More on non-bank liquidity providers (Citadel in Swaps)

Tougher regulatory requirements around capital and leverage ratios, and Volcker rules around prop trading, continue to reduce the ability and appetite of banks to provide principal based market-making activities, and warehouse risk. The more capital-intensive the product (such as inventory based corporate bonds), the less appetite banks have to provide such services.

As a consequence, there has been a reduction in levels of liquidity in some markets, resulting in increased volatility as market-makers are less able to provide immediacy risk transfer pricing and take large positions onto their books.

However, as banks step back, non-bank market-making firms are stepping up to the plate to provide those services. Which is why, back in September, I mentioned that the move by Zar Amrolia from (the Mighty) Deutsche Bank to the non-bank market maker XTX, was a sign of the times.

With that in mind, it’s interesting to read Continue reading

FX Platforms: Aug 15 vols surge on back of China volatility (EBS leads the pack, up 22%)

August saw a surge in volumes for major FX platforms, as the knock-on effects of the Chinese stock market free fall, spread to other markets causing sharp increase in FX volatility, driving up volumes.

Among the Top Tier platforms, EBS showed the largest gains, up 22.2% to $100.3bn/day, whilst Reuters Spot vols were up some 17.8% at $119bn/day, although Reuters ‘other products’ which include it’s SEF platform, were down -2.8% at $245bn/day. On the futures side, The CME showed a 21.5% increase across all FX products.

Among the second ranked platforms, Hotspot recorded a 20.4% increase to $28.3bn/day, whilst Fastmatch was up 14.5% at $9.2bn/day.

In terms of daily spikes in volumes, on 24th August, Hotspot saw daily volume surge to 59bn/day, and Fastmatch to over $20bn/day (4th highest daily vol), in both cases about twice the monthly daily averages (neither Reuters nor EBS provided details of daily peak volumes for August). FXCM and GAIN yet to release Aug metrics. Continue reading

Regional banks looking at Fixed Income SDPs

The evolving regulatory regimes and mandates of Dodd-Frank, Volcker Rule, EMIR, MiFid II and Basel capital reforms are designed to increase transparency, reduce risk and drive OTC derivatives markets onto transparent and regulated markets and platforms.

As a result banks are radically changing, (and indeed cannibalizing) business models within the fixed income (FICC) businesses, pulling back or even withdrawing from more capital-intensive inventory based market-making activities in products such as credits as they move towards what is called a ‘capital light operating model’.

Banks are now specialising around core skills, value propositions and client franchise, with a reduction in those willing to be flow banks, whilst others specialise in execution capabilities around an agency model. As a result, clients will be offered execution services from banks that will be a blend of principal/agency, bilateral/cleared, all of which requiring investment by dealers in new technology and connectivity pipes to execution venues such as SEFs, post-trade reporting (TR) repositories, central clearing houses (CCPs) and more.

So, what’s happening in Europe in terms of fixed income e-trading, and in particular what’s the future for single-dealer platforms in fixed income? Continue reading

Incentives for Central Clearing – paper by BIS

The Bank of International Settlements (BIS) has released an interesting research paper which looks at the incentives for various market participants to centrally clear bilateral OTC derivative trades.

Following the financial crisis, G20 leaders agreed that standardised over-the-counter (OTC) derivatives contracts were to be cleared through central counterparties (CCPs). A number of regulatory reforms have been introduced that affect the incentives for central clearing of these contracts. These reforms include requirements to exchange initial and variation margin for non-centrally cleared derivatives exposures, standards relating to the measurement of counterparty credit risk for derivatives contracts, and capital requirements for bank exposures to CCPs.

The paper found that:

Clearing member banks (ie those institutions that clear directly with CCPs) have incentives to clear centrally.

Whilst central clearing incentives for market participants that clear indirectly (ie that are not directly clearing members of a CCP but clear through an intermediary that is a clearing member of a CCP) are less obvious and could not be comprehensively analysed on the basis of the data received in the quantitative analysis.

However, given that clearing members account for the bulk of derivatives trading, the conclusion of the analysis – there are incentives for them to clear centrally – indicates that the G20 objective on OTC derivatives reforms has, for the most part, been achieved.

Continue reading

Are Europe and US moving closer to NDF clearing mandates?

Could clearing mandate for NDFs be closer that we think?

Europe has tended to lag the US by about 18 months in implementing regulatory reforms in general, and trading and clearing mandates in particular.

So, the timing this week of a new consultation paper by The European Securities and Markets Authority (ESMA) on mandatory clearing of swaps and Non-Deliverable Forwards (NDFs) is potentially significant, as it could suggest a more rapid convergence between Europe and US on NDF clearing mandates.

The reason for this is that the paper has been published barely a week before Continue reading

New investment banking models: ‘capital-lite’, ‘agency’ and ‘client-clearing’

Regulation is driving change in capital market structure, and as highlighted in the future of investment banking, banks continue to move towards a ‘capital-lite’ business model, as they seek to ‘optimise’ use of and return on capital.

The introduction of mandatory trading and clearing for standardised swaps (SEFs in US and OTF and MTFs in Europe) has resulted in higher capital charges for OTC bilateral trades, and reduced the appetite of banks to warehouse and hold inventory which is moving more banks towards a ‘capital lite’ model.

This is the backdrop to the announcement that JP Morgan the setting up a 150 strong fixed income agency execution desk called JP Morgan Execution Services (JPMES), to run alongside its principal trading operations.

At first sight, it looks as if JP Morgan is simply hedging its bets and backing both agency and principal business models. However,
Continue reading

How many SEFs will the market support?

There is a great post by Amir Khwaja of Clarus Financial over on Tabb Forum. Amir looks at the current SEF volumes and asks some questions about how many SEFs can the market support.

Continue reading


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