I’ve said this before, here and elsewhere, that I’ve been a great admirer of FTF News for some time. The team at FTF is great at what they do: new aggregation and curation, tremendous original content, and conferences and events in New York, Chicago and London.
Today FTF held their Chicago DerivOps conference. I was honored to chair the event, and to moderate a panel on FMCs with Yvonne Downs from Jefferies, Max Itkin from Pentwater Capital and Rajeev Ranjin from the Chicago Fed. The full conference agenda is here.
As conference chair, I was able to deliver some opening remarks. As I do sometimes, I selected the topic of FCM data, as published by CFTC, as a topic on which to focus. The opening remarks are pasted below, but full disclosure: I pretty much strayed from the text and spoke extemporaneously. I was supposed to talk for 5 to 10 minutes. I had to cut myself off when the clock counted down from 15 minutes to zero.
The lineup was, as always, terrific. I was proud to be able to contribute to the event. My guess is that most attendees got a lot out of it. I certainly did.
I want to start by thanking all the fine folks at Financial Technologies Forum – my friend Maureen Lowe, Katie Flanagan, Eugene Grygo, Liz Acury, and the rest of their team. I’ve been fortunate to be a part of this DerivOps conference for a couple of years now, it really is one of the best conferences in Chicago. And I’ve been a big fan of Maureen and the rest of the folks at FTF. If you’re not engaged with this team – on Twitter, in their LinkedIn group, on their website, well, I’d strongly encourage you all to do that. They are excellent at what they do – the content aggregation and curation, the original content they are producing, it is all really terrific stuff. Trust me when I say this, you should be engaged with them in the many ways they are available -it will help you professionally in ways that will surprise you.
I want to thank the sponsors of today’s event: TriOptima, LCH Clearnet, Tradeweb, Options Clearing Corp and Omgeo, Lombard Risk, Misys, Simcorp and MarketAxess. Without these sponsors this event would not be possible, thank you all for participating. And to the attendees, be sure to visit with them during the breaks today – they have a lot to offer in the FinTech space, you should take some time to see what innovations these sponsors are bringing online in the recent past and for the rest of 2014.
Finally, I want to thank all of you, our attendees. Obviously, the purpose of the event, the reason we’re all here, the sponsors, FTF, all the panelists and speakers, is for you. I’m sure you’ll get a lot our of today’s event.
We have an excellent lineup: In a few minutes we’ll get started with a roundtable on SEFs – Swap Execution Facilities, those brand new regulated platforms on which OTC swaps are required to be traded, born out of the Financial Reform Bill that we all know as Dodd-Frank, The moderator for this panel is John McPartland, the Senior Policy Advisor at the Federal Reserve Bank, a fellow I first met a few years ago here at the FTF DerivOps conference in Chicago. Pay attention to this panel, folks – McPartland is one of the really great minds in trading and clearing policies, and he has a top-notch lineup with folks from LCH Clearnet, Citi and Tradeweb.
After a short break we’ll have a presentation by Mary Harris from TriOptima on portfolio reconciliation, and after that we’ll have a panel on Collateral Management, moderated by Larissa Miller, founder of Stuart Investments and a professor at IIT, with panelists from Northern Trust, Nuveen and she’ll have Ted Levroni from Omgeo.
After lunch I’ll be moderating a panel on FCMs – we’ll be touching on some of the points from this morning’s panels, and looking at some of the criteria that firms can and should use to help them choose clearing firms for the OTC and exchange-traded derivatives activity. This panel includes Max Itkin, head of Ops at Pentwater Capital, Yvonne Downs, Chief Operating Office at Jefferies, and Rajeev Ranjin, a policy specialist at the Chicago Fed.
Following that we’ll have a panel on Global Reg Compliance, moderated by Michael Sackheim from the law firm Sidley Austin, with panelists from Gladius Capital Management, the FCM Straits Financial, and with Gavin McConville from Lombard Risk.
That panel will be followed by a presentation Risk and Reconciliation in the derivatives market, by Maan Bsat from Misys.
We’ll wrap thing up this afternoon with a panel moderated by Larissa Miller from Stuart Investments and IIT, the topic there will address how firms can cope with the new rules and requirements for clearing. Larissa will have Joe Corcoran from OCC, Kevin Walker from Nuveen, and Joe Kamnick, a director at the SEC, who is really sharp and who was on one of my panels at last year’s conference. He’s a great guy and a really good sport. We were a little hard on him last year, as a representative of one of the market regulators, but he came though that okay. The proof is that he is back again this year. I’m looking forward to hearing what Joe has to say.
Let me wrap up my comments with a few stats, some raw numbers to keep in the back of your mind as you speak to the sponsors, as you listen to the speakers, as we go through the day. People often refer to the explosion of exchange volumes as a sign of robust health and growth in the US Capital markets. They often make the same case when talking about outstanding notional amounts for the swaps market. My own suspicion is that volume alone, or outstanding notional amount alone, only tells part of the story. Certainly volume figures are indicative of exchange and clearinghouse health, but I’m not sure that the same can be said of the overall health of the US financial markets.
As you all know, FCMs and broker dealers are required to submit, to CFTC, FOCUS reports, or FCM 1FR forms if they’re not a broker dealer, and the CFTC uses these reports to produce their FCM Financial Data reports every month. There is an extensive archive of these reports at CFTC’s website: cftc.gov. These reports have a ton of useful information that anyone can review, and can use to draw some conclusions about the relative health of the US futures market, and by extension, the US swaps market, the US securities markets, and the US financial world in general.
Since the focus of my consulting practice is mainly in the FCM back-office technology world, I look at these reports pretty often. In preparation for this years DerivOps conference, I took a look at the year-end reports for 2013, posted by CFTC in February, and year-end from 10 years before, in 2003. As one might expect, the pure raw figures provided by CFTC show some positives and some negatives.
For example: in those 10 years, between 2003 and 2013, the amount of US Customer Segregated Funds more than doubled – from a little over $71 million in 2003, to $143.7 million in 2013. That is a clear sign of outstanding growth. And it is worth noting that during this period, the US and the global economy went through staggering upheaval: from the collapse of the US housing market, the global recession, the international credit crisis, the collapse of Lehman and Bear Stearns, the bankruptcy of what was then one of the top-10 FCMs in the US – MF Global, and all the attendant upheaval from that – missing customer money, accusations of mismanagement and malfeasance. MF Global’s collapse was followed in short order by the revelations out of Cedar Falls Iowa that Russ Wasendorf had stolen more than $200 million of his own customer’s money to fund his lavish lifestyle and to fund his divorce settlement with his ex-wife. Russ Wasedorf’s actions led to the demise of a mid-tier FCM called Peregrine Financial, or PFG Best, as it was rebranded.
Fun Fact, as an aside: in the months just after MF Global failed, US customers took more than $10 million out of the US Futures Markets. That sounds like a mind-bogglingly large figure, but at the time, it was only one-fifteenth of the total ledger balance of what was then around $153 million in US Customer funds.
So that’s some good news. Here is some news that might be considered less-good:
Between 2003 and 2013, the concentration of US Customer Seg at the top end of the spectrum has grown. In 2003, the top-5 FCMs had 41.7% of the total reported Customer Seg, and the top-10 had 65% of the Seg Funds reported. By 2013, the top-5 reported 49.6% and the top-10 had 75% of the US Customer Seg balance. That’s right, as of December 2013, more than thee quarters of all the US Customer Seg funds were held at just 10 FCMs.
I’ll leave it to others to decide whether that is a sign of health in the US futures industry. But here are some figures that I, and many others, consider definitely bad news.
In 2003, 177 FCMs submitted FOCUS reports or FCM 1FRs to CFTC. In 2013 only 100 did.
In 2003, 102 FCMs reported that they held Customer Seg funds to CFTC. As of December 2013, just 69 FCMs reported that they are clearing Customer Seg.
So in ten years, while the amount of Customer Seg more than doubled, we’ve seen a decrease of roughly 30% in the number of FCMs, and in the number of FCMs who clear customer business. In oder to promote a healthy, robust, vibrant US capital market, that is a trend that I think we should all commit ourselves to reversing.
With that said, with those figures fresh in your mind, let’s get started with today’s program. First up is the roundtable on SEFs, so I’ll turn the dais over to a man I greatly admire, John McPartland from the Chicago Fed.
If you were at the event, drop a comment in below and let me know what you thought of it, or e-mail me at my G-Mail address and say hello. (You can find the G-Mail address on my Twitter profile, my LinkedIn profile, the Needham Consulting Facebook Page, or my Google+ profile page.