This is one of a pair of CEO-to-CEO interviews in this issue of Futures Industry.

26 Futures Industry | www.futuresindustry.com LUKKEN: As CEO, what is the broad vision the Malaysian client base to the asset classes Today we have 45. The vast majority of that you paint for your shareholders, and we have. And it exposed palm oil to our ex- them spend their time in China in what what’s the 60,000-foot strategy you’re try- isting clients, giving them a new commod- I’ll call the investment stage. In other ing to put in place? ity that they can trade in conjunction with words, educating people with respect to GILL: When I first became CEO in May, our soy oil contracts. As a result of that alli- the products that we have, and spending I hit the road and I talked to a bunch of ance, we’ve seen a 57% growth in the trad- time with regulators so that we are at- investors around the U.S. and in London, ing of palm oil. tuned with their philosophy. Tokyo and Singapore. It was fascinating What also differentiates us from every because of the consistency of the questions other global exchange is that we have re- LUKKEN: On the issue of Peregrine and that were asked of us. Everybody wanted to search and development staff around the MF Global, what are your initial thoughts know where growth is going to come from world. For example, the decision to deepen about what the industry needs to do in for CME and what’s going to happen to our investment in the Dubai Mercantile response to these two episodes? And in CME as a result of the ongoing changes in Exchange was actually driven by our Asia particular, what are your thoughts on the the regulatory environment. research staff. They identified a need for a idea of creating an automated system for The simplest way to respond was to talk third benchmark in the crude oil market for monitoring account balances? about all the efforts that we have put in the Asia client base, which is growing mas- GILL: I think if you’re talking about restor- place up until this point in time that are sively and doesn’t have a reliable benchmark ing the confidence of the industry among now beginning to bear fruit. The vision is of their own. So the Asia research guys who the client base, there has to be something to be a global financial services company were charged with coming up with a third that assures clients that the funds that that’s selling relevant products to our clients benchmark, what we have called the East they provide to the FCMs are going to be around the world. of Suez benchmark, said to us, why are we used for particular purposes, and there’s In the U.S., we’re in an environment that reinventing the wheel? DME trades exactly no way, shape, or form in which it can be we understand well. We can blend in per- what these guys consume. otherwise used.

What we have found is that the best way for us to tap into new client bases and get into new product development is to make alliances with exchanges that have a need for one of two things—better distribution for their products and a fist class matching engine. fectly, and we know what our clients need. LUKKEN: When you think about inter- LUKKEN: What about the’’ comment that Around the rest of the world, that’s not national growth, certainly the alliance ap- CME made about needing to reevaluate the necessarily clear to us. What we have found proach has been very successful, but what system in which customer funds are held at is that the best way for us to tap into new about organic growth, or mergers and ac- the firm level? I think the FCMs want to client bases and get into new product devel- quisitions? What do you think is the most know a little bit more about what CME has opment is to make alliances with exchanges effective of all those models? in mind. that have a need for one of two things— GILL: I think you have to accept the real- GILL: Basically, the top line thought there better distribution for their products and a ity that when you are trying to do business is that we have to work with the FCMs. first-class matching engine. in other parts of the world, the context is We cannot undertake any kind of ma- We have been able to provide that to not quite the same. A partner exchange jor change without involving the people various exchanges around the world, and understands the regulatory landscape bet- whose lives are going to change, and spe- each of these exchanges brings something ter than we do, and it has a client base cifically the FCMs. That includes the large to the table for us too. Take Malaysia. It is that can readily attach itself to our plat- bank-owned FCMs but also the smaller a smaller exchange, but the products that form. So with an alliance, you basically firms. We have to come up with a solution it has are first class. Palm oil is a great ex- have a potential new client base attached that’s good for everybody. ample. It is the most consumed edible oil to Globex all at one go. You don’t have to We don’t have the answer yet. But one of in the entire world, yet it is being traded bring them on one firm at a time or one the things that we are doing is charting, if at a fraction [of the volume] of what the client at a time. you will, a day in the life of funds. How do soy oil is. So the opportunities for palm oil China is a perfect example. Under- funds come into an FCM? How do funds are huge. standing that culture, recognizing it, leave the FCM? Who can put money into Our alliance solved two issues for the and going along with it becomes key. an account that doesn’t belong to a client? Malaysians—global distribution for what CME has spent many years develop- Who can take money out? By tracking that they had and the reliability of the matching relationships there. These relation- flow, we can identify the potential points of ing engine. For us, it added to the position- ships are what I would consider to be failure and have each one of them covered. ing of the Globex matching engine as the very deep. Five years ago, we had two Now a lot of people are saying that insur- Bloomberg of the futures world. It exposed or three people on the ground in Asia. ance has to be part of the solution. I’m not

Futures Industry | September 2012 27 Phupinder Gill sure insurance is the right thing to do. It us from Hong Kong, Taiwan or Singapore. Then there’s the third possibility where may be, but it’s going to impose a cost on They see this as an opportunity that’s very futures are more efficient than swaps and the industry. squarely China-oriented, or they’re look- you’ll see a lot of futures that have swap- There is one more point I’d like to make ing at CME Group as a first-class exchange like qualities. on competition. Having the FCMs with us that has multiple asset classes and most of We have to be prepared for all three of and working with us is not a key to sur- the world’s benchmarks. these environments from an operational point vival; it is the only way to survival. We of view. From a strategic point of view, all need each other in a large way, and CME LUKKEN: Let me turn to Dodd-Frank, three scenarios reinforce one theme, which is does not intend to do anything to disad- which will bring about a real transformation basically that futures and swaps are so inter- vantage the FCM, because it’s a strategy of the trading and clearing environment related. So the question for us is how we make that does not work. here in the U.S. What is your perspective CME the most attractive place to do business, on the transition to clearing, and especially no matter what environment emerges. LUKKEN: Well, I think that will be very re- the choice about whether to trade a swap or To that end, we are putting tools in assuring to our members. I appreciate your a future? To what degree will people come place. CME Direct is one such tool where making that point. to the conclusion that futures will be more customers see OTC trades and exchange-

We cannot undertake any kind of major change without involving the people whose lives are going to change, and specifically the FCMs.

GILL: I continue to be out on the road efficient to trade than swaps because of the traded trades on a side-by-side basis and talking to our clients about how the busi- margin rules and all the other’’ regulations have the ability to choose both or either ness model has changed, what the busi- that are being put in place? one of those things. ness pressures are, and where they see GILL: Let me share with you the three op- I think the bigger issue is the collateral themselves going. tions that we are seeing. Scenario number requirements that are going to emerge as If you remember, in the late 80s to the one, the business continues the way it is a result of the implementation of Dodd- mid 90s we had an influx of Japanese and now, except swaps are being cleared. I think Frank—and how innovative the clearing- European banks coming in to join us, and that is a good starting assumption. It may houses can be and how broad thinking the the industry went up to more than 100 not be a good ending assumption, however. regulators will be with respect to collateral clearing members. Then, as things started Scenario number two, the swaps market, schemes that might be introduced. to slow down, the industry contracted and once it becomes a listed market through we dropped down to as few as 65 firms. SEFs [swap execution facilities], may be- LUKKEN: In the futures world, you have Now we’re starting to see more folks are come more efficient. The marketplace for been very successful with the integrated coming on board from Asia. There are swaps might actually increase because the model, with execution and clearing con- seven other such firms that are coming to products are in a cleared environment. nected in a vertical silo. Now with swaps coming into clearing, how does that play into your integrated vertical model? About Phupinder Gill GILL: Our perspective is that whenever in- tellectual property is concerned, we’re very iPad, iPhone or BlackBerry? committed to being a vertically integrated An iPhone and a BlackBerry firm. We list hundreds of contracts a year. The development effort behind those is Favorite App? huge. Like most new development efforts, Angry Birds some work, some don’t. To the extent that these development efforts work, we want to Last book read? reap the benefits of those efforts. Mindset by Carol Dweck Whenever the IP doesn’t belong to us and it belongs to everybody else, as in the Favorite movie? case of swaps, we’re very clearly a horizon- “House of Games” tal participant. Basically, we have said, “you know what, these swaps have a complimen- Favorite restaurant? tary side—futures.” Penang in Chicago, Nonya in New York So CME is very comfortable operating both as a vertical silo and in the horizon- Favorite hotel? tal world, because the circumstances under Mandarin Oriental in Hong Kong both of them are not the same in any way, shape, or form.

28 Futures Industry | www.futuresindustry.com LUKKEN: You started your career at CME mist many years ago and he drove a lot of in 1988. What were the key milestones the exchange’s innovation. He invented the in your career, and who were your prin- Eurodollar contract, he helped us launch cipal influences? the S&P 500, he helped us pioneer the GILL: I was very fortunate to come in ba- concept of the E-mini as a response to the sically at the dawn of portfolio margining. Dow, and he invented weather futures for The futures industry at that point in time us. Any major innovation that this com- did not have it. I joined the clearinghouse, pany went through at that time had been literally, a month and a half before they led by Fred, and I had the privilege of were going to launch SPAN. So I learned by watching a genius work. fire. Three months later, I took over the risk Fred said that what separates success- management function. At that time, I was ful individuals from the unsuccessful ones the only risk manager. is how long they stick with a problem. That’s what Fred did. He’d call me at 11 LUKKEN: Did you have any sort of math or p.m. at night, ask me if I’m still asleep, engineering background? and I’d say, “I’m not anymore,” and he’d GILL: I was a finance major in school. I talk about an issue we were discussing ear- was fortunate enough to finish both my lier in the day and he had an idea that he BA and MBA in four and a half years. In wanted me to pursue.

Having the FCMs with us and working with us is not a key to survival; it is the only way to survival. We need each other in a large way, and CME does not intend to do anything to disadvantage the FCM, because it’s a strategy that does not work. the summer breaks I didn’t have the money LUKKEN: Turning to a more’’ personal mat- to go home, so I went to school. That fo- ter, what is it that gets your mind away cus on finance helped me when I took over from work and recharges your battery, so from the person who ran risk for us. When to speak? she left, she recommended that I take over, GILL: About 12 years ago, my ex-wife and and I had been at the clearinghouse for I adopted a little boy from Guatemala. only three months. Basically, she said that Whenever I’m in town, I pick him up on I was chosen because I kept asking her too Friday and I spend the weekend with him. many questions. He’s a great kid. I spend a lot of time, as I had the opportunity to work with a few much time as I can, with him. In fact, he’s people in the clearinghouse to transform the most widely traveled kid that I know. the risk management function into what it I’m in Asia a lot. No matter where in Asia is now. When I first took over, it was very I am, I always take the time to spend at least far away from what it is now. But we put it a day with my mom and dad, just touch on a path that I believe was very, very good. base and say hello. They’re very important, The big influences early in my career they’re big influences in my life, so I like to were Kate Meyer and John Davidson who see both of them. were an integral part of the clearinghouse And, whenever I find time, I play golf. team. John, in particular, had a mindset Actually, what I do, you can’t call it golf. But that you have to think first before you do I like to throw the stick. anything. I would say, if he had a mission statement, that was it—think before doing. LUKKEN: Thank you Gill, and I am look- As I matured within the organization, a ing forward to working with you in your fellow that was hugely influential in my life new role. was Fred Arditti. He was the chief econo-

Futures Industry | September 2012 29 CEO to CEO: Interview with DTCC’s Michael Bodson

By Walt Lukken

On April 23, the Depository Trust & Clearing Corporation announced the election of Michael Bodson as the company’s next president and chief executive officer. Bodson joined DTCC in 2007 after 20 years at Morgan Stanley and most recently served as the company’s chief operating officer. He succeeded Donald Donohue, who retired at the end of July 2012. In this interview, Walt Lukken, the new president and chief executive officer of the FIA, talks to Bodson about his priorities as head of the DTCC. This is one of a pair of CEO-to-CEO interviews in this issue of Futures Industry.

30 Futures Industry | www.futuresindustry.com LUKKEN: Mike, you took over as the new LUKKEN: How did the financial crisis of measure sensitivity to a change in market chief executive officer of DTCC on July 1. 2008 change your view of the world? conditions. So VaR is not going to save What is your vision for the company and BODSON: There are a variety of lessons you. VaR is going to give you a warning what are your immediate strategic priori- learned from that experience, but I’m going signal. And you can choose to act on that ties? to focus about one in particular---the change signal, or you can choose to ignore it and BODSON: I’ve been working very closely in how people look at risk management. do so at your own peril. with Don for the last five years in terms Going into 2008, I think the industry of sculpting and shaping the strategy of at large looked at risk very much within a LUKKEN: Let’s talk about DTCC’s business DTCC. So there will be a lot of continuity standard deviation approach. We all knew model. Historically, you have been a user in terms of the strategy that has been articu- the bell curve and we focused on that big controlled utility, which is a pretty com- lated up to now. center and managing the risk within that mon model on the securities side of the DTCC is focused on two core businesses, center. I think the crisis woke us to the real- industry. But you’re now starting to enter which are first, the clearing and settlement ity that the risk outside of that center--the into joint ventures that are run as for- services that we provide to the financial fat tail, the black swan, whatever you want profit businesses. Philosophically, how do markets, and second, the global data re- to call it--truly is what creates dispropor- all of these things hang together under the pository services that build on our product tionate risk. DTCC umbrella? expertise and our network of connectivity So, I think lesson one was expect the un- BODSON: There are two factors that we look in these markets. Both of those businesses expected. In other words, look beyond the at. First, whatever endeavor we’re undertak- were in existence long before I showed up standard deviation. It’s the unknown risk, ing must help our clients, our participants on the scene, and as CEO my top priority or the risk that you think you have managed and the marketplace reduce cost or risk or is to ensure continued execution on those but in reality haven’t, that really brings you capital usage. Secondly, we don’t always two fronts. great levels of harm. have all the skills or expertise or technology As an organization, our highest priority That doesn’t mean we don’t excel at risk needed to provide that value. In the case of will always be ensuring that the financial management. We got through Bear Stearns, New York Portfolio Clearing, for instance, markets continue to function the way they Lehman Brothers, and Madoff very effec- while we obviously had the risk manage- should. We have such a critically important tively. We never missed a day of process- ment and the securities inventory, what role in the market infrastructure that we ing. That wasn’t just by luck…that was by made the one pot possible was partnering don’t have the luxury of ever missing a day. design. But I think the lesson we learned with somebody who brought the futures So risk management has to be our number is that the game has changed. What was portfolio and the expertise in futures clear- one priority at all times. an acceptable level of risk management in ing. It’s that partnering of capabilities that Our second priority is to help the in- 2007 and 2008 is no longer acceptable go- makes it a unique product offering. dustry meet the requirements of regulatory ing forward. We have to rethink the way we When we look at all our joint ventures, reform through initiatives such as global approach risk management, improve the be it Omgeo, MarkitServ or NYPC, we look data repositories across various asset classes ways we define and identify risk, and dem- to partner with firms that are focused on and legal entity identifiers. Both of those onstrate that we are even more effectively delivering the same value proposition as we projects have some very significant deliver- mitigating risk. are. So, with eNYPC, it was the capital sav- ables and some highly aggressive deadlines. ings of one pot margining. As for Markit- It’s a big challenge designing a system and LUKKEN: Some people say that there has Serv, it was providing a uniform platform a process that will meet the requirements been an over-reliance on risk models, such for the affirmation and confirmation of of global regulators under some very tight as Value-at-Risk, as a risk management tool. over-the-counter derivatives. In the case of time constraints, getting industry support In fact, some people say that an over-reli- Omgeo, what the industry was looking for and completing users acceptance testing. So ance on models was one of the reasons why is how you apply this affirmation process in getting those two projects up and running the banks lost so much money during the the most expedient way possible. are really where we will be heavily focused financial crisis. Has DTCC changed its reli- I think the recipe for success in this type for the rest of this year. ance on models and how you use that tool of partnership is having a very strong and Longer term, I think our strategy is not in thinking about risk? active board membership with corporate that dissimilar from what it is now. The BODSON: Well, I think you’re using the values that are very much aligned as to the industry has created this wonderful as- right terms. VaR is not the answer. It’s a business purpose of the entity and to the set in DTCC. It combines some amazing tool to arrive at an answer. It’s a tool to management and governance structures to processing capabilities and an outstanding network of connectivity in the U.S., and now, because of the global trade reposi- About DTCC tory, we are operating more and more on • Industry-owned clearinghouse for cash securities, repos, treasuries, a global basis. I think the more that firms and agencies in U.S. re-examine market structure and how they • Settled more than $1.7 quadrillion in securities transactions across as- undertake their business operations, the set classes in 2011. Joint venture owner of New York Portfolio Clearing more demand they will seek to partner with NYSE Euronext, DTCC’s first venture in futures clearing aimed at with us and leverage DTCC in ways that portfolio margining fixed income cash and futures products. will lower their costs and lower the overall risk profile of the industry.

Futures Industry | September 2012 31 Michael Bodson be put in place. In all three instances, we Clearnet coming in, adding swaps to the reporting credit and rates and meeting the have boards that comprise not only repre- one pot margining solution offered by regulatory deadline, as well as getting things sentatives of the owners but also representa- NYPC. This will be the first clearinghouse up and running as quickly as possible. Eq- tives of the industry. We can’t just simply sit to have portfolio margining for futures, uities, commodities, and foreign exchange there and say we have a natural monopoly cash and swaps. How is that project going, have compliance dates in October. So our on certain business, and therefore we can and what’s the timeline? timelines and our project plans are all driv- maximize the profit. That runs against both BODSON: It’s going well. We’re trying to get ing toward getting the U.S. SDR up as our creed as well as the market participants’ this up and running towards the end of this quickly as possible. board members’ responsibility. year or the early part of 2013. That said, this We’re also building a global network of data is innovative, so we have to make sure that repositories, and doing those concurrently is LUKKEN: Looking at NYPC in particular, the regulators are comfortable with how the quite a challenge. It’s a massive undertaking, can you give us a quick update on its prog- risk management is going to take place and but the industry’s been very, very supportive. ress to date? how we’re going to ensure that we’re not cre- BODSON: I think it’s off to a good start. Any ating some sort of potential risk that has not LUKKEN: Recently you announced that for- new undertaking obviously has a period of been seen before. So we have to go through mer CFTC Commissioner Mike Dunn had fits and starts. But I think the value propo- the appropriate oversight process and make agreed to serve as chairman of the DTCC sition of margin savings has been proven sure that our stakeholders are comfortable SDR board. repeatedly. We’ve got strong active partici- that we are doing the right thing. BODSON: We’re thrilled to have Mike join pation by the major dealers. We have really us. We realized that we needed to raise our exciting products coming out—be it adding LUKKEN: Turning to data reporting, I know level of expertise when it came to regulatory options to the list of clearable products or DTCC has been designated by the Interna- matters. Having someone with Mike’s expe- the general collateral finance (GCF) futures tional Swap Dealers Association as the swap rience and long knowledge of the market- contract or the “one-pot” offering to market data repository for a variety of different as- place who can advise us and guide us as we professional customers. So by combining set classes. Can you give us an update on develop the SDRs and other businesses will the strengths with our partner in this effort, where you stand with that project? be hugely beneficial. we’re working to be innovative and creative BODSON: We have an application to be one It’s also an indication that we take the regu- and respond to what the market needs. of the U.S. SDRs pending now at CFTC, so latory obligations and market oversight very, we’re under the review process. At the same very seriously. This is new ground for every- LUKKEN: Now with the Project Trinity an- time, we are continuing to move ahead on body. Having somebody who has sat at the nouncement in March, you have LCH. all fronts. The industry is very focused on table as these rules and regulations were being written and who understands the subtleties of what needs to get done will allow us to better About Mike Bodson serve our constituents, the marketplace and The person you most admire? regulators. And he happens to be a heck of a My father—he left school at 16 to work and became CFO of a company. nice guy, too, which is always nice to see. He was a self-made man. LUKKEN: Looking five years down the road, The person who had the most influence on your career? there may be more than one SDR registered Too many to list—I have been lucky to have great mentors, each of whom with the CFTC. How do you see this mar- taught me something new. ket developing? BODSON: We have been fairly consistent iPad, iPhone or BlackBerry? in our views. What the marketplace would Two BlackBerrys and one iPad like to see, and what regulators need to see, is aggregated standardized data on a timely Favorite App? basis. That can’t really be done by having LOL—Pandora, iBooks and Bookworm fragmented data repository structures. I was on a panel and somebody said, Last book read? well, data standardization is easy. Sure, per- Business—Demon of Their Own Design, Fun—The Buddha in the Attic haps on day one when everybody agrees to a set of standards. But as time goes on, as Favorite TV Show? standards starting to diverge and issues of Anything sports duplication of trade entry and data cleans- ing start to rise, it makes it that much more Where were you born? difficult to get a true and complete picture Montreal, Canada. I moved to the U.S. at age five. of what’s happening in the marketplace. In times of stress, when that information Favorite Vice? is that much more valuable, having multiple A good pinot noir is truly a wonderful vice. repositories diminishes the effectiveness of what those tools were supposed to represent. Dodd-Frank does permit multiple

32 Futures Industry | www.futuresindustry.com data repositories, and some market partici- Greece default. We start publicizing num- piano, and spending time with friends, pants may want to use different repositories. bers that were between two and three bil- spending time working out—those are all We respect the law. We respect market par- lion euros, again, a very manageable num- different ways of letting go of the stress a ticipants. We just think that, intellectually, ber that reduced the anxiety that somehow little bit. it makes much more sense to create a final, a default would cause an immediate col- Earlier this year we lost two of our man- centralized repository for the data of each lapse on credit default swap exposure. So, aging directors at DTCC. They both were asset class. it’s a very powerful tool, but its power de- absolutely great guys and their lives ended Look at what happened when we first pends on people having confidence that it is much too early. It’s a stark reminder that started reporting information about what complete and it’s accurate, and it’s harder to even though what we do is very important the net exposure was on credit default do that when you start getting fragmented and critical to the financial markets, life swaps. Post Lehman, the market rumors information at multiple repositories. itself is always much more important. I’m

Any new undertaking obviously has a period of fits and starts. But I think the value proposition of of margin savings has been proven repeatedly. We’ve got strong active participation by the major dealers. were out there of net payments due of a LUKKEN: Just to wrap up, we’ve talked never going to say that I’m not a worka- hundred billion, two hundred billion, four about your work priorities and what you’re holic and I’m not on 24/7. But ’’there’s hundred billion dollars. We knew from going to be doing after July 1st when you more to life than just work. I’m lucky to DTCC’s centralized global data repository take over this new role. On a personal note, have two great kids and I try to spend as that the actual payment and the dues were what gets your mind off of work? What is it much time with them as possible. And, around six billion dollars. When we started you do to get away from it all, to relax and otherwise, just try to enjoy life as much as publicizing that, it took a lot of stress and recharge your batteries, so to speak? I can. anxiety out of the marketplace. BODSON: Who says I ever relax? Look, Roll the clock forward, and we have the I think I’m like everybody else. Going LUKKEN: Amen. Thank you Mike and good dialogue about the size of the exposure to a home, reading a good book, playing the luck in your new role.

Futures Industry | September 2012 33 Getting Crowded in Here U.S. Options Exchanges Continue to Proliferate

By Rachel Koning Beals

For the last decade or so, the U.S. equity options business has been characterized by an exceptionally high level of competition among exchanges. While some observers expected that the forces of competition eventually would lead to consolidation, the opposite has turned out to be the case. With Nasdaq OMX powering up its third options exchange this year, the International Securities Exchange getting ready to launch a second market, and the Miami International Exchange’s fully electronic challenger awaiting regulatory approval, it’s getting to be a standing room-only field of competitors in the U.S. options business.

ll told, the industry could see a total taken that a step further, launching a third “Exchanges have to provide fair access. of 12 different venues for trading eq- options exchange in June. They can’t discriminate against a user,” said A uity options. All of these venues are The driving force behind the proliferation Chris Nagy, the former head of order rout- jostling for a share of the market at a time of trading venues has been the desire to offer ing at TD Ameritrade who now is president when total volume has been shrinking. different pricing models to different customer of KOR, a consulting firm. “But all people In several cases, exchanges have chosen to segments. The fact that the products are fun- are not created equal; different factions of offer two venues under the same roof. The gible is also a key factor—with one clearing- the market have different price, feed, time, Chicago Board Options Exchange, for ex- house serving the entire industry, no single and liquidity needs. So the exchanges have ample, launched its C2 exchange to appeal exchange has a stranglehold on liquidity. The to differentiate—within the rules.” to electronic traders. NYSE Euronext oper- regulatory environment also plays a role; the The emergence of such a large number ates two options exchanges—NYSE Amex Securities and Exchange Commission’s rules of exchanges didn’t come about overnight. and NYSE Arca—each with its own rules make it difficult to target limited segments of Over a decade ago, the ISE helped bring and pricing model. Nasdaq OMX has now the market within one exchange. about electronic trading and the mul-

34 Futures Industry | www.futuresindustry.com tiple listing of options, which dramatically at the national best bid and offer. Berman “traditional” pro rata structures, options ex- changed how exchanges attract liquid- mentioned two platforms that his firm uses— changes such as the PHLX, NYSE Amex, ity. About five years ago, the maker-taker Bloomberg’s EMSX and Wolverine’s WEX. CBOE, and the ISE charged both the pro- model, which is designed to reward liquid- Alternatively, he will instant message an order viders and the takers of liquidity. Orders to ity providers, came into the options world to a floor broker on heavily traded contracts liquidity providers were typically based on and shook up the industry again. Another like the options on the S&P 500 or Procter & quote size and not position in the queue. innovation is the taker-maker model, which Gamble to see if he can get a price “between But as more and more options moved to inverts the maker-taker model by providing the quotes, usually around mid-market.” trading in one-cent increments, exchanges rebates for firms who take rather than make But the middle of the food chain feels a found that rebates were an effective way to liquidity. Penny-increment pricing has had little differently about the stress brought on attract more liquidity. a big impact too, in shrinking the spreads by exchange growth. Since January 2007, when options ex- that paid the market makers. For all of these “Any time you have a market that goes changes were allowed to quote products reasons and more, the options exchanges from having a small number of execution less than $3 in one-cent price increments, have had to reinvent and reinvent again. venues to dramatically more, it raises costs venues with more traditional pricing began Despite the relatively low barriers to en- for everyone who needs to connect to all shifting to a hybrid structure of pro-rata and try, the incumbent exchanges have an ad- of those venues and decide where to route maker-taker rules. Newer exchanges such vantage over newcomers because they can their orders,” said Justin Schack, managing as BATS, NYSE Arca and Nasdaq’s NOM leverage their existing infrastructure. director at Rosenblatt Securities. made their marks with maker-taker pricing, Crowded capitalizing on penny trading as well as the “For the exchanges, it’s all about scale. Most big firms have staff dedicated It’s relatively cheap to open up a second ex- to monitoring the fee schedules and involvement of automated trading firms. change,” said Edward Boyle, industry con- matching rules at all of the venues, said The CBOE, on the other hand, uses the sultant and former executive vice president Schack, who analyzes market-structure pro rata allocation model exclusively, which of NYSE Euronext, who helped develop issues for the firm’s clients. Every time favors market makers quoting large size. NYSE Arca and NYSE Amex. “Your con- the exchanges change the details of their With C2, the exchange operator applies the nectivity, which is a big initial cost, is already pricing models—which happens on a pro rata model to trading in some classes Any time you have a market that goes from having a small number of execution venues to dramatically more, it raises costs for everyone who needs to connect to all of those venues and decide where to

route their orders. justin schack, Rosenblatt Securities

in place. Your customers know where to go. regular basis—the firms have to tweak ’’ while using the price-time priority model You just buy a second SRO [self-regulatory their order routing engines, which adds organization] license, or a third,” he said. “It’s to their costs. in others. With C2, certain “overlays” grant much more difficult to build from scratch.” Jim Michuda, chief executive officer of priority to different traders, such as custom- Wolverine Execution Services, added that ers and so-called market turners. User Impact firms like his have to provide connectivity to Nasdaq OMX’s late-June launch of its Although the proliferation of trading all of the exchanges. “From where we sit, as third platform—BX Options—marked the venues has made trading equity options a provider of execution services and market newest incarnation of the taker-maker ap- more complicated, some market users wel- data, the proliferation of exchanges is not proach. In this approach, the pricing model come the choice. good for our business because of the burden is tilted in favor of the firms that take li- Larry Berman, director of trading for on infrastructure,” said Michuda. “We need quidity (hitting an offer or lifting a bid) Eaton Vance subsidiary Parametric Risk to be a member of XYZ exchange no matter rather than the other way around. Advisors, said the trend has reduced execu- what because we need to offer that potential The Boston Options Exchange, now tion costs. access to clients whether we actually use it or called the BOX Options Exchange, pio- “For end-users, the spreads have gotten not,” said Michuda. neered the taker-maker pricing strategy tighter and that’s a benefit. Bid-and-offer And then there is the challenge of calcu- in the options market in 2009, but it was quantity has grown, so it’s not always time- lating the fees for trading on multiple plat- the only exchange using it until this year. price priority, and market makers now have forms. “Let’s put it this way, our billing sys- In June, ISE switched 25 options classes to to be more aggressive in pricing in order to tem is the most complex piece of software taker-maker pricing. attract order flow,” said Berman, who previ- that we run,” said Michuda. Unlike the ISE, BX Options will offer ously was an Amex floor specialist. taker-maker pricing in all options traded in Berman, who uses options for income Re-Introducing: Taker-Maker penny increments and unlike BOX, it will generation and hedging for client assets, ac- But change can also bring about inno- limit the rebate strategy to customers only. cesses the markets via direct market access vation. It’s about more than the number of The exchange pays a rebate of 12 cents platforms that show him aggregate pricing exchanges; it’s about their capability. Under per contract for the three most actively

Futures Industry | September 2012 35 Options Exchanges traded ETF options (SPY, QQQ, IWM) pool heavily reliant on retail market orders. the course of a month. The program only and 32 cents in all other penny pilot names, Most retail brokers contract with interme- applies to contracts that are listed on mul- which effectively covers the vast majority diaries known as consolidators or smart tiple exchanges. During an August confer- of volume. This applies only to customer routers: UBS, Susquehanna, Citi/ATD, for ence call with analysts, CBOE executives orders, however. Market makers that take example. The retail firms deliver their orders said the program had helped the exchange liquidity pay a fee of 43 cents per contract to the consolidators and the consolidators achieve “considerable market share gains.” on all contracts. deliver them to the exchanges. The middle- Exchanges are adding creative layers in With this formula (which is experimen- men pay the retail brokers some amount other ways, too. The ISE, for instance, in tal, according to several industry insiders), every month based on the number of con- late July introduced a new order type, the the exchange attracts broker-dealers with tracts and the quality of flow they collect. Add Liquidity Only Order (ALO). An ALO customer order flow who generally pay fees For the consolidators, the story changed specifies that the order can only be executed for taking liquidity on the other exchanges. earlier this year when CBOE instituted its if it adds liquidity to the order book as a But it may also attract liquidity makers by Volume Incentive Program, under which it maker. If the order cannot be added to the maximizing execution possibilities with doled out extra payments to high-volume book, it will be cancelled. Alternatively, it customer order flow. traders such as the large consolidators. For may be re-priced to rest on the book at the Taker-maker pricing and payment-for- example, a firm can earn a credit of 20 cents discretion of the firm entering the order. order-flow schemes are close cousins. The per contract if its customer volume averages latter has historically deepened an options 375,000 to 650,000 contracts per day over The Upstart in Miami The newest potential entrant, Miami In- Exchange Competition ternational Securities Exchange or MIAX, believes there is room for more. In June 2012, more than 325.8 million single stock options traded in the U.S., with trading “The industry is looking for innovation, divided among nine exchanges. The chart below shows the share of the market held by each which our business model will bring,” said exchange during the month of June. Shelly Brown, senior vice president of strategic planning and operations at MIAX. CBOE 22.27% “We believe that those seeking liquidity will find MIAX to be more than competitive on C2 execution price, execution cost, speed, reli- 1.36% ability, and customer service.” AMEX The exchange is also going for geography, 15.19% looking to be the go-to mart for growing Latin American business. Once the options exchange is operational, the parent com- NYSE ARCA pany plans to open an equities exchange 10.36% and pursue listings from Latin American companies. Sales, membership, marketing and listing operations will be in Miami, while technology development and operations are in Princeton, N.J. The parent company filed an application to establish the options exchange with the SEC in April and hopes to launch in late September. MIAX has amassed a staff of 70 PHLX full-time employees and consultants, and 19.99% developed its platform with a $20 million equipment financing deal with Dell. Spearheading the efforts is Thomas Gal- lagher, a founding partner of the Princeton, N.J.-based law firm Gallagher, Briody & Butler, where he’s counseled on debt and NSDQ equity financings and other transactions 4.99% for the past 25 years. Matt Rotella, the ISE 17.38% head of trading systems development and operations, and Frank Ziegler, head of the BOX technology infrastructure, both previously 4.58% worked at Nasdaq OMX PHLX. Brown BATS previously worked at PEAK, a Chicago- 3.88% based firm that specialized in trading op- Source: OCC tions, and before that worked at PHLX.

36 Futures Industry | www.futuresindustry.com Exchange Expansion

This year, the 10th (and counting) options exchanges fire up another all-electronic platform. What brings distinction within this growing roster? Mostly access and pricing.

OPTIONS EXCHANGE PARENT/OWNERSHIP LAUNCH YEAR FEAUTURED PRODUCTS/FUNCTIONALITY* ORDER MATCHING/PRICING

Price-Time Priority/ BATS Options BATS Global Markets, Inc. 2010 Fully electronic/multiply listed equity options Maker-Taker/Penny Price Improvement

Taker-Maker/Price-Time TMX Group and seven BOX Options Exchange 2004 Some 1,500 option classes Priority/Price Improvement broker-dealers** (PIP)

Chicago Board Options Equity, index and ETF options, incl. S&P 500 CBOE Holdings, Inc. 1973 Pro Rata Exchange—CBOE (SPX); CBOE Volatility Index (VIX)®

Electronic/multiply listed equity options/ Maker-Taker/Pro C2 Options Exchange CBOE Holdings, Inc. 2010 CBOE licensed products RataModified Price-Time

International Securities ISE Holdings, Inc./Deutsche Options trading on over 2,000 underlying 2000 Pro Rata/Maker-Taker Exchange—ISE Borse Group’s Eurex equity, ETF, indexand FX products

ISE Holdings, Inc./Deutsche 2012, pending Options on underlying equity, ETF, index ISE (Second Platform) Proposed Combined Model Borse Group’s Eurex SEC approval and FX products

Plans to operate electronic platform to buy Miami International 2012, pending MIAX or sell securities with continuous, auto- N/A Holdings, Inc. SEC approval mated matching function.

Equity and equity index options on securities Taker-Maker/Price-Time Nasdaq BX Options Nasdaq OMX 2012 listed listed on NASDAQ, NYSE, NYSE Amex Priority/Penny Pilot and NYSE Arca.

Equity and equity index options on securities Nasdaq Options Maker-Taker/Price-Time Nasdaq OMX 2008 listed listed on NASDAQ, NYSE, NYSE Amex Market—NOM Priority/Penny Pricing and NYSE Arca.

Nasdaq OMX Over 2,600 equity options, sector index Nasdaq PHLX Nasdaq OMX bought PHLX in options and U.S. dollar-settled currency Pro Rata/Maker-Taker 2008 options

NYSE Euronext Pro Rata Customer Priority completed Amex NYSE Amex NYSE Euronext Equity and equity index options for Floor/ Price-Time for Acquisition in Electronic 2008

Archipelago and NYSE merge Equity and equity index options, hybrid floor Price-Time Blend With Lead NYSE Arca NYSE Euronext 2006/ Combines and electronic platforms Market Maker/Penny Pilot Pacific Exchange and Amex

*Exchange-provided description **Achieved SRO status in April to eliminate Nasdaq regulation Source: OCC

Futures Industry | September 2012 37 Options Exchanges

Dynamic Market “The options market pie itself has been “There’s clearly still upside left in the mar- For much of the past decade, increasing growing and will continue to grow, though ketplace,” said KOR’s Nagy. “Nasdaq BX volume provided a tailwind to industry ex- perhaps not at the double-digit figures of overnight gained 1% market share, that’s an pansion. The total number of single stock the 2000s,” said Howard Kramer, a partner incredible feat and they talked about it on equity options traded on U.S. exchanges in the asset management group at the law their earnings call. Cost little, payoff pretty rose from 1.37 billion contracts in 2005 to firm of Willkie Farr & Gallagher LLP. “But good. You don’t need to have days of old

Do we have the market structure that can support eight to 10 exchanges? Maybe. Do we have the environment that can support

12 to 15? I seriously doubt it. Howard Kramer, Willkie Farr & Gallagher LLP

3.61 billion in 2010—more than double the story is about multiplicity and growth, when exchanges would need 30% market and perhaps if we ’’didn’t have market growth share. Technology has made bricks-and- the volume in just five years. This year, however, the level of trading [over recent years], then it would have been mortar exchanges more competitive, so even activity is slumping. During the first half tougher to launch these new exchanges.” they’re not necessarily looking for 30%-40%. of the year, 1.92 million equity options Kramer is uncertain as to whether there Now maybe 10% to 11% is okay because changed hands, down 6.9% from 2.07 mil- is room for more. “Do we have the market they’re scaling the technology.” lion in the first half of 2011. Tabb Group, a structure that can support eight to 10 ex- ...... consulting firm, expects options volume to changes? Maybe. Do we have the environ- Rachel Koning Beals is a freelance reporter. decline by as much as 10% this year before ment that can support 12 to 15? I seriously resuming an uptrend. doubt it,” he said.

Battle for Market Share U.S. Equity Options Volume by Exchange: 2005 to the Present This graph shows the changes in the market share of U.S. equity options exchanges, based on the number of single stock options traded per month.

100% 100%

BATS 90% 90%

80% 80% BOX

70% 70% ISE

60% 60% NSDQ

50% 50% PHLX

40% 40% NYSE Arca

30% 30% AMEX

20% 20% C2

10% 10% CBOE

0% 0%

JAN., 05MAR MAY JULY SEPT NOV JAN., 06MAR MAY JULY SEPT NOV JAN., 07MAR MAY JULY SEPT NOV JAN., 08MAR MAY JULY SEPT NOV JAN., 09MAR MAY JULY SEPT NOV JAN., 10MAR MAY JULY SEPT NOV JAN., 11MAR MAY JULY SEPT NOV JAN., 12MAR MAY

Source: OCC

38 Futures Industry | www.futuresindustry.com Big Things Happen at Boca! March 12-15, 2013 Boca Raton Resort & Club l Florida

Join senior managers from brokerage firms and exchanges, money managers and international regulators. More than 1,000 decision makers, innovators and policymakers from 30+ countries will gather to share information, exchange ideas, discuss trends and network with peers at the FIA International Futures Industry Conference.

BOCA FAST FACTS • More than 1,000 professionals attend from all • 32 countries are represented: Argentina, Austra- over the world lia, Brazil, Canada, China, Colombia, Ethiopia, • Nearly 30% of the attendees come from outside France, Germany, Hong Kong, India, Indonesia, the U.S. Ireland, Italy, Japan, Korea, Mexico, Netherlands, • Representatives from 39 brokerage firms Norway, Poland, Qatar, Russia, Saudi Arabia, • Representatives from 61 international exchanges Singapore, South Africa, Spain, Sweden, Switzer- and clearing organizations land, Taiwan, Turkey, United Kingdom, United • 26 members of the press States

For registration and general conference questions, call +1.202.466.5460. For the full sponsorship menu and exhibit information, contact Toni Vitale Chan at +1.312.636.2919 or [email protected] www.futuresindustry.org/boca Portfolio Margining: The Next Generation in Risk Management at Eurex Clearing

By Thomas Book and Dmitrij Senko, Eurex Clearing

Eurex Clearing plans to introduce a new risk methodology for calculating initial margin for both listed and over-the-counter derivatives. The new method, called Eurex Clearing Prisma, builds on current best practices in risk management and is significantly more accurate in estimating risks than previous methods. As a result, the new method offers greater capital efficiency for clearinghouse members and their customers as well as better protection from risks.

he new method takes a portfolio- Eurex Clearing’s Eurex Clearing Prisma introduces ag- based approach to analyzing risk. In Future Approach gregation rules that allow for the concise Tother words, margin requirements Historically clearing houses have calcu- capturing of diversification and offsetting are determined by considering an entire lated initial margin by employing SPAN- effects in a portfolio context. This is done portfolio of positions, rather than by con- like (standardized portfolio analysis) mod- by means of introducing scenarios that si- sidering each position in isolation and then els where each position in a portfolio is multaneously describe the changes across all aggregating the results. Eurex Clearing evaluated under several scenarios. The best risk factors (e.g., the interest rates, prices of Prisma also includes a number of compo- known of these models is the Standardized underlying, volatility etc.). Eurex Clearing’s nents designed to enhance the modeling Portfolio Analysis model developed by the approach views a member’s entire portfolio of risk, including adjustments for volatility Chicago Mercantile Exchange in the late and accounts for hedging and cross-correla- dynamics, correlation breaks, illiquidity and 1980s. Portfolio effects are modeled by tion effects on a portfolio level as opposed counter-cyclicality. means of explicitly defined product groups to a product-by-product view. Eurex Clearing will begin using the new and rule-based aggregation and risk offsets At the heart of Eurex Clearing Prisma is method with the introduction of its OTC that start from a product-by-product view. a simulation-based portfolio Value-at-Risk clearing service for interest rate swaps early In the last several decades, achievements calculation enriched by using stress period in the fourth quarter. Shortly thereafter we in academic research, advances in computer scenarios, historical scenarios and adjust- plan to introduce the methodology for listed technologies and lessons learned from the ments for volatility dynamics, correlation equity and equity index derivatives, and in financial crisis have all contributed to major breaks, illiquidity and counter-cyclicality. 2013 we expect to add futures and options developments in risk analysis and risk man- The core margin calculation process con- in fixed income derivatives and other listed agement. The new Eurex Clearing Prisma sists of three components: asset classes as well as additional OTC prod- margin calculation methodology has been n Risk simulation is based on substantial ucts. The margin calculation and data dis- developed based on current best practices historical information throughout the semination will be—as it is today—in real- in risk management and in consultation economic cycle. Historical scenarios time, and the data will be offered to users via with the industry experts represented in the from the recent past are supplemented Eurex Clearing’s Enhanced Risk Solution. Eurex Clearing Risk Committee. by scenarios from known stress peri-

40 Futures Industry | www.futuresindustry.com ods to account for obvious market are segregated (e.g., segregated member ac- different tenors and misstate the risks that disturbances that happened in the less count) then risk netting is restricted to respect credit and liquidity considerations can af- recent past. Examples of those stress the economic structure of the segregation. fect these differently. periods include the credit crunch, the Each product is assigned to a so-called Lehman bankruptcy and the Greek liquidation group, allowing risk offsets to be Forward-Looking Properties debt restructuring. Each position in a calculated within the group. Offsets across The ultimate goal of Eurex Clearing’s portfolio is revalued consistently un- different liquidation groups are not granted. Prisma is to adequately forecast the poten- der each scenario. The market risk is A liquidation group comprises products tial future losses during default manage- calculated as a tail analysis of the port- which share similar risk factors—for ex- ment. The core of the margining model is folio losses under scenarios. ample interest rate swaps and fixed income given by the set of scenarios describing si- n Model adjustments are made to account futures. A liquidation group can be hedged, multaneous changes of all risk factors. The for simplifications of the scenario calcu- priced and auctioned within a reasonable scenario profit or loss is calculated by reval- lation, especially changes in the correla- period of time. uing the positions mapped to the relevant tion (correlation break) and simplifica- Risk period matches the expected length risk factors that run through the scenarios. tions in the implied volatility modeling of default management process—The risk In scenario construction, the “more is for options (compression). period expresses the expected time needed better” approach is misleading. Scenarios n Liquidity risk accounts for losses due to to liquidate without unduly stressing mar- should be sufficient in quantity and ensure trading impact of selling or buying large kets. This may include set-up time, transfer, adequate “forward-looking” properties. concentrated positions. hedging, direct sales or auctions, and a buf- For example, historical VaR lacks forward- To help members understand the new ap- fer period to protect against unforeseen sit- looking properties despite having many sce- proach and replicate its margin calculations, uations. This time period is based on Eurex narios, as became obvious in many models Eurex Clearing is actively sharing informa- Clearing’s operational procedures for liqui- in 2008. tion about the new model and working dation. A harmonized risk period is applied Eurex Clearing Prisma’s comprehensive closely with back office vendors. Members for products subject to cross-margining. The set of scenarios effectively captures the sub- are able to submit multiple sample portfo- risk periods are initially set based on past ex- stantial information of a 10-year look-back lios in order to assess the outcomes of the periences, the definition of the default man- period. Rather than using all the data for new margining methodology. In addition, agement process and consultations with the the entire 10-year period, the set of scenar- Eurex Clearing is developing an online mar- market. For portfolios containing OTC in- ios is based on the most recent three years gin calculation engine which will be avail- terest rate swaps and fixed income futures of history supplemented by selected im- able for users in the course of 2013. products such as Euro-Bund Futures sub- portant periods of stress during the most ject to cross-margining, the risk period is set recent 10 years. Consistency with Default to five days. For listed-only portfolios where There is a trade-off between too short and Management Process no cross margining with OTC is required, too long look-back periods. If a look-back While Eurex Clearing Prisma’s VaR shorter risk periods are used. The adequacy period is too short, it may overlook substan- methodology has many similarities to the of the assumed risk periods will be validated tial information in the past, leading to inad- risk models used by banks and other fi- during regular “default fire drills.” equate risk estimation. On the other hand, nancial institutions, there is a crucial dif- a very long look-back period is impractical ference. A clearinghouse must consider Coverage of the for performance and replication reasons; at not only the potential market risk in any Relevant Risk Factors the same time the incremental contribution single institution’s positions but also the Eurex Clearing Prisma covers all the to model quality is questionable. potential market-wide impact of a default material risk factors for the products and To improve the forward-looking prop- by one or more of its members. For this portfolios in question. For example, in op- erties of the margins and avoid the pit- reason, a strong alignment between the tions portfolios, the modeling of implied falls of historical VaR, Eurex Clearing’s risk calculation and the mechanics of the volatility takes into account the structure Prisma uses dynamic volatility modeling. default management process is required. In of the implied volatility surface dynamics In other words, one model component the section below, we explain the implica- across strike and expiry dimensions. Some is dynamically increasing when market tions for the definition of the portfolio and other models rely on “parallel” shocks to volatility increases. This model compo- the risk period. implied volatility surfaces, overlooking the nent improves the risk sensitivity of the Portfolio risk netting is aligned with fact that options for different strikes and margin requirements. the logic of the default management— expiries may exhibit differing implied vola- Prisma also has several components that Portfolio margining can only be applied for tility moves. Such basis risk may become are designed to prevent sudden jumps in positions that can be handled jointly during material for portfolios with option strat- margin requirements, which can be disrup- the default management process. This is to egies. This risk is fully captured with the tive to clearinghouse members and clients. avoid any risk of margin shortfalls during new methodology. One of these components is a “volatility the liquidation procedure due to previously Another example is the modeling of floor.” When market volatility is low, mar- granted margin offsets on positions that end multiple curves and OIS discounting to ad- gins are calculated based on minimum vola- up being liquidated separately. equately capture risks of interest rate swaps tility levels that are linked to the through-the- Eurex Clearing Prisma’s risk netting portfolios. Less sophisticated single-curve cycle view on volatility. Another stabilizing therefore divides positions into “liquidation models commonly used before 2008 as- component is the use of stress periods in our groups.” Furthermore, if parts of the portfolio sume similar behavior of Libor rates with scenarios. Such measures stabilize margin

Futures Industry | September 2012 41 Portfolio Margining computation both in the long term through in 2008. The problem is the missing for- Examples of Test Calculations the economic cycle and in the short term, ward-looking property. A model with the In this section, we describe four examples which has the advantage that significant same structure but overlooking some ma- of how the two margining methods—the jumps for unchanged portfolios are avoided terial risk drivers will produce even lower existing position-based margining method over a few weeks. effective confidence level for portfolios called Risk-Based Margining and the new These components address the following: materially dependent on the risk factors portfolio-based Prisma method—generate n Variability in correlations: In the not captured by the model. In contrast different levels of margin requirements. In new risk model, the offset structure is a with the examples above, Eurex Clear- general both methods deliver comparable key driver for risk estimates for diversi- ing Prisma addresses the forward-looking results for offsetting strategies that are ex- fied portfolios, but this structure is not property by means of a dynamic volatil- plicitly covered by the RBM method, but stable over time. Thus, it forms a very ity model and introduces model compo- the new portfolio methodology more ad- vulnerable assumption for the overall risk nents to account for other limitations of equately accounts for risk offsets in diversi- model. For example, if the correlation of the comparable models such as instabil- fied portfolios. two equities varies over time, the risk of a ity of correlations and pro-cyclicality. As For the spread margining example, Risk- long-short strategy quantified with fixed a result, the overall structure of the Eurex Based Margining explicitly captures the off- correlation assumption measured over Clearing Prisma model enables the risk setting by the spread margining concept. long time period will be misstated. Eurex coverage at an effective confidence level As shown in the Portfolio 1 diagram, a Clearing Prisma quantifies the impact on of 99.6%. typical calendar spread trade will be mar- a portfolio of the variation in the offset- n Illiquidity and concentrations: In ad- gined more efficiently with the new sys- ting structure over time. The variability dition to market risk considerations, tem. In this example, the diagram shows of correlations is measured for different liquidity and concentration aspects are the hypothetical margin requirement for a time sub-periods and corresponding ad- important from the clearinghouse per- position consisting of one long position in justments are included in the model. spective. Members can have large con- the Euro Stoxx 50 futures contract and one n Confidence level: Collateralization at centrated portfolios and liquidation has short position in the same contract but in a 100% confidence is in general neither to be conducted within a limited time more distant expiration month. feasible nor economically reasonable. An frame. In such a scenario, the quantifi- For small and mid-sized diversified linear effective confidence level of a margin- cation of the potential losses should not portfolios, Eurex Clearing Prisma accounts ing model is a function of the model’s rely on the dynamics of mid-prices only. more adequately for risk offsets and leads structure, i.e., the result of the interplay The risk model quantifies the bid-ask to smaller margin requirements relative to of all methodological components. For discounts due to illiquidity and concen- Risk-Based Margining. Better diversifica- example, a model structured as a histori- trations (i.e. a position that represents tion is the key driving force for margin re- cal VaR 99% may capture all risk factors 50% of the daily traded volume in one duction for such portfolios. Illiquidity and and still produce an effective confidence product would be expected to have a non-linearity do not come into play for level of as low as 90% when back-tested substantial bid-ask spread). such portfolios.

Portfolio 1: Index Futures Spread Trade Portfolio 2: Diversified Linear Portfolio

50,000 50,000

45,000 45,000

40,000 40,000

35,000 35,000

30,000 30,000

25,000 25,000

20,000 20,000

15,000 15,000

10,000 10,000

5,000 5,000

Risk-Based Margining Eurex Clearing Prisma Risk-Based Margining Eurex Clearing Prisma

42 Futures Industry | www.futuresindustry.com The Portfolio 2 diagram shows the hypo- ing real default situations and recalibrates Step 2: Portfolio margining will be in- thetical margin requirement for a portfolio the model parameters if required. Never- troduced for single stock equity derivatives with a long position consisting of a single theless, recent crisis situations revealed that and equity index derivatives at the end of Dax futures contract, a short position con- models, despite being well thought through, 2012. Covered products will include not sisting of 10 single stock futures on RWE, are limited in their ability to foresee all risks. only the products listed for trading on and a short position consisting of 20 single It should be noted, therefore, that margin- Eurex but also the products traded bilat- stock futures on Deutsche Bank. ing is only one of the several layers of pro- erally that are eligible for the EurexOTC For more complex portfolios, the out- tection in the risk management framework Trade Entry services. To facilitate a smooth come of the comparison is highly portfolio of Eurex Clearing. transition for clearing members and their dependent. Depending on how a portfolio Eurex Clearing has strict criteria for ad- clients during the migration period, Eurex is structured, certain special circumstances mitting members to guarantee that every Clearing Prisma will run in parallel with can occur where the new model will cap- clearing participant has sufficient financial the previous margining methodology. ture the risks more adequately and make the strength. In addition, the clearinghouse Step 3: Allowing cross-margining of clearing safer. Two portfolios in the exam- maintains an additional capital buffer in OTC and listed derivatives. During this ples below require almost similar margins the form of a default fund, which covers re- step, Eurex Clearing will allow combining according to the old methodology, but ma- sidual risks beyond the margin confidence the interest rate swaps submitted through terially different margins according to Eurex level. The sufficiency of this line of defense EurexOTC Clear with the exchange’s listed Clearing Prisma. is tested separately by means of historical fixed income derivatives, with efficient mar- Portfolio 3 is concentrated and direc- and hypothetical “what-if” stress scenarios. gin aggregation and offsets for hedged posi- tional, leaving little room for diversifica- tions. Eurex Clearing is currently working tion effects. The new margin figure is higher Implementation to determine a launch date for this cross- than the old one because Eurex Clearing and Launch Plan margining and will inform the market in Prisma discovers unusual concentrations as Eurex Clearing will introduce the new due course. part of the calculation process. portfolio margining method in several Step 4: Extension of the product scope Portfolio 4 is a long-short mid-sized steps. Each will encompass different prod- coverage. During further steps, Eurex Clear- portfolio where diversification effects are uct groups and asset classes. ing will roll out the portfolio approach for significant. The new margin is lower than Step 1: Portfolio margining is initially other already cleared asset classes and fur- the old one because Eurex Clearing Prisma available for the OTC interest rate swaps of- ther expand the products in the scope of the more adequately accounts for correlations. fering, the launch of the service is currently EurexOTC Clear service offering in agree- coordinated with major partner banks and ment with market needs. Further Layers of Protection expected for the beginning of the fourth ...... Eurex Clearing conducts regular valida- quarter of 2012. The offering covers plain va- Thomas Book is head of Eurex Clearing and tion of the model to test how the margining nilla interest rate swap products in four ma- a member of the Eurex executive board. would have performed in the past and dur- jor currencies: EUR, USD, GBP and CHF. Dmitrij Senko is vice president of clearing.

Portfolio 3: Directional Concentrated Portfolio Portfolio 4: Long/Short Diversified Portfolio

450,000,000 450,000,000

400,000,000 400,000,000

350,000,000 350,000,000

300,000,000 300,000,000

250,000,000 250,000,000

200,000,000 200,000,000

150,000,000 150,000,000

100,000,000 100,000,000

50,000,000 50,000,000

Risk-Based Margining Eurex Clearing Prisma Risk-Based Margining Eurex Clearing Prisma

Futures Industry | September 2012 43 2012

3 days • 12 social events • 26 sessions • 140+ exhibitors • 6,000 attendees Tuesday - Thursday October 30 -November 1, 2012 Hilton Chicago • 720 S. Michicgan Avenue

Largest futures and options expo of the year!

Unlimited networking opportunities with industry professionals from: • brokerage firms and exchanges • fund managers • proprietary traders • investors • regulators • technology and other service providers • analysts • press

Futures & Options Expo 2012 is sponsored by the Futures Industry Association. The FIA is the primary industry association for centrally cleared futures and swaps. Its membership includes the world’s largest derivatives clearing firms as well as exchanges and clearinghouses from more than 20 countries. The FIA seeks to promote best practices and standardization in the cleared derivatives markets, provide policymakers with an informed perspective on the derivatives markets, and advocate for the interests of its members, its markets and its customers. The FIA strives to protect open and competitive markets, protect the public interest through adherence to high standards of professional conduct and financial integrity, and promote public trust and confidence in the cleared markets. Expo Overview

Tuesday October 30, 2012 6:00 p.m. - 8:00 p.m. CME Group Reception Wednesday, October 31, 2012 8:00 a.m. Registration Opens 9:00 a.m. - 12:30 p.m. Business Sessions 10:00 a.m. Exhibit Hall Opens 12:30 p.m. Lunch with Keynote Speaker 2:00 p.m. - 5:00 p.m. Business Sessions 4:00 p.m. - 6:30 p.m. Taste of Expo Exhibit Hall Reception Thursday, November 1, 2012 8:00 a.m. Registration Opens 9:00 a.m. - 12:00 p.m. Business Sessions 10:00 a.m. - 4:00 p.m. Exhibit Hall Open 12:00 p.m. Networking Lunch 1:00 p.m. - 5:00 p.m. Business Sessions 6:30 p.m. - 10:00 p.m. FIA Futures Cares Great Chicago Steak Out Dinner Reception (Ticket Required) Expo Exhibitors

Acquire Media Moscow Exchange Actant MGEX-Minneapolis Grain Exchange, Inc. Activ Financial Nadex ADVA Optical Networking NASDAQ OMX Advantage Futures National Futures Association Anova Technologies Need to Know News Arista Networks Newedge Group Australian Securities Exchange Nissan Century Securities Co., Ltd Barchart.com, Inc. NovaSparks Baymarkets NYSE Euronext Bionic Trader System Object+ Financial Products BlackRock OCC Bloomberg LP Omgeo LLC BM&FBovespa OneMarketData BNP Paribas OptionsCity Software, Inc. Borsa Italiana S.p.A. Orc BT Patsystems Calypso Technology Philip Futures Inc. CDW Prime Analytics, LLC CFN Serivces, Inc. QuantHouse Chicago Area Private Dining Steakhouse Group Quick Screen Trading Chicago Board Options Exchange | CBOE Futures Exchange Reliance Globalcom Ciena RTS Realtime Systems Inc. Cinnober Russell Investments CME Group SAP Corvil Sapient Global Markets CQG, Inc. Shinhan Investment Corp. Cyborg Trading Systems Sidera Dow Jones & Company Singapore Exchange eFinancialCareers Sky Road LLC Eris Exchange LLC Solace Systems Eurex Solarflare Exegy Spryware LLC F5 Networks Inc. State Street Global Advisors Federated Investors Stellar Trading Systems FFastFill, Inc. StreamBase Systems, Inc. Fidessa SunGard Fifth Third Bank SuperDerivatives Futures Magazine Symphono, LLC GlobalRisk Corporation Telstra Global Gnodal Telx Greater Chicago Food Depository TeraExchange Henderson & Lyman Tethys Technology Inc. Hibernia Atlantic Thomson Reuters Hong Kong Exchanges and Clearing Limited TIBCO Software IDC Global Inc. TMX | Montreal Exchange IIT Stuart School of Business Tokyo Commodity Exchange Informatica Tokyo Financial Exchange Interactive Data Tokyo Stock Exchange, Inc. IntercontinentalExchange Inc. (ICE) Trading Technologies International Inc. IPC Systems Inc. TradingScreen Inc. ITG Transaction Network Services Inc. Korea Exchange Turkish Derivatives Exchange KVH Japan Ullink LCH.Clearnet Volatility Exchange Lightower Fiber Networks West Monroe Partners London Metal Exchange WhenTech LLC MATba - Mercado a Termino de Buenos Aires Wolverine Execution Services (WEX) McGladrey YJT Solutions McObject LLC ZE Power Group Inc. MexDer, Mexican Derivatives Exchange Zeptonics Pty Ltd Special Events

Tuesday, October 30, 2012 CME Group Reception 6:00-8:00 p.m. • Union Station, 210 South Canal Street, entrance on Jackson Blvd

CME Group invites you to an Expo welcome reception at Chicago’s famed Union Station! Join your fellow delegates for food and drink in the magnificent Great Hall, a 20,000-square-foot classic venue boasting 18 soaring Corinthian columns and a spectacular five-story, barrel-vaulted, atrium ceiling. Trolleys will be provided to take delegates from the Hilton Chicago to the venue starting at 5:45 p.m. Wednesday, October 31, 2012 FIA Division Lunch 12:30 p.m. Keynote Speaker: Michael Murphy Taste of Expo! 4:00-6:30 p.m. • Extended to include an extra half-hour of networking time! Your adrenaline will be pumping after a great first day at Expo 2012. Unwind with your colleagues during the annual Taste of Expo reception event. Join us on the show floor for food, drinks and quality networking courtesy of the Expo 2012 exhibitors. See you there! Thursday, November 1, 2012 Exhibit Hall Networking Lunch 12:00-1:00 p.m.

Join your colleagues for lunch on the trade show floor, brought to you by FIA and our conference partners. FIA Futures Cares Great Chicago Steak Out in support of the Greater Chicago Food Depository 6:30 p.m.-10:30 p.m. (see pages 50 - 51)

Check for Expo program updates at www.futuresindustry.org/expo Expo Registration

Venue Sept. 1- On or after All seminars and trade show events will Registration Type: Oct. 5 oct. 6 take place at the Hilton Chicago, 720 S. l Full Seminar Member* $800 $900 Michigan Ave., Chicago, IL 60605. Phone (Includes all sessions, Non-member $950 $1,050 312.922.4400. luncheons and receptions) Regulator $350 $350 Hilton Reservations l Single Day Member* $450 $500 Book your Hilton hotel reservations online Wednesday or Thursday Non-member $525 $575 by visiting www.futuresindustry.org/expo (Includes exhibit hall, all sessions, and clicking on the Expo Hotel Reserva lunch, and reception for that day) tions link. Or phone 312.922.4400 and mention the FIA to receive the conference l Single Session Member* $125 $135 rate of $315 single/double plus 15.4% tax. (Includes exhibit hall) Non-member $145 $155 Rooms are available on a first-come, first- served basis only. Reservation cut-off date is l Luncheon—Wednesday (Includes exhibit hall) $65 $65 October 12, 2012. l Exhibits Only $50 $50 Registration Materials (Exhibit hall pass is valid for both days) Pick up your badge and materials at the * Member rate applies to any employee of an FIA member firm. For FIA membership informa- on-site registration desks, October 31- tion, contact Toni Vitale Chan at 312.636.2919 or [email protected]. For general November 1 beginning at 8:00 a.m. registration questions, contact Damon Roberts at 202.466.5460 or [email protected]. New This Year at Expo! FIA will have a second registration desk $100 administrative charge for cancellations or accommodation costs or other losses located in the Lower Level Lobby of the received in writing no later than October 1, incurred by delegates. Hilton Chicago, conveniently located for 2012. Thereafter, we regret that no refunds direct access to the Expo trade show floor. can be made. All cancellations, substitutions Special Requirements and changes must be made in writing. In We would like to accommodate the special Cancellations the unlikely event of the FIA Futures and needs of our delegates and therefore we ask If you are unable to attend, a substitute Options Expo 2012 being cancelled, the FIA you to advise us in advance of any special delegate is welcome at no extra charge. and its employees regret that they cannot dietary or access requirements—e-mail Alternatively, we will make a refund minus accept any liability for consequential travel [email protected]. Register online at www.futuresindustry.org/expo

Questions about registration? Please contact Damon Roberts at [email protected] or 202.466.5460. Questions about exhibit or sponsorship sales? Please contact Toni Vitale Chan at [email protected] or 312.636.2919. Questions about exhibit logistics? Please contact Marsha Saunders at [email protected] or 202.466.5460.

What is Expo? Who Attends Expo? Expo showcases products, services, and information for market pro- More than 6,000 people from more than 30 countries will attend fessionals and participants. Hundreds of risk management products, Expo. Attendees range from senior staff at brokerage firms and trading tools, books, and exchange and technology products are pre- exchanges to floor traders, pension fund managers, corporate treasur- sented by more than 140 companies from around the world. ers, CTAs and CPOs, and individual investors. Expo also offers a variety of sessions that allow participants to discuss Join FIA and save on conference registration fees. For FIA member- industry trends, hear expert views on key issues, improve trading skills, ship information, contact Toni Vitale Chan at 312.636.2919; and learn about new products, systems, and practices. Our program e-mail: [email protected]. includes sessions for business, operations, and technology professionals as well as traders in both the futures and equity options industries. Expo Sponsors

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Benchmark Shift Drives ICE Brent Option Surge By John Parry

t’s not unusual for exchanges to host the two benchmarks had hit an all-time high Hedging Price Risk contracts which are barely used by the of nearly $28. But how do the fundamentals of the Imarket. But it is unusual for a relatively Zac Phillips, head of oil and gas research market translate into option business? One quiet contract to suddenly burst into new life, at investment bank Fox-Davies, explained example is the airline industry. Mercatus, particularly for a long-established commodity. that Brent was driven higher by geopoliti- an energy hedging and risk management Brent crude oil options are a case in cal events in the Middle East and declining advisory firm, recently surveyed the airline point. As recently as 2010, ICE Futures North Sea production. Meanwhile, increas- industry on its jet fuel hedging activity. The Europe handled just 165,286 Brent options ing U.S. and Canadian production, particu- company found that more than 80% of the contracts all year. In 2011 volume shot up larly from shale formations, weighed on WTI airlines were hedging fuel price risk, and that to 2.2 million contracts and by July 2012 prices. The resulting divergence in prices the most common instruments to do this volumes had already doubled to more than created significant basis risk for hedgers. were swaps and options. 4 million contracts, including a record month “With a price differential of $15-$20 per The market for derivatives based on in May of over one million contracts. barrel, using WTI as a hedge for non-WTI middle distillates such as jet fuel is not as Between ICE and its main rival, the New production became problematic,” said Phil- liquid as the crude oil market, according to York Mercantile Exchange, more than two lips. Effectively, a barrel of Brent or equivalent oil industry adviser Daniel Carr. A number of thousand energy derivatives are available for was only 80% hedged by WTI futures. That airlines therefore use Brent crude swaps and trading, but Brent options on ICE has sud- resulted in losses for non-U.S. producers options, with swaps aimed at a two-year denly become the hot new contract. What’s selling oil benchmarked to WTI. Likewise, hedge horizon and options used for cover- behind this surge? consumers whose costs were linked to Brent ing shorter term price risk. Finnair’s 2011 found that WTI hedges were not fully offset- annual report, for example, describes how Shift in Benchmark ting the rise in Brent prices. And finally, asset its use of swaps and options is designed Brent crude options were first listed in managers of index funds locked into WTI to cover a larger part of the higher risk as it 2001 on London’s International Petroleum missed out on Brent’s out-performance. nears expiry while at the same time allowing Exchange but remained largely moribund As a result, there has been a marked shift beneficial price moves to come through. until a decade later. The key to its emer- in market behavior as producers, consumers Julian Keites, director of price risk man- gence as a major contract was a change and asset managers have switched to using agement at World Fuel Services in London, in market thinking about physical crude Brent as the benchmark for oil prices. Aaron explained that for this type of end-user, benchmarking. Gill, ICE’s London-based managing director options are a better hedging tool than As the largest exchange-traded futures of business development, said Brent is now futures. “As, for example, a two-year swap contract on crude oil, the West Texas Inter- used as the benchmark for around two- approaches its term end-date the client per- mediate futures contract traded on Nymex thirds of global crude production. That has ceives his exposure to the reference price has long been the leading benchmark for been reflected in the growth of Brent futures more clearly. Options have a real value here physical crude and related products. Even trading on ICE, which surpassed Nymex as they can hedge a potential negative cash though the contract is based on a delivery WTI futures volume earlier this year for the call on the swap, e.g. by buying puts to point in Oklahoma, the deep liquidity available first time ever. Similar factors are now driving cover downside price risk. Since the client at Nymex made it the market of choice for the growth of Brent options. usually wants to cover one way price risk, international hedgers and speculators alike. “For now WTI still remains the main options do the job better than futures.” Recently, however, the international rel- market for crude oil options but ICE Brent Mercatus president Mike Corley noted evance of the WTI contract has come under is gaining market share fast,” commented that other energy users are hedging. “At strain, mainly because its land-locked deliv- Olivier Jakob, managing director of Swiss- the top of the list are transport companies, ery point is subject to different supply and based oil market consultancy Petromatrix. but not far behind are manufacturers and demand pressures than seaborne Brent. “Brent is increasingly used by oil market processors who consume enormous Starting in the first quarter of 2011, WTI hedgers and the growth in ICE Brent options amounts of natural gas and electricity. and Brent prices started to fundamentally di- is a natural trend considering the growth in The Brent option is often a good choice verge, and by October the spread between Brent futures.” as it is liquid and will have a decent to

Futures Industry | September 2012 53 profile

strong correlation to the actual product you also clears several other types of options Paul Newman, head of commodities at are consuming e.g. bunker fuel, at least over linked to WTI, such as calendar spread op- ICAP in London, observed that for many the longer term.” tions and average price options. Adding to- years crude oil was traded almost entirely in gether the open interest for all of these options the form of physical cargos, forwards with Open Interest contracts brings the total number of outstand- varying dates, and swaps for hedging. “Five The growing hedge activity in Brent op- ing WTI-related options to 5.83 million. years ago we gave up less than 5% of our tions is reflected in the steep rise in open What’s more, Nymex also clears its own OTC trading into post-trade clearing,” said interest. The total number of outstanding version of the Brent options through Clear- Newman. “Now it’s more like 90% to 95%.” Brent options at ICE was around 80,000 port. As of the end of June, Nymex reported contracts at the beginning of 2011, rising to 387,000 contracts in open interest in Brent Market-Making over 400,000 by the end of the year. By the average price options, up 78% from the Much of ICE’s volume in Brent options is middle of 2012, open interest was consis- previous year, and 123,000 European style negotiated off the exchange and then sub- tently holding above one million contracts. last day Brent options, up 39% from the mitted for clearing. Mike Hiley, Newedge’s Across the Atlantic, the WTI options previous year. Nymex may not be the natural New York-based head of energy OTC, said market at Nymex is still much larger in terms home for Brent options, but clearly many of the London locals who have emerged as of open interest. The number of outstanding its customers are active in that market and screen traders on ICE perform a valuable positions in its flagship LO contract—Ameri- prefer to maintain their positions at Nymex. function in enhancing liquidity. A number of can-style options on WTI futures—was 3.46 These numbers highlight another factor these have attracted external funding for million contracts at the end of June. in the growth of Brent options volume—the their trading activities, which increases the That was three times the size of the open migration towards central clearing. Well volumes they trade. interest in Brent options, but the growth before the credit crisis of 2008-2009, the ICE’s Brent option contract is a classic trend is negative. Open interest in the LO energy sector embraced clearing as a way American style option on the underlying contract was down 12.7% from June 2011. to reduce counterparty risk and use capital future, with a contract size of 1,000 barrels, And open interest in the less active LC more efficiently. Even though much of the which trades 24 consecutive months out, contract—European-style options on WTI trading continues to take place in the over- followed by Jun/Dec expiries currently out futures—was 270,000, down 40% from the the-counter environment, most trades are to 2015. It has a one cent tick size and year-ago level. routed through the exchanges for clearing, trades 22 hours a day, closing for two hours That’s not the whole story, however. Nymex boosting volumes at both ICE and Nymex. around the U.K.’s midnight, which means it is open during both the Singapore and US trading day. Options in Vogue: ICE Brent Options Jan. 2010 - Jun. 2012 ICE operates a nominated market-maker programme which provides discounted trad- 1.2 ing fees for Brent options and corresponding futures hedging strategies. Market makers have to be present and make markets End-of-Month Open Interest 1.0 for a variety of different strikes at various Monthly Volume times during the trading day, but specific market-making terms are not disclosed for 0.8 reasons of commercial sensitivity. Later this year ICE will tweak its Brent contracts—both futures and options—to 0.6 Brent NX (new expiry) to reflect shifts in the underlying dated Brent market. The first ICE Brent NX contract month available for trad- In millions of contracts 0.4 ing will be December 2012, which will allow participants to hedge their full 2013 calendar 0.2 year exposure. There will be no changes to the existing ICE Brent contracts, which will continue to trade as normal and will be the 0 only contract months available for trading up Jan 2010Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2011Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2012Feb Mar Apr May Jun to November 2012.

John Parry is a freelance journalist and editor based in the U.K.

54 Futures Industry | www.futuresindustry.com Washington

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

he Commodity Futures Trading Commission has made insurance, certain consumer and commercial arrangements, and significant progress in finalizing Dodd-Frank reforms. By early certain loan participations. On the other hand, the rule states that TAugust, the agency had approved 36 rules, leaving fewer than the CFTC will consider a guarantee of a swap as an “integral part” of 20 rules to finalize. a swap, while the SEC will consider a guarantee of a security-based One critical rule approved recently was the joint CFTC-Securities swap to be a security. and Exchange Commission rule defining what constitutes a swap or Foreign exchange forwards and foreign exchange swaps are security based swap. The agency also proposed guidance on how it defined as swaps but the Treasury Secretary can determine to plans to apply Dodd-Frank regulations to cross-border transactions. exempt them from certain Dodd-Frank requirements, such as the Among some of the other rules approved was a schedule to requirement to submit these contracts to a clearinghouse. Foreign phase in compliance with new clearing requirement under the Dodd- exchange products that are not eligible for this exemption include Frank Act. In addition, the CFTC offered some relief from certain foreign currency options, non-deliverable forwards, currency swaps regulations allowing firms and participants more time to transition and cross-currency swaps. into compliance. Contracts that fit the definition of “mixed swaps,” meaning that they contain elements of both swaps and security-based swaps, Swap Definitions will be subject to dual regulation by the CFTC and the SEC. The two The swap definition rule was drafted jointly with the Securities agencies plan to establish a process, however, whereby a partici- and Exchange Commission and was approved by that agency on pant that intends to list, trade, or clear such a mixed swap can ask July 9. The rule is expected to take effect later this fall. Once the for regulation by one or the other agency. swap definition takes effect, a host of other rules will become effec- Security-based swap agreements are defined as contracts over tive, including registration, business conduct, and clearing require- which the CFTC has full regulatory and enforcement authority even ments for various types of over-the-counter derivatives as well as though they are related to securities. This includes swaps based on the CFTC’s new position limits rule. broad security indices and swaps based on U.S. Treasury bonds. Speaking at the July 10 public meeting at which the CFTC ap- The final rule excludes forward contracts in non-financial com- proved the swap definition, CFTC Chairman Gary Gensler high- modities from the swap definition. CFTC staff explained that the lighted the importance of this rule as the trigger for implementing a forward exclusion should be interpreted “in a manner consistent with number of other rules finalized earlier this year. “Light will begin to the CFTC’s historical interpretation” with respect to futures contracts. shine on the swaps market for the first time,” Gensler said. The staff also explained that the principles underlying the CFTC’s The rule spells out the definitions of swaps, security-based Brent interpretation regarding “book-out” transactions will apply to the swaps and security-based swap agreements contained in the forward exclusion from the swap definition. Dodd-Frank Act and provides detailed rules and interpretative The CFTC also said it is providing an interpretation on volumetric guidance on what types of contracts fit these definitions. Swaps fall options, which are options embedded in a forward contract based under the authority of the CFTC; security-based swaps under the upon the quantity of the underlying commodity. The CFTC said authority of the SEC; security-based swap agreements fall under the these contracts may qualify for the forward contract exclusion if CFTC’s authority but also are subject to the SEC’s anti-fraud author- the optionality is due to physical factors or regulatory requirements ity; and mixed swaps are subject to dual regulation. beyond the control of the parties to the contract. Alongside the rule, the two agencies issued an interpretation to CFTC Commissioner Bart Chilton, the only one of the five com- clarify whether particular types of contracts are swaps, security- missioners who voted against the joint definition, said that he was based swaps or mixed swaps. For example, contracts based on concerned about the forward contract exclusion. Chilton explained interest rates and U.S. Treasury securities are swaps subject to that in his view the rule went too far in allowing certain types of for- the CFTC’s jurisdiction, while contracts based on yields of a debt wards that contain embedded options to be excluded from the defi- security, a loan or a narrow-based index are security-based swaps nition. He questioned why the CFTC would allow forward contracts subject to the SEC’s jurisdiction. The two agencies also adopted a that are not taken to delivery to be treated as forwards, and warned new test for determining whether a CDS index is broad or narrow. that the industry would use this provision as a loophole to evade the The joint rule also spells out what products are not swaps or Dodd-Frank requirements that apply to swaps. “I don’t think we’ve security-based swaps. These products include traditional types of reached the right balance,” he said.

Futures Industry | September 2012 55 Washington

Cross-Border Guidance on a transaction-by-transaction basis based on the identity of the The Commodity Futures Trading Commission on June 29 ap- counterparty. Entity level requirements, such as for capital, chief proved for public comment proposed interpretative guidance regard- compliance officer, swap data recordkeeping and reporting and ing the cross-border application of swaps provisions in Title VII of the large-trader reporting, would apply to all registered swap dealers. Dodd Frank Act. Accompanying the guidance is a proposed exemp- The CFTC is proposing that these rules in certain circumstances tive order which would delay the effective date of certain rules by set- could be met by complying with comparable and comprehensive ting up a phased compliance schedule for certain swap participants. foreign regulatory requirements, or what the CFTC calls “substituted CFTC Commissioners Jill Sommers and Scott O’Malia both compliance.” Transaction level rules, such as clearing, margin, real- voted for releasing the proposed guidance for comment despite time reporting, trade execution, trading documentation and sales strong concerns about the CFTC’s approach. Sommers cautioned practices, would apply to all transactions with U.S counterparties, that issuing guidance rather than a proposed rule opens the CFTC or so-called U.S.-facing transactions. Parties would be able to rely to litigation because the proposal lacks a cost-benefit analysis. She on substituted compliance for these requirements only in certain further warned that differing compliance dates puts certain market circumstances. U.S.-facing transactions would include not only participants at a disadvantage. O’Malia said the proposed guidance transactions with persons or entities operating or incorporated in “steps on the toes of other sovereign nations.” the U.S. but also transactions with their overseas branches. It would Lawmakers have also faulted the CFTC for issuing guidance also include transactions with foreign affiliates that are guaranteed outside of the public rulemaking process. Representatives Scott by a U.S. entity, as well as the foreign affiliates operating as conduits Garrett (R-N.J.) and Randy Neugebauer (R-Texas) said they had for a U.S. entity’s swap activity. “serious concerns” about the use of informal guidance when ad- Timeline for Mandatory Clearing dressing a significant matter of public policy, and warned about the possibility of retaliation. “Whatever the United States chooses to do The CFTC on July 24 approved final regulations setting out a sched- with regard to the extraterritorial application of its laws will greatly ule to phase in compliance with new clearing requirements under the influence how foreign countries treat U.S. persons doing business in Dodd-Frank Act. The schedule applies to three categories of market their respective jurisdictions,” the two lawmakers said in a letter to participants and establishes when they will be required to comply with the CFTC. the mandatory clearing requirements. The compliance schedule does The guidance interprets the language in Section 722(d) of Title VII not apply, however, to documentation or trading requirements. of the Dodd Frank Act which limits CFTC jurisdiction to activity which The first category includes swap dealers, security-based swap has “a direct and significant” connection “with activities in or effect on dealers, major swap participants, major security-based swap par- commerce in the U. S.” Among other things, the guidance considers ticipants and active funds. For this category, the transactions must which swaps a non-U.S. entity must count in deciding whether to be cleared within the first 90 days after the CFTC official determines register in the U.S. as a swap dealer or major swap participant. The a type of swap must be cleared. The CFTC said the compliance release also contains a definition of a U.S. person such that a swap schedule provides these market participants with the least additional with such a person as a counterparty would count towards the de time to come into compliance based on, among other things, their minimus threshold for purposes of the registration reporting, and other level of activity, market experience, resources, and their status as requirements. registrants with the CFTC or Securities and Exchange Commission. At the suggestion of swap market participants, the CFTC pro- The second category includes commodity pools, private funds posed a two-tier compliance regime whereby certain requirements as defined in Section 202(a) of the Investment Advisors Act of 1940 would apply to the entire entity without regard to the counterparty (other than active funds in the first category); or persons predomi- (entity level requirements) and certain requirements would apply nantly engaged in banking or financial activities. The CFTC said this

CFTC Offers Relief to Ease Dodd-Frank Implementation

As firms take steps to implement Dodd-Frank regulations, the CFTC has offered some relief on several rulemakings. Aggregation Requirements—On July 24, CFTC staff issued temporary no-action relief from the aggregation requirements of the CFTC’s position limit rule for futures and swaps, granting a 60-day extension but no later than Dec. 31, 2012. “This temporary relief is intended to provide sufficient time to transition to fully compliant aggregation,” the CFTC said. The relief was granted in response to petitions from energy firms as well as FIA. Large Trader Reporting—CFTC staff on July 2 issued a no-action letter granting temporary relief from compliance with the large trading reporting system for physical commodity swaps and swaptions, taking into account many of the concerns raised by FIA and other industry groups. Conflicts of Interest Regulations—On June 1, CFTC staff issued a letter providing a 60-day extension for certain conflicts of interest regulations under Regulation 1.71 that were set to take effect on June 4. The no-action relief was issued in response to requests from FIA and the National Introducing Brokers Association. The conflicts of interest regulations are designed to protect research analysts who work at FCMs and IBs from being “improperly influenced” by employees in other parts of the firms. The regulations also prohibit swap dealers from interfering with the clearing business at an affiliated FCM.

56 Futures Industry | www.futuresindustry.com category differs from its earlier proposal because employee benefit and prevent abuse of any exemption or exception to the clearing plans are not included in this category. This category of market requirement under Dodd-Frank Act. In addition, clearinghouses would participants must come into compliance with the clearing mandate be required to post on their websites a list of all swaps that they will within 180 days. accept for clearing and clearly indicate which of those swaps are on The third category of market participants includes all other swaps the CFTC’s list of the swaps that must be cleared. market participants, including those involving third-party subac- After the proposed rules have been open for public comment, the counts and ERISA plans. The CFTC has given this category of CFTC will then seek to finalize the clearing determination within 90 market participants 270 days to come into compliance. The CFTC days. Once the clearing determination is finalized, the three-stage noted that third-party subaccounts are in the third category because schedule for phasing in compliance will take effect. “they are likely to require the most amount of time for documentation, coordination, and management.” End-User Exception This final rule, approved on July 10, implements the exception to Swaps Subject to Mandatory Clearing the clearing requirement for non-financial entities and small financial The CFTC on July 24 issued for public comment a list of interest institutions. CFTC staff estimated that 30,000 entities may opt to rate and credit default swaps that will be subject to the agency’s use this exception. The rule establishes criteria for determining when mandatory clearing rules. The proposal list includes four classes of a swap being used by a non-financial entity to hedge or mitigate interest rate swaps—fixed-to-floating, basis, forward rate agree- commercial risk is exempt from clearing requirements. The rule also ments, and OIS—and specifies the range of currencies, maturities, exempts “small financial institutions” with total assets of $10 billion reference rates and other characteristics that would be covered. For or less from clearing requirements. In addition, the rule specifies the credit default swaps, the CFTC proposed two classes of swaps— information that counterparties must report to satisfy notification North American and European—and a range of tenors, series, refer- requirements for entities seeking an exemption. ence indices and other characteristics. Gensler said the end-user exception is based on a “very broad In making this proposed determination, the CFTC said that it interpretation” of what constitutes a hedge or a transaction to received submissions from eight clearinghouses covering all the mitigate commercial risk because Congress wanted non-financial swaps that they cleared as of Feb. 1. The CFTC explained that it companies to have a choice. “I think Congressional intent here was decided to focus on IRS and CDS in the first clearing determination to be very liberal with the definition.” because of the “market importance” of these swaps and the degree to which they are already being cleared. The CFTC added that it Block Trade Rule for Swaps intends to consider other types of swaps submitted by clearing- The Commodity Futures Trading Commission on June 25 pro- houses, such as swaps based on agricultural and energy commodi- posed rules related to the aggregation of swap transaction orders to ties and equity indices. meet minimum block trade requirements. The proposed rules would, The CFTC said the proposed rules codify statutory provisions that among other things, prohibit the aggregation of orders for different make clear that any swaps entered into prior to the enactment of the trading accounts in order to satisfy the minimum block size or cap Dodd-Frank Act or prior to the application of the clearing require- size requirements, except for orders aggregated by certain comment are not required to be cleared. The proposed rules also include modity trading advisers, investment advisers and foreign persons. provisions designed to prevent evasion of the clearing requirement

SEC Issues “Roadmap” for Derivatives Regulation Implementation

The Securities and Exchange Commission issued a policy statement on June 11 describing the order in which it expects new Dodd-Frank rules related to the derivatives market to take effect. The SEC asked for public comment on the sequencing of the rules, which are divided into five groups and start with the adoption of definitional rules and the proposal of cross-border rules. “The policy statement seeks to provide a ‘roadmap’ to market participants and the public on how we expect to implement the various regulatory requirements for this market,” SEC Chairman Mary Schapiro said in a statement. “We look forward to public comment on our anticipated sequencing as we continue to adopt and implement the rules under the law.”

SEC Adopts Clearing Submission Rules The Securities and Exchange Commission on June 28 adopted final rules establishing procedures for its review of certain clearinghouse actions. The rules detail how clearinghouses will provide information to the SEC about the security-based swaps that they clear. “This is an important step in laying the groundwork for the SEC’s ability to determine which security-based swap contracts are required to be cleared,” said Mary Schapiro, chairman of the SEC. The SEC also adopted rules requiring clearing agencies that are designated as systemically important to submit advance notices of material changes to their rules, procedures or operations.

Futures Industry | September 2012 57 partner who shares our commitment to delivering this capability.” LME is no stranger to Cinnober technology; over the past ten years, the Swedish company has provided five different systems for LME, including its electronic trading platform, LMEselect. “We’re excited to continue and deepen our 10-year relationship with the Newedge Selects Fidessa LME and take part in this great initiative while building a top-modern for Trading Platform and OMS world-class clearinghouse from scratch,” Cinnober Chief Executive Newedge has selected the Fidessa trading platform and order Officer Javier Tordable remarked. management system for its global derivatives and equity trading business, the two companies announced on July 24. The first phase of this project, covering trading hubs in London and Chicago, is now live. Subsequent phases will see the platform rolled out across other hubs in Asia this year. CME Buys IM Technology Fidessa said its platform will provide Newedge with a multi-asset to Support New Energy Platform trading workflow solution across its front and middle-office opera- In July, CME Group announced plans to launch its own instant tions, incorporating global order management, access to Newedge messaging platform to support energy traders who use its new CME trading algorithms, FIX connectivity and smart order routing tools. Direct platform. CME also announced that it has acquired Pivot, one Fidessa also will also supply market data and low-latency gateways of the leaders in IM systems designed for traders, and will integrate for more than 100 derivatives and cash equity markets, with fixed Pivot’s technology into CME Direct, which offers side-by-side trading income slated for addition in 2013. for listed and OTC energy derivatives. “Fidessa’s sophisticated multi-asset workflow offering - including an Pivot, which was founded in 2004, offers software that is designed integrated, multi-asset algorithmic trading engine and centralised pre- to streamline the workflow for traders in equity and energy OTC trade risk and monitoring tools - will play an integral role to deliver next- markets that rely on instant messaging to communicate with their generation capabilities to our global clients spanning all asset classes,” counterparties. Pivot will continue to operate as a stand-alone com- said Nicholas Garrow, global head of eSolutions at Newedge. pany, but it will also be available to CME customers as a component of CME Direct. CME explained that the IM technology will provide traders with tools for distributing and negotiating requests for quotes, block orders, complex options and other types of trades that are difficult to execute in a central order book. For example, a trading desk can use the technology to aggregate all of its IM messages, filter and sort the messages to more efficiently identify potential trades, and LME Opts for Cinnober Clearing Technology broadcast indications of interest to multiple counterparties. In addition, In July, the London Metal Exchange named the Swedish software Pivot’s system has the ability to convert text-based chat into machine- company, Cinnober, as its technology partner for its new clearing- readable data and electronic order messages. house, LME Clear. Cinnober will provide its Tradexpress RealTime “Instant messaging has become a critical part of the financial Clearing system for LME Clear, which is set to open in 2014. Cin- community’s price discovery and trading operations,” said Michel nober’s clearing technology will deliver real time risk management, Everaert, CME’s managing director of OTC solutions. “By integrat- clearing and treasury functionality for products traded on-exchange ing Pivot’s messaging solutions with CME Direct, we will offer our as well as over-the-counter. customers an industry-leading messaging software alongside the After LME announced its decision to run its own clearinghouse first fully automated front-to-back-office platform for trading CME in December 2011, the exchange reviewed more than 20 possible Group’s listed and OTC energy products.” technology providers, then in May narrowed the choice down to two Pivot is already available for energy trading on CME and will vendors—Cinnober and Calypso. continue to function as a stand-alone service for equity market “In today’s clearing environment, regulatory, market and client participants, CME said. Later this year, CME will officially rebrand the demands emphasize the need for high performance systems in product as CME Direct Messenger and integrate it into its CME Di- terms of resilience, processing ability and the move to real time risk rect system. Users already registered with CME Direct will have free management,” said Trevor Spanner, managing director of post trade access to the IM platform. Customers can also pay for the product services at LME. “We are pleased and excited to have a technology as a stand-alone feature separate from CME Direct.

58 Futures Industry | www.futuresindustry.com These services include quote recognition technology that extracts data from individual IM conversations and consolidates the information in a customizable view, allowing customers to quickly filter bro- kered markets and view real-time alerts based on certain parameters. The ICE Chat service also meets Dodd-Frank regulatory standards. The platform provides message retention plans for archiving, tools for compliance officers to review users’ logs, track history and receive breach-of-policy alerts, and accessible database storage. ICE Closes Trading Floor in New York Open outcry futures trading in New York will come to an end this fall, when IntercontinentalExchange moves the last of its floor-traded contracts to the screen. ICE Futures U.S. announced on July 26 that options on sugar, coffee, cotton, cocoa and frozen orange OpenLink Connects to juice futures will be available only for electronic trading starting in ICE Trade Vault for SDR Reporting October. ICE said improved options functionality on its electronic OpenLink Financial, a software company that specializes in trading platform has encouraged more traders to migrate away from providing trading, risk management and operations processing solu- open outcry. As of July, more than 75% of its options volume was tions for energy companies, has expanded its suite of Dodd-Frank traded electronically, compared to just 10% in April 2011, ICE said. regulatory compliance solutions by connecting with ICE Trade Vault, The improved functionality includes support for combination trades, the swap data repository operated by IntercontinentalExchange. hedged option transactions, user-defined-spreads, and request In a July announcement, OpenLink said the new service will help for quotes. ICE said it will maintain its New York facility for traders participants in the commodity swap markets comply with the Com- and brokers who want to use the space to access its markets. ICE modity Futures Trading Commission’s reporting requirements, which bought the former New York Board of Trade in 2007 and began will start taking effect this fall. The new service will support report- converting the exchange to electronic trading, starting with its ing of required transaction data, including primary economic terms, futures contracts. confirmation and valuation data. “The rapid adoption of electronic trading by options market “The combination of ICE Trade Vault and OpenLink will allow participants is strong validation of the capabilities ICE has built into global market participants to benefit from our functionality and its electronic trading platform,” said Ben Jackson, president of compliance tools, helping them manage new reporting requirements ICE Futures U.S. “Market participants have migrated to electronic through a well-designed, cost-effective solution,” said Bruce Tupper, trading for options as a result of the functionality, transparency and president of ICE Trade Vault. efficiency of the platform. At the same time, we are pleased to con- As part of the implementation of Dodd-Frank, market participants tinue to offer the floor facility as a venue for access to these markets are required to submit trade data on all swap transactions, whether to support customer business.” cleared or bilateral, to swap data repositories. ICE Trade Vault was the first SDR approved by the CFTC but several other applications are ICE Revamps IM Trading Tool pending. OpenLink said it is in contact with other potential SDRs and IntercontinentalExchange is taking its instant messaging plat- is exploring the potential to establish connectivity to them as well. form to a new level. In July, ICE rebranded YellowJacket, changing its name to ICE Chat. The platform, which ICE acquired in 2008, delivers real-time chat messages between traders and brokers. The service is widely used for negotiating trades in energy and other Tokyo Grain Exchange Transfers commodity derivatives markets, and recently has been making Agricultural Futures to Kansai and Tocom inroads into equity options. ICE also made the service available for Following several years of declining trading volumes and financial free for all users of its WebICE front-end trading technology. losses, the Tokyo Grain Exchange will wind down its business and WebICE users previously had been able to access YellowJacket as a transfer its agricultural futures to other Japanese exchanges in separate application, but now have free access to ICE Chat’s basic February. Starting in February, TGE’s soybean, azuki, corn and raw features as a part of WebICE. sugar contracts will migrate to the Tokyo Commodity Exchange, The newly branded platform still functions just as YellowJacket while TGE’s rice futures will be transferred to the Kansai Futures did, incorporating instant messaging technology with automation Exchange in Osaka. and data integration. The platform offers access to IM contacts from Tocom currently is limited to industrial commodities such as multiple providers (such as AIM and Yahoo); it allows message shar- precious metals and crude oil, but plans to launch an agricultural ing across a trading desk; and it supplies specific tools that both market in February. The exchange announced in June that it will brokers and traders can use for organizing messages and alerts. manage the processing of open positions and orders remaining on While these capabilities come free of charge for WebICE custom- the TGE market. At the termination of trading on TGE, open posi- ers, premium ICE Chat services are available for an additional fee. tions will be treated as open positions on Tocom’s new market. The

Futures Industry | September 2012 59 transition will be eased by the fact that TGE uses the same trading technology as Tocom. “We have decided to open the agricultural commodity market in careful consideration of the profitability and the importance of having an agricultural market in Japan,” commented Tadashi Ezaki, Tocom’s president and chief executive officer. “We will extend our ASX Adds SGX Hub to Global Network ongoing efforts to attract a more diverse set of trading participants ASX and Singapore Exchange have formed a technology part- and improve the usability and reliability of the Tocom market to nership that will link each other’s futures and options markets by agricultural contracts.” establishing a presence in each other’s co-location data centers. In The Kansai exchange has been competing with TGE in the trad- the first phase, which started on Sept. 3, ASX relocated its Singa- ing of rice futures since August 2011, when the government allowed pore hub to SGX’s data center, providing trading firms in the data trading to resume after a hiatus of more than three decades. The center with direct connectivity through ASX’s network to its futures Osaka exchange currently offers futures on azuki, U.S. soybean, market in Sydney. corn, raw sugar and several other agricultural commodities in addi- The next stage of the partnership will allow customers in the ASX tion to rice. Its trading volumes are miniscule, however. Total volume data center in Sydney to directly connect to the SGX data center. for the first half of 2012 was 104,710 contracts, with most of that That phase is tentatively scheduled to start in April or May of 2013, concentrated in the rice futures contract. according to ASX. Initially this will provide access to the futures and During the first half of 2012, TGE reported trading volume of options traded on SGX, and may be expanded to include equities if 637,250 contracts, down 65% from the first half of 2011. Its two there is enough demand. most active contracts were futures on U.S. soybeans and corn, Peter Hiom, ASX’s deputy chief executive officer, said the part- which together accounted for about 80% of its total volume. nership is part of a plan to “internationalize the ASX” and deliver new trading opportunities to Australian investors. ASX currently generates about 6% of its volume from its international network, which includes hubs in Chicago, New York, London, Hong Kong and Singapore. Nasdaq OMX to Launch London-Based For its part, SGX said the partnership will draw more participants Interest Rate Derivatives Platform to the Singapore market and improve the ability of SGX custom- Nasdaq OMX announced on June 21 that it plans to launch ers to access international markets. SGX President Muthukrishnan a London-based trading venue called NLX that will offer a range Ramaswami said that the partnership will allow SGX to offer “easier of both short-term and long-term interest rate listed derivatives and more cost-effective connectivity” for its customers, further products denominated in euros and sterling. Nasdaq OMX is aim- strengthening its position as the “gateway” to Asian markets. ing to launch the new venue by the first quarter of 2013, pending approval from the Financial Services Authority. Nasdaq OMX is partnering with LCH.Clearnet to provide clearing and settlement for NLX. “The new market will be a single platform for both short-term interest rate and long-term interest rate euro- and sterling-based SGX Buys Power Market listed derivative products,” said Charlotte Crosswell, chief executive Singapore Exchange has acquired a 49% stake in Energy Market officer of NLX. “The combination of strong technology, risk manage- Company, a Singapore-based company that operates a spot market ment and the market presence of Nasdaq OMX and LCH.Clearnet for wholesale electricity. In an Aug. 6 press release, SGX said the deal has allowed us to build a very competitive offering and we have a marks its entry into the electricity sector and puts the exchange in po- system ready for customer testing.” sition to develop electricity and related derivatives. SGX paid S$17.64 NLX expects to support central order book and off-exchange million (US$14 million) and a deferred consideration of up to S$2 mil- trades on the same platform. The initial product range will include lion over three years, subject to certain conditions being met. futures based on three-month Euribor and Sterling interest rates “The demand for electricity and energy products will increase in as well as the long gilt and the bund, bobl and schatz. Options line with Asia’s growth and this acquisition will position SGX to take will follow approximately three months after launch. Margining will advantage of these opportunities,” said SGX Chief Executive Officer be based on the PAIRS methodology developed by LCH.Clear- Magnus Böcker. net, which is based on Value-at-Risk rather than SPAN. This will EMC was established in 2001 as a joint venture between provide “significant portfolio margin efficiencies,” NLX said. The Singapore’s Energy Market Authority and The Marketplace matching engine will be powered by Genium Inet, which Nasdaq Company. Its key activities include calculating prices, scheduling OMX claims is one of the fastest trading platforms in the world, generation, and clearing and settling transactions in the National and will be located in the Equinix LD4 facility in Slough on the Energy Market of Singapore. outskirts of London.

60 Futures Industry | www.futuresindustry.com prominent

The U.S. Senate confirmedMatthew report to Duncan Niederauer, chief execu- vices. He reports to Christophe Hemon, Rutherford as the Treasury Department’s tive officer of NYSE Euronext. group chief operating officer. Ryan was assistant secretary for financial markets. In addition, Patrick Birley was ap- previously at RBS, where he was managing Since 2009, he has served as deputy as- pointed chief commercial officer of NYSE director, head of markets operations. sistant secretary for federal finance. In his Euronext’s clearinghouse in London, which new role, Rutherford will advise Treasury is set to begin operations in June 2013. He NYSE Euronext appointed Hiroshi Secretary Tim Geithner on matters includ- reports to Ibbotson and will work alongside Nomoto as chief representative of the To- ing domestic finance and financial markets. Declan Ward, executive director and head kyo office. He will be responsible for leading of NYSE Liffe Clearing. Birley was previously NYSE Euronext’s sales and client coverage The Federal Reserve Bank of New chief executive officer of the South African teams for Japan and the wider Japanese fi- York named Simon Potter as head of the Futures Exchange and chief executive of nancial community in the Asia-Pacific region. markets group. He was previously executive the European Climate Exchange prior to its Nomoto has more than 20 years experience vice president and co-head of the research acquisition by IntercontinentalExchange. within the derivatives industry and has previ- and statistics group. ously worked for Societe Generale (Fimat), IntercontinentalExchange promoted Mizuho Securities and Barclays. The China Securities Regulatory Com- Tom Farley to senior vice president of fi- mission promoted Jiang Yang to deputy nancial markets. Farley previously served as Christopher Fix was appointed as chief chairman. He was previously assistant to the president of ICE Futures U.S. since Febru- executive officer of the Dubai Mercantile chairman. ary 2007. He will report to Jeff Sprecher, Exchange. He was previously head of mar- chairman and chief executive officer of ICE. keting commodity futures for Asia Pacific for The World Federation of Exchanges Ben Jackson was BNP Paribas. appointed Hüseyin Erkan as secretary named president of general. He succeeds Thomas Krantz. ICE Futures U.S. and Edward Joyce, the Until recently, Erkan served as chairman and will continue to serve former president and chief executive officer of the Istanbul Stock as chief operating chief operating officer Exchange. He was a member of the WFE officer.Bruce Tupper of CBOE Holdings, board of directors from 2008 to 2011. was named president received the Joseph of ICE Trade Vault, the company’s swap W. Sullivan Award at Andrei Kirilenko, chief economist at data repository. He was most recently vice the Option Industry the Commodity Futures Trading Commis- president of ICE eConfirm. Council’s 30th annual options industry sion, will leave his post at the end of 2012 to ICE Futures U.S. hired Scott Brusso as conference. He served as president and become a professor at the Massachusetts director, foreign exchange sales. Prior to join- chief operating officer of CBOE from 2000 Institute of Technology Sloan School of ing ICE, he was director of foreign exchange to 2011. He was honored for his role in the Management. He began his tenure at the for CME Group. He is based in Chicago. creation of CBOE’s hybrid trading systems, CFTC in 2008 and has been serving as chief development of the VIX product line, launch economist since 2010. Hong Kong Mercantile Exchange ap- of the all-electronic CBOE Futures Exchange pointed Jane Wang and William Bark- and C2 Options Exchange and in CBOE’s Mark Ibbotson was promoted to co- shire as co-presidents following the retire- demutualization and initial public offering. chief executive of NYSE Liffe, with respon- ment of Albert Helmig, who was president sibility for exchange trading, clearing and of the exchange for more than three years. The OCC elected six new members to regulation. He was previously executive Wang, a veteran in commodities trading, its board of directors including two in newly vice president of global clearing. Finbarr joined the exchange in 2008 as managing created public director roles. New directors Hutcheson was also promoted to co-chief director, greater China. Barkshire joined the are Steven Crutchfield, chief executive executive of NYSE Liffe with responsibility exchange as senior advisor in 2009 and was officer, NYSE Amex Options and senior vice for commercial and business development. most recently chief operating officer. president, NYSE Euronext; Elizabeth King, Hutcheson was executive vice presi- head of regulatory affairs, Getco; Kevin dent, global OTC services. Ibbotson and LCH.Clearnet appointed Martin Ryan Russell, managing director, head of equities Hutcheson succeed Garry Jones and they as group head of operations and client ser- trading for the Americas, Citigroup Global

Futures Industry | September 2012 61 prominent

Markets; and Jonathan Werts, managing Getco named Jon Ross as chief tech- markets. Other members of the executive director, global execution services, Bank of nology officer, based in the firm’s Chicago committee are Elizabeth King of Getco, America Merrill Lynch. Crutchfield replaces headquarters. Prior to his appointment, Hans Pieterse of Optiver, Eva Sanchez Thomas Callahan as an exchange director Ross was the head of Getco’s execution of Citadel and FIA EPTA chairman Remco and the new members replace Paul Brody, services in Europe. Robert Smith was Lenterman of IMC Trading. William Felder and Valar Mihan. In ad- named head of Europe, based in London. dition, Matthew Gelber and Alice White He previously was head of the firm’s Asian The FIA Technology Division on June were elected as public directors. operations. Smith replaced Stephen Warr 5 elected officers for the next 12 months. and John Mueller who were serving as Greg Wood of Deutsche Bank Securities interim co-heads of the London office.Farid was elected president; Tim Gits of Eurex Antoine Babule was Moslehi, the firm’s chief risk officer, was was elected first vice president;John Rapa named chief executive named to replace Smith as head of Asia and of Tellefsen and Co. was elected second officer for Newedge will be based in Singapore. vice president; Diane McFadden of ICE USA. He has been with Clear U.S. was elected secretary; and the firm since 1995, Nomura Holding America named Mi- Diane Saucier of Trading Technologies was most recently serving chael Otten as executive director, legal. elected treasurer. as chief administrative He is based in New York and reports to officer. He replacedBill Sexton, who Angie Karna, managing director, legal. Otten FIA Asia hired Pauline Yong as director recently left the firm. Newedge also an- formerly worked at the Commodity Futures of member relations. She previous worked nounced that Peter Barrowcliff joined the Trading Commission as an attorney in the with CME Group and has experience in firm’s metals desk as global chief operating enforcement division. In 2007 he was ap- marketing and customer support in the officer. He was previously at Nomura. pointed counsel to former CFTC Chairman derivatives industry. Reuben Jeffery. Deutsche Bank appointed Piers Citadel tapped Jamil Nazarali to take Murray as global head of fixed income Phillip Futures named Robert Keeley as over as president of Citadel Execution Ser- prime brokerage in the markets clearing senior vice president, director of sales and vices. He replaced Andrew Kolinsky, who business. He was previously global head business development. Keeley, who reports is retiring from the firm. Citadel Execution of rates clearing at J.P. Morgan. Murray, to Lynette Lim, director and principal of the Services makes markets in U.S. and Euro- based in New York, will report to Jon firm, was most recently at Newedge. pean stocks and handles order routing for Hitchon, head of markets clearing. retail broker-dealers. Nazarali joined Citadel Citi added three people to its futures and last year from Knight Equity Markets, where Bill Metzger was named vice president OTC clearing team in Japan. Hiroko Sato, he was global head of electronic trading. at Deutsche Bank Securities. He most formerly a partner at Fusion Investments, a recently was a consultant and prior to that hedge fund, joined Citi as a director to lead BGC Partners appointed Michael he was a senior vice president of opera- listed and OTC derivatives clearing origina- Riffice as managing director and head tions at Citi. He is also serving as president tion in Japan as well as prime brokerage of futures and options, Americas. Riffice of FIA Chicago. sales. Masako Saito, who previously is based in New York and reports to worked at Daiwa Securities, will focus on Jean-Pierre Aubin, executive managing distribution of Citi’s new trading platform for director and global head of listed products In Memoriam listed derivatives. Maiko Ohara, formerly in and structured solutions. Riffice has held the firm’s Chicago office, with manage the senior roles at a number of financial services The FIA was saddened to hear that domestic futures sales team in Japan. firms and most recently worked in the inter- former FIA Chairman Stephen Selig dealer broker sector. passed away. Throughout the course The FIA European Principal Traders of his career he had a dynamic role in Association announced named Mark Torben Munch was named chief execu- shaping commodity futures trading laws Spanbroek secretary general in addition to tive officer of Orc Group, effective at the be- and in representing the interests of both his current role as vice chairman. In addition, ginning of 2013. He was previously execu- futures commission merchants and ex- Jan Dezort has joined the group’s executive tive vice president and chief operating officer changes. He played a major role in the committee. Spanbroek retired from Getco in of SimCorp, a global software provider to formation of the FIA, serving as an out- 2011 after serving for nine years as head of the international investment management side counsel in its formative years. Over business development and market structure industry. the course of his career he served on in Europe. Dezort, head of regulatory affairs critical advisory panels and committees at RSJ, has served in various roles focus- both in the legal and regulatory arena. ing on supervision and regulation of capital

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