Regulation | SingleDealerPlatforms.Org

The positive side of MiFID II

Posted on March 1, 2018 by James Cusack

Most of the discussion around MiFID II in an FX context has been pitched in fairly negative terms – yet the industry has much to gain from the clarity the directive will bring to the trading process.

It is understandable that some market participants have viewed the implementation of the new rules with trepidation given that they are required to provide a greater degree of detail around their trade execution.

However, it is also understandable that traders want to see the same level of transparency in FX that they see in equity or fixed income trading.

We have seen that banks are using MiFID II to improve transparency around the FX trading process. By reporting on price construction and displaying cost to the client, the sales desk ‘owns’ this P+L to a greater extent.

This is significant because banks are facing unprecedented pressure on costs. Margins are shrinking and as a result headcount is falling, so it is vitally important for FX sales desks to be able to justify their existence.

One of the most effective means of underlining their importance is to improve efficiency. This can be achieved by getting clients to self-serve but having a management information system to demonstrate value and proactivity in increasing margin/wallet share.

That means client trades can be attributed even if they are done on a self-service basis, increasing the visibility of eFX across the investment banking arm by highlighting the profitability of the sales desk relative to its modest headcount.

Intelligent institutions are overcoming budgetary constraints, using the compliance budgets allocated to MiFID II to re-tool existing systems to the overall benefit of the user.

In conjunction with the Global Code of Conduct, MiFID II has also created a more level playing field within the FX industry. The ability to demonstrate full compliance is vital to maintaining market credibility and will also serve to limit the impact of firms who have used technology to distort the market.

Filed under: MiFID II, Regulation, Single-Dealer Platforms, Web trading technology | Leave a comment »

The Capital Markets’ Industrial Revolution

Posted on April 4, 2016 by Paul Blank

Interesting comparison from GreySpark in their latest research report. Comparing the digital transformation of investment banking to the automation of manufacturing processes in industries such as motor and aircraft manufacturers.

Their report draws analogies, between investment banking, and the motor and aircraft industries, which also experienced heavy regulatory burden, regular government interference, ever evolving demand patterns, regular bouts of over-capacity and a critical requirement to pool resources in order to innovate.

In their opinion, banks will reinvent their operating models on three pillars:

A fully-automated manufacturing plant for the creation, assembly and packaging of financial products and services.
A multi-channel distribution franchise that provides a consistent user experience for all interactions between the bank and its clients.
Data managed as an asset across the entire supply chain.

The adoption of this new operating model has significant implications:

Investment banks’ supply and value chains will invariably extend beyond the enterprise and incorporate suppliers, partners, market infrastructure and shared utilities.
The number of joint-ventures and strategic alliances between complementary institutions will multiply as banks focus on their core expertise, client franchises and geographies.
As value creation will be effectively distributed across functions, the manner in which it is accounted for will also change – determining where key decisions are made and how individual contributions are rewarded.

Link to report here (behind paywall):

Filed under: Paul Blank, Regulation, Survey Results, Technology Trends | Leave a comment »

Electronic trading in fixed income markets: report by BIS (Bank of intl settlements) – worth reading!

Posted on February 25, 2016 by Paul Blank

An interesting report (well worth reading), published in January by The BIS (Bank of international settlements), looks at the impact of ‘electronification’ of the fixed income markets. The report was based on structured interviews with market participants, and a survey of electronic trading platforms.

It argues that advances in technology and regulatory changes have significantly affected the economics of intermediation in fixed income markets and that electronification is changing the behaviour of investors. The rise of electronic trading is creating efficiencies for many market participants, improving market quality in normal times, lowering transaction costs and reducing market segmentation, while at the same time Continue reading →

Filed under: Corporate Bonds, OTC, Regulation, Single-Dealer Platforms, Survey Results | Leave a comment »

Future of Single-Dealer Platforms: SIs, MTFs or OTFs?

Posted on February 18, 2016 by Paul Blank

An excellent article in Risk.net covered also in FXWeek, looks at the future of Single-Dealer Platforms under MiFID II and discusses the options for bank platforms.

Should they register as:

Systematic Internalisers (SIs), which enables them to utlilise their own risk capital and trade on bilateral basis with customers
Organised Trading Facilities (OTFs), in which case they cannot use their own capital, and would in effect be running an agency business, but cannot run both an SI adn OTF under the same legal entity
Multilateral Trading Facility (MTF), which offers all to all trading

Initially, the SI regime seems obvious, as they can deploy their own capital, and trade with clients on a bilateral basis, which is what most SDPs currently do.

The test for an SI is that it Continue reading →

Filed under: FX, MiFID II, OTC, OTF, Regulation, Single-Dealer Platforms | 1 Comment »

BofE study finds mandatory swaps trading on SEFs increases liquidity and lowers costs!

Posted on January 17, 2016 by Paul Blank

Some interesting findings from a paper from the Bank of England, which looked at the impact of mandatory trading on swap execution facilities (SEF), for interest rate swaps (IRS) as required under Dodd Frank Act.

The paper looked at transactional data from the USD and EUR segments of the plain vanilla IRS market. The findings showed that as a result of SEF trading:

Activity increases
Liquidity improves across the swap market
Improvement being largest for USD mandated contracts which are most affected by the mandate
The reduction in execution costs is economically significant
Execution costs in USD mandated contracts, drop for market end-users alone, by $3 million–$4 million daily relative to EUR mandated contracts and in total by about $7 million–$13 million daily
Inter-dealer activity drops concurrently with the improvement in liquidity suggesting that execution costs may have fallen because dealer intermediation chains became shorter

Overall, the results suggest that:

“The improvements in transparency brought about by the Dodd-Frank trading mandate have substantially improved interest rate swap market liquidity.

Finally, the report finds that the Dodd-Frank mandate caused the activity of the EUR segment of the market to geographically fragment. However, this does not appear to have compromised liquidity.

Full report here

Filed under: Dodd Frank, OTC, Paul Blank, Regulation, SEF | Leave a comment »

Reuters announce FX Options vols increased 166% in 2015 (seems far higher than official BofE survey data suggests)

Posted on January 11, 2016 by Paul Blank

A Reuters press release on FX Options caught my eye today. The announcement states that:

Thomson Reuters FX dealer-to-client venue saw a surge in options trading volumes of 166 percent in 2015 compared with the previous year. In particular the fourth quarter of 2015 saw record-high monthly, weekly and daily volumes with over 36 global and local active options price-makers and more than 225 active options price-takers now on Thomson Reuters FX platform.

Thomson Reuters FX Trading provides both relationship trading (bank-to-client) and bi-lateral trading (interbank) for vanilla and exotic FX options. In recent months the company has introduced electronic FX options callouts to streamline how banks can access options liquidity in the interbank market. By providing one single point of access to options liquidity via electronic callouts or via Thomson Reuters FXall dealer-to-client request-for-quote service, FX Trading helps market participants to efficiently manage their trading risk.

According to Phil Weisberg, Global Head of FX at Reuters: Continue reading →

Filed under: FX, Paul Blank, Regulation, Survey Results | Leave a comment »

The continual rise of non-bank market-makers.

Posted on January 5, 2016 by Paul Blank

I have covered the rise of ‘non-bank’ or ‘alternative’ market-makers a few times recently, notably here, here and here.

Looking at how, armed with market leading technology, talented etrading techies from sell-side firms and teams of razor-sharp quants, these firms are now providing deep consistent liquidity to the market in a capacity previously the preserve of the top-tier ‘flow’ monster’ banks.

The perception of non-bank market makers has traditionally been Continue reading →

Filed under: alternative market maker, FX, Paul Blank, Regulation, Technology Trends | Leave a comment »

Interesting Celent report on future of Spot FX trading technology & platforms

Posted on January 2, 2016 by Paul Blank

Just finished reviewing an interesting Celent report by Brad Bailey, on evolving spot FX market structure and technology trends in light of changes in global regulation, a blurring of traditional liquidity pools and the ongoing competitive landscape.

Brad touches on a number of the themes we have covered here over the year, but it’s always good to have someone else’s perspective on them.

The themes covered being: Continue reading →

Filed under: FX, MDP, OTC, Paul Blank, Regulation, Single-Dealer Platforms, Survey Results, Technology Trends | 1 Comment »

Right-sizing in FICC – more cuts probably on the way

Posted on December 14, 2015 by Paul Blank

Last week, Morgan Stanley announced another wave of Fixed Income, Currencies and Commodities (FICC) redundancies. Some 1,200 due to leave the bank, of which around 500 (I have seen this equated to nearly 25%) coming from front-office FICC sales and trading positions, and many being at MD and above level.

In their Q3, 2015 figures released in Oct, they made mention of the underperformance in FICC:

Institutional Securities net revenues excluding DVA were $3.5 billion
continued strength in Equity sales and trading
leadership in Investment Banking with notable strength in M&A
underperformance in Fixed Income & Commodities sales and trading
FICC sales and trading net revenues of $583m down from $997m in Q3, 2014 primarily reflecting difficult market conditions for our credit and securitized products businesses

Indeed, looking at 2014 full year results below, we can see that FICC contributions to overall revenues have Continue reading →

Filed under: FX, Paul Blank, Regulation | Leave a comment »

US regulators fine Barclays $150m for abuse of ‘last look’ (fascinating reading)

Posted on November 18, 2015 by Paul Blank

The NY Department of Financial Services (NYDFS), has handed Barclays an additional $150m penalty and ordered the bank to terminate an employee for what it called: ‘Automated, Electronic Foreign Exchange Trading Misconduct’

According to the NYDFS:

Barclays Used “Last Look” System to Automatically Reject Client Orders that Would Be Unprofitable Because of Subsequent Price Swings during Milliseconds-long Latency (“Hold”) Periods.

The additional fine brings the overall Barclays Foreign Exchange NYDFS Penalty to $635 Million.

That clearly explains why last month Barclays released ‘last look’ guidelines on their BARX website. In previous posts, I have argued that the practice of last look, in effect provides banks with ‘an option on the price’ that gives them an asymmetric advantage over their clients. The press release actually makes fascinating reading, and for that reason I have reproduced most of it below (the bold underline is from the original press release, and not my emphasis).

According to Anthony J. Albanese, Acting Superintendent of Financial Services” at NYDFS, in addition to the fines, Barclays would also: Continue reading →

Filed under: FX, last look, Paul Blank, Regulation | Leave a comment »

SingleDealerPlatforms.Org

Subscribe

Log in