Monday 22nd November 2010

Trading Places, November 22, 2010

Read this week's Trading Places to catch up on people moves across the FX world.

Mandell joins StanChart

Christiane Mandell started as head of financial institution sales for the Americas at Standard

Chartered in New York on November 15. Mandell reports to Adam Freeman, regional head of

financial markets sales in London, and Adrian Walkling, global head of financial institutions sales in

Singapore. She also has a local reporting line to Mohammed Grimeh, head of Standard Chartered

Securities. In this newly created role, Mandell is responsible for foreign exchange, rates,

commodities and credit products sales across financial institutions in the US, Canada and Latin

America.

Mandell joined the bank from Royal Bank of Scotland in Stamford, Connecticut, where she was most

recently head of global banking and markets for Latin America and Canada, and previously head of

FX and local markets for the Americas. Prior to this, Mandell was global head of foreign exchange at

Bank of America, where she worked for 18 years in different senior roles, including head of

institutional sales for fixed income and head of electronic commerce (FX Week, August 20).

"As financial institutions in the Americas increasingly look toward Asia, Africa and the Middle East for

investment and trade opportunities, Chris and her team are ideally placed to leverage our deep

presence and long history in those regions on behalf of our clients," said Walkling, in a prepared

statement.

TwoFour expands sales team

Steven Dorlen has joined TwoFour's New York office as a new member of the consulting sales team.

He reports locally to Stephen Fry, TwoFour's managing director. Dorlen joins from Hyatt Leader, a

New York-based recruitment firm, where he was senior account manager. Before that, he was

account manager at Princeton Information and Aetea Information Technology.

Dorlen's hire follows TwoFour's recent appointment of Chris Steenbock and Chris Zaremba as sales

managers for the Americas, and for Europe, the Middle East and Africa, respectively (FX Week, 7

June).

Tuck joins Barclays Corporate in senior management restructure

Matt Tuck has joined Barclays Corporate in London as head of financial institutions (FI), replacing

Colin Nutt, who became vice-chairman at Barclays Corporate in July.

Tuck starts at the bank in January and will report to Kevin Wall, head of client coverage at Barclays

Corporate, locally.

Tuck was most recently at Deutsche Bank, where he held roles as regional head of northern Europe,

cash management financial institutions and global co-head of cash management sales to non-bank

financial institutions from 2003. Prior to Deutsche, he held senior sales and operations positions at

Citi and JP Morgan.

In his new role, Tuck is responsible for exploring new opportunities for Barclays Corporate among

the Barclays Capital client base, particularly FI clients, as part of the closer working relationship

between the corporate and investment banks.

IPC hires Petrie as network operations chief

Richard Petrie has joined IPC Systems, as vice-president of network operations for the Europe, Africa

and Middle East region.

Based in London, Petrie is responsible for driving network growth and expansion strategy into

emerging markets as well as managing IPC's enhanced voice services and electronic connectivity

services.

He joins from London-based Colt Telecommunications, where he was head of product and solutions

services. Before this, he was the global head of network services for BGC Partners' electronic trading

system, eSpeed.

Bonde joins Nordea

Casper Bonde has joined Nordea in Copenhagen as senior sales manager of the fixed-income relative

value group, covering institutional clients on the asset liability management and relative value side.

He reports locally to Jacob Lester, director at Nordea. According to market sources he resigned from

JP Morgan before the summer, where he was an FX salesperson to Scandinavian institutions and

corporates for three years. He reported to London-based Thomas Christensen, executive director. It

is not known whether he has been replaced. JP Morgan and Nordea declined to comment. Casper

could not be contacted.

Polidano surfaces at NAB

Dan Polidano has joined National Australia Bank (NAB) in Sydney, as a senior FX options trader.

Polidano joins from Crédit Agricole, where has worked as a director and senior FX options trader for

Asia since April, reporting to Steve Chan, head of FX options trading for Asia.

Prior to this, he was a director for G-10 vanilla FX options trading at Barclays Capital for three years.

He has also had senior roles at UBS in Singapore as a director in emerging Asia FX options trading,

and at ANZ in Melbourne as an FX options trader for five years (FX Week, May 3).

Digital Vega launches multibank FX options trading platform

LONDON - Digital Vega has become one of the first vendors to fill a gap in the market for a multi-

bank forex options trading platform, with the launch of Medusa last week.

Medusa is aimed at buy-side traders looking to trade FX option structures on prices from up to five

relationship‐based liquidity providers. The system supports trading in single options, straddles,

strangles and risk reversals.

The first transactions on Medusa were undertaken on November 11, by Pareto Investment

Management, owned by BNY Mellon Asset Management. The trades consisted of single options, in

AUD/USD in market amounts, said vendor officials.

Mark Suter, chief executive at Digital Vega in London, said the platform will have four banks pricing

into the platform in the next two to three weeks, with a further six coming on board in the early part

of next year. "They have confirmed interest in participating and once agreements are in place, they

will connect," he said.

"In a market environment where users increasingly require multiple, comparable quotes under

fiduciary regimes, we believe Medusa is a real step forward and will set new market standards in FX

options trading. We anticipate many market participants who are looking to benefit from simplicity,

transparency and liquidity in their trading, coming on board in the coming weeks."

Suter said the platform is also in the process of rollout with global asset managers, corporates,

hedge funds and regional banks. Trading can be accessed via graphical user interface or application

programming interface, with pricing in either premium or volatility terms, with or without delta

hedge with real‐time execution and confirmation.

The platform was developed jointly with software vendor Worldflow. It also has reporting tools for

buy‐ and sell‐side participants, enabling them to identify best execution as well as detailed client and

provider activity and service levels.

Officials said the platform has been integrated with the Traiana Harmony network, for real‐time

trade notifications, and position and exposure management tools.

Other vendors looking to take advantage of the increased need for automation in the options

market include GFI Fenics, which is in soft launch-phase with a multi-bank product, with more than

100 FXO trades executed in the past month, say market sources.

Market endorses 'elegant' CFTC proposal on margin

The Commodity Futures Exchange Commission (CFTC) tabled four proposals on segregation for client

margin in cleared over-the-counter derivatives trades, and early feedback from the industry

indicates a clear front-runner.

The so-called 'legally segregated/operationally commingled' approach, in which clients will have a

secured claim for the value of their collateral held in omnibus accounts at dealers – or futures

clearing merchants (FCMs) – is proving popular among buy-side and sell-side firms alike.

"The CFTC came up with a sensible structural compromise, incorporating this legal separateness but

physical commingling. I think that has virtues from both perspectives that would seem to provide a

nice solution," says one head of collateral management at a major investment bank.

"We think the CFTC's legally segregated/operationally commingled proposal is an elegant solution

that addresses the operational burden and still gives legal segregation – we support that," adds

Richard Prager, head of fixed-income trading at Blackrock in New York.

The issues relate to client clearing, in which FCMs act as intermediaries between clients and central

counterparties (CCPs), by passing along margin on the client's behalf. Under the current US model,

all client margin is placed in an omnibus account at the FCM, which will post margin to the CCP for a

group of clients on an aggregate basis.

This model makes it possible for members of the same omnibus account to suffer losses if the FCM

and one or more of its clients default simultaneously – a phenomenon known as risk mutualisation.

If the initial margin held by the CCP at that point is not enough to pay for the defaulted positions to

be exited or hedged, the clearer is entitled to make up the shortfall by taking margin out of the

dealer's omnibus client account – in other words, the initial margin of the non-defaulting clients.

This model has proved a success in the futures world, but some buy-side firms have said they would

not accept risk mutualisation in OTC clearing. The CFTC held an industry roundtable on October 22 to

discuss the issues before announcing today's proposals.

As well as the legally segregated/operationally commingled proposal, the CFTC also mooted

maintaining the current model; introducing a variation on the current model whereby CCPs could

only tap the omnibus account once the rest of its risk waterfall (including the guarantee fund and

the CCP's own contributions) has been exhausted; and what has become known as super-

segregation, in which each client would have its own segregated account at the CCP.

Some members of the buy-side want to avoid any approach under which some form of risk

mutualisation remains. Meanwhile, dealers have been keen to avoid a move towards super-

segregation, which they argue would be operationally burdensome and prohibitively expensive.

In brief, November 22, 2010

Blacktree hires Kalirai

Harvinder Kalirai has joined Blacktree, the London-based investment management firm. He reports

to Alexei Jiltsov, chief information officer and managing partner. Kalirai joins from BCA Research,

where he was managing director of foreign exchange strategy.

Previously, he was head of currency management at CIBC Global Asset Management and he has also

held senior positions at State Street Global Markets in London, Sydney and Boston.

Blacktree specialises in macro-systematic currency trading strategies and is headed by Jiltsov, Balraj

Bassi and Anne Sanciaume. Bassi and Kalirai previously worked together at State Street.

South Korea could crack down on FX derivatives

South Korea could possibly tighten its foreign exchange derivatives regulations, a senior government

official reportedly announced on November 16. The decision is dependent on the outcome of an

investigation into banks’ activities following growing fears of the threat posed by rapid foreign

capital flows.

“The capital flows issue is very important for a small and open economy such as South Korea,” said

Financial Supervisory Service governor Kim Jong-chang, according to Dow Jones. “Our investigation is

part of strengthening our oversight over the foreign exchange market... If we find improper [foreign-

exchange derivatives] trading we will issue sanctions, but we will also consider improving the

regulatory framework.”

The remarks come as Seoul is under pressure to contain the potentially destabilising effects of rapid

inflows and outflows of foreign capital.

Reval and FXall combine forex forces

Risk management solutions provider Reval has combined platforms with FXall to offer corporate

end-users of derivatives a web-based solution for FX trading, it announced last week. It offers users

FXall's reporting, control and settlement tools as well as the analytical tools of Reval's software-as-a-

service solution to manage their risk management process. Corporate FX traders can access two-way

executable prices from multiple counterparties through the Reval user interface, deal on a live price

and obtain immediate acknowledgment.

Data and tech let down OTC derivatives valuations

Fifty-two percent of survey participants said the biggest hurdle to implementing valuations best

practices were data and technology architecture, according to Open Link Financial and Maven Wave

Partners. Those surveyed were senior operations professionals at investment firms involved in OTC

derivatives. OpenLink Financial is a risk management, trading and operations software provider

while Maven Wave Partners is a technology consulting solutions firm. "Firms are trying to adapt their

management of both vanilla and exotic derivatives products in a market that is becoming

increasingly regulated and complex," said Eric Gulbrandsen, managing director in the financial

services practice at Maven Wave Partners.

StreamBase optimises CEP platform with live data

StreamBase has integrated a real-time data feed from investment research firm Morningstar into its

complex event processing (CEP) platform. The new feature, launched on November 16, gives access

to global investment information across multiple asset classes, including stocks, indexes, foreign

exchange, derivatives and research analysis.

Adam Honoré, research director at consultancy Aite Group, said in a prepared statement: “While

market participants are considering a variety of solutions to reduce the latency issues in their trading

systems, the flexibility of being able to react to the dynamic market conditions is the primary

requirement. We expect to see more hedge funds and traditional asset managers invest in

customisable solutions and look into new opportunities.”

UK leads growth in FX markets

Foreign exchange trading has leapt by a third from last year, with the UK accounting for 37% of all

global trades, according to a new research released today (November 22).

The report, Foreign Exchange 2010, commissioned by financial services firm TheCityUK, revealed UK

shares of global turnover are up from 35% in 2007 and 32% in 2004, indicating a steady growth

trend. In second place was the US (17%) and in third Japan (6%). The research is based on statistics

from the Bank for International Settlements.

London took the lion's share of UK daily turnover, averaging $1,853 billion in April 2010. This was

driven by trading generated in prime brokerage, investment banking and hedge funds.

Globally, average daily turnover in FX transactions, including spot transactions, outright forwards

and FX swaps totalled $3.9 trillion, an increase of a third on last year, indicating a return of risk

appetite and economic recovery.

In 2008, weaker global trade, lower volatility, deleveraging and a fall in activity by international

investors contributed to a 24% decline in trading.

"The economic downturn did not interrupt liquidity in the foreign exchange markets, and foreign

exchange was one of the few sources of steady profits for global banks," said Marko Maslakovic,

senior manager in economic research at TheCityUK. "Investors saw the foreign exchange market as a

liquid market in which to invest at a time when the rest of the world's financial markets were in

turmoil."

Twice as many US dollars are traded on the foreign exchange market in the UK than in the US, and

more than twice as many euros are traded in the UK than in all the eurozone countries combined.

Foreign-owned institutions account for around 70% of foreign exchange trading in London.

HSBC wins Schaeffer from BAML in new US options role

HSBC has hired Burt Schaeffer as its North America and Latin America currency options trading chief.

Schaeffer replaces Jason Henderson, former co-head of global markets at HSBC in New

York. Henderson relocated to HSBC in Toronto in October, following his appointment as head of FX

trading (FX Week, October 25).

Schaeffer reports globally to Vincent Craignou, global head of foreign exchange options in London.

His position became effective on November 15.

Most recently, Schaeffer was head of FX options at Bank of America Merrill Lynch, also in New York.

He retained the role through the merger of Bank of America and Merrill Lynch in 2008.

Henderson was appointed co-head of global markets in April to replace HSBC veteran Brad

Meredith, former executive vice-president for global banking and markets, who retired after 19

years' service.

Schaeffer could not be reached. HSBC declined to comment.

UBS hires in options trading

Swiss bank UBS has hired two new options traders to its Stamford trading floor, the bank has

confirmed.

James Matarese joined in August as a foreign exchange options trader, reporting locally to Michael

Monaco, managing director and senior trader in the FX derivatives group for the Americas. Matarese

joins from Crédit Agricole CIB in New York, where he also worked in FX derivatives trading. He

previously worked at investment adviser Vinya Capital as a junior portfolio manager and has also

worked in industrial engineering.

Rich Gaborow has also joined UBS as a foreign exchange options trader, focusing on Latin America.

He was most recently also at Crédit Agricole in the same city, as a director in FX options trading.

Meanwhile, Crédit Agricole has lost another FX options trader in New York, Louis Kiener. It is unclear

where Kiener is moving to. Previously, he was an FX derivatives trader at BNP Paribas in New York.

Recent hires at UBS in London include: Kirsty Gillies and Stephan Hoeger in the institutional FX sales

team, Chris Purves, Mark Meredith and Parwinder Sekhon in senior electronic FX roles, George

Athanasopoulos as global head of foreign exchange distribution, and Richard Longmore as head of

institutional FX sales (FX Week, October 4).

Crédit Agricole declined to comment.

BoE: High-frequency traders raise risks of liquidity event

The foreign exchange market needs to address the increasing role of high-frequency traders as

market-makers to insure against a liquidity event, says Michael Cross, head of the foreign exchange

division at the Bank of England (BoE).

Speaking at the FX Week Europe congress in London last Tuesday (November 15), Cross said officials

at the BoE have expressed concerns about the possible emergence of a liquidity mirage in FX.

"The rise of market-makers outside of banks has certainly increased the number of people providing

liquidity to the market, but that could potentially create a liquidity mirage that I and others at the

bank have talked about," said Cross.

In September, the Bank for International Settlements reported that average daily turnover in the FX

market has jumped 20% in the past three years to $4 trillion a day (FX Week, September 6). Statistics

show turnover growth was driven by a 48% rise in spot transactions, which Cross put down to high-

frequency traders providing prices via FX electronic connectivity networks.

Cross said the FX market should scrutinise the intentions of liquidity providers such as high-

frequency traders, particularly during times of heightened volatility. In particular, he questioned

their appetite to continue pricing when the desire to take risk can evaporate quickly.

"Those are exactly the sort of circumstances in which you get a liquidity event in FX. This could undo

the good story the FX market has got to tell for itself, when it faces off to the central banks and

regulators," said Cross.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed into law

in July, regulation of FX swaps and forwards has been left to the US Treasury (FX Week, November

15). The Treasury is reviewing the status of the products with the industry.

Meanwhile, the European Commission published its proposals on over-the-counter derivatives

reform in September, but makes no mention of an exception for foreign exchange.

Cross added it is still unclear if trade internalisation by banks has markedly improved overall market

liquidity, or whether it has simply transferred liquidity from one place to another.

Overall, Cross praised the robustness of the market, highlighting the role of CLS in maintaining

stability during the financial crisis by mitigating settlement risk, keeping intact the infrastructure of

the forex markets.

But he cautioned the industry should not be complacent, particularly in light of the May flash crash.

On May 6, the Dow Jones Industrial Average went into freefall, quickly collapsing by 998.5 points

before rebounding almost as rapidly. Said Cross: "If you get a sharp pullback in liquidity supply then

you could get disorderly moves in the short term."

BAML promotes Rolfe as London FX sales chief

Matthew Rolfe has been promoted to head of FX sales to UK corporates at Bank of America Merrill

Lynch (BAML), following the resignation of Paul Hart earlier this month.

In his new role, it is expected Rolfe will have a reporting line to Mark Webster, managing director

and head of foreign exchange sales for Europe, the Middle East and Africa (EMEA) locally in London.

Rolfe joined in June in a dual hire by BAML alongside Nick Hardy, as part of a strategic expansion of

the UK FX corporate sales team.

Rolfe previously was at Morgan Stanley in London, where he was an executive director in FX sales,

responsible for building up its UK corporate sales business. Prior to that, he was at Citi, also in

London and also on the UK corporate sales team.

Hardy, meanwhile, joined from Royal Bank of Scotland, where he was an executive director in

London. He joined RBS from ABN Amro in London following the merger of the two banks (FX Week,

April 2005).

Hart's departure follows that of Quentin Smith, former foreign exchange salesperson to UK

investors, and Andreas Karthaus, former head of foreign exchange sales to Germany and Austria,

from the London office (FX Week, September 6 and November 1). Karthaus is believed to be setting

up his own business, although no details were available.

Hart could not be reached while BAML declined to comment.

Morgan Stanley loses options trader in London

Andrew Mayer, an executive director at Morgan Stanley and member of the bank's options business

in London, has left the bank, according to market sources.

Mayer joined the bank in 2008 as an emerging market (EM) options trader, reporting to Stephen

Winder, head of EM foreign exchange derivatives and cash trading in London. Earlier this year his

reporting line shifted to Senad Prusac, formerly head of FX options trading and current head of FX

and EM in New York, after a restructure of the desk merged EM FX options into the global FX options

book.

Before Morgan Stanley, Mayer held trading roles at Commerzbank, Bear Stearns and Calyon. He

began his career at the Royal Bank of Scotland, which he joined as a graduate.

Mayer is tipped to be joining a US house.

His departure follows a series of recent hires to Morgan Stanley's London FX team, including James

Thimont as an options trader, and Francois Héritier and Julia Kozlowska to its corporate sales

division.

Mayer could not be reached, while Morgan Stanley declined to comment.

JP Morgan offers streaming spot DXY

JP Morgan is pushing out streaming tradable spot prices for the US dollar index (DXY) over its

electronic trading platform MorganDirect, with liquidity across a full forward curve and the ability to

roll positions automatically.

The bank generates prices for the spot product using proprietary algorithms based on a fixed

formula for the trade-weighted index that goes back to 1973. The index trades the US dollar against

a basket comprising the euro, yen, sterling, Canadian dollar, Swedish krona and Swiss franc.

Isaac Lieberman, managing director in foreign exchange trading at JP Morgan in New York, said the

spot DXY is being streamed on a 27/6 basis with a full forward curve and options. "One of the

conventions we have created is that you are not just trading the DXY value but clearing the DXY as a

standalone currency product with profit and loss to be paid/received in dollars."

Before launch, the index was traded as a futures contract or exchange-traded fund, said bank

officials.

The unit was launched with an early adopter group of macro fund managers in September. "What

we are looking to do is grow our range of customers," said Lieberman. "We've seen a lot of demand

from retail aggregators and large macro traders who want to express a view on the US dollar. In

addition we've seen interest from long-short equity funds that want to use the spot DXY as a base

anchor for their US dollar risk."

The bank is in discussions with retail aggregators to white-label the platform, to enable access for

retail traders.

So far, volumes average in the tens of millions a day, but Lieberman said the bank is looking to grow

volumes to $1 billion on average a day as a starting point. The bank prices the currency up to $100

million. Trading is available via application programming interface or graphical user interface on

MorganDirect Professional and Morgan Direct, respectively.

The bank also added more execution algorithms under the AlgoX branding on Morgan Direct in

September. These include sliceberg, panther, stop loss+, stop limit and take profit, in addition to the

previously available Twap+ and time slicer orders. "The clients interested in the algo tools are hedge

funds and money managers who need to trade large tickets or are looking for really good averages

on their fills," said Lieberman.

Pension funds boost investment in FX

Pension funds are increasingly investing in FX as an asset class, said Thanos Papasavvas, head of

currency management at Investec Asset Management, at last Tuesday's (November 16) FX Week

Europe conference in London.

"We are seeing a pick-up of interest in pension funds, both on the local authority side and on the

private side," said Papasavvas.

He said Investec Asset Management is seeing allocations ranging from 3% to 7% of overall investor

assets into FX. Notably, investors want to steer away from single managers, typically carry traders, to

a minimum of two managers using different styles following the poor performance of the carry

strategy.

"It is very difficult to read what the environment will be over the next three to six months. Central

banks are driving currencies. Therefore, we are seeing consultants moving away from simple

strategies to a multi-strategy focus," said Papasavvas.

Michael Sneyd, FX economist at Barclays Wealth, agreed, adding that the company is positioning its

clients towards emerging markets currencies, such as the Turkish lira, over G-10 currencies, due to

central bank uncertainty.

He referred to the Bank of England's inflation report from two weeks ago, in which governor Mervyn

King said the UK could see high inflation, requiring rate hikes, or that inflation could fall sharply,

requiring further quantitative easing.

"You have to adopt a wait-and-see policy, watch the data carefully and see whether or not the UK

will continue in its strong recovery or lose track," said Sneyd.

Second flash crash inevitable

A second flash crash is inevitable while there is no consistency in the rules at exchanges, said

delegates at the FX Week Europe congress in London last Tuesday (November 16).

"We are going to have another flash crash, the regulators haven't looked at the problem

completely," said Gary Stone, chief strategy officer at Bloomberg Tradebook.

A four-strong panel asserted that future regulation will not protect clients from the perils of high-

frequency and algorithmic trading.

Jonathan Wykes, director and European head of advanced execution services (AES) for foreign

exchange sales at Credit Suisse, believed the dangers resulted from a lack of parameters set in terms

of price and time.

"You had this hot potato effect of everybody trying to get out of positions. There were no breaks, so

as to see those percentages move and to pause trading," Wykes said.

The panel concluded that responsibility for running marketplaces properly falls on providers and

market owners, not regulators. Stone suggested building tighter links between the different markets

to increase stability.

"When [parts of the] market were breaking down in 2008, everybody ran to the FX market and used

it as a proxy," said Stone, "You need to have links to ensure that when the CME, for example, does

go into a stop loss, that the equity does something equivalent."

Wykes was confident that the market self-regulates well and that it is incumbent on regulators to

understand algorithms in FX as a market "additive rather than a disruptive".

However, Stone conceded there was a need for further regulation following the US Securities and

Exchange Commission's (SEC) ban of naked access earlier this year, which gave customers access to

the markets without effective controls, according to SEC chair Mary Schapiro. "There has to be some

sort of check that does go on as orders pass through," said Stone.

Tech takes lead over regulation in 2010

Technology has been the main focus for the market in 2010, according to a delegate poll at the FX

Week Europe congress held in London last Tuesday (November 16).

Of the delegates polled, 26% said implementing technology had been their main focus this year, and

19% new electronic trading tools.

Exactly a quarter of those polled said liquidity was a key issue, while regulation was cited as equally

as important as cost and efficiencies, with 11% of votes each. Remaining voters chose ‘other'

concerns.

"It looks like people are putting the technology in place, but the costs and efficiencies are still to

come through," said David Poole, chief operating officer and principal at ClientKnowledge.

Yaacov Heidingsfeld, chief executive at TraderTools, said he sees a continued trend for banks to

improve trade internalisation, allowing big institutions to integrate flows across different sectors to

extract more margins.

"This is driven by a need to increase margins at a time when spreads are tightening while time to

execution is continuously decreasing," he said.

Heidingsfeld also said liquidity aggregation continues to be in demand in the market. Indeed, most

delegates polled also said they were either in the process of installing liquidity aggregation tools or

are already using them and finding added value.

Stephane Malrait, global head of electronic commerce at Société Générale, said tier-one and -two

banks are also benefiting from liquidity-aggregation tools.

"Banks in the top 40 can add their own platform to distribute prices on a global basis 24 hours a day,

which was not the case five years ago," he said.

Steve Toland, head of foreign exchange sales for Europe, the Middle East and Africa and the

Americas at Icap Electronic Broking, said that, going forward, the key issue will be measuring cost of

execution.

Tech takes lead over regulation in 2010

Technology has been the main focus for the market in 2010, according to a delegate poll at the FX

Week Europe congress held in London last Tuesday (November 16).

Of the delegates polled, 26% said implementing technology had been their main focus this year, and

19% new electronic trading tools.

Exactly a quarter of those polled said liquidity was a key issue, while regulation was cited as equally

as important as cost and efficiencies, with 11% of votes each. Remaining voters chose ‘other'

concerns.

"It looks like people are putting the technology in place, but the costs and efficiencies are still to

come through," said David Poole, chief operating officer and principal at ClientKnowledge.

Yaacov Heidingsfeld, chief executive at TraderTools, said he sees a continued trend for banks to

improve trade internalisation, allowing big institutions to integrate flows across different sectors to

extract more margins.

"This is driven by a need to increase margins at a time when spreads are tightening while time to

execution is continuously decreasing," he said.

Heidingsfeld also said liquidity aggregation continues to be in demand in the market. Indeed, most

delegates polled also said they were either in the process of installing liquidity aggregation tools or

are already using them and finding added value.

Stephane Malrait, global head of electronic commerce at Société Générale, said tier-one and -two

banks are also benefiting from liquidity-aggregation tools.

"Banks in the top 40 can add their own platform to distribute prices on a global basis 24 hours a day,

which was not the case five years ago," he said.

Steve Toland, head of foreign exchange sales for Europe, the Middle East and Africa and the

Americas at Icap Electronic Broking, said that, going forward, the key issue will be measuring cost of

execution.

Lehman opts to settle over Dante flip-clause transactions

The Lehman Brothers Holding Inc (LBHI) administration has decided to reach an out-of-court

settlement with Australian investment services group Perpetual Trustee over disputed collateral in a

series of credit-linked notes issued by Saphir Finance - a special-purpose vehicle (SPV) established by

Lehman Brothers International (Europe) in 2002.

A joint motion, filed on November 17 in the US Bankruptcy Court for the Southern District of New

York by Lehman Brothers Special Financing (LBSF) - the swap counterparty to the Saphir notes - and

the Official Committee of Unsecured Creditors of LBHI, states: "[We] respectfully move this Court to

promptly stay this appeal for 90 days pending the closing of a settlement of this dispute between the

only two stakeholders here, LBSF and Perpetual... the sole Noteholder."

It is unclear at this point what the settlement will entail, but it will come as a relief to BNY Corporate

Trustee Services - a subsidiary of Bank of New York Mellon - which served as trustee for the Saphir

transactions. BNY has been caught in the crossfire between the LBHI administration - the parent

company for LBSF - and Perpetual over which party has first claim on collateral in the Saphir notes.

The dispute centred on certain contractual provisions - known as flip clauses - which LBHI argued

were invalid ipso facto clauses. Flip-clauses are common in structured finance deals and are meant

to de-link the credit risk of the swap counterparty - in this case LBSF - from the SPV. In general, the

swap counterparty would be senior to note-holders in the priority of payments following an event of

default, but the flip clause is designed to reverse the payment priority if the swap provider is the

party that defaults, allowing note-holders first call on collateral.

The battle for collateral in the Saphir notes - which formed part of a multi-issuer secured obligation

programme called Dante - has been drawn out. As the contract documentation was subject to

English law, the Royal Courts of Justice first ruled in July 2009 that the flip-clauses were valid and

that noteholders should have first call on collateral. However, LBHI also filed a case against BNY in

the US Bankruptcy Court, which in January 2010 reversed the decision of the English courts and

ruled the clauses were void, putting the US and English courts at loggerheads.

Noteholders and the trustees will be buoyed by the news of a settlement. However, it is too early to

say whether this will provide a precedent for other disputes over flip-clauses undertaken by the LBHI

estate.

"It would be premature for me to comment on whether this will set a precedent for other flip-clause

disputes," says a source close to the matter.

Irish woes may spread to other PIIGS

The Irish Parliament in Dublin

Market fears over the solvency of Ireland’s troubled banks and the potential threat they pose to

both government finances and to the country’s growth prospects may yet bring contagion to other

peripheral European markets, investors fear.

Ireland is one of the countries included in the PIIGS bracket, an acronym for the peripheral

economies of Portugal, Ireland, Italy, Greece and Spain, which are generally viewed as having the

most threatening debt problems of any countries in the Eurozone.

Some investors and analysts fear that the recent focus by markets on Ireland’s debt troubles – debts

largely concentrated in the country’s banking and property sectors – could quickly shift to other

overly indebted countries in peripheral Europe. The first of these countries could be Portugal, where

government measures to address the public debt and fiscal deficit have been remiss relative to other

heavily indebted European countries.

“There is a risk of contagion and it is likely Portugal will have to seek some kind of funds too as a

result of this,” says John Kinahan, head of portfolio management at Lee Overlay Partners, an asset

management company with offices in Dublin and London. “When it comes to your investment

strategy, you just have to be aware this could happen to any one of a number of Eurozone countries,

and so there is a good bit of volatility in the markets.”

Until this week, the Irish government had dismissed EU talk of an Irish bailout package as

inappropriate and unnecessary, pointing to the fact that Ireland would not need to go to the market

before mid-2011.

But on November 18 Patrick Honohan, governor of Ireland’s central bank, told RTE Radio that the

country would accept “tens of billions” of euros in loans from the International Monetary Fund (IMF)

in order to reassure the markets that the country’s bank debts would not bring down the whole

economy.

Delegates from the European Commission, European Central Bank and International Monetary Fund

arrived in Dublin this week to iron out what such a package might look like, and to allay Irish fears

that the funds would be dubbed a sovereign bailout rather than a bank collateral facility.

But some investors argue that Ireland’s bank debt troubles are by no means the most pressing. They

believe the market's focus could quickly shift to other countries as investors follow debt problems

across the currency union even more closely.

“I think the recent calendar of events in Ireland is the reason the market is focused on it just now,”

says Daragh Maher, deputy head of foreign exchange strategy at Crédit Agricole in London. “The

Irish budget needs to be passed from December 7 and there was the increased banking bailout bill

too, so a lot of the recent skeletons in the closet have been related to Ireland. And it was not helped

by Germany announcing in late October that future bailouts would require some kind of private

sector burden sharing.”

Compared with other PIIGS countries, says Maher, the Irish sovereign does not need to come to the

market very soon and is not suffering from especially high debts; the IMF projects Irish national debt

to rise to 55.2% of GDP by the end of 2010, below even its forecasts for German and French national

debt. Rather, it is Ireland’s bank debts and the cost they pose to the Irish government which have

spooked investors. But, as a member of the PIIGS grouping, Ireland is not viewed in isolation by the

market.

“The risk of contagion *to the PIIGS+ is substantial,” says Maher. “Linkages between the behaviour of

the peripheral debt markets seem to be very strong. The European Union and European Central

Bank hope they can ring-fence Ireland and thus get stabilisation in Portugal and Spain. But the more

likely outcome is that the market decides it has exhausted the Ireland story and starts looking for the

next weakest link in the chain. Portugal would then be in the limelight.”

But the uniqueness of Ireland’s problems may cause investors to pause before they punish Portugal

too.

“If the EU and IMF come to some agreement and Ireland is bailed out and taken out of the markets

for the next two or three years, then arguably the contagion can be ring-fenced and it will not spread

to other peripheral countries,” says Chris Iggo, chief investment officer at Axa Investment Managers

in London.

“Spain worries me more than Portugal actually, not because it is fundamentally weaker than the

others but just because it is big and does have some problems related to the property market and to

banks, particularly the smaller savings banks which were overly exposed to property lending,” says

Iggo. “But at the moment the market does not seem to be extending the concerns about Ireland to

Spain.”

SEC risk chief to step down

First head of regulator's risk division will return to academia in January

Henry Hu, the first director of the US Securities and Exchange Commission's division of risk, strategy

and financial innovation, is to resign in January 2011 and return to academia. Hu will return to the

University of Texas' law school in Austin, where he is the Allan Shivers professor of banking and

finance law.

Hu joined the SEC in September 2009 to head the newly created division, which combined the

offices of economic analysis and risk assessment with other functions and was intended to give the

regulator better foresight on systemic risk issues. No replacement has been named.

UBS regains top spot for CLS

UBS swings back into the lead as the top provider of CLS third-party services, as demand for access

to the industry utility continues to rise.

The crisis has highlighted the role of CLS in ensuring the stability of the foreign exchange market. But

what has also become evident is that the large replacement and intraday funding risks assumed on

behalf of clients by third-party providers is not commensurate with charges.

"It's not about ticket price like some banks thought it was at the beginning of CLS. It's really about

settlement and operational risk reduction, and that has a lot of value. Some of the initial

assumptions going into it in terms of where the revenue dynamics were, were not entirely correct,"

said Hays Littlejohn, managing director in global wholesale cash solutions at UBS in Zurich. "All banks

are going through the process of looking at the terms that were agreed with clients when they went

live."

In some instances, this has resulted in banks such as Nomura and Santander being deemed large

enough to be direct members, having previously been third-party clients of Citi.

In the past year, CLS introduced a new charging structure that weights value of tickets settled over

the system greater than volume. "That recognises there is value in settlement risk elimination and

that it should be priced in that way instead," said Littlejohn. "Most relationships and certainly most

new relationships are looked at with that in mind because the cost of CLS and the dynamics

associated with that are different, or are more expensive for certain types of transactions. That has

to be taken into account when pricing."

He said that, while no further risks have been exposed, some have become more acute. "You only

have a couple of hours when all the settlement systems connected to CLS are working on the same

time schedule and your time for managing issues is short," said Littlejohn. "So with the number of

transactions and the values going over CLS increasing, that's something that can become a little bit

more acute. And when people's risk appetite is low and liquidity is scarce, then people get a little bit

more panicky."

That risk was highlighted in May when the triple effects of the US stock market crash, European

sovereign debt crisis and UK elections caused a sharp spike in trade, resulting in a backlog in

notifications emanating at certain member-bank systems, to and from CLS.

"There were a couple of providers – not UBS – that struggled to get their tickets in that day and that

has knock-on effects for all the banks that are connected or the market itself," said Littlejohn.

"Providers have to be prepared to deal with this with an end-to-end view."

While CLS intends to double capacity by year-end, member banks have been encouraged to review

their own bottlenecks. "One thing CLS could do, which a number of market utilities do, would be to

have some sort of certification or self-certification that the testing has been done," he said.

The impending regulations mean the bank is seeing slower take-up from the banking community as

banks await details on risk management requirements, but this has been more than compensated by

the fund management community.

"We think the new regulations will ultimately lead to more interest in CLS, CLS third-party and other

clearing services where UBS also offers market leading solutions," he said.

Asia Risk Congress 2010: Asian banks prepare for national clearing houses

Keith Noyes, Isda

Several Asian nations could compel their banks to clear swaps in-country - others seek to join foreign

CCPs on special terms

Financial institutions in Korea, China and India expect new derivatives regulations will force them to

move some of their standardised contracts to a national central counterparty (CCP).

Panellists at the Asia Risk Congress 2010 in Hong Kong on November 16 predicted more open

economies such as Australia would be more likely to work with established CCPs than set up their

own, due to lack of trading volume.

Keith Noyes, Asia-Pacific regional director for the International Swaps and Derivatives Association,

predicted licensed financial institutions in economies where their currencies are not freely traded –

notably China, India and Korea – will probably see the emergence of a national CCP clearing some of

the foreign exchange and interest rate derivatives.

This will contrast with Australia, where regulators are putting pressure on the industry – particularly

decision-makers at established clearers such as LCH.Clearnet and CME Group – to introduce more

user-friendly, second-tiered membership so regional Australian banks can also join as members to

clear Australian dollar-denominated swaps.

At present, LCH.Clearnet clearing members are required to bid on the entire portfolio of a defaulting

member – a requirement Noyes said has discouraged large Australian banks from joining. Instead, he

said, Australian regulators are asking "these global CCPs to come up with a second-tier membership

that allows Australian banks to clear their Australian dollar swaps portfolio, but not be required to

bid on, for example, a euro/yen when a member defaults – that seems to be a sensible approach".

Darren Measures, JP Morgan's Hong Kong-based head of risk for the Asia-Pacific region, pointed out

that the range of products available for clearing by CCPs in the US today is still limited – and, even

though the July 2011 deadline is approaching, banks and buy-side firms are still trying to understand

what is on offer from the various CCPs.

While the Dodd-Frank financial reform legislation covers all over-the-counter derivatives, including

credit default swaps (CDS), forex, commodities and equities, CCPs at present tend to accept only a

few in each asset class.

"All index CDSs [are available for clearing], and there are some attempts in sporadic clearers to do

single-name, but on very limited volumes. It is difficult to do single-name CDS due to lack of liquidity

outside of sovereign names," said Measures.

He added that his buy-side clients have also been concerned about the methods used by different

CCPs for calculating margin requirements. Traditional asset managers in particular are facing for the

first time urgent broker demands for upfront collateral and variation margin to cover top-up margin

calls from CCPs.

"Some buy-side clients never had a history of posting very complex calculated collateral, netted

agreements, using value-at-risk. What they have been expected to put together in terms of

infrastructure over a short period of time, I am not sure people are ready for it," said Measure.

Tod Skarecky, solutions architect for OTC derivatives clearing at Calypso Technology, said most

derivatives dealers and buy-side firms are concentrating on getting connectivity with CCPs in place.

But he predicted a new balance of power after clearing via CCPs becomes mandatory – the tables

will turn, Skarecky says, giving banks much more power over CCP membership rules, technology and

what OTC contracts should be cleared.

"Banks already have their rules – they define how they transact, it is now up to clearing houses to

play along with that," he says.

In Asia, Noyes said, the key driver for setting up CCP is the commitment by the G-20 group of leading

economies to have CCP in place by the end of 2012.

Noyes expects to see interest rate swaps across a number of currencies, and forex forwards moving

to clearing in the near term, followed possibly by index CDSs.

Participants also said that Asian regulators had learned from the debate over Dodd-Frank and would

probably not require corporate users of derivatives for genuine hedging purposes to clear their

positions through CCPs – posting working capital as margin would impose an unacceptable cost and

would either push up prices or discourage hedging altogether.