Longstanding market secretary of the former London International Financial Futures and Options Exchange (LIFFE) and icon of London’s derivatives industry, Nick Carew Hunt, passed away this week at the age of 71 after a short illness.

Once the largest futures trading venue in Europe, LIFFE was founded in 1979 and modelled after the Chicago Mercantile Exchange (CME) as an open outcry floor. Carew Hunt led the exchange (now ICE Futures Europe) through numerous phases of growth: including the launch of its trading floor in London’s Royal Exchange, its 1991 move to a larger floor at Cannon Bridge, and its integration into Euronext in 2002.  

He remained with the group for its subsequent 2007 Euronext acquisition by NYSE to form NYSE Euronext, and the purchase of NYSE Euronext by Intercontinental Exchange (ICE) in 2013, following which LIFFE was rebranded as ICE Futures Europe. He also played a major role in the venue’s move towards electronic trading in the late 90s.  

“[We] join the industry in mourning the loss of Nick Carew Hunt, an integral part of London’s futures community and the growth of the derivatives industry in both the UK and Europe,” said the Futures Industry Association (FIA) in a statement this week. 

“Nick was at the centre of some of the biggest evolutions our markets saw across the last four decades. But more importantly, he was a valuable friend and mentor to many across this industry. His deep knowledge as well as his good humour will be missed,” said added FIA president and CEO, Walt Lukken. 

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Francesco Margini

ION Markets has expanded its cleared derivatives offering with XTP, a front-to-back product suite providing real-time insights into net positions, margins, risk, analytics, commissions and more. 

“Record trading volumes, persistent market volatility and sudden shifts in valuations have challenged the derivatives industry to an unprecedented degree,” said Francesco Margini, chief product officer – cleared derivatives at ION Markets, speaking to The TRADE.  

“We are continually seeing new peaks in intraday volatility and volumes, both of which are the ultimate concerns for firms and traders operating in the space. In these complex conditions, fragmented legacy software and manual, antiquated operational processes have exposed their limits. The status quo is no longer sustainable for several firms who are now looking to transform their operations to manage risk effectively and process their business at scale.  

“Our customers recognise the significant value delivered by an automated, integrated front-to-back platform that can seamlessly process their business in real-time and produce actionable insights on all client activity across execution, clearing and settlement.” 

The XTP cleared derivatives product suite now includes the JANUS risk management and Clarus CHARM analytics solutions, broadening the functionality available to clients. 

The group has been working towards a single platform for its expansion, and as such, is rebranding its suite of cleared derivatives products under the XTP brand. 

“We’ve seen strong demand across our customers for solutions that can fully automate the execution and post-trade workflow and generate in real-time an aggregate view of client positions, liquidity, and risk across exchange-traded derivatives (ETDs) and over the counter (OTC) derivatives, given the convergence of these classes in recent years,” Margini added. 

“Much of our work at ION centres on innovation through re-engineering and integration: as part of our product strategy, we concluded that we could best meet the demands of our derivatives customers by bringing together sophisticated tools developed by the likes of Clarus Financial Technology and LIST, to evolve our already popular execution and post-trade offering, XTP. With the integration of the Charm (Clarus) and Janus (LIST) products into the XTP front-to-back suite, we have created a powerful platform meeting all key customer requirements and catering for future needs.” 

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Deutsche Börse Group has invested $3 million into Caplight Technologies, a platform designed to enable institutional investors to hedge, generate income or take long and short positions on private company stock using structured products and synthetics.

The company, founded by Javier Avalos and Justin Moore in 2021, aims to bring public equity market-like transaction data, execution, and settlement mechanics to the private markets, thus allowing many large institutional investors to access the private markets for the first time.  

Venture capital-backed private companies represent over $3.8 trillion in value across over 1,000 companies, according to CB Insights. Caplight’s platform offers investors the ability to make long and short directional investments on Venture-backed private company stock using proprietary financial products and unique price discovery tools. Investors utilise the Caplight platform for the purpose of hedging, income generation, shorting, or investment strategies on private company stock. 

“Until now, the VC asset class has existed ‘long only’, meaning no ability to hedge or make directional investments. Caplight gives investors the tools to actively manage their risk across illiquid assets. We’re incredibly excited to be turning the hedging of private company stock into a product,” said CEO Avalos.  

Earlier this year, Caplight completed the first ever call option on private company stock, and is currently working on plans to explore collaboration opportunities with global derivatives exchange Eurex, a wholly owned subsidiary of Deutsche Börse, to bring structured pre-IPO investment products to the global financial markets. 

The latest raise from Deutsche Börse brings Caplight’s funding to $10 million, including a $5 million seed round led by Better Tomorrow Ventures that was completed in January 2022. Other investors include Fin Capital, Susquehanna Private Equity Investments, LLLP, and Clocktower Ventures. 

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CME Group has seen its quarterly international average daily volume (ADV) jump to 6.1 million contracts in Q3 2022, up 21% year on year. 

“Market conditions in the third quarter of the year continued to create a heightened need for risk management globally.”

Reflecting all trading reported from outside the US, volume was driven largely by 36% growth in FX products, a 32% increase in interest rate products and a 25% growth in equity index products. 

“We saw a considerable uptick in volumes outside of the US in Q3 year on year, and we are committed to working with clients in these regions and beyond to provide them with the tools to manage their risk going forward,” said Samman.  

EMEA ADV reached 4.2 million contracts, up 14% from Q3 2021. This was driven by a strong performance in interest rate and FX products in the region, up 30% and 29% respectively, compared to the same period in 2021.  

Asia Pacific saw even stronger growth, up 41% year on year, driven by a 66% growth in FX and a 64% growth in equity index products.  

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With the transition from Libor to SOFR at the end of 2021, derivatives traders have had a bumpy ride switching to the new risk-free rate. The first SOFR swaptions traded earlier this year, with a couple of block trades executed by Goldman Sachs and JP Morgan in February 2022, but concerns have been raised around the lack of a robust volatility market, with limited liquidity and not many dealers yet quoting the instruments.

Tradeweb is seeking to change that, and last week completed the first ever fully electronic SOFR swaption with Goldman Sachs and Caisse de dépôt et de placement du Québec (CDPQ) as counterparties on its Tradeweb Swap Execution Facility (TW SEF). Since the completion of the trade, 15 dealers are now providing swaptions pricing on the platform.  

Tradeweb has been offering SOFR swaptions trading on its platform since the Libor transition at the end of 2021, and the latest development gives market participants a more efficient way to access market rates liquidity – using its request-for-quote (RFQ) tool to put multiple liquidity providers in competition, and request-for-market (RFM) functionality to access two-way markets. 

Colm Murtagh, head of US institutional rates at Tradeweb, said: “Facilitating SOFR swaptions trading is yet another meaningful step forward in the electronification of markets, demonstrating how non-linear swaps can also benefit from electronic execution and access to deeper pools of liquidity.” 

A swaption (also known as a swap option) trade allows participants the ability to opt into an interest rate swap contract. Swaptions provide traders with optionality and control as they transact and hedge in the OTC market, and players like Pimco and Pershing Square have raked in hundreds of millions of dollars using them as a position against higher rates. With the expectation of further rate hikes, equity and fixed income managers who would not normally participate have also been piling into the market as a hedge, driving volumes upwards but making liquidity scarce. 

According to some reports, the US swaptions market doubled in the last quarter of 2021 alone, and the growth has continued this year – Tradeweb reported a 42.3% year-on-year jump in average daily volumes for May, up to $214.9 billion. Given that in the first quarter of the year Tradeweb accounted for 52% of all platform swaps and 71% of dealer-to-client swaps, that suggests a sizeable market-wide jump. 

The electronification of trading is an ongoing trend in the swaps market, with a 2021 study from Coalition Greenwich finding that European swaps traders on the buy-side already executed 45% of their trades electronically, and growth expected to continue in the coming year.  

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Derivatives giant CME Group has confirmed plans for a new daily US dollar reference rate 

Set to launch from 28 February 2022, the reference rates will be published daily at 4pm ET, the highest volume hour for cryptocurrency trading.  

“These new reference rates are designed to meet the ever-evolving needs of participants in the digital asset space,” said Tim McCourt, global head of equity index and alternative investment products at CME Group. “In Q4 2021, the New York calculation window was the second-most traded hour for Bitcoin futures behind the London rate. As we continue to see more institutional clients use our Bitcoin and Ether futures products in active portfolios or structured products like ETFs, these New York reference rates become increasingly important as they allow market participants to more accurately and precisely assess cryptocurrency price risk with timing more closely aligned to their portfolios and regions.”  

The new reference rates add to the existing CME CF Bitcoin Reference Rate (BRR) and CME CF-Ether Dollar Reference Rate (ETHUSD_RR), which provide a daily benchmark price for Bitcoin and Ether in US dollars, but are published at 4pm London time.  

The existing reference rates will continue to serve as the benchmark rates for settlement of all CME Group Bitcoin and Ether futures and micro futures. However, the new rates will serve to synchronise the US markets, adding a new risk management tool for crypto investors, especially on the institutional side, where large blocks are traded.  

“When you run a 24/7 global crypto business, you need a regional end-of-day benchmark rate,” noted Joe Hickey, global head of trading at BlockFi, a crypto trading platform with over a million customers and more than $15 billion in assets under management.  

“This will help fill BlockFi’s institutional client demand for a liquid benchmark rate during New York hours, while also providing a new way for us to monitor the markets regionally.” 

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As part of an annual statistics report, ESMA said the EU derivatives market grew from around €660 trillion in overall notional outstanding in the first quarter of 2018, to €735 trillion by year-end, and the market saw a peak notional amount in the second quarter of €900 trillion. The overall growth to €735 trillion reflects an 11% increase from 2017. 

Over the course of the year, ESMA added IRDs’ notional amount increased 24% from €448 trillion in the first quarter of 2018 to €557 trillion by year-end, accounting for 76% the overall notional amount.

The report also showed that over the counter (OTC) trading still leads the derivatives market, as it accounted for 90% of notional traded by the last quarter of 2018, while the remaining 10% were traded on exchange.

When also considering the proportion of derivatives executed on trading venues including multilateral and organised trading facilities (MTFs and OTFs), ESMA revealed the share of notional amount traded on venue grew throughout 2018 from 13% to 17%. The growth is thought to have been impacted by requirements under MiFID II.

“This trend may partly be due to the MiFID II trading obligation, implemented in January 2018, which requires that products subject to the clearing obligation which meet certain conditions be traded on trading venues from January 2018,” ESMA said. “That said, some of the growth seen above may also be from improvements in reporting, with trading venues now more explicitly reported with the implementation of MiFID II.”

Elsewhere, IRDs and credit derivatives dominated central clearing of OTC derivatives in 2018 following the roll-out of clearing obligations under EMIR. IRDs accounted for 63% of the proportion of OTC notional amount centrally cleared, up from 61% earlier in the year, followed by credit derivatives which accounted for around 25%.

“For IRDs central clearing was carried out mostly by central counterparties (CCPs) in the EU (between 57% and 58% of the total outstanding notional amount throughout 2018), while on average 4% of the total notional amount outstanding was cleared by CCPs located in a third country,” ESMA said. “For credit derivatives the proportion of notional amount cleared by EU CCPs increased during 2018, from 11% of total outstanding in 1Q18 to 13% in 4Q18. The proportion of notional amount cleared in a third country CCP was on average 12% of the total in 2018.”

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The Acuiti Front-Office Software Review found that of those firms considering implementing a new front-office provider in the next two years, the most likely was brokers (55%), followed by non-bank FCMs (38%) and proprietary trading firms (35%).

However, there are no signs that trading and investment firms will be seeking to consolidate the number of providers they currently use, with just 5% of clients planning tor reduce this figure over the next 24 months.

The study canvassed over 200 derivatives markets participants and reviewed six vendors – Bloomberg, CQG, CME Direct, Fidessa (now part of Ion Investment Group), Stellar Trading Systems and Trading Technologies – as well as comparing third-party systems to in-house builds.

 “There is huge opportunity for vendors to grow market share in the derivatives market as the latest phase of cost reduction has reached a natural conclusion and a significant proportion of firms are considering new providers,” said Will Mitting, founder and managing director of Acuiti.

“We found that, while many of the major incumbents are set to grow both organically and through new client acquisition, clients are also looking at newer providers with Vela in particular set for growth according to our findings.”

Provider consolidation has been evidenced within the front-office trading systems landscape in recent years, particularly following the introduction of MiFID II in January last year.

The TRADE’s annual Execution Management Systems (EMS) survey, published in September, found that buy-side firms have drastically reduced the number of providers used since 2017, with around two-thirds of respondents now only using one provider, compared to one-third doing so two years earlier.

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The new Citi Regulatory Initial Margin Calculation Service will help asset managers, pension funds and insurance companies that will come under into scope of the rules, based on their derivatives volumes threshold, from 1 September 2020 and 2021.

The service will enable buy-side firms to go from estimating their future collateral levels to efficiently monitoring their requirements and operating full daily initial margin calculation and reconciliation. It also leverages the ISDA SIMM model, made possible through a partnership collateral technology vendor, AcadiaSoft.

“There are several key questions that in-scope firms need to address – When will they need to start posting collateral, how much collateral will be required, and how can they optimise collateral and mitigate the cost of compliance?” said Diana Shapiro, North America head of collateral management services, Citi.

“An early and accurate view of the likely initial margin levels will enable clients to plan the scope and scale of work needed to comply with the regulations.”

Citi stated the ad-hoc service estimation or periodic initial margin calculation is based on a regularly supplied trade file and can be applied to existing or hypothetical portfolios for the purposes of simulating their collateral requirements under different scenarios.

Over the past 18 months, the US bank has invested significantly in its collateral management capabilities, which includes the migration to a fully cloud-based architecture.

It is also developing a collateral analytics solution to help clients optimise funding costs, and has a full front-to-back regulatory initial margin offering which includes both collateral and custodial services.

“As firms come into scope of UMR under phases 5 and 6, the additional margin obligations could strain their operational platforms, drain liquidity from their portfolios and increase collateral drag,” said Fergus Pery, Global Head of Collateral Management Services.

“We see this as an opportunity to help our clients understand the growing impact of collateral management on investment performance and to create value by implementing sound practices today.”

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The MAP functionality currently supports the execution of lists comprising GBP-denominated vanilla and inflation swaps, gilts and gilt index-linked bonds, and aims to replace existing manual-based workflows whereby trades were conducted via phone or chat apps.

“Our MAP functionality is a clear demonstration of Tradeweb’s unique ability to enhance the trading experience for our clients, and connect the buy-side with deep liquidity pools across asset classes on a single electronic venue, and in this case a single trade,” said Lee Olesky, CEO of Tradeweb Markets.

“Tradeweb’s strategic approach continues to be focused on building robust and efficient trading solutions that advance our markets globally.”

As well as aiming to reduce the time spent on preparing and completing such trades, the MAP functionality seeks to reduce errors, increase execution speed and achieve greater competitive pricing, according to Tradeweb.

The first fully-electronic MAP transaction using in-competition request-for-quote (RFQ) was completed between Legal & General Investment Management (LGIM) and Bank of America Merrill Lynch.

“The Global Trading team at LGIM is constantly looking for ways to innovate, and ultimately improve client outcomes,” said Phil Hunter, head of rates trading at Legal & General Investment Management. “The Tradeweb MAP functionality helps LGIM reduce trading costs and achieve straight-through processing, while also ensuring that enhanced best execution requirements under MiFID II are being met.”

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