Boca Bits — FIA Boca 2015 Day Three
Originally published March 13, 2015 in the Maven Wave blog (www.mavenwave.com)
Did you ever have one of those days that seemed pretty normal as you went through it minute-by-minute, but then it turned out to be something not quite so good when you got to the end and took a moment or two to take a look back? That’s how Thursday at FIA Boca was for me.
Politics and Clearing Kick It Off
Mike Conaway, Republican Representative from Texas and Chairman of the House Committee on Agriculture, was the morning keynote. He gave a reasoned and informed speech on the key issues of adjustments to Dodd Frank, reauthorization of the Commodity Exchange Act, upcoming debate on position limits, cross-border regulation, and data collection requirements, but it’s hard to square his logical demeanor with a U.S. Congress that is riven by partisan divide, even within the majority Republicans. Color me skeptical. The good news is that no major action is necessary from Congress because the CFTC already possesses the capacity to deal with the most important issues on their own. Whether or not the agency actually will do so is another question entirely.
The Clearing 2015 panel followed and, while I had to miss part of the discussion in order to take a short meeting, I am happy to report that the panel reported more headwinds, disagreements, and problems than success stories and other reasons for optimism. When the discussion turned to new products, for example, Sunil Cutinho announced that the CME would launch swaptions this year and Michael Davie of LCH.Clearnet countered that they had concluded that swaptions could not be effectively risk managed by a clearing house. There was apparently also a dust-up over repo contracts but I only came in at the end of that exchange. There was somewhat more agreement on SitG (Skin in the Game), with most saying that any differences can be worked out; the overall tone was somewhat confrontational.
The Back End of the Program is Always Fun
The “good times” continued with a panel on CCP risk. As previously noted, no other topic generated as much discussion at Boca, but at the end of the day the same themes and opinions were repeated over and over: default waterfall, Cover 2 (not the NFL defense, the notion that a default by the 2 biggest clearing firms needs to be covered), SitG, tear-ups and forced allocation, constriction of risk capital, and non-aligned and overly prescriptive international regulation. The debate is important but it sure does get old after awhile.
The “Is There a New Sheriff in Town?” panel delved into questions covered by the FIA Law and Compliance division and included discussions on an alphabet soup of issues: EFRPs, DMA, OCR, and OFAC (1). OFAC? That was a new one for me but it apparently has dragged sanctions related to the situation in Ukraine into the realm of U.S. futures. Who knew? The panel did a good job of making technical questions clear and relevant and they didn’t tar-and-feather CME representative Tom LaSala, even though it was clearly end-users versus the exchanges. In all fairness, the exchanges are being put in a difficult position by regulators but there is seemingly no love lost between FCMs and the exchanges.
The final panel of the day was “The History of the CFTC Abridged,” and featured decades and decades of historical perspective from current and former CFTC and FIA personnel including Walt Lukken, John Damgard, Thomas Erickson, John Rainbolt, and Ken Raisler. Several humorous anecdotes ensued, such as how the original legislation was nearly vetoed by President Gerald Ford, a Commissioner from the 1970’s that would tease people by putting a blow up doll of a woman in their offices, and a CBOT President that bloodied the nose of the first CFTC head of trading and markets at an early Boca conference. A certain perspective on how things work out over time despite the crazy events that pop up was somehow reassuring. In the long run, the CFTC has done a phenomenal job of innovating, working for the greater good, and cooperating with all market participants. While things may look difficult now, it’s relatively easy to find times when things were as bad or worse and, yet, things have managed to work out just fine so far.
Products and Announcements
Ever since ICE staged their midnight raid on the Chicago Board of Trade, there has been an expectation that big mergers, acquisitions, or products will debut at Boca. Several of the bigger items this year were:
- SocGen takes a stake in Eris Exchange. Eris is not yet ubiquitous in the realm of cleared swaps but they may be close to assembling a critical mass that will put them over the top as a swaps alternative. Growth could be swift once that happens.
- Nasdaq announced the launch of energy derivatives to compete with CME and ICE. This story got very little traction, being dismissed because it offers nothing new except for lower fees. That tactic has never worked before and it probably won’t work this time either.
- Trading Technologies (TT) has gone live with their SaaS-based, new platform, the important first step as they look to pivot from their legacy X-Trader system.
- Sungard has a new, utility approach to offering middle and back office solutions with Barclays as a first client. Based upon conversations, Sungard will need to quickly ink more deals if they are to overcome skepticism that they can deliver on such a comprehensive offering.
- Global Risk is teaming with CQG to bring their real-time risk management capabilities to a new platform. Real-time risk is a holy grail in the industry, particularly as markets overlap, regulatory requirements increase, and everything goes faster and faster and faster. This is just one example as others are working in this space as well and we can expect more growth here in the years to come.
- Ion Trading announced their new XTP platform in conference materials but don’t appear to be backing the announcement up with a big, coordinated push, opting instead for a slow-and-steady, phased roll out. Time will tell on whether or not they can give Sungard a run for their money.
Other Take Aways:
We’re in the “fifth day with the in-laws” stage in the post Dodd Frank world, where the industry turns to fighting with each other rather than the common enemies. This should pass soon, particularly as European rules and regulations are finalized and the industry can begin the process of evolving business practices to meet regulations. It will be a relief to get past the “talk about it, talk about it, talk about it” phase.
- In the debate about CCP risk, there is a lot of discussion about setting the correct incentives so that stakeholders respond in the appropriate and optimal way. That got me to thinking: what are the incentives that market regulators are responding to? While there is no doubt that many have answered the calling to serve the greater good of society, it can’t be ignored that theirs are political jobs and that bureaucracy can punish those who get out of line and reward those who toe the line. That’s not a heartening thought for markets that are by nearly all accounts choking on excessive and misguided regulation.
- Despite the overhang of regulation, debate on clearing, and uncertain economic conditions, the overall mood and tone for the industry is positive. A first indicator of health in the industry is attendance at the trade show and this year broke records. Further, big problems generate big solutions in response and it’s likely that the industry is on the cusp of a burst of creativity and growth. The recent merger/realignment of the FIA into a global association is an indicator of that: coordination and cooperation around common goals can produce outsized results.
As we put Boca 2015 in the books, I want to thank you for reading. Please let me know if you have any questions or if I can be of assistance in any way.
(1)EFRP = Exchange For Related Position, DMA = Direct Market Access, OCR = Ownership and Control Report, OFAC = Office of Foreign Assets Control or “all is lost when wars in Eastern Europe add cost and complexity to futures clearing firms and their customers”.
