Robert Allen, president of FMX Futures Exchange

Having opened on 23 September, the FMX Futures Exchange is the first US interest rate futures exchange to launch with a fully operational, globally connected trading system, allowing for potential capital savings driven by clearing partner LCH’s cross-margin capabilities.

BGC Group and ten global investment banks and market-making firms announced a partnership in April 2024 to create FMX Holdings which includes the exchange, as well as a spot foreign exchange platform, and a US cash treasuries platform.

“We are pleased ION connected to the FMX Futures Exchange. The combination of the FMX Futures Exchange with LCH will provide clients with choice, innovative execution technology, and potentially significant cross-margin capabilities,” said Robert Allen, president of FMX Futures Exchange.

ION supports FMX across its cleared derivatives front-, middle-, and back-office platforms, allowing banks and brokers using ION’s technology stack to offer clients advanced execution capabilities and clearing services on the new exchange from day one.

Read more: Fireside Friday with… ION’s Edoardo Pacenti

“The joint effort with FMX Futures Exchange demonstrates once again the effectiveness of ION’s front-to-back product strategy: the powerful combination of modern, integrated solutions across execution and clearing removes the technical barriers often hindering market readiness and participation,” said Francesco Margini, chief product officer for cleared derivatives at ION Markets.

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The new rule changes published by the SEC have been primarily driven by the need to enhance market stability and reduce systematic risk. They will bolster the security of the US Treasury market by mandating central clearing for eligible securities, such as repos and reverse repos, inter dealer broker transactions and other cash transactions. In doing so, these rules are intended to reduce counterparty risk, limit contagion and increase transparency in the market.

The lessons learnt from past financial stress conditions and crises, particularly those involving non-bank market participants, have driven these changes. One counterparty defaulting could pass risk on to another party, this in turn could have a cascading effect on liquidity across the market. In addition, currently, the Fixed Income Clearing Corporation (FICC) is indirectly exposed if one of its members makes a trade with a non-member and subsequently defaults on the transaction.

With these changes, there will be a dramatic increase in the amount of daily US Treasury clearing activity processed through the FICC.

What aspect of the proposals should institutions be most conscious of?

Primarily, institutions must be aware that the SEC has introduced a regulatory change to redefine what constitutes a ‘dealer’. This is done to increase oversight of Proprietary Trading Firms (PTFs), which play a significant role in providing liquidity in the US Treasury market.

PTFs engage in trading with their own capital rather than on behalf of clients and will have to register with the SEC and FINRA as dealers. If PTFs do not want to register as dealers, they must establish a Sponsored Member arrangement.

While this is a significant change for PTFs, they already have experience delivering similar large-scale projects following the change to the T+1 settlement in May 2024 which can be applied to the upcoming dealer redefinition and central clearing changes. 

How will fixed income trading desks be impacted by these proposals?

Central clearing is likely to help ease counterparty credit limits due to better risk management and transparency provided by the CCPs and migrate previously uncollateralised bilateral contracts to the CCPs. In particular, counterparty default and fire sales risk should be much lower.

This could improve market liquidity by removing existing trading restrictions and mitigating counterparty and bilateral trading risk. This will be particularly beneficial in times of stress, as these factors will ensure that dealers don’t withdraw liquidity.

At the same time, the cost of central clearing and risk management activities will likely increase the overall costs of transactions for participants who don’t currently centrally clear transactions. These costs will be passed on from FICC members to non-FICC members.

Similarly, highly leveraged or low-margin trading strategies, like basis and relative value trades, may become uneconomical as a result of these proposals. This means that less PTFs will trade them, leading to a reduction in liquidity on the underlying asset classes, such as US Treasury actives and this is likely to counteract the previously mentioned benefits.

Are any specific strategies being developed to accommodate these changes?

For existing members of the FICC, providing sponsorship services to non-member firms represents an opportunity that could lead to significant revenue for the FICC members, as they can charge fees for this service.

Sponsoring Members could also benefit from collateral netting between them and Sponsored Members. This strategy reduces the amount of collateral needed overall by offsetting obligations against each other and achieves economies of scale on collateral management, aggregating across several balance sheets.

Another strategy being developed to accommodate changes is investment in technology. This is largely to mitigate the costs of central clearing. This includes investment in scalable transaction reporting systems, which reduce the need for manual intervention, minimise the risk of failures and reduce the marginal cost per transaction. Overall, investing in technology will make it more economical for firms to comply with the new rule changes.

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Francesco Margini

The move comes as the FCM sought a solution which could provide extensive automation across clearing and settlement workflows. 

Joe Guinan, chair and chief executive of Advantage Futures, said: “In the two decades since founding Advantage Futures, we’ve expanded from a small boutique to among the industry’s highest volume clearing firms serving some of the world’s high-volume traders.

“[…] Having successfully completed the migration to ION’s XTP, we now deliver real-time data and automation capabilities, meeting client needs to process ever-growing trade volumes quickly and efficiently.”

XTP offers real-time, post-trade capabilities, providing real-time visibility of positions, commissions, fees, margins, cash flows, and risk.

ION has been investing in its XTP offering, onboarding a rapidly growing number of FCM’s and global banks in recent times. 

Read more: Fireside Friday with… ION’s Tommaso Di Grazia

Francesco Margini, chief product officer for cleared derivatives at ION Markets, said: “The transition from [Advantage Futures’] legacy back-office solution to XTP was completed in record time, leveraging ION’s established methodology and tools developed to manage large and complex migration projects.

“The Advantage-XTP rollout demonstrates ION’s proven track record in bringing new products to the market and the strong discipline required for a timely and successful delivery to customers.”

Advantage Futures’ client base includes: professional traders, institutional clients, exchange-traded funds, foreign and domestic non-clearing futures brokers, hedge funds, and individual traders.

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Tommaso Di Grazia

ION’s XTP Execution (XTPE) is an automated front-office trade workflow solution focused on cleared derivatives trading.

The solution provides users with integrated order management capabilities, order execution, direct connectivity to all key exchanges globally, and indirect access to local exchanges through a network of execution brokers.

“We are in continuous dialogue with our clients to understand their evolving needs, such as the need for a consolidated trading platform that can transform front-office efficiency,” said Tommaso Di Grazia, head of fixed income product development at ION Markets.  

“In response, we are proud to have integrated our flagship fixed income solutions with XTP Execution. The integration will offer our clients the enhanced connectivity and agility they need to differentiate in a challenging market landscape.”

Read more: Fireside Friday with… ION’s Tommaso Di Grazia

The integration of XTPE will give ION’s fixed income clients access to an increased scope of futures markets, offering users with centralised access.

The move will also enable dealers to access markets without the need to be an exchange member. For dealers who are existing users of XTPE for their FCM activity, the integration will also provide an option to consolidate their futures connectivity across FCM and FI business lines.

As well as reducing time to market to access extra liquidity, clients will benefit from reduced support and infrastructure costs, making global trading operations more agile and cost-efficient, ION claimed.

“XTP Execution has long provided firms in the derivatives industry with centralised access to brokers and exchanges. We are delighted that our fixed income solutions clients will now also be able to enjoy this advantage through this latest integration,” said Francesco Marhini, chief product officer for cleared derivatives at ION Markets.

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As part of the move, ION’s Fidessa trading platform is now certified for cash equities trading on BSE.

After completing the audit process, BSE has since certified Fidessa as compliant with all relevant exchange rules and regulatory standards, allowing exchange members to use the platform for equities trading on BSE.

Several top Indian brokers already use Fidessa to trade or for connectivity outside of India. As a result, this latest development will support the continued growth of Indian capital markets.

BSE was established in 1875 and serves as Asia’s oldest stock exchange, with more than 5,700 listings.

Meanwhile, Fidessa offers  order management, algorithmic trading and risk management, with a focus on simplicity, reliability, and automation

“ION is delighted that Fidessa is certified for equities trading on BSE,” said Robert Cioffi, global head of equities product management at ION Markets.

“Already established as a trusted market data vendor to brokers and exchanges in India, the partnership with BSE further strengthens ION’s position in the region, and unlocks Fidessa’s full capabilities for exchange members.”

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Portfolio trading has seen a dramatic rise these past few years. It involves trading a basket of bonds of variable credit quality and risk as a single, all-or-none transaction, whereby the trade instruction specifies that the entire order must be filled. It’s not very different from list trading which has existed for a long time where dealers were requested to price a backet of instruments. However, in this scenario, traders don’t have the option of choosing the bonds included in a portfolio. Despite this, portfolio trading has become increasingly attractive.

The rise in credit portfolio trading can be attributed to a combination of factors: primarily, the advances we’ve made from a technological standpoint and recent regulatory changes.

On the technological front, the ability to analyse data has improved dramatically in recent years. Data analytics has allowed traders to optimise portfolio pricing and risk management, for instance, by looking at historical data and market conditions. In addition, algo trading has made portfolio trading more efficient by automating workflows and streamlining execution.

The pandemic and working from home strengthened demand for more efficient trade executions. Moreover, financial market regulations such as Mifid II have helped drive more post-trade transparency, audit trails and proof of best execution.

What are the key challenges linked to the adoption of portfolio trading and what innovations are helping combat these issues?

One of the top challenges is the complexity surrounding pricing. It is difficult to accurately price a diverse portfolio of bonds as different bonds have different amounts of data available on them; therefore, establishing a precise value for a portfolio with multiple bonds can be difficult. Additionally, portfolios frequently contain both highly liquid and illiquid assets, which makes it difficult to find buyers willing to accept a portfolio with such a mix of bonds, potentially posing significant risk.

In addition, regulatory changes in recent years have made it more costly for banks to hold on to riskier assets. Financial institutions have become reluctant to have inventory on their books, with their risk warehousing capabilities significantly reduced.

Innovations in algorithmic trading, improved data analytics, and new technologies are helping to combat these challenges. Algorithms can help significantly in offloading the risk of a portfolio. For instance, traders can automatically offload less-desirable bonds from their portfolios by identifying the best times and price to sell them. In addition, better data analytics and new technological capabilities are helping traders to be more efficient in portfolio construction and risk assessment. Data analytics and AI tools can analyse huge volumes of data accurately, which helps traders judge the balance and risk of a portfolio transaction and make better decisions.

What are the key trends likely to shape the future outlook of credit portfolio trading?

While automation is already underway, big data and AI will continue to be at the forefront. The vast amount of data that is generated by electronic trading can be processed using AI to generate more sophisticated pricing, portfolio construction, risk analysis, and execution. Significantly, this data can be processed by AI to make decisions almost instantaneously, it is much faster and more accurate than what a human could do.

In parallel, as portfolio trading continues to grow, so will regulatory scrutiny. Portfolio trading often involves high-value trades with high capital requirements. Therefore, regulators are keen to manage risk and ensure there are no unscrupulous trades. This is important in preventing potential financial instability and ensuring that as portfolio trading becomes more widespread, it does not lead to market disruption. New regulations around credit portfolio trading are, therefore, highly likely in the coming years, with the potential to alter the market environment around portfolio trading.

Finally, ETFs are playing a significant role in shaping the outlook of credit portfolio trading as they increasingly become the natural tool for liquidity and risk management while entering portfolio positions and adjusting the derived risk profile.

What is the wider role of credit portfolio trading within the broader fixed income landscape?

Credit portfolio trading plays an important role in enhancing liquidity and promoting greater efficiency. By bundling multiple bonds into a single transaction, portfolio trading promotes liquidity for bonds that might not trade independently. Importantly, this helps to improve the liquidity of the entire fixed-income market whilst at the same time protecting the leakage of information during trade execution.

Portfolio trading is significantly more efficient than trading individual bonds. Previously, if traders were looking to sell 10 bonds for example, it would take a significant amount of time, with an individual having to make multiple calls to sell even a single bond. With portfolio trading, by bundling bonds together, this process is much more efficient.

This process promotes better practice in the fixed-income market as a whole and reducing the time and effort needed to execute trades, reducing the potential for errors while ensuring best execution.

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Enrico Melchioni

The development follows the successful migration of LIST’s Borsa italiana client onto Euronext’s Optiq technology earlier this year.

Read more: LIST completes migration to Euronext’s Optiq

LIST’s FastTrade modular solution is designed as a low-latency, multi-asset electronic trading system, offering full customisation and trading functionalities.

The platfom’s normalised connectivity architecture enables integration of LuxSE that uses Euronext’s Optiq technology.

“Following the successful migration of our clients to the Optiq trading platform earlier this year, we are delighted to share FastTrade’s newly certified connectivity to the Luxembourg Stock Exchange,” said Enrico Melchioni, product owner for FastTrade at LIST.

“This latest initiative reflects our commitment to swift adaptation in line with the market’s evolution and our clients’ needs and consolidates our position as a key provider of cross-asset, multi-market trading technology and connectivity.”

Through the activation of a new certified adapter in FastTrade, LIST offers clients the ability to access all products listed on LuxSE across all asset classes.

All existing functionalities, namely: trading, execution, and liquidity provision, are made available automatically to clients wanting to access LuxSE.

This will enable clients deploying FastTrade to benefit from an expanded connectivity base, alongside the ability to grow their trading capability.

“This marks an important step in bringing increased visibility to the wide range of securities available for trading at the Luxembourg Stock Exchange and facilitate the onboarding of new trading members,” said Guy Weymeschkirch, head of markets and surveillance at LuxSE.

“We look forward to reinforcing our work and collaboration with LIST in the future.”

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In 2023, Spain joined a growing list of European countries set to introduce new restrictions on instruments aimed at retail investors, which would ban the promotion of CFDs and restricting leverage on other instruments.

In response, none of the surveyed retail brokers either strongly or somewhat agreed with Spanish regulators’ intentions, while 69% strongly disagreed with them.

Looking at the impact these regulatory restrictions would have on listed markets in the EU and UK, just over half (51%) of responds believe there would be an increase in listed volumes, with 10% of that portion expecting a significant increase, while 41% expect a slight increase.

Meanwhile, only 14% of respondents expressed that there would be a decrease in listed volumes, while 34% expect no change.

The report found that should retail flow to listed markets increase, there would be significant benefits.

Proprietary trading firms which took part in the survey predict that significant flows into listed derivatives markets would improve liquidity, provide greater opportunities for institutional firms and increase revenues.

Of those surveyed, less than 10% predicted that the move would result in increased volatility in the market.

“This report suggests that restrictions on retail investment in bilateral products such as CFDs will boost engagement with listed derivatives markets. This will bring greater liquidity and more diverse flow to the markets in Europe,” Will Mitting, founder of Acuiti, told The TRADE.

“For incumbent institutional firms this provides an opportunity. As volumes in listed markets grow, institutional clients are likely to trade more while some institutional sell-side firms see opportunities in targeting retail investors if they trade listed derivatives.”

Mitting did, however, emphasise that the report also found that restrictions on retail flows to CFDs will result in retail focused brokers expanding their offerings to institutional investors, “which will increase competition for incumbent institutional sell-side firms”.

“These shifts are likely to cause significant disruptions and innovation in European institutional markets,” stressed Mitting.

Looking at how a ban could impact competition in institutional markets as retail brokers seek to replace retail revenues with institutional flows, no surveyed sell-side respondents expected a significant increase in competition, however, 53% stated that they expect a slight increase in competition, while the remainder (47%) expect no change.

Acuiti stated that this potentially reflects an under-appreciation of the challenge and ambitions of retail brokers found in the report, emphasising that while clearing firms are likely to see benefits from retail brokers moving into futures and options, execution-focused focused brokers will inevitably face grater competition.

“Increased retail participation in the listed derivatives space will only accelerate the sell-side demand for modern, scalable technology,” Francesco Margini, chief product officer for cleared derivatives at ION Markets, told The TRADE.

“This is essential for supporting large scale client onboarding and significantly increased transactional volumes across execution and clearing.”

The report highlighted that the growth of retail investing added depth and improved liquidity in US derivatives markets, attributing it as a key factor in the significant growth that US listed market have seen since 2019.

Retail brokers which have the advantage of being technology-led, will likely put them in good stead as they approach listed and institutional markets.

Despite the challenges that may arise due to regulatory restrictions for European retail brokers, Acuiti concluded that with challenges comes opportunities and the potential for reinvention for the affected parties.

The post Retail regulatory restrictions could boost European listed derivatives markets, but how will institutional brokers be affected? appeared first on The TRADE.

The move follows a successful rollout of the equity segment in March. LIST has upgraded its FastTrade trading solution to accommodate the migration of Italian bond markets to the new platform, providing Italian sell-side clients increased access to international investor bases.

LIST’s FastTrade solution is fully customisable and offers improved trading capabilities, developed to handle the migration of Italian bond markets managed Borsa Italiana to Euronext’s Optiq technology.

FastTrade has provided a transition of Italian bond market clients, offering Italian investors increased access to a range of products, alongside enabling the marketplace to trade on an integrated platform.

“After successfully migrating equities markets earlier in the year, we’re delighted to have now migrated bond market trading seamlessly for our clients,” said Vito Mangiaracina, chief technology officer at LIST.

“[…] It demonstrates LIST’s ability to manage complex projects when supporting our clients and the wider financial community in the transition to a new technology.”

The migration also brings new software versions, aiding with changes in market models and workflows, as well as a redesign and implementation of new data centres and telecommunication infrastructure.

The migration follows Euronext’s acquisition of the Borsa Italian Cash and Derivatives markets exchange in April 2021. Euronext is replacing previous Millennium technology used by the Borsa Italiana exchange with a new Optiq trading platform.

Read more: European Commission approves Euronext Borsa Italiana acquisition

“While the migration to Euronext Optiq technology for the bond markets came with challenges, thanks to the detailed preparation and cooperation of all the involved parties, the migration was a great success,” said Flavio Mazzarotto, chief services officer at LIST.

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As part of the agreement, ION will provide direct access to CEDX via its cleared derivatives all-in-one automated trade workflow solution, XTP Execution, which offers Tier 1 banks and brokers integrated order management, connectivity and order execution.

The direct trading connectivity means users of the ION solution will gain access to CEDX’s futures and options markets for single country and pan-European equity indices – CEDX has also set out plans to expand into pan-European single stock options from 2023 subject to regulatory approval.

“Direct connectivity through the XTP Execution service will help to increase CEDX’s footprint across Europe ahead of its strategic expansion into single stock options,” said Iouri Saroukhanov, head of European derivatives, Cboe Europe.

“We are excited for ION’s clients to benefit from a transparent, efficient, and truly pan-European equity derivatives market, and accelerating towards our vision of creating the most complete equity derivatives ecosystem in Europe.”

ABN Amro Clearing, Goldman Sachs and Morgan Stanley became the first participant banks to back the new Cboe Amsterdam derivatives exchange in April 2021 ahead of its launch.

The European derivatives market later launched in September of that year, initially offering trading in futures and options based on key Cboe Europe single country and pan-European indices.

Cboe has since been expanding the remit of the marketplace, confirming plans to add single stock options on leading European companies to its remit in February, subject to regulatory approvals. The options are expected to be added in November.

“Trading connectivity to CEDX for XTP Execution customers extends market coverage of our cleared derivatives front-office suite and further consolidates ION Markets’ leading position in the industry,” said Francesco Margini, chief product officer for Cleared Derivatives, ION Markets.

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