Review of 2018: Breakups, heartache and meltdowns

Stock market volatility was the recurring story of 2018.  Each episode was attributed to something new, and each claimed a new victim: some central counterparties did not collect enough margin to cover February’s moves, attracting the attention of regulators; alternative premia investors were underwater even before a horrible October; and sliding Asian markets in the fourth quarter resulted in a €260 million hit at Natixis, tied to Korean structured products.  

Other asset classes also saw moments of drama – it was a spread move in European power futures that produced the year’s other big trading loss, as a single-member default at Nasdaq’s Swedish CCP ate up €107 million of other members’ funds. Overall, though, volatility in macro products was relatively muted, as were credit losses, despite growing nervousness about US leveraged lending. Perhaps that will be next year’s story.

In the background, banks and buy-side firms continued experimenting with new technology – in more cases, with something to show for it – and market structure was also in flux. 

Here, we look back at some of the year’s biggest Risk.net stories, and those with greatest potential to shape the coming 12 months. 

A HUGE SQUEEZE…

Eoin Coveney, nbillustration.co.uk

In the closing months of 2017, there was a conviction in some places that popular short-volatility bets were storing up trouble. Concerned about crowding, CME Group, for example, had started ratcheting up margin requirements, add-ons and default fund contributions – a story Risk.net told months later. But when the short-vol bet went wrong, the violence of the moves still came as a surprise to many.

An initial 2.2% drop in the S&P 500 came on February 2 – a Friday – and was blamed on inflation concerns. When markets opened again on the Monday, the falls continued, and eventually hit a kind of technical accelerant. Retail products that delivered the inverse of the Vix index of S&P 500 volatility – such as Credit Suisse’s XIV – had to buy record amounts of futures as the Vix surged, and their rules forced them to do it towards the end of the trading day.

Some traders and strategists also pointed to an earlier structural effect, as the fall in stocks flipped the gamma position on dealers’ S&P options books, forcing them to sell futures on the index as a hedge – and amplifying the February 5 moves.

The event was over within a matter of days, but it had a lasting effect: for years, investors had been able to fund long-volatility bets on relatively fragile Asian stocks by shorting more robust US ones. In a flash, that logic was turned on its head, forcing a rethink of an entire class of trading strategies and products.

“The recent premium observed was probably the result of the increasing cost of that swap and may have been driven by the institutional market’s reduced appetite for XIV-type risk” – Stuart Barton, partner and portfolio manager, Invest in Vol (XIV hedging rule helped protect Credit Suisse, February 6)

“It was a huge, huge, huge, huge squeeze. I’ve never seen anything like it before” – head of equity derivatives trading at a large US bank (Volatility trap: how gamma roused a market monster, February 15)

“Many hedge funds and pension funds have changed the way they see and use volatility. The February event was a wake-up call for everyone” – Guillaume Flamarion, head of equity derivatives group payoff structuring, JP Morgan (Equity vol strategies get defensive, October 23)

… BUT NO WEDDING BELLS

It’s a match made in heaven. Asset managers are looking for an edge in vast datasets; banks have lots of unique numbers that nobody else gets to see. But because banks’ most valuable data relates to client positions and flows, it’s a marriage that may never happen.

This year, Risk.net revealed Goldman Sachs had given a team of quants the task of identifying commercial opportunities in the data held by its securities division. Other banks are making their own, cautious forays – getting lawyers to assess the legal risks, speaking with clients to find out whether and how the data could be aggregated and anonymised.

In the meantime, asset managers are buying in data from specialist vendors – some of them with access to unusual information – or going it alone, by drilling into their own troves of data.

“Every bank has data and analytics that they create on their own that they feel are proprietary, and I can imagine there is an interest in sharing that with clients” – market data manager at a US asset manager (Goldman building team to sell its own alternative data, May 2)

“All the investment banks are trying to sell their data” – Andrew Chin, chief risk officer and head of quantitative research, AllianceBernstein (Banks look to spin money from their own data, August 16)

“We’re looking to do more of those things with an explicit consent framework going forward” – JR Lowry, North American head of State Street Global Exchange (Banks discreetly seek personnel to mine alt data riches, September 4)

“Data science, big data and machine learning are all becoming a necessity just to compete” – Anthony Lawler, co-head of GAM Systematic (Do or die – asset managers take up data science, October 1)

“Whenever [the funds] buy a mall, we collect data on the per-square-foot purchase cost, the foot traffic, when was the last time they changed the air conditioning or painted the parking lot, so we have a lot of internal data in the US” – Ravit Mandell, chief data scientist for the intelligent digital solutions unit at JP Morgan Asset Management (JP Morgan data scientist on mining and machine learning, June 18)

TIME TO MOVE ON?

The clock is running down, the race is getting harder, and the stakes are rising.

With less than three years left until banks are free to stop contributing to the Libor process, the regulatory line hardened this year: in July, the Financial Conduct Authority warned it could take the decision about whether to support the ailing benchmark out of the industry’s hands. And as the year drew to a close, observers warned regulators may be willing to use a capital stick to ensure banks transition to new risk-free rates ahead of the key end-2021 date.

Early transition first requires the biggest swaps currencies to designate their RFRs. The euro working group finally caught up with its peers this year, and there were signs Europe’s benchmarks regulation could be delayed, avoiding a much earlier ban being applied to the use of Euribor.

Transition also requires the market to stop adding to its stock of Libor-linked products, which will only happen as liquidity develops in the RFR-linked alternatives. Progress has been made here – RFR bonds have been issued, and hedged, RFR swaps and futures are trading. But it may not be going as quickly as the industry and its regulators had been hoping.

Speaking to Risk.net earlier in the year, some banks indicated they would be willing to keep supporting Libor beyond the end of 2021, under new rules being drawn up by Ice Benchmark Administration – assuming the FCA gives them that choice, of course.

Attention turned to hugely complex technical challenges as the year progressed: the creation of term versions of the RFRs, which are all overnight rates; and the design of contractual amendments that will mitigate the dangers for Libor-referencing products that are still outstanding at the point of Libor’s (probable) death. In late November, the industry appeared to have converged on a way of making these amendments – but as bitter dissent from Japanese banks showed, in rates benchmark reform you can’t please all the people, all the time.

“By January 2022, is it possible for us to organise an orderly transition away from Libor? I doubt it” – head of benchmark supervision at a European bank (Some banks open to committing to Libor post-2021, June 11)

“We do not want a repeat of the problems we previously experienced with this benchmark” – Andrew Bailey, chief executive, Financial Conduct Authority (FCA could kill off Libor, says Bailey, July 13)

“From our experience on this transaction, the SOFR derivatives market is thin, but developing” - Andrea Dore, head of capital markets, World Bank (World Bank completes first SOFR bond hedge, August 16)

“In principle, deriving a term reference rate from transactions or quotes in swaps and futures markets is perfectly viable” – Edwin Schooling-Latter, head of markets policy, UK Financial Conduct Authority (Term versions of RFRs will work – FCA official, September 26)

“We have tremendous amounts of feedback from borrowers and lenders that term settings will be important to the success of the new RFRs” – Tim Bowler, president, Ice Benchmark Administration (IBA launches term risk-free rates, October 10)

“An existing benchmark designated as critical… may, if its discontinuation affects the continuity of contracts that reference it, be used until 31 December 2021” – draft European Parliament amendment to the EU’s Benchmarks Regulation (EU lawmakers open to delaying ban on critical benchmarks, October 12)

 “You need a pricing model and scaling and adjustment factors to convert your futures prices into fixings … That would create model risk” – a European asset manager (Search for term Libor replacement hits twin barriers, November 5)

“Ultimately we could only choose what we felt to be the least unfavourable RFR method” – Tokyo-based head of trading (Japan dealers unhappy with all Libor fallback options, November 18)

“It’s very probable you could end up with basis risk between the two” – a source on the euro RFR working group (Libor fallbacks set to split cash and swaps, December 5) 

THE OTHER BENCHMARK

In the background of the Libor work, more obstacles lurk for market participants – the possible emergence of a basis between rates on bank assets and liabilities; a huge modelling overhaul required to price and value rates products; the threat that the two halves of a Libor-linked hedge will suddenly stop matching up.

And, of course, how regulation treats the emergence of a brand-new benchmark: new market risk capital rules will rest more heavily on products referencing such a benchmark.   

“If you’re a lender like Wells Fargo or Bank of America, with trillions of US dollars in loans on your balance sheet, you can’t stand this” – a source close to the Libor reform process (Libor transition raises basis risk fear, June 26)

“There are a lot of things that need to happen. Operationally this could be a huge issue” – a quant at a European bank (Libor switch calls for modelling overhaul, quants warn, July 5)

“So potentially we switch to risk-free rates and then there is no data going back to 2007. Therefore you can’t use internal models” – Daniel Mayer, senior manager, Deloitte (Libor reform threatens risk modelling under FRTB, September 10)

LOOKING FOR SOMETHING DIFFERENT?

February’s sharp drop in the S&P was the start of a historically bad year for alternative risk premia managers – a class of investments that accounts for an estimated $320 billion of assets, and seeks to earn returns from a range of premia backed by academic research. But as a tough February was followed by a bumpy August and brutal October, two important points became clear: first, some managers were able to buck the trend; and, second, those that struggled appeared to be driven disproportionately by a single class of investment, equity value.

For trend followers – a common alt-premia strategy – the year’s travails were just the latest leg in a run of poor performance. This has prompted some firms to apply their strategies to more exotic assets – ranging from the Kazakh currency, to cheese, asphalt and sunflower seeds – or to refine their timing, getting in and out of trends earlier.

Others are looking elsewhere. In July, Risk.net spoke to David Harding – whose Winton Capital built its success on trend following, but is now slashing the weighting given to the strategy.

“We have become famous as a trend follower. That’s a great thing. It gives you this reputation and franchise. But it’s also a bit of a prison” – David Harding, Winton Capital (Winton’s David Harding on turning away from trend following, July 19)

“Telling clients you have boffins that piece through ancient scrolls of rice prices to fathom the enigma of trends doesn’t work anymore” - Matt Stevenson, head of product management, Florin Court Capital (From AI to cheese: funds seek fixes for trend following, August 24)

“From our point of view, the challenges this year are disproportionately due to one factor in one asset class, and that’s value-investing in equities” – Sara Shores, head of investment strategy for factor investing, BlackRock (What’s in the box? Bad year reveals alt premia’s gaps, November 1)

“We follow a philosophy of going to markets where we don’t compete with people like us” – Scott Kerson, Gresham Investment Management (From trend follower to trailblazer, December 7)

PEAKS AND TROUGHS

Bouts of volatility crackled from asset class to asset class as the year wore on – after stocks in February, rates markets were hit at the end of May, then oil products in July and emerging markets currencies in August. In each fresh outbreak, there was one constant: futures and options clearing houses found they had not been collecting enough initial margin.

By September, JP Morgan had seen enough. Its head of clearing, Nick Rustad, flagged 13 significant breaches in an interview with Risk.net, and suggested futures clearers should rethink their models.

On the day the article went up, another central counterparty, Nasdaq’s Stockholm-based commodities clearing house, was trying to collect more margin from one of its biggest traders. It would ultimately be unsuccessful, and the trader – Einar Aas – would be declared in default early on September 11.

In theory, this should just have been another entry on the year’s list of breaches. The market move that produced the loss was 39% larger than Nasdaq’s model was designed to cover – small beer compared to three other breaches that had exceeded 200% – but somehow, it ended up consuming two-thirds of the CCP’s default fund, forcing members to pay €107 million.

For clearing experts who spoke to Risk.net, the magnifying effect was likely the auction process through which Nasdaq tried to balance its books – only four bidders were involved and the portfolio was sold at the second attempt. But there has been no official explanation yet from Nasdaq, or from the Swedish regulator, which is investigating.

In the aftermath, other CCPs complained Nasdaq had not informed them quickly enough of the defaulter’s identity, which could have hampered their ability to manage their own risks; and banks began to question the fairness of traditional clearing house defences.

“Everything certainly did work as intended. We made all of our settlements on time. Everyone met all their calls” – Amy McCormick, first vice-president of financial risk management, Options Clearing Corporation (OCC stands by margin model as regulators investigate, August 2)

“There is a large disparity between how CCPs calculate OTC and listed derivatives margin policy, and that has come to the fore this year” – Nick Rustad, head of clearing, JP Morgan (JP exec calls for derivatives margin changes, September 10)

“The numbers don’t add up. We’re still scratching our heads as to why they lost so much on an individual member” – a Nasdaq clearing member (Spotlight on auction in €114m Nasdaq clearing blow-up, September 19)

“When this happened, Nasdaq didn’t immediately identify, for at least 24 hours, who the defaulter was to the other clearing houses in the world” – a source at a regulator (Nasdaq slow to share defaulter info with peer CCPs, September 21)

“We continually monitor the appropriateness of our risk management practices and are satisfied with the current segregation of our clearing offering into two guaranty funds” – CME spokesperson (After Nasdaq, cracks appear in foundation of clearing, October 30)

THE PERILS OF A DIRECT APPROACH

Nasdaq’s embarrassing blow-up also put the spotlight on margin models and clearing policies at other CCPs. Some of the firm’s rivals pointed the finger at direct clearing rules that allowed Aas to use the service without going through a bank intermediary. Risk.net later learned that CME had abandoned plans to launch a similar service – the direct funding participant (DFP) model – in the same month as the Nasdaq blow-up.

In October, CME was also revealed to be working on a revamp of Span, its time-worn margin model for listed derivatives. A lot is at stake. The replacement model is intended to govern margin requirements not just for futures and options, but for over-the-counter derivatives as well – and will be applied at the more-than-20 exchanges that have licensed the model.

Another question came to the fore as the 10^th anniversary of the Lehman Brothers collapse approached: how were CCPs ensuring their margin numbers still reflect the experience of the crisis?

“During the volatility spike in the first quarter of 2018, IM did not react at all, because the Lehman floor was still the overriding driver of margin requirements for most portfolios” – Thomas Laux, chief risk officer, Eurex Clearing (Lehman’s ghost: how three CCPs anchor models to crash, September 17)

“We should ask: was this individual margined properly?” – Jeff Sprecher, chairman and chief executive, Ice (Nasdaq default: rivals question direct clearing, Oct 18)

“We are working on enhancements to Span and are currently going through the regulatory approval process” – a CME spokesperson (CME plans sweeping overhaul of ageing Span model, October 28)

“As we saw with Nasdaq, a single individual can easily take out 70% of the default fund – and as a result participants across the Street are waking to the real risk associated with CCPs” – head of CCP risk at a global bank (Clearing houses in Asia to overhaul creaking margin models, November 11)

“We do not have any plans to pursue the DFP model further at this time” – CME spokesperson (CME abandons buy-side direct clearing initiative, November 30)

EXPLAIN YOURSELF!

Let’s say you have a self-taught algorithm that outperforms other models when assessing a specific flavour of risk, but the success of it is hard to explain to senior management precisely because it is self-taught – what do you do?

BlackRock found itself in this position in 2018, after researching uses of neural networks in liquidity risk modelling. It chose to keep the models in the lab – a decision many would argue was the right one. But unless financial services firms can find a way to make such models explainable – to consumers, management, investors or regulators – some of their vast potential will go untapped.

Regulators have not yet tackled the issue in specific standards, but it’s on the radar – cropping up in speeches and informal forums.

“Everyone is using machine learning. It is not going to slow down. But exactly because it is not going to slow down, we need to develop a proper framework for it” – Alexei Kondratyev, managing director, Standard Chartered (Machine learning hits explainability barrier, November 6)

“The senior people want to see something they can understand” – Stefano Pasquali, head of liquidity research, BlackRock (BlackRock shelves unexplainable AI liquidity models, November 12)

“The biggest problem, in terms of regulatory oversight and ML explainability, will come from consumer-facing interactions between customers and financial institutions” – Andrew Burt, chief privacy officer and legal engineer, Immuta (Fed’s Brainard wary of black box AI models in consumer credit, November 14)

MOVING OUT

Risk.net montage

The chances of a no-deal Brexit seemed to rise as 2018 drew to a close, sharpening the market’s focus on the many and varied ways in which it would wreak havoc.

Bank sales teams having to move to the continent; two versions of Mifid II; futures being treated as swaps; pension funds losing their clearing exemption; banks suffering a loss of netting efficiencies and a jump in capital requirements. The list goes on.

By September, many brokers and trading platforms had already begun to activate their contingency plans – and claimed any deal would now arrive too late to arrest those changes.

And while politicians were confronting an apparent impasse – with UK prime minister Theresa May refusing to put her deal to a vote it seemed unlikely to win – there was late movement on two issues of particular import to derivatives markets. By December 4, three UK-based dealers – Barclays, NatWest Markets and UBS – had begun a so-called Part VII transfer process, through which a court could endorse a big-bang move of swaps from a UK legal entity to one in the EU. Others were thought to be waiting in the wings.

The looming threat that UK clearing houses might have to cancel the memberships of EU clients also appeared to have been averted as European legislators and regulators agreed a one-year equivalence regime – after months of badgering by the Bank of England. As always with Brexit, though, nothing is guaranteed.

“[Brexit] will likely lead banks to re-examine how they can run certain businesses in a profitable manner” – Christian Scarafia, senior analyst, Fitch Ratings (Brexit set to jack up banks’ capital costs, December 6)

“From the point of view of a bank entering into a new transaction with a pension scheme, the clearing obligation would apply” – Pauline Ashall, partner, Linklaters (UK pension funds may have to clear, post-Brexit, December 5)

“The worst possible outcome is divergence, because then we and the rest of the industry would have to create two different systems” – Ben Pott, head of government affairs, Nex Group (As Brexit looms, Mifid transparency faces the chop, November 26)

“It’s mindboggling to think about how you would become compliant with all the OTC rules” – senior clearing executive at a US bank (Brexit: listed derivatives face OTC mutation, October 9)

“[Contingency plans] are past the point of no return and will be carried out whatever the outcome of the Brexit negotiations” – CBOE Europe spokesperson (Brexit deal talk ‘too late’ for departing brokers, September 14)

“If nothing happens between now and March 29, you need all EU members to have exited as they can’t continue to be members” – head of regulation at a European bank (EU clients face axe from UK CCPs, October 4)

“Everyone at the moment is in this complex shadowland” – Jonathan Herbst, partner, Norton Rose (Day one of a no-deal Brexit: swaps and chaperones, October 9)

“Part VII definitely makes it easier from a mechanical perspective for the bank and its clients compared to piecemeal novation” – compliance director at a US bank (Two banks begin moving swaps out of London, pre-Brexit, November 30)

“Part VII is a nine- to 12-month process involving due diligence, planning, drafting and legal analysis to work out what needs to be done. The processes may already be in train, even though only a few have pushed the button” – Matthew Brewer, legal director, Pinsent Masons (NatWest kick-starts Brexit swaps transfer, December 20)

ROMANCING THE ROBOTS

Which fixed income roles have most to fear from automation – sales or trading? The nuanced answer to that blunt question is that it depends what you’re selling (or trading) and the time horizon in question.

In a series of four articles, Risk.net looked at the digital overhaul of the front office and found a reassuring near-term outlook for humans: banks are not trying to replace their sales and trading staff, instead they are building an arsenal of helpful robotic pals. Tools that will identify the best client to call with a particular idea, for example, or find the optimal hedge for a customer’s trade.

Over time, though, more of the decisions are expected to be left with machines – leaving humans in a kind of oversight capacity. This is likely to happen more rapidly in lower-margin products and for less-valuable customers. By November, BNP Paribas was already talking openly about its plans to reduce fixed income headcount by automating both sales and trading jobs.

In the back office, meanwhile, the savings could be even bigger. Banks agree they need to get rid of the endless back-and-forth of trade reconciliation – they just have to select one of many competing ways to do it.

“Nobody would design this system today for the future… we have to disrupt ourselves, changing it piece by piece, bit by bit, code by code” – Scott O’Malia, chief executive, International Swaps and Derivatives Association (The battle for the back office, April 3)

“You know the film, Aliens? Remember Sigourney Weaver encased in a giant metal robot – a human in a machine, but still human? Whoever builds the best one of these will be the winner” – Chris Purves, head of the strategic development lab for foreign exchange, rates and credit, UBS (Rise of the cyborgs: tech remakes the front office, July 9)

“Traders and salespeople spend much more time on admin than before. Chatbots and other technologies, such as artificial intelligence, collectively enable us to significantly reduce that admin, so traders and salespeople can go back to being traders and salespeople” – Craig Butterworth, global head of client ecosystems, Nomura (Symphony bots march on Bloomberg, July 10)

“We are trying to systematise – or automate – more of the process that leads to price creation” – Ezra Nahum, partner and head of fixed income strats, Goldman Sachs (Machine earning: how tech is shaking up bank market-making, August 6)

“There are a lot of initiatives to multiply the different e-books across the firm, in all three regions, to save costs more than generating revenues” – Olivier Osty, head of global markets, BNP Paribas (Derivatives house of the year: BNP Paribas, November 27)

CALL ME?

Stock market volatility claimed another victim as the year drew to a close, when Natixis warned the market it had suffered a €260 million hit as a result of a “deficient” hedging strategy for “specific products” as a result of “the deterioration of market conditions” in Asia.

This turned out to be another way of saying the bank had lost money on autocallables sold in Korea. It was not the first to do so – and dealers were on alert at various points of the year – but the size of the hit dwarfs anything experienced by a single dealer in recent years. In 2015, when fears of a China slowdown caused a precipitous drop in the HSCEI index, structured product dealers were estimated to have lost a combined $300 million.

The bank’s rivals blamed the jumbo loss on the jumbo book Natixis is said to have built in the years after the 2015 rout – as other banks became more conservative – and on autocalls linked to a leveraged version of the main Korean index.

“Global banks and Korean securities houses learnt a very important lesson from the 2015 experience on how risky it is at times when the underlying plunges” – Ken Woo, head of equities, Hana Financial (Korea autocall dealers brace for losses but no 2015 repeat, July 29)

“Natixis was very innovative over the last three years in gaining market share, and now it dawns that they found an innovative way to lose money” – Hong Kong-based structuring head at a rival dealer (Natixis’s €260m hit blamed on big books and Kospi3 product, December 20)

THE PRICE OF POPULARITY

In Europe, buy-side firms have been executing more of their swaps on trading platforms this year. They have also been executing them differently – and not always to dealers’ satisfaction.

New tools offered by Bloomberg and Tradeweb allow buy-siders to trade from their own order management systems, rather than visiting the platforms. Some firms are also making use of compression – or list – trading services to execute large packages of trades in one go, presenting a technical challenge to the dealers that have to price and risk-manage them.

For all of these trades, the preferred protocol remains request-for-quote – in which a client can obtain prices from a selected group of dealers – but after an end-March clarification from European regulators, the number of quotes being obtained at a time has jumped. In some cases, clients are asking 10 or more dealers to provide a price, creating a dilemma for the winning bank, which then has to hedge with rivals that know the trade is coming.

These mass-RFQs arguably resemble an inefficient central limit order book, so – as the year ended – interdealer broker Tradition launched a genuine buy-side Clob, offering swaps users an alternative way to trade.

“You have to continue to innovate in this space or you’re going to lose” – Lee Olesky, chief executive, Tradeweb (Game of Sefs: automation helps Tradeweb topple Bloomberg, Jan 8)

“It’s idiotic. It’s absolutely insane. We get RFQs with 10-plus participants” – Head of rates trading at a European bank (Number of banks per RFQ jumps in EU, posing risk to prices, May 9)

“We trade the overwhelming majority of swaps now in a compression tool that allows us to trade a number of off-the-run swaps in one go” – Rutger Olthof, senior trader, NN Investment Partners (Buy side using compression tools to create, not destroy, May 24)

“We are dipping our toes into something that hasn’t been done before” – Dan Marcus, chief executive, Trad-X (A buy-side swaps order book – with a difference, Dec 17)

DIVERSITY IS KEY

Richard Osley, www.nbillustration.co.uk

Across the Atlantic, rates trading is heading in a different direction. After years in which exchange-style Clobs were seen as the electronification end-game – by regulators as well – this year has seen an emerging diversity. It’s welcome, but there’s a thin line between diversity and fragmentation.

It’s being driven by a variety of forces – one being dealers’ attempts to run their business in a more efficient way, matching off client flows against each other, rather than paying brokerage and platform fees to hedge. With more business being ‘internalised’, the trades that do find their way to the market are, by definition, those that are harder to risk-manage.

As a result, more dealers are rediscovering the advantages of bilateral trading – where liquidity can be customised for a specific counterparty and trade, rather than beaming a single price to all participants on a Clob. After resisting this trend for years, even the most successful denizen of the US Treasuries order books, Jump Trading, has launched a bilateral business – a move its senior executives explained to Risk.net in a series of exclusive interviews.  

“Years ago our flow would be random and harmless, but because we’re offsetting that internally now, what comes out of the bank is actually fairly toxic” – Head of G10 rates trading at a US bank (Direct streaming gains foothold in US Treasuries market, September 5)

“It’s very frustrating for us, it really is. That is an incredibly inefficient market that we simply cannot get access to” – Mark Bruce, head of fixed income, currencies and commodities at Jump Trading (Off-the-run barriers frustrate Jump Trading, October 19)

“We still believe the Clob is the best way to do business from a market structure perspective, but we can’t fight the market” – Matt Schrecengost, chief operating officer, Jump Trading (Jump: inside the secretive e-trading giant, November 8)

A FLEXIBLE RELATIONSHIP

All of this sets up a debate: what is the best way to trade swaps? Dealers voted with their feet when stock market volatility surged in February, abandoning Clobs and returning to their phones. And CFTC chairman, Christopher Giancarlo, has long promised to give the market more flexibility in its mode of execution.

His proposals – expected around the middle of the year – eventually arrived in November, but there are downsides to a push for greater freedom of choice. Critics have warned it could result in liquidity draining away from trading venues, possibly undermining efforts to create new benchmark rates.

“There is no way a bank is going to put tight prices on 20–30 instruments as they could get machine-gunned with the minimum sizes and lose a lot of money” – an interdealer broker source (US swap trading overhaul may reinforce market split, users warn, March 21)

“These kinds of events are very, very rare” – a US dollar swaps market participant (US swap rate failed during volatility rout, April 9)

“I spent the past weekend reading 200 pages of preamble, so it’s well in the works” – Amir Zaidi, director of the division of market oversight, US Commodity Futures Trading Commission (CFTC’s long-awaited Sef reboot set for July, April 26)

“The benchmark and fixing model could potentially be negatively impacted if you see a step back into a more voice-driven marketplace” – Scott Fitzpatrick, chief executive, Tradition Sef (Sef reforms could distort new, sounder benchmark rates, October 19)