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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 http://marketsmedia.com/otc-markets-eye-regulatory-activity/
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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 http://www.securitiestechnologymonitor.com/blogs/taxes-interfere-with-transactions-31656-1.html
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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.”
http://marketsmedia.com/otc-markets-seek-new-normal/
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OneChicago offers derivatives to counter short ban
MarketWatch
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.
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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)
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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.
http://marketsmedia.com/home/futures-exchange-applauds-cftc-block-trading-rule/
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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)
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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.
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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.
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Feature: There Can Be Only One: David Downey and OneChicago Stand Alone
WatersTechnology
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.
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OneChicago Certifies FFastFill as ISV
TMC Net
By Rahul Arora
TMCnet Contributor OneChicago (OCX), a US equity finance exchange, recently announced that it has certified FFastFill, …
Read the full article here.
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OneChicago offers derivatives to counter short ban
MarketWatch
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.
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Single Stock Futures Await Their Day
IFR INTERNATIONAL FINANCING REVIEW
By Maureen Nevin Duffy
August 5, 2011
David Downey, CEO of OneChicago, spoke with IFR reporter Maureen Nevin Duffy about single stock futures (SSFs) and the outlook for the market.
Read the full article here. (Subscription required)
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Big Interview
Securities Lending Times
June 6, 2011
Following a year of steady growth, OneChicago’s David Downey speaks to SLT about how the market is reacting to securities lending on exchange
Read the full article here.
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ETFs and Futures; OneChicago
Points and Figures
June 1, 2011
OneChicago is a futures exchange that was founded after the CFMA Act in 2000 was passed. It was an innovative idea at the time, and has been hampered by the SEC since its inception. … Single Stock Futures (SSF) would not disrupt the market, and would add depth to the bid/ask spread. They are useful financial tools who’s time has come.
Read the full article here.
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OneChicago Changes Fees
Markets Media
May 6, 2011
OneChicago, an all-electronic exchange for trading single stock futures, said it is modifying its trading-fee structure to bring it in-line with how over-the-counter transactions are priced.
OneChicago fees will be split into an execution fee of $20 per million executed notional value, and a carrying fee of $1 per $1 million notional value per day.
Read the full article here
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OneChicago unveils OCX.NoDivRisk
Securities Lending Times
May 4, 2011
OneChicago, LLC, has renamed one of its security futures products to OCX.NoDivRisk from OCX.NoDiv. The exchange believes the new identifier for the product suite, which removes dividend risk, better reflects its value to investors.
The OCX.NoDivRisk product suite, launched in Q4 2010, addresses customer’s concerns regarding dividend risk when trading security futures.
Read the full article here.
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OneChicago: Fear of Unknown Greatest Risk Facing Industry Today
By Anthony Malakian, Buy Side Technology
April 21, 2011
Single-stock futures exchange OneChicago (OCX) is regulated by both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), so it has a unique view of the news that the two regulators could diverge on how they implement the Dodd–Frank Act.
Yesterday, our sibling publication Risk magazine quoted SEC chair Mary Schapiro as saying that the two regulatory bodies could deviate on certain rules because of “the fact that [securities and futures] are different products and trade differently.”
OneChicago’s CEO David Downey says market participants’ greatest fear is that of the unknown: They don’t know which rules they will have to meet and how much it cost to implement those finalized rules.
Read the full article here.
(Subscription required)
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OneChicago Changes Fee Structure to Highlight Significant Cost Savings
-New Fees will position security futures as competitive equity finance product
-Fee structure sets first example for listed derivatives in accordance with Dodd-Frank
Reuters
April 13, 2011
OneChicago, LLC (OCX), an equity finance exchange trading security futures, today announced that it is modifying its trading fee structure to more clearly illustrate the superior financing rates and significant cost savings market participants experience while carrying their equity exposure via security futures.
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Brokers Applaud SEC Approval of ISE’s New Order Type for Clean Crosses
By Peter Chapman, Traders Magazine
March 23, 2011
That transparency could cause the market for delta neutral trades to explode, Menslage said. “You would be able to access the option and the stock right on the screen,” he said. “The concept of trading volatility as an asset class can be done electronically.”
To do so, the ISE would need to build out functionality found at the OneChicago single-stock futures exchange, traders say. With the exchange’s BETS system, traders can simultaneously input both the futures portion and the stock portion of a combined trade. The futures trade goes to OneChicago’s matching engine. The stock trade is reported to the Nasdaq trade reporting facility.
Read the full article here.
| Subject | RadioShow | Date |
|---|---|---|
| Dodd-Frank: The Exchange Perspective | TabbFORUM.com Capital Markets Interview by Greg Crawford with OneChicago CEO David Downey | January 23, 2012 |
| Unintended Consequences of Dodd-Frank | TabbFORUM.com Capital Markets Interview by Greg Crawford with OneChicago CEO David Downey | January 23, 2012 |
| OneChicago's David Downey on Single Stock Futures | InstitutionalInvestor.com Interview by Jay Akasie with OneChicago CEO David Downey | February 10, 2012 |
| Mark Esposito of OneChicago Discusses Their NoDivRisk (1D) Single Stock Futures | MarketsWiki.tv Interview by Doug Ashburn with Mark Esposito | February 14, 2012 |