EU has opened two antitrust probes into transparancy in CDS market


The EU has opened two antitrust probes into transparency in CDS market.

First Probe: CDS information market: The first investigation focuses on the financial information necessary for trading CDS. The Commission has indications that the 16 banks that act as dealers in the CDS market give most of the pricing, indices and other essential daily data only to Markit, the leading financial information company in the market concerned. This could be the consequence of collusion between them or an abuse of a possible collective dominance and may have the effect of foreclosing the access to the valuable raw data by other information service providers. If proven, such behaviour would be in violation of EU antitrust rules (Articles 101 and 102 of the Treaty on the Functioning of the European Union – TFEU). The 16 CDS bank dealers are: JP Morgan, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Crédit Suisse First Boston, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo Bank/Wachovia, Crédit Agricole and Société Générale.

The probe will also examine the behaviour of Markit, a UK-based company created originally to enhance transparency in the CDS market. The Commission is now concerned certain clauses in Markit’s licence and distribution agreements could be abusive and impede the development of competition in the market for the provision of CDS information.

Second Probe: CDS clearing: In the second case, the Commission is investigating a number of agreements between nine of the above 16 CDS dealers (Bank of America Corporation, Barclays Bank plc, Citigroup Inc, Crédit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group, Inc., JP Morgan Chase & Co, Morgan Stanley and UBS AG) and ICE Clear Europe. These agreements were concluded at the time of the sale, by the dealers, of a company called The Clearing Corporation to ICE. They contain a number of clauses (preferential fees and profit sharing arrangements) which might create an incentive for the banks to use only ICE as a clearing house. The effects of these agreements could be that other clearing houses have difficulties successfully entering the market and that other CDS players have no real choice where to clear their transactions. If proven, the practice would violate Art 101.

The Commission will also investigate whether the fee structures used by ICE give an unfair advantage to the nine banks, by discriminating against other CDS dealers. This could potentially constitute an abuse of a dominant position by ICE in breach of Article 102.

Full details here:

The Streetwise Professor has added his thoughts to the EU probe here

At a packed NATAS, two sessions focus on SDPs


The Waters North American Trading Architecture Summit in New York yesterday was very well-attended. In fact there was standing room only at the plenary sessions.

Among a wide range of topics, two presentations addressed SDP technology. Patrick Myles, CTO of Caplin Systems, talked about the role of domain-driven design, architectural frameworks and anti-corruption layers in designing multi-asset e-commerce systems. Later in the day, Matt Davey, CTO of Lab49, demonstrated an HTML5-based trading front end, and talked about the use of hardware messaging appliances.

Other popular topics included – no surprise – cloud computing in finance (seen broadly as important but difficult and expensive) and low-latency architecture.

SEC & CFTC clarify Swap Definitions, but FX still fuzzy!


The SEC yesterday released full definitions of Swaps here.

The CFTC also released a summary Q&A paper to clarify the SEC definitions for SWAPS which is available here. For the avoidance of doubt, the CFTC goes out of its way in the paper to clarify that amongst others, the following transactions are Swaps:

Foreign Exchange Swaps and Forwards, Foreign currency Options (not exchange traded), Non-Deliverable Forwards in FX (NDF), Commodity options, Cross -Currency Swaps, Forward Rate Agreements, Contracts for Difference, Swaptions, Forward Swaps.

The US Treasury Secretary still has until July to make a determination to exempt FX Swaps from Dodd Frank (see determination of Foreign Exchange swaps and forwards). If exempted, FX Swaps will not be required to trade on a SEF, although they may be required to clear via a recognised Central Clearing Counterparty (CCP), and will still be subject to the CFTC reporting rules as below.

Reporting Swaps in: However, the CFTC makes it clear that even if FX Swaps and FX fwds were exempt, they would still be subject to Swaps reporting requirements (to a swap data repository, or to the CFTC), and swaps dealers and major swaps participants would be subject to business conduct standards.

Plus all other FX products that meet the Swap definition, remain subject to the Commodity Exchange Act (CEA), even if FX Swaps and Fwds are exempt, this would include Foreign Currency Options (other than traded on exchange) and Non-Deliverable Forwards.

Is Deutsche Bank calling the top on Retail FX?


Deutsche Bank is exiting the Retail FX space by selling its hugely successful FX platform dbFX to Gain Capital, in order to focus on its core institutional FX business. The business was started in 2006, using technology provided by FXCM. However, this was no ordinary retail FX business, this was Deutsche Bank retail client FX flow. As such, the average account size of dbFX clients at $100k was some 40 times the average account size for in the retail FX business. Yet for the mighty Deutsche Bank, this is seen as a distraction to their core institutional FX business (full story here).

According to Bank of International Settlements Data (BIS), retail FX has been growing strongly, and has accounted for over 10% of global FX volumes (see here). Yet, not everyone is making money from retail FX. Goldman Sachs who bought a 10pct stake in CMC only three years ago, last year wrote down their $140mln investment to nearly zero (story here)

Personal View: Too early to tell whether Deutsche Bank is calling the top for Retail FX, and whether we will see other banks begin to exit this space, or (as I suspect) this is more a sign of the focus of the top global FX banks on their core institutional client business, and that even a profitable platform such as dbFX is seen as a distraction for Deutsche Bank to it’s core client franchise!

Also, the consolidation in retail trading platforms continues with the above deal, and also in the US, with trading platform TradeStation for Active Traders being sold for $411mln to the large Japanese Brokerage MONEX: story here

Tabb SEF barometer – Survey results now available!


Last month, I mentioned a Tabb online survey to gauge the market impact of SEFs here

The results have just been published, and key findings are:

  • Most respondents expect SEFs to improve the swaps market
  • Central Limit Order book for certain swaps products inevitable within 2 yrs
  • SEF consolidation to start with two years, resulting in 3-4 SEFs per asset class
  • SEFs and Clearing mandates, will drive many dealers to move to an agency -trading model for flow products
  • 40% of respondents did NOT think SEFs would reduce systematic risk!

Full survey findings and report available here  (ignore the price tag, it is free, if you register first)

A website is not enough! RBS choose PlayBook tablet and a native application


It was interesting to read that RBS are to offer institutional clients a PlayBook tablet app

Obviously the choice of the as yet unreleased Blackberry PlayBook is mildly controversial, with most of the world talking about iPads or Android based tablets. The PlayBook has the advantage that it is made by Blackberry, who still dominate the corporate phone market, but whether that makes the PlayBook the right horse to back is open to debate.

However, what I found more interesting was the quote at the end of the article.

“Successful banks in this space will deliver content optimised for client use on their preferred devices. Mobile access to a Website will not be enough.”

There is a lot of debate in the tech world about native vs web for mobile devices. There are benefits to both of course, but the last sentence (Mobile access to a Website will not be enough) is possibly confusing. However good mobile browsers are at viewing websites, if it is content that is intended to be regularly viewed on a mobile device a more targeted approach can provide a much improved user experience.

This does not mean that a ‘website’ that is designed for mobile devices cannot be as good as, or even better, than a device specific native application. This would normally be called a ‘web app’ rather than a ‘website’, which is where the ambiguity in the quote lies. The difference may be subtle in some cases, but it is important that a mobile application, native or web app, is made with the type of device, screen size and input method in mind.

e-Commerce article in e-Forex April 2011


Back in January I blogged about the launch a survey of e-commerce practices worldwide. We (Caplin) sponsored this survey which was conducted by Lepus. With the help of Robert Smith, head of research at Lepus, I subsequently authored a feature article summarising the main findings of the research; this has now been published in the April 2011 edition of e-Forex magazine.

If you’re an e-Forex subscriber, or if you register free on the e-Forex website, you can read the full article here.

You can, of course, still obtain your own copy of the full research report by visiting this page on the Caplin website.

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