2014 FIA Expo — Day One
Originally published November 6, 2014 on the Maven Wave blog (www.mavenwave.com)
FIA Expo officially kicked off on Wednesday with over 4,000 delegates from over 30 countries in attendance and the first day’s programming did not disappoint from a content standpoint. The morning session featured a CEO sandwich as the exchange CEO panel was surrounded by speeches from two newly appointed CFTC commissioners and was topped off with the return of Excuse the Disruption. The afternoon was even better with unexpected fireworks from the innocuous sounding “A View from the Buyside” and “CCP Risk” panels.
The CEO Vision panel was moderated by Ron Insana from CNBC and featured Phupinder Gill from CME Group, Andreas Preuss of Eurex, Jeff Sprecher from ICE, and Ed Tilly of CBOE. There was little or no sparring on the panel this year as the discussion generally concentrated on the subject of market structure and the consequences thereof. Insana kept returning to what must have been a defining moment in his career, spending time on the CBOE floor on the day of the October 1987 market crash. Highlights included Preuss challenging Insana on the overuse of the term “flash crash”, particularly as it is used to point the finger at market behavior when it is market structure that is to blame for such events. He also cautioned against the “speed is bad” frame of mind and said that he could show examples of 15 -17 minute stretches of market stress on Eurex where HFT firms were the only ones providing liquidity.
Sprecher continued his recent assault on equity market structure, an argument that is based on reason and an attempt to figure out how to make money with the NYSE franchise. He particularly pointed out where customers are required to connect to new exchanges even though the new venues might not provide any liquidity. He also likened his experience with getting his first taste of managing a U.S. equity market through ICE’s purchase of NYSE to “jumping on a bike without training wheels” and referred to himself as a manager for the first time that I can recall. In the past, Sprecher has referred to himself as a bad manager so the NYSE acquisition must have really changed him.
Gill is always good for some spot on comments and he did not disappoint today. With regard to equity markets he noted that it is good to be careful what you wish for: the buyside wanted better prices so increments were moved from nickels to pennies but that caused the bid and offer sizes to shrink so the buyside asked for and got dark pools which, in turn, created new problems. With regard to complaints of market speed, Gill said it was like the comment, “Don’t build the road, it will hurt the horses hooves.”
Finally, Tilly offered a refreshing perspective primarily from the equity options space, particularly when he pointed out that the structure of that market precludes the possibility of dark pools and that algos override the most pernicious effects of HFT because of the complexity from so many strikes listed. Interestingly, the terms “algo” and “HFT” are sometimes used interchangeably by others but there can be a real distinction between the two.
The “bread” for the CEO “sandwich” came in the form of keynotes from new CFTC Chairman Timothy Massad and Commissioner Sharon Bowen. Massad’s speech had slightly more meat than Bowen’s but both were more important for their tone than their content. Massad said that he viewed the continuing cross-border kerfuffle with Europe as “a glass half full” and he made several illuminating references to comments that he made to his staff, including that they have the opportunity to “make the CFTC the greatest financial regulator in the world”. He came across as both affable and collegial or, put another way: he’s no Gary Gensler. Bowen was making her very first speech as a Commissioner and she mentioned her long connection with the futures industry: she had an internship at the CBOT in her university days before embarking on a successful legal career coming out of Northwestern Law School. And lest we forget, both Massad and Bowen continued the familiar refrain that the CFTC budget is too low for the agency to be able to fulfill its statutory mandates. On that note, and that note alone, they were just like the previous CFTC Chairman.
“Excuse the Disruption”, the shameless ripoff of ESPN’s “Pardon the Interruption”, was back for the second year but this time with only FIA’s Walt Lukken and CME’s Kim Taylor and not Tom Farley from NYSE. The format is a machine gun burst of fact and opinion on over a dozen topics and provides a quick take on important issues like cross-border CCP recognition (it’s all on Europe now), FCMs (rules and regs are killing them), and SEFs (consolidation is underway but volume may rise when the no-action on packages expires). We were even treated to a short video from Uncle Bart Chilton in which we learned which two pop hits contained the word “fandango”(1).
Following a luncheon speech from James Surowiecki, author of “The Wisdom of Crowds”, I attended panels on “A View from the Buyside” and “CCP Risk”. I didn’t think that these would necessarily be the most interesting of panels but the content was relevant, both to you, the reader, and to the work that we’ve been doing here at Maven Wave. No matter because both panels had their share of fireworks and were pretty darn entertaining in the end.
The Buyside panel was sponsored by SIFMA and featured Matthew Nevins of SIFMA as moderator and John Dobbs of Credit Suisse, Stephen Humenik from Covington & Burling, Jork Muijres of Transtrend BV, Angela Patel from Putnam Investments, William Thum of Vanguard, and Tara Tilbury from Ameriprise Financial. The overall message from the panel was that the mandate for clearing of OTC swaps is nothing short of a continuing nightmare. While some took heart with the fact that Chairman Massad indicated that continued no-action on package transactions would be forthcoming and that futurization for products like MAC (Market Agreed Coupon) swaps and certain FX NDF’s (Non-Deliverable Forwards) made sense, by and large problems are numerous and seemingly intractable. Mention was made of conflicting U.S. and European requirements, CFTC rules such as 1.35 and 7.34 that have outsized impacts on their operations. There were also stinging words for CME Rule 538 which make dealer arranged cleared swap/futures package transactions illegal, forcing the buyside to leg the trades even though no swaps CLOBs currently exist. In short, the buyside is not happy and they’re pointing fingers at the regulators and the exchanges.
The seemingly boring “CCP Risk” panel continued the fun and games. Jacqueline Mesa from FIA moderated and Sunil Cuthino of CME, Chris Edmonds from ICE, Tracey Jordal of Pimco, Roland Neuschwander from the Deutsche Bundesbank, Emily Portney of JP Morgan, Commissioner Mark Wetjen from the CFTC, and John Williams of Millbank Tweed comprised the panel. While there was a great deal of agreement on issues such as what a mess the Europeans have made of cross-border equivalency (the ears of Brussels bureaucrats must have been burning all day), and seemingly irreconcilable conflict between Basel III, ESMA and the CFTC, the debate really got going when the CCPs on the panel squared off against the FCM and customer rep over the idea that the CCPs needed to have “more skin in the game”, as recently suggested in a white paper from Pimco(2). Simply put, Pimco suggested that a CCP like ICE or CME should be required to put up their own capital and that the waterfall of payments in the event of a liquidity “event” be altered so that the CCPs capital be put at risk. Mesa did a great job of steering the debate even though the panelists had seemingly no issue with expressing their strongly held beliefs. There was no clear winner or loser and battle lines were not etched in stone (3) but it seems likely that we haven’t heard the last word on this topic (4). Personally, I side more with the CCPs on this issue. It’s as if the buyside was invited to the party (i.e. forced to attend by Dodd Frank) and now they want to dictate how the punch is made. While their input is welcomed (more rum!), their perspective is not the be all and end all and is likely not as well informed as that of the market operators.
(1)“A Whiter Shade of Pale” by Procol Harum and “Bohemian Rhapsody” by Queen.
(2) http://www.pimco.com/EN/Insights/Pages/Setting-Global-Standards-for-Central-Clearinghouses-.aspx
(3) For example, Edmonds agreed with Portney that JPM would have risk if they were in a CCP pool with a client that they turned down and another FCM picked up and Wetjen concurred with Cuthino’s point that CCPs didn’t have complete control on products offered as FCMs have the power to decide how much they let clients trade those products.
(4) I side more with the CCPs on this and I, like Ron Insana with the 1987 crash, have personal experience to back it up: when I was at ICE, we followed the advice of our commercial customers in designing the first cleared physical power contracts in 2005 even though we on the ICE staff believed from experience that financially settled products were the way to go. We were right and the commercial customers were wrong: the physical contracts were a Frankenstein compromise of a contract that neither customers,clearing firms nor the clearing house liked and they failed miserably. We launch financially settled power contracts the next year and they were an immediate success. That experience leaves me inclined to follow the suggestions of the market designers and operators rather than the commercial users of the product. But that’s my bias.
