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ModernTrader, ISSUE 511, 29 July 2015

The Future of Single Stock Futures

Single stock futures have not turned out as they initially were planned, but they may be ready for a breakout.

Single stock futures were not supposed to be an exotic market. In fact, they were supposed to be so big that the U.S. Congress hurriedly passed the infamous (for other reasons) Commodity Futures Modernization Act of 2000 (CFMA) at the end of the Clinton Administration for fear that the Brits would beat us to the punch.

Author: Daniel P. Collins

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Security Lending Times 07 May 2015

OneChicago gives its two cents

OneChicago has requested guidance from the Internal Revenue Service (IRS) and US Department of the Treasury concerning three issues related to section 1058 of the Internal Revenue Code.

The request has arisen in response to the IRS and Treasury’s invitation for public comment on recommendations for items that should be included on the 2015-2016 Guidance Priority List.

OneChicago has requested guidance on whether a taxpayer who uses an exchange-traded and centrally-cleared derivative, rather than a bilateral, over-the-counter (OTC) derivative, to provide for the return of securities under section 1058 would be eligible for the non-recognition treatment afforded by that section.

Guidance has also been requested regarding whether section 1058 imposes a requirement on all those that transfer securities—organisations and individuals—to be able to reacquire the transferred securities within five days.

Finally, OneChicago has asked for guidance on whether a taxpayer who has transferred securities to a transferee in accordance with the requirements of section 1058 and subsequently executes a hedging transaction with a third party would remain eligible for non-recognition treatment of the initial transfer under section 1058.

The firm commented: “The lack of clarity regarding these three issues has caused market participants to defer moving certain bilateral derivatives activity onto regulated exchanges.”

Author: Stephen Durham

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OneChicago Preps Migration off CBOE Feed Network

Date: 01/06/2015


Opalesque New York August 8, 2014

New futures products seek to shrink settlement timelines

Traditionally in the futures markets products are settled on a T+3 timeline. A simplified definition of T+3 is to say they are settled within three days. A new group of futures products is offering a T+1, or one day settlement option and the products are catching the attention of hedge funds.

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Traders Magazine Online News, May 2, 2014



How OneChicago Had Its HFT Lawsuit Dismissed

Last week, the City of Providence, Rhode Island dismissed OneChicago in its class action “Flash Boys”-inspired lawsuit. CEO David Downey explains how his equity finance exchange was dismissed.

Read the full  article.   here



TabbFORUM – May 2014

Top Features: Tom McCabe; Exchanges: The New Tech Providers

To diversify and stabilize revenue streams, exchanges are venturing into technology-focused businesses that shift away from traditional trading and transaction-based services, becoming direct competition for established technology vendors and market data providers.

Read the full contributed article. here  (Registration required)



 Media Notice 11/11/13

OneChicago Names Barazi to Parse CFTC, SEC Rules


MarketsMedia  11/06/2013



OneChicago to Participate in Panel Discussion at Financial Information Services Division Meeting


Single stock futures… a new dawn
May 15, 2012

In our work, promoting exchange listed single stock futures as a financing or stock lending
facility, Saratoga Capital’s success in introducing the product has been predicated on our
ability to clarify clients’ misconceptions regarding the single stock futures market.
Initial responses include:

• “Futures? We don’t trade futures.”
• “Single stock futures? They don’t seem very liquid.”
• “How do single stock futures minimise our US withholding tax?”

The product’s unfortunate association with speculative trading strategies often found in illiquid
commodities has been a significant barrier to extolling the many virtues of this sophisticated
financing and stock lending instrument.  While customers can and do trade single stock futures in
a speculative manner, the more subtle uses of single stock futures can be easily overlooked.
Additionally, trading single stock futures does not specifically require Commodity Future
Trading Commission (CFTC) registration—exemptions are available for most equity based strategies.

To read more of this article, see page 20 of this PDF


OTC Markets Eye Regulatory Changes
Markets Media
April 1, 2013

The transition from a mainly bilaterally cleared OTC business to a centrally cleared OTC derivatives market is likely to be accompanied by an increase in exchange-traded derivatives that are the economic equivalent of OTC transactions.

For example, OneChicago (OCX), a security futures exchange, provides a marketplace for trading over 2,800 futures in more than 1,500 individual equities and exchange-traded funds.

OCX’s Exchange Future for Physical is the economic equivalent of OTC equity swaps, specifically stock lending and equity repo transactions.

Securities lending and equity repos, which are secured lending of stock for cash or the lending of cash for collateral, are covered by a binding ISDA agreement, which provides for the terms of the loan.

“We look at our product as a futures product which is the economic equivalent of an equity repo,” said Thomas McCabe, chief operating officer at OneChicago. “We compete with security-based swaps that are traded OTC.”

The SEC and CFTC have jurisdictions over separate parts of the swaps market, with the SEC overseeing security-based swaps, or swaps based on a single name or narrow index, while the CFTC oversees all other OTC swaps.

Full article at


Taxes Interfere With Transactions
Securities Technology Monitor
March 19, 2013

The newly proposed U.S. and E.U. financial transactions taxes (FTTs), premised on the belief that the financial sector caused the 2008 financial crisis, have led to several industry debates. None the least of it is how the taxes will impact securities lending transactions.

The recently proposed U.S. FTT at .03% of the notional value is projected to raise $35 billion annually, if enacted. The E.U. FTT is proposed at .1% for non-derivative financial transactions and .01 % for derivatives transactions and is projected to raise €50 billion annually, if passed. Importantly, the U.S. FTT is for the trade, not both the buyer and seller while the E.U. FTT is for both the buyer and the seller, making it even more punitive.

Full article at


OTC Derivatives Markets Seek New Normal
Markets Media
September 13, 2012

Capital markets are undergoing massive changes in anticipation of new rules for over-the-counter derivatives, but the end result of these rules is unclear.

The stated goals of the U.S. Dodd-Frank Act, the European Market Infrastructure Regulation in Europe and similar regulatory initiatives is to make the OTC derivatives markets more transparent by requiring that most swaps be traded on a swap execution facility and centrally cleared through a designated clearing organization.

But transparency is a double-edged sword, according to some experts.

In particular, by requiring firms to expose their derivatives activity to the markets at large and to regulators through swap data repositories, the regulations may have the unintended consequence of restricting such activity or pushing it offshore.

“Transparency is not the unmitigated good that people make it out to be,” said Steven Lofchie, partner at law firm Cadwalader Wickersham & Taft. “The notion that anything is an unmitigated good is simplistic. For example, if the market knew that a major buy-side institution had pulled its business from a major sell-side institution because it was worried about its credit, might that ‘transparency’ precipitate a run on the bank? By the same token, sudden jumps in credit default swap spreads being completely transparent may prove a mixed blessing to market stability.”

One of the goals of impending regulations is the introduction of central clearing which allows electronic confirmation and settlement of OTC derivatives.

“Both buy and sell side firms are investing significantly in systems that provide the required connectivity,” said Rohan Douglas, founder and chief executive of Quantifi, a provider of analytics, trading and risk management solutions.

“In this new environment, the emphasis is on efficiency, automation, connectivity and transaction cost. In many firms we are seeing a trend towards specialized, best-of-breed components that provide a more flexible trading infrastructure.”

The transition from a mainly bilaterally cleared OTC business to a centrally cleared OTC derivatives market is likely to be accompanied by an increase in exchange-traded derivatives that are the economic equivalent of OTC transactions.

For example, OneChicago (OCX), a security futures exchange, provides a marketplace for trading over 2,800 futures in more than 1,500 individual equities and exchange-traded funds.

OCX’s Exchange Future for Physical is the economic equivalent of OTC equity swaps, specifically stock lending and equity repo transactions.

Securities lending and equity repos, which are secured lending of stock for cash or the lending of cash for collateral, are covered by a binding ISDA agreement, which provides for the terms of the loan.

Another example is the U.S.-based futures venue Eris Exchange. Eris Exchange, as a designated contract market (DCM), provides forward starting interest rate swap futures that are cleared by clearer CME Clearing and traded on Eris SwapBook and Eris BlockBox.

The Eris Exchange model collapses multiple cash flows associated with OTC swaps into a single futures price and cash flow which transfers through variation margin in a futures clearing account, according to the company.

OTC derivatives volumes have held steady despite the impending changes in clearing and execution.

Interest rate derivatives compose over 80% of all derivatives trading, according to Celent, a research firm. However, other products such as FX and credit derivatives are increasing their share. From a profitability point of view, FX derivatives trading has been almost as profitable as interest rate trading for banks, Celent said.

The wild card is the possibility that companies that engage in derivatives trading for either hedging or speculative purposes will move their business offshore in response to the Volcker Rule, which restricts proprietary trading, or other elements of Dodd-Frank.

“Markets are truly global,” said Douglas of Quantifi. “Regulatory arbitrage will become increasingly likely as regulations become more complex and the challenges of co-ordination and uniformity become larger. The new OTC market regulations highlight this with significant challenges being faced to co-ordinate the different needs and characteristics of the different regions.”


OneChicago offers derivatives to counter short ban
August 18, 2011

OneChicago LLC developed the contracts in the week since the tougher short-selling rules were introduced in an effort to limit market declines, with products linked to exchange-traded funds composed of stocks listed in France, Spain, Italy and Belgium. …

Read the full article here.


Clock Now Ticks for Swaps Compliance

By Tommy Fernandez

July 30, 2012

The starter’s pistol is about to be fired for the swaps industry.

The Commodity Futures Trading Commission is expected to publish on August 2 its recently approved swaps definitions in the Federal Register.

Sixty days later-on October 1-market participants, including asset managers, are expected to comply with the first set of rules related to these definitions.

For example, firms must decide whether they need to register as swap dealers or major swap participants. Other chores include learning and adopting new business conduct codes, such as provisions governing conflicts of interest and monitoring of position limits, and developing systems for recording and reporting swaps transactions.

After that, the swaps industry will move relatively rapidly toward trading standardized contracts on electronic venues known as swap execution facilities. This, mandated by the 2010 Dodd-Frank Wall Street Reform Act, is designed to head off a repeat of the calamitous use of swaps contracts, privately negotiated, that led to the credit crisis of 2008.

Not all of the rules on how this will take place are clear, and registration will clearly cause growing pains in the form of serving two regulatory masters, the CFTC and the Securities and Exchange Commission, but experts say the operational headaches are manageable.

“For the vast majority of fund managers, the product definitions were significant since they were a bellwether on the state of the regulatory reform-that is, Dodd-Frank rulemaking overall is viewed as having entered the ‘final stage,'” says Andrew Cross, team leader of the Derivatives and Structured Products practice at the law firm Reed Smith.

Cross said that the definitions provide clarity for asset managers in a number of important areas. They can now seriously consider whether they need to register as swaps dealers or major swap participants, or apply for exemption. They can determine whether they need to be treated as commodity trading advisors for giving advice on over-the-counter instruments. The definitions, he says, will also help managers prepare for the impacts of earlier adopted changes to the CFTC Rules 4.5 and 4.13, which govern exemptions to commodity pool operator registration for mutual funds and hedge funds.

The definitions have already had an impact, says Jack Callahan, CME Group Executive Director and OTC Product Specialist.

“We’ve seen a definite increase in new customer activity since the swap definitions were finalized, as many buy side firms are progressing towards clearing their first trades and completing their final stages of testing and internal readiness,” he says. “We’ve already cleared trades across a variety of market participants including asset managers, insurance companies, hedge funds, and banks.”

CME prepared for the rule changes, in part, by building a system that allows market participants to clear their trades in real-time. That means customers can focus more on managing their portfolios and worry less about operational and credit risk, Callahan says.

Meanwhile, the IntercontinentalExchange, which operates regulated futures exchanges, clearing houses and over-the-counter markets, developed ICE Trade Vault as a swap data repository. It enrolled 250 customers in advance of its launch. The Trade Vault has already received provisional approval from the CFTC as a Swap Data Repository.

To be sure, observers say that there are plenty of areas where the new definitions and rules are still unclear, and complying with them will be a bear.

Read the full article here. (Subscription required)


Futures Exchange Applauds CFTC Block Trading Rule

A futures exchange is in favor of rules that would require over-the-counter swaps to be subject to the same requirements as exchange-traded instruments.

In particular, the exchange is applauding a proposed rule by the U.S. Commodity Futures Trading Commission (CFTC) that would prohibit the aggregation of orders for different trading accounts in order to satisfy minimum block size or cap size requirements, unless such aggregation was performed on an exchange or swap execution facility (SEF) by a CFTC-registered commodity trading advisor (CTA).

“We are acutely concerned that OTC swaps, mandated to move to a SEF or exchange, be subject to the same regulatory requirements as single stock futures,” said David Downey, chief executive of OneChicago (OCX), a security futures exchange which provides a marketplace for trading over 2,800 futures in more than 1,500 individual equities and exchange-traded funds.

“Consequently, we encourage the CFTC to continue building a like regulatory environment for swaps. In that vein, we offer the OCX rulebook as a model.”

OCX’s Exchange Future for Physical is the economic equivalent of OTC equity swaps, specifically stock lending and equity repo transactions.

Securities lending and equity repos, which are secured lending of stock for cash or the lending of cash for collateral, are covered by a binding agreement (ISDA agreement), which provides for the terms of the loan.

“It’s critical that equivalent products be treated in an equivalent manner,” said Downey.

If too many trades were permitted to be aggregated and thus executable as blocks, the Dodd-Frank objectives of increased transparency and price discovery for swaps trading could be undermined, according to the CFTC.

By prohibiting aggregation of orders for different accounts to meet the minimum block size requirement, the proposed rule would prevent circumvention of exchange trading and of the real-time reporting obligations associated with non-block transactions.

In the futures market, all block rules approved by the CFTC have included an aggregation prohibition, with the exception of block trades done through CTAs.

In the futures market, where market participants have engaged in block transactions for years, exchanges that permit block trading have rules that prohibit the aggregation of orders for different trading accounts.

New capital requirements under the Basel III accord, a set of global regulatory standards aimed at toughening up bank capital adequacy rules that kick in from the start of next year, have made it more difficult for banks to execute transactions in large blocks because the amount of liquidity that must be maintained to meet regulatory demands has gone up.

“Basel III has resulted in a significant ratcheting up of capital requirements for risk weighted assets, including credit,” said Rick McVey, chief executive of MarketAxess, an electronic bond trading platforms operator, at Markets Media’s recent Summer Trading Network conference in New York. “Block trades as a proportion of total Trace volumes are steadily declining, as dealers trim balance sheets and manage inventory much more actively.”

The concept of aggregation also figured prominently in the CFTC’s final rule on position limits, which requires dealers to aggregate positions in commodities derivatives contracts for the purpose of calculating position limits.

The rule establishes account aggregation standards for positions in reference contracts, i.e., futures and swaps which are economically-equivalent to futures.

For decades, futures commission merchants (FCMs) and FCM affiliates engaging in dealer trading activities on behalf of a common parent have been disaggregated from their “walled off” commonly-owned asset management affiliates for purposes of determining compliance with speculative position limits and reporting requirements.

Dealers say that the rule goes against the grain of historic aggregation policy, and the consequences would be “drastic, severe, and far-reaching”, according to the Futures Industry Association, a trade body, in a comment letter.



How to Spell the Future of ‘SEF’? Aggregation and Consolidation

OneChicago’s David Downey recently spoke with Tim Bourgaize Murray of Waters Technology to discuss the future once SEFs are operational, including what smaller SEFs might do, how the sell side will leverage its previous advantages, and the lingering challenges that lie ahead.

Read the full article here. (Subscription required)


Has OneChicago’s day in the sun finally come?
Securities Finance Monitor

OneChicago, the US single stock futures exchange, has struggled since its launch in 2002 with regulatory, tax and competitive hurdles. Recent rumblings however suggest that its day in the sun may be finally coming, the result of a need for CCPs in financing transactions and winning over regulators to get equal tax treatment for its Single Stock Futures with other products.

Read the full article here.


Is There a Better Alternative to Central Clearing of Swaps
Wall Street and Technology
By Greg MacSweeny

OneChicago Exchange offers an established exchange-traded product that could replace some types of swaps — without having to create an entirely new market infrastructure.

Read the full article here.


Feature: There Can Be Only One: David Downey and OneChicago Stand Alone
By Anthony Malakian

The OneChicago Exchange was created in response to a change in the law. Now the exchange sits in the middle of the SEC and CFTC and has had to fight to respond to regulatory changes.

Read the full article here.

OneChicago Videos

Click a row to watch a video

Subject RadioShow Date
Dodd-Frank: The Exchange Perspective Capital Markets Interview by Greg Crawford with OneChicago CEO David Downey January 23, 2012
Unintended Consequences of Dodd-Frank Capital Markets Interview by Greg Crawford with OneChicago CEO David Downey January 23, 2012
OneChicago's David Downey on Single Stock Futures Interview by Jay Akasie with OneChicago CEO David Downey February 10, 2012
Mark Esposito of OneChicago Discusses Their NoDivRisk (1D) Single Stock Futures Interview by Doug Ashburn with Mark Esposito February 14, 2012