Boca Bits —FIA Boca 2017 Day Three and Wrap Up
Originally published March 19, 2017 on the Maven Wave blog (www.mavenwave.com)
The final day of FIA Boca 2017 contains the greatest amount of content but it’s also in some ways the least interesting day of the conference. The third day of FIA Boca shifts from sexy topics like blockchain and fintech and delves into the BBI and VBBI areas: boring, but important and very boring, but important. Topics covered on day three this year included clearing, liquidity, CCP risk, and a Washington outlook.
BBI: Boring but Important
The first panel of the day was “Clearing — The Way Ahead”. George Simonetti of Wells Fargo moderated with Sunil Cutinho of the CME, Dan Maguire from LCH.Clearnet, Eurex’s Eric Mueller, and Hester Serafini from ICE Clear U.S. While these panels rarely turn into conspicuous displays of competition, this year’s edition seemed even more collegial than normal. A primary reason for this is likely the concern that the regulatory cycle between the U.S. and Europe may be getting out of synch, with the U.S. starting to ease back on the regulation gas pedal as Europe is set to impose significant new regulations in 2018 and beyond. Mueller called this out as he said that political discussion is to be expected but things must be worked out soon. Serafini expressed concern at what will happen with the next default, as continued concentration in clearing brought about in part by a decline in the number of clearing firms may make the ability to port positions during a crisis very difficult. Cutinho concurred and called on regulators to look at the rationality of capital requirements, particularly when some proposed ratios border on the absurd. Maguire, for his part, gave the most succinct view of how LCH views their business, including finding solutions outside of the traditional, such as their announced SwapAgent service, which will offer a full range of service for non-cleared swaps. Taken together, the comments from the panel inspired confidence that the leading clearing houses are on top of the major pain areas and that the market will be well served by their leadership the next time you know what hits the fan.
The next BBI topic was liquidity and compared to clearing, there was less clarity and agreement in the discussion. Kevin McPartland from Greenwich Associates led a panel that featured Nicolas Bertrand from LSE, Chris Edmonds of ICE, TradeForecaster’s Keith Fishe, Jonah Platt of Citadel, Antonio Reyes from Citadel, and John Shay of Nasdaq. A central problem in a conversation on liquidity is the definition of terms. Reyes pointed out that viewing activity on a SEF from the perspective of a highly liquid CLOB could be misleading: the participants on a SEF might be well served by executing three RFQs, which would look inadequate next to a big CLOB. Platt agreed and said that liquidity in certain markets has improved, such as IRS and on the run Treasuries, while others, such as off the run Treasuries, still need work. Not surprisingly, Citadel recently made a commitment to the off the run business. Fishe pointed out that the market continues to evolve and cited a Chicago-based firm that is only five years old but has risen to be in the top three for trading in options on futures. Finally, Edmonds was the most optimistic, stating that he believes that we are only at the beginning in the curve of innovation. At the end of the day, there was no clear consensus on a complicated topic but it seems likely that things are not as bad as some would say and that markets will probably adjust, evolve, and ultimately rise to the occasion when the time comes.
The Home Stretch: VBBI
Following lunch, the conversation veered into VBBI (very boring but important) territory with the “CCP Risk — Where are we Now?” panel. Eric Aldous from RBC Capital Markets led the discussion with Lee Betsill of CME, Helen Lofthouse from ASX, Citigroup’s Chris Perkins, Robert Steigerwald from the Chicago Fed, and member of the European Parliament Kay Swinburne. The main topics of conversation revolved around resolution and recovery in the event of a clearing firm or clearing house default and delved into deep issues such Variation Margin Gains Haircutting (VMGH). All sides of the table (clearing house, regulator, central bank, and FCM) were represented and participants displayed a great deal of comity, but there are clearly strong tensions at work under the surface. Quite frankly, I don’t have the depth of knowledge to fully explain or comprehend the goings on here but I can comment that all parties appear to be working for the greater good and that significant progress has already been made. Let’s hope that continues.
The final panel of the day was “Washington Outlook” with Dawn Stump of Stump Strategic leading a panel that featured Julie Bauer from OCC, Ryan Jachym of JP Morgan, Delta Strategy Group’s Jim Newsome, and Mark Wetjen from DTCC. In a year when most political pundits have been wildly off target or flat out wrong, I’ll keep it brief here. Panelists generally agreed that major revisions and rollbacks to Dodd Frank are unlikely, the administration may have difficulty in getting anything done with an overfull plate of healthcare repeal and replace, major tax reform, and Congressional inquiries, and all agreed that the government will not be shut down in a fight over raising the debt ceiling. (If everyone agrees, is it time to worry? I, for one, hope not!)
Odds and Ends
FIA Boca 2017 faced a big weather challenge as a severe winter storm ravaged the East Coast right as the conference got underway. Cancellations were few but there was a slight drop in attendance. One enterprising attendee told me that he thought there might be fewer in attendance so he asked for and received a move from a golf course bungalow to an oceanfront room with a balcony at no extra charge. It never hurts to ask!
Every year, there are a few firms that seem “to be onto something”. Firms that received notable mentions or seemed to generate buzz this year included:
All in all, FIA Boca displayed an industry that has weathered several years of change and disruption and is now on solid footing. However, it seems likely that more disruption may well be in store just down the road as venture funded fintech start to change the entire structure of the marketplace. Stay tuned: the next few years should be interesting.
