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P&L’s Squawkbox


September a good month for platforms. September proved lucrative on a year-on-year basis for the major trading venues. Icap says average daily spot FX volume on its EBS currency trading platform in September was $183.1 billion, an increase of 25% over the previous year although slightly down on August’s $186.9 billion.

Average daily FX spot volume on Thomson Reuters’ three main trading services – Dealing, Matching and Reuters Trading for FX – in September was $176 billion, the second highest month on record for the company. This represents a 32% growth compared to September 2010 and a 6% growth on August’s volumes.

“Market events in September have pushed FX volumes up even further so that we are seeing our second highest month on record, with volumes in excess of $176 billion per day. This has only been surpassed by volumes surrounding the flash crash last May and represents a 32% increase year on year,” says Jas Singh, global head of treasury, Thomson Reuters.

“All our euro-based currency pairs saw higher than average volumes, which is to be expected due to falling confidence in the Eurozone. The flight to and from commodities-based currencies, although notable, remains level with August and we have seen growth in the Russian rouble, Indian rupee and Singapore dollar,” he adds.

September was also CME Group’s second busiest month ever in foreign exchange products. Volume averaged 1.1 million contracts per day, up 14% compared with September 2010, reflecting average daily notional value of $143 billion, up 16% year-over-year. CME’s September volume included records across 10 different currency pairs in both major and emerging market currencies.

During the third quarter, CME says FX volume averaged 988,000 contracts per day, up 14% compared with the same period a year ago, reflecting average daily notional value of $135 billion, up 23% year-over-year.

Knight Capital’s Hotspot FX saw average daily volume in September of $68.2 billion, an increase of 8.1% compared to August’s volumes and a rise of 101.8% year-on-year. All numbers are double-counted, compared to the other platforms which report on a single count basis.

A total of $1.499 trillion was traded on the platform, up from $743.0 billion in September 2010. Comparing September to August, the European and Americas sessions experienced the biggest swings in market share. The European session increased by 2.91% while the Americas decreased by 2.04%. The Asian session posted a decrease in volume percentage of 0.87%. 

The third quarter proved to be Hotspot’s highest total volume quarter so far – 2.3% greater than Q2 2011. Total volume for the quarter was $4.253 trillion and average daily volume was $64.5 billion, based on 66 trading days. Average daily volume in Q3 was up 14.3% compared to Q2 2011 and up 98.0% versus Q3 2010.

Finally, CLS Bank also released volumes and values for September. During the month, CLS settled a record average daily value of $5.21 trillion, up 8% on August 2011 and a year-on-year increase of 23%. Average daily volumes during the month were at their highest since the peak of May 2010, at 935,810 instructions. Meanwhile, CLS’s Aggregation Service recorded an average compression ratio of 95.5%.

All in all, a good month for the platforms – well those that report anyway.


And it was a good month for clearing as well. CME Group has posted a monthly record for clearing interest rate swaps and credit default swaps in September, in a sign that it is making progress ahead of new rules designed to move over-the-counter derivatives onto exchanges and electronic platforms.

In September, the exchange operator cleared more than $35.5 billion in interest rate swaps, beating the previous record of $1.2 billion in August. CME cleared $6.5 billion in credit default swaps in September, exceeding the previous record monthly total of $287 million in August.

CME also expanded its existing US dollar-denominated IRS offering on 17 October to include euro-denominated IRS. By year-end, CME Group will expand its CDS offering to include CDX high yield indices, and will extend its IRS offering to include the British pound, Japanese yen, Swiss franc and Canadian dollar-denominated IRS.

“CME Group is pleased to have 15 clearing members with approximately 500 customer accounts actively clearing trades ahead of the Dodd-Frank clearing mandate,” says Laurent Paulhac, managing director, OTC products and services. “With more than 2,500 customer accounts in the pipeline, we will continue to help our customers advance towards clearing in order to reduce their counterparty credit risk.”


And interest rate derivatives…Tradeweb has announced a 90% increase in notional trading volume on its global multi-dealer-to-client interest rate derivatives platform for the third quarter of 2011 versus the same quarter last year. The firm attributes the increase not just to greater activity by clients in volatile market conditions but an increasing number of companies active on the Tradeweb platform amid an environment of heightened regulation.

Final rules on derivatives trading in the US under the Dodd-Frank Act are expected in 2012 and similar proposals are expected from European regulators. Once implemented, trading of most swaps will need to take place on a swap execution facility or exchange. Tradeweb intends to register as a SEF as soon as allowed, says
Lee Olesky, chief executive officer of Tradeweb.

“Regulation is accelerating the transition of derivatives trading to more efficient markets. Market participants are starting to take the steps needed to comply with the underlying principles of market reform, even when faced with uncertain timing for implementation,” he adds.


Icap reports rise in revenues. The interdealer broker says group revenue in the six months ending 30 September were marginally ahead of the same period last year as it benefitted from high levels of volatility in the financial markets.

Volumes on its electronic broking platforms, EBS and BrokerTec, reached $884.6 billion in the five months to the end of August 2011, an increase of 18% year-on-year. Average daily FX volumes on EBS increased 12% year-on-year to $173.1 billion. 

Volumes on i-Swap, the platform launched last year for trading euro interest rate swaps, have a nominal value of over €590 billion matched to date through the electronic order book. This accounts for more than 20% of Icap’s euro IRS trades. “As you would expect in a comparatively young electronic market, we saw a shift back to voice broking in July and August, due to very significant volatility in European financial markets in this period.  However, we expect electronic IRS volumes to continue to grow,” Icap says.

In voice broking, the company’s team in Singapore has now been “substantially” rebuilt following the defection of 40 brokers to rival firm Tradition in September last year.

Performance in Icap’s post trade risk and information businesses was strong, Icap says. TriOptima’s triReduce service, which allows customers to tear up their existing trades to eliminate cost, credit and operational risk and reduce capital requirements, recently undertook the largest dollar interest rate swap tear-up to date for SwapClear, with $7.1 trillion notional principal eliminated from LCH.Clearnet’s SwapClear service.  

“The first six months of the year has seen Icap continue to focus on organic growth, increasing the number of asset classes our post trade business supports and developing our electronic and hybrid initiatives,” says Michael Spencer, group chief executive of Icap. “We have also seen higher volumes on our pure electronic platforms, with, for example, $407 billion traded on EBS on 4 August, the third-highest volume day in its history.”

Icap says it expects the recent high levels of volatility in financial markets to continue. “We remain confident that the diversity of our products and services will continue to assist our customers around the world to do business and reduce risk in these uncertain times,” Spencer says.

Separately, Icap has provisionally agreed with Barclays Capital, Deutsche Bank, JP Morgan and Bank of America Merrill Lynch to co-invest in i-Swap to assist in the growth and development of the platform. Icap, which will continue to run and consolidate the results of i-Swap, says there is potential for additional investment by other user banks. The transaction is subject to regulatory approvals. 

Washington DC

Regulation as a business opportunity? The US National Futures Association and GFI Group have entered into an agreement that paves the way for NFA to perform regulatory services for GFI’s swap execution facility.

The agreement establishes a preliminary framework for the exchange of information and the development of technology standards that will enable GFI and NFA to develop and launch automated trade practice and surveillance systems and also to develop procedures and processes necessary for GFI to fulfil its SEF self-regulatory obligations.

Under the Dodd-Frank Act, the CFTC has proposed to allow SEFs to contract with a registered futures association, such as NFA, or another registered entity for regulatory services.

NFA and Bloomberg have also entered into a similar agreement and say they hope to sign a separate Regulatory Services Agreement.

Washington DC

Not for some businesses it seems. The proposed Volcker Rule, which will restrict banks’ ability to trade in certain derivatives and securities for their own profit, has attracted criticism for being “the most burdensome way” of implementing legislation.

The draft from the Federal Deposit Insurance Corp (FDIC) was officially released in mid-October and gives leeway to a bank if it is hedging a specific position or a portfolio of risks across multiple trading desks. However it adds that hedging trades would need to have a “reasonable,” not a full, correlation with the underlying risk. In a sign the legislation may be slightly more lenient than the initial proposal, banks could also gain exemption from the rule if they are hedging a risk that is highly likely to arise in the future as a part of their regular business.

Although analysts say the rule is likely to be less restrictive than originally feared, and the document raises many questions needing to be answered before the final rule is published, it has attracted criticism from industry group Sifma (Securities Industry and Financial Markets Association).

In a statement, Sifma CEO and president Tim Ryan, says, “While we will continue to review this expansive draft proposal, upon first read it seems to reflect much consideration about how these businesses and markets work, but it also seems to have some complex and potentially burdensome provisions that may impede Congress’s stated intent to allow for traditional market making activities and the asset management alternative fund business.

“Sifma’s primary concern is the potential negative impact of the proposed rule on market liquidity. Any restriction on the ability of financial institutions to make markets for different kinds of financial instruments will reduce market liquidity, capital formation and credit availability, thereby hampering economic growth and job creation. The document raises important questions related to the costs and burdens of complying with certain aspects of the proposal and SIFMA appreciates the opportunity to work with regulators to ensure proper economic analysis is undertaken,” he continues.

“Importantly, we understand that this draft may be subject to revision before formal publication and we look forward to the full proposed rule. Given its magnitude and impact on US markets, it will be subject to significant comment and hopefully consideration by the regulators to insure against undermining the depth, liquidity, and viability of US financial markets.”

Comments on the draft proposal can be submitted to regulators by 16 December, 2011, after which a final rule is expected to come into force for mid-2012.

Sao Paulo

All in all its another BRIC in the wall. Securities exchanges from five of the world’s largest emerging markets have formed a joint initiative to offer investors access to their economies and to increase the liquidity of their trading venues.

The exchanges from Brazil, Russia, India, Hong Kong and South Africa – which accounted for 18% of the volume of listed derivative contracts traded globally, according to the Futures Industry Association – will cross-list derivatives on their flagship equity indexes by June 2012.  

The partnership highlights a growing trend of emerging markets turning to each other as sources of growth and reinforces the notion of a ‘South-South divide’.

The cross-listed instruments will be available in local currencies, meaning an investor in Brazil will be able to bet on the performance of the Hang Seng or the Micex using reals. The local currency settlement will be particularly agreeable to regulators in countries with tight exchange controls, such as South Africa and India, says Russell Loubser, chief executive of the Johannesburg Stock Exchange (JSE).

The initiative brings together Brazil’s BM&FBovespa, Russia’s Micex and RTS Stock Exchange, Hong Kong Exchanges and Clearing Limited and JSE. The National Stock Exchange of India and the BSE Ltd (India) have signed letters of support and will join the alliance after finalising outstanding requirements. 

“Global investors are increasingly seeking exposure to leading developing markets,” says Ronald Arculli, chairman of HKEx and of the World Federation of Exchanges (WFE). “The alliance enables more investors to gain exposure to the emerging economies of the BRICS group whose economic power is on the rise.

“From a global perspective this alliance highlights the growing significance of the BRICS economies and financial markets for the coming decade, and further underlines the importance of enhancing cooperation between the BRICS members,” he says.

At the second stage of the project, members of the alliance will jointly develop new products for cross-listing on their exchanges that will also be available in local currencies.

“In addition to measuring market performance, equity indices may be used as underlying assets to create new products, which can be the next step in the alliance development,” says Loubser.

The third stage may include further cooperation in other asset classes.

“Apart from cross-listing products, there are other opportunities for growth and development within this alliance. For example, creation of joint products combining various underliers which will facilitate liquidity growth in the BRICS markets and improve the understanding of other developing markets by local investors,” says Ruben Aganbegyan, president of Micex.

Interest towards the BRICS markets is supported by the above-average growth forecast for these regions, as well as the rising consumer power generated by growing middle classes in each of the participating economies.

According to the WFE, the six exchanges in the alliance represent a combined market capitalisation of $9.02 trillion.

New York

Better times post-Dodd-Frank? A survey conducted by Tabb Group finds that despite the risks to liquidity posed by CFTC-proposed regulation, over the long term nearly 75% of existing swap dealers believe liquidity will ultimately improve in the post-Dodd-Frank Act era.
This is due to increased market participation, further product standardisation and electronic trading access, they say.

It is not all good news, however, for the same survey finds that in the first year after Dodd-Frank implementation, nearly nine out of 10 top-tier dealers and two thirds of mid-tier dealers expect profits to remain flat or decline.
Regardless of the unknowns, complexities and costs, the dealer community as a whole believes it is ready for change, says Kevin McPartland, a Tabb principal, director of fixed income research and author of the new study, Credit and Rates Swaps Dealers 2011: Redefined and Reborn.

“Although lobbying will continue and politics persist,” McPartland says. “Dealers see the advantages of a mostly cleared swaps market.”

Taking advantage of new opportunities won’t be easy though, as nearly 60% of current dealers believe barriers-to-entry will grow and most express doubt as to why non-dealers would want to get into a business where profit margins are decreasing and regulatory oversight is increasing.

According to McPartland, interviews for the study confirmed that dealer-to-dealer electronic trading of on-the-run, investment grade credit default swaps index products in the US now accounts for over 80% of total transaction volume of those products, proof that swaps trading is moving to the screen ahead of regulatory mandates.

“Even in the dealer-to-client market, trading in the CDX.IG is roughly 25% of the total contract volume,” he adds. 
Dodd-Frank is not the only change weighing on markets. Nearly 60% of the swap dealers interviewed claim Basel III will have a bigger impact on their business than Dodd-Frank. While Basel III doesn’t dictate how a swap must be executed, it does impact each bank’s capacity to fund their swaps trading desk by defining the maximum leverage allowed.

The study also finds that over 90% of existing dealers see clearing certainty as a major issue; 95% plan to offer some form of margin financing to clients; and technology was only second to relationships as a strategic advantage after Dodd-Frank implementation.

Profit & Loss

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