A version of this blog post originally appeared in FOW.
As additional final rules are promulgated throughout the globe, an emerging trend for financial market regulators is to transfer, allocate and defer significant implementation discretion to financial market utilities and other relevant transaction infrastructures.
For instance, on May 16, 2013, in a landmark ruling decided in a public forum, the U.S. Commodities Futures Trading Commission (CFTC) voted, by a margin of 3-2, to implement, among other rules, the final “made available to trade” (MAT) rule.
The MAT rule fundamentally changes the swaps market by instituting the method and manner by which specific products required to be executed and cleared are identified.
This changes the swaps market because the CFTC, in its final rule, has effectively transferred, allocated and deferred significant power to swap execution facilities (SEFs) and designated contract markets (DCMs), (collectively, “facilities”) to unilaterally bind the entire swaps market to mandatory participation.
This blog post was taken from the Astec Analytics Securities Lending Focus for May 2013.
Trading venues require a number of different characteristics to function properly no matter what product or service is traded. “Liquidity” is an oft-quoted characteristic when describing an efficient market.
Market “liquidity” is where a given asset can be sold without causing a significant movement in the price and with minimum loss of value – otherwise defined as exhibiting equilibrium between buyers and sellers where a scarcity of either can lead to deflated or inflated prices, respectively. Just ask anyone looking to buy a house in London.
But what has this got to do with securities lending? A great deal in fact.
A version of this blog post was originally published by Wall Street & Technology.
Virtually every industry in every corner of the world has undergone technological or process evolution in recent times. There are countless examples of innovations that have addressed a challenge – the process takes too long, the process costs too much, the process is too risky – and changed the game by helping organizations or individuals operate smarter through efficiency, automation, or simplification.
Let’s consider communication, or the transmission of messages, as just one area where evolution has occurred. There are ways to communicate that involve quite a bit of manual work, such as the use of a carrier pigeon. Not the quickest way to transmit a message, and not too efficient, as apparently a carrier pigeon typically only flew in one direction – home – and would need to be manually taken to a message’s original location to begin the process. Given the level of difficulty and manual intervention required, it’s no surprise we don’t see the skies full of email or text message pigeons today.
On the flip side, if we look at a more modern messaging bird, it is evident that technology has changed the game for how individuals, organizations, and governmental entities can communicate and discover information. Twitter offers its users a simplified and efficient way to communicate specific messages to an audience across the room or across the world – pointing to why the social network has amassed millions of users in just a few years.
A similar, albeit less feathery, evolution is taking place within the corporate actions space today.
This blog post was originally published on TabbFORUM.
New rules have recently come into effect that have substantively changed the customer collateral asset protections relevant to central clearing.
Specifically, the Dodd-Frank Act prescribed that the CFTC adopt rules that provide for enhanced protections of cleared swaps customer margin collateral. The mandate is known as “legal segregation with operational commingling,” or LSOC. LSOC provides a fundamental change in how futures commission merchants (FCMs), as members of central clearing counterparties (CCPs), must manage customer margin collateral.
As a result of these rules, there was an initial flurry of activity to automate compliant processes. For instance, the first phase simply provided a bridge whereby FCMs reported excess collateral without reaching individual-customer-level granularity.
A version of this blog post originally appeared in Securities Lending Times (p 16).
The overarching mandate of financial reform is to mitigate the potential risks associated with systemically important financial activities and institutions. Statutory authority has purposely reserved an abundance of discretionary authority for the regulators to capture and reconfigure processes that have “an effect upon,” covered activities.
As a means of exercising this reservation of authority, rule-makers as well regulatory-framework-setting bodies now seek to target shadow banking.
For instance, the Financial Stability Board (FSB), which itself does not have rule-making authority yet is considered a persuasive advisory body concerning international standards within the financial system, seeks to “mitigate the spill-over effect between the regular banking system and the shadow banking system.”
Additionally, the Financial Stability Oversight Council (FSOC), which has rule-making authority under Section 120 of the Dodd-Frank Act, seeks to enhance and substantively modify the shadow banking space. The FSOC has concluded that the current state of shadow banking contributes to systemic risks. As a result, it now seeks to address the perceived bank-like activities that pose risks by subjecting shadow banking, and related activities such as money market mutual funds, (MMFs), and securitization activities to more onerous oversight.
The full version of this blog post originally appeared in Wall Street & Technology. It also appeared on Bank Systems & Technology.
Today’s economic environment has become increasingly difficult, forcing executives and managers to analyze expenditures and business practices with more scrutiny in an effort to remain profitable.
In addition to the expense of creating and maintaining an effective cost identification and management solution, broker-dealers are faced with the issue of the integrity of its results. Most financial services firms today are engaged in multiple businesses across global markets and with a magnitude of clients and business partners. Each new profit conduit is also an opportunity to add expense.
This blog post originally appeared on TabbFORUM.
Risk can and should be seen as the core of a financial institution. The management of risk has become an industry in itself, led in turn by regulatory drivers, technological advancement, trading floor developments and quantitative research. In this blur of evolution, it is easy to lose sight of exactly what is required of the risk department, and it is worth taking a step back to refocus on what is important.
A version of this blog post originally appeared on Forbes.
It started with tulips, went through corn and technology, and most recently hit property and cheap money. I am of course talking about bubbles. Not the type children play with and people write songs about, but the kind that, when they burst, can cause financial havoc.
The word “bubble” is bandied about all too often. There seems to be a constant fear that any price rise could become a short-sharp-shock. The latest in this long line up are bonds. Junk bonds, investment-grade corporates and even U.S. Treasuries – the classic ‘no-risk’ investment option – all seem to be reaching new heights.
Low interest rates and stimulus efforts from the U.S. government and Federal Reserve have brought U.S. yields to record lows. Add to this a fast flow of cash away from riskier equities and into the perceived safe haven of bonds, and maybe there is a case to be made that these fixed income securities are starting to get overheated.
Is this a bubble? If prices slowly retreat rather than burst, overheating like this isn’t usually defined as a bubble. So then, does this increase in demand for bonds look set to pop?
With the advent of this new Limit Up-Limit Down rule, the onus is on broker-dealers to have a system in place that will not allow executions to occur outside the set price bands nor quote outside the price bands, and will monitor for executions that might occur during a halt after a limit state has been enacted for more than 15 seconds. Broker-dealers will also need to have access to this market data to truly understand the price band movements and how this may impact their resting limit orders.
In the end, it feels like this rule is a blanket oversight that fails to tackle the real issue around extraordinary market volatility, the rise of high frequency trading and rogue algorithms. When it comes to Limit Up-Limit Down, when will the regulators realize their limits?
A version of this blog post was originally published by Markets Media.
In a time long forgotten, seven days before the third full moon of the year, a drum beats a slow and terrible accompaniment to the death march of the sacrifices to a god whose satisfaction is needed to guarantee a good harvest and the survival of the tribe for another 12 months. As the mid-afternoon sun moves through the sky, the deity himself appears – a winged snake – and makes his way down the steps of the temple built to honor him. At the base of the temple, a carved statue of Kukulkan’s head meets the shadowy shape of his body, bringing together his astral and physical form. At that moment, the human sacrifices are made, and the people pray in terrified silence that it is enough.
An eon later, and March 20 sees the 2013 vernal equinox, signifying the end of winter and the astronomical start of spring. This annual event carries with it echoes of legends and rituals from ancient cultures that have direct relevance to our approach to financial risk management today.