asia’s race to otc clearing€™s race to otc clearing june 2012 | ... new tax rule • and more...

Kospi 200 Options | Dodd-Frank Timing Guide | Tech Firm Merger Wave

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Asia’s Race to OTC Clearing

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SwapClear is the only clearing service to have successfully handled an OTC interest rate swap default. When the worst happens, you need the best on your side.

“Experience” is an overused buzzword. Until there’s a default.

swapclear.com

We’re ready. Are you?

DATE: 2.15.12 PROJECT: LCH.Clearnet SwapClear Ad: FIA, March Issue

TRIM: 8.375 in. x 10.75 in. BLEED: 8.625 in. x 11 in. PRINTS: 4-CP

The race for OTc clearing in AsiaIn part two of our series on OTC clearing in Asia, we look at developments in Australia, Korea and India. | By Will Acworth

customer Protections for cleared Swaps: A Q&A with Vanguard

William Thum, a principal at Vanguard, discusses several issues related to the protection of customer funds. | By Will Acworth

34 Swap reporting clearing & Trading: A Timing Guide

The CFTC has finalized several Dodd-Frank rules and has released a proposed timetable for finalizing the rest. This article provides an update on the potential timing schedule for new swap reporting, clearing and trading requirements for swap market participants. | By Annette Nazareth and Gabriel Rosenberg

feATureS

22

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Futures Industry | June 2012 03

SwapClear is the only clearing service to have successfully handled an OTC interest rate swap default. When the worst happens, you need the best on your side.

“Experience” is an overused buzzword. Until there’s a default.

swapclear.com

We’re ready. Are you?

DATE: 2.15.12 PROJECT: LCH.Clearnet SwapClear Ad: FIA, March Issue

TRIM: 8.375 in. x 10.75 in. BLEED: 8.625 in. x 11 in. PRINTS: 4-CP

boca ScrapbookPage 50

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Kospi 200 Options | Dodd-Frank Timing Guide | Tech Firm Merger Wave

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Asia’s Race to

OTC Clearing

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FUTURES INDUSTRY (ISSN #10656855 ) is published bi-monthly, except July and August by the FUTURES INDUSTRY ASSOCIATION, 2001 Pennsylvania Avenue N.W., Suite 600, Wash ington, D.C. 20006-1823; (202) 466-5460. Sub scriptions are $24 Domestic and $32 Inter na-tional, and are included as part of the member dues. Periodicals postage paid at the Washington, DC and additional mailing offices. Postmaster: Send address changes to Futures Industry, 2001 Pennsylvania Avenue N.W., Suite 600, Wash ington, D.C. 20006-1823. Copyright 2012 by the Futures Industry Association.

Materials contained herein may not be reproduced for general distribution, advertising or promotional purposes without the expressed consent of the FIA. The statements of fact and opinion in signed articles are the sole responsibility of the authors, and do not necessarily reflect the positions of the officers, mem-bers or staff of FIA, nor the employers of the authors.

Futures IndustryEditor-in-Chief Editor Mary Ann Burns Will Acworth

Deputy Editor Assistant Editor Joanne Morrison Tracy Wahler

Futures Industry edItorIal advIsory BoardRussell Abramson, J.P. Morgan Arthur Bell, Arthur Bell Certified Public Accountants Galen Burghardt, Newedge USA Christopher Culp, Lexecon Kevin Foley, Katten Muchin Rosenman LLP Diane Garnick Michael Gorham, Illinois Institute of Technology Anthony Leitner, A J Leitner and Associates, LLC Terrence Martell, Baruch College John Munro, ION Trading Gerry Perez, Interactive Brokers Group Leslie Sutphen, Newedge USA Barbara Wierzynski, Futures Industry Association

The Futures Industry Association is the international trade organization for the futures industry. Its mem-bership includes more than 28 of the largest futures commission merchants. FIA estimates that its mem-bers are responsible for more than 90% of all public customer business executed on U.S. contract mar-kets. FIA membership also includes more than 30 international futures and options exchanges and clearinghouses in North and South America, Europe, Africa, Asia and Australia, plus banks, law and ac-counting firms, money managers, end users, and service providers with an interest in the derivatives industry.

@Markets is a registered trademark of the Futures Industry Association.

memBershIp InFo & advertIsIng ratesToni Vitale ChanFutures Industry Association 2001 Pennsylvania Avenue N.W., Suite 600 Washington, D.C. 20006-1823 Phone: (312) 636-2919 Fax: (202) 772-3075 E-mail: [email protected] Web: www.futuresindustry.org

j u n e 2 0 12 | v 2 2 . n 3

08 President’s Message By Walt Lukken

10 Trading Volume

16 News Briefs �•�NFA’s�customer�safeguards

•�Options�industry�criticizes� ��new�tax�rule •�and�more

37 Product Profile Re-engineering the

Kospi 200 Options Market The�Kospi�200�stock�index�options�has�been�the�most�heavily�traded�deriva-tives�contract�in�the�world�for�the�last�decade,�but�that’s�about�to�change.

By Nick Ronalds

39 Tech Talk Boom Time for

Financial Technolgy M&A The�merger�wave�among�exchanges�has�subsided,�but�further�down�the�food�chain�there�have�been�at�least�70�trading�technology�deals�over�the�past�year�and�more�are�on�the�way.

By Bennett Voyles

42 Washington Watch CFTC Moves Ahead with

Dodd-Frank Rulemakings As�the�Dodd-Frank�Act�nears�its�second�anniversary,�the�Commodity�Futures�Trading�Commission�has�made�significant�progress�in�finalizing�a�wide�set�of�new�rules�for�the�deal-ing,�trading,�clearing�and�reporting�of�over-the-counter�derivatives.

By Will Acworth and Joanne Morrison

45 @Markets •�Second�Brazilian�Deal�for�ICE

•�New�OTC�Energy�Trading� ��Platform�in�Europe •�DTCC�Hits�Key�Milestones�in ��OTC�Reporting •�Mexico’s�BMV�Rolls�Out� ��New�Trading�Engine •�and�more

50 Boca Scrapbook

53 Prominent People

PA G e 1 0

Global�futures�and�options�volume�

by�region

depar tments

04 Futures Industry | www.futuresindustry.com

35.5% Asia Pacific

35.1% North America

19.2% Europe

8.6% Latin America

1.6% Other

CLIENT NAME: element79JOB#: 15526DESC: Harris

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100 70 30 100 10 25 50 75 90 100100 60 100 70 30 100 60 40 70 4070 30 100 40 40 100 40 100 40 70 40 70 40 40 340 70 40 70 40 40100 60A

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Material Close: 2/6/12 Insertion Date: March 2012

Execution.Consistency.Expertise. Successful futures organizations look to partners BMO Harris Bank and BMO Capital Markets for execution that defines best in class. Through our long-standing, consistent presence in the industry, we deliver an uncompromising level of service. The combination of our expertise, accessibility, stability, and responsiveness has made us the leader in delivering tailored products and services to the futures industry.

www.bmoharris.com www.bmocm.com

BMO Harris® is a trade name used by BMO Harris Bank N.A. and its affiliates. Loan and deposit products and services are provided by BMO Harris Bank N.A. Member FDIC. BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A. and Bank of Montreal Ireland p.l.c., and the institutional broker dealer businesses of BMO Capital Markets Corp., BMO Nesbitt Burns Trading Corp. S.A., BMO Nesbitt Burns Securities Limited and BMO Capital Markets GKST Inc. in the U.S., BMO Nesbitt Burns Inc. in Canada, Europe and Asia, BMO Nesbitt Burns Ltée/Ltd. in Canada, BMO Capital Markets Limited in Europe, Asia and Australia and BMO Advisors Private Limited in India. ® Registered trademark of Bank of Montreal in the United States, Canada and elsewhere.


Board of directors officers n Michael C. DawleyManaging Director, Co-Head of Futures and Derivatives Clearing Services Goldman,�Sachs�&�Co. Chairman

n Peter G. JohnsonManaging Director, Global Head of Futures, OTC Clearing and FX Prime Brokerage Bank�of�America�Merrill�Lynch Vice Chairman

n Najib LamhaouarGlobal Head of OTC Clearing and ETD HSBC�Securities�(USA)�Inc. Secretary

n Gerald F. CorcoranChairman and Chief Executive Officer R.J.�O’Brien�&�Associates�LLCTreasurer board members Patrice BlancPresident Futures�Brokerage�Division Jefferies�&�Co. and Chief Executive Officer Jefferies�Bache�LLC

n Philippe BuhannicChairman and Chief Executive Officer TradingScreen�Inc.

n George E. CrappleCo-Chairman and Co-Chief Executive Officer Millburn�Ridgefield�Corporation

Fredrik GentzelManaging Director, Global Head of Listed Derivatives Deutsche�Bank�AG

n Richard B. GorelickChief Executive Officer RGM�Advisors�LLC

n Arthur W. HahnPartner Katten�Muchin�Rosenman�LLP

n Christopher K. HehmeyerManaging Member HTG�Capital� Partners�LLC

nM. Clark Hutchison, IIIGlobal Head of Listed Derivatives Morgan�Stanley

nJeffrey D. JenningsManaging Director, Global Head of Listed Derivatives Credit�Suisse�Securities�(USA)�LLC

Sanjay KannambadiChief Executive Officer and Global Head BNY�Mellon�Clearing�LLC

n Jerome KempGlobal Head of Exchange Traded Derivatives Sales and Clearing Citigroup�Global� Markets�Limited

n Andy MilnesHead of Supply and Trading, Global Oil Americas BP�Corporation� North�America,�Inc.

n David S. MitchellPartner Fried,�Frank,�Harris,�Shriver�&�Jacobson�LLP

Reinhardt OlsenManaging Director North America, and Head of ETD UBS�Securities�LLC

n Emily PortneyManaging Director, Global Head of Futures and Options J.P.�Morgan�Securities�LLC

n Kenneth M. RaislerPartner Sullivan�&�Cromwell�LLP

n Edward J. RosenPartner Cleary�Gottlieb� Steen�&�Hamilton�LLP

n Michael R. Schaefer

n William SextonChief Executive Officer Newedge�USA�LLC

n Donald R. Wilson, Jr.Chief Executive Officer DRW�Trading�Group

Jeremy WrightGlobal Head of Futures and Options Markets The�Royal�Bank�of�Scotland�plc

n Alice Patricia White

n Michael YarianManaging Diretor, Head of Futures and OTC Derivative Clearing Barclays�Capital�Inc.

special advisersRichard BerliandManagement Consultant

John M. Damgard Senior Adviser Futures�Industry�Association�

Gary DeWaal Senior Managing Director and Global General Counsel Newedge�Group

n Executive Committee Member n Associate Member Director n Public Director

FIa Chapters and divisions presidents/Chairmen fia asiaPaul S. DaviesGoldman�Sachs� Futures�Pte�Ltd.

fia chicagoBill MetzgerHM�Consulting

f ia european principal traders associationRemco LentermanIMC�Trading�B.V.

futures servicesVincent MatteraBMO�Capital�Markets

information technologyGreg WoodDeutsche�Bank�Securities�Inc.

japan chapterMitch FulscherChairman

Shozo OhtaTokyo�Financial�Exchange� President

law & complianceMaria ChiodiCredit�Suisse� Securities�(USA)�LLC

fia principal traders groupDonald R. Wilson, Jr.DRW�Trading�Group

the Futures Industry association, Inc.Walt Lukken President and CEO

Barbara Wierzynski Executive Vice President and General Counsel

Mary Ann Burns Executive Vice President, Industry Relations

Guy Sheetz Senior Vice President, Chief Financial Officer and Chief Operating Officer

Tracy Wahler Vice President of Communications

Maria Banks Accounting Assistant

Adoncia Boykins Director Member Services

Steven Bradbury Senior Accountant

Michael Cho Senior Accountant

Gary Herman Controller

Mary Kincheloe Communications Assistant

Linda Leerdam Receptionist

Roselia Marmolejos Administrative Assistant

Steve Proctor Technology Coordinator

Damon Roberts Meetings Coordinator

Marsha Saunders Manager, Meetings and Events

Mindy Serin eCommunications Coordinator

Toby Taylor Executive Assistant and Office Manager

Beth Thompson Law & Compliance Division Coordinator

ThE

PRESIDENT’S


Japan Conference

in cooperation with FIA and FIA Asia

25-26 July 2012 l Palace Hotel TokyoProgram & Registration: www.futuresindustry.org/japan

Host Sponsors

Gold Sponsors

Silver Sponsor

Media Sponsors

Sponsor

Japan RisingThe FIA Japan Chapter is pleased to announce that a compelling international conference will be held in Tokyo on July 25-26. This major event, organized by FIA Japan with the cooperation of FIA and FIA Asia, will focus on the vital developments currently taking place in Japan’s fi nancial markets.

Session Topics (subject to change)Japan Exchanges Presentations (TSE, OSE, TFX, TOCOM) • FSA Keynote Speaker

Keynote Address: Masaaki Shirakawa, Governor, Bank of JapanRegulatory Reform - Presentations by FSA and METI • TSE & OSE - Merger and Future Strategy

TFX and TOCOM - Strategies for Growth • ATP Developments - Japan and Asia • Japan Inbound and Outbound Business Developing • Developments and Views from Outside Japan: Americas, Europe, and Asia

OTC Markets and Clearing - Japan and Asia • High-Frequency Trader and Hedge Fund Perspectives: Plans and Requirements for Asia • FX Markets - Expansion in Asia

Walt LukkenPresident

Encouraging Dialogue

Joining FIA as president and chief executive officer is both tre-mendously exciting and extremely daunting. Exciting because we stand at an extraordinarily dynamic moment in the history of

this industry. Daunting because that very dynamism puts enormous demands on all of us…and I follow in the footsteps of John Dam-gard, the man who led FIA for the last 30 years.

In the three months since I joined the organization, I have visited with many member companies and I expect to visit many more in the months to come. When I came aboard, I set a goal—to listen to as many members of the association and industry as possible so that I can better understand your concerns and meet your needs. As an industry association, we are only as strong as our member-ship. At a time of historic regulatory change, we clearly have an important role to fill, but I want to be certain that we hear from all sides of the industry as we advocate on your behalf.

My top priority remains tackling the serious concerns raised by MF Global and the weaknesses in our system of customer protec-tions that were exposed by that firm’s insolvency. FIA has been working diligently to address this issue, including issuing in March initial recommendations for improving customer funds protec-tions and a frequently asked questions document to provide more information on customer protections. We are pleased to see that a number of our recommendations are already being implemented by the industry’s self-regulatory organizations. As the facts continue to come to light about MF Global in the days and weeks ahead, I fully expect that there will be more recommendations. I look forward to working with Congress and the Commodity Futures Trading Com-mission to make sure that we restore industry confidence in the protections for the funds entrusted to us by our customers.

As we head into the home stretch of Dodd-Frank implementa-tion, we must remain engaged with the outstanding regulatory proposals that lie ahead. During my near 20 years in Washington, I have learned that you cannot guarantee good decisions by poli-cymakers, but you can guarantee informed decisions. While many of us are feeling fatigued during this time of enormous change, we must continue to make our voices heard. Only then can regulators promulgate rules that take into account the legal and operational realities of our industry. Without speaking up, we may find ourselves faced with a situation where the cure is worse than the disease.

Many of us agree that central clearing will go a long way toward reducing the overall level of risk in the derivatives markets, but regula-tors must be careful not to create new risks in the process or make the business so expensive that we lose the benefits of competition. If the

cumulative costs of Dodd-Frank force consolidation of FCMs in order to remain profitable—or, still worse, cause firms to shutter their doors permanently—our industry and economy will suffer greatly. Ironically, this consolidation would concentrate a higher level of risk among fewer firms, directly contradicting one of the core goals of the financial reforms.

As many of us head to London for the FIA/FOA International Derivatives Expo in late June, we are reminded of the global nature of this business and the importance of cross-border coordination among regulators. As this magazine goes to press, the CFTC is very close to issuing guidance on how it plans to apply Dodd-Frank to transactions that take place beyond the borders of the U.S. I hope that the CFTC will hold true to its traditional practice of mutual recognition, based on the principle that foreign regulators should be judged by whether their regulation is “comparable” to U.S. regulation rather than identical. I know that market participants and regulators around the world are watching this issue very closely. FIA and FIA Asia—along with our partner in Europe the FOA—are looking forward to a constructive dialogue with the CFTC when this guidance is released.

The futures business has faced challenges in the past and has al-ways risen to the occasion. I am confident that we can do so again but it will require that we work together. I cannot think of a time in the past where the interests of the industry—the FCMs, exchanges, clearinghouses, asset managers and customers—have been more aligned. Our industry will need this strength in numbers and diversity as we face the challenges ahead.

In closing, I want to thank John Damgard for all his years of service to the industry. He built a wonderful organization with a tre-mendous staff and I am excited by this opportunity to stand on the shoulders of this industry giant. I look forward to introducing myself to many of you in the coming weeks and most importantly listening to your ideas and thoughts about the industry and the FIA.

Japan Conference

in cooperation with FIA and FIA Asia

25-26 July 2012 l Palace Hotel TokyoProgram & Registration: www.futuresindustry.org/japan

Host Sponsors

Gold Sponsors

Silver Sponsor

Media Sponsors

Sponsor

Japan RisingThe FIA Japan Chapter is pleased to announce that a compelling international conference will be held in Tokyo on July 25-26. This major event, organized by FIA Japan with the cooperation of FIA and FIA Asia, will focus on the vital developments currently taking place in Japan’s fi nancial markets.

Session Topics (subject to change)Japan Exchanges Presentations (TSE, OSE, TFX, TOCOM) • FSA Keynote Speaker

Keynote Address: Masaaki Shirakawa, Governor, Bank of JapanRegulatory Reform - Presentations by FSA and METI • TSE & OSE - Merger and Future Strategy

TFX and TOCOM - Strategies for Growth • ATP Developments - Japan and Asia • Japan Inbound and Outbound Business Developing • Developments and Views from Outside Japan: Americas, Europe, and Asia

OTC Markets and Clearing - Japan and Asia • High-Frequency Trader and Hedge Fund Perspectives: Plans and Requirements for Asia • FX Markets - Expansion in Asia

Global Futures and Options VolumeBased on the number of contracts traded and/or cleared at 76 exchanges worldwide

Jan-Mar 2011 Jan-Mar 2012 % Change

Futures 2,843,837,424 2,519,447,124 -11.4%

Options 3,236,853,746 2,837,190,579 -12.3%

Total 6,080,691,170 5,356,637,703 -11.9%

Global Futures and Options Volume by CategoryBased on the number of contracts traded and/or cleared at 76 exchanges worldwide

Category Jan-Mar 2011 Jan-Mar 2012 % Change

Equity Indexes 2,075,118,977 1,696,342,493 -18.3%

Individual Equities 1,733,285,094 1,667,932,968 -3.8%

Interest Rate 935,926,148 782,134,493 -16.4%

Foreign Currency 672,074,688 551,447,355 -17.9%

Energy 218,929,952 211,714,631 -3.3%

Agriculture 255,934,426 205,719,243 -19.6%

Non-Precious Metals 97,051,984 113,590,605 17.0%

Precious Metals 53,784,183 85,069,820 58.2%

Other 38,585,718 42,686,095 10.6%

Total 6,080,691,170 5,356,637,703 -11.9%

Note: Energy includes contracts based on emissions. Other includes contracts based on commodity indices, credit, fertilizer, housing, inflation, lumber, plastics and weather.

Global Futures and Options Volume by RegionBased on the number of contracts traded and/or cleared at 76 exchanges worldwide

Region Jan-Mar 2012 Jan-Mar 2012 % Change

Asia Pacific 2,347,967,834 1,902,768,325 -19.0%

North America 2,060,645,826 1,881,365,531 -8.7%

Europe 1,176,880,333 1,029,483,114 -12.5%

Latin America 404,669,605 458,171,295 13.2%

Other 90,527,572 84,849,438 -6.3%

Total 6,080,691,170 5,356,637,703 -11.9%

Note: Location of exchanges is determined by country of registration. Other consists of exchanges in Dubai, Israel, South Africa, and Turkey.

31.7% Equity Indexes

31.1% Individual Equities

14.6% Interest Rate

10.3% Foreign Currency

4.0% Energy

3.8% Agriculture

3.7% Metals

0.8% Other

35.5% Asia Pacific

35.1% North America

19.2% Europe

8.6% Latin America

1.6% Other



Top 30 Derivatives ExchangesRanked by number of contracts traded and/or cleared

Rank ExchangeJan-Mar 2012

VolumeAnnual

% ChangeMar 2012

Open InterestAnnual % Change

1 CME Group 763,084,221 -10.8% 89,682,716 -4.3%

2 Korea Exchange 715,724,212 -29.6% 4,588,314 -27.7%

3 Eurex 575,315,240 -16.3% 109,548,005 -4.4%

4 National Stock Exchange of India 489,009,140 -4.3% 6,303,528 -37.3%

5 NYSE Euronext 479,598,654 -16.2% 58,781,799 -16.5%

6 BM&FBovespa 421,278,540 9.4% 47,170,884 -10.2%

7 CBOE Group 302,667,534 -3.9% 19,084,691 4.5%

8 Nasdaq OMX 302,182,568 -10.7% 7,237,355 -2.0%

9 Multi Commodity Exchange of India 244,792,611 -12.9% 1,477,428 38.3%

10 MICEX-RTS 215,843,310 4.7% 4,054,757 8.0%

11 IntercontinentalExchange 96,466,729 -2.5% 8,274,652 13.7%

12 Shanghai Futures Exchange 67,780,672 7.5% 979,221 0.9%

13 Dalian Commodity Exchange 64,821,741 4.1% 1,989,953 31.5%

14 ASX Group 60,562,058 106.7% 14,642,001 255.8%

15 TMX Group 55,276,152 19.6% 4,946,320 27.3%

16 Osaka Securities Exchange 50,697,434 -15.5% 4,263,993 16.5%

17 Zhengzhou Commodity Exchange 45,901,809 -53.9% 1,010,008 5.1%

18 JSE South Africa 44,655,525 -2.0% 14,894,839 9.9%

19 London Metal Exchange 40,787,863 17.8% 1,942,520 -6.4%

20 Taiwan Futures Exchange 37,470,834 -19.9% 907,960 -32.3%

21 Hong Kong Exchanges & Clearing 30,106,876 -10.4% 5,861,532 -10.1%

22 BATS Exchange* 29,044,468 16.7% N/A N/A

23 Mexican Derivatives Exchange 23,788,148 128.1% 8,894,764 -65.1%

24 London Stock Exchange Group 21,148,972 7.1% 12,856,073 -20.1%

25 China Financial Futures Exchange 20,477,024 73.7% 64,137 71.3%

26 Tokyo Financial Exchange 20,247,589 -48.4% 1,113,091 -33.2%

27 Singapore Exchange 18,963,522 0.4% 1,626,801 49.8%

28 Turkish Derivatives Exchange 18,689,617 3.4% 322,868 -5.4%

29 Mercado Español de Futuros y Opciones Financieros 18,534,542 -4.2% 13,389,171 8.2%

30 Tel-Aviv Stock Exchange 17,030,151 -29.6% 573,010 -37.3%

* Open interest for the options traded on BATS is held at the OCC.


Exchange GroupsFutures and options volume broken down by subsidiary exchanges

ExchangeVolume

Jan-Mar 2011Volume

Jan-Mar 2012%

ChangeOpen Interest

Mar 2011Open Interest

Mar 2012%

Change

ASX * 5,602,073 36,620,202 553.7% 1,768,636 12,632,833 614.3%

ASX 24 23,703,177 23,941,856 1.0% 2,346,176 2,009,168 -14.4%

asX group 29,305,250 60,562,058 106.7% 4,114,812 14,642,001 255.8%

* data not adjusted for change in multiplier for single stock options

Bolsa de Valores de São Paulo 214,963,037 256,672,643 19.4% 10,925,991 15,255,477 39.6%

Bolsa de Mercadorias & Futuros 170,103,297 164,605,897 -3.2% 41,630,613 31,915,407 -23.3%

Bm&FBovespa 385,066,334 421,278,540 9.4% 52,556,604 47,170,884 -10.2%

Chicago Board Options Exchange 302,336,237 284,768,127 -5.8% 18,078,306 18,731,184 3.6%

C2 Exchange 10,073,531 13,775,820 36.8% N/A N/A N/A

CBOE Futures Exchange 2,635,826 4,123,587 56.4% 184,533 297,891 61.4%

CBoe group 315,045,594 302,667,534 -3.9% 18,262,839 19,084,691 4.5%

Chicago Mercantile Exchange 444,464,636 379,259,300 -14.7% 36,906,269 34,949,072 -5.3%

Chicago Board of Trade 265,283,714 238,897,626 -9.9% 16,345,118 15,117,208 -7.5%

New York Mercantile Exchange 145,693,328 144,927,295 -0.5% 40,491,254 39,616,436 -2.2%

Cme group 855,441,678 763,084,221 -10.8% 93,742,641 89,682,716 -4.3%

Eurex 489,769,840 409,021,213 -16.5% 114,565,826 109,544,541 -4.4%

International Securities Exchange 197,651,465 166,294,027 -15.9% N/A N/A N/A

eurex 687,421,305 575,315,240 -16.3% 114,572,609 109,548,005 -4.4%

ICE Futures Europe 71,428,702 69,477,970 -2.7% 3,909,627 5,128,618 31.2%

ICE Futures U.S. 26,308,504 25,434,329 -3.3% 3,095,151 2,909,051 -6.0%

ICE Futures Canada 1,203,995 1,532,772 27.3% 210,537 236,983 12.6%

Chicago Climate Futures Exchange 36,463 21,658 -40.6% 59,499 - -100.0%

Intercontinentalexchange * 98,977,664 96,466,729 -2.5% 7,274,814 8,274,652 13.7%

* does not include OTC transactions

MCX-SX 223,442,996 143,639,165 -35.7% 794,788 844,086 6.2%

Multi Commodity Exchange of India 57,491,824 101,153,446 75.9% 273,364 633,342 131.7%

multi Commodity exchange of India 280,934,820 244,792,611 -12.9% 1,068,152 1,477,428 38.3%

Nasdaq OMX PHLX 253,206,247 220,052,712 -13.1% 87,268 68,204 -21.8%

Nasdaq Options Market (U.S.) 55,792,601 51,401,971 -7.9% N/A N/A N/A

Nasdaq OMX (Nordic markets) 29,183,902 30,428,005 4.3% 7,165,205 7,031,290 -1.9%

Nasdaq OMX Commodities 230,302 299,880 30.2% 130,806 137,861 5.4%

nasdaq omX 338,413,052 302,182,568 -10.7% 7,383,279 7,237,355 -2.0%

NYSE Liffe Europe 296,528,786 216,595,302 -27.0% 70,354,353 57,727,258 -17.9%

NYSE Amex Options 150,054,919 145,464,384 -3.1% N/A N/A N/A

NYSE Arca Options 124,198,362 111,377,656 -10.3% N/A N/A N/A

NYSE Liffe U.S. 1,344,528 6,161,312 358.3% 43,943 1,052,955 2296.2%

nyse euronext 572,126,595 479,598,654 -16.2% 70,437,262 58,781,799 -16.5%


Top 20 Energy Futures & Options ContractsRank Contract Contract Size Jan-Mar 2011 Jan-Mar 2012 % Change

1 Light, Sweet Crude Oil Futures, Nymex 1,000 barrels 51,380,478 40,540,619 -21.1%

2 Brent Crude Oil Futures, ICE Futures Europe 1,000 barrels 32,759,312 35,486,663 8.3%

3 Natural Gas Futures, Nymex 10,000 MMBTU 19,875,836 24,849,967 25.0%

4 Gasoil Futures, ICE Futures Europe 100 tonnes 17,667,466 16,770,887 -5.1%

5 Crude Oil Futures, MCX 100 barrels 12,091,098 10,848,042 -10.3%

6 WTI Crude Oil Futures, ICE Futures Europe 1,000 barrels 16,687,785 9,626,956 -42.3%

7 No. 2 Heating Oil Futures, Nymex 42,000 gal 7,951,564 9,306,172 17.0%

8 NY Harbor RBOB Gasoline Futures, Nymex 42,000 gal 6,932,145 9,223,327 33.1%

9 Natural Gas European-Style Options, Nymex 10,000 MMBTU 6,519,127 8,485,413 30.2%

10 Light, Sweet Crude Oil Options, Nymex 1,000 barrels 10,554,939 7,865,704 -25.5%

11 Henry Hub Natural Gas Swap Futures, Nymex 2,500 MMBTU 5,535,683 7,114,124 28.5%

12 Natural Gas Futures, MCX 1,250 MMBTU 2,686,810 5,792,952 115.6%

13 U.S. Oil Fund ETF Options * N/A 9,587,504 5,792,941 -39.6%

14 U.S. Natural Gas Fund ETF Options * N/A 5,216,385 3,830,270 -26.6%

15 Natural Gas Penultimate Swap Futures, Nymex 2,500 MMBTU 2,018,211 3,083,401 52.8%

16 Brent Crude Oil Futures, MICEX-RTS 10 barrels 4,357,995 1,925,887 -55.8%

17 EUA Futures, ICE Futures Europe 1,000 EUAs 1,174,761 1,471,075 25.2%

18 Brent Crude Oil Options, ICE Futures Europe 1,000 barrels 393,340 1,421,905 261.5%

19 UK Natural Gas (Seasons) Fut., ICE Futures Europe 1,000 therms/day 831,390 1,344,570 61.7%

20 Crude Oil 1-Mnth Calendar Spread Opt., Nymex 1,000 barrels 924,616 1,161,915 25.7%

* Traded on multiple U.S. options exchanges

Top 20 Agricultural Futures & Options ContractsRank Contract Contract Size Jan-Mar 2011 Jan-Mar 2012 % Change

1 Rubber Futures, SHFE 5 tons 21,042,287 25,855,417 22.9%

2 Corn Futures, CBOT 5,000 bushels 21,006,497 20,121,969 -4.2%

3 Soy Meal Futures, DCE 10 tonnes 11,726,109 16,372,120 39.6%

4 White Sugar Futures, ZCE 10 tonnes 27,217,109 14,030,274 -48.5%

5 Soybean Futures, CBOT 5,000 bushels 12,056,060 12,101,301 0.4%

6 Soy Oil Futures, DCE 10 tonnes 14,530,170 9,933,156 -31.6%

7 Corn Futures, DCE 10 tonnes 8,840,476 8,945,924 1.2%

8 Sugar #11 Futures, ICE Futures U.S. 50 long tons 7,297,551 7,080,440 -3.0%

9 Wheat Futures, CBOT 5,000 bushels 6,384,864 6,536,101 2.4%

10 Strong Gluten Wheat Futures, ZCE 10 tonnes 4,803,921 5,971,725 24.3%

11 Soybean Oil Futures, CBOT 60,000 lbs 6,241,692 5,911,547 -5.3%

12 Corn Options, CBOT 5,000 bushels 7,101,338 5,837,031 -17.8%

13 Soybean Meal Futures, CBOT 100 tons 4,028,730 4,212,159 4.6%

14 Cotton No. 1 Futures, ZCE 5 tonnes 42,104,846 4,079,119 -90.3%

15 No. 1 Soybean Futures, DCE 10 tonnes 5,716,048 3,901,968 -31.7%

16 Live Cattle Futures, CME 40,000 lbs 3,624,238 3,774,840 4.2%

17 Palm Oil Futures, DCE 10 tonnes 5,830,232 3,753,715 -35.6%

18 Soybean Options, CBOT 5,000 bushels 3,485,168 3,513,176 0.8%

19 Lean Hogs Futures, CME 40,000 lbs 2,465,274 2,717,162 10.2%

20 Rapeseed/Mustard Seed Futures, NCDEX 10 tonnes 766,366 2,326,743 203.6%


Top 20 Foreign Exchange Futures & Options ContractsRank Contract Contract Size Jan-Mar 2011 Jan-Mar 2012 % Change

1 U.S. Dollar/Indian Rupee Futures, MCX-SX 1,000 USD 215,237,086 139,085,045 -35.4%

2 U.S. Dollar/Indian Rupee Futures, NSE India 1,000 USD 159,993,230 138,416,873 -13.5%

3 U.S. Dollar/Russian Ruble Futures, Micex-RTS 1,000 USD 29,187,432 52,930,578 81.3%

4 U.S. Dollar/Indian Rupee Options, NSE India 1,000 USD 31,142,982 50,308,014 61.5%

5 U.S. Dollar Futures, BM&F 50,000 USD 16,633,169 23,793,003 43.0%

6 Euro FX Futures, CME 125,000 Euro 21,292,359 17,650,572 -17.1%

7 U.S. Dollar Futures, KRX 10,000 USD 14,712,718 13,889,216 -5.6%

8 U.S. Dollar Futures, ROFEX 1,000 USD 8,812,383 12,720,547 44.3%

9 Euro/U.S. Dollar Futures, Micex-RTS 1,000 Euro 9,325,589 8,643,203 -7.3%

10 Australian Dollar Futures, CME 100,000 AUD 6,598,697 8,010,529 21.4%

11 British Pound Futures, CME 62,500 GBP 7,972,584 6,144,091 -22.9%

12 Japanese Yen Futures, CME 12,500,000 Yen 8,878,749 5,827,633 -34.4%

13 Canadian Dollar Futures, CME 100,000 CAD 5,125,876 5,434,948 6.0%

14 Euro/Japanese Yen Futures, TFX 10,000 Euro 6,287,544 5,258,077 -16.4%

15 Australian Dollar/Japanese Yen Futures, TFX 10,000 AUD 10,248,490 5,102,370 -50.2%

16 U.S. Dollar Futures, Turkdex 1,000 USD 2,904,249 3,345,511 15.2%

17 U.S. Dollar/Japanese Yen Futures, TFX 10,000 USD 9,310,148 2,894,432 -68.9%

18 EUR/Indian Rupee Futures, MCX-SX 1,000 Euro 5,508,088 2,746,814 -50.1%

19 Mexican Peso Futures, CME 500,000 Pesos 2,145,524 2,675,680 24.7%

20 U.S. Dollar Options, BM&F 50,000 USD 2,643,048 2,570,253 -2.8%

Top 20 Equity Index Futures & Options ContractsRank Contract Index Multiplier Jan-Mar 2011 Jan-Mar 2012 % Change

1 Kospi 200 Options, KRX 100,000 Korean won * 960,439,249 658,200,192 -31.5%

2 S&P CNX Nifty Options, NSE India 100 Indian rupees 214,680,806 206,737,773 -3.7%

3 SPDR S&P 500 ETF Options ** N/A 138,568,368 139,155,897 0.4%

4 E-mini S&P 500 Futures, CME 50 U.S. Dollars 135,456,122 111,385,339 -17.8%

5 RTS Futures, Micex-RTS 2 U.S. Dollars 66,247,942 77,173,251 16.5%

6 Euro Stoxx 50 Futures, Eurex 10 Euros 94,757,810 77,091,110 -18.6%

7 Euro Stoxx 50 Options, Eurex 10 Euros 79,652,933 75,539,560 -5.2%

8 S&P 500 Options, CBOE 100 U.S. Dollars 41,322,687 40,967,605 -0.9%

9 iShares Russell 2000 ETF Options ** N/A 36,853,913 31,482,799 -14.6%

10 Nikkei 225 Mini Futures, OSE 100 Yen 35,171,507 31,190,649 -11.3%

11 Powershares QQQ ETF Options ** N/A 30,668,577 29,087,979 -5.2%

12 VIX Options, CBOE 100 U.S. Dollars 25,634,632 26,554,069 3.6%

13 S&P CNX Nifty Options, NSE India 100 Indian rupees 36,229,940 26,289,181 -27.4%

14 Taiex Options, Taifex 50 New Taiwan dollars 34,355,081 25,548,162 -25.6%

15 CSI 300 Futures, CFFEX 300 Chinese renminbi 11,789,513 20,477,024 73.7%

16 iShares MSCI Emerging Markets Index ** N/A 18,826,688 18,147,303 -3.6%

17 Financial Select Sector SPDR ETF Options ** N/A 16,157,420 17,421,505 7.8%

18 KOSPI 200 Futures, KRX 500,000 Korean won 21,420,194 15,629,281 -27.0%

19 Dax Options, Eurex 5 Euros 18,743,011 14,822,038 -20.9%

20 TA-25 Options, TASE 100 New Israeli shekels 20,682,546 14,730,599 -28.8%

* Multiplier changed to 500,000 won during March for new series ** Traded on multiple U.S. options exchanges


Top 20 Metals Futures & Options ContractsRank Contract Contract Size Jan-Mar 2011 Jan-Mar 2012 % Change

1 Steel Rebar Futures, SHFE 10 tonnes 17,579,304 16,221,412 -7.7%

2 Copper Futures, SHFE 5 tonnes 7,586,239 15,689,303 106.8%

3 High Grade Primary Aluminum Futures, LME 25 tonnes 13,281,492 15,474,184 16.5%

4 Silver MIC Futures, MCX * 1 kilogram 1,949,110 14,760,348 657.3%

5 SPDR Gold Shares ETF Options ** N/A 15,063,190 13,935,245 -7.5%

6 Gold Petal Futures, MCX *** 1 gram N/A 13,127,207 N/A

7 Comex Gold Futures, Nymex 100 oz 11,977,343 12,513,728 4.5%

8 Silver M Futures, MCX 5 kilograms 8,307,611 10,237,962 23.2%

9 iShares Silver Trust ETF Options ** N/A 13,390,405 9,571,574 -28.5%

10 Copper - Grade A Futures, LME 25 tonnes 8,929,580 9,204,412 3.1%

11 Copper Futures, MCX 1 tonne 7,586,239 9,095,915 19.9%

12 Zinc Futures, SHFE 5 tonnes 15,484,595 7,609,879 -50.9%

13 Special High Grade Zinc Futures, LME 25 tonnes 4,886,714 7,265,123 48.7%

14 Gold M Futures, MCX 100 gram 3,201,794 5,963,119 86.2%

15 Silver Futures, MCX 30 kilograms 6,043,868 4,668,271 -22.8%

16 Copper Mini Futures, MCX **** 250 kilograms N/A 4,443,053 N/A

17 Nickel Futures, MCX 250 kilograms 3,654,994 3,938,502 7.8%

18 Comex Copper Futures, Nymex 25,000 lbs 2,789,166 3,926,961 40.8%

19 Standard Lead Futures, LME 25 tonnes 2,524,653 3,585,762 42.0%

20 Comex Silver Futures, Nymex 5,000 oz 4,790,094 3,425,703 -28.5%

* Began trading in February 2011 ** Traded on multiple U.S. options exchanges *** Began trading in April 2011 **** Began trading in February 2012

Top 20 Interest Rate Futures & Options ContractsRank Contract Contract Size Jan-Mar 2011 Jan-Mar 2012 % Change

1 Eurodollar Futures, CME 1,000,000 USD 156,207,410 126,261,488 -19.2%

2 One Day Inter-Bank Deposit Futures, BM&F 100,000 Real 83,118,036 79,929,342 -3.8%

3 10 Year Treasury Note Futures, CBOT 100,000 USD 79,292,763 70,071,332 -11.6%

4 Euro-Bund Futures, Eurex 100,000 Euro 59,137,105 46,791,765 -20.9%

5 3 Month Euribor Futures, Liffe U.K. 1,000,000 Euro 71,121,258 46,218,595 -35.0%


7 Eurodollar Mid-Curve Options, CME 1,000,000 USD 26,890,289 29,570,862 10.0%

8 Euro-Schatz Futures, Eurex 100,000 Euro 46,160,288 27,497,213 -40.4%

9 Euro-Bobl Futures, Eurex 100,000 Euro 38,414,630 27,190,727 -29.2%

10 3 Month Sterling Options, Liffe U.K. 500,000 GBP 38,915,326 26,928,110 -30.8%

11 3 Month Euribor Options, Liffe U.K. 1,000,000 Euro 29,871,734 24,666,630 -17.4%

12 30 Year Treasury Bond Futures, CBOT 100,000 USD 22,647,348 22,101,472 -2.4%

13 Eurodollar Options, CME 1,000,000 USD 20,750,676 20,726,156 -0.1%

14 IDI Index Options on Futures, BM&F 1 Real 34,440,417 20,356,563 -40.9%

15 TIIE 28 Futures, Mexder 100,000 MXN 4,504,093 19,061,564 323.2%

16 10 Year Treasury Note Options, CBOT 100,000 USD 14,210,562 14,574,185 2.6%


18 Euro-Bund Options, Eurex 100,000 Euro 7,327,814 10,570,524 44.3%

19 3 Year Treasury Bond Futures, ASX 24 100,000 AUD 9,888,218 10,424,619 5.4%

20 Long Gilt Futures, Liffe U.K. 100,000 GBP 8,047,719 9,526,620 18.4%


NFA Proposes New Safeguards for Customer Funds

The national Futures Association pro-posed new financial requirements intended to strengthen regulations regarding the treatment and monitoring of customer seg-regated funds held by futures commission merchants. The proposed requirements, which were announced on May 29, place new restrictions on the withdrawal of cus-tomer funds from segregated accounts and require additional disclosure by FCMs. The new requirements also apply to customer secured amounts held in foreign futures and options accounts. The proposed require-ments are now pending approval from the Commodity Futures Trading Commission.

“These new requirements will help begin the process of restoring public confidence in the financial integrity of customer segre-gated funds,” said nFA President Dan Roth. “Making this information available to the public will give investors a better picture of the financial standing of the FCM with which they are conducting business.”

Under the proposed rules, all FCMs must have written policies and procedures regarding the maintenance of the firm’s residual interest in its customer segregated funds. These policies and procedures must target an amount either by percentage or dollars that the FCM seeks to maintain as its residual interest in those accounts.

The proposed rules restrict the amount of funds an FCM can withdraw from customer segregated funds account to 25% unless the firm’s chief executive officer, chief financial officer or other defined principal pre-approves the transaction in writing. In addition, the FCM must immediately notify nFA in writing of that disbursement, disclose the amount of the withdrawal, provide the reason for with-drawal, and confirm that a qualified individual pre-approved the disbursement in writing. The FCM also must disclose in its notice to nFA the amount of the remaining total residual interest in the customer segregated funds accounts and provide a representation that the FCM remains in compliance with segregation requirements.

The nFA rules also call for FCMs to

provide certain financial and operational information on a monthly or semi-monthly basis. nFA said it plans to make some of this information publicly available on its website.

CME Requires Daily Reporting of Segregated Funds Balances

On May 1, CME Group began requir-ing all futures commission merchants to file daily statements for customer funds in segregated, secured and sequestered accounts by 12:00 noon each day. These statements must be signed by each firm’s chief executive officer or chief financial officer or their designated representative. CME also announced its plans to perform “limited reviews” of the daily statements “on a surprise basis.”

“Customer segregation is the cornerstone of the futures industry, and it is critical to ensure the protections afforded under seg-regation are as strong as they can be for our market participants,” CME said in an advisory notice explaining the new requirements.

CME added that it is working with the industry to adopt “further improvements” to customer protections and determine “best practices” for internal controls and proce-dures over customer assets. For example, CME said disbursements of customer funds that exceed 25% of excess funds will have to be pre-approved in writing by a firm’s chief executive officer, chief financial officer or designated principal. In addition, clearing members will be required to file bi-monthly reports on how customer funds are invested and where those funds are held.

CME said the bi-monthly investment reporting requirement will take effect on July 1, with the first report due on July 15.

Mutual Funds Challenge CFTC Rulemaking

The Investment Company Institute, a trade association that represents the U.S. mutual fund industry, joined with the U.S. Chamber of Commerce in filing a legal challenge against the Commodity Futures Trading Commission’s final rule imposing certain regulations on registered invest-

ment companies such as mutual funds and exchange-traded funds. In their complaint, which was filed on April 17 with the U.S. District Court for the District of Colum-bia, the two organizations charged that the CFTC’s amendment of Rule 4.5 was “arbitrary and capricious” and claimed that the CFTC violated the Administrative Procedure Act as well as the Commodity Exchange Act. The two organizations said the rules were adopted “without satisfying the agency’s obligation to weigh the costs or benefits of the rule” and add an unnec-essary and redundant layer of regulation on top of the existing rules imposed on investment companies by the Securities and Exchange Commission.

U.S. Options Industry Criticizes New Tax Rules

U.S. options industry representatives cautioned that rules proposed by the Internal Revenue Service to implement a dividend withholding tax on foreign options traders will disrupt markets and drive away business from foreign investors. The IRS proposed the rules in connection with the Foreign Account Tax Compliance Act, a law enacted in 2010 intended to combat tax evasion by foreign investors in U.S. markets.

Options industry representatives warn that the rules, which could take effect at the beginning of 2013, would drive away busi-ness from U.S. markets because they would discourage non-U.S. investors from engag-ing in a wide range of routine transactions.

In a comment letter submitted to the IRS on April 6, the U.S. Securities Market Coali-tion, a group that includes all of the U.S. options exchanges and the Options Clearing Corporation, cautioned that the proposed regulations would preclude non-U.S. persons from entering into a wide range of options transactions. “The proposed regula-tions would have a disruptive effect on the option markets,” the group wrote. “They would impose withholding tax on dividends and would effectively preclude foreign per-sons from using these trading strategies.”

The industry coalition also cautioned that in order to comply with the proposed

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newsbriefsregulations, broker/dealers will have to incur substantial systems costs. “The Coalition is concerned that some broker/dealers may decide not to permit foreign customers to trade on U.S. options exchanges rather than incur these systems costs.”

The Chicago Board Options Exchange, also part of the coalition, filed separate comments as well, estimating that foreign participants account for 15% to 20% of trad-ing volume on U.S. options exchanges. “The proposed regulations would lead directly to a reduction in this trading volume,” the CBOE warned. The exchange also said that the proposed regulation would impose U.S. with-holding tax on many options transactions, such as spreads, “that have nothing to do with avoiding withholding tax on dividends.”

SEC Approves Measure To Limit Volatility

The Securities and Exchange Com-mission announced on June 1 that it has approved two proposals submitted by the national securities exchanges and the Finan-cial Industry Regulatory Authority that are designed to address extraordinary volatility in individual securities and the broader stock markets. The changes will be implemented by Feb. 4, 2013.

“In today’s complex electronic markets, we need an automated and appropriately calibrated way to pause or limit trading if prices move too far too fast,” said SEC Chairman Mary Schapiro.

The “limit up-limit down” mechanism prevents trades in individual listed equity se-curities from occurring outside of a specified price band, which would be set at a per-centage level above and below the average price of the security over the immediately preceding five-minute period. This replaces the existing single-stock circuit breakers ap-proved by the SEC on a pilot basis after the May 6, 2010 market events. For more liquid securities—those in the S&P 500 Index, Russell 1000 Index, and certain exchange-traded products—the level will be 5%, and for other listed securities the level will be 10%. The percentages will be doubled during the opening and closing periods and broader price bands will apply to securities

priced $3 per share or less.The second initiative approved by the

SEC updates existing market-wide circuit breakers that when triggered halt trading all exchange-listed securities throughout the U.S. markets. The changes lower the percentage of a market decline required to trigger a halt and shorten the amount of time that trading is halted. In addition, the circuit breakers will use the S&P 500 index rather than the Dow Jones Industrial Average as the pricing reference to measure a market decline.

New Standards for Financial Market Infrastructures

Two international groups of market regulators—the Committee on Payment and Settlement Systems and the Technical Committee of the International Organiza-tion of Securities Commissions—published a joint report on April 16 titled “Principles for Financial Market Infrastructures.” The report is intended to serve as an important benchmark for regulatory standards around the world. The report outlines 24 high-level principles for the proper management and operation of financial market infrastructures such as clearinghouses and trade reposito-ries. These principles cover such issues as segregation and portability, credit and liquid-ity risk management, governance, financial resources and access requirements. CPSS and IOSCO said their members will strive to adopt the new standards by the end of 2012. Financial market infrastructures are expected to observe the standards as soon as possible.

China Eases Rules on Foreign Investment in Brokerage Firms

The U.S. Treasury Department an-nounced on May 4 that the Chinese govern-ment has made several new commitments to open its financial markets to foreign firms as part of its program to reform the financial sector. The commitments were discussed during the fourth meeting of the U.S.-China strategic and economic dialogue in Beijing.

Of particular interest to firms in the futures industry are the following three com-mitments: 1) foreign firms will be allowed to

form joint venture futures brokerages, with an investment ceiling of up to 49%, 2) the investment ceiling in joint venture securities brokerages will be raised from 33% to 49%, and 3) the investment quota for QFIIs will be raised from $30 billion to $80 billion.

In 2007 the Chinese government allowed three futures brokerage joint ventures to be established through its special trade agree-ment with Hong Kong and Macau. Since then no new joint ventures in futures broker-age have been allowed. A Treasury spokes-person confirmed that the new commitment opens the market to foreign investors from any country and permits those investors to take up to a 49% equity stake. In addition, any existing joint ventures that have less than 49% foreign equity ownership will be allowed to increase the foreign equity own-ership to 49%.

Australia Looks to Industry to Lead Derivatives Revamp

Australia’s Council of Financial Regulators issued a consultation paper on April 14 on the implementation of G-20 commitments on OTC derivatives in Australia. In contrast to the approach being taken in many other jurisdictions, the Australian regulators said that “industry-led solutions” should be the preferred route to increasing the use of cen-tralized infrastructure within the Australian OTC derivatives market. But they added that if progress fails to keep pace with interna-tional developments, regulators should have the ability to mandate trading, clearing and reporting obligations.

“Broadly, the Council considers that it is preferable for an increased uptake in central-ized arrangements for OTC derivatives to be an industry-led initiative, with additional impetus coming from some changes to incentives,” the regulators said in a report to the government explaining their views. “How-ever, to ensure that desired outcomes are reached in acceptable timeframes, a capacity to mandate certain obligations should also be available, though any such decision should only be made after thorough consultation.”

The paper expressed the regulators’ ex-pectation that economic factors, combined with capital charges and margin require-

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newsbriefsments on uncleared derivatives, will drive the adoption of central clearing. The consulta-tion paper also proposed to allow the use of clearinghouses and trade repositories located offshore, rather than requiring the use of domestic entities.

CFTC Technology Panel Examines HFT and Swap Risks

On March 29, the Commodity Futures Trading Commission’s Technology Advi-sory Committee held an all-day meeting to discuss a range of topics including high-frequency trading and credit checks in the cleared swap markets.

Scott O’Malia, the CFTC commissioner who chairs the Technology Advisory Com-mittee, announced the formation of a new subcommittee that will examine different types of HFT and their effects on futures markets and then report back to the full committee on what actions the CFTC should take to strengthen its oversight. The subcommittee consists of representatives from principal trading firms, customer-facing intermediaries, exchanges, service providers and academia, under the leadership of An-drei Kirilenko, the CFTC’s chief economist.

The Technology Advisory Committee also discussed credit checks in the cleared swaps market. Participants discussed a range of solutions for conducting customer credit checks on over-the-counter deriva-tives transactions conducted through swap execution facilities. Much of the discussion centered on whether these trades should pass through credit filters before or imme-diately after execution. In addition, panelists discussed the challenges in applying credit limits to customers trading in a marketplace that will likely have multiple execution and clearing platforms.

ESMA Sets Timetable for OTC Clearing Standards

The European Securities and Markets Authority has set a September deadline for the drafting of technical standards for the implementation of the European Markets Infrastructure Regulation, which establishes a new regulatory framework for the reporting and clearing of over-the-counter derivatives

and the requirements for clearinghouses. The technical standards will set the details of the new rules and address such issues as the timeline for implementing mandatory clearing; the application across different as-set classes and different types of counter-parties; the process for determining which contracts should be subject to manda-tory clearing; and the financial resources of clearinghouses. verena Ross, ESMA’s executive director, announced on May 24 that ESMA plans to publish a consultation paper in June with the proposed texts of these standards, hold a public hearing on the standards in July, and deliver the stan-dards to the European Commission by the end of September. Ross said the expecta-tion is that the Commission will endorse the standards by the end of the year so that the European Union can meet the G-20 com-mitments on central clearing.

FIA Issues Order Handling Recommendations for Executing Brokers

The FIA on March 14 issued order han-dling risk management recommendations for executing brokers. The report docu-ments both current practice and emerging technologies in order to respond to regula-tory concerns about algorithmic trading. The recommendations were developed by experts from executing firms and represent the latest in a series of recommendations developed by FIA members for trading firms, brokers and exchanges.

FIA PTG and FIA EPTA Issue Software Guidelines

The FIA Principal Traders Group and the FIA European Traders Association on March 14 issued a set of recommendations to assist trading firms in establishing internal procedures, processes and controls for the development, testing and deployment of trading software. These best practices were developed by representatives from a dozen FIA PTG and FIA EPTA member firms and are the latest in a series of best practices recom-mendations developed by FIA members for trading firms, brokers and exchanges.

“Managing the development, testing

and deployment of trading applications and technology infrastructure is a complex and dynamic process,” said Remco Lenterman, chairman of the FIA EPTA. “Proper applica-tion of these best practices will reinforce the role of our member firms as responsible market participants. We are committed to business practices that are consistent with relevant regulatory obligations and risk man-agement requirements.”

Penson Sells FCM Business to Knight Capital

Knight Capital Group will pay $5 million to acquire the futures clearing business of Penson Financial Services, the two compa-nies announced on May 29. Knight Capital said the deal will fill a “strategic gap” in its client offering by adding futures to the range of products that it offers. The acquisi-tion, which is subject to closing conditions and regulatory approvals, is expected to be completed in the second quarter of 2012. Upon the close of the acquisition, the futures clearing business will operate as a division of Knight Execution & Clear-ing Services, a broker-dealer that provides electronic trading, clearing and settlement services for a wide range of U.S. equities and equity options markets. As of March 31, Penson had $561 million in segregated customer funds. Penson expects to transfer client assets within one day of the close. A Knight Capital spokeswoman confirmed that John Streich, chief executive officer of Penson Futures, would remain with the unit.

Marex Spectron Expands Professional Trader Division

Schneider Trading Associates will sell its clearing business to Marex Spectron, the two companies announced on May 10. After the deal closes, STA will focus on its broker-age business, which provides services for independent brokers and brokerage groups. Marex Spectron, which plans to merge the STA clearing business with its professional trader services group, said the combined group will service more than 1,100 profes-sional traders generating more than 200 million contracts in volume annually. The London-based company also said it plans to


integrate the technology infrastructure de-veloped by STA into its Easyscreen platform. Sonny Schneider, founder and chief execu-tive officer of STA, will join Marex Spectron as chairman of its Pro-Trader division. He will work with John Lowrey, global head of electronic trading and DMA services, to sup-port the development of Marex Spectron’s global electronic offering.

ICE Applies Circuit Breakers to Commodity Futures

ICE Futures U.S. and ICE Futures Europe implemented “interval price limits” for their commodity futures contracts during March and April. Under the new policy, the ex-changes will briefly apply a limit on the range of price moves if triggered by an extreme price move in the preceding 15 seconds. “IPL functionality acts as a temporary circuit breaker feature on the electronic platform to diminish the likelihood and extent of short-term price spikes or aberrant market moves,” the exchanges said. “While it is designed to be in force throughout each trading day, it is expected that the protec-tions will be actively triggered only in the case of extreme price moves over very short periods of time.”

FSOC Designates Clearinghouses as “Systemically Important”

CME Group, IntercontinentalExchange’s ICE Clear Credit, and the Options Clearing Corporation were notified by the Financial Stability Oversight Council in letters sent out in late May that regulators plan to designate these derivatives clearinghouses as systemi-cally important financial market utilities. Such a designation will put them under tighter government oversight. The clearinghouses have 60 days to seek a waiver before the notices take effect. Officials at ICE said they do not plan to seek a waiver from the designation. CME confirmed receiving a notice from FSOC but would not comment beyond that. OCC previously has indicated it is willing to accept such a designation. In a related development, the Depository Trust and Clearing Corporation confirmed that three of its clearing and settlement subsid-

iaries received notices from the FSOC that they would be designated as systemically important financial market utilities. DTCC said it had no disagreement with the pro-posed designations.

CME Expands Trading Hours for Grain and Oilseed Contracts

CME Group, responding to competition from IntercontinentalExchange, expanded the trading hours for its grain and oilseed futures and options contracts. The move came after ICE began offering a competing set of agricultural contracts and made them available for electronic trading 22 hours per day. CME expanded its hours for elec-tronic trading to 21 from 17 hours per day. CME also decided to eliminate a tradition of delaying the opening of floor trading on the days when the U.S. Agriculture Depart-ment releases market-moving reports. CME initially sought to expand electronic hours to 22 hours a day to match the ICE trading hours, but amid concerns from commer-cial users CME agreed to scale back its extended trading hour plan by one hour.

EU Lawmakers Approve Financial Transaction Tax

During a plenary session on May 23, the European Parliament adopted the European Commission’s proposal for a financial trans-action tax. In a press release, the European Parliament said the proposed tax, approved by a vote of 487 to 152, “should be better designed to capture more traders and make evasion unprofitable.” The proposed EU-wide tax is subject to review and potential veto by member states and faces strong op-position from countries such as the U.K.

LCH.Clearnet Expands CDS Clearing beyond France

LCH.Clearnet S.A., the Paris-based subsidiary of LCH.Clearnet Group, an-nounced on May 15 that it is expanding CDSClear, the clearing service that it offers for credit default swaps. The CDS offering was first launched in 2010 with just four French banks as members—BnP Paribas, Credit Agricole, natixis and Société Générale. LCH.Clearnet

has now added 10 international banks as members: Bank of America Merrill Lynch, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan, Morgan Stanley and UBS.

CDSClear currently clears 129 contracts based on European credit default indices. LCH.Clearnet said European single-name CDS will be introduced later this year with offsets against CDS index products, subject to regulatory approval. CDSClear is also actively working towards delivery of an inter-national client clearing service later this year, including a U.S. offering.

“We are working hard on building our client offering and are keen to engage with clients globally and gain their input into its development,” said Charlie Longden, chief executive officer of CDSClear. Longden joined the company in December from Markit, where he was managing director of fixed income, with a mandate to broaden the service to international users.


Asia The race is on. Clearinghouses are scrambling to roll

out clearing services for over-the-counter derivatives.

Clients are poring over the details of various

offerings, analyzing default structures, calculating

margin requirements, and testing the operational

details. While the vast majority of OTC trades are still

conducted bilaterally, in recent months the number of

trades that have been submitted to clearinghouses

has picked up noticeably.

The Race for OTC Clearing in

By Will Acworth

Korea has drafted laws that will mandate clearing through an onshore clearinghouse, but a snag in the legislative process has de-layed the Korea Exchange’s plans to launch clearing for Korean won-denominated in-terest rate swaps. And in India, there is no mandate for clearing as of yet, but the local government securities clearinghouse is de-veloping plans to offer clearing for interest rate swaps denominated in rupees.

Australia: Industry-Led Solutions

In contrast to the approach taken in most other jurisdictions around the world, the Australian regulators have agreed to let the market take the lead in driving the adoption of central clearing. In a consulta-

tion paper released on April 14, Australia’s Council of Financial Regulators said that “industry-led solutions” should be the pre-ferred route. The regulators explained that financial institutions will have powerful economic incentives to move their OTC trades into clearinghouses.

For example, new capital charges and margin requirements for uncleared deriva-tives will send a “price signal” to all market participants, especially the larger market participants, the regulators said. And once a critical mass of large market participants


Three clearinghouses—LCH.Clear-net, CME Group and Singapore Exchange—have already launched

clearing services for interest rate swaps in various Asian currencies and are begin-ning to see meaningful volumes of cleared trades. LCH.Clearnet continues to be well ahead of the rest, thanks to its long head start and strong dealer support, but CME’s addition of Japanese yen and Australian dollar swaps this spring immediately at-tracted some business, and SGX continues to see meaningful increases in the volume of interest rate swaps that it clears.

Meanwhile a large number of other clearinghouses in the region are prepar-ing to offer clearing for OTC interest rate swaps, the largest segment of the overall market. Clearinghouses in Ja-pan, Hong Kong, Korea, Australia, In-dia and China are at various stages of readiness, with Japan, Hong Kong and Korea the closest to launch.

This is proving to be no simple proj-ect, however. Several clearinghouses have been forced to delay the timetable for their plans, either because the necessary changes to local laws have not been final-ized or because the financial and opera-tional details are still being worked out in consultation with the financial insti-tutions that might become their clearing members.

In fact, in some jurisdictions, the lo-cal clearing solution may not be available until well after the year-end deadline set by the Group of 20 leaders in November 2009. All of the signatories to that agree-ment—including a number of countries in the Asia-Pacific region—pledged to re-quire clearing for all standardized OTC derivatives by the end of 2012, a goal that has proven to be difficult to achieve even in the U.S. and Europe.

In a previous article, Futures Industry described progress towards OTC clearing in Japan, Singapore and Hong Kong (see “OTC Clearing in Asia: Under Construc-tion” in the March 2012 issue). This article covers three more jurisdictions: Australia, Korea and India. Each of the three is tak-ing a different approach, highlighting the fragmented nature of the clearing land-scape in Asia-Pacific. Australia is relying on market forces to drive the adoption of clearing, at least for now. Two global clearinghouses—LCH.Clearnet and CME Group—are already clearing trades for Australian financial institutions, and the domestic exchange may also enter the race.

begins central clearing, they expect the “network externalities” of clearing will make it likely that the practice will spread.

What explains the decision to avoid a mandate, at least for now? For one thing, the regulators recognized that the Austra-lian OTC derivatives market is relatively small and very cross-border in nature. Both of those characteristics would pose a “challenge” to the success of any domestic regulatory initiative, they said. The regu-lators also recognized that the transition to central clearing will require significant changes to market practices and organiza-tional structures. For example, a host of changes to legal and operational arrange-ments will be needed, and larger amounts of collateral have to be posted and received.

For this reason, it makes sense to give financial institutions sufficient time to make the necessary adjustments, they said. “Allowing time for the work-through of changed price signals will per-mit the financial system to reconfigure itself in an organic way, with scope for regulatory guidance or intervention as necessary.”

Despite the market-friendly approach, the regulators have not ruled out in-troducing a mandate at a later stage, cautioned Dale Rayner, a lawyer in the Sydney office of Clifford Chance. The government is in the process of drafting a legislative framework that will authorize the Australian Securities and Investment Commission to require clearing and is now assessing feedback from market participants. “The regulators have taken the view that market forces will drive the adoption of clearing among Australian financial institutions, but they want to retain the ability to mandate a solution if the pace of change is not sufficient,” Rayner said.

Extensive consultation with local and international financial institutions played a key role in the regulators’ decision to

adopt this approach, according to David Love, director, policy and international affairs at the Australian Financial Markets Association. Love said that although the Australian regulators are committed to the objectives of the G-20 derivatives reforms, they realized that the reforms should be carefully calibrated to the specific context of the Australian OTC market.

One of the key features of that market is that swaps are traded on a global basis. Large international banks are major play-ers in the Australian market, and trades

It’s a very open

market, and we said

to the regulators that

it is very important

to avoid fragmenting

liquidity and tiering

the market. DaviD lOve,

Australian Financial Markets Association


that originate in Australia may be booked in London, New York or Hong Kong. “It’s a very open market, and we said to the regulators that it is very important to avoid fragmenting liquidity and tiering the mar-ket,” he said.

Still another factor is that the market is beginning to offer better pricing for coun-terparties willing to clear their swaps. One bank executive said swap desks are start-ing to use two pricing curves, with better terms for cleared than for uncleared trades. This reflects the capital costs anticipated for uncleared derivatives, he explained, adding that clients are weighing this price differential against the costs of funding the market requirements.

Love noted that the major dealers in the Australian market—both local and international—are anticipating that they will be subject to the clearing mandate in Dodd-Frank as well as the higher capital requirements that will be established un-der the Basel 3 standards. Cross-currency swaps are a big business, and several major Australian banks have entered into client clearing relationships with members of the main global clearinghouses such as LCH.Clearnet and CME Group.

“All the major Australian banks accept that they have to clear,” Love said. “They are closely monitoring the implementa-tion of the Dodd-Frank Act, and they also recognize that Basel 3 is coming down the track.” He added that Australian banks raise approximately 50% of their capital offshore and then use swaps to convert the proceeds into Australian dollars. As a result, there is a good chance that some of their swap transactions with offshore counterparties will come under the man-datory clearing requirements of Dodd-Frank, especially if the CFTC takes an expansive interpretation of its application to non-U.S. entities.

Global ClearingIn fact, a number of local banks and

other financial institutions have already begun to clear their trades. Officials at sev-eral international clearing firms said they have clients in Australia who have gone live at both LCH.Clearnet and CME and have cleared swaps denominated in U.S. dollars and euros as well as Australian dollars.

Steve Mahoney, global head of OTC clearing at Credit Suisse, said that his bank has cleared several interest rate swaps

with Australian counterparties during lo-cal hours. The significance, Mahoney ex-plained, is that this shows trades can be executed and cleared at any time around the globe. “It doesn’t matter where the clearinghouse is located,” he said. “All you need is the technology to route the trades and process the trades for clearing.”

LCH.Clearnet offers clearing for the widest range of Australian dollar interest rate swaps, including zero coupon swaps, single currency basis swaps and com-pounding swaps, and is prepared to ac-cept for clearing swaps with maturities of up to 30 years. As of May 31, the notional value of the outstanding amount of cleared swaps was A$ 3,473 billion (US$ 3,452 billion), and it has been estimated that LCH.Clearnet is clearing approximately half of the dealer-to-dealer market for Aus-tralian dollar interest rate swaps.

CME joined the race only recently, add-ing Australian dollar interest rate swaps to its clearing offering in mid-April. Even so, the Chicago-based clearinghouse has found some success, particularly with the buy-side. As of May 31, the notional value of the outstanding positions was A$ 1 bil-lion (US$ 994 million), and CME officials

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said that the majority of those positions were dealer-to-client trades. In contrast, LCH.Clearnet’s total included just A$ 497.5 million (US$ 494.5 million) in no-tional value of dealer-to-client trades.

“We continue to see more and more interest in clearing from a broad range of market participants in Asia, in par-ticular banks and asset managers,” said Laurent Paulhac, head of OTC products and services at CME. Paulhac added that the addition of Australian dollar and Japanese yen swaps to its offering had a noticeable impact.

“When we added the two Asian cur-rencies in April, we originally thought that U.S. institutions would be the main clients, but as the volume picked up, we discovered that institutions in Aus-tralia and Japan were also interested. So we geared up our infrastructure in those time zones and made the necessary adjust-ments so that our services would easily be consumable by clients in the Asia-Pacific region as well as Europe.”

These are still early days. Only a small number of Australian financial institutions have actually begun clearing. But officials at several banks said clients are interested

in using both clearinghouses. A number of factors drive the decision on which to use, including existing relationships and famil-iarity with the legal environment. Looking ahead, cross-margining will be a key issue affecting the choice of clearinghouse, ac-cording to Credit Suisse’s Mahoney.

“That’s the battleground for clear-inghouses around the world,” he com-mented. “Capital efficiency is on every client’s wish list. The more you can bring products together and cross-margin them, the more it will resemble what they pay today, with one margin call across a whole portfolio of positions.”

A Local Solution?But what about ASX? As the operator

of Australia’s futures market, ASX can offer substantial margin offsets between interest rate futures and interest rate swaps. ASX officials have spoken publicly about their interest in offering a domestic clearing so-lution, but AFMA’s Love said it’s not clear that there is enough demand to support the cost of building such a service. “There is ongoing discussion about a possible lo-cal clearing solution, but questions remain about how it would work in practice and

whether it could be economically viable.”ASX has not formally announced the

details of its plans, but several industry sources said the exchange has formed a working group with industry representa-tives to explore how the clearing solution would work. The expectation is that the service will be provided by the clearing-house now used for the exchange’s futures market, but it will be backed by a stand-alone default fund. Cross-margining with futures is a key objective; ASX has the largest fixed income futures market in the Asia-Pacific region, with annual turnover in fiscal 2011 of more than A$ 45.18 tril-lion (US$ 44.91 trillion) in notional value.

The industry sources also said ASX is consulting with the Singapore Exchange, which already offers clearing for interest rate swaps and non-deliverable forwards. SGX has signed up nearly a dozen banks for its OTC derivatives clearing service and has cleared S$ 264.6 billion (US$ 207 billion) in notional value of interest rates swaps since the launch of the service in November 2010. SGX’s offering is limited to dealer-to-dealer trades, however, and the exchange’s futures market does not of-fer the same potential for cross-margining.

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Meanwhile ASX is pushing ahead with a more limited project—offering clearing for OTC equity derivatives. The new service gives users the flexibility to specify matu-rity, type of option, exercise price and ex-ercise type. In addition, the positions can be offset with the exchange’s listed options, and trades can be entered into with one counterparty and exited via another.

The equity derivatives offering comes at a good time, according to Ian Nissen, Citi’s head of futures, OTC clearing and prime finance sales for Australia and New Zealand. “There’s been a pick-up in the use of options strategies among invest-ment managers that are looking to im-prove their returns,” he explained. “By booking more of their options positions into clearinghouses, they can reduce their counterparty risk and free up their bal-ance sheet for the really tailored OTC products,” he added.

Phase one, which was launched in May, covers options on 19 stocks as well as the S&P ASX 200 index, the main benchmark for the Australian equity market. Phase two, which is scheduled for early next year, will cover all classes of options listed on the exchange and will cover options expiring as far out as four years.

Korea: December TargetAs a member of the G-20, Korea has

been very focused on meeting the time-table for derivatives reforms. The govern-ment has drafted the legislation neces-sary to amend the local laws and provide legal certainty for the clearing of OTC derivatives. In contrast to the Australian approach, the Korean government intends to require all dealers in swaps, including branches of foreign banks, to clear their trades, and has designated the Korea Ex-change to serve as the clearinghouse for the Korean OTC market.

Last December KRX officials circulated white papers outlining their plans to offer clearing, including clearing rules and oper-ational procedures. The exchange intends to start with plain vanilla fixed-for-floating interest rate swaps denominated in Korean won, with a maturity of up to 10 years. The clearing service will be supported by a default fund supported by contributions from clearing members as well as the “set-tlement reserve fund” that draws on the exchange’s own financial resources.

Jae-Joon Lim, a director of business

development in the exchange’s deriva-tives market division, explained that the potential market for its clearing service consists of the 79 banks and securities firms that are licensed to act as dealers in OTC derivatives. The membership re-quirements have not been finalized yet, he said, but KRX is studying the examples set by CME and SGX. KRX also is talk-ing to Markit, the platform that many of

the large international dealers use to pro-cess their OTC trades, so that trades con-firmed on this platform can be routed to the KRX clearinghouse.

Initially the goal was to launch the ser-vice in July, but the timetable has been de-layed by a snag in the legislative process. The Financial Services Commission, Ko-rea’s markets regulator, submitted amend-ments to the National Assembly last year that will lay the legal foundation for the clearing service. Those amendments were part of a larger package of financial reform measures that bogged down in disputes over other, unrelated issues, according to several lawyers familiar with the status of the legislation.

KRX expects that the legislation will be reintroduced by September, Lim said. Other sources agreed the clearing-related

amendments are a high priority for the government, which wants to meet the G-20 schedule, but warned that there con-tinues to be opposition to other provisions of the legislation that will encourage the creation of investment banks. They pre-dicted that even the new KRX timetable, which envisions the launch of clearing services in November or December of this year, may prove to be too optimistic.

Paget Dare Bryan, a partner in the Hong Kong office of Clifford Chance, added that there is another issue that needs to be addressed. It’s not completely clear, he said, how the rules and the law will permit client clearing “portability,” meaning the transfer of positions and assets from one clearing member to an-other in case of a default of that clearing member. That raises the concern that a transfer might fail to work as expected or be challenged in court.

This is especially an issue for banks us-ing client clearing, he added, because it would affect the capital charge on their cleared positions. Basel 3 proposals offer very low capital charges for risk exposures to clearinghouses, but only if it is highly likely that positions can be ported to an-other clearing member in case of default. Otherwise the exposure has to be treated as a risk exposure to the clearing member, rather than the clearinghouse.

Lim emphasized, however, that cen-tral clearing ultimately should result in more participation in the Korean swap market, rather than less. Currently the market is dominated by banks, but by reducing counterparty credit risk,

clearing will increase the volume traded by securities firms. “The securities firms are not major players today, but with clearing they will be able to become more active,” he predicted.

India: Cautious ApproachIn some respects, India is farther ahead

than either Australia or Korea in the imple-mentation of the G-20 reforms. The Re-serve Bank of India, the country’s central bank and the principal regulator of India’s OTC derivatives markets, began imple-menting a trade reporting requirement for interest rate swaps and forward rate agree-ments in August 2007, well in advance of the financial crisis that prompted the G-20 reforms. In March 2012, the central bank extended that reporting requirement to cover all interest rate and foreign exchange

Asia Clearing

The securities

firms are not major

players today, but

with clearing they will

be able to become

more active.

jae-jOOn liM, Korea Exchange


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derivatives, and expanded the scope to in-clude not only interbank trades but also client trades.

The repository for these trade reports—the Clearing Corporation of India—is now developing a plan to offer clearing for these trades. CCIL was established in 2001 at the instigation of central bank for the purpose of improving trade processing and reducing settlement risk in the govern-ment securities market. Since then it has expanded into the settlement of foreign exchange trades and a wider range of mar-ket infrastructure services. CCIL’s primary owners are the leading Indian banks, but foreign banks are also represented in the ownership structure.

Siddhartha Roy, CCIL’s chief risk officer, said the company is preparing to launch clearing for interest rate swaps. Initially the service will target rupee-denominated overnight index swaps that reference the Mumbai Interbank Offered Rate, a widely used overnight money market index. This type of swap accounts for the bulk of the interest rate swap market in India, accord-ing to the data collected by CCIL through its repository.

CCIL expects that the 20 banks that are the most active participants in the market will be the most likely to join the service, at least during the initial stages, Roy said. Clearing will be limited to members, so there will be no provision for porting client trades to another clearing member.

The original target for launch was June, but Roy said this had to be put off after the RBI decided to take a closer look at the details of the clearing service to make sure that they were in line with international standards. In particular, the central bank is examining the “principles for financial market infrastructures” that were set out in April by the Committee on Payment and Settlement Systems, an organization representing central banks, and the Inter-national Organization of Securities Com-missions. These principles are designed to ensure international convergence among the many central clearing solutions emerg-ing around the world, and regulators are expected to begin implementing the stan-dards this year.

Although CCIL does not provide clear-ing services for exchange-traded futures and options, it does have experience in

post-trade processing and settlement for a wide range of other financial instruments, including OTC derivatives.

In March, CCIL conducted its second portfolio compression exercise for inter-est rate swaps. The purpose was to reduce the overall notional value and the number of outstanding contracts by identifying economically redundant trades for early termination, freeing up capital for market participants and reducing the overall level of risk. CCIL said 21 banks participated in the exercise, including several large for-eign banks, and more than 17,000 trades were terminated, leading to a reduction in notional value of 8.954 trillion rupees (US$ 162.6 billion). ..............Will acworth is the editor of Futures Industry magazine.


vanguard is a registered investment adviser based in valley Forge, Pennsylvania, with more

than $1.8 trillion in assets under management. vanguard has been a vocal supporter of many of the

proposed derivatives market reforms including enhanced regulatory oversight and requiring the central

clearing of standardized swaps.

William Thum is a principal in vanguard’s legal department and is responsible for derivatives

legal support including coverage of fixed income and equities trading, negotiation of derivatives

trading agreements, and legal analysis of derivatives regulatory reform. He is also heavily involved with

industry initiatives to establish new market architecture and standard clearing documentation. Before

joining vanguard in 2010, he was a partner at the law firm of Fried Frank and head of derivatives

documentation, Americas, at Morgan Stanley.

In this interview, Thum discusses several issues related to the protection of customer funds.

He offers his views on the “LSOC” model approved earlier this year by the Commodity Futures

Trading Commission to safeguard margin for cleared swaps. He also comments on several regulatory

initiatives to strengthen customer fund protections, including the amendments to Rule 1.25 that the

Commodity Futures Trading Commission adopted in December and the recommendations that the

Futures Industry Association’s MF Global task force issued in March.

He cautions, however, that customers cannot rely entirely on regulations to protect their funds.

Regular due diligence is also essential, and he suggests several questions that institutional investors

should ask their futures commission merchants.

Customer Protections for Cleared Swaps: A Q&A with VanguardBy Will Acworth


FI: You have been very involved in the rule-making process at the Commodity Futures Trading Commission, especially with re-spect to the rules around the clearing of swaps. Let’s start by talking about the kinds of risks that you see in these rules.THUM: Swaps clearing presents two main benefits. First of all, it substantially miti-gates credit risk related to your dealer, or the possibility your dealer will default and fail to perform under the swap. As the principal to the trade is the clearinghouse, you can derive significant comfort from the risk mu-tualization across all of the clearinghouse’s members. Secondly, it facilitates the easy transfer, or porting, of live positions from a failing clearing member to a strong clearing member. This is a significant benefit com-pared to the over-the-counter world where positions are terminated upon a dealer’s de-fault and you have to enter into new trades with a new dealer.

Given the importance of the ability to

port and thereby maintain open positions, we have been very attentive to any risk that might impact our ability to move trades to a relatively strong clearing member.

Other risks presented by individual clear-ing members are certainly important, but hopefully they are of lesser consequence. The first is fellow customer risk, or the possibil-ity that your clearing member fails due to its inability to meet the margin obligations of one of its other customers. The second is investment risk, where the investments made by your clearing member decline and it can-not replenish the margin pool. Finally, there is operational or fraud risk, where your clear-ing member fails to properly segregate your margin from its assets.

In thinking about the CFTC’s rules and how they address clearing member risks, I put them into three categories. There are the risks that are fully addressed by the regulatory structure surrounding cleared swaps. Then there are the risks that are only partially addressed by the regulatory structure. And finally there are the risks that need to be mitigated by your own due diligence. In other words, not all clearing members are created equal, and if you per-form a regular due diligence review of your

clearing member, you can largely mitigate some of these risks.

FI: What risk mitigation techniques have you been using up to now in the OTC bi-lateral world? THUM: Well, Vanguard has a suite of SEC-registered mutual funds, some of which en-ter into over-the-counter derivatives trades, and in accordance with the ‘40 Act, mutual fund assets must be held by a custodian. Our derivatives are backed by full bilateral collateral arrangements where collateral is pledged either by the fund or by its dealer to secure obligations arising under the de-rivatives transactions. Consistent with the ’40 Act mandate, those pledged assets are held by the fund’s custodian in a segregated control account. So if the pledgor defaults, the secured party has access to the pledged assets securing the obligation. We have also negotiated what I’ll call “pledgor access provisions” whereby if the secured party

defaults, the pledgor can easily recover the pledged assets from the custodian.

The use of a custodian to hold the pledged assets protects a fund from a whole host of risks that the dealer presents. The assets are not held by the dealer, they’re not commingled with other customers’ funds, they’re not invested by the dealer, and there’s no risk of fraud because the dealer has no access to these assets in the ordinary course of trading.

While the custodial structure eliminates risks otherwise presented if the dealer held the collateral, there are, of course, other risks. For example, there remains credit risk to the dealer with respect to market gains or losses that arise between the time that collat-eral is last posted to you and the time you’re able to liquidate the collateral and apply the proceeds. Conceivably you could be under-secured depending on the extent to which the market has moved in the interim and the market value exceeds the pledged assets. In addition, while having a custodian hold assets on your behalf insulates you from risk to your dealer, you are presented with a de-gree of risk related to the custodian itself in the event the custodian commits fraud or becomes insolvent.

FI: In a custodial arrangement, the margin can’t be invested by the dealer and there-fore you have a degree of protection against what you have described as investment risk. But if the dealer can’t invest those funds on your behalf, doesn’t that create an opportu-nity cost for the customer? THUM: That’s right. When the collateral is held outside of the dealer by a custodian, that impacts the pricing of deals. It becomes more expensive to do the trades in that the dealer cannot benefit from holding the col-lateral and using it in its business. In addi-tion, there are expenses related to setting up and maintaining the custodial relationship. But remember, I’m speaking about SEC-registered mutual funds, where the fund’s pledged assets must be held by a third-party custodian. Other market participants, such as hedge funds, typically do transfer their collateral directly to the dealer and that col-lateral is held and invested by the dealer raising the prospect of dealer risk related to

any collateral in excess of the market value of the derivatives.

The main point is that there are a num-ber of risk mitigation techniques that have been developed in the over-the-counter de-rivatives world. Those techniques are, for the most part, set up for each account and involve negotiation of bespoke documenta-tion. There’s no market standard documen-tation for the custodial relationships. There are costs associated with holding the collat-eral this way. And while many of the risks presented in the over-the-counter world are addressed through these practices, they don’t eliminate all risks. In fact, some new risks are introduced when you have a custo-dial third party involved.

FI: Let’s talk about LSOC. This is a new type of clearing model that the CFTC has mandated for cleared swaps starting this fall. What are the key details of the LSOC rules? THUM: There are a couple that stand out. Of course, the main rule, 22.15, clarifies that one customer’s margin can’t be used to cover a fellow customer’s default. This is a signifi-cant point of departure from the futures model where the clearinghouse has access to the entire pool of customer margin in the

We have been very attentive to any risk that might impact our ability

to move trades to a relatively strong clearing member.’’


event one customer fails and the clearing member also fails in its obligation to make up any margin shortfall. That’s the most critical point in the LSOC rules. There’s also a related rule, 22.13(c)(2), which says that when a customer posts additional margin to the clearing member above and beyond the clearinghouse minimum requirement, that margin also receives full protection and may not be used by the clearinghouse to meet any other customer’s default. So you not only have your core margin protected, you also have any excess margin protected from fellow customer risk.

Another area of the rule making ad-dresses margin that is posted to the clearing-house by a clearing member, either specifi-cally with respect to an individual customer or overall as a cushion to address margin transfers on a daily basis. Rule 22.2(e) clari-fies the extent to which LSOC treatment, or full protection from fellow customer risk, is also provided to this excess margin posted by the clearing member.

FI: What are the pros and cons of LSOC from your perspective? THUM: Well, LSOC is effective in largely insu-lating each individual customer from the risk presented by fellow customers of a common clearing member. The margin transferred by each customer to the clearing member, while held in a commingled, omnibus account, is fully segregated from the margin posted by any of the clearing member’s other customers. In the event another customer fails to meet a margin call, neither the clearing member, nor indeed the clearinghouse can use the margin posted by the other solvent customers to sat-isfy the margin shortfall.

Getting back to one of the primary ob-jectives mentioned at the outset, a critical benefit, of course, is that all of that margin is then available for the solvent customers to help facilitate the prompt transfer of their positions to a new solvent clearing member. If the clearinghouse had access to all cus-tomer margin to meet the needs of a failed customer, less margin would be available for porting which could either be delayed or derailed as the clearinghouse needed to

collect additional margin prior to arranging the transfer of solvent customer’s positions. Given that portability, and not trade ter-mination, is a major benefit of the central clearing, a system that effectively preserves the margin value for each customer and makes it available to support trades that are ported to a new clearing member is a sig-nificant improvement.

FI: There are some other requirements that address record keeping and disclosure. Can you talk about those and the value that those provide to you as a customer of this industry? THUM: That’s where it’s important that we don’t just think about the LSOC rule as sim-ply mitigating fellow customer risk. There is also important language in the LSOC rule that serves to mitigate the risk that a clearing member is not maintaining adequate segre-gation or is somehow making use of margin in an inappropriate manner. That language is in rules 22.11(c) and 22.11(e).

First of all, the clearing member must provide the clearinghouse with daily re-cords of its customers, their positions, and their margin. And then the clear-inghouse is tasked with confirming that such reports are accurate, complete, and timely. So this is effectively a full disclo-sure by the clearing member to the clear-inghouse of who the customers are, what their positions are, and how much the margin has been posted with respect to each customer and their positions.

Mandating this window into the clear-ing member’s business will undoubtedly enhance the discipline of the clearing member in maintaining full segregation and robust record keeping. It also will provide the clearinghouse with accurate, complete and timely information so that if something goes wrong with a customer, or even with the clearing member, the clear-inghouse will know who the clients are, what their trades are, and what margin has been posted for those trades. Armed with this information, the ability to efficiently port trades to a new clearing member

without the need to post additional mar-gin is significantly enhanced.

FI: So the clearinghouse would have posi-tion-level information for each customer? THUM: That’s right. In addition, under LSOC, the clearinghouse collects margin on a gross basis related to the risk presented by each individual customer rather than on a net basis across the risk presented by all of a clearing member’s customers. Gross margin requirements also help to ensure the clearinghouse will hold adequate margin for the porting of customer positions in the event of the failure of a clearing member.

FI: Has your firm had any experience with LSOC? THUM: Well, we certainly have been in con-versation with clearing members and each of the different clearinghouses as we assess the appropriate selection to be used by the Vanguard funds. In so doing, we have considered the various models for holding

margin and protecting margin for cleared swaps. What has always seemed to us to be the system that makes the most sense is where a clearinghouse has a regular window into the trades that are put on by individual customers and the risks presented by those specific trades, and collects margin on a gross basis from each customer. In other words, a system where each customer “pays its own freight” in terms of the relative risk that it and its trades present to the system. So that helped to guide our own thought process in our support for the LSOC model over time.

The futures model has always appeared to us to be less desirable. That model looks at exposure on a net basis across all cus-tomers, with the apparent expectation that there could be access to the margin of non-defaulting customers to satisfy defaults by a defaulting customer. In effect, we came to perceive that those customers with conser-vative trading strategies and approaches and robust credit parameters are subsidizing the customers with lower credit qualities and more aggressive trading strategies.

Consumer Protections

Given that portability, and not trade termination, is a major benefit

of the central clearing, a system that effectively preserves the margin

value for each customer and makes it available to support trades that

are ported to a new clearing member is a significant improvement.’’


FI: How do you address the argument that the futures model has, in fact, worked? Even if you are right that futures customers are exposed to fellow customer risk, in practice the clearinghouses have never tapped one customer’s assets to cover a default by an-other customer. THUM: We certainly have not had the fel-low customer risk issue tested, to a large extent, in the futures world. One could ar-gue, though, that the type of trading in the futures world presents less risk to the system than trading in the cleared swaps world. In the cleared swaps world, we see a much broader range of trade types, with each type traded at a much lower level of frequency. This lower liquidity also raises the possibil-ity of greater volatility, so the risks that an individual customer can present to the over-all model could be significantly greater in the cleared swaps world.

So it is particularly important in the cleared swaps world that each individual customer pays its own freight with respect

to its relative risk, as I said before. We also see that, going forward, it’s compelling for the futures model to be reconsidered and ideally have the LSOC approach ap-ply to the futures world. The benefit, of course, is not only will every customer be paying its own freight, but also, when you have a harmonization of the models used between futures and cleared swaps, you then open the door to the possibility for portfolio margining and greater mar-gin efficiency across your futures and your cleared swaps trading.

FI: You have made some comments at indus-try conferences about the need for clarifica-tion on certain issues covered by the LSOC rules. Can you give us some examples? THUM: It seems to us that, while the LSOC rules make it very clear how a customer’s initial margin is protected, how the rule relates to variation margin could benefit from further clarification. Our understand-ing is that the largest three clearinghouses may have different interpretations of what is required under LSOC with respect to the

level of protection to be applied to variation margin. So we feel that this area would ben-efit from clarification from the CFTC.

Another issue relates to this idea of excess margin posted by clearing members at the clearinghouse. It’s clear that excess margin posted by customers receives full protec-tion from fellow customer risk under the LSOC rules. The question is, what about excess margin posted by a clearing member to either supplement an individual cus-tomer’s margin or as an overall buffer for all customers of that clearing member? That’s another area where it appears there may be some divergent views among the clear-inghouses and, again, we think that there should be an effort made to see if clarifica-tion of the rule would help to minimize any unintended ambiguity on this topic.

FI: As you know, the CFTC has made some amendments to Rule 1.25, which sets limits on how FCMs invest customer funds. What is your view of those amendments?

THUM: This relates to the investment risk that I talked about at the outset. The ques-tion is, to what extent are customers ex-posed to the investments of customer mar-gin made by a clearing member? In other words, the risk that the clearing member makes poor investments, there are signifi-cant losses, and the clearing member fails and is unable to supplement the margin ac-count to address those losses. In amending Rule 1.25, the CFTC narrowed the range of investment options that a clearing member is permitted to make. We see this as a sig-nificant step forward in terms of mitigating investment risk overall. So those who ques-tion the extent to which investment risk has been addressed by the LSOC rules should gain some comfort from the recent changes to Rule 1.25.

Certainly we could eliminate all invest-ment risk by having the margin held in a third-party account or certain other more novel approaches that have been suggested. The critical question is what is the incremental level of risk? How can that incremental level of risk be most efficiently mitigated? Is the

best approach to develop a cumbersome and expensive system to fully eliminate that incre-mental risk? We think that, through a combi-nation of related rule-making and a customer’s own due diligence, the relatively small level of incremental risk can largely be mitigated. FI: There have been some proposals put out by the FIA and other organizations about how to improve customer protections. What do you see as the most critical ele-ments of those recommendations? THUM: I think the FIA has done a great job in crafting a set of best practices that really can go a long way to filling any per-ceived gaps in addressing the kind of in-cremental risk not addressed by the LSOC rule. Requiring daily reporting of clearing member segregation calculations to the self-regulatory organization is a key best practice that should be implemented on a uniform basis. The twice monthly report-ing of clearing member compliance with the Rule 1.25 investment limitation is also very important, as is an annual clear-

ing member certification that there are no material weaknesses in a clearing member’s controls relating to capital computations and protection of customer funds. These are all critical ways that some of that incre-mental risk can be addressed.

There’s also an added discipline that is the natural byproduct of greater transpar-ency into clearing member practices. These best practices really create an environment where the clearing members—not just indi-vidual clearing members but across all clear-ing members—consistently apply much more robust practices.

FI: The Federal Home Loan Banks filed a comment letter with the CFTC suggesting that some of this information should be made public. What is your take on that? THUM: I think it’s a great idea. The main thrust of that comment letter is that as soon as the regulatory organization gets the re-port from the clearing member, the results of the report should be made available im-mediately on the appropriate web site so that customers have a regular window into

What has always seemed to us to be the system that makes the most

sense is where a clearinghouse has a regular window into the trades

that are put on by individual customers and the risks presented by

those specific trades.’’


the health and best practices of their clear-ing members. Having more transparency can only enhance the level of discipline of each clearing member, and it will better en-able individual customers to assess clear-ing members against its own risk tolerance levels as it contemplates whether to main-tain its trading portfolio with a particular clearing member. And if the risks exceed those tolerance levels, it allows the custom-ers time to make the decision to move to a clearing member that is acting within their tolerance thresholds.

FI: The CFTC currently publishes some FCM financial data on its web site on a monthly basis. Is that information helpful to you? THUM: I think it’s helpful, but I think a lot can happen within the course of a month. The recommendations in the FHLB letter that resonate the most with us are, first, that the daily clearing member reporting

of segregation calculations should be pub-lished immediately on the web site; second, if there’s a notice of a breach of segregation by a clearing member, that should imme-diately be made available on the web site; and third, that the results of any stress test should be published on the web site.

The more information that is avail-able, the more it will enhance the prac-tices of the clearing members and pro-vide the customers with information to be able to assess their clearing members against their risk tolerance expectations and decide if they need to best protect their customer assets by moving them to a new clearing member.

FI: Should there be any kind of lag or delay of these reports in order to prevent them from having some kind of market impact? THUM: No, I think at the end of the day you have to consider who bears the risk of an inadequate flow of information. The funds which we manage represent the investments of a broad range of the public that are fo-cusing on retirement, children’s education, and meeting their future hopes and dreams.

When you limit the flow of information with respect to a failure to meet regulatory obligations, especially rules meant to pro-tect customer assets, the customers are the ones that are bearing that risk. Not having that information in a timely way effectively serves to compromise the credibility of the system for the customers to make their in-vestment choices.

FI: One of the themes that you brought up several times is the need for customers to do due diligence on the FCMs that they are planning to use for their cleared swaps. What kinds of things should customers be looking at as they do their due diligence on FCMs? THUM: This gets back to the point I made early on, that not all clearing members are created equally. While they may offer similar services, the way they handle the risk inher-ent in their operating model can be very dif-ferent. Customers have the right to ask their

clearing members how they are performing against a customer’s risk tolerance levels. For example, what is the clearing member’s capitalization level? Is it capitalized at the CFTC minimum level or at some multiple thereof? When you talk to different clearing members, you will find there is a fair diver-gence in capitalization.

In terms of investment risk, there are some clearing members that limit invest-ments to only the most liquid and less volatile range of investments within the overall pool that they’re permitted to make. So if you were to ask them what investments they make and have that dialogue on a consistent basis, you may find that some clearing members are more conservative in their investments, whereas others, perhaps to achieve a greater re-turn, invest across the whole spectrum al-lowed under Rule 1.25.

And, of course, there’s the history of their compliance with asset segregation rules. Have they consistently met their re-quirements under the segregation rules or have there been gaps from time to time?

The last area would be how clearing

members delegate their responsibilities to clearers in other jurisdictions. You could ask your clearing member for the list of clearers that it uses in specific jurisdictions and perform due diligence on the clearers on that list. Then make sure that you’re comfortable with those firms, or limit the range of instruments that you are trading so that there is no need to rely on unac-ceptable delegated clearers.

The idea here is that each customer needs to bear some level of responsibility for performing regular due diligence on its clearing members, in coming up with its risk tolerance levels, and then deciding on whether or not a particular clearing mem-ber should continue to serve in that role or, indeed, if positions should move to a new clearing member.

FI: One last question. What happens if a customer doesn’t have tens of billions or hundreds of billions of dollars in assets un-

der management? Do you think that the relatively smaller funds or organizations will have the same ability to conduct that due diligence and to obtain that kind of infor-mation from FCMs as the large organiza-tions such as yours? THUM: I think that’s where the FIA’s pro-posal comes in. While a large fund family can make these sorts of due diligence in-quiries as an inherent part of its own audit process, all market participants would ben-efit greatly from requirements for clearing members to make a more robust disclosure to the regulators and for the regulators to promptly make that information available to the market. ..............Will acworth is the editor of Futures Industry magazine.

Consumer Protections

i think the Fia has done a great job in crafting a set of best

practices that really can go a long way to filling any perceived

gaps in addressing the kind of incremental risk not addressed by

the LSOC rule.’’

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In the november 2011 issue of Futures Industry, we discussed the significant uncertainty around the

timing of Dodd-Frank swap market reforms and the problems that this uncertainty raised for swap

market participants. Seven months later, the timeline is gradually becoming clearer.

swap reporting Clearing & trading: a timing guideBy Annette Nazareth and Gabriel Rosenberg

CFTC Proposed Timing of Key Reporting, Clearing and Trading Rules

June and July 2012

Swap Product Definitions

Clearing End-User Exemption

Clearing Phase-In

Mandatory Clearing Determination Proposal

SEF Core Principles

DCM/SEF “Made Available to Trade” Determinations

Mandatory Trading Phase-In

Fall 2012

Block Trades

DCM/SEF/DCO Conflicts of Interest and Governance

Margin Requirements for Non-Banks

The CFTC has finalized several Dodd-Frank rules and has released a pro-posed timetable for finalizing the rest.

In this article, we provide an update on how the CFTC’s proposed and final rules, along with Commissioner Scott O’Malia’s draft rule schedule, create a preliminary sched-ule of swap reporting, clearing and trading requirements for swap market participants.

ReportingTo enhance regulators’ visibility into the

swap markets, Dodd-Frank mandates that swap information be reported to swap data repositories. To promote public transpar-ency, a subset of this reported information, including swap price and size, must be dis-seminated to the public in real-time.

The CFTC finalized its swap reporting rules on December 20, 2011. These rules, following the statute, place the primary re-porting burden on CFTC-registered swap dealers and major swap participants or any swap execution facility or designated con-tract market on which the swap is traded.



When neither party to a swap is a swap dealer or major swap participant, then one of the parties will need to report the trade.

The CFTC’s rules phase in reporting re-quirements by type of market participant and type of swap. SDs and MSPs will need to start reporting credit and interest rate swap transactions as of the day that they are required to register with the CFTC. We ex-pect this registration date to be in the third quarter of 2012. Ninety days later—likely in the fourth quarter of 2012—swap deal-ers and MSPs will need to start reporting all other swaps. Ninety days after that—likely in the first quarter of 2013—other market participants will need to report to SDRs swaps they enter into with non-SD/MSP counterparties.

Between now and the required reporting dates, market participants will need to es-tablish connections to SDRs and the opera-tional and technological capability to collect swap information and report it. Many SDs and MSPs, for whom these requirements will become effective first, have already started the process. By 2013, end users—including those that function as dealers in particular markets but fall below the SD de

minimis thresholds—will need to identify swaps they enter into with non-SDs/MSPs and ensure they have arrangements or sys-tems in place to report those swaps.

ClearingTo decrease counterparty credit risk in

the swap markets, Dodd-Frank requires central clearing for swaps. The central counterparty will collect initial and varia-tion margin from swap counterparties and ensure its own financial stability through guaranty funds and risk management pro-cedures. Commercial end users will be eligible for an exemption from the clearing requirements for any swap entered into to hedge or mitigate commercial risk, subject to meeting a number of obligations around making that election.

The CFTC’s proposed rule schedule sug-gests that in June the agency will begin pro-posing specific swaps that must be cleared. Consistent with Dodd-Frank, the schedule indicates that the CFTC will review the proposal and related public comments for 90 days. As a result, we expect the first man-datory clearing requirements to be finalized in September or October. The first swaps

that are required to be cleared are expected to be liquid interest rate and index credit default swaps.

In September 2011, the CFTC pro-posed a rule that would phase in compli-ance with mandatory clearing determina-tions by three tiers of market participants. This rule, which is scheduled to be final-ized in June, would require clearing of a swap between two entities that are SDs, MSPs or “active funds” within 90 days of a CFTC determination that the swap has to be cleared. If the rule is finalized as proposed, we would expect these first swap clearing requirements to become effective in the first quarter of 2013. Fi-nancial end users, other than third-party managed subaccounts, would have 180 days to comply, while commercial end us-ers and third-party managed subaccounts would have 270 days. This would place the first clearing requirements for these groups in the second and third quarter of 2013, respectively.

In advance of clearing compliance, mar-ket participants will need to ensure they have access to a clearinghouse. For all but the biggest market participants, this will

Estimated Reporting, Clearing and Trading Timeline

SDs/MSPs:Credit and Interest

Rate Swaps

SDs/MSPs:All OtherSwaps

All OtherMarket

Participants

SwapsBetween

SDs/MSPs/Active Funds

SwapsInvolvingFinancialEnd Users

Swaps InvolvingNon-Financial End

Users or Third-Party Subaccounts

SwapsBetween

SDs/MSPs/Active Funds

SwapsInvolvingFinancialEnd Users

Swaps InvolvingNon-Financial End

Users or Third-Party Subaccounts

2Q2012

3Q2012

4Q2012

1Q2013

2Q2013

3Q2013

MandatoryDCM/SEFTraining

MandatoryClearing

Reporting

Estimated Reporting, Clearing and Trading Deadline


Timing Guiderequire developing a relationship with one or more clearinghouse members, each of which will need to be a registered futures commission merchant. Commercial end users will need to consider whether or not to avail themselves of the commercial end user exception from the clearing require-ment and, if so, will need to obtain board

approval and meet other CFTC require-ments before clearing requirements are phased in.

DCM/SEF TradingTo promote pre-trade price transparency,

Dodd-Frank requires that all cleared swaps must be executed on a DCM or SEF, unless

no DCM or SEF makes the swap “available for trading.” The CFTC has proposed rules governing SEFs and the “available for trad-ing” determination. Both are scheduled to be finalized in July.

The CFTC’s September 2011 phase-in proposal would link the timing of manda-tory DCM or SEF trading to the timing of the clearing requirements. Market par-ticipants would not be required to trade a swap on a DCM or SEF until the date they are required to clear the swap or 30 days after the swap is “made available for trading,” whichever comes later. As a re-sult, DCM and SEF trading is unlikely to begin before the first or second quarter of 2013 for trades between SDs, MSPs and active funds; the second or third quarter of 2013 for trades involving financial end us-ers; and the third or fourth quarter of 2014 for trades involving commercial end users and third-party subaccounts.

In advance of these compliance dates, market participants will need to ensure they have access to SEFs or DCMs, either directly or through a market intermedi-ary. Market participants will also need to monitor which swaps are “made available to trade” and choose whether to use these standardized swaps or, instead, opt for more customized bilateral swaps that do not need to be traded on SEFs or DCMs but may be subject to higher margin and capital requirements. ..............annette nazareth is a partner, and Gabriel Rosenberg is an associate, at Davis Polk & Wardwell. They work in the law firm’s financial institutions group.

Cross-Border Impact of Title VIILooming large in the background of any discussion of Title VII timing

and preparedness is the question of the cross-border reach of Dodd-Frank’s derivatives provisions. Section 722 of the statute provides that Title VII’s provisions relating to swaps do not apply to “activities outside the United States” unless the activities in question: (1) “have a direct and significant connection with activities in, or effect on, commerce of the United States” or (2) are evasive. These vague criteria are not fur-ther defined, leaving market participants unsure as to how cross-border transactions will be treated, including for the reporting, clearing and trad-ing requirements. For example, will a swap entered into between a New York branch of a non-U.S. bank and a non-U.S. counterparty need to be cleared at a CFTC-registered or recognized clearinghouse? What about a swap entered into between an offshore branch of a U.S. bank and a non-U.S. counterparty?

Market participants have needed to plan for Title VII compliance without answers to these questions. Slowly, details of the CFTC’s likely approach have started to emerge. In a carefully crafted speech on May 21, Chairman Gensler outlined “key elements” of a possible CFTC cross-border approach. These include that:

■■ in determining whether a non-U.S. entity is a swap dealer, the CFTC will consider the entity’s “U.S.-facing swap activity,” a term which he did not define;

■■ transactions with overseas branches of persons or entities operat-ing in the United States and transactions with overseas affiliates that are guaranteed by a U.S. entity or “operating as conduits for a U.S. entity’s swap activity” will be considered “U.S.-facing transactions”;

■■ Title VII swap requirements will be divided into “entity-level” (e.g., capital, risk management and recordkeeping) and “transaction-level” (e.g., clearing, margin, real-time public reporting, trade execution and sales practices);

■■ the CFTC may defer to comparable home-country regulation on entity-level requirements for overseas swap dealers; and

■■ transaction-level requirements will apply to all “U.S.-facing transac-tions,” but may not apply to transactions between overseas swap dealer (including a foreign swap dealer that is an affiliate of a U.S. person) and non-U.S. counterparties not guaranteed by or operating as conduits for U.S. entities, such as a swap between a non-U.S. swap dealer and a non-U.S. insurance company that is not guaran-teed by a U.S. person.

The CFTC’s proposed rulemaking schedule lists two cross-border re-leases for June—proposed cross-border guidance and proposed cross-border relief. It is unclear exactly what these proposals will say or when exactly they will be released. Until then, market participants will be left planning for compliance with the reporting, clearing, trading and other elements of Dodd-Frank derivatives reform without a clear picture of the impact on their cross-border activities.—Annette Nazareth and Gabriel Rosenberg


The Kospi 200 stock index options has been the most heavily traded deriva-tives contract in the world for the last

10 years, but that’s about to change. The Korea Exchange this year is changing the size of the contract by making a five-fold in-crease in the multiplier. The reason? Regula-tors want to discourage retail speculation in these options.

That’s quite a change for this contract, which has long enjoyed tremendous popu-larity among Korean investors. The contract was listed in July 1997 and by 2002 it had surpassed all the major stock index con-tracts in Europe and north America in terms of trading activity.

One key to its success is the relatively small size of the contract. With a multiplier of just 100,000 won ($85), it doesn’t cost that much for investors to buy a handful of options on the index, which is the main benchmark for the Korean stock market.

Another key to its success was the widespread access to the internet in Korea, which encouraged vibrant competition among Korean brokers to offer online trad-ing services to retail investors. A raft of web-sites sprang up with market analysis and research designed to make it easier for what one observer called “a nation of cyber trad-ers” to trade the Kospi 200 options. (See “The World’s Biggest Equity Index Deriva-tive,” Futures Industry, november 2002.)

During the early years, retail participation in the Kospi 200 options volume accounted for approximately two-thirds of the entire market, an exceptionally high level relative to most other large futures and options market. Since 2002, however, the character of the market has gradually changed, with more participation by institutional players such as domestic securities firms and institutional investors as well as foreign banks, and for-eign trading firms. The increase in trading by non-Korean companies has been especially

noteworthy, rising from under 10% in 2001 to more than a third in 2011.

This year, retail traders made up 28.8% of the Kospi 200 option market in April, ac-cording to data posted on the KRX website. Foreign entities accounted for 42.3% of vol-ume in April, and Korean institutions made up the remainder.

Information DisadvantageThe increasing institutionalization of the

Korean market has been supported by the exchange, but it also prompted some local observers to comment that retail investors were suffering from “information disadvan-tages” compared to domestic and foreign institutions. This issue came to the fore-front as it became clear that retail investors generally were losing money in their trading of Kospi options. In a May 2011 working paper, the Korean Capital Market Institute, a local think-tank, cited one estimate that Korean retail investors had lost 1.7 trillion won in options trading from 2002 to 2005, while domestic securities firms and foreign

investors had gained 1.3 trillion won during the same period.

“The huge losses inflicted on individual investors, and the fact that the losses continue, show that it is necessary to control individual investors’ derivatives trading at a reasonable level,” the KCMI paper recommended.

That concern has not gone unnoticed by the government. The Financial Services Commission, the primary markets regulator in Korea, has taken a number of actions in the last year or so to discourage excessive retail speculation in derivatives. When KRX announced the change in the multiplier in January, the exchange explained that the FSC wanted the exchange “to address the issues related to the excessive speculation and high participation of retail investors in the derivatives market.”

The change began taking effect on March 9, when the September 2012 contract was listed for trading with the new multiplier of 500,000 won (equivalent to $425), which is the same size as the Kospi 200 futures. Every time a nearby contract expired, the newly added contract will have the new multiplier until the old multiplier is extinguished. Since KRX lists four contracts at a time, three serial months and the next quarterly, the process will be complete when the June contract expires on June 15.

Effect on VolumeOne certain effect of the increase in the

contract size will be a nominal decrease in the number of contracts traded. If the value of trading stays unchanged, the Kospi 200 option volume will drop 80% to one-fifth of its previous volume. For example, the Kospi option traded 3.67 billion contracts in all of 2011; assuming the new multiplier and the same notional value, the volume would have been 734 million contracts.

Even with the adjustment for size, that

Re-Engineering the Kospi 200 Options MarketBy Nick Ronalds

PROFIlE


This year, retail

traders made up

28.8% of the Kospi

200 option market

in April, according to

data posted on the

KRX website.’’


is still a huge amount of trading activity, but it would have knocked the contract out of first place in the FIA’s 2011 global volume ranking. Interestingly, it appears that another Asian equity index option, the nifty index option traded on the national Stock Exchange of India, could become the new number one this year. More than 868 million nifty options were traded last year. In the first quarter of this year the Kospi 200 options still outranked the nifty options in terms of volume, but that was before the new multiplier took effect.

What is less certain is whether the larger size will cause the overall value of the mar-ket to shrink. Chris Price, managing director of AsiaEx, a financial consultancy, said many brokers in Korea are worried that lower turnover from the larger contract size could widen spreads and reduce market depth, hampering pricing efficiency. But Kevin Lee, managing director for newedge in Korea, has a more upbeat view.

“In the short term, the notional value could decline more than proportionally to the change in multiplier,” Lee told Futures Industry. “But I think the notional value will return to the status quo quickly.” He pre-dicted that over the long term the contract

volume could bounce back above its prior level after the market has time to adjust.

Gyun Jun, an analyst for Samsung Se-curities, commented in a recent report that the increased size could result in a widening of the bid-ask spread, a reduction in market depth, and a drop in “noise traders” in the second half of the year. On the other hand, he sees a silver lining for the futures con-tracts because both contracts now have the

same multiplier. “All things considered, we expect pricing efficiency in index options to deteriorate,” he says, “but the parity in the multipliers in the futures and options con-tracts should improve liquidity and market impact in the futures.”

Less HedgingThe change in multiplier comes at a time

when trading volume is down considerably from last year. As of the end of April, year-to-date volume was down by 30% from the same period in 2011. The decline has been largely driven by a major contraction in the equity-linked warrant market, according to market participants. The ELW market was so hot last year that the Financial Services Com-

mission introduced a series of measures to cool it off, starting with mandatory minimum account balances. Restrictions on liquidity providers in March of this year has pulled ELW trading down over 65% since they went into effect. Since Kospi futures and options are often used as a hedge for warrant issues and as one leg of an active spread strategy, the reduction in ELW trading has weighed heavily on the Kospi market.

Clearing and exchange fees for the Kospi option remain unchanged. Both were assessed on a notional value basis prior to the switchover and still are. Similarly, Korean brokerage is generally based on a notional value, so no impact on incentives seems likely from that quarter. Interestingly, the exchange’s trading fee on Kospi futures and single stock futures was cut 20% on May 2.

Faster AccessWhile the change in contract size may

lead to lower retail volumes, other changes being made by the exchange could lead to more participation from automated trading firms. On June 4, KRX opened a proxim-ity hosting center in Busan, the exchange’s headquarters, that will provide faster access to the KRX markets than the existing point of access in Seoul. A number of trading firms and service providers have already set up shop in the new facility to take advantage of the faster connection. On the other hand, market data continues to come out of Seoul, which means the latency gains from moving servers to Busan are partially offset by having to route the data from Seoul to Busan.

Whatever the ultimate impact on the volume, for the Kospi 200 options to stand at the pinnacle of listed derivatives for over a decade is a singular achievement. Even if it first drops a place or two in the rankings it will doubtless continue jostling for the top spots for years to come, a magnet for trad-ers and institutional investors alike.

Nick Ronalds is a senior adviser to FIA Asia

and a consultant on Asian markets.

PROFIlE


A Decade at the Top

Annual volume in the Kospi 200 Options

year volume

1997 4,528,424

1998 32,310,812

1999 79,936,658

2000 193,829,070

2001 823,289,608

2002 1,889,823,786

2003 2,837,724,953

2004 2,521,557,274

2005 2,535,201,692

2006 2,414,422,952

2007 2,709,844,077

2008 2,766,474,404

2009 2,920,990,655

2010 3,525,898,562

2011 3,671,662,258

The Financial Services

Commission, the

primary markets

regulator in Korea,

has taken a number

of actions in the

last year or so to

discourage excessive

retail speculation in

derivatives.’’

The merger wave among exchanges has subsided, but further down the food chain smaller companies are being

gobbled up right and left. Worldwide, there have been at least 70

trading technology deals in the past year, according to data from FT Partners, a San Francisco investment bank focused on fi-nancial sector transactions. And more are on the way, according to Steve McLaughlin, the firm’s managing partner.

“I think the pipeline is good. I think you’ll continue to see the same trend for the next couple of years,” McLaughlin said.

One driver is technology; advances in electronic trading have created demand for a host of specialized technologies for linking traders to markets as well as greater inter-est in outsourcing connectivity to service providers. Another is regulation; the global derivatives reform is forcing market par-ticipants to overhaul their trade processing systems and establish connectivity to new trading venues and clearing platforms.

Many of the recent deals involved a merger between two specialized technology companies. In other cases, smaller compa-nies with niche expertise are merging with larger companies able to offer a more com-plete end-to-end solution.

“Some of these smaller providers need to become part of a bigger solution,” said Adam Honoré, director of research for Bos-ton-based Aite Group. He added that he spends a lot of his time arranging partner-ships between vendors that want to knit to-gether a more comprehensive solution. This in turn will lead to more mergers down the line, he predicted.

Case in point—feed handlers for mar-ket data. Honoré explained that it does not make sense for companies that specialize in building trading systems to write their own applications for receiving and process-ing the market data feed for every trading venue. Instead, it makes more economic sense to outsource that function, he said.

“Why should an execution management vendor continue to build and support all its own feed handlers,” he commented, “if it’s

costing them a million, million and a half a year, versus going out and licensing the software just like an end user would for a fraction of that cost?”

Another driver has been timing; invest-ment bankers say some of the smaller com-panies are now more willing to sell out. “The industry has been shaken up a lot and a lot of smaller companies have suffered as a result,” said McLaughlin. “I think over the course of time price expectations have come down as well as optimism about market re-covery in volume, so that has led to some M&A activity.”

Venture capital cycles are also driving some of the action. Investments in financial tech-nology companies that might have been sold between 2007 and 2010 were delayed until now because of market conditions, McLaugh-lin commented. “People were holding out until a pretty good moment in time,” he said. “Pent-up sellers are now picking 2012 or 2013 as the time they want to get out.”

Looking through the list of recent deals, several interesting themes emerge.

Getting into a New Asset ClassMarkit’s acquisition of Logicscope is an

example of a deal that helped the acquirer extend its expertise into a new asset class—and capitalize on the global changes to derivatives markets. Logicscope has a well-established niche in the foreign exchange markets as a provider of trade processing technology and connectivity. Its principal product is TradeSTP, a system that consoli-dates and routes trade messages to end-us-ers. The system is connected to a wide range of execution venues, including not only the multilateral platforms such as EBS and FX-All but also a long list of the major dealers, and its clients include more than 400 finan-cial institutions that trade FX.

When Markit announced the deal last September, the company said it wanted to use Logicscope’s platform to accelerate its plans to extend its trade processing services into foreign exchange markets. Those ser-vices are provided through MarkitServ, a joint venture with the Depository Trust and

Clearing Corporation that is widely used in other over-the-counter markets.

“We have been working with the FX industry since October 2010 to provide a complete trade processing solution for mar-ket participants,” Jeff Gooch, the chief ex-ecutive officer of MarkitServ, said when the deal was announced. “Logicscope’s comple-mentary technology and comprehensive product suite will enable us to offer the same standards of trade processing, connec-tivity and compliance to FX market partici-pants that we currently offer for credit, rates and equity derivatives.”

In March, Markit announced a new ser-vice that highlighted the value of the Logic-scope acquisition. Market participants that need to submit FX trades for central clear-ing are now able to use MarkitServ as a sin-gle point of access to CME Group, LCH.Clearnet and SGX. That type of “middle-ware” solution solves the need for market participants to meet clearing requirements without having to build their own connec-tions to each clearinghouse.

Leveraging TechnologyAfter European antitrust regulators frus-

trated its bid to combine with Deutsche Boerse, NYSE Euronext redoubled its in-vestment in technology services, an alter-native path for growth that focuses less on where the liquidity is going and more on how it gets there.

So far, the strategy seems to be working. Technology services have been the fast-grow-ing segment of NYSE Euronext over the past five years. Revenues from such services as co-location and software licenses have climbed from $130 million in 2007 to $358 million in 2011, accelerated by acquisitions such as its purchase of Wombat, a data service pro-vider, in 2008 and NYFIX, an electronic trading services provider, in 2009.

In its latest move, NYSE Euronext in Feb-ruary purchased a 25% share in Fixnetix, an IT outsourcing service that supports ultra-low latency trading, market data process-ing and real-time risk management. NYSE Euronext reportedly paid £17.5 million

Boom Times for Financial Technology M&ABy Bennett Voyles

TECh



($27.5 million) for the stake and also re-ceived the option to buy the rest of Fixnetix at any time over the next three years.

At the announcement, NYSE Euronext said the deal would make it possible for the company to augment the IT services now available through its NYSE Technologies division. For its part, Fixnetix said the deal would allow it to extend its U.S. coverage and expand into Asia. For both companies, the partnership allows them to capitalize on the growing desire in the trading community for integrated end-to-end technical solutions.

“Acquiring this strategic interest in Fixnetix allows us to better leverage our combined technology presence to reach more customers in more locations,” Mi-chael Geltzeiler, group executive vice presi-dent and chief financial officer of NYSE Eu-ronext, said when the deal was announced.

Thinking GlobalOne of the biggest financial technology

deals this year was the $230.5 million pur-chase of Asia Tone by Equinix. Both com-panies are providers of network and co-lo-cation services, and many of their clients are financial institutions and trading firms that need high-capacity, low-latency connec-tions to market venues. Through this deal, Equinix gained data centers in Hong Kong, Singapore and Shanghai, bringing its global network to 104 data centers in 38 markets and strengthening its presence in three of Asia’s leading financial centers.

Although Equinix serves a wide range of industry sectors, financial services are a major focus. Equinix positions itself as the host for a “high-performance global trading ecosystem” that allows traders to optimize their connectivity to clearing firms, market venues and other service providers.

Regulation Is a Growth Industry

Just in time to meet the massive new data-collection requirements of Dodd-Frank, Basel III and Solvency II, Markit an-nounced a deal in May to purchase Cadis, a financial data management company founded in 2007. Cadis’ enterprise data management platform consolidates data from multiple sources within a centralized hub, providing users with reliable, transpar-ent and auditable data.

“Data management is top of just about

TECh

date transaction summary

5/29/12 Knight Capital Group buys Penson Futures for $5 million.

5/10/12 Marex Spectron buys clearing business from Schneider Trading Associates and merges it into its professional trader services group.

5/9/12 Markit buys Cadis, a company specializing in enterprise data management.

5/2/12 Equinex, a global data center services provider, buys Asia Tone, a Hong Kong-based data center provider, for $230.5 million.

5/2/12 Tullett Prebon buys Elevation, an equities and equity derivatives broker based in New York.

4/30/12 Maple Group Acquisition Corp., a consortium of Canadian financial institutions and pension funds, offers to buy Alpha Trading Systems, an alternative trading plat-form, for C$175 million and Canadian Depository for Securities for C$167.5 million as part of a renewed offer for TMX Group.

4/25/12 Nasdaq OMX buys NOS Clearing, a Norwegian commodity clearinghouse, for NOK 230 million ($40.4 million).

4/3/12 S&P Capital IQ, a division of The McGraw-Hill Companies, acquires QuantHouse, a provider of market data and trading solutions.

3/9/12 London Stock Exchange Group offers to buy majority stake in LCH.Clearnet for €463 million ($607 million) in cash.

3/9/12 IMC Financial Markets buys 9.99% stake in TOM, a Dutch company that combines a multilateral trading facility with smart order routing to other trading venues for European equities and equity options.

3/6/12 Sun Trading, a Chicago-based proprietary trading firm, announces acquisition of Endeavor Trading, a Chicago-based proprietary trading firm.

2/21/12 CME Group and Oman Investment increase their stakes in the Dubai Mercantile Exchange.

2/16/12 NYSE Euronext buys 25% of Fixnetix, a U.K. company that provides low-latency market data, risk controls and other technology services, with option to buy the remainder within three years.

2/7/12 Brady, a supplier of trading and risk management solutions for energy, metals and soft commodities, acquires Navita Systems, a Norwegian provider of software and services to the energy and commodity trading community, for NOK 150 million ($25.1 million).

1/31/12 Nordic Capital, a private equity fund, acquires Orc Group, a trading technology provider, for SEK 2,021 million ($293 million).

12/19/11 INTL FCStone buys TRX Futures, a soft commodities broker based in London.

12/12/11 Virtu buys NYSE Amex floor operations business from Cohen Capital.

12/12/11 London Stock Exchange Group buys 50% of FTSE International from Pearson for £450 million ($705 million) in cash, giving LSEG 100% ownership and control.

11/30/11 Getco buys NYSE floor operations business from Bank of America Merrill Lynch.

11/29/11 TMX Group agrees to acquire Razor Risk Technologies, an Australian provider of credit risk software, for $9.9 million in cash.

11/28/11 ION Trading, a provider of trading technology that is partly owned by the private equity firm TA Associates, offers to acquire the remainder of the shares in software vendor Patsystems that it does not already own.

11/22/11 Tokyo Stock Exchange agrees to acquire Osaka Securities Exchange for approxi-mately $1.2 billion.

Financial Technology M&A Selected transactions announced since January 2011 that have involved exchanges, trading firms and other companies involved in the trading and clearing of securities and derivatives


every financial institution’s agenda; the scale and complexity of the data they are manag-ing have never been greater,” Lance Uggla, Markit’s chief executive officer, said at the announcement of the sale. “Data is increas-ingly at the heart of financial institutions,” added Daniel Simpson, the chief executive officer of Cadis. “By combining our exper-tise with Markit’s distribution and customer network, we will be able to help more firms meet increased regulatory pressures and risk management demands.”

Clicks Like BricksWhile most of these deals highlight

the value of technology, two of the most technologically advanced firms are mov-ing in the opposite direction. In the last 12 months, Getco and Virtu Financial, both of which are masters in the use of low-latency trading technology and automated market making, have expanded their floor trading businesses.

In November, Bank of America Merrill Lynch sold its floor trading business at the New York Stock Exchange to Getco, and in December, Virtu made a similar deal with Cohen Capital to buy its floor trading busi-ness on NYSE Amex.

In Getco’s case, the deal meant that the firm took over “designated market maker” assignments for dozens of stocks that trade on the NYSE floor. All told, Getco is the DMM for approximately 650 companies and a total of 850 securities at the NYSE.

What prompted Getco to go against the tide and buy into a business that still involves human beings engaged in manual processes? Quite simply, Getco intends to use its advanced trading technology to sup-ply more competitive prices to the NYSE floor, attracting more business there and boosting its profile among potential buyers of its trading services.

“We viewed the acquisition of the Bank of America DMM as a further extension of our core market making business,” said Getco spokeswoman Sophie Sohn. “The NYSE ex-change model provides a unique value proposi-tion for U.S. listed companies and allows tech-nology focused firms like Getco to integrate the best aspects of electronic markets with the benefits of a human trader’s perspective.”

Bennett Voyles is a freelance journalist.

date transaction summary

11/22/11 FFastFill agrees to acquire WTD Consulting, a Chicago-based firm that provides technology consulting and software solutions, for $12 million.

9/21/11 Markit buys Logicscope, a provider of post-trade services for foreign exchange trading.

8/3/11 FFastFill acquires Spread Intelligence, a London-based provider of spread trading tools, for £1.5 million ($2.37 million) in cash and shares.

8/1/11 NYSE Euronext announces agreement to buy Metabit, a Tokyo-based market ac-cess firm.

7/21/11 Patsystems agrees to acquire Mixit, a U.S.-based vendor of trading systems for equities and options, for $20.2 million.

7/14/11 Getco buys Automat, a London-based proprietary trading firm.

7/14/11 IntercontinentalExchange announces acquisition of 12.4% stake in Brazil’s Cetip for approximately $515 million in cash.

6/10/11 Maple Group Acquisition Corp., a consortium of Canadian financial insitutions, an-nounces plan to acquire TMX Group for $3.6 billion.

6/7/11 Deutsche Boerse acquires SIX Group’s 50% stake in Eurex for $862.5 million in cash and equity.

5/31/11 Virtu Financial merges with Madison Tyler Holdings, a market-maker and elec-tronic trading firm, and secures funding from Silver Lake, a private equity firm.

5/27/11 Deutsche Boerse acquires Kingsbury International, a U.S.-based business and economic consulting firm.

5/22/11 Correlix, a provider of latency management services, secures $9 million in financ-ing from several private equity funds including Blumberg Capital and Vernon & Park.

5/4/11 Colt Group, a U.K. telecommunications company majority-owned by Fidelity, ac-quires majority stake in MarketPrizm, a company that provides low-latency market data and order entry infrastructure that is controlled by Instinet.

4/7/11 Jefferies Group buys Bache Global Commodities from Prudential Financial for $430 million.

3/22/11 Marex Group buys Spectron Group for £94.5 million ($154 million).

3/21/11 Standard Chartered buys 3% stake in United Stock Exchange of India.

3/21/11 Charles Schwab buys optionsXpress for $1 billion.

2/25/11 Cinnober Financial Technology, a Swedish software trading company, buys 3% stake in U.K-based FFastFill.

2/25/11 IntercontinentalExchange buys Ballista Securities, a registered broker/dealer that offers an electronic platform for the execution of block-sized and complex multi-leg options transactions.

2/23/11 Eurex buys majority stake in European Energy Exchange.

2/15/11 Deutsche Boerse and NYSE Euronext announce proposed merger. The exchanges terminate agreement one year later after a decision by the European Commission to block the proposed merger.

2/9/11 London Stock Exchange Group and TMX Group announce proposed merger. LSE terminates its offer in June 2011.

2/3/11 Micex Group buys majority stake in RTS Group.

Source: Financial Technology Partners, company filings.

Financial Technology M&A Selected transactions announced since January 2011 that have involved exchanges, trading firms and other companies involved in the trading and clearing of securities and derivatives


A s the Dodd-Frank Act nears its second anniversary, the Com-modity Futures Trading Commission has made significant progress in finalizing a wide set of new rules for the dealing,

trading, clearing and reporting of over-the-counter derivatives.As of early May, the CFTC had hosted 27 public meetings to vote

on rulemakings as well as 18 public roundtables to examine certain issues related to those rulemakings. The agency had finalized 33 rulemakings, leaving fewer than 20 rules on the drawing board.

During March, April and May, the agency approved joint rules with the Securities and Exchange Commission that define what constitutes a dealer and a major swap participant. The CFTC also finalized a rule that updates and extends the core principles ap-plicable to designated contract markets; it finalized rules on the recordkeeping and reporting requirements for historical swaps; it adopted a package of clearing rules; and it is in the final stages of drafting guidance on how Dodd-Frank regulations will apply to activities outside of the U.S.

“We are on schedule to complete the remaining reforms this year,” CFTC Chairman Gary Gensler told the Senate Banking Com-mittee on May 22.

Gensler added that the recently reported trading losses at J.P. Morgan’s London-based affiliate should serve a reminder about the importance of cross-border application of Dodd-Frank regulations. “I think it’s a good reminder that risk in London can come back here,” he told the Senate committee. Mary Schapiro, chairman of the SEC, agreed. “What we need to do is take what happened at J.P. Morgan and view it through the lens of these criteria and see how that helps to inform the rulemaking going forward.”

Cross-Border Application of Dodd-FrankIn a May 21 speech to the Financial Industry Regulatory Authority,

Gensler outlined how the CFTC plans to apply Dodd-Frank regula-tions to activity outside of the U.S. For example, foreign entities that transact in more than a de minimis level of U.S. facing swap dealing activity would be required to register under the CFTC’s swap dealer registration rules. Gensler added that the CFTC will release guidance addressing what it means to be a U.S.-facing transaction.

“I believe this must include transactions not only with per-sons or entities operating in the United States, but also with their overseas branches,” Gensler said. He added that this must also include transactions with overseas affiliates that are guaranteed by a U.S. entity as well as the overseas affiliates operating as conduits for a U.S. entity’s swap activity.

The guidance will include a tiered approach for requirements for overseas swap dealers. Some requirements would be considered

entity-level, such as capital, risk management and recordkeeping. Other requirements would be considered transaction-level, such as clearing, margin, real-time public reporting, trade execution and sales practices. The entity-level requirements would apply to all reg-istered swap dealers, but in certain circumstances overseas swap dealers could comply with these requirements through what Gensler called “substituted compliance.”

Position Limit AggregationOn May 19, the CFTC voted unanimously to issue a notice of pro-

posed rulemaking that would modify the agency’s position limit rules as they relate to the requirements for aggregating positions among af-filiated entities. The proposal effectively raises the ownership threshold for requiring that positions between affiliated entities be aggregated.

The agency’s action came after a group of commercial energy firms petitioned the CFTC for relief from the position limit rules. The FIA in a March 26 letter to the CFTC expressed its support for those petitions.

Under the proposal, if the ownership interest is less than 10%, a firm would not be required to aggregate positions with those of the affiliated entity. The proposal would permit any person with a 10% to 50% own-ership or equity interest in an entity to disaggregate the owned entity’s positions, provided there are protections and firewalls in place to ensure trading decisions are made independently of one another. If the owner-ship interest exceeds 50%, the entity must always aggregate positions with those of the owned entity, even if there is a lack of knowledge of, and control over, the trading of the owned entity.

The CFTC’s proposed rulemaking also expands the exemp-tion from aggregation requirements to include ownership interest acquired through market-making activities of an affiliated broker-dealer and allows commodity pools structured as limited liability companies to rely on the exemption from aggregation for indepen-dent account controllers.

Swap Dealer Definitions The CFTC and the SEC on April 18 approved final rules setting

out official definitions for swap dealer, major swap participant, and eligible swap participant. The joint rules—critical to the implementa-tion of dozens of other Dodd-Frank rulemakings intended for the over-the-counter markets—were approved at separate meetings held by the two agencies.

The SEC’s entity definitions apply to firms that trade security-based swaps such as single-name credit default swaps. The CFTC’s rules cover swaps in all other asset classes such as inter-est rates, commodities and foreign exchange as well as swaps based on broad-based credit and equity indices.

CFTC Moves Ahead with Dodd-Frank RulemakingsBy Will Acworth and Joanne Morrison

WAShINgTON


CFTC staff estimated that roughly 125 firms will be captured under the swap dealer definition and six firms will be classified as major swap participants.

The final entity definition rules include a number of provisions designed to exempt commercial hedgers and end users from having to register as swap dealers. Representative Frank Lucas (R-Okla.), chairman of the House Agriculture Committee, issued a statement shortly after the CFTC meeting expressing support for that ap-proach. “From what I can tell today, there were improvements made to the final rule that will reduce the negative impact on end users out in the countryside,” said Lucas.

Staff at both agencies explained that the dealer definitions include firms that hold themselves out as dealers in swaps, make a market in swaps, regularly enter into swaps with counterparties as an ordinary course of business, or engage in activity causing them to be “commonly known” as dealers or market makers in swaps.• Thresholds Both sets of rules contain de minimus thresholds. Firms will be

excluded from the dealer definitions if the value of their swap posi-tions falls below those thresholds. The CFTC threshold starts at a gross notional amount of $8 billion over a 12-month period. This threshold will be reduced to $3 billion after five years, unless the CFTC determines that market conditions justify setting a different threshold. The rules require the CFTC to conduct a review of the market after two and a half years and only after that review has been conducted can it adjust the threshold.

When the CFTC proposed the entity definitions in December 2010, its proposed threshold was set at $100 million. Although the final threshold is much higher and therefore excludes a larger number of firms from the definitions, Gensler defended this deci-sion. “The $3 billion threshold in the rule represents $12 million a trading day, with the phase-in of $8 billion representing $32 million notional per trading day. Putting this in perspective, the interest rate swap market transacts, on average, over $500 billion notional per day. As further reference, this year the futures markets for crude oil traded, on average, $65 billion of notional per day.”

The SEC set the same thresholds for credit default swaps. However, the de minimus threshold for all other security-based swaps is initially set at $400 million, falling to $150 million after five years. SEC staff said the thresholds for security-based swaps are lower to reflect the smaller size of these markets.

Under both sets of rules, a much lower threshold is set for firms trading with “special entities” such as pension funds and municipalities. That threshold is set at just $25 million in notional value.

• Proprietary Trading Firms excluded The final rules include provisions that exclude firms that trade for

their own account from the swap dealer definition so long as they ex-ecute their trades on swap execution facilities and DCMs and submit all of their trades for clearing. These firms are required to register with the CFTC in the existing “floor trader” category.

CFTC Commissioner Jill Sommers applauded this provision in the rules. “Because the Commission has an interest in these trad-ers and their market activity, requiring registration as a floor trader

strikes the appropriate balance between our regulatory interests and the burdens associated with regulation,” she said. CFTC staff explained that this provision cannot be finalized until the conform-ing amendments are finalized to include swaps in existing regula-tions. In addition, although these firms will not be included in the swap dealer definition, they will be subject to certain requirements in Part 23 of the CFTC’s rules, which establish duties for swap dealers and major swap participants. These include requirements relating to the establishment of risk management procedures and the monitoring of position limits.

• Hedging Transactions excluded Embedded in the CFTC’s definition rules is an “interim final

rule” that excludes swaps used for hedging transactions in a physical marketing channel. This part of the rules will take ef-fect along with the rest of the rules, but is considered “interim” because the CFTC is continuing to ask for feedback from the industry. This includes transactions that qualify as a bona fide hedge under Commodity Exchange Act rules, trades that qualify for hedging transactions under Financial Accounting Standards Board rules and Government Accounting Standards Board rules, and transactions that are used to reduce risk.

CFTC Approves DCM Core PrinciplesThe CFTC on May 10 approved a final rule that updates and

extends the core principles applicable to designated contract markets. The final rule was approved by a vote of 5-0, with several commission-ers commenting favorably on the rule’s adoption of a flexible approach to compliance. Gensler said that the final rule contains a mixture of rules, guidance and acceptable practices, and suggested that this pro-vides exchanges with “flexibility” in how they comply with the core prin-ciples. Sommers, who voted against the rule when it was first proposed in December 2010, said she was pleased that the final rule pulled back from the “overly prescriptive” details in the proposed rule.

The CFTC did not act, however, on one of the most controversial provisions in the original proposal—the so-called 85% rule. Under this provision, at least 85% of the volume in an exchange-traded fu-tures or options contract would have to trade in the central market. If more than 15% of the volume is executed through block trades, exchange-for-swaps or other off-exchange facilities, that contract would have to be traded on a swap execution facility rather than a DCO. Gensler said during the meeting that the agency has decided to address this issue as part of the SEF rulemaking, which he said is due to be considered this summer.

During the discussion of the DCM core principles, Gensler said the final rule addresses the potential that market participants might distort prices for certain cash-settled contracts that are based on third-party indices by manipulating the underlying index. He cited as examples the Libor interest rate published by the British Bankers Association and energy market indices published by price report-ing agencies such as Platt’s. CFTC staff explained that the final rule requires DCMs to verify that the mechanism used by price reporting agencies to compile prices is not susceptible to manipulation, and that they can obtain information about the market participants that provide information to price reporting agencies.

CFTC Approves Rules on Clearing Documentation, Timing of Acceptance

The CFTC on March 20 approved a package of rules cover-ing four topics: clearing documentation, timing of acceptance for clearing, allocation of bunched orders, and clearing member risk management requirements.

The CFTC set a deadline of Oct. 1 for futures commission merchants, DCOs and designated clearing organizations to come into compliance with these new rules. For swap dealers, major swap participants, and swap execution facilities, the rules will become effective on either Oct. 1 or the date when the CFTC finalizes entity definitions and other related rulemakings, which-ever comes later.

This package of rulemakings, which was dubbed “the plumbing of plumbing” by Gensler, was approved by a 4-to-1 vote.

CFTC Commissioner Scott O’Malia voted against the rules. Al-though he praised the staff for taking a flexible, principles-based ap-proach, he criticized the agency for inadequate cost-benefit analysis and for failing to develop a schedule that integrates these rules with other rulemakings. “I know the Commission is capable of much more. The question remains, however, if we will ever slow down our rulemaking machine to do the actual work.”

Sommers voted in favor of the rules but stressed the need for flexibility in the timing of compliance. During the discussion of the rules, CFTC staff emphasized that the rules are not prescriptive and noted that firms unable to come into compliance because of tech-nological factors could request more time and other relief.• Customer Clearing Documentation Rules The customer clearing documentation rules prohibit tri-party

agreements between customers and swap dealers, major swap dealers and FCMs that are clearing members and DCOs. The rule prevents agreements that would: a) disclose to an FCM, swap dealer or major swap participant the identity of a customer’s original executing counterparty; b) restrict the size of the position a customer may take with any individual counterparty apart from an overall credit limit for all positions held by the customer at the FCM; c) limit the number of counterparties with whom a customer may enter into a trade; d) impair a customer’s access to execution of a trade on terms that have a “reasonable relationship” to the best terms available; or e) prevent compliance with specified time frames for acceptance of trades into clearing.

• Time Frames for Submission and acceptance for Clearing Rules

The rules require a clearing member, or the DCO acting on its behalf, to accept or reject each trade submitted for clearing as quickly as would be “technologically practicable” if fully auto-mated systems were used. The goal of this rule is to minimize the amount of time between submission of a trade for clearing and the acceptance or rejection of that trade. CFTC staff said the timing standard requires action in a matter of milliseconds or sec-onds and at most a few minutes but “not hours or days.” CFTC staff emphasized that the agency is not requiring automated trade processing nor does the agency prescribe a particular method for trade processing.

The rules also establish the time frame for a swap dealer, major swap participant, FCM, swap execution facility and DCO to submit swaps to a DCO for clearing. Swaps that are required to be cleared must be submitted for clearing to a DCO “as soon as technologically practicable” after execution but no later than the close of business on the day of execution.

These rules also establish procedures for handling orders for multiple clients that are bunched together as a single trade. The rules would allow bunched orders for swaps executed as a block trade to be immediately accepted for clearing and then allocated into individual accounts later in the day.

• Clearing Member Risk Management Rules These rules require swap dealers, major swap participants and

FCMs that are clearing members to establish credit and mar-ket risk-based limits based on position size, order size, margin requirements or similar factors. The rules also require firms to use automated means to screen orders for compliance with risk-based limits, monitor adherence to risk-based limits intra-day and overnight, and conduct stress tests of all positions in the proprietary account and all positions in any customer account that could post material risk to the FCM at least once a week. In addition, firms are required to evaluate their ability to meet variation margin require-ments in cash at least once a week, evaluate their ability to liquidate positions cleared in an “orderly manner, estimate at least monthly the cost of liquidation, and test all lines of credit at least annually.

“It is really a list of best practices without being too prescrip-tive,” said Gensler. He also noted that the CFTC’s work in this area was based in part on risk management best practices rec-ommended by the FIA.

Cost-Benefit AnalysisDuring the May 10 meeting, Gensler revealed that the CFTC

recently signed a memorandum of understanding with the Office of Management and Budget, an arm of the White House, that will strengthen the CFTC’s ability to conduct cost-benefit analyses. The MOU will allow a member of staff from the Office of Informa-tion and Regulatory Affairs, a division of OMB, to provide “technical assistance” to the CFTC’s rule-making process, starting with the products definition that is close to being finalized with the SEC.

Final Rules on Commodity OptionsThe CFTC separately approved on April 18 final rules on com-

modity options by unanimous vote.The Dodd-Frank Act included commodity options within the statutory definition of swap and the CFTC’s final rule brings these transactions under the same regula-tions that apply to swaps. The final rules include an interim final rule providing an exemption for certain commodity options that are physically delivered. CFTC staff noted that although these so-called trade options are exempt from the swap definition and related rules, they are still subject to position limits, reporting and recordkeeping requirements, and anti-fraud and anti-manipulation rules.

Will Acworth is editor and Joanne Morrison is deputy editor

of Futures Industry.

WAShINgTON



CME Launches Side-By-Side Trading for Listed and OTC Markets

CME Group on May 22 announced the launch of CME Direct, an online application that offers side-by-side access to CME listed futures and over-the-counter markets. CME said the new service will aggregate bids and offers into a single book, eliminating the need for multiple trading screens. CME also said the service is fully integrated with ConfirmHub and ClearPort and offers electronic processing of trades and straight-through submission to CME Clearing.

The service, which is designed to operate directly from an internet browser, initially will target energy markets, namely the exchange’s benchmark futures on crude oil, natural gas and refined products as well as certain OTC oil swaps. Quotes for the OTC products will be provided by inter-dealer brokers and can be traded via electronic and voice. As of the launch date, three firms had signed up to provide liquidity to CME Direct users—Marex Spec-tron, Tradition Financial Services and Tullett Prebon—and CME said several other brokers are testing the system.

“By combining brokered OTC markets with CME Group’s clearing and STP platforms—ClearPort and ConfirmHub—CME Direct offers the first global, fully automated front-to-back-office platform for trad-ing CME listed and OTC energy products,” Michel Everaert, CME’s managing director of OTC solutions, said in a statement. “CME Direct is a big step forward for markets to comply with current and anticipated market regulations, including those proposed under the Dodd-Frank Act and MiFID that call for more transparency, auto-mated trading, data reporting and clearing in OTC markets.”

ICE Signs Second Brazilian DealIntercontinentalExchange is expanding its presence in Brazil with

plans to launch a bond platform in partnership with Cetip S.A., a Bra-zilian central depository and custody provider. The partnership, which is slated for launch in the second half of this year, comes less than a year after ICE launched its BRIX platform for trading Brazilian electric power. “We have high hopes for Brazil, and it’s been a very good emerging market for us,” said Jeff Sprecher, chief executive officer of ICE, during a May 2 conference call with investors and analysts.

Under the terms of the partnership, ICE will provide the expertise

in trading technology and Cetip will be responsible for developing the product strategy and promoting the new platform. To cement the deal, ICE acquired 31.6 million shares of Cetip common stock for approximately $512 million in cash. That makes ICE the single largest shareholder in Cetip, which was established in 1988 and demutualized in 2008.

ICE officials said the strategy behind this deal is similar to the plans for its BRIX platform, which was developed in partnership with a local company that is a large player in Brazil’s energy markets. According to Sprecher, the BRIX platform has 100 firms enrolled less than a year after launch. “We went into a market that was not developed at all and helped to organize standard contracts, stan-dard trading agreements, and now electronic transparency,” said Sprecher. “It gives us some confidence as we work with Cetip on a similar vein in the fixed income and bond markets that we, hope-fully, will see similar success, particularly given that Cetip was a fixed income bank and dealer consortium.”

For Cetip, ICE’s experience with operating a trading platform in the credit default swaps market was attractive because Brazil’s fixed income markets have similar liquidity characteristics. “A major rea-son for this partnership is ICE’s demonstrated ability to successfully deliver liquidity and pricing transparency in other less liquid markets, similar to the scenario we currently have with our local corporate debt,” Louis Fernando Fleury, chief executive officer of Cetip, said in an April 26 statement announcing the partnership.

Griffin Markets to Launch European OTC Energy Trading Platform Using ICE Technology

Griffin Markets Group, a newly formed London-based energy trading platform provider, announced on April 25 that it plans to launch a multi-lateral trading facility for the European over-the-counter energy markets. The platform will launch with OTC gas, electronic and coal contracts, pending approval by the Financial Services Authority.

The platform will offer pre-trade counterparty credit manage-ment and post-trade processing and settlement for both bilat-eral and centrally cleared transactions. The platform will rely on technology from IntercontinentalExchange but will be “agnostic” on connectivity to clearinghouses, said nick Jackson, a spokesman for the new platform.

The platform is intended for larger institutional customer and end-users such as commodity-based utilities, banks and hedge funds. Prices and quotes will be posted electronically, while traditional voice broking will be available for less liquid markets such as gas, power, coal and emissions options.

DTCC Hits Key Milestones in OTC Derivatives Reporting

As new reporting requirements for over-the-counter deriva-tives are set to be implemented by U.S. and global regulators, the Depository Trust and Clearing Corporation has launched swap data repositories in two additional asset classes. In April DTCC began accepting trades submitted to its trade repository for commodity derivatives in partnership with the European Federation of Energy Traders. The repository accepts a full range of commodity swaps, both physical and financial, and will be ready for Dodd-Frank Act reporting prior to Oct. 14, when all OTC commodity derivatives must be reported to a trade repository if they are subject to the Commod-ity Futures Trading Commission’s jurisdiction.

In May DTCC began testing on its new global trade reposi-tory for foreign exchange transactions, which is expected to be in full production by the fourth quarter of this year. The first phase of operation included testing for data submission of primary economic terms, confirmation data and snapshot reporting of FX forwards, swaps and derivatives by firms. DTCC plans to publish aggregated data on OTC FX trades.

DTCC also has begun publishing data from its repository for interest rate derivatives, meeting the regulatory demand for greater transparency into that market. In May DTCC began publishing weekly reports on interest rate swaps that include aggregated, anonymous positions data for all interest rate products, with break-downs by currency, maturity, sub-product and an indicator identify-ing whether the product is cleared or uncleared.

81.5% Swaps

10.9% Forwards

5.4% Swaptions

2.2% Options


ICE officials said they view this partnership as having the potential to follow the same track as the European Climate Ex-change. ECX relied on ICE’s technology platform and ultimately was acquired by ICE.

“If we can find entrepreneurs that are more likely to be successful building a business than ICE alone, we back them with our technol-ogy under terms that are consistent with our long-term goals and our long-term revenue model,” Jeffrey Sprecher, ICE’s chief execu-tive officer, explained in a May 2 conference call with investors and analysts. “This idea of providing entrepreneurs with technology for start-up initiatives follows, for example, the successful use of this strategy providing technology for the European Climate Exchange, which we acquired in 2010, and which for years has been one of our fastest growing businesses.”

Griffin’s chief executive officer, Andrew Stephens, was the former chief executive officer of energy trading firm Spectron Group, which was merged into Marex Financial in 2011. Partnering with Stephens on the new platform are Simon Davidson, who was formerly the chief information officer at Spectron, and Andrew Strickland, who introduced ICAP’s electronic trading in the European power markets.

ISE Introduces Implied Order FunctionalityInternational Securities Exchange on May 3 introduced implied

order functionality, making it the first U.S. equity options exchange to offer this technology for multi-legged orders. The new functionality eliminates the manual process for executing the stock legs of stock-option orders and will enhance the execution of multi-legged strategy orders by enabling greater interaction of the complex order book with the regular order book. The result will be an increased fill rate for multi-legged strategy orders as well as tighter spreads and increased liquidity on the regular order book, according to the exchange.

“The launch of implied orders is a milestone accomplishment for ISE and will deliver measurable improvements in the execution qual-ity of both our complex and regular order books,” said Gary Katz,

49.8% Dealer vs. CCP

29.2% Dealer vs. Non-Dealer

21.0% Dealer vs. Dealer

half of otC Interest rate trades are Cleared

swaps account for the Bulk of the otC Interest rate market

Source: DTCC Weekly Snapshot as of May 11, 2012 in notional amounts of aggregate positions reported to repository


ISE’s president and chief executive officer. The new functionality displays liquidity from ISE’s complex order

book on the regular order book published to the Options Price Reporting Authority. An implied order is automatically created if the limit price of a multi-legged order can match or improve the ISE bid or offer when each leg of the order is paired against a resting order or quote. For the system to generate an implied order, the net price of the multi-legged order must be satisfied when both legs are filled on the regular book.

Separately, in April ISE launched a fully managed historical tick database that offers full OPRA data including all quotes and trades for all exchanges, U.S. equities level one data, pre-computed implied volatilities and Greeks, full corporate action histories and ISE open/close trade data. ISE said this hosted solution is ideal for, among other things, full tick or time interval back-testing, validating algorithms and pre/post-trade analysis.

Deutsche Börse Launches Algo Trading ToolDeutsche Börse in May launched AlphaFlash Traders, an

automated event-driven trading application building upon the machine-readable news feed service that it launched in 2010. The new application will allow market participants to configure trading parameters and set up automatic trading strategies based on a range of macroeconomic information available from the AlphaFlash news feed.

The drag-and-drop system is intended for a broader range of users than those who subscribe to the algo news feed. It will allow traders to establish multiple automated trading strategies based on machine-readable news from 300 global macroeconomic indica-tors as well as U.S. and international treasury auction data. “We’ve created this program to allow individual professional traders to trade around economic events, when in the past they might not have been able to do so,” said Clint Rhea, chief operating officer of need to Know news, a division of the exchange operator’s market data and analytics business unit that is involved in the new service.

Currently this program is available to customers using Trading Technologies’ X_Trader Pro platform, but it is being adapted for other execution platforms. “We are working with some other provid-ers,” said Rhea, adding that it will not be a long turnaround time to expand the offering to other platforms.

Deutsche Börse first launched its algo news feed in April 2010. It was the first joint product of the exchange opera-tor’s market data and analytics segment in partnership with its two wholly-owned news services, need to Know news and Market news International. In May, Deutsche Börse announced that its algo news feed is available in CME Group’s co-location facility located in the Chicago suburbs, providing traders with machine-readable trading signals for integration into their algorithms. The news data feed is also available at another location in Chicago, new Jersey, Washington, D.C., Frankfurt, London, Sydney, London, Tokyo and Singapore.

HKEX Invests USD $380 Million in Technology Initiatives

Hong Kong Exchanges and Clearing Limited in late March an-nounced its new technology program called “HKEX Orion.” The program includes a series of technology initiatives that will be imple-mented over the next three years at a total cost of HKD $3 billion (USD $380 million).

Among the first scheduled upgrades is a HKD $750 million (USD $97 million) hosting service to be launched at the end of this year that will allow participants to co-locate their systems next to HKEX’s core platforms to provide low-latency access. The network latency target through the hosting service network is below 50 microsec-onds compared to the current 1.5 milliseconds (1,500 microsec-onds). Other initiatives include a 2012 upgrade to the exchange’s SDnet network to improve its capacity and performance and the introduction in 2013 of new market data services.

So far, 22 firms have signed up as “founding members” for the hosting facility at its new data center, including ABn Amro Clearing, BT Radianz, Fixnetix, KvH, RTS Realtime Systems and Thomson Reuters.

RTS Targets Chinese TradersRTS Realtime Systems Group, a provider of trading technology,

announced on May 28 that it has established connectivity to the China Financial Futures Exchange, the Dalian Commodities Ex-change, the Shanghai Futures Exchange and the Zhengzhou Com-modities Exchange, allowing clients in China to deploy its Tango algorithmic trading technology for trading on these four exchanges. “There is a growing demand throughout the Chinese institutional investor and trading community to provide traders with customized algorithmic strategies,” Andy Woodhouse, the company’s managing director for Asia Pacific, said in a statement. “RTD Tango will let sell-side firms build customizable algorithms for their buy-side clients, which will operate on domestic markets and manage high volumes of order flow.”


Mexico’s BMV Rolls out New Trading Engine Mexico’s Bolsa Mexicana de valores has been testing a new

system that will bring all of its asset classes into the same trading engine. The new technology will be launched in stages, beginning with equities in June. Futures and options listed on the Mexican De-rivatives Exchange are set to come onto the new engine in October, according to Jorge Alegria, chief executive officer of Mexder and senior vice president of markets and information at BMv.

“Testing is going very well. As you may imagine, there are several stages in the project that are all equally important,” Alegria said. The new platform will include some order functionalities that are tailored for algorithmic trading such as immediate or cancel order func-tionality. On the other hand, the new technology will also cater to larger institutional traders, allowing institutions to trade large blocks without affecting the price.

The most critical aspect of the technology upgrade is that all of the exchange operator’s markets will be on the same trading engine. “It is going to be very efficient to have everything under the same trading engine. We have three trading engines today, one for equi-ties, one for futures and one for options,” Alegria said.

Once everything is on the same trading engine, market partici-pants will be able to buy a stock and sell a call option against the stock in the same order with minimum latency and safer execution, he added.

Since March the exchange operator has been testing the new technology in the equities market with the broker-dealer community. “So far the results are very encouraging,” said Alegria. “So far we are around 100 microseconds roundtrip,” he said, adding that capacity testing is around 200,000 messages, but the platform can handle even more than that.

MGEX and CME Partner on Wheat Spread Trading

MGEX has introduced a single-click functionality for trading spreads between hard red spring wheat futures traded on the Min-neapolis Grain Exchange and soft red winter wheat futures contracts traded on the Chicago Board of Trade. Beginning with the May 20 trading session, MGEX and CBOT market participants have had single-click spread trading on the CME Globex trading platform, making it easier for traders to manage the risk of legging the spread. “The Globex matching engine will match both of those legs and the transaction will not be executed until both sides of those legs are matched,” said Rita Maloney, a spokeswoman for MGEX.

SGX Offers Straight-Through Link for OTC Trades

Singapore Exchange’s AsiaClear announced in April that it is now able to link over-the-counter brokerage systems directly to its OTC trade registration system. SGX said the OTC brokerage com-munity will benefit from the link, which allows trades matched in a broker’s system to flow straight through to the exchange’s trade registration system. “Customers will gain from an improvement in operational efficiency and a reduction in errors,” SGX said in an April 18 press release. So far three brokers—Mercari, Tradex and Trayport—have linked their systems to the trade registration sys-tem, and two others—Baltex and Cleartrade—are in the process of establishing connectivity.

Montreal Exchange Builds New Functionalities for Strategy Trades

The Montreal Exchange on May 14 launched new functionalities for its futures market. Approved participants will be able to create customized strategies such as spread trades and submit them to the market. In addition, implied pricing was activated on inter-group strategies, allowing the strategy order books to interact with liquidity in the underlying legs of the strategy. “These functionalities provide market participants with a new price discovery mechanism as well as reduced execution risk for multi-legged strategies, enhancing MX’s service offering for the futures trading community,” the com-pany said in a May 14 notice.


Fixnetix Partners with NovaSparks to Accelerate Market Data

Fixnetix, a technology company that provides market data, trad-ing and risk controls, is adding low-latency market data processing to its range of services. The company announced in April that it has formed a partnership with novaSparks, a company that specializes in ultra-fast feed handlers. Fixnetix clients will now be able to use technology from novaSparks to process market data at speeds as fast as 740 nanoseconds.

novasparks uses a matrix of FPGA chips to process market data, an approach that the two companies claim is faster than software-based solutions. novaSparks currently offers feed handlers for CME Group and Eurex as well as a number of equity exchanges, and is rolling out feed handlers for other exchanges in Europe and north America.

The partnership allows Fixnetix to combine the novaSparks feed handlers with its own systems for low-latency execution and risk controls, which also rely on FPGA technology. Fixnetix has established connections to 33 co-location and proximity hosting centers across Europe and the U.S., and recently began extending its network in Asia. Fixnetix says its iX-eCute service can apply 20 customizable pre-trade risk controls in fractions of microseconds, making it one of the fastest trading solutions on offer.

“We’re matching the checks at the same speed at which people want to execute the trades,” said Bob Fuller, chief administrative of-ficer at Fixnetix and chairman of the MiFID IT subgroup, a regulatory advisory body that focuses on IT issues. He explained that using a PFGA chip is faster than a software program. “You bypass going through the customer’s operating system,” he said.

Fuller added that demand for high-speed risk controls has risen as regulators look more closely at high-frequency trading and apply new risk management requirements to firms that pro-vide direct market access. “It’s now going out to big broking firms that wish to control the trading of their DMA folks and we can do all of that in nanoseconds.”

Spain’s Meff Cuts Latency by 110 Microseconds Spain’s BME, the parent company of Meff, will offer co-location

services in the fourth quarter to all of its members after expand-ing its communications infrastructure and IT systems in its data processing center in Madrid. The co-location service, which will provide access to the group’s futures and options markets as well as its cash equities markets, is located within the BME data center. BME officials said the move from the existing proximity data center, which is located 10.5 kilometers away, will reduce latency by about 110 microseconds.

ICAP Adds Index Futures Rolls to Electronic Trading Platform

ICAP has enhanced its electronic trading system for European equity derivatives, adding the ability to execute rolls in European equity index futures. In a May 28 announcement, the interdealer broker said the new offering covers futures based on several leading European indices, including the Dax, Euro Stoxx and FTSE indices, and plans to add other indices in the future. The recently launched trading system, called iLinked, offers dealers the option of trans-acting electronically or using a voice broker and was developed in response to the demand for electronic trading in over-the-counter markets. “We have seen strong customer demand for iLinked since its launch in March this year and already have 25 participating firms,” Garry Steward, ICAP’s head of equity derivatives in Europe, said in a statement. “The addition of futures rolls to the platform today is the result of customer demand and the continuing need to bring OTC liquidity onto an orderly and transparent electronic platform.”

Orc Integrates with NYSE Liffe’s Cscreen Platform

Technology and service provider Orc has integrated its trad-ing products with Cscreen, nYSE Liffe’s pre-trading price discov-ery platform, to give traders a more efficient way to interact with indications of interest for both equity and index derivatives from inter-dealer brokers. The integration provides Orc users with a way to combine their activities in the over-the-counter equity derivatives markets with their screen trading in listed derivatives and benefit from an aggregated view of both markets.

“The integration with Cscreen is a natural extension of our electronic trading solutions allowing firms to more efficiently manage their OTC trading flows,” said Jon Freebody, vice president of sales at Orc. “As markets and regulations evolve, providing a tighter inte-gration between OTC trading and electronic trading will allow firms to continue to grow their businesses.”

Cscreen is an electronic tool for OTC equity derivatives that allows brokers to publish indications of interest for a wide range of equity derivatives based on individual stocks as well as indices. There is no automatic matching and all trades are finalized over the phone, but Cscreen users can submit their trades directly to Bclear for processing and clearing. More than 40 brokers are active on the Cscreen service, including AFS, BGC, Exane, GFI, JB Drax Honore, Link, Mint, newedge, TFS and Tullet Prebon. During April, the service had an average of 1,314 users per day and an average of 8,671 orders were entered per day.


BOCA

“Improving the cost benefit analysis done by the CFTC has been a goal of mine,” Rep. K. Michael Conaway (R-Tex) said in his keynote address

CFTC Chairman Gary Gensler discusses the Dodd-Frank agenda over coming months at the ICE Energy Breakfast

Exchange leaders discuss collateral protection, OTC clearing and new

business plans during the Exchange Leaders Meet the Press panel


At a special tribute for John Damgard’s 30 years of service as president of the

FIA, staff launch a campaign to elect him as the next president of the U.S.

Political Analyst Charlie Cook discusses election year is-sues at the BRICS Exchange Alliance Washington Outlook Breakfast

FIA President and CEO Walt Lukken is joined by John Damgard, former

FIA President, at a press conference

Futures industry leaders discuss ways to better

protect customer funds

Thank you!To our sponsors and exhibitors

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• Eurex• IntercontinentalExchange, Inc.• MCX-SX• MEFF• MexDer, Mexican Derivatives Exchange

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• Bank of America Merrill Lynch• BRICS Exchange Alliance• Chicago Board Options Exchange• CME Group• DTCC (Depository Trust & Clearing Corporation)• Eurex Exchange• FIA/FOA IDX• ICAP• IntercontinentalExchange• LCH.Clearnet

• Newedge Group• New York Portfolio Clearing, LLC• NYSE Euronext• OCC• Singapore Exchange• SunGard• SwapClear (LCH.Clearnet)• Tokyo Commodity Exchange (TOCOM)• Traiana Inc.• WFE World Federation of Exchanges

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PROMINENT

The Senate confirmed the nomina-tions of jerome Powell, a former private equity executive, and jeremy Stein, an economics professor at Harvard Univer-sity, to serve as members of the Federal Reserve’s Board of Governors.

The Senate also confirmed the nomination of Mary john Miller as the Treasury Department’s undersecretary for domestic finance. She

will be responsible for developing and coordinating Treasury’s policies and guidance related to financial institutions, federal debt financing, financial regulation and capital markets. Since 2010, Miller has served as assistant secretary for financial markets. The Senate also confirmed alastair Maclennon Fitzpayne as Treasury’s assistant secretary for legislative affairs. Fitzpayne has served as Treasury’s deputy chief of staff since January 2009.

The Senate also confirmed adam Sieminski to be the administrator for the Energy Information Administration. Sieminski previously was chief energy economist at Deutsche Bank in new York.

The Securities and Exchange Commis-sion named George Canellos as deputy director of the division of enforcement. He was serving as director of the SEC’s new York regional office. In addition Diane Blizzard was named associate director for regulatory policy and investment adviser regulation in the division of investment management. She filled the vacancy cre-ated when Robert Plaze was promoted to deputy director of the division. Blizzard has been a member of the SEC’s division of investment management for 12 years. erica Williams was named the agency’s deputy chief of staff. She has been a member of SEC Chairman Mary Schapiro’s staff since February 2011 focusing on enforce-ment and regulatory issues. james Burns

was named deputy director in the division of trading and markets. He has been a member of Schapiro’s staff since March 2010. james Mcnamara was named to the newly created position of managing ex-ecutive of the SEC’s division of trading and markets. He is currently an assistant director in the SEC’s office of financial management.

Hector Sants, chief executive of the U.K.’s Financial Services Authority, will leave his post at the end of June. Upon his departure, andrew

Bailey will take over as head of the pruden-tial business unit. Martin Wheatley will remain the head of the conduct business unit and will serve as the future chief executive officer of the Financial Conduct Authority.

Masamichi Kono was appointed as chairman of the International Organization of Securities Commissions’ board. Kono is the vice commissioner for international affairs at Japan’s Financial Services Agency and has served as chairman of the IOSCO technical committee since 2011. The IOSCO board also appointed two vice chairs: vedat akgiray, chairman of the Capital Markets Board of Turkey, and ethiopis Tafara, director of the U.S. Securities and Exchange Commission’s international affairs division. In addition, the IOSCO board elected Greg Medcraft, chairman of the Australian Secu-rities and Investment Commission, to take over as chairman after Kono steps down from the position in March 2013.

The Autorité des Marchés Financiers, France’s principal financial markets regula-tor, appointed Philippe Guillot as executive director of the markets directorate, a new entity formed by the AMF in 2011 to moni-tor the markets, infrastructure and market stakeholders. Guillot was previously head of trading at Crédit Agricole Cheuvreux.

Hong Kong’s Securities and Futures Commission announced that Bénédicte nolens was appointed as senior director of risk and strategy to oversee the newly es-tablished risk and strategy unit. Prior to join-ing the SFC, she was a managing director and head of compliance for the Asia-Pacific region at Credit Suisse.

nancy Schnabel has taken a position as an attorney in the banking supervision and markets division at the Federal Reserve Bank of new York. Most recently she was special counsel and policy advisor at the Commodity Futures Trading Commission for Commissioner Scott O’Malia.

Robert Colby was named chief legal officer for the Financial Industry Regulatory Authority. Colby was most recently a partner at Davis Polk &

Wardwell. Prior to that he was deputy director of the division of trading and markets at the Securities and Exchange Commission. Colby succeeded T. Grant Callery, general counsel at FInRA, who is retiring in October, and Marc Menchel, general counsel for regulation, who left for private practice.

Phupinder Gill took the helm as chief executive officer of CME Group after Craig Donohue retired from the position after the

company’s May 23 shareholder meeting. As part of the company’s succession plan, the board appointed Terrence Duffy to an expanded role as executive chairman and president.

CME Group named Susan Schultz to the newly created position of executive director and counsel to Terry Duffy. With

more than 30 years of legal and regula-tory experience in the derivatives industry, Schultz most recently served as managing director, group deputy general counsel and chief operating officer of the LCA division of newedge Group. She began her career with the Chicago Mercantile Exchange. Addition-ally, linda Rich, senior managing director, government relations and legislative affairs, was appointed to CME’s management team. Rich also reports to Duffy.

CME also named izumi Kazuhara as executive director, head of Japan. He is based in Tokyo and reports to julien le noble, CME Group managing director, head of Asia Pacific. Kazuhara has extensive experience in the exchanges sector and de-rivatives industry, having previously worked at both nYSE Euronext and Eurex.

LCH.Clearnet appointed Dennis Mclaughlin as group chief risk officer, reporting to ian axe, group chief executive officer. He was

previously at AOn, where he was the CEO for innovation and analytics. Prior to that, he was global head of capital and balance sheet management at Merrill Lynch. LCH.Clearnet also appointed Magnus Spen-cer as group general counsel. Spencer most recently was Europe, the Middle East and Africa general counsel at Barclays Capital.

Singapore Exchange announced a new organizational structure that became effective in May. Under the new structure, Magnus Bocker, chief executive officer, assumed direct responsibility for the list-ings and sales and clients business unit. Muthukrishnan Ramaswami, president, is in charge of the other four business units including the derivatives, market data and access, post-trade and securities units. Gan Seow ann, co-president, has re-signed from his position but will remain with SGX as an adviser.

Additionally, SGX appointed Christine lie as the exchange’s chief represen-tative in Beijing. She replaced lloyd loh. Lie previously was in charge of the


PROMINENT

FIA Elects Directors and OfficersThe Futures Industry Association elected 17 directors to its board of directors at the

association’s annual meeting in March in Boca Raton, Fla. After the election, the following officers were elected by the new board: Michael Dawley, managing director, co-head of futures and derivatives clearing services, Goldman Sachs, was re-elected as chairman; Peter johnson, managing director, global head of futures, OTC clearing and FX prime brokerage, Bank of America Merrill Lynch, was re-elected as vice chairman; najib lamha-ouar, global head of exchange-traded derivatives and OTC clearing, global markets, HSBC Securities (USA) Inc., was re-elected as secretary; and Gerald Corcoran, chairman and chief executive officer, R.J. O’Brien & Associates, Inc., was elected as treasurer.

Eight directors were elected for two-year terms in the regular member category: Pa-trice Blanc, president, futures brokerage division, Jefferies & Company, and chief execu-tive officer, Jefferies Bache; Gerald Corcoran; Michael Dawley; Sanjay Kannambadi, chief executive officer and global head, BnY Mellon Clearing; najib lamhaouar; Rein-hardt Olsen, managing director, north American head of exchange-traded derivatives, UBS Securities; William Sexton, chief executive officer, newedge USA; and Michael Yarian, managing director, head of futures and OTC derivative clearing, Barclays Capital.

Four directors were elected to fill the remainder of two-year terms expiring in 2013 in the regular member category: Fredrik Gentzel, managing director, global head of listed derivatives, Deutsche Bank AG; jerome Kemp, global head of exchange-traded deriva-tives sales and clearing, Citigroup Global Markets; emily Portney, managing director, global head of futures and options, J.P. Morgan Securities; and jeremy Wright, global head of futures and options markets, The Royal Bank of Scotland plc.

Five directors were elected for two-year terms in the associate member category: Richard Gorelick, chief executive officer, RGM Advisors; arthur Hahn, partner, Katten Muchin Rosenman; David Mitchell, partner, Fried, Frank, Harris, Shriver & Jacobson; Kenneth Raisler, partner, Sullivan & Cromwell; and Donald Wilson, jr., chief executive officer, DRW Trading Group.

Michael Schaefer and alice Patricia White were elected as public directors. In addition, the new board re-appointed the following individuals as special advisers to the board: Richard Berliand, management consultant; and Gary DeWaal,senior managing director and global general counsel, newedge Group.

The board also appointed john Damgard, the association’s former president, as se-nior adviser to the board. Additionally, Gerald Corcoran was appointed chairman of FIA Technology Services, a subsidiary of the FIA that supports electronic execution of give-up agreements and execution brokerage payments.

The Institute for Financial Markets, the non-profit educational and training affiliate of the FIA, elected several new members to its board of trustees: Micah Green, a partner at the law firm of Patton Boggs; john Damgard; and vassilis vergotis, executive vice presi-dent and head of business development, Americas, Eurex. In addition, the IFM’s board of trustees also re-elected Peter Borish, chief executive officer, Touradji Capital Manage-ment, as chairman, and Patricia Foshée as president.

The FIA also announced that Bill Herder was appointed as executive director of FIA Asia. He is based in Singapore. nick Ronalds, who has led FIA Asia since 2007, will serve as a senior adviser to FIA Asia, focusing on the association’s activities in China.


exchange’s listings business with Chinese companies. She joined the exchange in november from Hong Kong Exchanges and Clearing.

Garry jones, nYSE Euronext’s global head of derivatives, will step down at the end of June following a management restructur-ing that eliminated his position. Jones joined Liffe in 2007 and was named global head of derivatives for nYSE Euronext in 2009.

Stanley Young, chief executive officer of nYSE Technologies also resigned following the restructuring.

alan Whiting succeeded Hugh Freedberg as non-executive chairman of nYSE Liffe’s global derivatives business. Freedberg, who served as chief executive officer of nYSE Liffe from 1998 to 2009, retired from the post. Whiting was head of financial regulation at the U.K. Treasury from 1992 to 1997 and executive director at the London Metal Exchange from 1997 to 2004.

In addition, nYSE Euronext hired Peter leukert as chief information officer. He is leading nYSE Euronext’s global IT opera-tions and reports to Dominique Cerutti, the company’s president and deputy chief executive officer. Leukert previously was CIO of Commerzbank, in charge of all applications and IT infrastructure as well as co-leader of the integration of Dresdner Bank into Commerzbank. Prior to that, he was a partner at McKinsey. Leukert replaced Steve Rubinow, who left the company to join FXall.

The Depository Trust and Clearing Corpora-tion announced that its board of directors elected Michael Bodson as president and chief executive

officer of the company, effective July 1. Bodson is currently the chief operating officer and will succeed Donald Donahue, who will retire at the end of July.

In addition, Michael Dunn, former com-missioner at the Commodity Futures Trading Commission, was appointed chairman of DTCC’s U.S. swap data repository. Dunn reports to Bodson.

ASX’s board of directors elected Roderic Holiday-Smith, the former head of Chicago Research and Trading, as chairman. Holli-day-Smith was appointed a director of ASX in July 2006. Prior to the merger of ASX and the Sydney Futures Exchange in July 2006 he was chairman of SFE Corporation Lim-ited from 1998. Earlier in his career he spent 11 years in Chicago, first as chief executive officer of Chicago Research and Trading, and then as president of nationsBanc-CRT. He succeeded David Gonski, who re-signed in March to take up an appointment as the chairman of Australia’s Future Fund Board of Guardians.

new York Portfolio Clearing appointed alexander “Sandy” Broderick as chief executive officer. Broderick joined nYPC from Société

Générale, where he was head of British pound derivatives and bond trading. He replaced interim chief Murray Pozmanter of DTCC. Broderick was involved in the development of LCH.Clearnet SwapClear and served as chairman of the OTCDerivnet Board.

CBOE Holdings appointed alexandra albright to the newly created role of chief compliance officer. Albright reports to edward Tilly, president and chief operating officer and to the regulatory oversight com-mittees of the CBOE exchanges. Albright previously served as an attorney for Kirkland & Ellis in Chicago. Prior to that, she served in senior legal positions with the Securities and Exchange Commission.

CBOE also announced that Margaret Williams was promoted to the new role of deputy chief regulatory officer. She will continue to report to Timothy Thompson, chief regulatory officer and senior vice presi-dent, regulatory services division.

joseph Corcoran was named first vice president and head of government relations for the OCC. Corcoran was previously at nYSE Euronext, where he served as chief counsel in nYSE Regulation and the office of legal and governmental affairs.

International Securities Exchange announced that Sylvain Mirochnikoff was elected to its board of directors for a one-year term. Mirochnikoff is managing director of the institutional equity division for Morgan Stanley.

Gary anderson was named the chief executive officer of the Dubai Gold and Commodities Ex-change. He brings 30 years of experience in

major investment banks. Most recently he was at Triniti Financial Group, a trading services firm for day traders of which he is a founding partner.

The board of directors of BSE, formerly known as the Bombay Stock Exchange, ap-pointed ashishkumar Chauhan as interim chief executive officer of the exchange. He succeeded Madhu Kannan, who left the exchange to take a position at Tata Group. Chauhan currently serves as the deputy chief executive officer of the exchange.

Hong Kong Exchanges and Clearing appointed Stephen Marzo as chief financial officer and Henry ingrouille as chief admin-istrative officer. Marzo, who has spent most of his career working in Asia, was most recently group chief financial officer at the noble Group. Ingrouille was most recently managing director and head of Asian opera-tions for Morgan Stanley.

HKEx also announced the names of individuals serving on its derivatives and clearing consultative panels. On the deriva-tives panel, the four new members named were Yam Pui lo of Haitong International Futures, Stephane Ritz of BnP Paribas Securities (Asia), Kai leung Wan of Glory Sky Global Markets and Pek Yen Yap of IMC Asia Pacific. The two individuals re-elected to the derivatives panel were lap Tak Chan of TG Securities and Toby lawson of newedge Financial Hong Kong. On the clearing panel, four new members were named: Chi Ming Chan of Celestial Commodities, Oliver Goh of Citigroup Global Markets Asia, Wong Si Ching lau of HSBC Broking Securities (Hong Kong)

PROMINENT


and james Taylor of newedge Financial Hong Kong. In addition, Shun Wai Chan of BOCI Securities was re-elected to the clearing panel.

The board of directors of Hong Kong Exchanges and Clearing Limited appointed Chow Chung Kong as non-executive chairman, subject to the approval of Hong Kong’s chief executive. His initial term is for two years. He replaced Ronald arculli, who stepped down after a maximum con-secutive six years as chairman. Arculli will remain on the board of directors. Chow pre-viously was chief executive officer of Hong Kong’s subway operator MTR Corp.

David Mengle was named senior risk advisor, OTC deriva-tives at the national Futures Association, the self-regulatory organization for the

U.S. futures industry. Mengle previously was a consultant for the Federal Reserve Bank of Chicago. Before that he was head of research for the International Swaps and Derivatives Association.

Morgan Stanley promoted joseph Sar-cona as global co-head of listed derivatives within the bank’s electronic trading division, based in new York. He was previously head of electronic trading for Asia, exclud-ing Japan. Sarcona reports to andrew Silverman and Bill neuberger, global co-heads of electronic trading. The firm named Gabriel Butler to fill Sarcona’s position in Hong Kong. Butler was previously head of electronic trading sales at Bank of America Merrill Lynch.

andy Coyne was appointed as chief executive officer of ICAP’s post-trade processing unit, Traiana. Based in London, Coyne reports to Gil Mandelzis, a founder of Traiana who moved to the newly created role as executive chairman. Coyne was previously at Citi, where he was head of FX prime and ecommerce products.

Samantha Page will join Bank of America Merrill Lynch in July as director of futures, options and OTC clearing within

the bank’s London-based fixed income, currencies and commodities team. She will report to Brooks Stevens, who heads fixed-income futures and options as well as OTC clearing for Europe, the Middle East and Africa, and to Bob Burke, global head of OTC derivatives clearing services in new York. Page previously worked at Royal Bank of Scotland as director of OTC clearing in the bank’s London office.

Greg Wood joined Deutsche Bank as the product manager of client algorithms span-ning the firm’s foreign exchange and futures and options businesses. He is based in new York and reports to jason Shell, head of FX trading for north America Paul Maley, head of listed derivatives for the Americas, and globally to Cameron Mouat, head of algo execution. Wood was previously at Credit Suisse as the U.S. head of business develop-ment for its AES futures unit.

Additionally, ed allen joined the bank as head of dbClear sales in Europe. He is based in London and reports to Chris Han-sen, Deutsche Bank’s global head of over-the-counter clearing sales and European head of futures sales. dbClear is the firm’s client clearing service platform that was established in 2009. Allen was previously at Bank of America Merrill Lynch, where he was director of OTC clearing for Europe, the Middle East and Africa.

vincent Mattera was named director, listed derivatives operations at BMO Capital Markets in new York. His responsibilities include futures clearing and agency equity options operations. Mattera, who also serves as the president of the FIA’s Futures Services Division in new York, previously was regional head of futures clearing at HSBC Securities.

newedge named james Sheker-demian as head of origination and structur-ing for its alternative investment solutions division in the Europe, Middle East and Af-rica region. He reports to jonathan Gane, global head of origination and structuring. Shekerdemian was previously at J.P. Mor-gan. In addition, Charles Hill was named deputy head of origination and structuring for Europe, the Middle East and Africa.

Marc lorin was appointed deputy head of origination and structuring of Americas.

newedge also appointed jeff Pollack as chief financial officer for the Americas, based in new York. He was most recently serving as CFO and chief operating officer for Mizuho Securities USA. He reports to isabelle Fandard, newedge’s global CFO and antoine Babule, chief administration officer for the Americas.

Brian Daly joined Royal Bank of Scotland as head of futures and options sales for Europe, the Middle East and Africa. Daly previously was head of

prime services for Europe at MF Global. Prior to that, he was at Morgan Stanley as managing director and European product manager for listed derivatives.

BATS Chi-X Europe, an electronic trading platform that has become Eu-rope’s most active venue for equities trading, has stepped up its plans to enter the European derivatives markets and promoted futures industry veteran Guy Simpkin to head of business develop-ment and said he will focus on bringing more competition into the European index and derivatives markets. Simp-kin, who reports to Mark Hemsley, the company’s chief executive officer, held senior business development roles at MF Global, LCH.Clearnet and nYSE Liffe before joining BATS Chi-X Europe in May 2010. BATS Chi-X Europe currently has a market share of approximately 25% in European equities, making it the largest equities trading platform in Europe.

Citigroup named Hiro Matsuki, a mem-ber of its prime finance team in Japan, to lead the origination of new clearing business in Japan for both listed and OTC derivatives. Matsuki will be responsible for providing hedge funds and other Japanese clients with access to central clearing in the U.S., Europe and Japan.

ICAP appointed Gil Mandelzis chief executive officer of EBS, reporting to


Michael Spencer, the company’s chief executive. He replaced David Rutter, who has left the company. Separately, ICAP announced that it has expanded its soft commodities team with the acquisi-tion of a cotton brokerage in new York led by vincent Pepe, louis Barbera and Marco Degennaro.

BGC Partners appointed Michael Riffice as managing director and head of futures and options, Americas. Riffice is based in new York and reports to jean-Pierre aubin, executive managing director and global head listed products and struc-tured solutions. Riffice has held senior roles at a number of financial services firms and most recently worked in the inter-dealer broker sector.

InTL FCStone’s board of directors elected john Radziwill as chairman and Pete Anderson as vice-chairman. Anderson is serving in a joint capacity as president and vice-chairman until his retirement in October. Radziwill has served on the board since December 2002.

BnP Paribas announced three appoint-ments to its commodity derivatives busi-ness. john Bills was named managing director, commodity structured origination Americas, reporting to Simon Dent, head of structured origination. Bills was previously with Credit Agricole. Chris Zammit was appointed director of commodity deriva-tives power trading and reports to Dora Sung, head of U.S. energy commodity trading. Zammit was most recently at J.P. Morgan. Mike Collens was named director, natural gas trader in Calgary and reports to Bruce Bianchini, head of energy trading in Canada. Collens was previously at Société Générale Energy in Calgary.

ADM Investor services appointed Kurt johnson as vice president, business development. He will also continue to serve as president of the

firm’s wholly-owned subsidiary, Archer Financial Services. Johnson succeeded Ron

Grossman, who retired after 16 years with the company. ADMIS also named Dennis Harding as vice president, information systems. Harding was previously director of application systems at the firm.

Société Générale Corporate and Invest-ment Banking created an energy and natural resources business line that is co-headed by Federico Turegano and jonathan Whitehead. In addition, within the global markets division of the bank, Whitehead was appointed head of commodities markets and François Combes and jean-François Maurey were appointed deputies. Tureg-ano was previously global head of natural resources financing. Whitehead, who joined SG CIB in May 2011, was previously head of commodity sales and structuring for Europe, Middle East and Africa at Barclays Capital.

R.J. O’Brien & Associates, Inc. hired Mark Sachs as executive vice president, sales and marketing. His responsibilities include creating and implementing new services for the firm’s private client division, which has been servicing thousands of new accounts transferred from MF Global in early november. He is also responsible for launching new branding efforts com-pany-wide as well as partnering with other members of RJO management to enhance sales strategy for the firm. Sachs previously served as president of Lind-Waldock, a retail futures brokerage firm owned by MF Global.

Borje ekholm was named interim chairman of nasdaq OMX’s board of directors, following the retirement of H. Furlong Baldwin.

Christopher nagy is launching KOR Trading, a consult-ing firm to help broker dealers, advisers, special interest groups and

investors with information to help them navigate the changing market structure environment. nagy worked for TD Ameritrade for more than 13 years and helped build its order-routing and market data infrastructure.

Rosenblatt Securities, an institutional brokerage based in new York, hired a four-person options sales and trad-ing team. The group is headed by Gary Wishnow, previously head of options sales and trading at FBn Securities. Earlier in his career, he was vice president of institutional sales and trading at Louis Capital Markets, a market maker at Knight Financial Products and a broker at ICAP. He will report to joe Gawronski, the firm’s president and chief operating officer. The team also consists of Steven Wil-liams, previously of Ramius Capital, who will be the chief derivatives and exchange-traded product strategist for Rosenblatt, Fabian amezaga, who previously was co-head of the crude oil options book at Citigroup Derivatives Markets, and Mat-thew Stoeber from FBn.

In Memoriam

The FIA was saddened to hear that Richard Ruzika passed away on May 7. He had been with Goldman Sachs for 30 years where he primarily traded com-modities. Before retiring in 2011, he was a partner and head of the firm’s Global Situations Group.

The FIA was also saddened to hear that Michael a. Milano passed away on March 29. Milano had a long career in the new York commodity markets. He became a member of the new York Mercantile Exchange in 1971 and worked as an independent floor trader for over 30 years.

The FIA was also saddened to hear of the passing of Fred “Fritz” Guth, a World War II marine veteran and CBOT member since June 1954.

The FIA was also saddened to hear that john “jay” Finnegan, passed away on May 7. He was a former director of Bear Stearns and a former member of the Chicago Board of Trade and the Chicago Mercantile Exchange.


PROMINENT

Infinium Capital Management promoted Scott Rose to chief executive officer. He previously was head of trading, including both market making and algorithmic trading. Charles Whitman, one of Infinium’s founders and the previous CEO, assumed the newly created role of chairman, overseeing a variety of new initiatives for the firm. Prior to joining Infinium, Rose was the co-founder and invest-ment manager at Fox River Partners. Before that he held senior roles at Citadel, where he was responsible for the launch of the firm’s equity options market-making business and the development of its energy businesses.

Gonzalo Chocano, formerly global head of futures and derivatives clearing services at Bank of America Merrill Lynch, joined Storm-Harbour, an indepen-

dent financial firm that advises financial institutions and corporations. Chocano is a principal and managing director based in the London office, with responsibility for client coverage and relationships in Spain across sales and trading, structuring and advisory, and capital markets.

Getco hired vipin Sood to oversee com-pliance at Getco’s Europe Automat division. He is based in the company’s London office. Sood previously worked at Citadel Asset Management.

Keith andrew joined Knight Capital’s market-making business in London. He was previously head of electronic foreign exchange trading at Morgan Stanley.

Campbell and Co. appointed Steven Schneider as chief administrative officer. Most recently he was chief financial officer for Ironwood Global in new York.

Trading Technologies appointed Rick lane as executive vice president and chief technology officer. This will be his second stint at the company; he first joined the company in 2010 when TT acquired a company he co-founded. Most recently he worked at Google as a product manager on display ad servicing technology.

Fidessa Group appointed David Polen as head of business development. He reports to Mark ames, chief executive of-ficer of Fidessa’s U.S. business. Polen has worked at Fidessa for 13 years in positions throughout the company.

Michael loesch, a former senior staffer at the Securities and Exchange Commis-sion, was named a partner at the law firm of Fulbright and Jawor-

ski working with the firm’s energy and securities litigation enforcement practice groups. Before joining the law firm in 2009, he worked at the Commodity Futures Trading Commission as chief of staff under then-acting Chairman Walter lukken. Before that he worked at the SEC for seven years, including a stint as counsel to the chairman and a supervisor in the agency’s enforcement division.

The Commodity Futures Floor Brokers and Traders Association re-elected George Gero as chairman of the board, Fred Schoenhut as vice chairman, Stephen ardizzone as president, Madeline Boyd as executive vice president, Frank Siciliano as vice president, jan Willem van derDor-pel as vice president, David Greenberg as vice president and john Mcnamara as vice president.

The International Swaps and Derivatives Association elected 13 directors at its 27th annual general meeting in Chicago. Three new directors were elected to the board: elie el Hayek, managing director and member of the global markets executive committee, HSBC Bank; Fujio nishio, chief manager, derivatives trading global markets sales and trading, Bank of Tokyo Mitsubishi; and Richard Prager, managing director and head of global trading at BlackRock.

The Bank for International Settle-ments announced that Paul Tucker was appointed chairman of the com-mittee on payment and settlement systems. Tucker, who is deputy gov-ernor, financial stability at the Bank of

England, succeeds William Dudley, president of the Federal Reserve Bank of new York, who has been the CPSS chairman since May 2009.

Wells Fargo named Yvette Hollings-worth as its chief compliance officer, suc-ceeding Tim Marrinan, who announced his retirement in 2011. Hollingsworth was most recently managing director and global head of operations compliance and financial crimes compliance and risk management at Barclays.

Cinnober Financial Technology, the Stockholm-based provider of technology to exchanges, appointed javier Tordable as chief executive officer. Tordable previously worked at several exchanges and trad-ing companies, including Deutsche Börse, Eurex and MTS. Most recently he led the ef-fort to establish a multilateral trading facility in Spain called Pave. Per-anders Häll-Bedman, who has been acting CEO since november 2011, will return to his position of deputy CEO.

FX Alliance, a leading electronic platform for foreign exchange trading, hired Steve Rubinow as chief information officer. He is responsible for leading global technology operations for the company, which recently concluded an initial public offering of shares. For the past six years, Rubinow was chief information officer of nYSE Euronext, where he led the technology integration of nYSE and Euronext following their merger. Before that he was chief technology officer of Archi-pelago Holdings. At FXall, Rubinow replaced Kevin lupowitz, who joined the company in March 2011 from Liquidnet.

KvH Co appointed edward Higase as president, chief executive officer and representative director. He succeeded Richard Warley, who became a member of the board of directors. Higase most recently served as managing director and executive vice president of Global Crossing’s Europe, Middle East and Africa businesses.

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