30 Years with John Damgard

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30 Years with John Damgard

Annual Volume Survey | OTC Clearing in Asia | SEF Aggregation

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features

06 President’s Message By John Damgard

08 News Briefs

47 Washington Watch By Joanne Morrison

depar tments

54 Tech Talk By James Woods

58 @Markets

61 Prominent People

30 Years with John DamgardAt the end of March John Damgard will step down after 30 years as the FIA’s president. In this interview, he discusses many of the critical developments that took place during his tenure as the head of FIA, including the shift to electronic trading, the Shad-Johnson Accord, and the industry’s response to the 9-11 attacks. | By Joanne Morrison

annual Volume survey: 24 Volume climbs 11.4% to 25 BillionThe global listed derivatives markets enjoyed a solid but not spectacular increase in trading activity in 2011. | By Will Acworth

34 Otc clearing in asia: under constructionAsia-Pacific regulators are putting in place requirements for mandatory clearing of over-the-counter derivatives while new OTC clearing services are being developed in every major financial center in the region. Three jurisdictions are relatively far along in the process—Japan, Singapore and Hong Kong. | By Will Acworth

clearing Interest rate swaps: 38 cme Group’s risk management frameworkTwo clearing experts at CME Group describe key elements of CME’s clearing solution for interest rate swaps, including the margin methodology and the “waterfall” of financial protections in case of a default. | By Sasha Rozenberg and Udesh Jha

swaps Liquidity aggregation43 The coming fragmentation of the swaps markets presents an opportunity for dealers and technology companies to provide tools for aggregating liquidity across multiple swap execution facilities. | By Kevin McPartland

16

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Futures Industry | March 2012 03

Futures Industry five times a year by the Futures Industry As soc iation, ISSN #10656855, 2001 Pennsylvania Avenue N.W., Suite 600, Wash ington, D.C. 20006-1823; (202) 466-5460. Sub scriptions are $24 Domestic and $32 Inter na-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, Wash ington, D.C. 20006-1823. Copyright 2012 by the Futures Industry Association.

Materials contained herein may not be reproduced for general distribution, advertising or promotional purposes without the expressed consent of the FIA. The statements of fact and opinion in signed articles are the sole responsibility of the authors, and do not necessarily reflect the positions of the officers, mem-bers or staff of FIA, nor the employers of the authors.

Futures IndustryEditor-in-Chief Editor Mary Ann Burns Will Acworth

Deputy Editor Assistant Editor Joanne Morrison Tracy Wahler

Futures Industry edItorIal advIsory BoardRussell Abramson, J.P. Morgan Arthur Bell, Arthur Bell Certified Public Accountants Galen Burghardt, Newedge USA Christopher Culp, Lexecon Kevin Foley, Katten Muchin Rosenman LLP Diane Garnick Michael Gorham, Illinois Institute of Technology Anthony Leitner, A J Leitner and Associates, LLC Terrence Martell, Baruch College John Munro, ION Trading Gerry Perez, Interactive Brokers Group Leslie Sutphen, Newedge USA Barbara Wierzynski, Futures Industry Association

The Futures Industry Association is the international trade organization for the futures industry. Its mem-bership includes more than 28 of the largest futures commission merchants. FIA estimates that its mem-bers are responsible for more than 90% of all public customer business executed on U.S. contract mar-kets. 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 ac-counting 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 ratesToni Vitale ChanFutures 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

04 Futures Industry | www.futuresindustry.com

Board of directors officers n Michael C. DawleyManaging Director, Co-Head of Futures and Derivatives Clearing Services Goldman, Sachs & Co. Chairman

n Peter G. JohnsonManaging Director, Global Head of Futures, OTC Clearing and FX Prime Brokerage Bank of America Merrill Lynch Vice Chairman

n Najib LamhaouarGlobal Head of OTC Clearing and ETD HSBC Securities (USA) Inc. Secretary

board members Patrice BlancPresident Jefferies Futures Brokerage and Chief Executive Officer Jefferies Bache LLC

n Philippe BuhannicChairman and Chief Executive Officer TradingScreen Inc.

Gonzalo Chocano

n Gerald F. CorcoranChairman and Chief Executive Officer R.J. O’Brien & Associates LLC

Robert T. Cox

n George E. CrappleCo-Chairman and Co-Chief Executive Officer Millburn Ridgefield Corporation

n John M. DamgardPresident Futures Industry Association

Laurie FerberExecutive Vice President and General Counsel MF Global Holdings Ltd.

Fredrik GentzelManaging Director, Global Head of Listed Derivatives Deutsche Bank AG

n Arthur W. HahnPartner Katten Muchin Rosenman LLP

n Christopher K. HehmeyerManaging Member HTG Capital Partners LLC

nM. Clark Hutchison, IIIGlobal Co-Head of Listed Derivatives Morgan Stanley

nJeffrey D. JenningsManaging Director, Global Head Listed Derivatives Credit Suisse Securities (USA) LLC

Sanjay KannambadiChief Executive Officer and Global Head BNY Mellon Clearing LLC

n Jerome KempGlobal Head of Exchange Traded Derivatives Sales and Clearing Citigroup Global Markets Limited

n Andy MilnesHead of Supply and Trading, Global Oil Americas BP Corporation North America, Inc.

n David S. MitchellPartner Fried, Frank, Harris, Shriver & Jacobson LLP

Reinhardt OlsenManaging Director and North America Head of ETD UBS Securities LLC

n Todd E. PetzelChief Investment Officer Offit Capital Advisors LLC

n Emily PortneyManaging Director, Global Head of Futures and Options JP Morgan Securities LLC

n Kenneth M. RaislerPartner Sullivan & Cromwell LLP

n Edward J. RosenPartner Cleary Gottlieb Steen & Hamilton LLP

n Michael Schaefer

n Stephen SchulerCo-Managing Member GETCO, LLC

n William SextonChief Executive Officer Newedge USA LLC

n Donald R. Wilson, Jr.Chief Executive Officer DRW Trading Group

Jeremy WrightGlobal Head of Futures and Options RBS Futures (London)

n Alice Patricia White

n Michael YarianManaging Diretor, Head of Futures and OTC Derivative Trading Barclays Capital Inc.

special advisorsRichard BerliandManagement Consultant

Gary DeWaal Senior Managing Director and Global General Counsel Newedge USA LLC

n Executive Committee Member n Associate Member Director n Public Director

FIa Chapters and divisions presidents/Chairmen fia asiaPaul S. DaviesGoldman Sachs Futures Pte Ltd.

fia chicagoBill MetzgerHM Consulting

f ia european principal traders associationRemco LentermanIMC Trading B.V.

futures servicesVincent MatteraDennis Murray Consulting

information technologyMatthew ReesR.J. O’Brien & Associates

japan chapterMitch FulscherChairman

Shozo OhtaTokyo Financial Exchange President

law & complianceMaria ChiodiCredit Suisse Securities (USA) LLC

fia principal traders groupDonald R. Wilson, Jr.DRW Trading Group

the Futures Industry association, Inc.John Damgard President

Walt Lukken Incoming President and CEO

Barbara Wierzynski Executive Vice President and General Counsel

Mary Ann Burns Executive Vice President, Industry Relations

Guy Sheetz Senior Vice President, Chief Financial Officer and Chief Operating Officer

Tracy Wahler Vice President of Communications

Angelique Wilkins Vice President, Conferences and Meetings

Maria Banks Accounting Assistant

Adoncia Boykins Director Member Services

Steven Bradbury Senior Accountant

Michael Cho Senior Accountant

Gary Herman Controller

Mary Kincheloe Communications Assistant

Linda Leerdam Receptionist

Roselia Marmolejos Administrative Assistant

Steve Proctor Technology Coordinator

Damon Roberts Meetings Coordinator

Marsha Saunders Manager, Meetings and Events

Mindy Serin eCommunications Coordinator

Toby Taylor Executive Assistant and Office Manager

Beth Thompson Law & Compliance Division Coordinator

ThE

This is my last President’s Message, and on this occasion I’d like to take a moment to talk about leadership. The FIA serves many purposes, but none are more important than its

role in bringing the industry together at a time of crisis and building a consensus on how to protect and preserve the integrity of our markets. As we deal with the aftermath of MF Global and its reper-cussions for the protection of customer funds, we would do well to look back at how we handled past crises and consider what lessons may still apply.

I am thinking in particular about how this industry responded to the collapse of Barings Bank in February 1995. For many of you, the collapse of Barings may seem like an episode out of the distant past, but for those of us who were around at the time, we well remember what a shock it was to see one of the most venerable names in banking brought down almost overnight because of a single rogue trader on the futures desk in Singapore. That incident dealt a severe blow to public confidence in our industry and in par-ticular in the safety of cross-border trading.

Less than a month later, at our annual industry conference in Boca Raton, we formed a task force to address the problems exposed by Barings. That task force consisted of 60 people from a broad range of exchanges, intermediaries and customers. Those were the days before email, so to get this done we had to hold any number of long arduous phone calls as well as two in-person meet-ings—one in Washington and another in London.

After a lot of hard work and sometimes difficult discussions, we reached a consensus on a broad range of recommendations on best practices for futures trading and clearing. That laid the foundation for the report that we issued in June and shared with regulators and exchanges and clearinghouses around the world. That report went a long way towards establishing new standards for our industry, and restoring the confidence of our customers and our regulators in this industry’s ability to tackle difficult issues in a pro-active way.

PrESIDENT’S

now, in the aftermath of MF Global, we are faced with a chal-lenge perhaps even greater than Barings, and I am proud to say that the FIA is once again taking a leadership role. In January we formed a task force under the leadership of FIA Chairman Mike Dawley to undertake a serious self-appraisal of policies and procedures for protecting customer funds and to consider ways to improve industry practices. As I have said before, the shortfall in the customer funds at MF Global was a huge black eye for our industry. Even though we still don’t know exactly what happened, there is no question that customer confidence in the protections for their funds has been seri-ously damaged, and it is now the industry’s responsibility to come together to respond.

At the end of February, the task force put forward an initial set of practical recommendations focused on policies and practices at futures commission merchants. Some of those can be imple-mented immediately. Others will require rule changes by either the federal regulators or the industry’s self-regulators to establish better visibility into the handling of customer funds and higher standards for internal controls. We also issued a “frequently asked questions” paper to provide customers with more transparency on the current protections in place for customer funds. And these are just the first steps. We are continuing to talk with a broad range of market participants and regulators, just as we did with Barings, and we expect to have more suggestions and recommendations in the near future that will help reassure customers that their money will be held safely and securely.

During my 30 years as FIA chairman, we have always been the industry’s champion through thick and thin. That is never more important than when we are dealing with difficult issues. I wish I could take credit for all of these achievements, but the truth is that it was all of you, the members of the FIA, who made it possible. The strength of the FIA has always been and will always be the

willingness of our members to step up and volunteer their time, energy and expertise to these industry-wide projects. Together we have overcome a whole host of challenges, and I am confident that with your unstint-ing support we will continue to do so in the years ahead.

John DamgardPresident

Leadership in Times of Crisis


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EU Blocks Deutsche Börse and NYSE Euronext MergerThe European Commission on Feb. 1 announced its official opposition to the pro-posed merger between Deutsche Börse and nYSE Euronext, stating that the combined entity would have a “quasi-monopoly” in European financial derivatives.

“These markets are at the heart of the fi-nancial system and it is crucial for the whole European economy that they remain com-petitive. We tried to find a solution, but the remedies offered fell far short of resolving the concerns,” said Joaquín Almunia, vice president in charge of competition policy.

The two exchanges expressed disap-pointment with the decision but said they have agreed to terminate their merger plans. “It is now time to move on and return our sole focus to executing our compelling exist-ing strategy—a strategy we have continued to implement without missing a beat over the last year,” said Jan-Michiel Hessels, nYSE Euronext chairman.

Since then nYSE Euronext has re-launched a plan to develop in-house clearing services for its European deriva-tives markets, an effort that was put on hold when the merger deal was announced. Dur-ing a February conference call with investors and analysts, nYSE Euronext officials said this project will convert nYSE Liffe Clearing into a full-service clearinghouse and end the exchange’s reliance on LCH.Clearnet for clearing services. The officials also said they plan to develop the ability to clear over-the-counter products.

“We look forward to engaging with us-ers to develop a full-service U.K.-based clearinghouse, which will offer operating and capital efficiencies, provide innovative solutions across listed and OTC markets and provide an unrivaled level of customer service,” Duncan niederauer, the ex-change’s chief executive officer, said on the call. “With legislation beginning to crystallize on the new mandates which will be imposed for central clearing of derivatives, now is the right time in our opinion to be working with users to develop competitive clearing solu-tions that will meet their needs.”

European Policy Makers Finalize EMIR The European Union announced on Feb. 9 that after a long period of negotiations, the European Parliament and the EU Council have agreed on the final text of the Euro-pean Market Infrastructure Regulation. This regulation includes a number of provisions that will directly impact members of the FIA and their affiliates, including mandatory clearing and trade reporting requirements for over-the-counter derivatives as well as organizational and prudential requirements for clearinghouses.

“I congratulate the European Parlia-ment and the Council on reaching today an important agreement on a regulation for more stability, transparency and efficiency in derivatives markets,” Michel Barnier, EU Commissioner for Internal Market and Ser-vices, said in a statement. “The EU has now also fulfilled its G20 commitments in this field, and on time.”

Barnier noted that the regulation ensures that information on all European deriva-tive transactions will be reported to trade repositories, thereby giving policy makers and market supervisors “a clear overview of what is going on in the markets.” He also commented that the regulation requires standard derivative contracts to be cleared through central counterparties and estab-lishes “stringent” organizational, business conduct and prudential requirements for these CCPs.

The next step will be a plenary vote in the European Parliament and then adoption by the Council, both of which are expected to take place in March. Once that occurs, the European Securities and Markets Authority will be required to draft technical standards for the application of EMIR.

In related news, ESMA announced the first step in putting EMIR into effect. On Feb. 16 ESMA issued a discussion paper on the “technical standards” for the implementation of the new regulation. The discussion paper covers such topics as the organizational and prudential requirements for clearinghouses and the scope of the clearing requirements for OTC derivatives. Comments are due by

March 19. Based on the responses that it receives, ESMA will prepare draft technical standards for another round of consultation during the summer.

ESMA also announced two other initia-tives related to the implementation of EMIR. It is working with the European Banking Authority and the European Insurance and Occupational Pensions Authority on a joint discussion paper for technical standards for OTC derivatives that are not subject to clearing requirements. In addition, the EBA is expected to issue in the coming weeks a discussion paper on technical standards for clearinghouse capital requirements.

Singapore Proposes OTC Derivatives Rules The Monetary Authority of Singapore is-sued a consultation paper on Jan. 13 on the regulatory oversight of the over-the-counter derivatives market in Singapore. The proposed regulatory regime will cover both financial and commodity derivatives and includes provisions requiring the use of clearinghouses and trade repositories as well as rules for market operators, clear-ing facilities, trade repositories and market intermediaries. The consultation does not propose mandatory trading on electronic platforms or exchanges. MAS said it is talk-ing with the industry on the potential costs and benefits of such a requirement and will consult on this at a later date.

To determine which OTC derivatives should be subject to the clearing mandate, the MAS proposal said it would look at such factors as potential systemic risk, degree of standardization, depth and liquidity of the market, availability of pricing data, the clear-inghouse’s risk management capabilities, and the international regulatory approach to that type of contract. Interest rate swaps denominated in Singapore and U.S. dollars and non-deliverable forwards in Asian cur-rencies “appear to fulfill these criteria,” the MAS said.

Under the proposal, market participants would not be required to use a Singapore-located clearinghouse; the MAS said this would “limit choices for market participants,

newsbriefs

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newsbriefslead to fragmentation of liquidity, reduce netting benefits and increase costs for [financial institutions] currently clearing with foreign CCPs.” The MAS instead proposed a mutual recognition framework under which foreign CCPs could apply for authorization to offer clearing services in Singapore.

Iosco Reviews Swap Trading PlatformsThe International Organization of Securi-ties Commissions issued a report on Jan. 25 describing the different types of trading platforms currently available for the execu-tion of OTC derivatives transactions in Iosco member jurisdictions. The report noted that there are two broad categories: those with multiple liquidity providers (multi-dealer platforms) and those with a single liquid-ity provider (single-dealer platforms). The report described the differences in the trade execution models, the participant cover-age, the degree of automation, the scope of asset class or product coverage, and the geographic coverage. Iosco said the report was drafted to help regulators and policy-makers as they develop derivatives trading policy proposals.

Dodd-Frank Amendments Advance in House The House Agriculture Committee on Jan. 25 approved by a voice vote six bills that would modify derivatives-related provi-sions of the Dodd-Frank Act. The bills have already cleared the House Financial Services Committee but will not become law unless and until approved by the Senate and Presi-dent Obama.

“Without these important changes, regulations could deter businesses from hedging against risk. That increases costs for consumers and reduces stability in the market place, which is contrary to the intent of the original Dodd-Frank legislation,” said House Agriculture Committee Chairman Frank Lucas (R-Okla).

One bill (H.R. 1840) requires the Com-modity Futures Trading Commission to assess the costs and benefits of proposed actions. Another bill (H.R. 2682) clari-fies that end-users are exempt from the

FIa

ACTIONS

FIA Participates in Coalition Urging China to Modernize Financial SectorFIA President John Damgard joined with the heads of 11 other financial services trade associations in writing a letter to Chinese vice President Xi Jing-ping in advance of his visit to the U.S. The letter emphasized that the fastest way for China to modernize its financial system is to open the financial sector to greater participation by foreign financial services firms. “Continued reform and modernization of China’s financial sector is essential if China is to achieve its economic goals of maintaining high rates of growth and job creation, build-ing a more services-based, consumer-driven economy, reducing poverty, and ensuring a more equitable distribution of opportunity and prosperity,” the coali-tion said in its letter.

ISDA, SIFMA and FIA Comment on “Available to Trade” RulemakingThe International Swaps and Derivatives Association, the Securities Industry and Financial Markets Association and the Futures Industry Association filed a joint letter on Feb. 13 to the Commodity Futures Trading Commission com-menting on the agency’s proposed rulemaking concerning the process by which over-the-counter swaps will be made “available to trade,” a term established by certain provisions of the Dodd-Frank Act. The three associations noted that the designation of a swap as “available to trade” will have broad ramifications for the market because such a swap will no longer be permitted to trade on a bilateral basis. The three associations offered a number of recommendations to avoid inappropriate designations. These included a recommendation that the determination should be made by the CFTC, not a swap execution facility or an exchange. The groups also recommended that the CFTC perform an in-depth study of the market to determine the amount of liquidity in a particular type of swap before designating it as “available to trade.” Furthermore, the trading requirement should not take effect until at least six months after the swap has been made “available to trade.”

Groups Warn of Extraterritorial Impact of Swap Dealer Registration RequirementsSix leading financial industry trade associations have expressed concern about the impact of U.S. swap dealer registration requirements on firms engaged in the global swap markets. In a Feb. 2 letter to the Commodity Futures Trading Commission, the six groups, which included the FIA, warned that the new rules could force dealers into “costly, disruptive, and time-consuming” restructuring of their operations.

“Legal entity restructuring is a costly, disruptive and time-consuming pro-cess, involving extensive re-documentation of client agreements, re-allocation of scarce capital, re-assignment or re-location of personnel as well as po-tentially extensive systems development and compliance infrastructure,” the groups warned.

In addition to the FIA, the signatories included the Securities Industry and Fi-nancial Markets Association, The Clearing House, The Financial Services Round-table, ABA Securities Association, and Institute of International Bankers.

PARTNERSas of 27 February

SPONSORSas of 27 February

Visit www.idw.org.uk for a complete exhibitor listing. Limited sponsorships and exhibit space are still available.

Contact Toni Vitale Chan +1.312.636.2919; [email protected] Bernadette Connolly +44 [0]20 7090 1334; [email protected]

IDX GALA IN AID OF FUTURES FOR KIDSWednesday 27 June – The Artillery Garden at the HAC, London EC1

FIA and FOA are pleased to announce that the IDX Gala Dinner will, once again, be held in aid of Futures for Kids (FFK). FFK was established in March 2008 to provide a fundraising vehicle through which this industry can raise money to support charities working to improve the lives of children around the world. For further information, to reserve tables / places or to discuss supporting the Dinner as a sponsor, please contact Bernadette Connolly by email ([email protected]) or tel +44 (0)20.7090.1334.

FIA/FOA Internati onal Derivati ves Expo26-27 June 2012

The Brewery, Chiswell Street, London EC1www.idw.org.uk


newsbriefs

MF

glo

ba

l UPDATE

CFTC FCM Study: No Material Breach of Customer Funds ProtectionThe Commodity Futures Trading Commission on Jan. 25 re-leased the findings of a review of futures commission merchants begun shortly after the MF Global collapse. The agency said it did not find any material breaches of customer funds protection requirements during the spot check. The review, which covered 70 FCMs, found that firms maintained excess funds in both segregated accounts and secured accounts. The FCMs held a total of roughly $166 billion in segregated accounts, which was about $13 billion in excess of the $153 billion owed to custom-ers. The FCMs also held about $48 billion in Part 30 secured accounts, which was about $7 billion in excess of the secured amount obligation. The CFTC reviewed customer segregated accounts at 14 of the largest FCMs. The CME and nFA re-viewed 56 other FCMs carrying customer funds.

FIA Establishes Task Force to Respond to MF GlobalThe Futures Industry Association announced on Jan. 24 that it has established a special committee to address issues related to the bankruptcy of MF Global. The Futures Market Finan-cial Integrity Task Force will develop and recommend specific measures that can be implemented in the near term through both industry best practices and regulatory change. In addition to these measures, the FIA intends to work with end-users and other market participants to examine the adequacy of current customer funds protection models in response to concerns raised by the MF Global bankruptcy.

“The FIA looks forward to partnering with end-users, regula-tors, legislators and clearinghouses to restore customer confi-dence in the futures markets,” said Michael Dawley, chairman of the FIA and managing director, Goldman Sachs & Co. “Although we still do not know for certain what caused the significant shortfall in customer segregated funds required to be held at MF Global, any loss of customer assets is entirely unacceptable and the reasons for the deficiency need to be identified.”

The task force will be headed by a steering committee con-sisting of a diverse group of futures commission merchants with institutional, commercial and retail customer bases as well as representatives of other industry segments.

SROs to Jointly Review Customer Segregation Protections In response to the MF Global collapse, national Futures As-sociation, CME Group, IntercontinentalExchange, Kansas City Board of Trade and the Minneapolis Grain Exchange have joined together to consider how to strengthen current safeguards for customer segregated funds. The coordinated effort by all of the

futures industry’s self-regulatory organizations will examine what changes can be made to rules or to the ways in which firms demonstrate compliance with those rules to prevent customer losses due to the insolvency of a futures commission merchant.

“Self-regulation has served the futures industry and its cus-tomers very well for a very long time,” said Daniel Roth, presi-dent of nFA. “However, the MF Global bankruptcy has dealt a severe blow to the public’s confidence in the financial integrity of our futures markets and it is incumbent upon the industry’s SROs—in collaboration with the Commodity Futures Trading Commission—to take the necessary steps to enhance cus-tomer protection, particularly in the area of segregated funds.”

CME Establishes $100 Million Fund to Protect Family Farmers and RanchersCME Group announced on Feb. 2 that it will establish a $100 million fund designed to provide further protection of customer segregated funds for U.S. family farmers and ranchers who hedge their business in CME’s futures markets. “In light of the recent MF Global failure, in which a clearing firm violated CFTC regulations and misused customer monies that should have been kept segregated, CME Group is adding this extra security measure to protect the country’s food producers who are using CME Group futures markets to hedge their crops and livestock that feed the world,” CME said. Under the Family Farmer and Rancher Protection Fund, expected to be in effect by March 1, 2012, farmers and ranchers using CME Group products will be eligible for up to $25,000 per account in the case of losses resulting from the future insolvency of a clearing member or other market participant. Farming and ranching cooperatives also will be eligible for up to $100,000 per cooperative. If losses in a future failure total more than $100 million, participants will be eligible for a pro-rata share of the fund, up to $100 million. This new fund is expected to be backed by an insurance policy and will not be available retroactively.

FSOC to Undertake MF Global ReviewTreasury Secretary Tim Geithner on Feb. 2 announced that the Financial Stability Oversight Council will investigate what changes are needed to better protect customer funds in the wake of the MF Global collapse, working with the Commodity Futures Trad-ing Commission and the Securities and Exchange Commission. “The failure of customer account segregation rules to protect the customers of MF Global illustrates that we have some work to do ahead,” Geithner said in a speech on the state of financial reform. “Recently, the CFTC finalized rules to improve protections for certain customer funds. The Council, working with the SEC and the CFTC, will undertake a broad review of what other changes are necessary to strengthen these protections further.”


margin requirements, while another (H.R. 3527) clarifies that energy and agriculture end-users are not misclassified as swap dealers. Inter-affiliate swap transactions would be exempt from Dodd-Frank provi-sions under another bill (H.R. 2779) passed by the committee. Small banks and farm credit institutions would not be classified as swap dealers under another bill passed (H.R. 3336).

The committee also voted on a bill (H.R. 2586) to modify provisions related to swap execution facilities. This bill prohibits regula-tors from requiring a minimum number of participants to receive or respond to deriva-tives transactions quote requests. It also prohibits regulators from limiting the means of interstate commerce that market participants can use to execute swaps and prohibits the agencies from requiring a SEF to delay quotes for any specific period of time.

CFTC Re-Regulates SEC-Registered Investment CompaniesThe Commodity Futures Trading Commis-sion on Feb. 9 issued a final rule regarding registration and compliance obligations for commodity pool operators and commodity trading advisors under section 4.5 of the Commodity Exchange Act. The rule passed 4-1, with CFTC Commissioner Jill Sommers in opposition.

The final rule substantially narrows exemptions from the CFTC’s CPO rules for fund managers that are registered with the Securities and Exchange Commission and reinstates a number of reporting and other regulatory requirements. In effect, the final rule will require these fund managers submit to dual regulation by the CFTC and the SEC or else reduce their trading of derivatives. The rule also will require CPOs and CTAs to provide more information to the CFTC about their financial condition and trading activi-ties, including information on assets under management, user of leverage, counterparty credit risk exposure, and trading and invest-ment positions for each pool.

“This rule reinstates the regulatory requirements in place prior to 2003 for registered investment companies that trade

over a de minimis amount in commodities or market themselves as commodity funds,” CFTC Chairman Gary Gensler explained. “This rule enhances transparency in a num-ber of ways and increases customer protec-tions through amendments to the compli-ance obligations for CPOs and CTAs.”

Sommers warned that the rule could be overturned in court. “It is unlikely, in my view, that the cost-benefit analysis supporting the rules will survive judicial scrutiny if chal-lenged,” she said.

The Investment Company Institute, a trade association that represents mutual funds and other fund managers, expressed strong opposition to the final rule. “We have serious concerns about amended CFTC Rule 4.5 and the unnecessary operational and compliance burdens it appears to impose on many mutual fund advisers,” ICI said in a statement. “While we continue to review the new rule in detail, it appears that it fails to address numerous concerns raised by ICI and others, and will impose needless costs on funds and fund shareholders.”

The CFTC also released a proposed rule aimed at reducing the compliance burdens associated with dual regulation by both the CFTC and SEC. The proposed rule, which was approved unanimously, asks for public comment on amending the reporting re-quirements applicable to certain investment companies registered under the Investment Company Act of 1940, whose advisors would be required to register with the CFTC as CPOs. The CFTC said this proposal seeks to harmonize CFTC and SEC require-ments to minimize the compliance burden on these registrants.

Obama Administration Proposes CFTC Budget Hike and 60/40 RepealPresident Obama’s proposed budget for fiscal 2013, which was released on Feb. 13, includes large increases to the budgets for the Commodity Futures Trading Commis-sion. If approved by Congress, the CFTC’s budget would rise to $308 million from the $205 million approved by Congress for fis-cal 2012, an increase of almost 50%. The increased budget would allow the agency

to add 296 employees, bringing its total staff to 1,015 people. The budget increase also would allow the agency to ramp up its investment in data and technology to $105 million from the current level of $60 million.

The Obama administration said the CFTC will need the additional funds to implement the swaps market regulation mandated by the Dodd-Frank Act. For example, the CFTC expects that the number of exchanges and trading platforms under its purview will triple between 2011 and 2013. The CFTC also plans to double the capacity of its market surveillance infrastructure.

The administration also proposed a partial repeal of the 60/40 tax treatment for futures and options. According to the Treasury Department, dealers in futures and options would be required to treat income from day-to-day transactions in futures and options as ordinary income rather than capital gains. This would apply to dealers in equity options as well as options on futures. Treasury estimated that this would raise $1.2 billion in revenues for the government over the next five years.

In contrast to the administration’s budget proposals for fiscal 2012, the new bud-get proposal does not include a user fee. Instead, the administration said it “strongly supports” legislation to fund the CFTC through user fees on transactions in futures, options and swaps. In December four House Democrats introduced a bill, H.R. 3665, that would authorize the CFTC to collect user fees up to the amount appro-priated by Congress. no action has been taken on that bill yet, however.

EU Lawmakers Seek Stricter Controls on HFT Members of the European Parliament’s economic and monetary affairs committee called for stricter controls on high-frequency trading to be included in the European Com-mission’s review of the Markets in Financial Instruments Directive. At a Feb. 13 hear-ing, Markus Ferber, a German member of the committee who is acting as rapporteur for the MiFID legislation, said the proposal “does not go far enough” in addressing problems caused by high-frequency trading.


newsbriefspurpose of the report is to describe the trad-ing and clearing of swaps in each area and identify areas of regulation that could be har-monized. In the third section of the report, the two agencies described several aspects of clearing where there are significant “divergences.” These include: requirements for mandatory clearing; segregation and portability; clearinghouse ownership and governance; and clearinghouse location.

NYSE Liffe to Introduce Position Limits for Commodity FuturesnYSE Liffe plans to introduce an “enhanced position management regime” for its com-modity futures and options contracts traded in London, the exchange said in a Feb. 15 notice to members. The exchange said the new regime, which will include hard limits in the front month as well as accountability levels in all months, is tentatively set to take effect in november for coffee, December for sugar and cocoa, and January 2013 for feed wheat. The exchange explained that it decided to introduce these changes after consulting with market participants and hearing requests for a more “formalized and prescribed” position management regime. The exchange also noted that European regulators have proposed formalized posi-tion management regimes in the MiFID 2 legislation. Feedback on the proposed changes is due by March 9.

U.S. Senator Calls for Limits on Mutual Fund Investments in CommoditiesAt a Jan. 26 hearing of the Senate Home-land Security’s permanent subcommittee on investigations, Senator Carl Levin (D-Mich.) urged the Internal Revenue Service to cease allowing mutual funds to avoid limits on their commodity investments. Levin, who chairs the subcommittee, claimed the policy has “opened the floodgates” to excessive speculation that has driven up prices for gasoline and heating oil.

Levin was referring to IRS rulings that have allowed mutual funds to raise their commodity holdings above 10% of income without triggering corporate income tax

Pascal Canfin, a French member of the committee, said long-term investors com-plain that they are at a disadvantage to the faster HFT traders and suggested that the proposal should include a “latency period” for orders and a limit on the number of can-celled orders. Other lawmakers noted the U.S. experience with the flash crash in May 2010 and complained that high-frequency traders pull out of the market when the liquidity they provide is most needed.

Several lawmakers expressed doubt, however, about the Commission’s proposal to address this problem by requiring all trad-ers using algorithms to continuously provide quotes to the markets during the trading day. Ferber said the committee is “rethinking” this approach. In addition, several lawmakers suggested that they will look at academic re-search before supporting greater restrictions on HFT. Kay Swinburne, a U.K. member, cautioned that more data is needed before deciding whether HFT is good or bad, and noted that the U.K. government’s Foresight project is analyzing a number of expert reports and studies on this issue.

CFTC Creates Advisory Panel on Automated and High-Frequency TradingThe Commodity Futures Trading Commis-sion on Feb. 9 voted to create a new advi-sory subcommittee on automated and high-frequency trading. The CFTC also published a notice requesting nominations for industry representatives to serve on the panel. The subcommittee will report to the full Tech-nology Advisory Committee. Developing a common definition of high-frequency trading will be a focus of this new panel. The subcommittee will be chaired by Andrei Kirilenko, the CFTC’s chief economist.

CFTC and SEC Release Joint Report on International Swap RegulationAs required by the Dodd-Frank Act, the Commodity Futures Trading Commission and the Securities and Exchange Com-mission issued a joint report on Jan. 31 on how swaps are regulated in the U.S., Asia and Europe. The regulators said that the

requirements. According to Levin, this has been accomplished by making the invest-ments through commodity-linked notes or through offshore shell corporations. At least $50 billion has been invested in commodi-ties by mutual funds, he said.

U.K. FSA Issues Guidance on Counterparty Credit Risk at ClearinghousesThe Financial Services Authority on Jan. 31 issued guidance on how clearinghouses should manage counterparty credit risk. The guidance was developed in response to changes in the clearing market, notably an uptick in the applications for new clearing services as well as increased regulatory attention to systemic risk issues. The guid-ance focuses on certain aspects of coun-terparty credit risk management, namely risk models and associated governance, processes and procedures, and does not address other aspects such as participant eligibility criteria. In particular, the guid-ance covers the following eight areas: risk management governance and counterparty credit risk control framework, initial margin models, variation margin calculation, default fund, stress testing, wrong way risk and concentration risk, collateral, and validation and back-testing.

ICE Clear Credit Launches Portfolio Margining for Clearing ParticipantsIntercontinentalExchange announced in January that ICE Clear Credit, its clearing-house for credit default swaps, is now offer-ing portfolio margining benefits for clearing members’ proprietary positions. ICE said it has petitioned the Commodity Futures Trading Commission and the Securities and Exchange Commission for permission to provide the same margining benefits to customers. “Customer portfolio margining is a key prerequisite to making CDS clearing attractive to clients,” Tom Benison, manag-ing director at J.P. Morgan, said in a state-ment. “Clients currently can avail themselves of offsetting trades in the bilateral world, so it’s important that they have the same ability within the clearing framework.”

Join Profit & Loss at our series of global Forex Network Conferences and events; Enjoy interactive panel discussions andnetworking opportunities with leading international and local industry leaders; Visit our world class FX technology trade shows.

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John Damgard has served as president of the FIA since 1982. At the end of March he will step down from this position, but he leaves a strong legacy at both the FIA and the futures industry. Under his leadership the association has grown to more than 270 members from nearly 30 countries. As the industry’s leading representative in Washington, the FIA has become a respected source of information about the trading and clearing of derivatives and a champion for free markets everywhere. In his role as the public face of the industry, Damgard has testified countless times before Congressional committees and has worked with every presidential administration since Ronald Reagan. He has been widely recognized in the media as a premier spokesman on all issues related to the futures, options and over-the-counter cleared derivatives markets. In this interview, he discusses many of the critical developments that took place during his tenure as the head of FIA. Among those are the shift to electronic trading and the enactment of the Commodity Futures Modernization Act, both of which helped foster innovation and growth in the derivatives market, the collective actions taken by the industry after serious events such as the collapse of Barings Bank, the September 11 attack and most recently the impact of MF Global.


John Damgard

30 Years with

By Joanne Morrison

FI: Over the course of your 30 years at the FIA, the futures markets have changed dramatically. Can you talk about how things looked when you started, the number of exchanges, how the markets were used, and how that compares to what we have today?

DAMGARD: Well, it was all open outcry when I started, and the business was still predominately agricultural and metals. The first big change came when people outside of the agricultural community recognized that these instruments could be used for other products besides bushels of corn and pork bel-lies. Once the Chicago exchanges showed that you could use the futures markets for things like foreign exchange and interest rates, it really set off a revolution in the financial markets that has continued right up to the present day.

Plus there was innovation in commodities as well. It may be hard to imagine now, but the New York Mer-cantile Exchange did not have any energy contracts un-til the late 1970s, and there weren’t any futures on crude oil until 1983. So when I stepped into this job in 1982, we were right in the midst of tremendous innovation.

The other really big change over the past 30 years was the advent of electronic trading. Once open outcry gave way to screen-based trading, it com-pletely changed the nature of the business. Elec-tronic trading took away the so-called trader’s edge, which had existed on the floor of the exchanges for a long time. Electronic trading leveled the playing field, which in the long run has been very good for everyone in the business.

Of course, in those days the exchanges were owned by the people on the floor, and open outcry forever was their cry. What overcame that resistance was the competition from exchanges in Europe, which had gone electronic well before the exchanges in Chicago and New York. Plus the fact that a handful of people in the industry saw which way the wind was blowing. You have to give credit to people like Leo Melamed who recognized that change was inevitable. He went down on the floor of the Merc and persuaded them to support Globex, which was one of the early electronic trading systems.

FI: Do you think the competition from Liffe and Eurex was a catalyst to help drive the U.S. to electronic trading?

DAMGARD: Without a doubt. When those two exchanges came to the U.S. and offered electronic trading for the benchmark interest rate futures, it really forced the U.S. exchanges to be competitive.

FI: One of the turning points in the history of elec-tronic trading was in the late 1990s when Liffe lost the bund contract to Eurex. At that time, Liffe was an open outcry exchange and many people in the industry were not sure it would survive. What was it that helped revive Liffe?

DAMGARD: The person I would single out as key to Liffe’s recovery is Brian Williamson, who was a member of the original group that established Liffe in 1982. Williamson returned to Liffe for a second stint as chairman from 1998 to 2003 and led the exchange through a profound restructuring. That was when the exchange abandoned open outcry in favor electronic trading and converted itself into a profit-oriented organi-zation owned by shareholders. And of course it survived and thrived to the point where now it’s one of the crown jewels of NYSE Euronext.

FI: Over the course of your tenure, there’s been a lot of consolidation among the FCMs. What impact do you think this has had on the industry?

DAMGARD: Well you’re right, the FCM business has consolidated tremendously. A lot of the old names with great standing in the industry for many years are no longer around. But that’s not all bad. The FCM busi-ness is extremely competitive, and the people who have invested in technology and improved their efficiency have been able to buy out the firms that for whatever reason did not want to stay in the business. If this con-tinues, however, I would be concerned that customers will have fewer choices. I think it is pretty important to have multiple choices as we move toward man-datory clearing for over-the-coun-ter-derivatives.

John came to Washington during the Nixon Administration to work as an aide to Vice

President Agnew.

John shows former Chicago Mayor Harold

Washington around the Futures & Options

Expo ’86 exhibit hall.

FI: There’s been a tremendous change in the role and function of exchanges. They have gone from mem-bership organizations dominated by floor traders to shareholder-owned for-profit enterprises. How do you think that has impacted the industry?

DAMGARD: One of the results is that a lot of the tension has gone out of the relationship between exchanges and clearing firms. It has become more of a partnership. You can see that in the way that the ex-changes are recognizing that they need the backing of the clearing firms to support things like new clearing services, or a new set of products.

FI: Over the last 30 years, there have been some land-mark changes in regulation. Can you talk about that?

DAMGARD: I have to start out with the Dodd-Frank Act. This legislation and subsequent reforms will affect the futures markets far more than expected. We have been busy at the FIA with dozens of working groups comprised of our members who have com-

mented on the proposed rules and have made wide ranging recommendations

on these rules

John and FIA general counsel Barbara Wierzynski at one of many FIA board meetings.

that will greatly impact our industry.Looking back, I would say creation of the CFTC

in 1974 was critical. In those days, virtually all futures contracts were based on agricultural commodities. There was very little interest on the part of the Securi-ties and Exchange Commission in regulating that mar-ket, so a separate futures markets agency was created with exclusive jurisdiction over futures.

That came into question with the advent of futures contracts based on equity products, which led to argu-ments about the legality of those products and whether they should be regulated by the CFTC as futures products or by the SEC as equity products. The real watershed event came in 1981, when Phil Johnson and John Shad, the chairmen of the CFTC and the SEC, negotiated what became known as the Shad-Johnson Accord. The SEC was given jurisdiction over options on securities, and the CFTC was given jurisdiction over futures and options on futures. That might look confusing, but it resolved the uncertainty and allowed the industry to move forward. Certainly it would have made it more difficult for the futures exchanges to create so many innovative products if they had been operating under the SEC’s oversight.

Passage of the Commodity Futures Modernization Act in 2000 was another very important regulatory milestone. With this law, our markets were able to grow and innovate while operating under a principles-based approach to regulation. By regulating through core principles rather than prescriptive rules, the CFTC was able to achieve its statutory goals while still giving the industry the flexibility it needed to adjust to changes in the markets and create new products.

The CFMA also provided legal certainty for the swaps market. The more volume that came into the swaps markets, the more the dealers were looking for ways in which to lay off their risk in the futures markets. I think it has been a very complimentary relationship not a competitive one.

FI: How do you think the industry’s voice has been heard in Congress on Dodd-Frank issues?

DAMGARD: It is always hard to have an effective voice in Congress when legislation is being drafted in response to a market crisis. That was the case when Congress began drafting Dodd-Frank. On top of that, there was one party controlling the White House and both the House and Senate.

FI: Just over 10 years ago you faced a very different kind of challenge—the September 11 attacks. The collapse of the World Trade Center buildings struck right at the heart of the futures industry in New York. What role did the FIA take in helping your members and the markets regroup?

DAMGARD: By the time I arrived at work the sec-ond airplane had hit the second tower. It was then that we realized that this was not some little airplane that hit the World Trade Center by accident.

FIA board members meet with President George H.W. Bush in 1990.

DAMGARD: The real question is, what’s prudent and what’s punishment? I think, since 2008, it’s been very good politics to demonize Wall Street and demonize people who are speculating in the market. The truth is that an awful lot of businesses out there depend on these markets for managing risk. I think we’re pretty vulnerable to new exchanges outside the United States operating under less costly regimes attracting the business. We know that markets move.

FI: You’ve been very vocal over the years about the im-pact of imposing position limits. Could you discuss this?

DAMGARD: Position limits have worked pretty well in the ags. The FIA has always been supportive of position reporting. We think it is important for regu-lators to have this information for proper surveillance of the markets, but we do not support the hard limits that have been set by the CFTC.

FI: A transaction tax proposal is again circulating in Congress. More than anyone else, you know this is not a new idea. It’s been proposed in the past by both Republicans and Democrats. Do you think we’ll ever see something like that?

DAMGARD: Other countries have tried it. Brazil tried it. Sweden

Our offices are only a few blocks from the White House, and as I was standing in my office with my staff, we caught a glimpse of the airplane that crashed into the Pentagon.

Our immediate concern was the personal safety of our staff and members. Quite a few of our member firms had offices in the towers. We also reached out almost immediately to the exchanges. The New York Board of Trade’s floor was completely destroyed and the New York Mercantile Exchange was severely damaged. Also the CFTC’s New York office was in one of the tow-ers. So we were very concerned about everyone’s safety.

The first hours we were constantly in contact with those firms and exchanges trying to locate people. Thankfully nearly all of them were able to evacuate the buildings. The folks at Carr and Cantor unfortunately were not able to get out in time, and to this day I can’t think about that day without remembering those who lost their lives in 9-11.

One of the remarkable things about that trag-edy was the way the whole industry came together. Normally the firms are fierce competitors but after 9-11 that was set aside. The firms that were relatively unaffected voluntarily offered to share office space and equipment and access to the exchanges with the firms that were really hit hard by the destruction.

As we have with other market emergencies over the years, the FIA provided a central communications point for the industry. The day after the attacks, we began hosting conference calls for member firms, exchanges and clearing firms. We held more than 25 calls in the six or seven days following the attacks. We also maintained con-tact with other critical industry trade groups to keep each other aware of decisions being made in various markets.

On a personal note, on Oct. 16, about five weeks after the attack, I accompanied Senator Bob Dole on a visit to Ground Zero, where we were joined by Mayor Rudy Giuliani. I was overcome by the devastation. The smoke, the debris, the dust, the sheer scale of the destruction—it was absolutely overwhelming.

FI: What did you learn about our industry after the September 11 attacks?

DAMGARD: I think it’s remarkable that the markets were up and running just days later, that we were more resilient than the stock market, than any number of other industries. There was this pride at the exchange level and among our members. Cooperation among market participants was outstanding. For example, the futures exchanges were willing to synchronize their hours with those of the cash markets during the re-opening process. We also were reminded of the impor-tance of being prepared for disasters. Since 2001 the FIA has worked regularly with exchanges and member firms on disaster recovery and preparedness issues.

FI: There seems to be a tone in Washington that regula-tors can keep pace with innovations in the market. Has that thought ever been as prominent as it is now?

John entertains the audience at

the 2006 FIA Asia Derivatives Conference

in Mumbai, India.

John addresses delegates of the

International Futures Industry Conference in

Boca Raton, FL.


tried it. And the first chance they had to rescind it,

they did. They saw how detrimental it

is to the market. I remember saying in testimony one time:

“Tax us on the money we make, but don’t tax us on how we make our

money.” I have concerns about money going to the Treasury with no cap and

no relationship to the cost of the regulation that the fee is suppose to address. I also

have concerns that fees and taxes will be used in an attempt to influence how people trade

and to affect market behavior generally.

FI: Over the years, jurisdiction of the CFTC has always been in the agriculture committees. How has that worked?

DAMGARD: My own view is that the institutional knowledge of these markets resides in the House and Senate Agriculture Committees. And nothing has persuaded me that that should necessarily change.

Ever since I’ve started, I’ve been able to go up to the Hill and visit with members of the Ag Committee such as Senator Lugar and say here’s what really makes sense and here’s what doesn’t make much sense. Very often the members themselves came from a farming background and they understood what it meant to hedge. So they always had a very good understanding of what it takes to draft legislation that strikes the right balance between promoting innovation and protecting the integrity of these markets.

FI: Last fall MF Global, one of the largest FCMs in the business, declared bankruptcy. How would you characterize the impact of that collapse and in particu-lar the shortfall in customer funds on the industry?

DAMGARD: This is the worst black eye that the in-dustry has ever received. The safety of customer money has been one of the sacrosanct principles of this indus-try. The idea that this has been violated is something that is going to take awhile to address and restore.

As tempting as it is to jump right in and say “we’ve got to do this and we’ve got to do that,” let’s not amputate the wrong leg. Let’s figure out what’s wrong with the patient before we decide what we’re going to do. There’s been a cry for moving the regulation function out of the exchanges. But it’s important to re-member that from an exchange standpoint, they want to make sure that the people that they trust to become clearing members of their clearinghouse are, in fact, well capitalized and are working within the rules.

But we’ve been through crises before. We had Vol-ume Investors. We had Sumitomo. We had the Hunt Brothers squeezing the silver market. We had Barings Bank. I think the industry has done a pretty good job over the years of looking at each of those incidents and addressing the causes and fixing the problems.

We’re going to do that again. I don’t know that we can honestly say that there will never be another prob-lem. But I do know that this industry will figure out what went wrong with MF Global and how to prevent that kind of thing from happening again.

FI: Did you expect to run a trade association for more than three decades?

DAMGARD: I’m told that I beat out Jack Valenti in terms of longevity. We’ve probably faced more crises and more uncertainty, as an industry, than perhaps any other trade association in town.

This wasn’t something that I expected to happen. When you study hard at school, you don’t necessarily say, “Boy, I can hardly wait to grow up and run a trade association.” It’s always a little accidental.

In my case, it was having worked in the White House for President Nixon and Vice President Agnew. Both of them went down in flames. I felt like I needed another experience to point to, and I went to the Department of Agriculture under Earl Butz—where I inherited a bunch of programs—one of which was the Commodity Exchange Authority, which of course was the predecessor to the CFTC.

I am very, very grateful to fate that I was selected for this job by John Conheeny in 1982. I’ve had 30 some years to watch the industry grow. All of the work we’ve done here at the FIA over the years could not have happened without the strength and talent of our members. It’s been a great ride. ..............Joanne Morrison is the deputy editor of Futures Industry.

FIA New York Expo May 17, 2012

NY Marriott Marquis1535 Broadway

New York, NY

The Futures Industry Association will hold its fi rst NY Expo on Thursday, May 17 at the New York Marriott Marquis.

One Day. Twelve Sessions. 24 Exhibits. Multiple networking opportunities.

Panel Topics Will Include:

New York Expo Exhibitors (as of February 27)

ADVA Optical Networking • CME Group • GlobalRisk Corporation • NYSE EuronextOrc • TMX | Montréal Exchange • WhenTech LLC • Omgeo LLC • Solarfl are Comminications

www.futuresindustry.org/nyexpo

WorkshopsReporting Requirements/SDRs • Getting Ready For OTC Clearing/Registration • LSOC/Margin & Collateral Risk Audits • Position Limits

Products Interest Rate Swaps • Energy

ClearingClearinghouse Leaders • Customer Protection Post MF Global • Clearing Certainty • Gross Margining Give-Up Best Practices

ExecutionTop Tech Trends • SEF Landscape • Risk Controls for SEFs and CCPs • Risk Management Recom-mendations • IT Challenges of Dodd-Frank

Partners Sponsors

Contact [email protected] for sponsorship and exhibiting opportunities.

Wednesday May 9, 2012

2:00 – 4:00 p.m.Session 1. Soup to Nuts

4:30 – 6:00 p.m.Session 2. Protection of Customer Funds

6:00 – 7:00 p.m.Opening Reception

Thursday May 10, 2012

CONCURRENT SESSIONS (choice of three panels)

8:30 – 10:00 a.m.Session 3. Looking West and East: The International Implications of Clearing Swaps and Trading Futures Post MF Global

Session 4. An Exchanges and SEF Update

Session 5. “Who, What and Where?” – Product and Entity Defi nitions

10:30 a.m. – noonSession 6. Meet the CFTC Directors – Where We Are Going in 2012Noon – 1:45 p.m.Keynote Lunch


2:00 – 3:30 p.m.Session 7. Litigation and Enforcement Update

Session 8. The Role of the Compliance Offi cer and Internal Controls in the New World

Session 9. “Sanity Clauses” – Basics in Documentation


4:00 – 5:30 p.m.Session 10. The Federal Reserve Board – The Industry’s New Regulator

Session 11. Professional Responsibility

Session 12. The Basics of Give Ups and Back Offi ce Operations

7:00 – 9:00 p.m.Reception and Dinner

Friday May 11, 2012


8:30 – 10:00 a.m.Session 13. “Aggregation, Implementation & Frustration”— Position Limits and Other Developments in Commodities

Session 14. The Clearing of OTC Swaps

Session 15. Basics of Execution Issues(Anti-disruptive Trading and Order Handling)


10:30 – noonSession 16. The Nuts and Bolts of Reporting and Recordkeeping

Session 17. Asset Management Developments

Session 18. “What Clients and Regulators Want” – Internal and External Business Conduct Standards

Noon – 2:00 p.m.Farewell Networking Box Lunch

Program is subject to change without notice.

www.futuresindustry.org/lc

SPONSORS

SPONSORSHIP OPPORTUNITIESA limited number of sponsorship opportunities are still available.

Contact Toni Vitale Chan at [email protected] or 312.636.2919.

Preliminary Program

FIA Law and Compliance Division Presents:

Conference on the Regulation of Futures, Derivatives and OTC Products

May 9-11, 2012Marriott Waterfront • Baltimore, Maryland

MARRIOTT WATERFRONT • 410.385.3000Located in Baltimore’s Harbor East neighborhood, the Baltimore Marriott Waterfront sits on the water’s edge. You’ll enjoy spectacular views from this Inner Harbor hotel, as well as easy access to the city’s fi nest shopping and restaurants. The hotel is a short drive to and from BWI airport and the Baltimore’s Penn Station.

Rooms have been reserved at special rates and are valid May 8-12. Rates range from $231-281/night and are quoted exclusive of applicable state and local taxes, occupancy, applicable service, and/or other hotel specifi c fees. The room block cut-off date is April 19, 2012. However, rooms are limited and available on a fi rst-come, fi rst-serve basis—they may sell out early! Any rooms available after the deadline will be on a space and rate available basis only. Please confi rm all cancellation policies and forfeiture of deposits directly with the hotel when booking your reservation. Please contact the hotel directly for reservations:

By phone: dial 1.800.266.9432 and mention “2012 Futures Industry Association - Annual Law & Compliance Division Conference” to apply for the group rate.

By internet: visit www.futuresindustry.org/lc and click on “Hotel and Area Information”

REGISTRATIONMembers of the FIA L&C Division 2012**For those who have already renewed their 2012 L&C Membership Through April 19 - $650 l After April 19 - $750Members of the FIA

Through April 19 - $700 l After April 19 - $800Price includes one-year membership in the FIA Law & Compliance Division

Non-Members of the FIA Through April 19 - $850 l After April 19 - $950CANCELLATIONS: Notice of cancellation must be received in writing before April 4 and will be subject to a $100.00 administrative fee. No refunds will be made after April 4. Substitutions may be made at any time without penalty. E-mail [email protected] with changes.

REGISTER AT WWW.FUTURESINDUSTRY.ORG/LC

www.futuresindustry.org/lcwww.futuresindustry.org/lc

Wednesday May 9, 2012

2:00 – 4:00 p.m.Session 1. Soup to Nuts

4:30 – 6:00 p.m.Session 2. Protection of Customer Funds

6:00 – 7:00 p.m.Opening Reception

Thursday May 10, 2012


8:30 – 10:00 a.m.Session 3. Looking West and East: The International Implications of Clearing Swaps and Trading Futures Post MF Global

Session 4. An Exchanges and SEF Update

Session 5. “Who, What and Where?” – Product and Entity Defi nitions

10:30 a.m. – noonSession 6. Meet the CFTC Directors – Where We Are Going in 2012Noon – 1:45 p.m.Keynote Lunch


2:00 – 3:30 p.m.Session 7. Litigation and Enforcement Update

Session 8. The Role of the Compliance Offi cer and Internal Controls in the New World

Session 9. “Sanity Clauses” – Basics in Documentation


4:00 – 5:30 p.m.Session 10. The Federal Reserve Board – The Industry’s New Regulator

Session 11. Professional Responsibility

Session 12. The Basics of Give Ups and Back Offi ce Operations

7:00 – 9:00 p.m.Reception and Dinner

Friday May 11, 2012


8:30 – 10:00 a.m.Session 13. “Aggregation, Implementation & Frustration”— Position Limits and Other Developments in Commodities

Session 14. The Clearing of OTC Swaps

Session 15. Basics of Execution Issues(Anti-disruptive Trading and Order Handling)


10:30 – noonSession 16. The Nuts and Bolts of Reporting and Recordkeeping

Session 17. Asset Management Developments

Session 18. “What Clients and Regulators Want” – Internal and External Business Conduct Standards

Noon – 2:00 p.m.Farewell Networking Box Lunch

Program is subject to change without notice.

www.futuresindustry.org/lc

SPONSORS

SPONSORSHIP OPPORTUNITIESA limited number of sponsorship opportunities are still available.

Contact Toni Vitale Chan at [email protected] or 312.636.2919.

Preliminary Program

FIA Law and Compliance Division Presents:

Conference on the Regulation of Futures, Derivatives and OTC Products

May 9-11, 2012Marriott Waterfront • Baltimore, Maryland

MARRIOTT WATERFRONT • 410.385.3000Located in Baltimore’s Harbor East neighborhood, the Baltimore Marriott Waterfront sits on the water’s edge. You’ll enjoy spectacular views from this Inner Harbor hotel, as well as easy access to the city’s fi nest shopping and restaurants. The hotel is a short drive to and from BWI airport and the Baltimore’s Penn Station.

Rooms have been reserved at special rates and are valid May 8-12. Rates range from $231-281/night and are quoted exclusive of applicable state and local taxes, occupancy, applicable service, and/or other hotel specifi c fees. The room block cut-off date is April 19, 2012. However, rooms are limited and available on a fi rst-come, fi rst-serve basis—they may sell out early! Any rooms available after the deadline will be on a space and rate available basis only. Please confi rm all cancellation policies and forfeiture of deposits directly with the hotel when booking your reservation. Please contact the hotel directly for reservations:

By phone: dial 1.800.266.9432 and mention “2012 Futures Industry Association - Annual Law & Compliance Division Conference” to apply for the group rate.

By internet: visit www.futuresindustry.org/lc and click on “Hotel and Area Information”

REGISTRATIONMembers of the FIA L&C Division 2012**For those who have already renewed their 2012 L&C Membership Through April 19 - $650 l After April 19 - $750Members of the FIA

Through April 19 - $700 l After April 19 - $800Price includes one-year membership in the FIA Law & Compliance Division

Non-Members of the FIA Through April 19 - $850 l After April 19 - $950CANCELLATIONS: Notice of cancellation must be received in writing before April 4 and will be subject to a $100.00 administrative fee. No refunds will be made after April 4. Substitutions may be made at any time without penalty. E-mail [email protected] with changes.

REGISTER AT WWW.FUTURESINDUSTRY.ORG/LC

www.futuresindustry.org/lcwww.futuresindustry.org/lc


2011 was not a year when the trading of futures and options around the world was characterized by

one big theme, such as the rise of emerging markets or a boom in commodities trading. Instead it was

a year of many smaller trends. Some of those trends were a continuation of what we saw emerge in

previous years, such as the recovery of the fixed income markets from the credit crisis of 2008. Others

came as a surprise, such as the substantial decline in some of China’s largest commodity markets.

Annual Volume Survey Volume Climbs 11.4% to 25 Billion Contracts WorldwideBy Will Acworth


Global Futures and Options VolumeBased on the number of contracts traded and/or cleared at 81 exchanges worldwide

2010 2011 % Change

Futures 12,049,275,638 12,945,211,880 7.4%

Options 10,375,413,639 12,027,190,688 15.9%

Combined 22,424,689,277 24,972,402,568 11.4%

On balance, the industry enjoyed a solid but not spectacular increase in trading activity last year. The number of fu-

tures and options traded on exchanges around the world rose 11.4% to a total of 24.97 billion contracts. That 11.4% rate of growth was a lot slower than what we saw in 2010, but it was more or less on par with the growth rate in the years preceding the 2008 crisis.

As always it helps to put things into a longer-term perspective. Looking back over the last five years, global volume has grown by 60.9%. The bulk of that growth has come from the emerging markets of Brazil, China, India and Russia, which have been march-ing forward year by year relatively unaffected by the turmoil of 2008 and 2009. Yet even in the U.S., the total number of exchange-

traded futures and options contracts has risen 33.3% over the past five years.

Asia-Pacific continues to account for the largest share of the global market for exchange-traded derivatives, with just over 39% of the total volume in 2011 compared to 33% for North America and 20% for

Europe. On the other hand, North America and Europe grew slightly faster than Asia-Pacific in 2011, a reversal of the usual trend.

Most sectors of the market grew, with the notable exceptions of agricultural and non-precious metals. In both cases that was primar-ily due to slumping volumes on three Chinese


exchanges, as described later in this article.For this year’s volume survey, the FIA

collected data from 81 exchanges around the world. A handful of exchanges were added to the FIA’s database in 2011, in-cluding India’s United Stock Exchange, the Indonesia Commodity and Derivatives Exchange, and the Singapore Mercantile Exchange. In this year’s listing of the 30 largest exchanges, Borsa Italiana’s deriva-tives exchange has been combined with the London Stock Exchange’s derivatives exchange, reflecting the fact that they are under common ownership. For the same reason the Montreal Exchange and the Bos-ton Options Exchange are combined under the TMX Group. Looking forward, Russia’s RTS and Micex will be combined in 2012 following their merger at the end of 2011.

Size MattersThe FIA measures volume by the num-

ber of contracts traded. The advantage of this approach is that it gives us a standard unit of measurement for contracts that are based on a huge range of underlying com-modities and financial instruments.

The problem with this metric is that contract sizes can differ enormously. At one extreme is the Eurodollar futures contract traded at CME, which is based on the value of interest paid on $1 million. At the other extreme are the currency futures traded in India, which are based on just $1,000. It does not take a lot of money to produce big volume numbers with such small contracts.

As it happens, those tiny Indian FX contracts are enormously popular. They trade on three exchanges—MCX Stock Ex-

change, the National Stock Exchange of In-dia, and United Stock Exchange. Last year the total volume of U.S. dollar/Indian ru-pee futures traded on these three exchanges reached 1,845.96 million. That was equiva-lent to almost a fifth of the Asia-Pacific re-gion’s total volume for the year.

Another example is the equity options market at Australia’s ASX. In May, the ex-change cut the size of its single stock equity options from 1,000 shares per contract to 100 shares, in order to put the contract size in line with international standards and encourage more trading by retail investors. The effect of this change is that it now takes 10 times as many contracts to achieve the same exposure, and the typical transaction generates 10 times as many contracts traded.

As a result, ASX jumped up the ex-


Global Futures and Options Volume by Category Based on the number of contracts traded and/or cleared at 81 exchanges worldwide

Category 2010 2011 % Change

Equity Indexes 7,416,030,134 8,459,520,735 14.1%

Individual Equities 6,295,265,079 7,062,363,140 12.2%

Interest Rate 3,202,061,602 3,491,200,916 9.0%

Foreign Currency 2,525,942,415 3,147,046,787 24.6%

Ag Commodities 1,305,531,145 991,422,529 -24.1%

Energy Products 723,614,925 814,767,491 12.6%

Non-Precious Metals 643,645,225 435,111,149 -32.4%

Precious Metals 174,943,677 341,256,129 95.1%

Other 137,655,075 229,713,692 66.9%

total 22,424,689,277 24,972,402,568 11.4%

Note: Energy includes contracts based on emissions. Other includes contracts based on commodity indices, credit, fertilizer, housing, inflation, lumber, plastics and weather.

Global Futures and Options Volume by RegionBased on the number of contracts traded and/or cleared at 81 exchanges worldwide

Region 2010 2011 % Change

Asia-Pacific 8,990,583,917 9,815,764,742 9.2%

North America 7,169,695,107 8,185,544,285 14.2%

Europe 4,422,009,307 5,017,124,930 13.5%

Latin America 1,518,883,227 1,603,203,726 5.6%

Other 323,517,719 350,764,885 8.4%

total 22,424,689,277 24,972,402,568 11.4%

Note: Location of exchanges is determined by country of registration. Other consists of exchanges in Dubai, Israel, South Africa, and Turkey.

33.9% Equity Index

28.3% Individual Equity

14.0% Interest Rate

12.5% Currency

4.0% Agricultural

3.3% Energy

3.1% Metals

0.9% Other

39.3% Asia-Pacific

32.8% North America

20.1% Europe

6.4% Latin America

1.4% Other


Volume Survey

change rankings this year. The exchange’s equity options volume in 2011 was 108.86 million, making it the eighth larg-est equity options market in the world. Total volume for ASX and ASX 24, for-merly known as the Sydney Futures Ex-change, was 225.35 million, more than double the previous year.

Those types of size differences contribute to a general impression that Asia’s high volumes are not as meaningful as what we see on the mature U.S. and European exchanges. The size issue can cut both ways, however. Much of the growth in the U.S. market is coming

from higher trading of options on exchange-traded funds, which are typically one-tenth the size of the comparable index options.

More importantly, the biggest contract of them all, the Kospi 200 stock index option, is about to change in size. Starting in March of this year, the Korea Exchange plans to increase the size of the Kospi 200 options in order to discourage speculation by retail investors. The multiplier will be increased from 100,000 won to 500,000 won, which is the same size as the Kospi 200 futures.

This change will have a pronounced effect on global volume trends. The Kospi 200 op-

tion is by far the world’s most actively traded derivative. Total volume in 2011 was 3,671.66 million, which is more than all of CME Group put together. After the change in contract size takes place, however, the number of contracts traded will be greatly reduced.

To show this effect, we can apply the new contract size to last year’s volume. If we as-sume that the value of the trading stayed the same, the number of contracts traded would have been 734.33 million—one fifth of the actual total. Taking that adjustment one step further, the total volume for the Asia-Pacific region as a whole would have been reduced

Top 30 Derivatives ExchangesRanked by number of contracts traded and/or cleared

Rank Exchange 2010 2011 % Change

1 Korea Exchange 3,748,861,401 3,927,956,666 4.8%

2 CME Group (includes CBOT and Nymex) 3,080,497,016 3,386,986,678 9.9%

3 Eurex (includes ISE) 2,642,092,726 2,821,502,018 6.8%

4 NYSE Euronext (includes U.S. and EU markets) 2,154,742,282 2,283,472,810 6.0%

5 National Stock Exchange of India 1,615,790,692 2,200,366,650 36.2%

6 BM&FBovespa 1,413,753,671 1,500,444,003 6.1%

7 Nasdaq OMX (includes U.S. and Nordic markets) 1,099,437,223 1,295,641,151 17.8%

8 CBOE Group (includes CFE and C2) 1,123,505,008 1,216,922,087 8.3%

9 Multi Commodity Exchange of India (includes MCX-SX) 1,081,813,643 1,196,322,051 10.6%

10 Russia Trading Systems Stock Exchange 623,992,363 1,082,559,225 73.5%

11 Zhengzhou Commodity Exchange 495,904,984 406,390,664 -18.1%

12 IntercontinentalExchange (includes U.S., U.K., and Canadian markets) 328,946,083 381,097,787 15.9%

13 United Stock Exchange of India 125,360,892 352,318,350 181.0%

14 Shanghai Futures Exchange 621,898,215 308,239,140 -50.4%

15 Dalian Commodity Exchange 403,167,751 289,047,000 -28.3%

16 ASX Group (includes ASX and ASX 24) 106,385,077 225,353,623 111.8%

17 TMX Group (includes BOX and Montreal Exchange) 136,051,028 201,660,687 48.2%

18 Osaka Securities Exchange 196,350,279 194,176,001 -1.1%

19 Taiwan Futures Exchange 139,792,891 182,995,171 30.9%

20 JSE South Africa 169,898,609 166,197,652 -2.2%

21 London Metal Exchange 120,258,119 146,597,545 21.9%

22 Tokyo Financial Exchange 121,278,095 144,901,960 19.5%

23 Hong Kong Exchanges & Clearing 116,054,377 140,493,472 21.1%

24 Boston Options Exchange 91,754,121 139,679,281 52.2%

25 Tel-Aviv Stock Exchange 80,440,925 98,965,159 23.0%

26 London Stock Exchange Group (includes Turquoise and IDEM) 88,433,932 86,285,501 -2.4%

27 Turkish Derivatives Exchange 63,952,177 74,287,630 16.2%

28 Singapore Exchange (includes AsiaClear) 61,593,687 72,119,650 17.1%

29 Mercado Español de Futuros y Opciones Financieros 70,224,176 67,572,131 -3.8%

30 Mercado a Término de Rosario 62,046,820 55,000,041 -11.4%


12.4%, which was better than the 8.9% rate of growth reported by its sister exchanges the Chicago Mercantile Exchange and the New York Mercantile Exchange.

One of the main reasons was a healthy increase in the trading of its benchmark fixed income contracts. The volume in the 10-year Treasury futures contract was up 8.1% to 317.82 million contracts. The Treasury futures complex as a whole–the full range of Treasury instruments from the two-year note to the ultra bond–was up 14.4% to 667.95 million contracts.

The picture is not quite as rosy if we take a longer view, however. Volumes in the 10-year and 30-year futures contracts are still below the peak set in 2007, and the two-year is still below where it was in 2008. The five-year is the only one to break new ground, up 29.1% to a new record of 170.56 million in 2011.

It’s the same story with the CBOT’s Treasury options. Only one of the options is more actively traded today than in 2007–the options on the two-year note futures. The options complex as a whole reached 77.37 million contracts in 2011, down by almost a fifth from 2007.

Likewise, volume in CME’s Eurodollar futures reached 564.09 million contracts in 2011, up 10.4% from 2010 but still well below the 2007 peak of 621.47 million.

As an aside, it’s worth noting that ELX and NYSE Liffe U.S. have barely made a dent in CME’s dominant position in the fixed income futures market. In the Euro-dollar futures market, their combined vol-ume amounted to 15.6 million contracts in 2011, which was equivalent to 2.7% of the total market. In the Treasury market, the two exchanges combined captured about 2.3% of the volume.

Meanwhile in Europe, Eurex’s bund, bobl and schatz contracts are also in recov-ery mode. After peaking at 690.33 million contracts in 2007, these three fixed income futures—the benchmarks for sovereign debt in the eurozone—sank to 412.18 million in 2009 before rebounding to 507.90 million in 2010 and 544.30 million in 2011. As with the CBOT Treasury complex, the Eurex fixed income futures are making a good recovery from the lows of 2009, but the volume is still not back to the pre-crisis peak.

The exchange’s fixed income options, on the other hand, set a new record in 2011, with combined volume in the bund, bobl and schatz options reaching 80.87 million contracts in 2011. That was up 28.6% over 2010 and 2.8% ahead of 2007’s volume.

Also worth noting was the growth in the

GlobalizationTwo thirds of the industry’s total volume is traded on exchanges outside the U.S.

Recovery ModeThe Chicago Board of Trade’s Treasury complex grew 12.5% in 2011, continuing its recovery from the 2008 credit crisis, but has not yet reached its pre-crisis peak

Note: Based on the volume of trading in all Treasury futures and options listed at the Chicago Board of Trade.

by almost three billion contracts. Its share of the global market would have been 31% instead of 39%, and North America’s share would have been 37% instead of 33%.

We don’t know yet how the change in size will affect the behavior of Korean inves-tors. Some retail investors may be discour-aged and leave the market, as the authorities are hoping, but some institutional investors

may welcome the larger size as a more ef-ficient way to trade. But we do know that thanks to the Kospi effect, Asia-Pacific’s place in the world will look quite a lot smaller at the end of 2012.

The Long Shadow of 20082011 was a good year for the Chi-

cago Board of Trade. Total volume was up

Exchange GroupsFutures and options volume broken down by subsidiary exchanges

Exchange 2010 2011 % Change

ASX 21,644,287 122,912,909 467.9%

ASX 24 84,740,790 102,440,714 20.9%

ASX Group 106,385,077 225,353,623 111.8%

Bolsa de Valores de São Paulo 803,470,201 840,967,001 4.7%

Bolsa de Mercadorias & Futuros 610,283,470 659,477,002 8.1%

BM&FBovespa 1,413,753,671 1,500,444,003 6.1%

Chicago Board Options Exchange 1,115,491,922 1,152,063,397 3.3%

C2 Exchange 3,610,470 52,818,616 1,362.9%

CBOE Futures Exchange 4,402,616 12,040,074 173.5%

CBOE Group 1,123,505,008 1,216,922,087 8.3%

Chicago Mercantile Exchange 1,656,415,731 1,804,312,467 8.9%

Chicago Board of Trade 923,593,304 1,037,747,075 12.4%

New York Mercantile Exchange 500,487,981 544,927,136 8.9%

CME Group 3,080,497,016 3,386,986,678 9.9%

Eurex 1,896,916,398 2,043,415,593 7.7%

International Securities Exchange 745,176,328 778,086,425 4.4%

Eurex 2,642,092,726 2,821,502,018 6.8%

ICE Futures Europe 217,120,773 269,003,783 23.9%

ICE Futures U.S. 107,174,831 107,287,467 0.1%

ICE Futures Canada 4,208,878 4,721,957 12.2%

Chicago Climate Futures Exchange 441,601 84,580 -80.8%

IntercontinentalExchange * 328,946,083 381,097,787 15.9%

* does not include OTC transactions

MCX-SX 884,606,842 850,129,060 -3.9%

Multi Commodity Exchange of India 197,206,801 346,192,991 75.5%

Multi Commodity Exchange of India 1,081,813,643 1,196,322,051 10.6%

Nasdaq OMX PHLX 846,895,365 983,485,204 16.1%

Nasdaq Options Market (U.S.) 142,922,225 194,199,918 35.9%

Nasdaq OMX (Nordic markets) 108,615,439 117,107,284 7.8%

Nasdaq OMX Commodities * 1,004,194 848,745 -15.5%

Nasdaq OMX 1,099,437,223 1,295,641,151 17.8%

* formerly Nord Pool

NYSE Liffe Europe 1,222,556,772 1,148,497,743 -6.1%

NYSE Amex Options 440,021,234 618,733,066 40.6%

NYSE Arca Options 488,093,760 495,343,827 1.5%

NYSE Liffe U.S. 4,070,516 20,898,174 413.4%

NYSE Euronext 2,154,742,282 2,283,472,810 6.0%


exchange’s BTP contract, which is based on Italian bonds and is offered by Eurex as an alternative way to manage risk for that part of the eurozone. BTP futures trading rose 70.9% to 2.39 million contracts in 2011, so it is still just a sapling in the fixed income forest, but it will be interesting to see if this contract continues to grow.

Options and VolatilityThe U.S. equity options market in gen-

eral had a very strong year. Volume at the nine U.S. equity options exchanges rose 17% to 4,562.75 million contracts, more than half of the total exchange-traded de-rivatives market in the U.S.

Most of that growth came in the in-dex products, especially the ETF options. Volume in the SPDR ETF options soared 59.7% to 729.48 million. That contract now ranks as the third most actively traded equity contract in the world. Volume in the iShares Russell 2000 ETF options rose 40.4% to 167.04 million, the ninth most actively traded in the world.

The number of single stock options traded in the U.S. grew by only 4.1% to 2,458.74 million contracts, but within that number there was considerable change in market share. Nasdaq OMX PHLX moved past the Chicago Board Options Exchange to claim the top position as the exchange with the highest number of contracts traded. NYSE Amex had the biggest gain in market share, rising to 14.5% from 12.2%. And Bats had the most impressive increase in volume, ris-ing 481% to 88.51 million contracts.

Most impressively of all, six out of the nine U.S. equity options exchanges rank among the 10 largest markets in the world for single stock options. Brazil’s BM&FBovespa is the only exchange in the world that trades more single stock options than the U.S. exchanges.

Among the hottest products of the year in the equity sector were the volatility contracts offered by the CBOE and CBOE Futures Ex-change. These contracts, which are based on the implied volatility of the equity markets, were introduced more than five years ago but really hit their stride in the last three years.

Vix options volume grew from 33.3 mil-lion in 2009 to 62.5 million in 2010 and then jumped again to 98.0 million in 2011. To put that into perspective, Vix options were the 14th most actively traded equity index product in the world last year and the sixth most actively traded in the U.S.

Meanwhile, Vix futures volume grew from 1.4 million in 2009 to 4.4 million in

Volume Survey


2010, then nearly tripled to 12.0 million in 2011. One reason for the surge in trading activity was the popularity of exchange-traded notes based on the Vix. The banks that issue those notes often use the Vix fu-tures to hedge their price risk.

Outside the U.S., equity index products were up strongly at many exchanges. In In-dia, the NSE’s main stock index product, the S&P CNX Nifty index options, surged in popularity, with volume rising 64.3% to 868.68 million contracts. In Russia, the RTS index futures grew even more rapidly, soaring 68.2% to 377.85 million contracts. In Tai-wan, the Taiex options increased 31.5% to 125.77 million. And in Israel, the TA-25 op-tions rose 23.5% to 87.13 million contracts.

In most cases, the home market for the underlying equities is also the home market for the related equity index derivatives. There is one notable exception, however. Futures on the Nikkei 225, the benchmark index for Japanese equities, are traded on three exchanges—the Osaka Securities Exchange, the Singapore Exchange, and CME—and all three have a significant share of the market.

OSE offers two versions: the standard Nikkei 225 futures and a mini contract that is 10 times smaller. SGX offers two versions, but most of its volume is in a contract that is half the size of the main OSE contract. CME offers one contract with the same size as the SGX contract and another denomi-nated in U.S. dollars.

After adjusting for contract size, OSE is very much the primary market, with its large and mini Nikkei futures accounting for about two thirds of the global volume. On the other hand, it is losing ground to its ri-vals. In 2011, the amount of trading activity in the OSE’s Nikkei 225 contracts declined 11.2%. SGX’s volume in its main contract was essentially flat, and CME’s volume in the yen Nikkei contract was up 50.2%.

It should be noted, however, that the market for the Nikkei 225 options is much less fragmented. Although SGX offers op-tions on the Nikkei 225, more than 95% of the volume is traded in Osaka.

Brent vs. WTIAs with the rest of the market, the story

in energy was a combination of several ma-jor trends. The most obvious, though hardly a new trend, was the growing use of the Brent crude oil contract traded at ICE Fu-tures Europe as a benchmark for oil prices. In 2011, volume in the Brent contract rose 32.0% to 132.05 million contracts. In con-trast, the West Texas Intermediate contract traded at Nymex, the benchmark crude oil futures in the U.S., grew just 3.8% to 175.04 million.

Over the last five years, volume in Brent futures has risen 121.1% while the Nymex WTI rose 44%. While the Brent contract still has a way to go before it displaces the Nymex contract as the king of the energy world, the gap is narrowing every year.

On the other hand, Nymex has a much deeper options market. In 2011, the volume in its main WTI crude oil options contract reached 36.72 million contracts, up 12.0%

Top 10 Equity Options ExchangesBased on the number of single stock equity options traded*

Rank Exchange 2010 2011 % Change

1 BM&FBovespa 802,229,293 838,325,495 4.5%

2 Nasdaq OMX PHLX 549,082,761 590,460,514 7.5%

3 Chicago Board Options Exchange 574,194,158 496,905,783 -13.5%

4 International Securities Exchange 470,680,991 430,641,061 -8.5%

5 NYSE Amex 287,207,967 356,637,924 24.2%

6 NYSE Arca 305,235,039 277,507,031 -9.1%

7 Eurex 308,858,688 275,330,936 -10.9%

8 NYSE Liffe 175,228,607 150,562,241 -14.1%

9 ASX 15,455,208 108,860,114 604.4%

10 Nasdaq Options Market 90,478,075 106,891,519 18.1%

* Does not include index or ETF options

International ArbitrageThe Osaka Securities Exchange is still the primary market for Nikkei 225 futures, but Singapore Exchange and CME Group accounted for more than a third of the total volume.

Note: Market share has been adjusted for contract size. Data for CME does not include contracts denominated in U.S. dollars.

39.0% OSE Nikkei 225 Large

29.4% SGX Nikkei 225

23.9% OSE Nikkei 225 Mini

7.8% CME Nikkei 225


Top 20 Energy Futures & Options ContractsRank Contract Contract Size 2010 2011 % Change

1 Light Sweet Crude Oil Futures, Nymex 1,000 barrels 168,652,141 175,036,216 3.8%

2 Brent Crude Oil Futures, ICE Futures Europe 1,000 barrels 100,022,169 132,045,563 32.0%

3 Natural Gas Futures, Nymex 10,000 MMBTU 64,323,068 76,864,334 19.5%

4 Gasoil Futures, ICE Futures Europe 100 tonnes 52,296,582 65,774,151 25.8%

5 Crude Oil Futures, MCX 100 barrels 41,537,053 54,753,722 31.8%

6 WTI Crude Oil Futures, ICE Futures Europe 1,000 barrels 52,586,415 51,097,818 -2.8%

7 Crude Oil Options on Futures, Nymex 1,000 barrels 32,785,267 36,716,805 12.0%

8 No. 2 Heating Oil Futures, Nymex 42,000 gal 26,970,106 31,838,626 18.1%

9 NY Harbor RBOB Gasoline Futures, Nymex 42,000 gal 27,898,698 31,129,256 11.6%

10 U.S. Oil Fund ETF Options* NA 15,191,991 28,881,647 90.1%

11 Nat. Gas European-Style Opt. on Futures, Nymex 10,000 MMBTU 23,957,725 23,773,183 -0.8%

12 Henry Hub Swap Futures, Nymex 2,500 MMBTU 20,417,178 20,825,660 2.0%

13 Brent Oil Futures, RTS 10 barrels 11,127,254 18,707,384 68.1%

14 U.S. Natural Gas Fund ETF Options* NA 19,180,569 12,818,730 -33.2%

15 Natural Gas Futures, MCX 1,250 MMBTU 11,176,937 9,882,133 -11.6%

16 Nat. Gas Penultimate Swap Futures, Nymex 2,500 MMBTU 8,995,324 7,384,147 -17.9%

17 EUA Futures, ICE Futures Europe 1,000 EUAs 4,263,655 5,444,050 27.7%

18 Crude Oil Futures, NCDEX 100 barrels 2,277,091 4,223,480 85.5%

19 miNY Crude Oil Futures, Nymex 500 barrels 3,157,814 3,000,140 -5.0%

20 Crude Oil 1 Month CSO Opt. on Futures, Nymex 1,000 barrels 2,049,582 2,886,427 40.8%

* Traded on multiple U.S. options exchanges

Top 20 Agricultural Futures & Options ContractsRank Contract Contract Size 2010 2011 % Change

1 Cotton No. 1 Futures, ZCE 5 tonnes 86,955,310 139,044,152 59.9%

2 White Sugar Futures, ZCE 10 tonnes 305,303,131 128,193,356 -58.0%

3 Rubber Futures, SHFE 5 tons 167,414,912 104,286,399 -37.7%

4 Corn Futures, CBOT 5,000 bushels 69,841,420 79,004,801 13.1%

5 Soy Oil Futures, DCE 10 tonnes 91,406,238 58,012,550 -36.5%

6 Soy Meal Futures, DCE 10 tonnes 125,581,888 50,170,334 -60.0%

7 Soybeans Futures, CBOT 5,000 bushels 36,933,960 45,143,755 22.2%

8 Corn Options on Futures, CBOT 5,000 bushels 20,810,260 28,650,380 37.7%

9 Corn Futures, DCE 10 tonnes 35,999,573 26,849,738 -25.4%

10 No. 1 Soybeans Futures, DCE 10 tonnes 37,393,600 25,239,532 -32.5%

11 Sugar #11 Futures, ICE Futures U.S. 50 long tons 29,052,539 24,629,369 -15.2%

12 Wheat Futures, CBOT 5,000 bushels 23,090,255 24,283,331 5.2%

13 Soybean Oil Futures, CBOT 60,000 lbs 20,791,164 24,156,509 16.2%

14 Palm Oil Futures, DCE 10 tonnes 41,799,813 22,593,961 -45.9%

15 Soybean Meal Futures, CBOT 100 short tons 14,052,845 16,920,194 20.4%

16 Live Cattle Futures, CME 40,000 lbs 11,332,739 13,532,554 19.4%

17 Soybeans Options on Futures, CBOT 5,000 bushels 10,046,345 13,236,367 31.8%

18 Lean Hogs Futures, CME 40,000 lbs 8,076,535 9,969,961 23.4%

19 Guar Seed Futures, NCDEX 10 tonnes 10,937,797 8,998,515 -17.7%

20 Strong Gluten Wheat Futures, ZCE 10 tonnes 5,804,642 7,909,755 36.3%

Volume Survey


Top 20 Foreign Exchange Futures & Options ContractsRank Contract Contract Size 2010 2011 % Change

1 U.S. Dollar/Indian Rupee Futures, MCX-SX 1,000 USD 821,254,927 807,559,846 -1.7%

2 U.S. Dollar/Indian Rupee Futures, NSE India 1,000 USD 699,042,420 697,825,411 -0.2%

3 U.S. Dollar/Indian Rupee Futures, USE* 1,000 USD 124,766,134 340,576,642 173.0%

4 U.S. Dollar/Indian Rupee Options, NSE India** 1,000 USD 6,277,165 252,807,126 3927.4%

5 U.S. Dollar/Russian Ruble Futures, RTS 1,000 USD 81,122,195 206,820,695 154.9%

6 U.S. Dollar Futures, BM&F 50,000 USD 82,453,621 86,167,955 4.5%

7 Euro FX Futures, CME 125,000 Euro 86,232,358 84,236,825 -2.3%

8 U.S. Dollar Futures, KRX 10,000 USD 64,256,678 70,212,467 9.3%

9 U.S. Dollar Futures, Rofex 1,000 USD 61,729,396 54,373,381 -11.9%

10 Euro/U.S. Dollar Futures, RTS 1,000 Euro 39,476,420 45,657,240 15.7%

11 Australian Dollar/Japanese Yen Futures, TFX 10,000 AUD 34,272,436 41,589,199 21.3%

12 U.S. Dollar/Japanese Yen Futures, TFX 10,000 USD 27,551,634 31,441,164 14.1%

13 Australian Dollar Futures, CME 100,000 AUD 25,903,355 30,751,538 18.7%

14 Euro/Indian Rupee Futures, MCX-SX 1,000 Euro 46,411,303 29,403,759 -36.6%

15 British Pound Futures, CME 62,500 GBP 30,220,239 29,028,755 -3.9%

16 Japanese Yen Futures, CME 12,500,000 Yen 31,862,793 28,369,147 -11.0%

17 Euro/Japanese Yen Futures, TFX 10,000 Euro 19,921,565 26,769,174 34.4%

18 Canadian Dollar Futures, CME 100,000 CAD 22,083,807 22,416,680 1.5%

19 U.S. Dollar Rollover Futures, BM&F 50,000 USD 19,223,570 20,145,632 4.8%

20 Euro/Indian Rupee Futures, NSE India 1,000 Euro 17,326,787 18,065,186 4.3%

* Began trading in September 2010 ** Began trading in October 2010

Top 20 Equity Index Futures & Options ContractsRank Contract Index Multiplier 2010 2011 % Change

1 Kospi 200 Options, KRX 100,000 Korean won 3,525,898,562 3,671,662,258 4.1%

2 S&P CNX Nifty Index Options, NSE India 100 Indian rupees 528,831,609 868,684,582 64.3%

3 SPDR S&P 500 ETF Options* NA 456,863,881 729,478,419 59.7%

4 E-mini S&P 500 Index Futures, CME 50 U.S. dollars 555,328,670 620,368,790 11.7%

5 Euro Stoxx 50 Futures, Eurex 10 Euros 372,229,766 408,860,002 9.8%

6 RTS Index Futures, RTS 2 U.S. dollars 224,696,733 377,845,640 68.2%

7 Euro Stoxx 50 Index Options, Eurex 10 Euros 284,707,318 369,241,952 29.7%

8 S&P 500 Index Options, CBOE 100 U.S. dollars 175,291,508 197,509,449 12.7%

9 iShares Russell 2000 ETF Options* NA 118,975,104 167,040,702 40.4%

10 Powershares QQQ ETF Options* NA 121,401,264 137,923,379 13.6%

11 Taiex Options, Taifex 50 New Taiwan dollars 95,666,916 125,767,624 31.5%

12 S&P CNX Nifty Index Futures, NSE India 100 Indian rupees 128,392,858 123,144,880 -4.1%

13 Nikkei 225 Mini Futures, OSE 100 Yen 125,113,769 117,905,210 -5.8%

14 Volatility Index Options, CBOE 100 U.S. dollars 62,452,232 97,988,951 56.9%

15 Kospi 200 Futures, KRX 500,000 Korean won 86,214,025 87,274,461 1.2%

16 TA-25 Index Options, TASE 100 New Israeli shekels 70,573,392 87,133,824 23.5%

17 Financial Select Sector SPDR ETF Options* NA 69,351,047 81,871,564 18.1%

18 E-mini Nasdaq 100 Futures, CME 20 U.S. dollars 79,637,745 75,165,277 -5.6%

19 iShares MSCI Emerging Markets Index* NA 58,287,483 70,577,232 21.1%

20 Dax Options, Eurex 5 Euros 75,123,356 67,616,997 -10.0%

* Traded on multiple U.S. options exchanges


Top 20 Metals Futures & Options ContractsRank Contract Contract Size 2010 2011 % Change

1 Steel Rebar Futures, SHFE 10 tonnes 225,612,417 81,884,789 -63.7%

2 iShares Silver Trust ETF Options* NA 21,187,121 79,433,438 274.9%

3 SPDR Gold Shares ETF Options* NA 54,737,222 74,967,191 37.0%

4 High Grade Primary Aluminum Futures, LME 25 tonnes 46,537,180 59,558,330 28.0%

5 Zinc Futures, SHFE 5 tonnes 146,589,373 53,663,483 -63.4%

6 Gold Futures, Nymex 100 ozs 44,730,345 49,175,593 9.9%

7 Copper Futures, SHFE 5 tonnes 50,788,568 48,961,130 -3.6%

8 Silver MIC Futures, MCX** 1 kilogram 0 46,865,399 NA

9 Silver M Futures, MCX 5 kilograms 21,325,577 46,804,425 119.5%

10 Copper - Grade A Futures, LME 25 tonnes 29,949,765 34,537,310 15.3%

11 Copper Futures, MCX 1 tonne 31,341,022 34,011,417 8.5%

12 Gold Petal Futures, MCX*** 1 grams 0 31,086,737 NA

13 Gold M Futures, MCX 100 gram 15,307,163 26,200,601 71.2%

14 Silver Futures, MCX 30 kilograms 16,440,533 24,434,577 48.6%

15 Special High Grade Zinc Futures, LME 25 tonnes 18,065,641 21,984,302 21.7%

16 Silver Futures, Nymex 5,000 ozs 12,826,666 19,608,557 52.9%

17 Gold Futures, TOCOM 1 kilogram 12,198,340 16,075,145 31.8%

18 Nickel Futures, MCX 250 kilograms 17,929,207 15,126,636 -15.6%

19 Gold Futures, RTS 1 oz 5,562,423 13,018,359 134.0%

20 Gold Futures, MCX 1 kilogram 12,052,225 12,655,765 5.0%

* Traded on multiple U.S. options exchanges ** Began trading in February 2011 *** Began trading in April 2011

Top 20 Interest Rate Futures & Options ContractsRank Contract Contract Size 2010 2011 % Change

1 Eurodollar Futures, CME 1,000,000 USD 510,955,113 564,086,746 10.4%

2 One Day Inter-Bank Deposit Futures, BM&F 100,000 Real 293,065,417 320,821,062 9.5%

3 10 Year Treasury Note Futures, CBOT 100,000 USD 293,718,907 317,402,598 8.1%

4 3 Month Euribor Futures, Liffe U.K. 1,000,000 Euro 248,504,960 241,950,875 -2.6%

5 Euro-Bund Futures, Eurex 100,000 Euro 231,484,529 236,188,831 2.0%


7 Euro-Schatz Futures, Eurex 100,000 Euro 140,923,898 165,798,952 17.7%

8 Euro-Bobl Futures, Eurex 100,000 Euro 133,851,275 142,309,151 6.3%

9 Euribor Options on Futures, Liffe U.K. 1,000,000 Euro 121,077,679 126,535,338 4.5%

10 Short Sterling Futures, Liffe U.K. 500,000 GBP 112,944,490 115,586,702 2.3%

11 Eurodollar Options on Futures, CME 1,000,000 USD 106,893,369 100,855,181 -5.6%

12 IDI Index Options on Futures, BM&F 1 Real 88,014,027 95,790,772 8.8%

13 Eurodollar Mid-Curve Options on Futures, CME 1,000,000 USD 76,490,147 92,429,741 20.8%

14 30 Year Treasury Bond Futures, CBOT 100,000 USD 83,509,754 92,338,638 10.6%


16 10 Year Treasury-Note Opti. on Futures, CBOT 100,000 USD 55,280,257 50,797,081 -8.1%

17 3 Year Treasury Bond Futures, ASX 24 100,000 AUD 34,482,136 41,662,349 20.8%

18 Options on Euro-Bund, Eurex 100,000 Euro 39,301,301 38,154,098 -2.9%

19 Long Gilt Futures, Liffe U.K. 100,000 GBP 28,525,983 34,362,932 20.5%

20 3 Year Treasury Bond Futures, KRX 100 million KRW 26,922,414 34,140,210 26.8%

Volume Survey


from 2010, and volume in one-month calen-dar spread options rose 40.8% to 2.89 mil-lion contracts. Brent options trading on ICE had a remarkable jump in volume in 2011, rising from a mere 165,000 contracts in 2010 to 2.2 million contracts, but that is just a tiny fraction of what’s traded at Nymex.

ICE and Nymex have been fierce com-petitors for many years. In fact, it was ICE’s listing of WTI futures that triggered Ny-mex’s decision to adopt CME’s electronic trading platform. Lately, however, the di-rect head-to-head competition in WTI has lessened. ICE’s volume in WTI futures has hovered around 51 million contracts a year over the last five years. With the 44% growth in WTI trading at Nymex during the same time-frame, that caused ICE’s share of the combined market to fall from just under 30% in 2007 to 22.6% in 2011.

Both exchanges reported strong growth in the trading of refined products. The gasoil contract traded at ICE rose 25.8% to 65.77 million, while at Nymex, heating oil futures rose 18.1% to 31.84 million and gasoline fu-tures rose 11.6% to 31.13 million contracts.

Ironically, the hottest energy contract of all wasn’t traded on either exchange. Op-tions on the USO ETF, an exchange-traded

fund that invests in oil futures, were tre-mendously popular in 2011. Volume in that contract, which trades on multiple U.S. op-tions exchanges, exploded 90.1% to 28.88 million contracts.

Bumpy Ride in ChinaIn the agricultural futures markets, two

countries dominate—the U.S. and China. In 2011, the amount of trading activity in these two countries went in opposite directions.

A look at the top 20 table for agricultural futures tells the story. Volume in the white sugar futures contract, last year’s number one contract in the agricultural sector, fell by more than half at the Zhengzhou Com-modity Exchange. Rubber futures trading was down 37.7% at the Shanghai Futures Exchange. The Dalian Commodity Ex-change’s soy oil and soy meal futures were down 36.5% and 60.0% respectively, and its palm oil futures fell 45.9%. The biggest decline of all was in rice futures traded at ZCE. Volume in that contract went from 26.85 million in 2010 to 5.93 million in 2011, a decline of 77.9%.

These were huge declines, and all the more dramatic given the rapid increases in past years. In 2010, ZCE’s white sugar

futures contract more than doubled in vol-ume, and trading in DCE’s cotton futures contract increased by more than 900%. As for rice futures, that contract had only been introduced in April 2009.

No wonder the Chinese commodity ex-changes had a down year in 2011. ZCE, currently the largest of the three, was down 18.1%; DCE fell 28.3%; and SHFE sank 50.4%. In the case of SHFE, the decline was broader than just agricultural contracts. Its steel rebar futures plummeted from 225.61 million contracts traded in 2010 to 81.88 million in 2011, a decline of 63.7%. Like-wise, its zinc futures fell from 146.59 mil-lion to 53.66 million, a decline of 36.6%.

In contrast, the U.S. agricultural fu-tures market reported solid but not spec-tacular gains. Corn and soybean volumes at the CBOT were up 13.1% and 22.2%, respectively. Wheat futures volume at the Kansas City Board of Trade was up 15.5%. On the other hand, the sugar futures traded on ICE Futures U.S. was down 15.2%, so clearly the rising tide did not lift all boats. ..............Will Acworth is the editor of Futures Industry.

®Center for International Law

The John Ma r s ha l l L a w Scho o l Ce n t e r f o r I n t e r na t i ona l La w

For information or to register, go to www.events.jmls.edu/derivatives or call 312.360.2659.

Derivatives: The Changing Legal and Compliance Landscape Recent Developments in the Regulation of Futures and the Impact of Dodd-Frank Clearing Issues and Systemic Risk Current Issues in Enforcement and Litigation

2012 Conference

Tuesday, April 17, 2012, 9 a.m. to 5 p.m.

The John Marshall Law School, 315 S. Plymouth Ct., Chicago


There are important differences among countries, however, reflecting the characteristics of the local market

and the priorities of the local regulator. In this article, we describe progress towards OTC clearing in three jurisdictions that are relatively far along in the process—Japan, Singapore and Hong Kong.

Japan expects to begin offering clearing in October for its interest rate swaps market, the largest in the region. Singapore already has begun clearing interest rate swaps and is hoping to capitalize on certain comparative advantages to attract business. Hong Kong is leveraging its proximity to China to carve out a niche as the center for clearing deriva-tives denominated in renminbi.

Japan: IRS Clearing by OctoberJapan in some respects has made the most progress of all the countries in the Asia-Pacific region. Legislation mandating central clearing was enacted in May 2010, before both the U.S. and Europe. The Ja-pan Securities Clearing Corporation has begun clearing credit default swaps and

All around the Asia-Pacific region, regulators are putting in place requirements for mandatory clearing

of over-the-counter derivatives. At the same time, new services for the clearing of OTC derivatives

are being developed in every major financial center in the region. While the landscape is still far from

final, at least five countries are on track to have OTC clearing services available for some portion of the

market by the end of this year.

OTC Clearing In Asia: Under ConstructionBy Will Acworth

expects to begin clearing interest rate swaps in October.

Rather than building a new clearinghouse from scratch, Japan’s dealers coalesced around the JSCC, a clearinghouse owned by the To-kyo Stock Exchange that serves the cash equi-ties and corporate bond markets as well as the TSE’s futures and options markets.

After extensive consultation with dealers, the JSCC launched clearing in July 2011 for its first set of OTC derivatives: five-year credit default swaps based on the iTraxx Japan index of 50 investment-grade Japanese corporations. Markit, the owner of the iTraxx indices, pro-vides the pricing data, and Calypso Technol-ogy, a specialist software provider, provides the technology that JSCC is using to manage the clearing service. Trades are submitted af-ter they are matched on DerivServ, a service maintained by the New York-based Deposi-tory Trust and Clearing Corporation that is widely used among dealers.

The JSCC’s CDS clearing service has not been very active so far. As of year-end 2011, the clearinghouse had cleared only 96 trans-actions worth 128.68 billion yen in notional

value ($1.58 billion). Part of the reason is that only five entities have signed up as clearing members: Daiwa Securities Capital Markets; Mitsubishi UFJ Morgan Stanley Securities; Mizuho Securities; Morgan Stanley MUFG Securities; and Nomura Securities.

Next up are interest rate swaps, a much bigger prize. Interest rate swaps account for 73.5% of the total OTC market in Japan, and approximately half of the entire region’s interest rate swaps market, according to es-timates from the International Swaps and Derivatives Association.

JSCC has been discussing its plans with regulators and swap dealers and is on track to start clearing “plain vanilla” yen-denom-inated swaps in October. According to a detailed plan recently published by JSCC, the clearinghouse plans to accept yen-de-nominated interest rate swaps referencing three-month and six-month yen Libor, with durations of up to 40 years. Margins will be determined by using a scaled historical value-at-risk methodology. Members will be able to post cash, Japanese government bonds and U.S. Treasuries as collateral.


About six months after the initial launch, JSCC plans to expand the range of clearable contracts to include interest rate swaps refer-encing one-month Libor and six-month Ti-bor. Clearing initially will be limited to trades involving clearinghouse members and their affiliates, but JSCC intends to begin offering true client clearing about a year after launch.

One big issue ahead is whether the JSCC will be the only option for clearing in the Japanese interest rate swaps market. Japan’s Financial Services Agency has been meeting with market participants as it prepares the regulations that will implement the clearing mandate, and several industry sources said the FSA is leaning towards a domestic-only requirement for some portion of the market.

That poses an issue for global dealers. Many of them already have begun using LCH.Clearnet for their yen-denominated interest rate swaps and would like to continue. As

of mid-February, LCH.Clearnet had cleared 158,000 yen-denominated interest rate swaps with a notional value of 2,903 trillion yen ($35.7 trillion). Virtually all the major dealers are members, including two Japanese banks—Mitsubishi UFJ and Nomura.

The position of the global dealers was spelled out by ISDA in a September letter to the FSA. The association agreed that purely domestic transactions should be cleared on-shore, but urged the FSA to allow counter-parties to cross-border transactions to have some choice in where they clear their trans-actions. In practical terms, this would allow a yen-based swap between a European bank and a foreign branch of a Japanese bank to be cleared at an offshore clearinghouse, pro-vided that the clearinghouse meets Japanese standards. ISDA estimated that 58% of the Japanese swap market would be subject to the FSA’s clearing mandate, but only 19% of the transactions would fall into the cat-egory of “must be cleared onshore” because both booking parties are located onshore.

The most recent development came at the end of December, when the FSA held a meeting with market participants to dis-cuss progress towards meeting the G-20 goals. According to a summary issued by the FSA, the clearing mandate initially will

apply only to swap dealers with a “signifi-cant” amount of business in clearing-eligi-ble yen-denominated swaps. The summary was silent on whether those firms would be able to use an offshore clearinghouse such as LCH.Clearnet to meet that requirement.

The FSA also said that it will establish a regulatory framework for the use of electronic trading platforms for OTC derivatives. That is a departure from trends elsewhere in the region; most other regulators are concentrat-ing on just clearing and reporting. The FSA explained that electronic trading platforms for swaps would give regulators more oversight of the market, improve price transparency, pro-mote straight-through processes, and improve the market’s resiliency in financial crises. The FSA noted, however, that actual implementa-tion could take up to three years and will be limited initially to inter-dealer trading in plain vanilla interest rate swaps.

Singapore: Pragmatic ApproachWhile Japan was the first to begin imple-menting the G-20 reforms, Singapore has made the most progress in terms of actual clearing activity. The Singapore Exchange began clearing commodity derivatives in 2006 (see “The Many Flavors of OTC Clearing” in the June 2009 issue of Futures Industry). In November 2010 SGX intro-duced clearing for interest rate swaps de-nominated in Singapore and U.S. dollars, and in November 2011 it added non-deliv-erable forwards, a type of currency deriva-tive, in seven currency pairs.

SGX’s clearing service for interest rate swaps and NDFs is based on a different

platform than what it uses for traditional futures and options. The membership cri-teria are more strict; only banks licensed in Singapore with at least one billion Sin-gapore dollars in capital are eligible. And the technology comes from a different pro-vider; SGX uses the Secur system developed by Nasdaq OMX for listed derivatives and commodity swaps, but uses Calypso for in-terest rate swaps and NDFs.

Trades are submitted to the clearing-house via approved third-party trade reg-istration systems, such as MarkitWire for interest rate swaps and Thomson Reuters for NDFs. To calculate margin, SGX uses a historical simulation Value-at-Risk methodology. Each clearing member’s ex-posure is marked-to-market three times a day and margin requirements adjusted accordingly. Clearing fund contributions are set at a minimum of $10 million.

Although the use of the service is vol-untary—the Singapore authorities have not yet implemented a clearing man-date—11 banks have signed up as clear-ing members for interest rate swaps. Of this group, three are local banks and the rest are based in Europe, Japan and the U.S. As of the end of 2011, $186 billion in notional value of interest rate swaps had been cleared since launch, not an especially large number in the OTC de-rivatives world but more than any other clearinghouse in the region.

Industry reactions are mixed. Some clearing firms that have joined the SGX initiative commented that they saw it more as an obligation than an opportunity, while

While Japan was the first to begin implementing the G-20 reforms,

Singapore has made the most progress in terms of actual

clearing activity.’’

sgX Clearing Members for otC Financial derivatives

• Barclays Bank PLC

• Citibank N.A.

• Credit Suisse AG

• DBS Bank Limited

• Deutsche Bank AG

• The Hong Kong and Shanghai Banking Corporation Limited

• Overseas-Chinese Banking Corporation Limited

• The Royal Bank of Scotland PLC

• Standard Chartered Bank

• United Overseas Bank Limited

• UBS AG


others said they are actively preparing to use the service.

One example of the latter is Royal Bank of Scotland, which is planning to clear its Asian NDF business through SGX. RBS officials explained that they see clearing as an impor-tant complement to their FX prime broker-age business in Asia, and intend to use SGX because it offers clearing in a wider range of Asian currencies than LCH.Clearnet.

SGX currently offers NDF clearing in seven Asian currencies: Chinese renminbi, Indian rupee, Indonesian rupiah, Korean won, Malaysian ringgit, Philippine peso, and Taiwan dollar. (LCH.Clearnet offers clearing for NDFs in only three Asian currencies.) SGX will accept NDFs with a term of up to one year and 10 days, which captures most of the commonly traded instruments in the market, according to one industry source.

That points to one of Singapore’s compara-tive advantages. There is a sizeable amount of NDF trading in Asia, and many of the lead-ing brokers use Singapore as the hub for their trading desks. Using the local clearinghouse is a logical extension of that trading activity.

Another comparative advantage is the appeal to Singapore banks that cannot or do not want to join the global clearinghouses. For local banks like DBS, OCBC and UOB, the ability to offer interest rate swaps is an important part of their corporate banking business. The Singaporean banks also are important players in the currency market, particularly as counterparties for local banks in other countries in the region. One indus-try source commented that the economics of clearing at SGX will look especially at-tractive for these banks when the Basel 3 capital requirements take effect. This will require banks to set aside more capital for OTC derivatives that are not cleared.

Meanwhile, the Monetary Authority of Singapore is working on regulations that will implement the mandatory clearing and reporting provisions agreed to by the G-20. In mid-February, the MAS issued a consul-tation paper on the regulatory oversight of the over-the-counter derivatives market in Singapore. The proposed regulatory regime will cover both financial and commodity derivatives and includes provisions requir-ing the use of clearinghouses and trade repositories as well as rules for market op-erators, clearing facilities, trade repositories and market intermediaries.

In terms of who will be required to clear their OTC trades, the MAS proposal is fairly broad. The consultation paper pro-poses that the clearing obligation will apply

to all contracts with at least one leg booked in Singapore and with at least one counter-party present in Singapore.

On the other hand, the regulator did not propose that all trades subject to the clear-ing mandate should be cleared by the local clearinghouse. The MAS said such an ap-proach would have a number of negative consequences, including limiting choices for market participants and the “fragmentation of liquidity.” The MAS also said that such an approach would reduce netting benefits and increase costs for financial institutions cur-rently clearing with foreign clearinghouses. The MAS instead proposed a mutual recog-nition framework under which foreign clear-inghouses could apply for authorization to offer their services in Singapore.

To determine which OTC derivatives should be subject to the clearing mandate, the MAS proposal said it would look at such factors as potential for systemic risk, degree of standardization, depth and liquid-ity of the market, availability of pricing data, the clearinghouse’s risk management capabilities, and the “international regula-tory approach” to that type of contract. The MAS tentatively identified two types of products as fulfilling these criteria—interest rate swaps denominated in Singapore and U.S. dollars and NDFs in Asian currencies.

Another interesting feature of the MAS consultation is that it does not propose mandatory trading on electronic platforms or exchanges. The MAS acknowledged that the G-20 declaration called for such a re-quirement where appropriate, but said it is talking with the industry on the potential costs and benefits and taking into consid-eration the characteristics of the OTC de-rivatives market in Singapore. The MAS also said it will continue to work with the industry to “encourage” trading of OTC de-rivatives on organized platforms.

Hong Kong: The Gateway StrategyIn Hong Kong, regulatory and commer-cial initiatives are advancing rapidly. The Hong Kong authorities—the Hong Kong Monetary Authority and the Securities and Futures Commission—issued a joint con-sultation paper in October laying out their vision for the regulatory framework, while Hong Kong Exchanges and Clearing is busy constructing an OTC clearing service.

As in Singapore, the focus is on interest rate swaps and NDFs. The key difference is the linkage to Hong Kong’s status as the offshore center for renminbi. The Chinese

government is using Hong Kong as the testing ground for its long-term strategy of making the Chinese currency fully convert-ible. As a result, HKEX and its regulators are particularly focused on the clearing of derivatives based on renminbi.

In their consultation paper, the HKMA and the SFC proposed allowing overseas clearinghouses to register with the local au-thorities and provide their clearing services in Hong Kong. On the other hand, they also asked for comment on whether only domes-tic clearinghouses should be designated for products with “systemic importance.”

“Our initial thinking was that such a re-striction may not be necessary” and could lead to a “proliferation of CCPs” that would fragment the market and reduce liquidity, they said in the consultation. “However, more recently, concerns have been raised about per-mitting overseas CCPs to clear transactions in domestic products that are of systemic impor-tance.” The regulators pointed in particular to concerns raised by regulators in Australia and Japan about the potential macroeconomic im-plications if systemically important products are cleared offshore.

HKEX, in its response to the consulta-tion, agreed that OTC derivatives with sys-temic importance to the Hong Kong finan-cial system should be subject to an onshore clearing requirement. HKEX explained that a financial institution subject to the new regulatory framework should be required to use a Hong Kong clearinghouse to clear renminbi-denominated interest rate swaps or renminbi forwards.

Taking the opposite side was the Man-aged Funds Association, a Washington-based group that represents hedge funds and commodity trading advisors. In its response to the consultation, the MFA warned that if the HKMA and SFC do not permit for-eign clearinghouses to become designated CCPs, the derivatives market could become fragmented along jurisdictional lines. That could cause “significant harm” to the mar-kets, MFA said, by impeding competition, impairing portability and interoperability, limiting participant access to clearing, and ultimately creating “artificial barriers” across a global marketplace and instrument type.

Another important feature of the pro-posed regulations is that the clearing re-quirement would apply not only to trades that are booked to a financial institution in Hong Kong but also to trades that are “originated or executed” by a financial in-stitution in Hong Kong. The regulators ex-plained that much of the OTC derivatives

Asia Clearing

activity in Hong Kong is not booked in Hong Kong. Instead the Hong Kong arm in most cases is the sales desk or trading desk, rather than the ultimate counterparty. Consequently, a clearing mandate would not be effective, they said, if it applies only to counterparties.

Another key characteristic of the emerg-ing regime in Hong Kong is the concept of a “threshold” for determining what should be cleared. A market participant whose swaps trading is below this threshold would not be subject to the clearing requirement. The Hong Kong regulators said in their consul-tation paper that this would ease the cost burden on less active players. But organiza-tions such as the MFA point out that this will be difficult to implement, given that a firm’s outstanding swaps can fluctuate sig-nificantly from month to month.

The Hong Kong regulators are now di-

gesting the responses to the October con-sultation and preparing to issue another more detailed consultation in the first quarter that will set out the details of the mandatory obligations, such as to whom the obligations apply, the types of transac-tions that are covered, the manner in which the obligations must be fulfilled, and the procedures for designation as an authorized clearinghouse. HKMA officials have said that they are “tentatively” targeting January 2013 for the new regulations, with a six-month grace period before banks and other financial institutions have to comply with the mandatory clearing requirements.

Meanwhile, HKEX is moving forward with its plans to build a new clearinghouse for OTC derivatives. The new clearing-house will support interest rate swaps and NDFs in the initial phase, with OTC eq-uity derivatives and other asset classes un-der consideration. HKEX officials said the exchange recognizes that the processing of OTC derivatives is more complex than the futures and options that it now clears, and for that reason it has contracted with Ca-lypso for a new clearing and risk manage-ment platform for these products. By the middle of 2012, it expects to begin testing the new system with market participants.

Dealers PrepareAlthough the clearing landscape in Asia-Pa-cific is far from finished, a number of lead-ing clearing firms are moving now to build an OTC clearing service for Asian clients. Executives at several major clearing firms said they are bringing additional staff into the region, assessing the risks and rewards of joining various clearing initiatives, talking with clients about margin requirements and clearinghouse rules, and generally preparing for the introduction of OTC clearing.

For example, Christopher Perkins, global head of OTC clearing at Citi, has been crisscrossing the region over the last several months, meeting with customers and regula-tors. Citi has cleared several interest rate swaps on behalf of Asia-Pacific customers through LCH.Clearnet and CME Group and expects the business to pick up considerably this year as clients grow more familiar with the process.

In February, the firm assigned Hiro Mat-suki, a member of its prime finance team in Japan, to lead the origination of new clear-ing business in Japan for both listed and OTC derivatives. Perkins said Matsuki’s primary role is to provide hedge funds and other Japanese clients with access to central clearing in the U.S. and Europe as well as Japan once the local solution comes on-line. Citi also has added people to the OTC clearing team in Australia led by Ian Nissen and has established a hub in Singapore for the processing of cleared OTC trades.

Perkins says Citi sees the region as “stra-tegically important” even though the size of the business is much less than in the U.S. or Europe. He is wary, however, about the risks of joining too many clearinghouses in the region. Partly that is driven by commer-cial considerations, but more importantly he is concerned about the potential risk to the bank itself. “We cannot be subject to unlim-ited liability through our membership in a clearinghouse,” he explained. “We are work-ing with regulators, industry peers and cli-ents to ensure that the clearing solutions take into account our need as clearing members to limit our liability in case of a default.”

Another key issue is fragmentation. In addition to Japan, Singapore and Hong

Kong, there are numerous other clearing initiatives under way around the region. The Korea Exchange is working on plans to establish clearing for interest rate swaps later this year. Australia’s regulators have is-sued a consultation paper on the regulation of OTC derivatives. China’s central bank has established a clearinghouse in Shang-hai for OTC derivatives. And the Clearing Corporation of India is targeting currency forwards and interest rate swaps.

The proliferation of new clearing solutions raises a simple question: Is there enough busi-ness to support all of these services? According to ISDA, the entire region accounts for less than 8% of the global market in OTC swaps. International swap dealers and clearing firms are urging regulators to allow them to use global clearinghouses such as LCH.Clearnet and CME. They claim that this is vastly more efficient from a margin perspective and greatly

reduces the operational costs of running a clearing business across the region.

The regulators have other concerns, how-ever. Their main responsibility is to protect against systemic risk and economic instabil-ity. If they allow risk exposures in the local currency to be cleared at an offshore clear-inghouse, that could undermine their ability to monitor the local market and the financial condition of local market participants. In ad-dition, if positions and collateral are held in a different jurisdiction, that could make it more difficult for local regulators to recover customer funds in case of a default.

How this issue is resolved is likely to vary by country. There is not much time; most of the regulators say they are trying to comply with the 2012 deadline set by the G-20 leaders back in 2009. The regulators say they are well aware of the cost issue and expect that in the early stages only the most plain vanilla types of products will be sub-ject to a clearing mandate. Even so, it seems very likely that the OTC clearing business will be divided up among multiple jurisdic-tions. Mutual recognition could be a way forward, but it remains to be seen if that will be adopted in practice. ..............Will Acworth is the editor of Futures Industry.


We are working with regulators, industry peers and clients to

ensure that the clearing solutions take into account our need as clearing

members to limit our liability in case of a default. ChriSTOphEr pErkinS, Citi


W e currently clear IRS denomi-nated in USD, EUR, CAD and GBP and expect to clear three

additional currencies—JPY, CHF and AUD—in April 2012. Beyond that, we ex-pect to add IRS denominated in other cur-rencies as well as amortizing swaps, forward rate agreements, cross-currency swaps, basis swaps and swaptions. As of Jan. 31, we have cleared more than $210 billion in U.S. cus-tomer volume in IRS, with 1,300 buy-side accounts holding over $146 billion in open interest outstanding as of that date.

Our risk management philosophy for IRS is based on both quantitative and qualitative measures. The quantitative measures include elements such as initial margins, guaranty fund, and assessment powers. The qualitative measures include membership requirements,

In 2011 CME Group launched a new service for clearing interest rate swaps. This service draws on

our long history of clearing and builds on the strength of CME’s interest rate products business, which

had an average daily value of $3.6 trillion in 2011 and over $28 trillion of notional outstanding.

Clearing Interest Rate Swaps:

CME Group’s Risk Management Framework

By Sasha Rozenberg and Udesh Jha

credit limits, waterfall design, clearing mem-ber surveillance programs, collateral manage-ment, governance, and incentives for clearing members to implement prudent risk manage-ment. In combination these measures allow us to manage both day-to-day idiosyncratic risks as well as large systemic risks.

In this article we describe some of the key elements of CME’s IRS clearing solu-tion, including the membership criteria for clearing firms, the methodology we use to set margin requirements, and the “water-fall” of financial protections that we have put in place in case of a default.

Customer OrientationAn important characteristic of our risk man-agement philosophy is the role played by risk mutualization through the guaranty fund.

Existing solutions for clearing dealer-to-dealer trades were designed to handle portfolios with high notional amounts but relatively small overall risk. These solutions were established with a low degree of risk mutualization, relying on the margin col-lected from every participant to cover ex-pected losses in extreme yet plausible sce-narios. This approach is commonly referred to as the “defaulter pays” model.

In the post-Dodd-Frank world, clearing firms must facilitate clearing of IRS for their clients. This poses a different degree of risk for clearinghouses than dealer-to-dealer clear-ing because the risk profile of client positions tends to have more exposure to the direction of movements in market variables. Dealer books tend to contain offsetting positions and there-fore carry less directional risk. In contrast, end


users such as asset managers, insurance compa-nies and pension funds typically have liabilities, which prompt them to manage directional in-terest rate risk. Their IRS hedges therefore tend to be directional and their cleared positions are relatively less balanced.

Providing clearing services to a customer base with directional portfolios therefore can demand large capital outlays. As explained be-low, we have addressed this by striking a balance between margin requirements and risk mutual-ization through guaranty fund contributions.

Client clearing also will require a large amount of additional collateral. Most esti-mates of the collateral that will eventually be required to support the $500 trillion IRS market are in excess of $400 billion, which may put significant strain on the liquidity in the market. Our approach to address this problem is three-fold: expanding the pool of acceptable collateral (with appropri-ate haircuts); offering margin offsets across different products; and optimizing the effi-ciency of collateral usage through balancing margin and guaranty fund contributions.

Membership CriteriaGiven the complexities and risks of clear-ing interest rate swaps, our IRS clearing solution requires stringent membership standards beyond capital requirements. It is critical that each clearing member possesses appropriate risk management capabilities and is sufficiently capitalized to provide liquidity during both normal and stressful times. For example, clear-ing members should have the ability and commitment to internally monitor, mar-gin, and stress test IRS exposures, the op-erational capacity to maintain house and client portfolios, and the ability to assess their clients’ creditworthiness. Clearing members must also have the operational capacity and financial wherewithal to bid on a large portfolio of IRS products shortly after a default event. They also must have the ability to liquidate or hedge positions they clear within a very short time frame. Each clearing member is subject to peri-odic reviews to ensure these requirements are current and adequate.

Margin MethodologyCME Clearing’s margin model for IRS is designed to provide at least 99% ex-post coverage over a five-day closeout period. The choice of a five-day closeout period is made to account adequately for the time required to cure a default through hedg-ing and/or liquidation in today’s IRS mar-ket. The model looks back over a five-year period, which provides 1,260 historical scenarios. All cleared portfolios are fully re-valued on each of the 1,260 scenarios and the fourth largest loss (corresponding to approximately a 99.7% confidence level) is chosen as the portfolio margin.

We use a scaled historical Value-at-Risk model for computation of daily initial mar-gins. In a scaled model, a forecast of volatility is determined and historical shocks are scaled by a ratio of the forecasted volatility to the volatility prevailing at the time the shocks were sampled. A scaled model provides bet-ter margin coverage than an un-scaled histor-ical VaR model because scaling incorporates the forecasts of potential future changes in

Figure 1 a Matter of Balance

Source: CME Group

This figure illustrates the key requirements of margins and the guaranty fund and the need to strike the correct balance between the two.


the yield curve by incorporating changes in short-term volatility. Prior research on this topic has concluded that the scaling of re-turns using volatility significantly improves the model coverage. For modeling volatility forecasts to simulate market expectations, we use an exponential weighted moving average (EWMA) method which is also widely used in financial time series analysis.

Additionally, for portfolios with mul-tiple currencies, CME’s margin model ac-counts for foreign exchange risk that can arise due to the need to convert collateral to cure losses. Our approach to control FX risk offers clients the opportunity to post margins in different currencies, which helps us to mitigate the FX risk and at the same time offer the most efficient overall margin requirements.

For large portfolios, we attach a li-quidity add-on to the base historical VaR margins. This approach makes margins charged to individual clients commen-surate with the total amount of risk they bring to the clearinghouse. This charge is regularly calibrated through periodically polling market participants to ensure that the model is consistent with current mar-ket expectations.

Prior to this scaled historical VaR-based model, we used a principal com-ponent analysis methodology to compute initial margins. PCA is an established tool to identify statistically independent risk factors that explain the movements in the underlying yield curve. The first three factors (parallel, tilt and curve changes) explain 95%-99% of the yield curve vola-tility. However, these risk factors fail to appropriately represent the risk of well-hedged portfolios, which are sensitive to higher movements of the yield curve be-yond parallel, tilt and curve. Furthermore, extending the model to margin portfolios

in multiple currencies would have made the model cumbersome, given the vary-ing levels of correlation across the curves. We therefore tested a variety of VaR and simulation-based methods, and the scaled historical VaR method stood out in terms of coverage, robustness and transparency, which are the key requirements of a mar-gin model.

Settlement variation, also known as daily mark-to-market, is aligned with the eco-nomics of the non-cleared OTC trades in order to avoid unnecessary bifurcation of the market. One of the key enablers of this consistency is the inclusion of price align-ment interest in the variation margin cal-culations. CME calculates PAI using OIS discounting based on the most appropriate risk-free funding rate such as Fed Funds for USD, EONIA for EUR, and SONIA for GBP. PAI is included in daily settlements where variation receivers pay the OIS rate of interest to variation payers.

Risk OffsetsDue to the wide array of asset classes cleared at CME, there is potential to provide for cross-asset correlation benefits between IRS and other cleared products. The his-torical VaR methodology naturally extends to margining a wide variety of asset classes with varying levels of correlation. In Octo-ber 2011, the Commodity Futures Trading Commission approved a rule that outlines the process for providing these margin off-sets for customers. Participants will have the ability to move selected futures contracts into their OTC sequestered accounts to offset the risk in their swap portfolio and therefore reduce margins. We are planning to launch the cross-margining program with Eurodollar and Treasury futures early this year. Preliminary analysis shows sig-nificant savings for margin offsets (see the

sample portfolios in Figure 2). To provide clients with greater visibil-

ity into our margin requirements and risk analytics, we have developed an interactive margin calculator called the Clearing On-line Risk Engine or CORE. This web-based tool allows member firms and customers to calculate and evaluate the initial margin requirements on their swap portfolios. The current version of CORE supports margin, P&L, delta ladders and yield curve scenario analysis. Future versions of CORE will sup-port “what-if ” analytics for margins and the guaranty fund, stress testing, incremental VaR and other analytics to support back-loading of portfolios.

Default Waterfall DesignCME’s IRS offering is subject to a finan-

cial safeguards package that is separate from the financial safeguards available to our base product classes, which includes our futures products, and the financial safeguards avail-able to cleared credit default swaps. The IRS financial safeguards will not be used to cover losses in these other product classes.

As we’ve seen with MF Global and Lehman Brothers, extreme events like the collapse of clearing members can and do occur. CME’s financial safeguards struc-ture is built to address such extreme events. The stress scenarios that are used to size the guaranty fund are a combination of extreme historical moves combined with extreme yet plausible hypothetical shocks.

In line with the expected regulations for systemically important derivatives clearing organizations, the fully funded portion of the guaranty fund is sized to cover a near-simultaneous default of the two largest IRS clearing members. In addition, CME has the ability to assess additional funds from each IRS clear-ing member in a size that would cover

CME Group

Figure 2 sample portfolios

portfolio description Margined separately (Million $)

Combined Margins (Million $)

savings (%)

10M 2Y Swap vs. 50 Front 2Y Treasury Future 0.07 0.02 71%

10M ATM 5Y Swap Hedged with ED (350 Contracts) 0.27 0.13 52%

2Y Invoice Swap (100M IRS Notional, 500 Treasury Futures) 0.67 0.23 66%





the next two largest IRS clearing mem-ber defaults, bringing the total available safeguards package equal to the combined exposure of the four largest clearing mem-bers. Our guaranty fund size is computed daily and the waterfall is tested regularly through simulated drills and polling all clearing members to ensure their ability to provide rapid response and adequate resources during a default.

Upon a clearing member default, the default management committee is immedi-ately convened and the process of hedging the defaulting positions begins alongside the efforts of porting non-defaulting cus-tomers to solvent clearing members. The auctioning of unhedged positions of the de-faulting portfolio is the next step in manag-ing the default.

In an extreme event, such that the en-tire financial safeguards package for IRS is exhausted and the end of the waterfall is reached, CME’s IRS offering provides a limited recourse feature. Namely, at the end of the waterfall the remaining IRS contracts are torn up–meaning that con-tractual obligations are annulled–at their then-current market value, with a poten-tial haircut on the profit making positions in the final settlement cycle. This asym-metrical arrangement limits the windfall profits and avoids further destabilization of the system by not increasing dramatic losses. This allows all participants in CME Clearing to know their maximum poten-tial exposure at any time.

Guaranty FundWe believe that in addition to an ap-

propriately conservative margin coverage standard, a substantial guaranty fund is an essential risk mitigation tool. First of all, the guaranty fund functions as a capital reserve for the total financial safeguards package, which protects against unknown default events. Secondly, the risk management poli-cies of clearing members significantly affect the likelihood and severity of a systemic event and the resulting risk in their client portfolios. Systemic events in the IRS mar-ket most likely will occur due to the failure of one or more large financial institutions, and therefore the clearing members bear significant responsibility for the overall risk of the clearinghouse. The desire to protect their contributions to the guaranty fund gives the clearing members a powerful in-centive to implement prudent risk manage-ment policies.

Collateral Management CME Clearing offers a number of collat-

eral programs to meet the needs of our clear-ing members and our clients and continues to work with market participants to deliver flexible and scalable collateral programs. We accept a wide range of asset types including cash (U.S. and six foreign currencies), U.S. Treasuries and agencies, select sovereign debt, U.S. equities, and gold. Additionally, we offer four customized collateral manage-ment programs that enable investments in approved money market funds. Internal processes are built in to continuously moni-tor and mitigate credit risks embedded with collateral. Limits are also imposed by collat-eral types to further eliminate any concen-tration of risk buildup.

A Final NoteGiven the increasing relevance of clear-

ing to customers’ risk management portfo-lios, we expect to see continued growth in IRS clearing. As we approach the clearing mandate that is expected to take effect the second half of the year, market participants that have not already begun clearing will need to test systems, understand processes and evaluate collateral requirements to en-sure that trading continues uninterrupted when the mandate takes effect. ..............Sasha rozenberg is managing director of OTC risk management and clearinghouse risk at CME Group. Udesh Jha is associate direc-tor of quant risk management and clearing-house risk at CME Group.

Figure 3 otC-Irs Financial safeguards Waterfall

Source: CME Group

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In just a couple of years, we estimate that 40 or more SEFs will be registered to trade swaps in the U.S.; approximately

the same number of organized trading fa-cilities will likely register in Europe. Not all of them will survive, of course. Tabb Group’s conservative estimate is that half—which amounts to about three or four per asset class, per region—will still be around in 2014. Even so, automatically monitor-ing liquidity across this many venues will be challenging. Those who wait until fragmen-tation sets in before they determine their ag-gregation strategies will struggle to survive.

SEF aggregation means different things to different people. Dealers need SEF aggre-gation for their market-making operations. They also need to be able to offer it to clients as a feature of their new agency swaps desks. SEF aggregation helps the buy-side ensure that they are getting the best prices; it also helps them tap into potentially dozens of execution venues. Proprietary trading firms will move into the swaps market too, oper-ating automated market-making and arbi-trage strategies across several SEFs.

SEF aggregation technology is already being built and is expected to come to mar-ket in time for the expected liquidity frag-mentation. Tabb Group research shows that 87% of swaps dealers are in the process of

either building SEF aggregation technology or are planning to build it in the near future (see Tabb Group’s October 2011 report, “Credit and Rates Swap Dealers 2011: Re-defined and Reborn”).

The cost to create swaps liquidity aggre-gation technology is significant. We estimate that between 2011 and 2013 the dealer com-munity, including both existing dealers and new entrants, will collectively spend in excess of $500 million to put swaps liquidity aggre-gation tools in place for their buy-side client base. Each of the top-tier dealers will spend about $15 million on its tools, split roughly evenly between their aggregation tools, client on-boarding and physical connectivity.

We’ve Seen This BeforeIt is possible that this work could be for naught and that liquidity will stay highly concentrated, but history tells us otherwise. Liquidity fragmentation is primarily a prod-uct of two things: electronic trading and regulation. One without the other could lead to a fragmented market, but the com-bination is a near-certain formula.

As we all remember, the technology ex-plosion of the 1990s hit the equities markets hard. New electronic communication net-works popped up everywhere to grab market share from then-incumbents the New York

Stock Exchange and Nasdaq. In 1997, the Order Handling Rule tipped the electronic trading domino and the following year Reg ATS formalized the role of the ECN. In 2000, the market decided to begin pricing stocks in penny increments (a.k.a. decimalization); in 2005, Reg NMS forced traders to execute orders at whichever venue had the best price. Fast forward to the present and the cumula-tive result of these events is an 80% collapse in the average order size, a thirtyfold increase in transaction volume, and a buy-side user base that sends nearly 40% of its order flow through algorithms to manage the fragmenta-tion. As of the end of 2011, the U.S. equity market had over 50 execution venues.

Swaps, of course, are not equities; the swaps market is firmly institutional whereas the equities market has a large retail com-ponent. But if we were just to consider the institutional side of the equities market, the fragmentation story would still be the same. The important thing is that the equities story of market evolution from manual to frag-mented to re-aggregated shows the general direction in which Dodd-Frank is taking us. Historical data and firsthand accounts of changes in foreign exchange and U.S. Trea-suries also teach us how technology and reg-ulation (or lack thereof) will cause liquidity fragmentation in the swaps market.

Swap execution facilities don’t technically exist yet and swaps market liquidity is not fragmented,

so why all the talk about SEF aggregation? This is because tomorrow’s market won’t look anything

like today’s market.

Swaps Liquidity AggregationBy Kevin McPartland

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More course topics and

dates at www.theIFM.org

Three Approaches to SEF AggregationAs of the end of 2011, SEF aggregation projects at the major dealers are still works in progress. Some dealers are actively test-ing new technology, and others are just sitting down to the drawing board. Some dealers are building out this technology in house, and others will look to service providers such as Broadway and Ion Trad-ing to manage the service. Still others will work with third-party technology partners such as Progress, StreamBase and SunGard to build custom solutions with off-the-shelf components.

These projects focus primarily on the most liquid corners of the swaps market, where products are sufficiently standard and easily traded on the screen. These products include, but are not limited to, index credit default swaps, on–the-run interest rate swaps, and already cleared energy swaps.

There are three primary approaches to SEF aggregation: connectivity aggregation, price/size aggregation, and what we call the Swaps Automated Agency Broker.

Connectivity aggregation is when the broker or third-party provider goes through the legwork of physically and logically con-necting up with each SEF. Fast and secure lines must be secured between multiple data centers in New York, New Jersey and Illinois to link execution venues with the primary data center of the aggregation pro-vider. The costs to do this can vary greatly from a few thousand dollars a month per line to a few hundred thousand per line for the fastest dedicated paths.

Price/size aggregation sits on top of con-nectivity aggregation. In addition to pro-viding clients with an easy way to access all SEFs, the provider also offers a front-end trading platform or API from which cli-ents can trade at each SEF. These execution

management systems will provide other tools such as a virtual consolidated order book view and access to relevant market data. This is what most people have in mind when discussing SEF aggregation. Similar approaches are used for equities, equity op-tions, corporate bonds, futures and FX. In fact, Tabb Group expects top-tier dealers to integrate swap trading functionality as described here into their current electronic trading platforms.

The Swaps Automated Agency Broker is the Cadillac of SEF aggregation. Similar to smart order routers used in other mar-kets, the SAAB determines how a trader

can best gain the exposure he needs. Going from SOR to SAAB is a big leap, though. An SOR simply does what it is told. The trader tells the SOR which instrument to trade and in what quantity. Taking into ac-count preferences—when the order must be filled, for example—the SOR executes as it was instructed at the best price it can find. The SAAB is much more intuitive. It can include a product selection optimiza-tion engine and a whole host of pre-trade checks. The criteria it uses might include credit checks, margin offsets, dealer rela-tionships, real vs. phantom liquidity, price/size, and fees.

Central Limit Request for QuoteOne of the most complicated things about aggregating swaps liquidity post-Dodd-Frank is the abundance of market models. In most other markets where liquidity has fragmented across multiple electronic plat-forms, trading is done only via an order book. Aggregating this liquidity simply re-quires consolidating these order books into a single virtual order book, one in which the user can see the total size available at each price point to both buy and sell.

Other markets, such as spot FX, utilize both order-book and streaming-quote mod-els. For the latter, dealers provide two-sided price streams throughout the day. Two-sided streaming quotes are more complicated for liquidity aggregators, but integrating them into an order book view has proven effective.

Despite the prescriptive nature of the SEF rules proposed by the Commodity Fu-tures Trading Commission, the swaps mar-ket will contain more market models than any other heavily regulated market. This flexibility is the biggest difference between a designated contract market, which is a fu-tures exchange, and a SEF. DCMs can only

operate with an order book model whereas SEFs have a choice. The following models will be used:

■ Request for Quote (RFQ), last look ■ Request for Quote (RFQ), firm ■ Request for Stream (RFS) ■ Continuous Stream ■ Scheduled Auction ■ Central Limit Order Book (CLOB)

In each of these six cases, the market can either be anonymous or name give-up. Fur-thermore, some SEFs will use two or more of these 12 permutations to attract liquid-ity from market participants with different trading needs. For example, a single SEF might look to attract asset managers with an RFQ market and higher turnover trad-ers via an order book. That means that SEF aggregators must be able to normalize avail-able liquidity presented in at least 12 differ-ent ways to provide a consolidated view of the world.

SDP to SAABUnder proposed regulations, dealers will not be able to fully own and operate SEFs. This means that single dealer portals, those that now act as primary sources of liquidity for the buy-side, cannot register as SEFs unless


SEF Aggregation

One of the most complicated things about aggregating swaps

liquidity post-Dodd-Frank is the abundance of market models.

For example, a single SEF might look to attract asset managers

with a request for quote market and higher turnover trad ers via a

central limit order book.


the owning dealers were to sell off most of their businesses. Therefore, many SDPs are in the process of converting their swap-trad-ing screens to SEF aggregators and SAABs (see Exhibit 1). These conversions are most prevalent among fixed-income platforms fo-cused on CDS and interest rate swaps trad-ing. Tabb Group has also seen evidence that platforms that are currently focused on other areas, such as spot FX or U.S. Treasuries, plan to build SEF aggregators rather than dismantle their SDPs. By providing their cli-ents with these new liquidity-seeking tools, dealers can try to maintain the screen real estate and relationships they have spent years establishing, even though those clients will be able to trade directly on SEFs themselves.

The Asset ClassesThe prospects for liquidity fragmentation, and the tools to manage it, differ by asset class. Al-though at least a portion of each major asset class—credit, energy, equity, FX and rates—will be impacted by trading and clearing mandates, only a subset will see widespread automation and electronic trading based on market demand for the product and the prof-itability of new trading strategies.

Rates and CreditTabb Group believes that interest rate and credit default swaps will see the most widespread adoption of SEF aggregation (see Exhibit 2). Competition among SEFs and exchanges to be the primary source of liquidity for IRS and CDS is fiercer than it is among the other asset classes due to already widespread usage and market de-mand. The IRS market is the biggest by notional outstanding and notional turn-over, and is the most widely used among clearable swaps. CDS trading, especially for index CDSs and the single-name CDS components of the indices, has already seen a huge uptick in electronic trading both in the interdealer (now 80% elec-tronic) and dealer-to-client markets (now 25% electronic) due in large part to prod-uct standardization. These factors all add up to a liquid, electronic and fragmented trading landscape.

NDFs and FX OptionsFX derivative markets are also ripe for li-quidity fragmentation, driven largely by the current state of the spot FX market. Nearly half of spot FX trading globally is done on the screen, with liquidity fragmented across well over a dozen execution points. Single-dealer portals compete with multi-dealer

portals for trade flow, and current FX ag-gregators pull it all together in a virtual order book. In fact, many view the current FX market as a good model to mimic when thinking about swaps market automation.

But spot FX, of course, does not fall un-der DFA rules—and due to a U.S. Treasury Department ruling, nor do FX swaps. Just two forms of FX derivatives will be subject to execution and clearing mandates under DFA: FX options and non-deliverable for-wards (NDFs).

The extent to which FX options and NDF liquidity will fragment is uncertain. We don’t yet know which of these products regulators will deem clearable. The regula-tors will have their hands full with credit and rate markets for the foreseeable future, which could leave FX on the back burner. It is also unclear if these products are liquid enough in the U.S. to provide accurate pric-ing for margin calculations.

Despite these lingering questions, electronic offerings to trade FX options are already emerg-ing. With business strategies that assume regu-latory mandates for SEF trading and that “if we build it, they will come,” platforms such as FXall and SURFACExchange are pushing full force into electronic FX options trading. Easier access to these products coupled with central clearing could drive some market participants to trade FX options, where before they could

not or would not. The volatility component inherent in any option is quite appealing for many investors today, as managing volatility is high on everyone’s to-do list.

Energizing EnergyOTC energy markets already have a thriv-ing e-trading-to-central clearing model. Enron, rather than Lehman, made sure of that about a decade ago. In the U.S., ICE’s OTC energy market, which is cleared by ICE Clear Europe, and CME’s Clearport handle most of the clearing volume. Most electronic trading in energy swaps hap-pens on ICE’s own platform; the rest is done by dozens of OTC energy brokers over the telephone.

Tabb Group research shows that for the products that are mandated for clearing, the major interdealer brokers will join ICE as the top energy SEFs. But even with four or more SEFs available to handle energy swap trading, liquidity fragmentation does not appear to be a pressing issue among energy traders. There are enough energy products out there that each SEF will more than likely specialize in one specific product, and hence keep liquidity concentrated by prod-uct. Henry Hub swaps may continue to trade in high volume at ICE, for example, but crude oil swaps could see their primary liquidity source at ICAP or GFI.

Ownershiplimits will

be lifted

Other

Nothing

They will bespun off and

become SEFs

They will beshut down

They willbecome SEFaggregators

41%

26%

13%

9%

7%

5%

What Will happen to single-dealer portals post dFa?Exhibit 1

Source: Tabb Group’s “SEF Industry Barometer: Fall 2011”


Energy options also fall under DFA rules. This is a niche market, but as with FX options, energy options are growing in popularity because they provide expo-sure to, or protection against, volatility. ICE and CME still handle most energy options trading, but competitors such as Parity Energy are making a push with SEF rules as a tailwind.

Tabb Group research shows that for the products that are mandated

for clearing, the major interdealer brokers will join iCE as the top

energy SEFs.

ConclusionSwaps liquidity is going to fragment. History tells us that a combination of available tech-nology and catalyzing regulation, both of which now exist in the swaps market, creates an environment in which liquidity fragmen-tation across multiple electronic trading plat-forms is nearly inevitable. Regulatory reform will impact how this fragmentation takes place, but they will not prevent its coming.

This fragmentation presents an opportu-nity for dealers at risk of being disinterme-

aggregators and advanced smart order rout-ers for the swaps market is considerably more complex than it is for those other markets.

Swap execution facilities are set to offer a wide range of trading methodologies; this va-riety will make normalizing current prices dif-ficult. The SEC and CFTC’s joint oversight of the market will mean different regulations for different products. As a result, aggregators will need to pull together liquidity from various markets following different rule books. Deter-mining how best to execute an order will mean

First-mover advantage is risky but nec-essary. With market models in such flux, building out such sophisticated technology requires an expectation of rework as final rules crystallize and the market evolves. This state of uncertainty has customers feeling rudderless and in need of guidance. Dealers and providers that can put forth this tech-nology early and gain a foothold on traders’ desktops are the ones who stand a chance of succeeding. The top swaps dealer in a world that requires huge amounts of capital com-mitment and sales people capable of pricing a swap in their head might not be so suc-cessful when put up against a cleared world that includes smart order routers that can find best execution faster than a sales trader can blink. Hence the opportunity.

Taking advantage will require collabora-tion: Dealers will need to work with special-ist software providers and network opera-tors to establish infrastructures that are both scalable and affordable (after all, technology budgets are cut more quickly than CDS bid/offer spreads). Complex event process-ing, messaging middleware and high-speed linkages between data centers are all crucial to making the business logic work. If you’ve kept up with developments in equity mar-ket technology over the past 10 years this will sound familiar, but the complexities here are much greater. ..............

diated by Dodd-Frank-inspired regulations, and for technology companies that have had little opportunity in the overly manual swaps market. Aggregating liquidity via smart tech-nology is common in other markets such as equities and FX; providers of such tools hope to make a splash with SEF aggregators using lessons they’ve learned from the past. Their enthusiasm is warranted, but creating SEF

much more than finding the size needed at the best price. The many-to-many, SEF-to-CCP environment will mean that aggregators must understand potential for margin offsets, credit limits at different clearinghouses, and SEF ex-ecution fees, among several other factors. This is all in addition to the inherent complexity of swaps compared to more cash-like instru-ments such as equities and FX.

SEF Aggregation

Energy

Equity

Credit

FX

Rates 87%

84%

80%

76%

73%

Percentage, by Asset Class, Who Believe SEF Aggregation Will Become CommonExhibit 2

Source: Tabb Group’s “SEF Industry Barometer: Fall 2011”


In the 18 months since Congress enacted the Dodd-Frank Act, the Commodity Futures Trading Commission has finalized nearly 30 different rulemakings related to the reporting, trading and

clearing of derivatives.Although there is still quite a bit of work to be done, CFTC Chair-

man Gary Gensler says the agency is still on track to complete the rulemaking process by the second half of this year. “As I’ve said all along, we are working to complete these rules in a thoughtful, balanced way—not against the clock,” Gensler said at the agency’s open meeting on Feb. 23.

It has not been a smooth process, however. The agency’s two Republican commissioners, Jill Sommers and Scott O’Malia, have dissented on many of the rulemakings citing

concerns about inadequate cost-benefit analysis, excessive complexity, extraterritorial impact and insufficient coordination with other regulators.

While some of the final rules cannot be implemented until other rules are finalized—the product and entity definitions in particu-lar—much of the overall framework is now in place. The table below outlines certain Dodd-Frank rulemakings that have been finalized and several of the more important outstanding proposals, listed in reverse chronological order.

The table includes information about when the rulemaking was approved, how the CFTC commissioners voted, and references to the section of the Federal Register where the complete text of the rulemaking can be found.

A Table of Dodd-Frank Rulemakings Completed by the CFTCBy Joanne Morrison

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name of rulemaking description Comment status effective date

Internal Business Conduct rules

The rules include requirements to record all forms of communication related to swaps trading, measures to prevent conflicts of interest between swap dealers and af-filiated FCMs, requirements for designated chief compliance officers and the duties of swap dealers and major swap participants.

The final rules were amended to allow firms to petition for more time to meet the recordkeeping requirements and to clarify the CFTC's intent in banning "improper" influence on an FCM's clearing decisions.

Final rule ap-proved 3-2 on Feb. 23, 2012. Sommers and O'Malia opposed.

60 days after being published in the Federal Register but implementation is contingent on finalization of SD and MSP definitions

Block size for swaps trading

A re-proposed rule establishing a method-ology for determining block trades in the swaps markets. The proposal will affect what trades will qualify as block trades on swap execution facilities. The proposal also will affect the real-time reporting rule, which allows a short delay for pub-lic disclosure of information about large trades. Thresholds vary depending on the asset class and are set by the notional amount within a market rather than by the number of transactions.

Sommers questioned whether CFTC staff had ample data to set thresholds and O'Malia questioned the CFTC's cost-benefit analysis.

Proposed rule approved 3-2 on Feb. 23, 2012. Sommers and O'Malia opposed.

Comment Period: 60 days after being published in the Federal Register.

Selected Dodd-Frank Rulemakings

Legend

Final Rules Proposed Rules Orders/Interpretations

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Cpo, Cta: amendments to Compliance obligations

The adopted amendments to Part 4 of CFTC regulations reinstate regulatory require-ments for investment companies registered with the SEC.

NFA on Aug. 18, 2010 petitioned the CFTC requesting that these rules be reinstated.

Final rule approved 4-1 on Feb. 9, 2012. Sommers opposed.

Most provisions are effec-tive April 24, 2012. (77 FR 11252)

harmonize Compli-ance obligations for registered Invest-ment Companies required to register as Cpos

The proposed rule would harmonize Part 4 recordkeeping, reporting and disclosures from CPOs with requirements set by the Securities and Exchange Commission for investment companies that are registered both with the CFTC and SEC.

Sommers said the proposals would not achieve “true harmo-nization.”

Proposed rule approved 5-0 on Feb. 9, 2012.

Comment period ends on April 24, 2012. (77 FR 11345)

protection of Cleared swaps Customer Collateral

Final rule requiring that FCMs and DCOs segregate swaps customer collateral from their own assets. In contrast to regulations governing segregated futures accounts, the new rule is based on the “complete legal segregation model” also known as LSOC.

CFTC staff is con-sidering whether the added customer protections should also apply to futures accounts.

Final rule approved 4-1 on Jan. 11, 2012. Sommers opposed.

Bankruptcy provisions effective April 9, 2012. All other aspects of the rule effective on Nov. 8, 2012 (77 FR 6336)

proposed “volcker rule” restrictions on proprietary trading

This proposed rule would prohibit CFTC-regulated banking entities such as FCMs from engaging in short-term proprietary trading of any security and derivative, and other financial instruments for the firm’s own account.

Similar to a proposal jointly issued in Octo-ber 2011 by the FDIC, Federal Reserve, Office of the Comp-troller of the Currency and the SEC.

Proposed rule approved 3-2 on Jan. 11, 2012. Sommers and O’Malia opposed.

Comment period ends on April 16, 2012. (77 FR 8332)

Business Conduct standards for swap dealers and Major swap participants

Final rule establishes a wide range of external business conduct standards for swap dealers and major swap partici-pants. SDs and MSPs must disclose mate-rial risks, conflicts of interest and material incentives. The rule sets out suitability and “know your customer” practices.

The rule also in-cludes restrictions on certain political con-tributions from swap dealers to municipal officials.

Final rule approved 4-1 on Jan. 11, 2012. Sommers op-posed.

Effective April 17, 2012. Implementation is the later of 180 days after this date or when a SD or MSP is registered. (77 FR 9734)

registration of swap dealers and Major swap participants

The final rule establishes a process for registration of SDs and MSPs. SDs and MSPs must become members of a “reg-istered futures association.” The rules do not require registration of associated per-sons of a SD or MSP, but they contain a provision barring any person subject to a “statutory disqualification” from engaging in swaps transactions.

Registration is not mandatory until the CFTC finalizes swap dealer and major swap participant definitions. Firms can begin registration on a voluntary basis.

Final rule approved 5-0 on Jan. 11, 2012.

March 19, 2012. Registra-tion is not mandatory until the CFTC finalizes swap dealer definitions. (77 FR 2613)

swap data recordkeeping and reporting requirements

The final rule requires the reporting of swap transaction data to swap data re-positories by swap execution facilities, DCMs, DCOs, swap dealers, major swap participants, and other swap counter-parties. The data include the “primary economic terms” and all data relating to execution confirmations and subsequent valuations. Reporting requirements will apply first to interest rate swaps and credit swaps; other types of swaps will be covered at a later date.

The rule does not apply to swaps executed before the effective date of the rule. Sommers warned that reporting requirements must be coordinated across regulatory borders.

Final rule approved 5-0 on Dec. 20, 2011.

The rule will take effect in three phases, with the first phase starting no sooner than July 16, 2012.(77 FR 2136)



real-time public reporting

Under the final rule, all swap transaction and pricing data must be reported to the appropriate registered swap data reposi-tory, regardless of whether the swap is executed on a regulated trading platform or bilaterally, and regardless of whether the swap is cleared or not.

The final rule does not contain rules relating to determining the appropriate minimum size for block trades and large notional off-facility swaps.


March 9, 2012, but phased in. On July 16, 2012, SDRs will publish data on interest rate and credit default swap transactions among SDs and MSPs. Ninety days later expanded to include foreign exchange, equity and commodity swaps. Ninety days after that for all other transactions. (77 FR 1182)

effective date for swap regulation

This order extends temporary exemp-tive relief from Dodd-Frank provisions that take effect automatically rather than through rulemaking action.

Without the exemp-tion, certain Dodd-Frank Act provisions would take effect automatically.

Final order approved 5-0 on Dec. 20, 2011.

Extended through July 16, 2012.

rule 1.25 Changes The revised Rule 1.25 limits the scope of the investments that FCMs and DCOs can make using customer funds. They are banned from investing customer funds in in-house repurchase transactions and for-eign sovereign debt.

The CFTC clarified that investment in foreign sovereign debt would be permitted by petition if an FCM or DCO has balances in segregated accounts denominated in that country’s currency.


Feb. 17, 2012, with 180 days to come into compli-ance. (76 FR 78776)

registration of Foreign Boards of trade

The rule replaces the existing process of staff-issued no-action relief. Currently the CFTC has more than 20 FBOTs operating under such relief.

FBOTs currently operating under no-action relief are granted provisional registration.


Feb. 21, 2012. (76 FR 80674)

proposed process for Making a swap available to trade

The proposed rule would implement a pro-cess for DCMs and swap execution facilities to make swaps available to trade. DCMs and SEFs would be required to submit any determination that a swap is available for trading to the CFTC either for approval or under self-certification procedures.

Sommers said the proposal was “deeply flawed.” She said it would bind an entire marketplace to a trade execution requirement.

Proposed rule approved 4-1 on Dec. 5, 2011. Sommers op-posed.

(76 FR 77728)

Final Interpretation regarding anti-Fraud authority

This interpretation defines the term “ac-tual delivery” for the purpose of determin-ing how to apply the anti-fraud authority provided in the Dodd-Frank Act’s Section 742(a), which covers retail commodity transactions.

Approved 5-0 on Dec. 2, 2011.

(76 FR 77670)


Legend



Confidential private Fund risk reporting

The rule requires SEC-registered invest-ment advisers and dually registered CFTC registrations with at least $150 million in private fund assets under management to periodically file a new reporting form (FORM PF). The amount of information reported and the frequency of reporting depends on the size of the advisor.

This rule was jointly developed with the Securities and Ex-change Commission. The SEC approved its rule on Oct. 26, 2011.

Final rule approved 5-0 on Oct. 31, 2011.

The rules call for a two-stage phase-in period for compliance with the new “Form PF” beginning with the fiscal year or quarter ending on Dec. 15, 2012. (76 FR 71128)

position limits for Futures and swaps

The final rule will establish CFTC-admin-istered limits on speculative positions in 28 “core” commodity futures contracts and “economically equivalent” futures, options, and swaps. The initial spot month limits will be the CFTC’s legacy limits for agricultural commodities and exchange limits for all other core contracts. Thereaf-ter, spot limits will be based on 25% of the deliverable supply and will be adjusted annually for energy and metal contracts and every other year for agricultural con-tracts.

Now retired CFTC Commissioner Michael Dunn, despite voting for the rule, expressed serious reservations about these new limits.

Final rule approved 3-2 on Oct. 19, 2011. Sommers and O’Malia opposed.

Effective Jan. 17, 2012. Implemented in two phases. Spot-month limits effec-tive 60 days after “swap” definition rule is finalized. The second phase will be applied to all non-spot contract months after the CFTC has received one year of open interest data. (76 FR 71626)

dCo general provisions and Core principals

The rules spell out a series of financial resource requirements for DCOs. The rules do not include a specific prescribed stress-testing formula for DCOs, but staff said the agency will be reviewing stress-testing models. The CFTC opted to delay acting on rules for DCOs deemed to be systemically important. DCO members must hold more than $50 million in capital to be eligible as members.

O’Malia voted against the final rules and issued a 15-page statement of dissent outlining several con-cerns, including the potential costs of the new regulations as well as the prescribed membership criteria.

Final rule approved 3-2 on Oct. 19, 2011. Sommers and O’Malia opposed.

Membership criteria is effective Jan. 9, 2012. Compliance is staggered for a number of provisions. For example, gross margining has a one-year effective date. (76 FR 69334)

registration and regulation of swap data repositories

The final rule establishes requirements related to registration, core principles, du-ties and responsibilities of the SDRs. The final rule also establishes a “provisional” registration process.

O’Malia raised several concerns about the rights of SDRs to use the data they col-lect for commercial purposes.

Final rule approved 4-1 on Aug. 4, 2011. Sommers opposed.

Effective Oct. 31, 2011 but will not be mandated until the CFTC approves a final “swap” definition. (76 FR 54538)

Whistleblower Incentives and protection

The final rule is similar to a proposal is-sued in December 2010, but it includes changes to harmonize with rules adopted by the SEC. The rule will enable the CFTC to pay whistleblowers an award for tips that lead to enforcement actions with sanctions in excess of $1,000,000. The rule does not require that individuals first report actions in question internally within their firms.

Sommers raised concerns about es-tablishing a program that bypasses internal programs within firms.

Final rule approved 4-1 on Aug. 4, 2011. Sommers opposed.

Oct. 24, 2011 (76 FR 53172)

regulation of agricultural swaps

This rule repeals and replaces Part 35 of the CFTC’s regulations to generally make transactions in agricultural swaps subject to the same laws and rules applicable to transactions in all other swaps.

The CFTC has not taken action on a related rule covering commodity options.

Final rule approved 5-0 on Aug. 4, 2011.

Dec. 31, 2011 (76 FR 49291)

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process for review of swaps for Mandatory Clearing

This final rule establishes procedures for the CFTC to determine if a swap must be cleared and sets out the process for determining the eligibility of a DCO to ac-cept a trade. Under the rule a DCO will be presumed eligible to accept for clearing any swap that is within a group or class of swaps already cleared at that DCO.

The CFTC is required to review swaps that have not been ac-cepted for clearing by a DCO to determine if they should be re-quired to be cleared.

Final rule approved 5-0 on July 19, 2011.

Sept. 26, 2011 (76 FR 44464)

process for registered entity rule submissions (part 40)

The rule establishes a process for the cer-tification and approval of new rules and rule amendments under Part 40 of the CFTC’s rules for DCMs, DCOs, and ulti-mately swap execution facilities and swap data repositories. Registered entities are required to submit self-certifications at least 10 business days before the effec-tive date of a rule. Systemically important DCOs are required to provide a 60-day advance notice.

Dunn raised concerns about the rules being prescriptive rather than principles-based.


Sept. 26, 2011 (76 FR 44776)

removal of ref-erence to Credit ratings in CFtC regulations

As required under the Dodd-Frank Act, the rule removes references to and reliance on credit ratings in CFTC rules applicable to FCMs, DCOs and CPOs.

References to credit ratings in rule 1.25, 30.7 removed on Dec. 5, 2011.


Sept. 23, 2011 (76 FR 44464)

Clearing documentation and timing rules

The proposed rule addresses two is-sues—customer clearing documentation and the timing of acceptance or rejec-tion of trades for clearing. The customer clearing documentation portion states that FCMs, MSPs, SDs and DCOs would be prohibited from providing the identity of a customer’s original executing coun-terparty, limiting the number of counter-parties with whom a customer may enter into a trade and from restricting the size of a customer position with any individual counterparty apart from an overall credit limit. The second part of the CFTC pro-posal included a provision requiring DCOs to either accept or reject a trade “as soon as technologically feasible.”

O’Malia highlighted the importance of allowing the industry to develop documen-tation and requested that a roundtable be held to further discuss the issue.

Proposed rule approved 3-2 on July 19, 2011. Sommers and O’Malia opposed.

(76 FR 47529)

anti-Manipulation and anti-Fraud rules

These rules expand the CFTC’s authority to prosecute fraud and manipulation. The rules eliminate the requirement that the CFTC show an artificial price. The rules also lower the scienter standard to reck-lessness for cases involving fraud-based manipulations.

The rules do not im-pose any new duties of inquiry, diligence, or disclosure.


Aug. 15, 2011 (76 FR 17549)


Legend



large trader reporting for Commodity swaps

The rule requires daily reporting of posi-tions in both cleared and uncleared physi-cal commodity swaps that are “economi-cally equivalent” to commodity futures based on 46 physical commodities. Clear-ing organizations must collect and report daily the aggregate proprietary and aggre-gate customer accounts of each clearing member. Clearing members must provide information on their proprietary positions and positions of their counterparties.

The CFTC estimates that roughly 100 clearing members and 100 swap deal-ers will be required to make these reports.


Effective Sep. 20, 2011 for FCMs and DCOs. Swap dealers will not need to comply until the final defini-tion of swap dealer is in place. (76 FR 43851)

definition of agricultural Commodity

The rule defines agricultural commod-ity, which is necessary to implement other Dodd-Frank rulemaking related to the oversight of agricultural commodity swaps.

This marked the first time either Congress or the CFTC formally defined the term agri-cultural commodity.


Sept. 12, 2011. (76 FR 41398)

protection of Consumer Information

The rule is designed to protect consumer information under the Fair Credit Report-ing Act. The rule prevents firms under the CFTC’s jurisdiction from using certain consumer information obtained from an affiliate to make solicitations to that con-sumer for marketing purposes.

This rule applies to FCMs, retail forex dealers, CTAs, CPOs, introducing brokers and swap dealers and major swap partici-pants.


Sept. 20, 2011. (76 FR 43879)

Consumer privacy protection under the gramm-leach-Bliley act

The rule expands the scope of the Gramm-Leach-Bliley Act to apply to swap dealers and major swap participants. The rule requires these firms to provide notice to consumers about their third party privacy policies and practices.


Sept. 20, 2011. (76 FR 43874)

proposed rule and Interpretive guidance regarding product definitions

The proposed rule would establish com-mon rules for determining the types of financial products included in the defini-tion of swap and security-based swap. The proposal would clarify how the two agencies will divide their jurisdiction over different types of swaps.

Many Dodd-Frank Rulemakings cannot be implemented until this definition is finalized.

Proposed rule approved 5-0 by SEC, 4-1 by CFTC on April 27, 2011. Sommers opposed.

(76 FR 29818)

proposed Capital requirements for non-Bank dealers

The proposed capital requirements would apply to swap dealers and major swap participants that are not subject to regula-tion by the Federal Reserve or any other U.S. banking regulator.

O’Malia cautioned that this proposal could ultimately raise costs for end-users.

Proposed rule approved 4-1 on April 27, 2011. O’Malia opposed.

(76 FR 27802)

proposed Margin requirements

The margin requirements are divided into three tiers. For trades between SDs or MSPs, both sides would be required to pay and collect initial and variation mar-gin. For trades with financial entities, SDs and MSPs would collect but not pay ini-tial and variation margin for each trade. For trades with end-users, SDs and MSPs would not be required to pay or collect ini-tial margin but would be allowed to enter into “credit support arrangements.”

The margin require-ments for non-cleared swaps proposed by U.S. banking regula-tors differ from the CFTC’s proposal and do not include an exemption for end-users.

Proposed rule approved 4-1 on April 12, 2011. O’Malia opposed.

(76 FR 23732)

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proposed Interpretive order on disruptive trading practices

The proposed interpretive order is de-signed to give guidance on the types of trading, practices and conduct that would be considered disruptive.

The CFTC issued an ANPR related to disruptive trading practices on Nov. 2, 2010. The order is intended as a guide in connection with the proposed rules.

Proposed rule approved 4-1 on Feb. 24, 2011. Sommers op-posed.

(76 FR 14826)

registration of Intermediaries

The proposed rule will update provisions in Part 3 of the CFTC rulebook relating to the registration of intermediaries such as FCMs. The update reflects that Dodd-Frank Act contains statutory definitions for new types of intermediaries such as SDs and MSPs and associated persons of a SD or MSP.

Non-U.S. SDs that ex-ecute transactions on a U.S. swap execution facility on behalf of non-U.S. customers would not have to register as FCMs.

Proposed rule approved 5-0 on Feb. 9, 2011.

(76 FR 12888)

amendments to Commodity pool operator and Commodity trading advisor regulations

The proposal would update Part 4 of CFTC regulations to reflect new and revised def-initions of commodity pool, CPO and CTA to include references to swaps.

The proposed rules would “clarify” how the prohibi-tion against trading advisors accepting margin in their own name would apply in the context of swap activities.

Proposed amendments approved 5-0 on Feb. 24, 2011.

(76 FR 7976)

swap termination rights

The proposed rule would require swap dealers and major swap participants to include a provision in their swap trading relationship documentation regarding ter-mination rights in the event a party be-comes subject to an “orderly liquidation” as set out under Dodd-Frank.

As part of the resolution authority in Dodd-Frank, the FDIC has one business day to transfer swaps and other contracts to a solvent third party.

Proposed rule approved 4-1 on Jan. 20, 2011. O’Malia opposed.

(76 FR 6708)

swap execution Facilities

The proposed rules would require that SEFs provide a basic functionality that gives all market participants the option to post both firm and indicative quotes to multiple parties, including all other parties participating in the SEF. The proposed rules would allow for request-for-quote systems or order books with certain conditions.

The proposed rules differ from SEF regulations proposed by the SEC on Feb. 2, 2011 for security-based swap SEFs.

Proposed rule approved 4-1 on Dec. 16, 2010. Sommers op-posed.

(76 FR 1214)

Joint CFtC/seC definition of swap dealers and Major swap participants

Under the proposed rules, a firm would have to register as a swap dealer if it engages in certain activities that the agency sees as “distinguishing characteristics” of swap dealers. The proposed definition would ex-empt firms with less than $100 million in swap activity over the prior 12 months or that entered into no more than 20 transac-tions with no more than 15 counterparties.

Many Dodd-Frank rulemakings can-not be implemented until this definition is finalized.

Proposed rule approved 3-2 on Dec. 1, 2010. Sommers and O’Malia opposed.

(76 FR 80174)

Legend




Morgan Stanley and FIA Tech Cooperate to Introduce Additional Efficiency to the Give-Up ProcessBy James Woods

TECh

One of the biggest challenges facing industry professionals who manage give-ups is the ability to reconcile

trades and commission rates for accurate billing. FIA Technology Services, a subsid-iary of the Futures Industry Association, announced in early February that it reached an agreement with Morgan Stanley to offer the industry a powerful software tool that can be used to confirm payment information between clearing and executing brokers as a result of give-ups. The tool, called eRECS, was developed by Morgan Stanley for inter-nal use, but through the agreement with FIA Tech, it will now be available to all eGAInS participants at no extra cost.

“Brokerage has been a challenge for our industry for many years,” said Craig Abruzzo, north American head of listed derivatives, Morgan Stanley. “We are happy to provide a solution that helps the whole industry deal more efficiently with payables and receivables.”

Mary Ann Burns, president of FIA Tech, says the deployment of eRECS is consis-tent with the vision of the FIA board when it established FIA Tech. “When the FIA board approved these projects, it was with the idea that the industry would work together to provide operational efficiency at a reason-able price. Morgan Stanley has given us the opportunity to deploy this tool at no additional cost to our current users. “

FIA Tech currently provides two ser-vices—the Electronic Give-Up System and the Electronic Give-Up Invoicing System—to help futures firms efficiently settle their give-up brokerage. EGUS automates the workflow governing the construction, review, execution and storage of the FIA’s Inter-national Uniform Give-up Agreement. This agreement includes the terms and condi-tions under which a give-up takes place as well as the fees the executing broker will charge the customer. More than 80,000 agreements have been executed using EGUS since its inception in 2007.

eGAInS automates payment and collection

of execution brokerage fees from participating exchanges. eGAInS receives trade data per-taining to give-ups nightly from Eurex, ICE U.S. and ICE Europe, and nYSE Euronext. eGAInS receives give-up agreement rate information automatically from EGUS, and uses this data to automatically calculate brokerage fees for par-ticipating firms. The result of the automated cal-culation of give-up brokerage fees is a monthly settlement of fees paid to executing brokers by clearing brokers. The clearing broker invoices the customer and uses eGAInS to settle with the executing broker. In 2011 over 28 million trades representing over 197 million contracts settled brokerage from the four exchanges cur-rently providing trade data to eGAInS.

A critical missing piece in the brokerage settlement process has been the ability for brokers to reconcile the rate, trade, and fee data in eGAIns with the same data in their in-ternal back office processing systems. When a contract does not match and settle right away, it can be months before the execut-ing and clearing broker can agree a price. Brokerage firms have designed different ap-proaches to satisfy their reconciliation needs. Some brokers have purchased software or

services that require customization to work with eGAInS and their internal systems. Other brokers have built systems in house to automate portions of the reconciliation pro-cess. Still others are reconciling their eGAInS data manually using spreadsheets.

“All of the brokers have benefited from automating brokerage payables and receiv-ables and we felt it was important to help the industry achieve even greater efficiency,” said Tom neville, executive director of finance for Morgan Stanley. “Morgan Stanley believes that all eGAInS brokers will benefit from the automated reconciliation process that we have used since the inception of eGAInS.”

As an EGUS and eGAInS participant, Morgan Stanley recognized early on the need to reconcile transactions and pay-ments generated in eGAInS with its internal accounting systems. To automate the pro-cess, they developed software in house.

“A major benefit of acquiring eRECS is that Morgan Stanley developed this tool for futures and options brokerage and has been using it and enhancing it over the last several years. It’s a mature software tool designed for a very specific purpose,” said Burns.

a perfect MatchExhibit 1Match Level “1” in the “approve” column indicates a perfect match between eGAINS and a firm’s back office/accounting system. Payments can be settled in eGAINS with no human intervention.


How eRECS WorkseRECS is a web-based application that

allows system users to reconcile trades, commission rates, receivables and payables with the corresponding data in their back office and accounting systems on a daily basis. eRECS can also be used to track manual invoice collection and payment operations so that all brokerage can be managed by a single solution. eRECS can be used enterprise wide or separately by business unit or region.

eRECS queries eGAInS starting at 2:00 a.m. EST until it obtains the daily eGAInS end-of-day file. eRECS will import data from a firm’s internal accounting system according to the individual firm’s processing schedule. eRECS is designed to handle files from leading back office systems including Sungard’s GMI and IOn’s RAnSYS as well as proprietary accounting systems.

eRECS matches on multiple levels: market, counterparty, product, trade prices, quantity, account number, commission fees and rates, and currency against both single and multiple trades, thus minimizing the num-ber of mismatches that require resolution.

eRECS matches transactions one-to-one, one-to-many and many-to-one. For ex-ample, a firm’s internal system may contain four orders of 100 lots each while eGAInS contains one order for 400 contracts. eRECS recognizes this as the same order and reconciles them as matched.

eRECS automatically approves what has been matched and removes the trades from the exception queue. Reconciled receivables will appear on the receivables invoices in eRECS; reconciled payables will appear on the payables invoices.

eRECS highlights discrepancies for easy resolution. For example, if account num-bers do not match, the trades that appear to match are displayed with the account number columns highlighted.

eRECS users can create PDFs of invoices that can be emailed to clients and other brokers. Users can also send a spreadsheet file containing the trade details with the invoice.

eRECS tracks receivables and payments for both automated and manual settlements. Firms can record payments into eRECS to close out payables. Users can track payment status at the invoice and transaction level.

eRECS reports can be generated by firm, market, client, currency and business unit. Firms can export eREC data to update their general ledger and invoicing systems or for general analysis. Export data can be used to automatically update eGAInS so that the correct brokerage can be calculated and settled (e.g., voice vs. electronic rates).

Adopting eRECSeRECS gives firms significant benefits

by streamlining cirtical pieces of its bro-kerage settlement operations; however, a fair amount of preparation and planning is required to allow a firm to make use of the eRECS functionality. To integrate eRECS into their brokerage operations,

firms need to prepare two files for daily delivery to eRECS. The first file is a daily view of trade information from the back office accounting system. Within eRECS, firms can create aliases or tables that recognize data differences between eGAInS and a firm’s accounting systems for exchange, firm or product codes and account numbers. These aliases allow eRECS to correctly interpret codes in their accounting systems when compar-ing them to eGAInS trades.

The second file is a daily file with conver-sion rates for different currencies to U.S. dollars. eRECS converts brokerage to USD for the purpose of displaying integrated amounts on reports and screens.

Many-to-Many reconciliationExhibit 2Match Level “2” in the approve column indicates a “many-to-many” exact reconciliation. eRECS recognizes that the three contracts in eGAINS matches the three contracts in the firm’s internal system even though they are presented differently.

discrepancies highlightedExhibit 3Match Level “12” shows “Commodity Difference” between eGAINS and internal books and highlights discrepancies.


Users must also change their bro-kerage reconciliation process from a monthly to a daily process. eRECS automatically reconciles transactions and changes to previously processed data daily, which is the quickest way to identify and resolve discrepancies.

Users also will need to determine whether they will do both eGAInS and non eGAInS execution brokerage invoicing and accounting within eRECS. Firms must identify the brokers and clients with whom they wish to pay and collect if they choose to use eRECS for manual invoicing.

James Woods is chief technology officer for

FIA Technology Services.

reconciled vs. BreaksExhibit 4Users can review their payables to see what has been reconciled and what has not. Line 16 shows an invoice with reconciliation breaks; line 20 shows an invoice with detail fully reconciled.

erECS report receivables payablesAdjusted Trade/Fee Report X XBreaks X XEntity Report X XInvoice Exception XInvoice Statement Report XOpen Items XOpen Items Aging X XPaid Items XReceipt Allocations Report XRecon Report XUnmatched Ready-To-Pay X

available reportsExhibit 5

• aBn aMro

• adM Investor services

• Bank of america Merrill lynch

• Barclays

• Citigroup

• Credit suisse

• daman Quattro

• deutsche Bank

• FC stone

• goldman sachs

• hsBC

• ICap u.s.

• Jefferies Bache

• JB drax honore

• J.p. Morgan

• Morgan stanley

• newedge

• r.J. o’Brien

• royal Bank of scotland

• sCs Commodities

• term Commodities

• uBs

egaIns participants

The 30th Annual Options Industry Conference is the premier event for top-level management and trading professionals. Set in vibrant New Orleans, the conference will feature an amazing slate of networking events and unforgettable experiences.

• Cyber Security • Social Media

• Exchange Leaders • The Buy-Side Story

PANELS ON IMPORTANT ISSUES FACING THE INDUSTRY:

• Charlie Cook, The Cook Political Report• Professor Peter Ricchiuti, Economist, Humorist• John Hague, McGladry & Pullen LLP

KEYNOTE SPEAKERS:

Eurex to Launch New Trading Architecture in December

Eurex is undertaking a “complete overhaul” of its trading systems and plans to launch a completely new trading architecture in De-cember. The new architecture is based on the trading technology that Eurex developed for the International Securities Exchange, its U.S. subsidiary, and will replace the exchange’s MISS infrastructure and values interface. As a result, market participants using those systems will have to establish new connections to the exchange. Eurex Clearing will continue to use its current systems, however.

Jürg Spillmann, the exchange’s deputy chief executive officer at Eurex and its head of IT and operations, said the new architecture will deliver “best in class” performance, efficiency, capacity and reliability. The exchange expects the new architecture will “mas-sively reduce” transaction latency, “substantially increase” message throughput and allow for greater flexibility in trading functionality and software updates. The system’s interfaces will be based upon in-dustry standards such as FIX and FAST. The exchange’s futures and options will be migrated to the new platform in phases in the months following the December launch.

ICE Clear U.S. Plans New Clearing Release in 2012

ICE Clear U.S. is planning a major clearing system release in 2012. According to a Feb. 14 notice, this will include transitioning the current risk and post-trade management systems and banking and reporting functionality to a newer system that was implemented for ICE Clear Europe in the fall of 2011. Key features include risk “snapshots” updated every five minutes, a streamlined banking model, a more robust report and file transfer system, and improved give-up processing. Once both clearinghouses are on the same ver-sion of software, future releases and enhancements will be available to both U.S. and European users of the clearing systems, ICE said. vendor testing is targeted for the end of April with clearing member testing to start at the beginning of July. A tentative timeframe for the launch date will be determined once testing has been scheduled.

NYSE Euronext Buys Stake in FixnetixnYSE Euronext announced in February that it has agreed to buy a

25% stake in Fixnetix, a U.K. technology company that provides low-latency market data, risk controls and other trading services. nYSE Eu-ronext, which announced the deal shortly after the failure of its merger with Deutsche Böerse, said the stake in Fixnetix will complement key areas of its commercial technology unit, nYSE Technologies. nYSE Euronext also has an option to buy the rest of the company at any time over the next three years. Although the companies will continue to op-erate independently, nYSE Technologies and Fixnetix will work together to offer customers integrated, multi-asset market access to liquidity venues in Europe, the Americas and Asia. The two companies said that their partnership will allow them to streamline the process for designing and installing various elements of global trading infrastructures. Clients can choose from a broader portfolio of targeted trading solutions deliv-ered with a lower time to market as a single solution.

HKEX Builds Ties to Mainland ChinaHong Kong Exchanges and Clearing and China Financial Futures

Exchange on Jan. 11 signed a memorandum of understanding to cooperate and exchange information. It is the first MOU that Shanghai’s CFFEX has signed with another exchange. The MOU was signed by Charles Li, chief executive officer of HKEX, and Zhu Yuchen, president of CFFEX at a ceremony in Shanghai. “CFFEX is at the forefront of the mainland’s financial development and HKEX, as an international exchange, is playing a leading role in China’s eco-nomic development,” Li said. “This shows that the two exchanges can work together towards a common goal.”

In related news, HKEX is laying the foundation for trading in renminbi futures and options. The exchange held a “market readi-ness test” in January to help member firms prepare their systems and operations for products denominated in the Chinese currency. The test covered buying, selling and post-trade activities with RMB-traded index futures, index options and stock options via HKATS, the trading system for HKEX’s derivatives market, and DCASS, the market’s clearing and settlement system. HKEX has not announced a launch date yet for these products.


Bursa Malaysia Takes Steps to Boost Derivatives Trading

Bursa Malaysia has announced two initiatives to encourage trading at its derivatives exchange subsidiary. In December, the exchange launched a new off-market trading facility that allows large trades to be transacted at a single price, thereby minimizing slippage and execution uncertainties. This service is available for the KLCI index futures, the crude palm oil futures, the 3-month KLIBOR futures and the 5-Year MGS futures contracts. The new system facilitates direct and private negotiations among customers and enables large orders to be transacted away from the trading system.

In January, it eased the requirements for individual traders to qualify as “local participants.” Candidates for this category of exchange member no longer need to take the licensing examination or show the relevant aca-demic qualification and industry experience. Instead the exchange has established a two-day “familiarization program” for individuals who aspire to be professional derivatives traders who trade for their own accounts.

“This liberalization measure signifies our commitment to grow the local participants base as they contribute greatly to market liquidity,” said Dato’ Tajuddin Atan, chief executive officer of Bursa Malaysia and chairman of Bursa Malaysia Derivatives, which is 25% owned by CME Group. “Traders can now easily manage their own portfolio, while at the same time enjoy the many benefits available including fee rebate and tax abatement.”

Tradeweb Launches Multi-Dealer Platform for FX Options

Tradeweb announced on Feb. 16 that it has launched an electronic trading platform for foreign exchange options. The new platform enables trading in options on 10 major currencies and allows buy-side investors to request quotes from up to five deal-ers simultaneously. Users can trade plain vanilla currency options or multi-leg strategies on a live or delta-exchange basis. At present there are seven dealers providing liquidity to the platform and several other firms are in the process of joining, Tradeweb said.

State Street Unveils Plans to Build a SEFState Street announced in February that it is building a trading platform for interest rate swaps and credit default swaps, putting it in competition with numerous other companies that are looking to capitalize on the swaps market’s transition to electronic trading. The bank said that it expects to seek registration with the Commodity Futures Trading Commission later this year to operate a swap execu-tion facility, a new type of trading venue created by the Dodd-Frank Act for the trading of standardized over-the-counter derivatives.

State Street’s SEF, which will be called SwapEx, will rely on technology already in use at the bank’s FX platforms Currenex and FX Connect, which rank among the largest multilateral trading venues in the spot FX markets. State Street officials said SwapEx will offer multiple methods for executing trades, including a central limit order book, request-for-quote, indications of interest and auction-style trading. State Street also plans to link SwapEx to other trading platforms so that traders can engage in relative value trading and other trading strategies across multiple asset classes.

The bank emphasized that its platform will be a “natural extension” of its existing business as a custodian and will be integrated with other services such as collateral management, post-trade processing, and clearing. Jeff Conway, executive vice president and head of in-vestment manager services at State Street, explained that buy-side clients will be able to use State Street for trading, clearing and process-ing their swap positions, managing the related collateral demands, and various other back-office services. State Street currently holds $21.8 trillion in assets in custody and management and provides OTC derivatives trading processing services to many large asset managers.

The launch of the new trading platform is part of a broader strategy targeting the “new environment” created by Dodd-Frank, explained Charley Cooper, a former CFTC official now working in State Street’s eExchange business. State Street expects that OTC derivatives will migrate to electronic trading platforms, he added, giving greater bargaining power to asset managers and other buy-side market participants and creating more demand for related services.

In anticipation of these changes, State Street established a futures commission merchant subsidiary in 2010 and has been hiring staff to build out its futures and swaps clearing capabilities. State Street also is providing its trading platform technology to other companies such as Eris Exchange, which offers trading in futures that mimic the economic features of interest rate swaps.

In a separate but related announcement, State Street said it plans to begin clearing interest rate swaps through LCH.Clearnet later this year. “State Street’s diverse, global client base demands a wide range of clearing choices across regions, exchanges and prod-ucts,” Clifford Lewis, executive vice president and head of State Street’s eExchange business, said in a statement. “We look forward to joining SwapClear as a member and to making the benefits of its services available to our clients.”


“Derivatives traders are seeking access to high-quality liquidity, fast execution, and efficient processing,” said Enrico Bruni, head of European markets at Tradeweb. “Our FX options platform addresses these needs by providing clients with competitive dealer auctions, full workflow integration and electronic post-trade processing.”

The addition of FX options is the latest move by Tradeweb into derivatives markets. Tradeweb also offers multi-dealer electronic trading of credit default swaps, interest rate swaps and European futures and options. Tradeweb, which is owned by Thomson Reuters and a consortium of banks, plans to register as a swap execution facility in the U.S., once the regulators finalize the rules, and operates as a multilateral trading facility in Europe subject to U.K. regulation.

Neovest Expands Futures Markets AccessJ.P. Morgan’s neovest subsidiary has added access to 15 futures

exchanges to its broker-neutral execution management system, bringing the total number of futures markets accessible through the platform to 29. The new futures markets include Australia’s ASX 24, Brazil’s BM&FBovespa, Hong Kong Exchanges and Clearing, all three of the futures markets operated by IntercontinentalExchange, Kansas City Board of Trade, Montreal Exchange, Osaka Securities Exchange, Singapore Exchange and the Tokyo Financial Exchange. The Utah-based company also has added market data support for calendar spreads on 25 futures exchanges.

Bryce Byers, the chief executive officer of neovest, said adding futures trading capabilities to the EMS was driven by the trends the firm is seeing among its buyside clients, notably more multi-asset trading and more interest in non-U.S. markets. He added that the EMS now includes functionality that matches what is typically avail-able on a stand alone futures trading platform.

“We have added a lot of functionality to make the trading work-flow more efficient,” he said in an interview. “For example, we have built a pro-rata allocation function into the system as well as risk controls that can be set on a product-by-product basis.”

Later this year neovest plans to extend connectivity to more futures exchanges, support trading of options on futures, and introduce more futures-specific order types. Byers mentioned that neovest is working on the design of a conditional order engine that will allow users to execute one-cancels-other orders.

Bloomberg Offers Free Use of Market Data APIIn a shift of policy, Bloomberg announced on Feb. 1 that it will

open its market data application programming interface for use by technology professionals globally under a free-use license. Bloom-berg’s API, known as BLPAPI, supports market data distribution to desktops, workgroups and enterprise applications. The announce-ment means that non-Bloomberg customers, vendors and software developers can now use BLPAPI as an alternative to proprietary technologies for market data distribution. “We intend to evolve BLPAPI into an open standard with the help of an independent committee charged with managing the future development and stability of a truly open market data interface,” Shawn Edwards, the company’s chief technology officer, said in a statement.

Traiana Connects Credit Limit Service to FX Options Trading Platform

Traiana, an ICAP subsidiary that specializes in providing post-trade solutions for the foreign exchange markets, is working with leading FX prime brokers to expand the use of its tools for manag-ing counterparty credit risk on electronic trading platforms. Traiana announced in February that its Harmony CreditLink service has been integrated into an electronic platform for trading foreign exchange options operated by Digital vega. Traiana also said that the FX prime brokerage arms of Citigroup and Morgan Stanley will be the first to use the Harmony CreditLink service to manage credit with their clients and counterparties.

Digital vega, whose owners include Deutsche Böerse and State Street, operates a multi-dealer FX options trading platform called Medusa and plans to apply to U.S. regulators for registration as a swap execution facility. “The provision of real-time, pre-trade limit checking allows us to deliver an integrated, industry-standard solution covering spot, forward and FX option trading,” Mark Suter, Digital vega’s chief executive officer, said in a statement. “Addition-ally, this partnership provides us with an ideal solution with which to address the significant pending changes to the FX regulatory environment.”

Traiana said Harmony CreditLink provides trading platforms, clearing firms, prime brokers, executing banks and buy-side firms the ability to monitor and manage credit in real-time across multiple trading venues in a consolidated view. The service provides an industry-wide central repository of prime brokerage limit calcula-tions and designation notices, real-time tri-party limit monitoring and ECn/exchange limit monitoring. It also provides electronic warnings and systems to manage the risk of limits being breached.


ProMINENT

David Wright, who worked for the Euro-pean Commission for more than 34 years, was appointed as secretary general of the International Organi-

zation of Securities Commissions. During his time at the Commission, he was at the forefront of the drive to integrate the Euro-pean Union’s financial services and capital markets. This included key roles in design-ing major European securities legislation such as the Markets in Financial Instruments Directive and the Market Abuse Directive. He also acted as the rapporteur on the De Larosière Committee on financial services reform. He replaced Greg Tanzer, who recently resigned to take up a position as a commissioner at the Australian Securities and Investments Commission.

The U.S. Securities and Exchange Com-mission promoted robert Fisher to deputy director in the office of international affairs. Fisher joined the SEC in 2002 and was most recently assistant director in the office of international affairs. Separately, David kotz, inspector general at the SEC since 2007, left the agency at the end of January to join a private investigative services firm, Gryphon Strategies, and focus on corporate fraud.

Marcus Zickwolff of Eurex Clearing was elected chairman of the European As-sociation of Central Counterparty Clearing Houses for a two-year term. His predeces-sor, rory Cunningham of LCH.Clearnet, will continue to be a member of the execu-tive board.

Margaret Cole is leaving her post as managing director and board member of the Financial Services Authority. Cole joined the FSA as director of enforcement in July 2005, following 20 years in private practice, spe-cializing in commercial litigation. Managing a division of 450 people, she had responsibil-

ity for enforcement policy, intelligence gath-ering, forensic investigations, and civil and criminal proceedings in areas that include market abuse and financial crime.

Michael Dunn, former commissioner at the Commodity Futures Trading Commission, was elected to the Kansas City Board of Trade Clearing Corp.’s

board of directors as a public director. Also elected to the KCBT Clearing Corp.’s board was James Lammle, who retired from the CFTC in 2006.

Michael Dean, Cargill, was elected president of the KCBT Clearing Corp. In addition, rock Marquardt, J.P. Morgan Securities, was elected first vice president; Bruce Wilson, individual member, was elected second vice president; and David Lehl, ADM Investor Services, was elected secretary-treasurer. Maureen Corbett, ABn Amro Clearing Chicago, James kanan, individual member, and Thomas Beringer, individual member, were elected as directors.

Michael Dunn has also joined Patton Boggs as a senior policy advisor, expand-ing the firm’s bench of former senior officials from federal regulatory agencies.

president Barack Obama nominated Deutsche Bank’s Adam Sieminski to serve as head of the Energy Information Admin-istration, the statistics arm of the Energy Department. Sieminski is currently the bank’s chief energy economist, a role he has held since 2005.

Glenn Seah rejoined Singapore Exchange as senior vice president and head of compliance effective Feb. 7. Seah will be responsible for driving SGX’s compliance with local and international regulations and best practices. He previously worked at

Standard Chartered Bank, where he was regional head, wholesale bank compliance in Singapore and Southeast Asia. Earlier in his career he served in various roles in SGX, including head of market surveillance and enforcement.

The European Energy Exchange appointed Steffen köhler as a new member of the management board, assuming the role as chief market officer. Köhler has extensive experience in derivatives trading and is currently executive director, head of product development at Eurex.

newedge appointed ronald Savino as regional chief admin-istrative officer for the Asia Pacific region. He was previously head of Asia Pacific futures and

options at Bank of America Merrill Lynch. Based in Hong Kong, Savino reports to Laurent Cunin, head of newedge APAC. Savino replaced Jens Winter, who recently moved to Frankfurt to assume the role of country head for Germany and Switzerland. newedge also appointed Andrew roper as director of the firm’s foreign-exchange sales desk. He is based in London and reports to Michael Bailey, head of FX. Prior to joining newedge, Roper was director of the FX sales desk at UniCredit.

Getco named Daniel Coleman as chief executive officer. Coleman joined the firm in 2010 from UBS and has been serving as the firm’s global head of equities and client services. He takes over from Stephen Schuler, one of the firm’s co-founders, who will continue to serve on Getco’s board of directors and will take on the newly created role of executive director. Coleman will focus on enhancing the firm’s core market-making business and continuing to expand the firm’s client services offerings in the U.S. and abroad. In his previous role as global head


ProMINENT

of equities and client services, Coleman oversaw the firm’s equities market-making operations and client-facing businesses, including the firm’s position as a designated market maker at the new York Stock Ex-change. Before joining Getco, Coleman was global head of equities at UBS. He began his career at O’Connor & Associates.

CBOE Holdings announced a reorganization in February. As part of that plan, Edward provost, executive vice president, was named chief business development officer. philip Slocum, executive vice president, was named special advisor to the chairman.

The OCC named James Brown as execu-tive vice president and general counsel to succeed Bill navin, who retired from the position. Brown was previously at Schiff Hardin, where he practiced since 1983.

LCH.Clearnet appointed Lisa rosen as group head of compliance and public af-fairs. She was previously managing director, global head of regulatory affairs at Barclays Capital in London. In this new role, she oversees LCH.Clearnet’s regulatory and lob-bying activities. She reports to Christophe hémon, group chief operating officer.

Donald horwitz, a veteran futures indus-try lawyer, joined the Intellectual Property Exchange International as managing direc-tor and general counsel. IPXI operates a marketplace for the licensing and trading of patents and other intellectual property. Its owners include CBOE Holdings and Royal

Philips Electronics. Horwitz previously was general counsel and chief regulatory officer at OneChicago. Earlier in his career he worked at UBS, ABn Amro and Sakura Delsher.

peter Borish was named chief execu-tive officer of Touradji Capital Management. He was previously the chairman and CEO of the Computer Trading

Corp. Borish is chairman of the Institute for Financial Markets.

national Futures Association elected two new members to its board of directors: Douglas Bry, president of northfield Trad-ing, and Ernest Jaffarian, president and chief executive officer of Efficient Capital Management. Both directors are representa-tives in the commodity pool operator/com-modity trading advisor category.

The nFA board elected Christopher heh-meyer, non-executive chairman at Penson GHCO, to serve a one-year term as chairman. The board also elected paul Georgy, presi-dent of Allendale, to serve as vice chairman.

Bruce Fekrat left the Commodity Futures Trading Commission after more than eight years of service and joined the law firm of WilmerHale as special

counsel. He works in the firm’s Washing-ton office and focuses on regulatory issues related to derivatives trading, advising swap dealers, managed funds, futures commission merchants and other market participants. At the CFTC, he was a senior special counsel in the market oversight division, where he drafted several rulemakings that implemented the Dodd-Frank Act and helped develop a reporting system for swaps market data.

nYSE Liffe U.S. announced that harvey Flax was appointed to the newly created position of business manager, GCF repo index futures. Flax comes to the exchange from Morgan Stanley, where he held a num-ber of senior roles in the firm’s fixed income and equity financing groups.

richard Jaycobs was named chief execu-tive officer of ELX Futures, to succeed neal Wolkoff, who announced his resignation from the post on April 30. Jaycobs, a 25-year vet-eran of the futures and derivatives industry, pre-viously was president of the Cantor Exchange.

Matthew Dowd was named to head up Montreal Exchange’s newly created U.S. of-fice located in new York. In this new role as business development manager, U.S. finan-cial markets, Dowd will help foster demand for Canadian dollar-denominated assets. Dowd was previously manager, business development, fixed income derivatives.

Mark phelps joined GHF Group as head of global marketing and sales. He is based in the clearing firm’s newly established office in Chi-cago. Phelps previously worked at nYSE Liffe for 14 years, most recently as head of business development for fixed income derivatives.

robert hammond joined MarketAxess as head of client sale and dealer relations in Eu-rope, the Middle East and Africa. He is based in London and will report to paul Ellis, head of MarketAxess Europe. Hammond was most recently at CME Group, as head of listed rates and over-the-counter clearing for EMEA.

Marti Tirinnanzi was named senior vice president of business development for TeraExchange, an independent swap execution facility set to launch in the first quarter. Tirinnanzi is heading up the Wash-ington, D.C. office. She most recently served as chairman of the Clearinghouse Working Group of the Federal Housing Finance Agency, where she oversaw the project to move Fannie Mae’s and Freddie Mac’s $2 trillion in over-the-counter inter-est swaps to clearing.

The Wholesale Market Brokers’ Asso-ciation Americas announced that Chris Ferreri has been elected chairman of the association. Ferreri is managing director of hybrid trading at ICAP. He succeeds Shawn Bernardo, senior managing director at Tullett Prebon. In addition, the WMBAA elected Christopher Giancarlo as vice chairman. Giancarlo is executive vice president at GFI Group.

In Memoriam

The FIA was saddened to hear of the death of Junius peake, 80, one of the finance industry’s earli-est advocates of electronic trad-ing. In 1975, he teamed up with two others, Morris Mendelson and r.T. Williams to propose an electronic stock exchange. Peake later helped establish the Interna-tional Futures Exchange, or Intex, the first electronic trading system for futures contracts.


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Documents

30 Years with John Damgard