Boca Bits — FIA Boca 2019 Day One
Over 1,100 market professionals and regulators descended on southern Florida for the first of three days as the 44th annual FIA Boca conference kicked off on Tuesday. The day followed the typical FIA script with a series of individual presentations from derivatives exchanges followed by an introduction from FIA CEO Walt Lukken and a final panel on the health of the industry. Of note, the lineup of exchange presentations consisted of three usual suspects and one intriguing rookie while the name change for the afternoon panel implied a trace of negativity. In other words, with no big announcements or fireworks to speak of it wound up being necessary to note the little things in order to derive some takeaways from the goings on. In any case, the first day was a little light on revelations, just as the first day of FIA Boca generally is.
Three regulars and an intriguing rookie
By definition, the morning session is generally devoid of intrigue because the InformationXchange sessions are essentially marketing pitches from the exchanges. Still, there are interesting developments to note and this year the presence of a new exchange in addition to presentations from Eurex, IntercontinentalExchange (ICE) and CME Group made for an nice contrast.
The new entrant was Hong Kong Exchanges and Clearing (HKEX) and their first appearance is likely to be followed by more in the years ahead. As the new kid on the block they were made to go first to a thinly populated room (CEO Charles Li joked that he might have to give the presentation again when the delegates showed up) but their news might prove to be the most important in the long run. Li was joined by a representative from MSCI as they detailed their recent announcement that HKEX will be listing an MSCI Chinese equity index product. MSCI recently quadrupled the percentage that China commands in their global index (from 5% to 20%) and the addition of a futures contract is another step as China’s capital markets are exposed to the world. HKEX is very much playing the long game when it comes to developing their markets and they seemed to downplay, or at least deemphasize, what their expectations are for the new futures contracts. No one can deny the potential of China and a student of the markets can’t help but note that HKEX has slowly and steadily building their inroads into China and, at the same time, facilitating Chinese access to the rest of the world. The 21st century is shaping up as the Asian century so the game is very much coming HKEX’s way.
Another one with a tailwind
If things are going well for HKEX then the same can also be said of Eurex. With the hot mess of Brexit dragging on and on (and on and on and on), the Germans find that the game is coming to them. The exchange has seemed solid but unremarkable in recent years and lagged others in growth and innovation. However, Eurex is very good at planning and that skill is coming in handy as the British practically hand them the keys to European clearing and market development. Market participants are being incentivized with a progressive partnership program and the exchange also found success by extending their trading hours. They, along with ICE, plan to experiment with “speed bumps” (or, as they term it: passive liquidity protection), a plan that drew criticism from DRW’s Don Wilson at a later session. All in all, 2019 looks to be a good year for Eurex.
Breaking the ICE
ICE took the next spot and while they described many promising initiatives the overall impression was somewhat less spunky and polished than in years passed. Perhaps it was the absence of CEO Jeff Sprecher from the proceedings and the fact that they are being forced to play more defense than in years passed (e.g. clearing in London and the hue and cry over equity data fees) but there wasn’t the usual energy from this group. (Pun intended). Good news included new oil contracts, success in JKM natural gas and the proposed launch of their cryptoasset platform, Bakkt.
It’s all FX from the CME
CME Group took the last slot and used foreign exchange (FX) as the central unifying theme for their session. Economist Blu Putnam detailed some current issues in FX, including the carry trade (general rule: get in when things are really bad and get out well before they turn that way again), while Sean Tully described success in emerging markets currencies, positive changes to options contracts, and a broad array of new products to fill customer needs. The third speaker was Andres Choussy from NEX Traiana who illustrated how the CME is looking to integrate and optimize their NEX acquisition by maximizing both cleared and OTC activity. Tellingly, they seem to be retaining the “NEX” and “Traiana” names which may, in the end, signal that melding the two worlds may not yield one whole and powerful market offering. Only time will tell.
Down the homestretch
The day concluded as FIA President and CEO delivered opening remarks and Alicia Crighton on Goldman Sachs lead a panel discussion on the health of the industry.
Lukken gave a strong defense of the markets (something that may come in handy if anti-market sentiment continues to swell in political circles) and detailed a new initiative to increase diversity at FIA and in the industry. FIA also issued a white paper that issued a warning about increasing fragmentation caused by regulation.
“Our markets are not defined by borders — they are defined by the needs of buyers and sellers no matter their location. FIA today is highlighting a growing problem in our markets, but one that can be addressed by international cooperation between regulators,” said Lukken.
The FIA is going to have to keep fighting if they want to turn this trend around.
Are you feeling ok?
The final panel of the day was notable due to how the name changed from 2018 to 2019. Last year the panel had the optimistic title “Looking to the Future” while this year it was changed to the somewhat dour “The Health of the Industry”. The future is forward while checking on your health implies that something might be wrong. Perhaps you’re not well?
Crighton was joined by John Davidson from the OCC, Dan Maguire of LCH, Nick Rustad from JP Morgan and Don Wilson of the eponymous DRW Trading. As per usual, Davidson was the most outspoken of the crew, criticizing the SEC for failing to lead by reasoned rulemaking and choosing instead to regulate through enforcement in answer to the question: is the market safer than it was five years ago?. Next, Wilson drew a solid laugh from ex-CME Kim Taylor when he used the words “extended unpleasant interaction” to describe the years long legal struggle with the CFTC over cleared swaps settlements that recently ended when the regulator lost in court and declined to press on. Unpleasant indeed.
The rest of the discussion covered a multitude of issues, including competition and FCM health, and generally pointed to a robust and engaged industry that is facing some serious challenges, not the least of which is the lunacy that is capital requirements for customer and market maker activity. Fortunately, the wiser minds that guide the industry are actively debating these issues.
There are one and a half days left for FIA Boca. Tomorrow’s schedule includes a heavy dose of discussion about regulation and a one-on-one with an iconoclastic, self-made markets billionaire. Come back tomorrow for an update.
Originally published March 13, 2019 in the John Lothian Newsletter.