FIA Expo 2020 — Day Two

I’ve often written that day two of a three day conference is often the most difficult to get through and that rule generally held for Virtual Expo as well. In this case it was Zoom fatigue more than B-list panelists but the end feeling of being worn down was pretty much the same. Fortunately, discussions on key takeaways from market disruptions in March, updates from five different exchanges, and a keynote from a titan of tech made things more interesting.

Two takes on lessons learned and a word from Europe

Echoing a recurring theme of “lessons learned” at Expo this year, day two of FIA Expo kicked off with a panel discussion on operations, segued into a one-on-one conversation with Michael Peters of Eurex and was followed by a look at the U.S. Treasury markets.

Scott Anderson of Societe Generale moderated the “Operations and Technology: Lessons Learned from the Pandemic” panel and was joined by Laurent Partouche from Eurex, Brian Sayers of CME Group, Bank of America Securities’ Diane Sherman and Kyle Tobolik from JP Morgan Chase. Not surprisingly, all of the panelists confirmed that the three week period of high volatility and volume in March produced between five and nine of their top ten historical volume days and that systems were remarkably robust, even in the face of unprecedented work from home (WFH) conditions. However, issues cascaded and grew beyond T (trade date) as give up and give in procedures were exposed as bottlenecks. As a reflection of that, a poll of panel attendees found that 77% identified “operational risk management / processing efficiency” as their top concern for 2021. (Both “timely / accurate margin call settlement” and “client growth / acquisition” were both named by 8% of respondents and “return to office” and “capital costs / balance sheet utilization” each checked in with 4% in that poll.) If the futures industry has an Achilles heel, it is clearly in the middle office.

Michael Peters is CEO of Eurex touched on lessons learned as well but spent more time talking about the current and future focus for growth. The number of times that Eurex has been unsuccessful at a large merger or acquisition are almost too numerous to count and Peters acknowledged as much by indicating that the exchange will focus on small to medium acquisitions with a new announcement expected in the not too distant future. Future areas of interest will be FX, energy, indices and data. If this were a poker game, it might seem reasonable to wonder if Eurex is bluffing but history suggests that this won’t be the case: the Germans generally play things straight and honest. WYSIWYG.

The “US Treasury Market: Key Takeaways from March 2020” panel went into detail on the market segment that exhibited the greatest stress in the Spring and featured a dynamite lineup of speakers. Ably moderated by Kevin McPartland from Greenwich Associates, it included Ben Allensworth from MFA, Citadel Securities’ Stephen Berger, Elisabeth Kirby of Tradeweb, Jamie Mortimore from JP Morgan Chase and Larry Weithers of DRW. The short answer is that intervention by the Fed changed everything, turning market conditions from constricted to normal on a dime, but plenty of other lessons were learned as well. Kirby noted that traders didn’t revert to picking up the phone as they did in 2014; this time they switched from the electronic CLOB to RFQs. Weithers commented that “March Madness” will never be the same again as the market experienced a unique confluence of events that caused a peak capacity problem. He called for improvements like blockchain to augment processes to help things work more smoothly in the future. Berger noted that market structure changes are needed as there has been a 4x increase in issuance since 2010 but very little increase in transparency or reporting mandates. This is especially necessary for Off The Run issues, a sentiment echoed by Mortimore, who also noted that margin procyclicality is also an issue. A typical month might have 40 margin events while March 2020 had 250. Mortimore supplied a raft of statistics that told the story (e.g. the bid/ask on 30 year on the run treasuries increased by 5bps — 10bps while it was 10x that in off the runs). Hedge funds were blamed as the bogeyman early on but Berger pointed out that subsequent research has revealed a much more complicated picture, a POV that the rest of the panelists concurred with. In the end, systems worked well under exceptionally trying conditions but more changes should be made in order to be ready for the next shock.

Swisher, Sprecher and international innovation

The day continued with one-on-ones between Walt Lukken of FIA and Kara Swisher and Lukken and Jeff Sprecher and concluded with a look at recent developments at three international exchanges.

Kara Swisher has had her finger on the pulse of technology innovation ever since she joined The Wall Street Journal’s San Francisco office in 1997. As Editor-at-Large at Recode and host of the Recode Decode Podcast, she is a formidable interviewer and she doesn’t hold back when it comes to speaking her mind. Perhaps my expectations were too high but I wound up being somewhat underwhelmed by her conversation, once again with Walt Lukken, the busiest man at Expo. She is no fan of big tech and she predicted a tough 12 to 18 months more with the pandemic. One comment that I found especially useful was the admonition to be careful to “believe what you see and not see what you believe”. Be questioning, don’t let your preconceived notions guide what you think.

Next on the docket, again with Walt Lukken at the helm, was a one-on-one with Jeff Sprecher, Chairman and CEO of ICE. Lukken started out by asking how the company was doing and Sprecher answered first about results and deals before turning to the people side of the business. In these pandemic times, the order of those items is usually reversed. Sprecher wnet on to give an answer that was a perfect 180 from the one given the day before by Terry Duffy when asked about negative prices in WTI in March and made a compelling case for the industry vertical that ICE has established in mortgages with the purchase of Mers, SimpleFile and Ellie Mae. He lamented that they weren’t six or nine months further ahead with Bakkt to take advantage of the rush to digital payments when the pandemic hit. All in all, add mortgages and payments to equities and data and both Sprecher and ICE look much bigger than the world covered by FIA.

The final panel of the day was led by Jim Kharouf of IncubEx and featured Claudio Jacob of B3, Chris Lee from HKEX and Singapore Exchange’s Rama Pillai discussing market developments in Brazil, Hong Kong and Singapore respectively. In a nutshell, the level of innovation and growth at each exchange is impressive and highlights the many ways in which the international futures markets continue to evolve. I’ll spare you the details here because, quite honestly, it’s hard to beat the marketing drum for them at the end of a very long day!

Hungry for more? You’re not alone

Before we go, one quick shout out for The Greater Chicago Food Depository (GCFD). FIA has raised more than $4 million for GCFD over the years and their mission to feed those in need is even more important today as the Covid 19 pandemic strains the lives of many. A typical FIA Expo finds attendees at The Great Chicago Steak Out on Thursday night but that won’t be happening this year. Instead, you can donate to this worthy and necessary mission by texting “FIA” to 91999. FIA will be matching up to $15,000 in donations so your contribution can count for so much more. Please help.

On to Day Three

The final day of Expo includes a look at DeFi, a keynote from a leading vaccine researcher, a look at retail markets through the lens of “small” products, a one-on-one with the CEO of Cboe and, capping it all off, a discussion of what interest rate futures might look like in a post-Libor world. I will share news on all of the above along with a recap of the event in a blog over the weekend. Stay tuned!