LATEST ARTICLES | DERIVATIVES
Daily trading volumes in global foreign exchange markets topped $1.79 trillion in November 2020, according to CLS, making FX by far the most heavily traded asset class. Most of this trading volume is executed either indirectly through electronic platforms or bilaterally between counterparties, rather than on traditional ‘exchange-type’ venues.This fragmentation of liquidity – combined with an explosion of data as more electronic venues come to market – can make the marketplace tricky to navigate. As a result, market participants across both the buy side and the sell side are now demanding more from their technology vendors. So how are the vendors responding?
A market survey by Acuiti has found that almost all tier one and tier two banks queried plan to invest more in derivatives post-trade operations over the next three years than in the last three, as a result of the COVID-19 fuelled market volatility seen in the first months of 2020.Almost half of tier one and two banks that responded to the survey are expecting to invest more than $5 million over the next three years in “long-awaited upgrades to post-trade processing capacity”.
Major investment banks will increase investment in post-trade infrastructure after reporting failures with back-office processes during the market volatility earlier this year.According to a recent survey by Acuti, 95% of tier one and tier two banks are planning to invest more than $1 million in post-trade infrastructure over the next three years, with 45% hoping to invest more than $5 million.
Regulators for the UK and US derivatives markets have signed a new cross-border supervisory agreement for clearing houses operating in both countries. The Bank of England (BoE) and the US Commodity Futures Trading Commission (CFTC) announced the signing of a new memorandum of understanding (MOU) where they have established a cooperation framework for overseeing international clearing houses.
NowCP, Paris, and european primary placement facility (eppf), Luxembourg, have launched a new co-operation to provide issuers with the full value chain of financial instruments from the short-end commercial paper to long-dated bonds.The cooperation will be fully automated starting with NowCP’s marketplace as the primary and secondary market trading venue.
CFTC releases no-action letters offering further relief for clearing organisations during Libor transition
The Commodity Futures Trading Commission (CFTC) has published two additional no-action letters offering relief to derivatives clearing organisations (DCOs) transitioning to the secured overnight financing rate (SOFR).The no-action letters will offer swap transaction and pricing data reporting relief to DCOs that will help transition certain cleared swaps from discounting using the effective federal funds rate (EFFR) to the SOFR.
This Finadium report investigates current dynamics in the Total Return Swaps market with a focus on bank resource optimization. We deliver market sizing through H2 2020 and analyze the dynamics that lead to a continued preference for TRS over physical financing transactions.
The Cboe Theoretical Value is a sophisticated, next-generation improvement of Cboe’s existing datasets, and forms a foundational element of Cboe Information Solutions’ options analytics product suite. This cohesive dataset helps customers better understand risk, access markets and make more informed trading decisions. Cboe Theo is now available via Cboe Hanweck here and will soon be used across Cboe’s global derivatives marketplace.
The FCA has published final rules banning the sale of derivatives and exchange traded notes (ETNs) that reference certain types of cryptoassets to retail consumers.The FCA considers these products to be ill-suited for retail consumers due to the harm they pose. These products cannot be reliably valued by retail consumers because of the:
US derivatives exchange ICE has launched a beta version of its GBP ICE Swap Rate for SONIA swaps through its ICE Benchmark Administration (IBA) business.ICE said that IBA has started publishing the beta version of the ICE Swap Rate for SONIA swaps following market feedback and consultation papers.
Euronext’s Anthony Attia gave the keynote starting PostTrade 360° Copenhagen on Wednesday morning, 23 September. As member of the management board, with a heavy role in the post-trade area, he sees new opportunity for his groups three CSDs to take a strong position as Europe’s CSD market is being consolidated. Portugal’s Interbolsa was the group’s first CSD, Norway’s VPS was acquired in 2019 and Denmark’s VP Securities this summer.
LCH has registered its first SONIA/SOFR cross-currency basis swap between Bank of America and Lloyds Bank Corporate Markets via SwapAgent.The UK clearing house said the trade was completed ahead of the upcoming discounting and price alignment interest transition to USD SOFR at LCH SwapAgent, which is scheduled for 16 October.
CME Group, the world’s leading and most diverse derivatives marketplace, announced the launch of options on its Micro E-mini S&P 500 and Micro E-mini Nasdaq-100 futures contracts, which became available for trading today. Options on the Micro E-mini S&P 500 and Micro E-mini Nasdaq-100 futures are 1/10th the size of their E-mini options counterparts. The listing cycle for the new options consists of five Friday weekly options, three end-of-month options and two quarterly options contracts.
Debate is growing over the implementation of the International Swaps and Derivatives Association’s (Isda’s) common domain model (CDM), as uptake remains slow nearly three years after the project’s launch.“Lack of standards creates a self-perpetuating mess,” says Daniel Schwartz, head of fintech and capital markets tech strategy advisory firm FT Advisory.“Furthermore, for those financial activities which evolve over time such as over-the-counter (OTC) derivatives trade, a data only standard will not fully address the problem. You might have accurate data at one point in time, but as the trade evolves it’s more than likely to get out of sync.”
With the London Interbank Offered Rate (“LIBOR”) set to extinguish at the end of next year, the heir apparent replacement index is the Secured Overnight Financing Rate (“SOFR”). SOFR has come under scrutiny recently during periods of significant interest rate volatility where it has shown very little correlation with 3-month LIBOR. This caused the Federal Reserve (the “Fed”) in May of this year to back-off from using SOFR, and revert to LIBOR, for its $600 million Main Street Lending Program. Tradeweb Markets Inc. (“Tradeweb”) and the Intercontinental Exchange Inc. (“ICE”) have stepped-in to offer an alternative index in the form of a daily Treasury yield curve. The index would publish 11 tenors, maturities ranging from one month to 30 years, and the yields are based on transactions executed on Tradeweb’s institutional trading platform, which is among the biggest marketplaces for U.S. government debt.
A scalable infrastructure to launch traditional, alternative and digital asset markets around the worldExberry, the exchange technology pioneer, has been appointed by London Derivatives Exchange (LDX) to provide matching engine technology. The new technology partnership will enable LDX to launch global markets and cover a wide spectrum of asset classes.Digital assets have emerged as an attractive new investment class, especially since the pandemic, and demand for alternative secondary market trading opportunities is increasing. Exberry’s infrastructure overcomes the limitations of current exchange technology – it delivers a platform designed to help any asset class launch markets, pivot, and scale.
Coronavirus and the end-2020 Brexit deadline have left UK firms facing historic uncertainties, prompting many to find more flexible ways to protect their foreign exchange exposure — even if these come at a higher initial cost.The pandemic is expected to cause Britain’s biggest economic contraction in 300 years and swell unemployment, debt and corporate bankruptcies. An added risk is that Britain could cast off from the European Union next year without having agreed any trade deals.
Key TakeawaysThe primary regulator for derivatives in the United States is making the regulation of digital assets a priority for the near future.The CFTC will focus on enhancing liquidity in U.S derivative markets too, which could limit the number of cryptocurrencies allowed for regulated derivatives.As a central piece in the U.S regulatory puzzle, acceptance of digital assets by the CFTC will be a milestone for the industry.
Structured products are no stranger to the limelight. Once only garnering interest from niche Wall Street trading floors, collateralized debt obligations (CDOs) and mortgage-backed securities (MBS) have become household names, as these products were cited as primary culprits of the financial system meltdown in 2008. Now, as the world continues to grapple with the fallout stemming from the COVID-19 outbreak, structured products are back in the forefront. This time, fingers are pointed at collateralized loan obligations (CLOs) as many believe they may pose an outsized risk in the current market environment. In this note, we discuss why we disagree with these assertions, and why we believe, if accessed correctly, CLOs present a source of opportunity.
Global financial regulators set out recommendations on Thursday for coordinating and speeding up preparations to scrap Libor, an interest rate benchmark banks were fined billions of dollars for trying to rig.The Financial Stability Board (FSB), which coordinates financial rules for the Group of 20 Economies (G20), surveyed the readiness of countries, banks and companies for getting rid of the benchmark by the end of 2021. Libor is currently used for pricing credit cards, home loans, company loans and derivatives worth trillions of dollars.
Enhancing its resiliency as a Systemically Important Financial Market Utility (SIFMU), OCC, the world's largest equity derivatives clearing organization, today announced that the U.S. Securities and Exchange Commission (SEC) approved Phase III of the company's Financial Safeguards Framework (FSF) for liquidity on June 4, 2020. The approved changes were implemented on June 29, 2020. “The implementation of the Financial Safeguards Framework Phase III enhancements is an important milestone for OCC, our clearing members, and market participants,” said Scot Warren, OCC Chief Operating Officer. “The enhancements are designed to meet new and evolving regulatory requirements and industry best practices.”
The S&P GSCI rose 5.09% in June and 10.47% for the second quarter of 2020. The recovery in the second quarter did not fully retrace the dramatic downside from the first quarter, as can be seen in the index’s -36.50% YTD return. Continued recovery in petroleum commodities contributed, but bullish sentiment in industrial metals such as copper helped keep the S&P GSCI in positive territory.V-shaped moves off 2020 lows were not distinctive to just the S&P 500®. The S&P GSCI Brent Crude Oil rose 8.44% in June and 38.18% for Q2 2020. The reopening of economies across the world supported an increase of crude oil demand...
The International Swaps and Derivatives Association, Inc. (ISDA), the Asia Securities Industry and Financial Markets Association (ASIFMA), the Futures Industry Association (FIA) and the Global Foreign Exchange Division (GFXD) of the Global Financial Markets Association (GFMA) have published a set of recommendations to reform the European Union Benchmarks Regulation (BMR). The proposals are aimed at maintaining the intended protections of the BMR but reducing the potential for uncertainty and disruption and preventing EU investors from being put at a competitive disadvantage versus non-EU entities.
European futures exchanges have been given a one-year delay to implement rules aimed at boosting competition under MiFID II, just two weeks before the regime was set to come into force. The European Parliament confirmed the delay for exchanges and clearing houses to implement open access, after regulators warned the coronavirus pandemic has impacted on firms’ ability to prepare. The delay was agreed by the European Parliament and EU national governments, and inserted into a draft EU financial services law.
Deutsche Bank will pay $10 million to settle two enforcement actions from the US derivatives watchdog for allegedly engaging in spoofing and violating swap data reporting requirements.The US Commodity Futures Trading Commission (CFTC) confirmed that the German investment bank had resolved federal court charges stemming from alleged spoofing activity which took place in 2013, and an outage on its swap reporting platform that lasted for five days in 2016.