Asia Etrader Issue 8 by Asia Etrading

AsiaEtrader Issue 8 | Volume 1

Q4 2013

The Electronic Trading Resource for Asia

HK SFC algo rules ASEAN link turns one NZX milking dairy futures ASIC squeezes broker dark pools

Distilling synthetic PB KONEX is born

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AsiaEtrader Issue 8 | Volume 1

Q4 2013

Turning lead into gold

The Electronic Trading Resource for Asia

HK SFC algo rules ASEAN link turns one ASIC squeezes broker dark pools NZX milking dairy futures

Hedge

funds

have

been

steadily

migrating into Asia (see Issue 6) to enjoy larger returns not seen in the West for a few years now. However, AUM tends to be lower on average putting pressure on costs coupled Distilling synthetic PB KONEX is born

with emerging markets not yet adequately

CREDITS

regulated or sophisticated to support these

Editor-in-Chief Stephen Edge steve@asiaetrading.com

types of investors. In the competitive world

Managing Editor Dan Barnes dan@icorp.co.uk Contributing Writers Stephen Price steveprice@ymail.com Lynn Strongindodds strongindodds@aol.com Rupert Walker rupertagwalker@gmail.com Cover Design Nadia P. nad3e9@gmail.com Magazine Design The Magazine Production Company, Adur Business Centre, Little High Street, Shoreham-by-Sea, West Sussex, BN43 5EG Printer Century View Printing Limited Units B3, B4 & A1; 10/F Ko Fai Industrial Building 7 Ko Fai Road Yau Tong Kowloon Hong Kong Advertising Enquiries support@asiaetrading.com eu@asiaetrading.com Subscription Enquiries support@asiaetrading.com eu@asiaetrading.com

of prime brokerage innovation falls to the sell-side to help develop hedge funds and the subsequent fees they can generate. Risk aversion and cautious CFOs provide for greater due diligence and transparency ensuring that just the right blend of leverage, financing and margin are blended to foster synthetic products to keep those hedge funds in business. Despite the hardships of modern brokerage it is this kind of innovation that will keep the wheels turning and the industry moving forward (though others may argue this was precisely what caused the GFC in the first place). It is with great pleasure that we bring to you our eighth addition of our humble magazine where we see Asia continue to grow and evolve.

Stephen J. Edge Editor

Scan the Quick Response Code with your iPhone or Android Phone to take you to the Subscription page

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contents

Contents IN THE ZONE Our quarterly round-up of industry news and developments across Asia last quarter.

Page 4

Cover Stories Distilling synthetic PB – Synthetic prime offers access to closed markets in Asia for the buy-side and reduced costs for the sell-side, as pressure on broker financing increases. Page 6

Connecting the dots – Trading has been thin on Konex, Korea’s newest stock market,

but the writing’s not on the wall just yet. Page 10

DERIVATIVES NZX to milk dairy futures with CFTC approval – The New Zealand Exchange may see volumes spike if dairy futures are approved by the US regulator. Page 14

Asia Futures Trading Q3 2013 Recap – See how Asia’s derivatives exchanges faired this past quarter. Page 18

BUY SIDE ASEAN Trading Link’s hesitant growth – Ambitions to connect Southeast Asia’s stock exchanges have achieved limited success, one year after its formation. Page 20

WHO’S WHO Asia Etrader spoke Richard Leung SVP and co-head information technology division at

Hong Kong Exchanges and Clearing Ltd. Page 22

REGULATION ASIC puts a leash on broker dark pools – New rules succeed in pushing liquidity from dark to lit markets. Page 26

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contents

WORD ON THE STEET “How do you prepare for significant market movements triggered by a trading error?” – Four of your industry peers weighed in. Page 29

opinion How many separate pools of collateral do you oversee? – See how the industry voted and hear from Barnaby Nelson of BNP Paribas Securities Services offer his expert opinion. Page 30

Hongsong Chou – examines risk control and overseas regulation of quantitative trading. Page 32

EQUITIES HK SFC electronic trading rules cut out brokers and ISVs – Latest rules require an in-depth understanding of trading platforms, leading asset managers to ditch platforms and brokers. Page 34

Asia’s Fragmentation Footprint Q3 2013 – See the latest on venue competition in

Asia. Page 36

Asia Equity Trading Q3 2013 Recap. Our quarterly review of turnover, average trade sizes, spread and market impact costs on Asia’s exchanges. Page 40

TECHNOLOGY A panel discussion between heads of technology demonstrated the pull of adaptable technology. Page 43

post trade One-stop repository – The DTCC’s ubiquity offers a path to cross-border trade reporting in Asia; however distrust will make breaking away from national reporting a challenge. Page 46

BACK PAGE 48 Dates – Exchange holidays and important industry events. Directory – A listing of Asia’s electronic trading industry participants.

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In the zone

In the Zone... The second half of the year started with the JPX Groups bringing its equity market under one platform, OTC derivatives clearing was brought into focus in Australia, Japan and Singapore, exchange competition in Korea, continued growth in Malaysia and Taiwan’s stock exchange has a new president. But that’s not all as we summarize Q3 2013 industry events in the Zone. Australia Last quarter, ASIC announced it is rolling out a new reporting regime under OTC derivatives reforms that is intended to be consistent with international requirements and enable regulators to better identify systemic risk concerns and potential market abuse. The reporting rules establish which entities will need to report to trade repositories, what information will need to be reported, and when the reporting obligation will start for different classes of reporting entities and different instrument types (see story on page 46). Meanwhile, Chi-X made a number of changes to its trading system in September to comply with ASIC’s Market Integrity Rules (MIRs), which include the introduction of regulatory data requirements. The changes include alteration of the way that some of Chi-X’s pegged orders work, so that they will always offer price improvement over the national best bid-offer (NBBO). On 11 September, ASX’s Over-the-counter (OTC) Derivatives Clearing Service, which went live on 1 July 2013, welcomed two new OTC clearing participants: the Commonwealth Bank of Australia, and Deutsche Bank. The service cleared its first Australian dollar interest rate swap trade, an OTC transaction between the two banks, the following day. The service provides central counterparty clearing for standardised OTC-traded Australian dollar interest rate derivatives, a market with an annual turnover of around A$15 trillion, according to the 2012 figures.

China Early in the quarter, the China Cotton Textile Association (CCTA) and the China Commercial Circulation Association of Textile and Apparel (CATA) held the ’Expert Forum on Yarn Futures’ in Dalian to discuss the introduction of yarn futures on the Dalian Commodity Exchange (DCE). In February, DCE submitted an application to the China Securities Regulatory Commission (CSRC) to commence yarn futures trading. Forum attendees discussed the progress being made in bringing yarn futures to the exchange, including trading rules. In other news, Uhuru Kenyatta, president of Kenya, visited Shenzhen Stock Exchange

pleaded guilty to one count of illegal short selling of the shares of China Properties Investments Holdings. The court fined Premium Stars HK$3,000 and ordered it to pay investigation costs. Also in early September, the SFC reprimanded Sun On Tat Securities Company and fined it HK$1.6 million for internal control failings. The SFC also reprimanded Kwong Suk Yee, a responsible officer of Sun On Tat, and fined her HK$200,000 for managerial and supervisory failures.

India Muthukrishnan Ramaswami to launch collateral management service with Clearstream

(SZSE) on 23 August. Kenyatta said the Kenyan government was creating an environment conducive for small and medium-sized enterprises (SMEs) to thrive. The Nairobi Securities Exchange is planning to develop a market segment for SMEs and Kenya would like to strengthen communication with SZSE.

On 16 August ACE Derivatives and Commodity Exchange, a Kotak Anchored Enterprise, launched new season Crude Palm Oil Contracts on the exchange platform, and modified two different contracts for the export and domestic soymeal markets.

Japan The biggest news out of Japan last quarter was the integration of Osaka Securities Exchange’s cash equity market into that of Tokyo Stock

Hong Kong The annual Fund Management Activities Survey was released on 25 July by the Securities and Futures Commission (SFC). It revealed that the fund management business rebounded in 2012, with overseas investors contributing HK$8,018 billion (or 64.6%) to the total fund management business, excluding real estate investment trusts (REITs), while insurance companies reported a 24.7% YoY increase in their assets under management, and private banking business increased 18.4% YoY. Hong Kong Exchanges and Clearing Limited (HKEx) and The London Metal Exchange (LME), part of the HKEx Group, appointed Garry Jones as the chief executive of the LME to succeed Martin Abbott, who resigned in June. On 1 August, Deutsche Börse announced it had connected the first participant from Hong Kong, and East Asia, Celestial Securities Limited, to its Xetra trading system, which provides direct access to exchange trading in Germany. In regulatory and legal developments, on 6 September the Eastern Magistrates’ Court convicted Premium Stars Investments after it

Vincent Camerlynck Appointed CEO of BNP Paribas Investment Partners, APAC

Exchange on 16 July. With this integration, the exchanges aim to further improve the convenience of the cash equity market with measures such as the unification of listing and trading rules, as well as the trading platform. Meanwhile, Japanese banks prepared for the advent of OTC client clearing. Capital markets software provider Calypso Technology, announced

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in the zone

initial agreement to November 30, 2013 from August 18, 2013. The first set of MOAs cover the preparatory steps to be taken by the parties in relation to the proposed acquisition by the PSE of the shareholdings of both the SGX and BAP in the Philippine Dealing Systems Holdings Corporation (PDS).

Singapore

Adam Bradley

Joined ASX as Head of Sales Technical Services

the results of a survey on OTC clearing conducted at its Japanese Market Forum 2013 in Tokyo, which was held on 1 September and was attended by leading Japanese banks, broker dealers, asset managers, insurance firms and financial services. The survey revealed that 80% of respondents are working on achieving operationally readiness for OTC clearing in Japan, and that 20% are already operationally ready, even though it is not mandated.

Singapore Exchange (SGX) proposed to publish closing prices for exchange traded funds (ETFs) and put in place a methodology to determine closing prices for ETFs that will reflect more closely the prevailing market conditions. SGX is seeking the views of the public and market participants on this proposal, and subject to regulatory approval and member readiness, aims to introduce the measure by the first quarter of 2014. SGX is also consulting the public on a proposal to reduce the standard board lot size of securities listed on the exchange from 1,000 to 100 units, with a view to reducing it to 1 unit in the longer term. The reduction of the board lot size to 100 units as a first step would allow SGX to assess the market

South Korea Modeled on the London Stock Exchange’s AIM, South Korea’s newest stock market, KONEX, got off to a lacklustre start with low turnover and little interest from outside of the country. The market provides a platform for SMEs to raise capital, and is intended to provide a steppingstone to listing on KOSDAQ. (See story on page 10).

Malaysia On 18 July, Bursa Malaysia announced its best quarterly and first half financial results since the 2007 rally. The strong performance was attributed to stronger performance across the securities, derivatives and Islamic markets, which all recorded high double-digit growth trading volumes as a result of increased foreign and retail participation. The exchange’s derivatives market hit a daily historical all-time high of 91,449 contracts traded, including negotiated large trades, at the close of market on 27 August 2013. The previous record volume was achieved on 25 June 2013 when the total volume traded was 87,123 contracts. The increase in trading volume was attributed to the increased volatility in the underlying cash equity market.

Phillipines In August, the Philippine Stock Exchange (PSE) signed separate Memorandum of Agreements (MOAs) with the Singapore Exchange Limited (SGX) and the Bankers Association of the Philippines (BAP) to extend the terms of an

Lee Such-Der

Welcomes changes by Taiwan FSC for market reform

impact before unitising the standard board lot. The exchange said that reducing the board lot size would benefit the public as individuals would find it easier to invest in higher-priced shares. In early September the exchange announced that it had signed Letter of Intent with Clearstream on the launch of a collateral management service to enable customers to more easily and efficiently use assets held at SGX’s securities depository, CDP, for their collateral needs. Under the agreement, SGX would use Clearstream’s collateral management infrastructure, the Global Liquidity Hub, and offer its Liquidity Hub GO service, to enable collateral to be allocated, optimised and substituted on a fully automated and real-time basis.

Taiwan On 1 July, Taiwan Stock Exchange (TWSE) announced the appointment of Michael Lin as

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president of the exchange. He succeeds Samuel Hsu. Lin joined TWSE as senior executive vice president in October 2006. Previous to this, he served as senior executive vice president of the Taiwan Depository & Clearing Corporation (TDCC). Before his tenure at TDCC, Lin held various management roles at the Fiscal Information Agency under the Ministry of Finance, as well as the Postal Savings Bureau, from 1990 to 2006. In other exchange news, TWSE and MIAX Options Exchange signed an MOU on 26 August to foster mutual cooperation and information exchange. The MIAX Options Exchange (MIAX) was approved by the US Securities and Exchange Commission (SEC) on 3 December, 2012, becoming the nation’s 11th options exchange. The signing of the MOU will enable US ETF issuers to launch options on MIAX that track ETFs linked to TWSE listed stocks. This could improve international links to the Taiwan capital market and encourage more investors to trade Taiwan securities. Meanwhile, the Financial Supervisory Commission (FSC) amended market rules to stimulate trading activity. Starting from 23 September, around 1,200 borrowed stocks currently eligible for margin trading will be exempt from the uptick rule and may be sold at a price lower than the closing price of the previous trading day. The uptick rule requires SBL short sales for borrowed shares to be entered at a price no lower than the previous day’s closing price. Currently 150 stocks are exempted from the uptick rule. The measure is expected to increase the ease of trading and expand hedging options available to investors. The FSC also plans to extend sameday trading to 200 large and mid-cap stocks from 6 January 2014.

Thailand On 15 July, Thailand Futures Exchange (TFEX) added 10 underlying securities for stock futures, bringing the total underlying securities to 60, and effective 2 September, the exchange decreased the minimum size required for block trade transactions of high notional-valued contracts. The minimum volume for block trade was reduced to 25 contracts, down from 100 contracts, for block trades of 10-Baht gold futures, 50-Baht gold futures, and 20 stock futures with high notional value. Block trading of silver, oil, and sector futures is now allowed, with a minimum volume of 25 contracts. Also in this quarter, the Stock Exchange of Thailand (SET), together with stock exchanges in Cambodia, Hanoi, Hochiminh and Laos, announced that they will collaborate to strengthen the region’s competitiveness and raise its global profile during the first GMS exchanges CEOs meeting, which was hosted by SET, as a platform for closer collaboration among GMS exchanges.

cover story 1

Distilling Synthetic PB Synthetic prime offers access to closed markets in Asia for the buy-side and reduced costs for the sell-side, as pressure on broker financing increases. By Dan Barnes

edge funds trading Asia must sidestep many obstacles. Accessing prime brokerage in Asia can be harder than in other regions. The challenge of trading across different countries without a unifying currency or rule book makes setting up shop difficult. “You need to see that a prime has local access; that it has strong FX hedging, as that can impact pricing; and that it has depth of swap book, with an active business that is up and running,” says Richard Bagshaw, head of Asia desk at hedge fund AHL, part of Man Group. Emerging local markets will often not recognise an omnibus account structure and so prime brokers (PBs) are unable to offer a single account to allow customers to trade the region. That can be a pain for hedge funds, from an administrative and cost perspective. To get around it, a PB will often hold assets in a local market in its own name and then write swap contracts for clients who want access to the cash flow from those assets. This ‘swap prime’ service can be included as part of full prime broker offering or wrapped up into an offering with capital introduction for meeting new investors, an online reporting service and cross-country margining to become synthetic prime brokerage. “Obtaining your own investor ID and having a local presence is possible,” says Jean-Paul Linschoten, a director in Prime Finance Sales at HSBC in Hong Kong, “But some of the smaller offshore funds prefer the operational ease of using swaps in the region as a means of not having to obtain licenses or comply with local reporting requirements. In addition, swaps remove the costs associated with set-up, custodian, settlement, and administration as well and the costs of maintaining those relationships. If you are going to trade the region, transacting

on swap allows you to execute with one counterparty as one whole transaction and not face multiple providers.” For alternative fund managers, finding a way to deflate the ever rising costs is highly desirable. Signing up to synthetic prime broker arrangement helps to manage cost and can be used to extend a funds access into certain markets. “There are two kinds of funds drawn to purely synthetic prime offerings,” says Sukru Kesebi, head of hedge fund consulting Asia Pacific at Deutsche Bank. “The small fund manager launching new product, that cannot pay its brokers in a meaningful way and so signs up to an ISDA relationship without any bells and whistles; and the behemoth blue chip overseas manager which has three to four full service prime brokers but sign another three to four synthetics with better access to markets like China and India.”

Kishore Ramakrishnan Financial Services Advisory

Ernst & Young

All about the money For hedge fund managers, getting the right financing and the right support to underpin a strategy are both key concerns when selecting a broker. “Financing costs are certainly front and centre,” says Kesebi. “You can generally see wide bands in pricing across the street from house to house. The cost, depth, and stability of the stock loan inventory is also a key consideration when selecting your prime broker.” Market observers believe that, by using their standing as well-capitalised banks with custody arms, full-service prime brokerage houses like JP Morgan, Citigroup and HSBC will stand to gain by offering prime custody at competitive pricing. Being predominantly a UK/Asian bank, HSBC’s focus has been on setting up in Europe

“Asset protection and client account segregation have become the underpinning criteria to building prime custody offerings.”

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Cover story 1

and then Asia followed by the US. Its Asian prime brokerage has been operational for a year and now it is opening up to US clients where the majority of the world’s hedge fund assets are held. “Post financial-crisis, we see that what is important for investors is content – how you help them make money – and less so financing, although with Basel III that is becoming more important,” says Linschoten. “We plan to capitalise on our Asian corporate network, insight and primary deal-flow to build our Asian equities franchise with investors outside the region, especially in the US.” Tighter regulation and risk management are adding to the cost and complexity of operations for fund managers. For example, under the fund management company (FMC) guidelines introduced in August 2012, Singapore – long a haven for alternative investment managers – has begun to require independent custody and valuation of investors’ assets, with FMCs being subjected to externally-managed independent annual audits. Their risk management frameworks must also now better reflect the investments they manage. The desire to minimise counterparty risk has led to wider interest in the multi-prime model, with funds using between two and four prime and clearing brokers to ensure continuity of operations and a third party custodian, such as BNY Mellon or State Street, keeping hold of the assets. As a counterpoint to this model, bigger banks with strong balance sheets are reportedly pulling their full range of services together to deliver a more holistic package – prime custody – that delivers a more efficient movement of assets by avoiding the messaging between a broker and a custodian. “The bigger banks like HSBC and Citi are offering one stop shop services with enhanced custody and administration tied in to offer a broader and wider service,” says Brian Rooney, senior vice president Asia Pacific at prime broker system supplier Core One Technologies. “That’s a big attraction. The preferred model used to be for one or two PB’s, which moved to multiple PBs, but now funds are trying to address the cost of managing multiple PBs. Custody prime delivers a complete service offering. There are new players entering the PB space who have traditionally offered regional custody, who are now coupling this with a synthetic & SBL offering.” “There is an increasing emphasis on the ability of the clients to safeguard their position and collateral exposures,” adds Kishore

Ramakrishnan, executive director for Financial Services Advisory at consultant Ernst & Young in Hong Kong. “Asset protection and client account segregation have become the underpinning criteria to building prime custody offerings. Multibillion dollar hedge fund managers typically have separate third-party custody arrangements which makes it tricky for the prime broker and the custodian to move assets back and forth based on client instructions. A firm that can integrate its PB services with its global custody platform stands to offer full segregation of assets under ‘prime custody’ and is also able to offer a competitive pricing structure.”

Sukru Kesebi Head of Hedge Fund Consulting Asia Pacific

Deutsche Bank

“The cost, depth, and stability of the stock loan inventory is also a key consideration when selecting your prime broker.”

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Rules, damned rules, and capital ratios Counterparty risk has also been the big issue for regulators post-financial crisis. Two aspects of their response directly reflect on prime brokerage. The first of these is Basel III, which has been revised with an eye to shoring up bank balance sheets so they are less likely to fail, and is being phased in by 2019. The new capital adequacy ratios it recommends set a fairly hefty capital charge for securities financing activity which was previously ignored. Added to that, banks have to make sure any short-term lending is covered by liquid assets. “A strong balance sheet is perhaps more important than ever,” says Ramakrishnan. “A PB’s ability to offer competitive pricing and funding at times of distress helps stay on top from the rest of the competition and this is possible only with a strong balance sheet. PB’s will be subject to higher capital and liquidity charges under the Basel III regime. [Its] liquidity coverage ratio requires PB’s to set aside to bundle of liquid assets to cover the net cash outflows over 30-day stress period. LCR provisions will significantly inflate the PB’s funding costs. In addition to the LCR requirement, PB’s securities financing activities will be subjected to a risk-weighted asset calculation framework proportionate to PB’s securities financing activities after netting long and short coverage.” Such bearish rules might appear to weigh heavily in favour of synthetic prime, where a swap exposure is used in lieu of the lending and financing. However, swap trading has also been targeted by regulators. The unregulated over-the-counter derivatives market allowed firms to accrue enormous – bankrupting – positions which significantly contributed to the post-2008 crisis. As a consequence the G20 mandated in 2009 that non-listed derivatives, such as equity swaps, have to be cleared via central counterparties (CCPs). Central clearing

cover story 1

is an expensive business. Counterparties incur costs by connecting to the CCP, and they must post assets with the CCP, which are held as margin against their positions. If the firm goes bust, the CCP takes on the positions of the firm and expends those margins while trading out of the positions. Potentially these costs might limit the appeal of swaps. However, despite progress in the US and Europe toward central clearing, the lack of movement in emerging markets has meant that synthetic access is still the most viable option says Adam York, head of Equity Finance/Delta One Sales, Asia-Pacific at HSBC. “Increased regulation of swaps could make the product less appealing for investors, but we are currently quite a long way in Asia from the CCP model prescribed under the G20 agreement,” he says.

“...some of the smaller offshore funds prefer the operational ease of using swaps in the region as a means of not having to obtain licenses or comply with local reporting requirements.” Jean-Paul Linschoten Prime Finance Sales

HSBC

New kids on the block The majority of global hedge fund assets are located in the US, a situation that has been exacerbated by a process of consolidation during the financial crisis, with US$10 billion funds becoming US$30 billion fund and the focus for almost every prime broker is the US. “Most of the capital flow is still US coming into Asia; there are maybe five or six Asian funds that are over US$1 billion AUM,” notes Rooney. However the demographic makeup of funds is changing, with an explosion of strategies as the region’s highs and lows create volatility and opportunity. “Looking across all strategies in Asia, 95% of funds 8-10 years ago were equity long-short,” says Kesebi. “We are now seeing more nonvanilla strategies, as Asian products become more diversified. There is an uptick in Global and Asian Macro funds, Multi-strategy funds, Special Situation/Event funds, and following the impressive returns in credit in 2012, we are seeing more Credit products. Based on our estimates, across the current startup funds space, approximately 70% of new launches are equity long-short.” Brokers need to change with their client base; a more diverse range of strategies requires greater flexibility from PBs, with multi-asset, diversified houses now holding sway over the more traditional firms.

“An equities franchise [that gets] thrown a multi-strategy trading, across a number of asset classes they [is] ill-equipped to service that fund or to finance the instruments that they are going to need,” observes one broker. Technology is also crucial. At a basic level, sell-side technology resources can allow funds to operate without getting their hands dirty. For example, stationing a server in Japan makes a firm taxable, and so providing a sell-side server through which to trade is preferable. At a more complex level, the right systems must be in place for a fund to be able to deliver its strategy effectively, especially important as strategies become more complex. “A [synthetic equity] swap platform needs to be flexible in terms of financing, accounting and reporting as each fund will trade each market differently,” says Rooney. “There is no such thing as one flavour suits all for Asia markets, so offering a flexible synthetic platform is paramount to the success of the PB’s client franchise.” HSBC has spent the last nine months building a synthetic Direct Market Access (DMA) platform, an extension of the cash DMA platform that allows a client to execute a swap instead of a cash trade, to gain exposure, and expects to roll it out over the next few months.

“Building a prime brokerage is a long, complicated and expensive road.” says Linschoten. “It’s a multi-year plan and certainly given the bank, its name and our presence in Asia, our Asian equities business has made incredible strides forward from a few years ago.” Competition is fierce. Goldman Sachs still has a firm grip on these markets and as of 2012 it was able to offers long equity swap positions for the ASEAN big five, China, Hong Kong, India, Pakistan Taiwan, South Korea and Vietnam, and synthetic short positions for many of those same markets, excepting China, India, Pakistan and Vietnam. Still HSBC notes it was ranked number eighth by the 2013 AsiaHedge survey having been operational for just over 12 months; however it has a fifth of the assets under management that Deutsche Bank holds (4th place) and one eighth of those held by leader Goldman Sachs. Ramakrishnan says, “If I were to pick top three factors that would help differentiate the cream from the rest of the PB service providers, I would say: Breadth of service alongside the ability to offer customised solutions; cost attributes, as determined by both the price and stability of liquidity and funding; and client relationship and reputation in the industry.”

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Jonathan Anderson President Emerging Advisors Group

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Peter Perkins Global Strategist & Partner MRB – The Macro Research Board

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cover story 2

Connecting the dots Trading has been thin on Konex, Korea’s newest stock market, but the writing’s not on the wall just yet. By Stephen Price

outh Korea’s new KONEX (KNX) market, touted as an incubator for venture enterprises and as a steppingstone for listing on Korea Composite Stock Price Index (KOSPI) or Korean Securities Dealers Automated Quotations (KOSDAQ), was met with talk of a soft landing in the media after launching in July, as trading volumes were low. But it is early days yet, and the yardsticks for success include more than just trading volume. “In the first month, controversy brewed over whether KONEX could be successful. Some market participants saw low liquidity as evidence of failure, and assessed turnover as lower than expected,” said Sohyun Kang, research fellow at Korea Capital Market Institute, who worked with market regulator the Financial Services

“It will never be possible to strike a balance between protecting investors and enabling the listing of SMEs in Korea...” Hank Morris Advisor, North Asia

Triple A Partners

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cover story 2

Commission (FSC) and the Korea Exchange (KRX) on setting up the market. “But debate about KONEX is largely a matter of different perceptions of the market’s nature. Many participants, including the entrepreneurs of listed SMEs, seem to perceive KONEX as an extension of extant markets. They might expect immediate high performance, like in the KOSPI or the KOSDAQ markets. Yet, the KONEX market was established based on quite different purposes from the other two exchanges: The start-ups and SMEs should be evaluated on their future potential rather than past performance.” On the first day of operations, July 1, 2013, trading volume was 220,000 shares. The following day volume dipped to 24,000 shares. September 3, 2013 saw the lowest trading volume as of September 17, with 3,000 shares changing hands, whilst the peak occurred on August 8, with volume reaching 486,000 shares. Meanwhile, trading value came in at KRW 1.379 billion on the market’s debut, and as of September 17 had ranged between KRW 21 million on September 9, to KRW 2.155 billion on August 8. Market capitalization has trended up from won 468.9 billion on July 1, to won 523.9 billion on September 17, and the number of listed companies increased from 21 to 22 on August 14. KOSPI lists 774 companies, whose market capitalization was US$1.04 trillion at the end of August, while 991 companies are listed on KOSDAQ, whose market capitalization was US$111.4 billion.

The master plan Part of South Korean President Park Geunhye’s ‘creative economy’ strategy and modeled on the London Stock Exchange’s Alternative Investment Market (AIM), KONEX was inaugurated with the intention of enabling venture enterprises to raise capital through an alternative method to bank loans, and in the process prepare for listing on KOSDAQ or KOSPI. “Korean start-up SMEs depend largely on banks to raise capital, but they can now raise capital through direct financing,” said Andy Maynard, global head of trading and execution at broker CLSA. Listing regulations for KNX are much looser than for KOSPI and KOSDAQ. Firms must have minimum paid-in capital of KRW500 million, or annual sales of more than KRW1 billion, or make a minimum annual profit of KRW300 million. That is about a tenth of the requirement for KOSDAQ-listed companies. KONEX constituents are not required to publish bi-annual or quarterly reports or designate an independent accountant, among other exemptions. But looser corporate governance

Sohyun Kang Research Fellow

Korea Capital Market Institute

“Some market participants saw low liquidity as evidence of failure, and assessed turnover as lower than expected...”

www.asiaetrading.com z Q4 2013 z Asia Etrader

rules and financial listing requirements mean the market is far riskier than KOSPI or KOSDAQ. Shares are traded in batches of 100 through single price auction, though a move to continuous auction trading is planned if conditions permit. Although performance data for listed companies are available online, KRX does not currently release index data. Meanwhile, trading is restricted to institutional and individual investors with a minimum deposit of KRW300 million. “Low turnover is a result of the minimum requirements for investors,” said Kang. “Some market participants consider the minimum requirement to be a major drag in fostering the venue. It is, however, only natural that the liquidity of KONEX is lower than that of the existing exchanges as the market was designed to trade among professionals and to attract long-term investments from informed investors. Nevertheless, low turnover is only a problem if liquidity gets so low that the market cannot achieve its main goals: Venture capital investors might not exit when they are willing to, and the listed companies might fail to raise money through KONEX. And the trading outlook is more of the same. “In the near term I expect turnover to continue to be very low,” said Maynard. “Investors have to take more risk investing in KONEX than KOSDAQ, but with no benefit. So unless the government amends current regulations, it is going to take a while to see any pick up in turnover in this market. And in Korea, retail investors are one of the biggest liquidity providers, so the exchange needs to lower barriers for them as well. “Retail investors, which account for 50% of KOSPI turnover, are required to have KRW300,000 (US$270,000) in deposits, so participation is low and trading is based on single-price-call auctions every 30 minutes, for 15 trading sessions per day. Therefore the liquidity outlook is not promising; however it could improve if the exchange changes the regulations and trading methods.” But KRX is in no hurry to tinker with the rules, though the prime minister’s office has reportedly asked the FSC to reduce the deposit requirement. “Since KONEX was designed to reduce the costs of the listing and regulation and because minimum requirements are low, market risk is very high,” said KRX in a written response to questions. “We therefore set the deposit limit at KRW300 million. KONEX aims to attract professional investors who have the ability to control risk. Some observers have suggested the deposit should be lowered to won 100 million, but just two months have passed, and

cover story 2

Andy Maynard Global Head of Trading & Execution

CLSA

“...unless the government amends current regulations, it is going to take a while to see any pick up in turnover in this market.”

we need more time to analyze the effect of the deposit limits.” “It will never be possible to strike a balance between protecting investors and enabling the listing of SMEs in Korea,” said Henry Morris, advisor North Asia for Asia Alternative Asset Partners. “The amount of background information on SMEs that list in KOSDAQ is not that great, and since KONEX requires even less disclosure, you may say that investor protection is a secondary motive in the case of KONEX, and that the primary motive in launching the market is to show that the Korean government is listening to the pleas of SMEs for more access to funding, from government and/or nongovernment sources.” Though low trading volume attributed to investor restrictions made headlines, it is just one measure of success, says KRX. “Konex was designed to be an incubator for KOSPI or KOSDAQ,” said KRX. “So we don’t use market liquidity as a main indicator. Instead, we think the number of listed company moving to KOSPI or KOSDAQ from KNX will be a more valid indicator. We expect companies will need some four or five years to graduate from KNX, and we anticipate that 20% of companies listed on KNX will move to KOSPI or KOSDAQ each year.” So far foreign institutional investors have shown no interest, with retail investors accounting for a reported 61% of trading volume in July, followed by Korean institutions at 32%. “The risk profile for investing into companies that are listed on KONEX is going to be higher than for KOSDAQ, which itself is higher than KOSPI, so it is no surprise that government entities appear to be active in trading on KONEX at this stage,” said Morris. “Government financial entities do not have the same earnings expectations as banks or other financials that are in private ownership, and do not wish to be considered too aggressive in their approach to risk management. The fact that foreign… investors are apparently not very interested in the KONEX market and that much of the tiny amount of trading that is being done is being conducted

by government related entities suggests that this is the basic distortion in this market, i.e., it depends entirely upon government support.”

Measuring up So how does KNX measure up against its peers? At one end of the spectrum is AIM, from which KRX borrowed the nominated advisor (NOMAD) system that assigns brokerages oversight responsibilities over listed companies. AIM was launched June 19, 1995 with 10 UK companies whose aggregate value was £82 million on the first day of trading. By the end of 1996, the number of companies had increased to 252, including international firms, and market value rose to £5.298 billion. In the same year average daily shares traded were 21.9 million. The market grew steadily, peaking in 2007 with 1,694 companies valued at £97.56 billion and average daily shares traded of 608.1 million, before declining to 1,096 companies valued at £61.747 billion at the end of 2012. But that’s the gold standard of enterprise boards. Launched in 1999, Hong Kong’s Growth Enterprise Market, on the other hand, has been beset by poor turnover and problems with corporate governance, though it has proven successful as a springboard for companies to move to the main board. Meanwhile, Shenzhen Stock Exchange’s ChiNext board, which was launched in October 2009 with 28 firms, listed 355 companies as of the end of August 2013, and saw 2.1 billion traded shares on July 24, 2013. “Many if not most SMEs in Korea remain forever in the SME category and never grow into larger companies. With just a few months of operational experience behind it, it is too early to say that KONEX is a failure, but similarly it is too early to call it a success,” said Morris. “If it can list many more deserving SMEs (there are tens of thousands of SMEs in Korea) and be a source of capital for hundreds or even thousands of SMEs, then it will be called a success.”

Taiwan next up East Asia will be home to another enterprise board by the year-end, when Taiwan’s GreTai’s Securities Market (GTSM) plans to launch the Go Incubation Board for Startup and Acceleration Firms (GISA). Intended as a platform for innovative non-public, small companies, GISA will enable firms to raise capital and access resources from the Small and Medium Enterprise Administration, Ministry of Economic Affairs, CPA firms, Securities and Futures Institute. The board is being touted as a stepping-stone to public issuance, and listing on the emerging stock board, or GTSM’s main board.

Domestic incorporated companies with paid-in capital of less than NT$50 million will be eligible, and once a firm meets all criteria for GISA listing, it will be able to raise capital through GISA, after which it can list on the board. However, GISA-listed companies will not be considered public companies, therefore Taiwan’s Securities and Exchange Act and Securities Investor and Futures Trader Protection Act would not apply. Non-professional investors will be limited to an annual investment of NT$60,000, and will be required to sign a risk statement, but there will be no limit on professional investors.

Asia Etrader z Q4 2013 z www.asiaetrading.com

derivatives

NZX to milk dairy futures with CFTC approval The New Zealand Exchange may see volumes spike if dairy futures are approved by the US regulator. By Dan Barnes

rading on dairy futures in New Zealand will be opened up to US investors if approved by American market regulators, which could substantially increase the market’s volume. The New Zealand Exchange (NZX) has already extended its trading hours on 23 August, opening at 2am local time, to capture overseas traders and is now seeking authorisation from US regulator the Commodity and Futures Trading Commission (CFTC). “The most imminent thing to affect liquidity on the NZX is that the CFTC is going through the review process with an announcement expected on 1 October 2013 as to whether it will approve NZX products as tradable for US companies,” says Kyle Schrad, risk management consultant at FC Stone, one of the NZX dairy futures broker. “Once that approval is made final we should see some pretty good expansion in terms of liquidity on the NZX.” Trading access to the NZX is offered via the trading platform of CQG, and Leighton Andrews, Head of Sales Asia Pacific & Japan at CQG says that with regulatory approval access could be granted to market participants almost immediately.

“We have relationships with close to 100 global brokers, most are US-based,” he says. “Their clients are already using CQG to trade dairy products on the CME so for them to add NZX as another venue is the flick of a switch.” Dairy makes up around 25% of New Zealand’s export receipts, which means any volatility in dairy price creates quite a large amount of risk for the country’s economy. In most countries with a dairy business around 5-10% of production is traded on a global basis, and the rest would typically be consumed domestically. “The US exports 10-11% of total dairy production, for the EU a bit more is exported but for NZ, 99% of our dairy production is exported in the form of dairy commodities so we have quite a large exposure to global volatility,” says Kathryn Jaggard, head of derivatives at NZX. Up until 6 volatility in dairy commodities – meaning whole milk powder, skimmed milk powder, anhydrous milk fat, butter, cheese and whey powder rather than liquid milk – had been limited, with market data provider Agrifax logging only one NZ$100 short-term price movement between 1991 and 2006. “Prices were stable and heading steadily upwards at a slow rate,” says Jaggard. ”Then

in 2006 there was a significant spike in prices due to weather events and prices spiked to their highest level ever seen in dairy. That particularly impacted processors and sellers who had long term contracts with suppliers and could not benefit from the higher prices.” Volatility has continued to develop since then because of growing demand for products from emerging economies, such as China. NZ is the biggest exported of whole milk powder to China and that continues to grow. As emerging economies become wealthier and demand greater levels of protein dairy consumption increases; China’s one child policy can lead to four grandparents and two parents all investing in one child. In 2008 a further development in the dairy industry set the scene for the development of risk management tools: the launch of the internet auction platform, GlobalDairyTrade (GDT). An online platform for selling physical products, GDT started out with dairy firm Fontera acting as the sole seller of products. Since then multiple sellers have joined, such as Arla and Dairy America. GDT became a company independent of Fontera, with the auction being run by Bostonbased CRA.

Asia Etrader z Q4 2013 z www.asiaetrading.com

derivatives

However in 2008 the global financial crisis had left commodity prices flat, amplifying volatility. GDT became established as a pricing benchmark globally for exported dairy products, for Asia Pacific products and also US and European products. “The emergence of Global Dairy Trade as a pricing benchmark really provided the possibility of creating a futures contract that was cash settled because it produced a reference price that represented actual sales of real products and it was well respected as a pricing benchmark,” says Jaggard. In 2010 the NZX began to check if there was demand for risk management, to which the answer came back ‘Yes’, with a preference for a futures contract that was cash settled, as physical delivery of dairy creating too many problems (see box “Let’s get physical”). The exchange spent some time looking at various possible reference prices, including surveys in Oceania, combined with surveys offshore, but they were not deemed robust enough to develop settlement rules for futures contracts. “In the end we chose to settle our futures contracts trades with GlobalDairyTrade,” says Jaggard.

The Competition New Zealand may be the most motivated, but it is not the first nation to look looking at how it can best manage volatility. The CME has been listing liquid dairy contracts for 18 years, although its products tend to be US-centric and are tied to US prices. Its biggest contract is Class III Milk Futures which has an open interest of 3-4000 contracts a month to the end of 2013. In 2010 NZX launched its first dairy product, the whole milk powder futures, which are cash settled to Global Dairy Trade and then in 2011 it launched skimmed milk powder and anhydrous milk fat – a dehydrated butter – contracts. The same year LIFFE launched a skimmed-milk contract, Eurex launched both an international skimmed milk contract and a butter contract and the CME launched an international skimmedmilk contract. “We suddenly felt rather small,” says Jaggard, “However it certainly reinforced the fact that t here was a growing demand for risk management in dairy and we knew we were on the right track. The key difference was the settlement of the contract; we could cash settle through a reference price.” Not only was the competition complimentary, it could also prove to be a source of liquidity for the exchange notes Andrews. “A lot of people in the market look at intercommodity or inter-exchange spreads, so many will be looking at the arbitrage opportunity

between CME Globex dairy and NZX dairy products,” he says. “On CQG that is a pretty simple set up to trade. We have CQ Spreader where the spread strategy sits at the exchange level so they can they can spread those product quite easily with very low latency.” The LIFFE contract is physically delivered but there is some expectation that when there are changes to EU dairy quotas in 2015, that will increase price volatility. At present there are limits on the production of milk in the EU, but when these quotas are dropped in 2015 there will be a lot more milk flowing out of Europe and in all likelihood a rationalisation of the industry with smaller farms consolidated. When Europe becomes more exposed to global d airy prices it will therefore have a greater requirement for risk management which may add to the liquidity on NZX. “In 2010, having launched in October, we traded about 25 lots and we traded 8000 lots last month,” notes Jaggard. “Open interest at the moment is just over 15,000. One of our challenges to get in with the main financial funds and the extension allows us to cater for the EU and US markets. We are getting quite a lot of volume out of Europe. There are likely to be at least two European dairy contracts because EU prices are generally different to Oceanic prices. As with other contracts that trade a spread, it enhances liquidity in both products so we expect that if Eurex and LIFFE get liquidity in their products, that will only enhance liquidity in ours.” That is likely to be echoed if the CFTC grant approval adds Schrad: “With US companies being able to trade it you’ll see a lot of interest in spread trading, between the US and international markets which will provide increased liquidity on the marketplace.”

Kathryn Jaggard Head of Derivatives

NZX

“The emergence of Global Dairy Trade as a pricing benchmark really provided the possibility of creating a futures contract that was cash settled...”

Let’s get physical Physical delivery of dairy futures becomes complex for a number of reasons. Firstly a physical product such as whole milk powder can be developed with various specifications, such as vitamin enrichment which can mean there is too much variety of received goods. Launching a specific contract – as the CME did in 2010 with an international kosher skimmed milk futures contract – can be too limited meaning producers don’t participate in the contract. Buyers may have approved sellers that they source from for particular specifications of products and taking delivery of product should a contract go to expiry may mean they are receiving products that they could not use in the manufacture of their products, creating logistical problems a likely secondary market. Contamination can also be an issue; if a tag on a container of whole milk powder is broken then it is considered a contaminated batch. Because dairy products have relatively high levels of fat the possibility of bacterial contamination makes quality control and grading very difficult. Even without actual contamination, powdered milk is perishable, with a shelf life of about two years, unlike commodities such as coffee or cocoa.

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The hottest topics. The biggest names. The fastest-growing region in the world.

ASIA 2013

fia asia derivatives conference 3-6 december 2013 | st. regis hotel, singapore

The Asian markets are on the rise, as companies proliferate and new players emerge onto the global landscape. The ninth annual FIA Asia Derivatives Conference is poised to be bigger than ever and capitalize on the opportunities that this robust market has to offer: ยง 550 senior delegates from 22 countries ยง More than 150 firms ยง 76% of the delegates are executive-level and senior management ยง Panels on: CCPs, Risk and Compliance, Commodities, Global Regulation, The Chinese Market, Korea, Cross-Border Trading and more ยง Over 25 exhibitors

derivatives

TOP 50 Futures Contracts by Volume in Asia for Q3 2013 Q3 2013

Q3 2012

Product

Vol

Shanghai Futures Exchange

Silver

183,155,874

13,269,850

169,886,024

Dalian Commodity Exchange

Soy Meal

146,991,686

318,188,616

-171,196,930 Agriculture

Shanghai Futures Exchange

Steel Rebar

126,192,222

144,824,286

-18,632,064 Commodity

National Stock Exchange of India

US Dollar/Indian Rupee

117,238,726

152,458,128

-35,219,402 Currency

Zhengzhou Commodity Exchange

Rapeseed Meal

107,331,638

MCX-SX

US Dollar/ Indian Rupee

93,959,058

129,558,609

-35,599,551 Currency

Zhengzhou Commodity Exchange

Flat Glass

73,430,222

Commodity

Dalian Commodity Exchange

Coke

56,936,322

19,644,634

37,291,688

Commodity

Dalian Commodity Exchange

Soy Oil

52,739,644

41,687,518

11,052,126

Agriculture

Shanghai Futures Exchange

Rubber

51,624,506

39,971,194

11,653,312

Commodity

Dalian Commodity Exchange

Linear Low Density Polyethylene (LLDPE) 40,237,310

38,798,966

1,438,344

Commodity

Shanghai Futures Exchange

Copper

39,850,572

29,488,336

10,362,236

Metal

Zhengzhou Commodity Exchange

White Sugar

34,158,604

122,057,382

-87,898,778 Commodity

Dalian Commodity Exchange

Palm Oil

33,557,644

22,342,196

11,215,448

Zhengzhou Commodity Exchange

Pure Terephthalic Acid (PTA)

30,981,316

97,607,446

-66,626,130 Commodity

Dalian Commodity Exchange

Hard Coking Coal

28,746,266

Commodity

Shanghai Futures Exchange

Gold

20,497,674

2,948,424

17,549,250

Metal

China Financial Futures Exchange

5-year Treasury Bond Futures (TF)

14,290,677

Interest Rate

Korea Exchange

US Dollar

12,950,720

13,427,485

-476,765 Currency

Australian Securities Exchange

3 Year Treasury Bond

11,998,065

11,861,576

136,489

Dalian Commodity Exchange

No. 1 Soybeans

8,126,390

40,405,588

-32,279,198 Agriculture

Dalian Commodity Exchange

Corn

7,754,748

23,082,664

-15,327,916 Commodity

Multi Commodity Exchange

Crude Oil

7,606,784

17,973,343

-10,366,559 Energy

Zhengzhou Commodity Exchange

Rapeseed Oil

7,266,840

3,240,994

4,025,846

Agriculture

Australian Securities Exchange

90 Day Bank Bills

7,254,889

5,097,534

2,157,355

Interest Rate

Multi Commodity Exchange

Silver Micro

6,903,314

12,109,953

-5,206,639 Metal

Australian Securities Exchange

10 Year Bond

6,052,355

4,483,751

1,568,604

Shanghai Futures Exchange

Zinc

5,244,816

9,351,850

-4,107,034 Metal

Multi Commodity Exchange

Gold Petal

4,578,252

5,869,972

-1,291,720 Metal

Tokyo Financial Exchange

US Dollar/ Japanese Yen

4,378,047

1,298,601

3,079,446

Multi Commodity Exchange

Copper

3,817,312

7,830,346

-4,013,034 Metal

Multi Commodity Exchange

Silver Mini

3,653,280

8,583,456

-4,930,176 Metal

Multi Commodity Exchange

Gold Mini

3,479,655

5,075,627

-1,595,972 Metal

Multi Commodity Exchange

Copper Mini

2,953,056

4,788,694

-1,835,638 Metal

Multi Commodity Exchange

Natural Gas

2,933,559

8,359,714

-5,426,155 Energy

Tokyo Commodity Exchange

Gold

2,833,841

2,656,737

177,104

Metal

Bursa Malaysia

Crude Plam Oil

2,155,813

1,896,549

259,264

Agriculture

Zhengzhou Commodity Exchange

Cotton No. 1

1,882,526

11,450,478

-9,567,952 Commodity

Multi Commodity Exchange

Silver

1,869,991

4,163,053

-2,293,062 Metal

Tokyo Financial Exchange

Australian Dollar/ Japanese Yen

1,848,065

2,906,943

-1,058,878 Currency

Multi Commodity Exchange

Gold

1,842,725

2,600,785

-758,060 Metal

Tokyo Stock Exchange

10 Year JGB

1,791,588

2,116,675

-325,087

Multi Commodity Exchange

Nickel

1,462,055

4,092,526

-2,630,471 Metal

Shanghai Futures Exchange

Aluminum

1,445,860

2,528,494

-1,082,634 Metal

Tokyo Financial Exchange

Euro/ Japanese Yen

1,353,634

3,443,521

-2,089,887 Currency

Multi Commodity Exchange

Nickel Mini

1,214,199

2,563,006

-1,348,807 Metal

National Commodity & Derivatives Exchange Ref Soya Oil

953,962

2,130,960

-1,176,998 Agriculture

Tokyo Financial Exchange

Three-month Euroyen

854,516

1,483,409

-628,893

National Commodity & Derivatives Exchange Cotton Seed Oil Cake

698,171

1,259,758

-561,587 Commodity

Zhengzhou Commodity Exchange

205,956

2,713,964

-2,508,008 Energy

Methanol

Total

Difference Type Metal

Agriculture

United Stock Exchange data NA. Source: Exchange Websites

Exchange

Agriculture

Interest Rate

Currency

Interest Rate

1,381,284,945 1,403,693,591 -22,408,646

Asia Etrader z Q4 2013 z www.asiaetrading.com

derivatives

Stock Index Futures Index

Q3 2013 Vol

Q3 2012 Vol Net

China Financial Futures Exchange Osaka Securities Exchange National Stock Exchange India TAIFEX Korea Exchange Singapore Exchange TAIFEX Osaka Securities Exchange Hong Kong Exchanges Singapore Exchange Tokyo Stock Exchange Singapore Exchange Hong Kong Exchanges Singapore Exchange Australian Exchange Hong Kong Exchanges Thailand Futures Exchange Bursa Malaysia

CSI300 Nikkei 225 mini S&P Nifty TAIEX KOSPI 200 Nikkei 225 mini-TAIEX Nikkei 225 HHI FTSE China A50 TOPIX MSCI Taiwan HSI SGX CNX Nifty SPI 200 Mini HSI SET 50 KLCI

58,111,640 47,312,547 23,988,334 12,539,770 12,318,158 7,668,229 7,441,144 6,408,145 5,534,747 5,147,285 5 118 622 4,995,793 4,926,071 4,387,717 2,441,610 2,237,418 1,612,979 717,703

27,930,849 30,243,360 17,329,793 11,482,810 17,104,867 6,407,754 7,139,294 4,389,045 3,813,494 2,269,985 3,729,113 4,245,679 4,924,352 3,636,907 2,587,721 2,086,235 957,217 514,991

30,180,791 17,069,187 6,658,541 1,056,960 -4,786,709 1,260,475 301,850 2,019,100 1,721,253 2,877,300 1,389,509 750,114 1,719 750,810 -146,111 151,183 655,762 202,712

212,907,912

150,793,466

62,114,446

Total region

Top 5 Gainers Top 5 Decliners Product Net Exchange Exchange

Product Net

Shanghai Futures Exchange

Silver 169,886,024

Dalian Commodity Exchange

Soy Meal

Dalian Commodity Exchange

Coke 37,291,688

Zhengzhou Commodity Exchange White Sugar

Shanghai Futures Exchange

Gold 17,549,250

Zhengzhou Commodity Exchange Pure Terephthalic Acid (PTA) -66,626,130

Shanghai Futures Exchange

Rubber 11,653,312

MCX-SX

Dalian Commodity Exchange

Palm Oil

National Stock Exchange of India US Dollar/Indian Rupee -35,219,402

11,215,448

-171,196,930 -87,898,778

US Dollar/Indian Rupee -35,599,551

Exchange

Product Volume

Soy Meal Rapeseed Meal Soy Oil Palm Oil No. 1 Soybeans

Dalian Commodity Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange

Top 5 Agriculture Futures

Total

146,991,686 107,331,638 52,739,644 33,557,644 8,126,390 348,747,002

Exchange

Product Volume

Steel Rebar Flat Glass Coke Rubber Linear Low Density Polyethylene (LLDPE)

Shanghai Futures Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange Shanghai Futures Exchange Dalian Commodity Exchange

Top 5 Commodity Futures

Total

126,192,222 73,430,222 56,936,322 51,624,506 40,237,310 348,420,582

Exchange

Product Volume

Top 5 Currency Futures

National Stock Exchange of India MCX-SX Korea Exchange Tokyo Financial Exchange Tokyo Financial Exchange

US Dollar/Indian Rupee US Dollar/ Indian Rupee US Dollar US Dollar/ Japanese Yen Australian Dollar/ Japanese Yen

Total

117,238,726 93,959,058 12,950,720 4,378,047 1,848,065 230,374,616

Exchange

Product Volume

Silver Copper Gold Silver Micro Zinc

Shanghai Futures Exchange Shanghai Futures Exchange Shanghai Futures Exchange Multi Commodity Exchange Shanghai Futures Exchange

Top 5 Metal Futures

Total

www.asiaetrading.com z Q4 2013 z Asia Etrader

183,155,874 39,850,572 20,497,674 6,903,314 5,244,816 255,652,250

Source: Exchange Websites

Exchange

buyside

ASEAN Trading Link’s hesitant growth Ambitions to connect Southeast Asia’s stock exchanges have achieved limited success, one year after the formation of the ASEAN Trading Link. By Rupert Walker

he creation of the ASEAN Trading Link a year ago was viewed as an important initiative towards promoting Southeast Asia as an asset class to global investors. Its object was to connect the region’s stock exchanges to streamline access and minimize trading costs for cross-border transactions, helping small brokers extend their businesses and expand retail investors’ options beyond their home markets. So far, its effectiveness is unclear. Either the Link will broaden its range and increase its depth to become an indispensible tool for regional and eventually global investors, or else it might stagnate and become a wellintentioned curiosity.

“It is still too early to judge the overall Link’s effectiveness and importance. It needs to broaden its scope to include other ASEAN markets – and especially frontier markets [such as Cambodia, Laos and Myanmar] – for its true value to be assessed,” said Carol Fong, CEO CIMB Securities. The Link was conceived by representatives at the 12th ASEAN Summit in 2007 as part of a vision to accelerate integration and increase trade within the region ahead of the proposed formation of a 10-nation economic community in 2015. Bursa Malaysia (BMB) and Singapore Exchange (SGX) connected to the ASEAN Trading Link on 18 September 2012, followed

by the Stock Exchange of Thailand (SET) a month later. Other exchanges will join the Link eventually – although neither the Philippines nor Indonesia seem in a hurry to get involved, and Vietnam’s Hanoi Stock Exchange (HSE) and Hochiminh Stock Exchange (HOSE) are unlikely to be the next to connect. Participating brokers need to install front office hardware and network connections mostly supplied by SunGard Financial Systems, a global service provider. The Link is made up of a fibre network, called the Intra-ASEAN Network (IAN), connecting each of the exchanges at a hub, through the ASEAN Common Exchange (ACE) gateway. The ACE is the point at which the domestic broker

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buyside

connects with the local exchange and where it transacts with its Link partners. This gateway routes orders to the respective ACE of the executing country, sends orders directly to the exchange, disseminates and receives the market data from each of the respective exchanges, holds the risk and client set up module and translates FIX messages into the proprietary protocol of the network. SunGard supplied infrastructure that was similar to the SunGard Global Network (SGN) and FIX systems that it was already delivering to its clients in the region. It was a nine-month project and was implemented on time. The main complexity, according to Paul McCartan, business development director, Asia-Pacific at SunGard Financial Systems, was to ensure that the necessary information would be passed through to exchanges as trades occurred in order to meet their individual compliance requirements. The Link is also connected to the SGN, a system that supports global, multi-asset class, institutional trading and connects buy-side and sell-side firms. “While most exchanges today adopt their own access point, the ASEAN trading link has proven that exchanges working together through a regional platform under a common protocol are beneficial in driving cross-border collaboration,” said McCartan. However, the Link is still at an early stage, and order volume is reportedly small (but undisclosed) and dominated by retail investors, acknowledged Dr Pakorn Peetathawatchai, chief strategy and finance officer at SET.

New Initiatives The next phase is the development of a posttrade link between brokers, exchanges, clearing houses, and central securities depositories, he said, which would lower the cost of foreign exchange transactions and remittances and hence increase flows. The Link will eventually include a central depository and a pan-clearing entity, for instance. But, any attempt to establish an automated link that can cope with an assortment of currencies, tax regimes and settlement calendars, as well as the volumes precipitated by the eventual introduction of algorithmic trading poses enormous challenges. The ASEAN exchanges are also trying to improve their liquidity and depth by introducing new products. Currently there is a FTSE ASEAN 40 index and there are exchange-traded funds (ETFs) listed on the regional bourses as well as the NYSE Arca, and new (but undisclosed) products and indices are planned by the end of this year. The merits of the ASEAN exchanges

Carol Fong CEO

CIMB Securities

“The Link is a good initiative, but perhaps a better alternative would be to merge some of the region’s stock markets to create a single exchange.”

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as an asset class will also be promoted to investors in Hong Kong and Japan, according to Peetathawatchai. Yet, even if the range of products is increased and post-trade systems are integrated, it is unlikely that the Link would attract large securities firms or their institutional investors. CIMB, for instance, rarely uses the Link because it has direct connectivity with individual exchanges within the region and the Link “doesn’t offer any cost or efficiency advantages,” according to Fong. “The Link is more useful for smaller brokers and their retail clients, rather than the large securities firms which have direct connectivity to Asean’s domestic exchanges,” she said. Meanwhile, enthusiasm for the project among other ASEAN exchanges appears to have waned. The Philippine Stock Exchange (PSE) has postponed plans to join the Link claiming that there is little support from either the country’s brokers or investors, and Indonesia is more focused on developing its domestic stock market, with a vigorous campaign to attract new company listings and retail investors to the Indonesia Stock Exchange (IDX). Nevertheless, SunGard’s McCartan remains upbeat. The success of the ASEAN Link can be viewed from two different perspectives, he argues. Firstly, the “fact that the exchanges came together with a vision of creating better and easier access is a success story on its own, regardless of how much volume that is being seen today. Secondly, it has kick-started a trend within the emerging markets signaling greater flow from outside participants.” Trading in Asia will slowly begin to become more standardised, he believes, as exchanges update their access points to meet international standards. Thailand has done this, along with Singapore and Malaysia, and both Indonesia and the Philippines are in the in the process of doing so. Deregulation should also help with cross-border trading and improve connectivity. Cooperation between seven exchanges in six countries was intended to be a first move towards a pan-Southeast Asia trading community. The technology works and there is momentum towards extending it to posttrade functions, but its application is likely to be restricted to small brokers and their retail clients. Rising personal wealth within the region should lead to the growth of pension and mutual funds, and hence to more institutional clients for the larger brokers. “The Link is a good initiative, but perhaps a better alternative would be to merge some of the region’s stock markets to create a single exchange,” says Fong.

Opinion Who’s Who & Analysis

Richard Leung Asia Etrader spoke with Richard Leung SVP and co-head information technology division at Hong Kong Exchanges and Clearing Ltd. He discussed with us the exchange’s technology strategy, the new Tsuen Kwan O data centre, insights on the closing auction, the decision to develop its own matching engine, the integration of the LME, exchange outages and what the future of electronic trading in Asia holds.

AE: How did you get started in capital markets? Richard Leung: My career has been all around the financial services industry, inside and outside of the capital markets; I started my career with an international financial market data vendor. I ended up responsible for all of the technological developments in Asia Pacific for them. After that I co-founded a software company,

“At HKEx, our main focus is to serve the markets that we operate in as a whole.” which was Hong Kong-based in terms of technical development work. We specialised in developing mission-critical high performance software for exchanges around the world. We had customers like Deutsche Borse, NYSE Euronext and SGX. They all use our solution to provide market data services. We developed what was called the CEF, consolidate exchange feed system, for Deutsche Borse that went live in 2001. I believe today they are still using the system, though of course there have been a lot of enhancements since. In 2008, the company was bought by Nomura to form part of the technology organization for

Chi-X Global. So the company I co-founded became the technology arm of Chi-X Global and I became the CTO for Chi-X Global. During the three-and-a-half years I was with the firm, I helped implement trading platforms in Japan and Australia for Chi-X, and in Singapore for Chi-East. In late 2011, I joined HKEx and became the co-head of the IT division. AE: How is the HKEx different than your previous experience with Chi-X? RL: My view about the role of the technologist, like myself, is to serve the business. The business model of Chi-X and that of HKEx are very different and therefore the emphasis on what is important for technologists to serve the business is very different. Chi-X was a start-up, and it is considered an alternative market. It is very focused on one thing from a business perspective: trading. It does not have clearing operations, and doesn’t use market data the way primary markets use it, in particular generating revenue from it. At Chi-X the main business objective is to take away market share of the primary exchange. At HKEx, our main focus is to serve the markets that we operate in as a whole. We have to make sure all the participants in the market are being well served, whether you are a major international broker, or you are a small local broker serving small local investors. From that angle, the emphasis, the use of the technology is very different. At Chi-X my main focus was to come up with the fastest possible platform, because the participants using the Chi-X platform are all very focused on the latency performance of the

“The very high-profile outages that we have seen in the recent past in other markets highlight the need to bring out technology changes quickly and at the same time maintain reliability. ” system. At HKEx, our key goal is reliability. We have to serve the market continuously, without failing. The very high-profile outages that we have seen in the recent past in other markets highlight the need to bring out technology changes quickly and at the same time maintain reliability. It’s a big challenge for exchange operators. At HKEx we continuously bring out new technology, new solutions for the market to help improve the efficiency of the market, but at the same time we have to ensure that these new solutions are as reliable, if not more reliable, than

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Opinionwho’s & Analysis who

“At this stage, we do not have a timetable for implementing it [closing auction], but it’s something we will continue to look at.” the old systems. We also have a responsibility to make sure that, by the time we bring these initiatives to the market, the wider market can make use of this solution, not just a particular segment of the market. The whole market must benefit. Traditionally, we may have a one-year development effort by IT, but the testing period could be equally long, not only by our users but also by the market. You are talking about a two-year timeframe for the deployment of key projects. If you are a start-up like Chi-X, you can’t do that. They make changes, they have to roll them out. It’s much easier for them to roll out because the number of target participants is relatively small.

and whatever new system we implement, we have to make sure those features are to be supported. Even if you go out and license a solution, fairly heavy customisation would be required to address the needs of this particular market. Because of that, we decided to continue developing our own matching engine for the cash market, and we are also considering in the longer term whether to expand this matching engine platform to cover other asset classes, in concert with our strategic plan of having horizontally integrated technology solutions for HKEx. AE: What are your thoughts on fullyintegrated exchange technology? HKEx has its own technology for AMS and on the derivatives side. Isn’t the exchange already integrated? RL: Not really. Let’s focus on technology. We’ve used different technology for the same purpose in different asset classes. Today, we have two different market data systems, one serving the cash market, the other the derivatives market. As part of the HKEx Orion program, our high level goal is to have a single platform that can serve multiple asset classes. The first deliverable, from a platform perspective, is the Orion market data system. We’re launching that

AE: Why has the HKEx yet to implement a closing auction and is it in the pipeline? RL: We always look at possible changes to the market microstructure to improve the efficiency of the market, and a closing auction is one of them. However, an initiative like this requires not only the exchange operator to provide a service, but also a wider acceptance of the market for which approach is the right one. At this stage, we do not have a timetable for implementing it, but it’s something we will continue to look at. AE: Why has the exchange decided to develop its own matching engine? RL: It depends on which market you are talking about. In the cash market, we have a long history of developing and supporting our own matching system. We believe that matching engine technology is core to an exchange. We are one of the very few exchanges with the expertise in developing such a matching system in-house. We think Hong Kong is quite a unique market, especially in cash equity. There are certain special features that the market is used to, www.asiaetrading.com z Q4 2013 z Asia Etrader

system for the cash market at the end of September, and then we plan to put derivatives data on the same platform, with a launch date of late in the first quarter or early in the second quarter, 2014. This is for market data dissemination. We have similar plans for other core technology services,

“We are one of the very few exchanges with the expertise in developing such a matching system in-house. ” such as trading and clearing. Clearing is more complex, because at the moment we have three clearing houses in Hong Kong. We are starting a new one, an OTC clearing house, and waiting for the license approval.

heading Who’s Who

“As part of the HKEx Orion program, our high level goal is to have a single platform that can serve multiple asset classes.”

That will be the fourth clearing house in operation. We are also building LME Clear in London, which will be in production in 2014, when we’ll have five clearing houses. They largely use very different technologies. As part of the HKEx Orion program we are looking at each one of these systems, particularly their commonality. Hopefully, we can extract common building blocks across multiple asset classes. Things like collateral

management and risk management can use the same platform across multiple clearing houses and across multiple asset classes. By doing so, we improve market efficiency by enabling cross margining, common collateral pool, etc. The use of a single technology solution to serve multiple asset classes will improve efficiency in the way technology supports the business at the exchange. For each of the platforms, we will use one of three approaches, depending on what’s appropriate. We can build, like the cash trading platform. The second approach we term ‘adopt’, for example with the Orion market data solution, in which we will license the technology from a vendor, but we are also licensing the source code for future development by in-house technical staff. Thirdly, there are situations where we’ll purely acquire the license for the solution. AE: What are some of the technical challenges of integrating the LME platform with the HKEx? RL: LME itself is a very successful exchange. They have about 80% market share on the base metal contracts they trade. In the last two or three years they invested significantly to upgrade their technology. So, their

market systems are quite up-to-date. LME is a commodity market which is different from the HKEx markets. So there is no need for tight integration of platforms, at least in the short- to medium-term. The technical challenges at LME are about changing the way of doing things. Previously, when they were a members-owned organisation they didn’t focus on IT. They outsourced all of the IT services to external parties. A key project at LME now is to migrate the IT

“We are starting a new one, an OTC clearing house, and waiting for the license approval.”

resources back from the outsource provider to in-house. During the integration stage, we conducted a thorough review on LME’s current state from a technology perspective. All their market systems are performing reasonably well. In the very long term, we will include LME in the HKEx Orion program, where possible. AE: Recently, the levels of required margin held at the clearinghouse was changed; what kind of technology was employed to facilitate this? RL: For that risk management reform that took place for the cash market in Hong Kong, we mainly modified existing technology on the clearing side. In the cash market our clearing system, CCASS, is a home-grown solution that has been around for quite some time. On the derivatives side, we are using NASDAQ OMX technology, it’s something we call DCASS. We are upgrading that to the Genium INET platform, again in the later part of this year. All the market conformance testing activities, all the market rehearsals have been completed successfully and we are looking at launching both the Genium INET trading and clearing in the next couple of months. AE: There have been a number of high profile ‘technical glitches’ in the news how are you developing the exchange platform to avoid this? RL: There are multiple steps we can take.

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who’s heading who

It’s a technologist’s dream not to have failure, but in reality it’s almost impossible not to. So what do we do? Firstly, we try to minimise the possibility of failure: by carrying out thorough testing by ourselves, by conducting reviews of the whole development and deployment process, and by conducting tests with the market. It takes us a long time to deploy something new. The necessary quality assurance process takes time on top of the development work itself. Any major system rollout at HKEx will involve some form of internal review, or external party review to ensure that we have covered all possibilities. We also have a lot of contingency procedures in place. We have primary systems and back-up systems at our primary data centre. We do drills with the market to simulate potential systems failures, not just for ourselves, to ensure that the whole market knows what to do when we have to execute the contingent procedure. Preparing people for failure is very important. The last thing you want during a failure is panic and nobody in the market knowing what to do. Of course, the impact is significant if our major trading platform fails and as a technologist, I must be worried. But at the same time, we have to ask ourselves before something like that happens, what have you done to minimize the chance of failure. We also have to ask ourselves: what have we not done to minimise the chance of a failure? HKEx has a long history of keeping the system live, particularly on the cash market. We have an excellent track record. I believe since 2000/2001 we have 100% uptime on the cash market. That’s not by chance. That’s through very rigorous processes and procedures for development and deployment. We are very proud of that. There is a strong culture of reliability in IT and we want to maintain that when we introduce system changes over the next couple of years. AE: Will you revisit the NASDAQ OMX technology for the DCASS platform? RL: We don’t have this plan for the moment. We have a lot of confidence with NASDAQ OMX providing the trading platform and also the clearing platform for us in the derivatives market. Also the incident that recently occurred in the US happened on a different technology platform, called SIP (Security Information Processor). The US market has a very unique structure whereby all the exchanges have to report all the trades and orders to the NASD (National Association of Security Dealers), and they used this SIP platform to consolidate the

“Things like collateral management and risk management can use the same platform across multiple clearing houses and across multiple asset classes. ” data and distribute it back to the market. And NASDAQ, not NASDAQ OMX, has always been the provider of technology to NASD for SIP. That was more of a market data solution that they had. What we are implementing at HKEx is the latest Genium INET trading and clearing. This platform has already been implemented in other major exchanges around the world, such as in the Nordic exchanges, SGX and ASX. And they have been performing very well and reliably. There is no reason for us to be concerned. So we will continue the program and based on the testing that we have done so far, we don’t see any problem. AE: Why did the exchange build the TKO Data Center, and what does HKEx hope it will achieve with the center? RL: Reliability is a very important factor for our IT systems. You must have very reliable software, you must have reliable operations, but of course, we also must have a very reliable infrastructure. In the past, HKEx had a data centre, more like computer rooms, in commercial buildings. With today’s technology needs, the need for power (for the high power density equipment) and cooling capacity continues to grow. So it was inevitable that we had to look at a proper data centre around Hong Kong to support our future business growth. We evaluated various different options. We have extremely high requirements and no commercial vendor can meet our requirements and at the same time, be cost effective. Therefore, we decided to build our own. What we have now built is the highest class data centre by international standards; it’s a Tier-4 class centre. The reason why we

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built it, in short, is because of our unique requirement for excellence and very high reliability. Another factor is that all major exchanges are offering colocation services due to the increased demand in electronic trading. Having our own data centre allows us to offer an ecosystem environment to our exchange participants necessary for efficient electronic trading. AE: What does the future of electronic trading hold in the next three to five years? RL: The answer is quite clear. Electronic trading has been around for a long time and will continue to develop as a core driving force of trading in the capital markets. The process of matching buy/sell orders has been electronic for many, many years. In terms of order creation and submission, it is very common today that buy/sell orders are generated by computer programs from institutional investors, known as algorithmic trading. For individual investors, their trading process has also become more and more electronic. For example, in the past an individual investor in Hong Kong, would call his or her broker to place an order. The broker would key in the order into our system for matching. Now, most people use their smartphones in Hong Kong or anywhere in the world to connect to their banks or brokers and punch in the buy/sell order, and that order will be in our system within a second, ready to be matched. This kind of trading process is actually the other type of electronic trading. Both, whether the institutional type of electronic trading, or individual investor type of electronic trading will continue to be the norm going forward. In more advanced markets, for example in the US, individual investors can even go to their brokers and use the software tools provided by their brokers to build their own trading strategies and generate orders electronically. I don’t think we will have that in Hong Kong in the near future, but the fact is that everyone is using a computer in dayto-day life, and therefore electronic trading, in one form or the other, is inevitable. From an exchange perspective, we are building systems with the needed capacity and capability to grow with electronic trading. Electronic trading may not bring in higher turnover to the market, it may, or may not, but definitely what it will increase is the number of orders going to the exchange on a daily basis. Therefore, we need to be ready and make sure our systems have the capacity to deal with increasing volume created by electronic trading.

regulations

Greg Medcraft ASIC Chairman

ASIC puts a leash on broker dark pools New rules succeed in pushing liquidity from dark to lit markets.

ustralian market participants have seen a move of between 3-4% of total market volume from dark pool trading into lit venues since dark trading was restricted in May, at cost to alternative investment managers. Rules introduced by the Australian Securities and Investment Commission (ASIC) on 26 May 2013 state that any exception to pre-trade transparency can only apply to off-market trading where a transaction is entered into at a price that is one tick size improvement inside the national best bid offer (NBBO), or at the midpoint, unless the order is of block size. “Before these market trading rules were introduced about 66-67% of overall volume went through the ASX lit book, Tradematch, and now it is closer to 70%, so there has definitely been a drift form dark pools into lit venues,” says Murrough O’Brien, head of sales trading,

By Dan Barnes

“There are strategies that deal with market microstructure and here the market microstructure has changed.” Rob Laible Head of Electronic & Program Trading

Macquarie Group

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regulations

of interest for dark pool operators and the exposure of clients to predatory order flow. Using a pool that does not publish pre-trade data (identity of participants, size of orders, price etc) allows firms to trade large orders without the market realising. That limits the movement of the stock’s price, or market impact, before the order is complete. Typically that is of most value to long-only buy-side firms such as pension and insurance funds. However without rules in place to limit participation it is possible that other firms can use the concealment of pre-trade data to hide less publicly useful trading. Firms might use technology to find big orders in the dark pools and then front run the big funds. These predatory firms typically trade in small size, and regulators know that by placing restrictions on the smaller trades, continuing to trade them in dark pools will be uneconomical. From the 10 November this first set of rules will be reinforced by another set of regulations that will improve disclosure of trading activity in the dark pools. This will impact the dark pool operators themselves by putting their business models under the spotlight.

John Fildes CEO

Chi-X Australia

To the letter

Citi Australia. “From that perspective it has been successful.” John Fildes, CEO of alternative exchange Chi-X Australia says, “We have seen a sizeable increase in block crossing in the dark – up two- or threefold – while smaller dark orders have decreased by a comparable amount, so the volume of trading that we see reported in the dark has actually been pretty flat, but the composition of it has changed.” By restricting the prices at which traders can buy and sell stocks, rules have affected the viability of certain trading strategies, rather than impacted trading overall. “There are strategies that deal with market microstructure and here the market microstructure has changed,” explains Rob Laible, head of electronic & program trading for Asia at broker Macquarie Group. “Therefore some strategies that used to be profitable will no longer profitable.” The rules were introduced after research by ASIC found a number of issues with dark pool trading that could interfere with the orderly running of a market. Among these were the negative impact on price formation, conflicts

ASIC’s approach has been measured. Rather than a knee-jerk reaction to market events such as the 2010 ‘Flash Crash’, it has taken concerns raised by such events to market participants, conducted its own research and then consulted the market about the results. Buy-side traders are positive about the move. Emma Quinn, the Head of Asia Pacific Trading for AllianceBernstein, says, “I think the new rules are positive for the market, and allow dark pools to function in a manner that doesn’t detract from lit liquidity.” By restricting trading to either the midpoint or with significant price improvement regulators are limiting the degree to which trading that could be conducted on the lit market moves to the dark. Also market making trading strategies that primarily buy on the bid/sell on the offer +/- will be most affected. The counterparties of these strategies are those trading aggressively by crossing the spread, asserts Laible. “Some people may be willing to buy on the bid plus a little bit,” he says, “But they might be less inclined to buy on the bid in a dark pool when they could just buy on the bid on the exchange. That will primarily affect hedge funds, some registered broker-dealers, and statistical arbitrage funds that look at latency arbitrage or are market making.” “Where there may have been more retail order flow being crossed in the dark previously, that is less the case now,” adds Fildes. In Canada, where a similar price improvement rule was imposed on dark pools in October

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“...the volume of trading that we see reported in the dark has actually been pretty flat, but the composition of it has changed.”

regulations

2012, the proportion of total equity trading taking place in those markets was 3.8% in November 2012, down by almost 40% from September 2012 when it was 6.4%. This directly targets concerns around the type of market participants in dark pools and reduces the movement of smaller trades away from lit trading, thereby improving price formation. The effect on trading venues themselves depends upon the type of market participants they hosted. “If you had participants in your dark pool using a strategy that depended on someone else crossing the spread, then you would have suffered more than another broker because the ability to capture the full spread has disappeared,” says one broker. The new rules will begin to take effect from November, and are intended to target the potential problems with the management of dark pools that were highlighted in the March report by ASIC. These include their tendency towards multilateral trading; a lack of transparency and disclosure; a lack of reporting from and monitoring of the market despite similar requirements for exchanges; the risk of preferential treatment for certain clients or conflicts of interest with the operators own trading. ASIC is taking a staggered approach to the regulation of crossing systems. From 10 November 2013 operators must publish information about their crossing system, such as products traded, on a website. At the same time the tick sizes that apply to exchange markets will also apply to crossing systems and clients must be able to opt out of using the system. Operators will also have to monitor activity 10 November 2013, and if suspicious activity is identified in a crossing system, it must be reported to ASIC. From 9 February 2014 operators must deal with client orders ‘fairly and in due turn’, then from 10 February they must make disclosures to clients on the operation of the crossing system; market participants must also protect confidential client information, have a common set of procedures which do not unfairly discriminate between users and notify users and ASIC about system issues as soon as practicable. Finally from 9 May 2014 in trade information they must identify the crossing system that matches were made in, and whether they

traded as principal, and as of 26 May, the existing system and control requirements for automated order processing will extend to crossing systems.

Welcome changes The reaction to the rules has been relatively positive. Laible points out that ASIC not only does its research, it is also quick to telegraph the issues it plans to tackle, which should allow the trading firms that use affected strategies to make changes, either continuing to run the same strategy but on a lit exchange, or to adjust it in such a way that it is not too disruptive. “ASIC certainly seem to have gathered enough information to make its decision and do its job to protect the public, making sure that execution of trading under its domain is in the public’s best interests,” he says. “However, the decision could be disruptive for certain businesses that have been using a particular strategy as those strategies may no longer be profitable.” Quinn says, “As an institutional buy-side trader, the biggest worry I face is who I’m interacting with in dark pools and whether brokers preference certain types of flow, or counterparties. I think the new regulation keeps brokers on their toes, especially required disclosure about who is in their pool and how trades get crossed in their pool.” Low levels of liquidity have meant that most buy-side clients have bigger problems to deal with says O’Brien, “From a buy-side perspective, the fact that we are crossing at mid is liked by some and not by others, but the main concern is where do I get the liquidity? It’s been very tough for them.” However the change to the market will have an effect beyond that of protecting buy-side traders. The tighter operating model for pools will limit the competitiveness of newer venues as they are less able to innovate. That may reduce the ability of brokers to challenge the existing dark pool operators. “I don’t think dark pools will disappear in Australia in the way that they have disappeared in Canada,” says O’Brien, “But unless you have a mature dark pool you don’t have value, because you don’t have critical mass in terms of liquidity which all of your desks internally are plugged into.”

Emma Quinn Head of Asia Pacific Trading

AllianceBernstein

“I think the new rules are positive for the market, and allow dark pools to function in a manner that doesn’t detract from lit liquidity.”

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word on the street

WORD on the street How do you prepare for sigificant market movements triggered by a trading error? Hani Shalabi, Head of AES, Asia Pacific Credit Suisse

rading errors are unpredictable so it makes it hard to prepare for every scenario. Therefore it’s important to have a few safety mechanisms IN place that act as catch-alls. One such catch-all is the basic circuit breaker. If an order moves a certain price percentage since arrival, pause it for a sanity check. If a fat finger error drags the whole market, at least it’s assured you won’t follow more than a certain percent. Even more granular is the concept of fair value which is the AVERAGE trailing short term price of a stock. If a dynamic price limit IS imposed, which is a small percentage offset from fair value, it is guaranteeD that you won’t trade into spikes. All AES orders have built-in spike avoidance.

Kesara Manchusree, Managing Director Thailand Futures Exchange

chieving low latency has become increasingly more demanding for brokers and as a derivatives exchanges it is necessary to put certain preventive measures against unintended orders in today’s fast pace environment. TFEX separates its API between man-made order and machine order which helps monitor and enhances risk management. Pre-trade risk control such as maximum order size and price band have been implemented on the exchange in order to prevent abrupt movement in trading prices and will give sufficient time for the market to cool down. Furthermore, there are 2 levels of price band that are imposed on most of the product traded on TFEX. Nonetheless, if and when such trading error occurs we do have a policy to deal with such event. We believe that the best practice is to have a robust preventive measure.

Hongsong Chou, Charles River Advisors Limited

hen such error happens, the first question that I ask will be: is it real, or, shall I follow? In many trading algorithms that I have helped develop, the basic reaction is: be very careful as it may be not real. Many trading algorithms have a protection band which, if price and/or volume indicators are within such band, treat such movements as reverting in the near future. If such movement goes outside of the band over a critical period of time, the algorithms may start to follow. Risk control is key here in the heat of all such market reactions.

Seunghyun Cho, Founder / Chairman One Asia Investment Partners

hen someone’s trading error triggers a significant market movement, it becomes a very good opportunity to take advantage of and to make a very good profit. This sort of volatility is an interesting play for traders like me as fat tail risk can be managed at the strategy level. But my biggest concern is the counterparty risk. When the prime broker fails to deal with that volatility, it will affect my funds adversely. Thus, we have been spending a lot to build a risk management system so as to have an insurance on that risk.

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opinion

How many separate pools of collateral do you oversee?

ne of the key issues that brought on the Global Financial Crisis (GFC) was counterparty risk; knowing who was on the other side of the trade and if they were solvent. This made it difficult for CFOs and heads of risk to know exactly what the exposure was at the firm level and to each counterparty the transacted with. As a consequence, firms stopped trading with one another, liquidity dried up exacerbating the damage and widening the reach of the fall-out. Post-GFC, reporting, audit and transparency are the mantra of regulators but complying with them has been no small feat given the scope and complexity OTC derivatives comprise. This holistic approach to visibility into a firms book has proven difficult to achieve as we can see

by the more than 42 percent of opinion poll respondents who said they have ‘Too many to count’ when asked how may pools of collateral they oversee. Rather surprising that this was the number one response considering how long post-GFC consolidation has been going on and deadlines for regulatory compliance looming (though some have been pushed back). Also surprising, was that there were responses for ‘Several but not sure’ though at just 14%. The overall consensus appears, at least in Asia, that there is a long way to go in terms of complying with regulatory requirements under transparency when more than 56% of respondents are not even sure what their total position is at any time. Silos appear to remain. There are some possible reasons for this. First of all Asia and its financial

institutions were for the most part not playing in the world of complex derivatives and were insulated from the fall-out. Asia makes up less than 10% of global OTC trading. As such the priority hasn’t been on holistic firm risk but on more regional considerations like exchange competition and algorithmic trading. Secondly, local regulators, having not felt the GFC sting haven’t made these policies a priority though they are watching and are employing a waitand-see approach . Lastly, the cost of delivering this visibility has been too high when the immediate ROI cannot possibly be captured in the short-term. The trading business has been hard on everyone particularly the sellside who has seen trading dry-up and margins squeezed. The additional cost of compliance is hard to justify.

Visit: http://www.AsiaEtrading.com/opinion-polls/ Vote on the latest Opinion Poll

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opinion

Expert Opinion How many separate pools of collateral do you oversee?

Barnaby Nelson Head of Client Development, Asia BNP Paribas Securities Services

veryone has complained about liquidity or collateral this year. It has become an increasingly accepted cliché to say that we all face major liquidity challenges and that they are becoming more acute every day. But are all brokers powerless to fix this? Are you absolutely sure that you couldn’t be doing more to reduce the amount of collateral that you keep tied up or to make more use of it? Here are a few ideas on what more could be done.

Yes, collateral is a problem In a world of multi-trillion-dollar collateral shortfalls, a recent survey on Asiaetrading. com found that over 40% of brokers in Asia currently oversee “more collateral pools than they can count”, averaging more than five each. Traditionally, multiple and static collateral pools invariably lead to more collateral being tied up than should be necessary – meaning wasted assets. It can also mean a huge operational burden when it comes to tracking and funding multiple margin calls on a daily basis – meaning higher operating costs and risk. Either way, the management of collateral is obviously already a problem.

Yes, it is getting worse In a recent survey by BNP Paribas Securities Services, 54% of brokers in Asia-Pacific have noticed an increase in the amount of collateral that they are being asked to keep year-on-year

– during a year when trading volumes have only just begun to recover from previous lows. Of these same brokers, 58% expect collateral requirements across Asian markets to continue to grow in 2014, with 15% expecting a dramatic increase: driven by requests from trading counterparties, market infrastructures and clearing houses. The challenge though is that it is getting harder and harder to address the problems that poor administration of collateral can cause – as the competition for scarce internal resources continues to grow. In 2013, Asian brokers spent 33% of their resources on regulatory change and 14% on cost reductions – leaving less than half their spend available for innovation, client service and transformational projects such as liquidity management.

“54% of brokers in Asia-Pacific have noticed an increase in the amount of collateral that they are being asked to keep year-on-year.”

So who to turn to? Banks have always been the go-to partners for managing collateral and liquidity– and prime brokers have historically provided an excellent means of optimising brokers’ liquidity (as they have for fund managers) by rehypothecating assets and using their balance sheets. Unfortunately however, this model has demonstrated its limitations in the last few years as clients and investors focus more on asset safety and recovery risk – to the point that many see the risk/benefit equation as no longer being in Banks’ favour. That is not to say though that brokers aren’t still looking for a solution. 54% of brokers have said that they see major liquidity benefits in outsourcing their risk (only 19% see no value at all) and so it is clear that the market is looking for a solution that can drive their business forward in a capital-scarce world. Experience in the last few years shows that brokers can significantly restructure not only the amount of collateral that is asked of them but also the ways in which collateral is managed, simply by taking a new look at an old problem. The main considerations in doing this are as follows: 1. Focus on Regulatory Capital (e.g. FRR in Hong Kong): Look for ways to outsource your settlement risks. By outsourcing their settlement obligations to a clearing Bank, brokers have been able to transfer their settlement risks and associated regulatory capital obligations for many years in markets

www.asiaetrading.com z Q4 2013 z Asia Etrader

such as London. With a robust and proven equivalent solution live in Hong Kong, this is a real option for any brokers in the Region today. 2. Keep your collateral in one place: By maintaining a single, comprehensive banking relationship you can reduce your collateral requirements by simply reducing overlapping requirements (e.g. FX versus clearing, etc.). 3. Keep your collateral safe: Make sure that you avoid any agreements that will endanger your (clients’) assets in a worst-case scenario. Today clients need assets to be recoverable in any scenario and they won’t accept anything less. 4. Make your collateral dynamic: Look for opportunities to monitor your collateral requirements in real time – in order to reduce the amount of static collateral that gets wasted every day. Liquidity and collateral challenges are here to stay. Each of us needs to make sure that we react quickly and intelligently – by making the most of the options available in the Asian market today.

O&A

Analysis on Risk Control and Overseas Regulation of Quantitative Trading By Hongsong Chou, Charles River Advisors Limited

he global financial market experienced quite a lot of events during late August. Chinese securities company Everbright Securities’ fat finger trade caused chaos in Chinese stock market. Later, Goldman Sachs made a series of erroneous option trades, triggering great volatility in option price. Only two days after that, Nasdaq halted trading for three hours due to technical glitch. These events lead to a thorough reflection on some issues. Although market participants have benefited from the burgeoning financial innovations during the past few years (such as quantitative trading, algorithmic trading and electronic trading), all such innovative ways of trading can pose great risks, so how to effectively manage such risks and how to supervise, track, analyze and regulate the abovementioned innovative trading activities have become two major issues for market participants and regulators. At first, let’s probe into the historical development of quantitative trading, algorithmic trading and electronic trading. Quantitative trading itself is a specific way of quantitative investing. As a methodology used in asset management, quantitative investment started to develop in the U.S. market from 1970s under the main driving force of the gradual popularization of index funds and the increasing use of ETFs and other low-cost investment vehicles. Users of these investment strategies need to trade a basket of stocks. The wide application of these investment strategies promoted the development of quantitative stock selection, intra-day algorithmic trading and other quantification-based trading. With the maturity of internet technology and the improved security, many European and American financial institutions started to use FIX as their main electronic trading standards, which greatly reduced communication costs. As a result, electronic trading gradually replaced traditional brokerage to become a major business unit in overseas securities companies. As of present, quantitative trading, algorithmic trading and

electronic trading have become a major trend and are used globally. High-frequency trading, which stands at the forefront of the trend, accounts for about 60% of the total trading volume of U.S. stock market. In some Asian markets (such as Australia and Japan), highfrequency trading contributes about 15-30% of the total trading volume. As such, a deep analysis of algorithmic trading is necessary. Algorithmic trading has a very wide definition and is easy to be confused. In general, algorithmic trading is classified into trading in a broad sense and those in a narrow sense. Algorithmic trading in a broad sense mainly refers to an investment strategy and is one of the quantitative trading strategies. Such investment strategy features many trades in short period of time and simultaneous trading across different markets, and, as a result, is highly sensitive to trading costs. Therefore, algorithmic trading in broad sense is made up of two components: generation of trading orders (focusing on investment return maximization) and execution of trading orders (focusing on trading cost minimizing). From risk management perspective, maximizing investment return doesn’t conflict against minimizing trading cost: minimizing trading cost is very likely to maximize investment return. Therefore, the narrow definition of algorithmic trading refers to special trading strategies that study and improve the execution of quantitative investment strategies in a quantitative manner. So, algorithmic trading in a narrow sense is also called execution strategy. The effectiveness of execution strategy will directly impact whether the algorithmic trading in a broad sense (namely quantitative investment strategy) can maximize investment returns. In addition, as execution strategy covers order handling, position management, market connectivity and quotation interface, there can be a lot of risk points, posing great challenges to management. The aforementioned trading errors by several brokers and market participants are all connected to trading order execution.

The development of overseas algorithmic trading system is a gradual process. In the beginning of 21st century, when algorithmic trading and electronic trading just emerged, the system architecture was very simple. Usually, the system was a large and inclusive computer software program, always developed by quantitative programmers (not controlled by IT departments). In 2006, trading systems became increasingly complex. The original model failed to fulfill the needs of system expandability. Therefore, securities companies started to divide systems into several modules, and IT departments started to be involved in system construction. During the past 2-3 years, trading systems have been gradually decoupled from quantitative investment departments in many companies. IT departments become increasingly responsible for development, deployment, maintenance and upgrading of the trading system because of the commoditization of the algorithmic trading technologies. After the emergence and popularization of electronic trading and algorithmic trading, procedures of risk management (especially trading procedures) are different from before. Specifically speaking, risk management metrics and inspection points have been spread out in the entire trading system. Risk management metrics for electronic trading, algorithmic trading and quantitative trading began to appear and overlap operation risk management procedures. Risk control measures using information technology and quantitative methods emerged and became real-time. As Exhibit 1 shows, the quantitative strategy module (the Strategies module in the figure, often developed by quantitative trading team) stays at the center of the entire design, but it’s still one of the many modules. There are a large number of risk points spread in the entire system. In algorithmic trading, processing speed, handling capacities, memory and CPU use, FIX message handling, order status and its transition process, position management, account management, pre-trade analysis and post-trade analysis will

Asia Etrader z Q4 2013 z www.asiaetrading.com

O&A

Exhibit 1: Design of Advanced Overseas Algorithmic Trading Platform

be monitored and recorded on a realtime basis by specific modules, including Pipe (risk management module for sub order), Manager (risk management module for main order), MDS (quotation module) and SDS (data module). This means risk management and regulation for innovative trading models like algorithmic trading and high-frequency trading have to be conducted via real-time sampling and monitoring across many points in the system, and multi-level and multi-tier oversight of the entire order placing process, in an attempt to prevent accidents. Of course, the setting of above risk management points will reduce order placement speed for some algorithmic trading and high-frequency trading strategies that pursue high-speed trading. Instead of reducing risk points, the solution to this problem is to adopt more advanced software and hardware technologies to improve risk inspection speed. FPGA technology, which is extensively used

Sources: Charles River Advisors Limited

in overseas markets, applies hardware with software embedded and is widely adopted to speed up risk inspection. At last, we will discuss the global regulation dynamics for algorithmic trading and highfrequency trading. In fact, trading deregulation is one of the driving forces for the development of algorithmic trading and high-frequency trading in overseas market, at least before 2010. In 2000, American stock market started to allow one-cent tick size, which spurred the popularization of computer-driven trading and algorithmic trading. In 2006, the enforcement of Reg NMS enabled traders to trade one stock in different places. Such regulatory changes lowered trading costs and brought rapid development of trading technologies. However, the lagging behind of risk inspection points caused trading errors, such as the “flash crash” in May 2010 and the Knight Capital incident in August 2012. Global regulators are mulling rules to prevent such incidents.

www.asiaetrading.com z Q4 2013 z Asia Etrader

For instance, Hong Kong Securities and Futures Commission launched a consultation statement on regulation of electronic trading in 2012, in order to solicit participants’ opinions on regulation of electronic trading and algorithmic trading. The specific measures proposed by Hong Kong Securities and Futures Commission mainly include: first, related practitioners are required to hold corresponding qualifications, have deep understanding for related models and technologies and receive regular training courses; second, the importance of quantitative tools and methods, especially pre-trade and post-trade tools, in electronic trading monitoring and management process shall be highlighted; third, it’s required that securities companies who provide electronic trading services to their customers and/or have in-house proprietary trading units to ensure their electronic trading systems meet the standards with respect to technology stability and integrity.

equities

HK SFC electronic trading rules cut out brokers and ISVs Latest rules require an in-depth understanding of trading platforms, leading asset managers to ditch platforms and brokers. By Dan Barnes

uy-side firms are reportedly slashing their broker panels to reduce the burden of new algorithmic trading rules in Hong Kong, while technology vendors are struggling with unexpected responsibility. The special administrative region’s market regulator, the Securities and finance Commission (SFC), introduced the rules in order to mitigate the risks of a market event due to a trading system fault or error. Although they were announced in March 2013, their true impact had not been fully realised by many market participants until recently. “Some firms may have underestimated the scope of the rules,” says Clare Witts, a director at agency broker ITG. “At first glance they look fairly straightforward, but when you take the wording into consideration, it can capture a lot of activity.” The rules are open because they are principles-based, which makes it hard for firms to bypass the regulator’s intent whilst being compliant at a technical level. They are intended to ensure that a system’s designers and the traders using it are ‘suitably qualified’ to deal with the technology that they are using, that the

systems are properly tested and checked, and that they comply with regulations. Any firm regulated in Hong Kong, whether buy- or sell-side has lots of work to do as a result. However firm such as independent software vendors (ISVs) that have clients regulated on either the buy- or sell-side in Hong Kong will also be under pressure, as they are asked to help their clients fulfil their own obligations. “A vendor that isn’t regulated may not expect to be affected,” says Witts. “Then suddenly a request lands on its desk from a client, who wants it to fill in a long document detailing things like their system adequacy, and provide assurances that they can keep all records in line with the SFC requirements – for example, audit logs and documentation of system design, testing and modifications which need to be kept for at least two years after the system stops being used.”

Plan B Buy- and sell-side firms alike have been preparing for the impact for some time, working together in order to that they are fully prepared. The buy-side has groups such as

the Asia TraderForum (ATF), the Hong Kong Investment Funds Association (IFA) for buy-side compliance departments and for the sell-side, trade body Asia Securities Industry & Financial Markets Association (ASIFMA). The IFA and ASIFMA have developed a four-colour coded template containing question that the buy-side intends on sending to the sell-side to fill in. “If a broker has 700 clients there is the potential they will hear 700 different interpretations of the regulations,” says Lee Bray, head of APAC Equity Trading at JP Morgan Asset Management. “It is just not practical to do that. The idea is that the questionnaire can aid both asset management firms and brokers to create a standard frame work to begin to approach the legislation from.” “The template was conceived of by the sellside industry body which has taken a pragmatic approach to avoid needless work,” added one buy-side head trader who declined to be named. “It was then developed further by the industry including lawyers, compliance specialist and the buy-side, with hundreds of people’s feedback. It is a collective work and it is meant to reduce needless duplication and wasted effort, so is a fine idea.”

Asia Etrader z Q4 2013 z www.asiaetrading.com

equities

Lee Bray

Clare Witts

Head of APAC Equity Trading

Director

JP Morgan Asset Management

ITG

“If a broker has 700 clients there is the

“Some firms

potential they will

may have

hear 700 different

underestimated the

interpretations of

scope of the rules.”

the regulations.”

Slash and burn Buy-side firms are cutting back on suppliers to cope with the rules, despite the efforts of the industry groups. Asset managers have never before had to concern themselves with the number of systems that are accessible via their trading desk. Brokers provide trading services including execution algorithms for free, knowing that they will be recompensed in trading fees. “[Cutting back on broker lists] is a common approach; a lot of my buy-side peers have discussed it because this is all new, and if you have 40 algo providers then there are also a lot of permutations of the different algorithms in the background, so it is safer to implement a slightly smaller broker list to begin with, get comfortable with the internal processes and then once they are bedded down, expand the list out again,” Bray says. Up until now, execution and order management system providers have been able

to support their system from behind a screen, in some cases using the software as a service (SaaS) model so that clients don’t even have technology installed on the hardware. Software developers who write algos but are not licensed by the SFC will note that there is a much larger onus on the buy-side to prove that the software developer has the right controls in place, which could be very difficult to get. “Recently a lot of people have suddenly realised how broadly this affects business,” says Witts. “As soon as a regulatory obligation is put on one firm in a chain, it extends along that chain because that firm is obliged to ensure that its service providers can also comply with the relevant sections of the rules, in order for it to be able to use those providers.” Brokers white labelling algorithms from their peers are likely to be impacted because they are an intermediary, but may not be in the

www.asiaetrading.com z Q4 2013 z Asia Etrader

best position to answer questions about algos which they do not develop themselves. It is common enough for global brokers to access a market via a local broker’s algos in Asia. They may experience difficulties around accessing intellectual property from a potential rival, and some buy-side compliance departments may not feel comfortable getting answers back from a broker that does not develop its own algos. Asset managers are under severe pressure to understand each of these systems and any material changes that occur in them; as algorithms can be updated fairly regularly, understanding what will trigger a requirement for relearning is causing significant concern. “There is some debate as to what constitutes a material change,” says Bray. “It is somewhat open to interpretation but in one reading, anytime an algo gets changed on the broker side there is an obligation to notify those using that product to update their training and skills. It is not a big step from that point on to assume that the algo offering on the desk will be reduced to core set, to make this process simpler.”

Gone too far There had been some uncertainty around how inclusive these rules they would be. It is now clear that FX and fixed income trading will not be considered covered. Dark pools are also not covered, and will fall under another upcoming regulation; the SFC and other regulatory bodies have been contacting brokers about how their dark pools work. “It won’t be up to the buy-side to include dark pools, even if the buy-side is routing out an algo or DMA order which interact with a dark pool, that part will not be covered which is substantially good news for buy-side traders,” said the head of desk at a Hong Kong-based asset manager. One further upside, in the long term, is the potential for asset managers to examine their relationships with sell-side providers and look at unbundling their services. “If broker lists get cut back because of concerns around execution services, it may be that we see an increase in commission sharing agreements, with some brokers selected purely for their research,” notes John Fildes, CEO of stock exchange Chi-X Australia. Whatever the upsides might be in the longterm, there are still short term pressures, notes the head of desk, “It is already coming on to October, the templates are not done yet and it will take some time for the brokers to fill then in so there is a bit of a mad rush towards the finish line here,” he says.

fragmentation

Fragmentation Footprint Q3 2013 Japan On Tuesday, 16 July 2013, the JPX began its technology consolidation with the cash equity segment. The clearing, and regulatory oversight of the Osaka Securities Exchange was integrated with the Tokyo Stock Exchange and the Japan Securities Clearing Corporation. This consolidation will serve to reduce costs and eliminate duplication which were grounds for the merger in the first place. That being said, all data reported is now the combined JPX Group. Generally, market share is compared to the primary and with the addition of OSE data to that of the TSE, market share will appear markedly different than previously reported. The effects of Abenomics continue to wane at the JPX as volumes have plateaued to around US$500billion per month, from its May high of US$936billion, with volatility returning to pre-stimulus norms of around 29. Although the economy as a whole appears to be moving forward the initial excitement, which saw retail investors return in force, has subsided. Average trades sizes by value on the primary continued to decline reaching a low of US$14,175 in August but bounced back to end the quarter at US15,107. There was a large drop in the average number of shares per trade this quarter to 1,750 on average from 2,024 in Q2. We suspect that this may be due to additional retail re-entering the market and low latency trading steadily growing in Japan. Auction data, which typically comprises 4-5% of total turnover was not included in comparisons. Also, Chi-X Japan’s non-display order book and SBI Japannext night session data were also not included. Turning to the proprietary trading systems (PTSs), average trade sizes increased slightly from last quarter averaging US$5,500 (Q2 US$5,310) at Chi-X Japan and US$5,600 (Q2 US$5,062) at SBIJ. Looking at the average order size by share however, we see a divergence on the PTSs. SBIJ actually saw the number of shares per trade increase from 646 shares in Q2 to 709 shares in Q3 while Chi-X Japan went from 645 shares in Q2 to 624 in Q3. The number of trades declined quarter-over-quarter at both venues as well as the PTS but Chi-X Japan saw trades increase in September slightly while SBIJ saw them fall. Market share has returned to the PTS though the effects of the amended TOB rule do not appear to be fuelling this. It seems rather that volatility has subsided and traders who have only access to the primary have stopped trading. Overall market share for the PTSs increased from 4.59% last quarter to 5.51% this quarter with SBIJ continuing to be the larger PTS with US$59billion in Q3 down 19.8% from US$70.8billion and Chi-X Japan executing US$35.8billion down 24% from US$44.5billion in Q2. On the primary notional was down far more, dropping from US$2.4trillion to US$1.63trillion or a whopping 47%. PTS trading seems far less elastic than on the JPX. Looking at the top 5 securities by share on the PTSs for the week ending 24 September, SBIJ appears to have a slight lead but it executes 65% more notional than Chi-X Japan. It also appears to have better price improvement than Chi-X Japan as well, but one thing that has consistently appeared is that each venue continues to trade in different names for the most part. That being said best execution in Japan would require access to all three venues.

ChiJ Top 5 Securities By Market Share*

Code Name

Market Share

Avg PI (bps)

9364

KAMIGMI

14.50%

5.0

6511

OKINWPW

13.30%

5.3

7276

KOITO

12.70%

2.1

2670

ABCMART

12.00%

4.3

3401

TEIJIN

11.00%

13.2

SBIJ Top 5 Securities By Market Share*

Code Name

Market Share

Avg PI (bps)

8379

HIROSIB

17.03%

9.08

6104

TOS-MC

16.47%

10.44

7751

CANON

15.87%

5.6

5426

HIT-MTL

15.39%

4.19

6592

MABUCHI

14.57%

5.87

* Week of 24 Sept, 2013

Australia The market microstructure story last quarter in Australia was the impact of Rule 4.2.3 Price Improvement (See page 26) implemented 26 May 2013 which saw broker dark pools suffer but increased liquidity at both ASX and Chi-X. Rule 4.2.3 replaces the ‘at or within the spread’ exception and occurs only where the order is sent with a price at the time of the trade where: • at a price step that is both above the best available bid and below the best available offer or • at the midpoint of the best available bid and best available offer where the midpoint is the average price of the spread. The affect of this has seen liquidity move on to displayed venues and away from broker internaliser platforms. This is bad for brokers but good for end users as there is more liquidity and better price discovery for them to trade against at a lower price – at least that is the idea. This rule change could push some brokers out of business reducing competition and services and potentially driving up trading costs to the industry. Looking at figure 1 the average trade based on shares rose rapidly from the date of the rule change with Chi-X Australia approaching the primary’s average trade size ending the quarter at 1,448 shares compared to 1,704 shares on ASX. Q3 average trade size by dollar value however was slightly lower quarter-on-quarter at US$2,444 per Chi-X Australia Top 5 Securities By Value

Code Name

Market Share

Avg PI (bps)

TLS

460.3

12.10%

10.70

BHP

185.0

3.00%

1.80

ANZ

172.8

4.30%

2.10

WBC

146.6

3.80%

2.00

CBA

146.3

2.30%

0.90

Asia Etrader z Q4 2013 z www.asiaetrading.com

fragmentation

www.asiaetrading.com z Q4 2013 z Asia Etrader

fragmentation

trade down from US$2,596 in Q2. It would appear that an influx of small cap stocks began trading on Chi-X Australia this past quarter. ASX also saw average trade sizes trend lower in Q3 averaging US$5,971 down from US$6,535. It should be noted that ASX auction data was not included in venue comparisons which typically comprises 20-25% of notional and much larger trade sizes. Turning to overall market share Chi-X Australia had an impressive 13.9% increase quarter-on-quarter to achieve 9.60% on average from Q3. From August to September an impressive monthon-month gain of more than 22% to 10.89% of total equity trading down under. The boost appears to be from those small cap names. Notional traded in Q3 was down however on both the primary and the challenger averaging in aggregate US$61billion from US$73.5billion in Q2. Centre Point, the ASXs non-display order book continues to capture liquidity. According to the ASX, the venue reported a record A$5.1billion in notional trading in August up 30.8% from A$3.9billion in July commanding 6.2% of on-market share trading. It is worthwhile noting that overall trading ex-auction during the same period was up just 2.8% suggesting more trading is moving onto Centre Point away from the CLOB. How is that affecting liquidity? Of the brokers executing on Centre Point, UBS retained its number 1 position again, executing A$1.6billion on 386,000 trades. Merrill Lynch has made huge strides placing second with A$1.25billion in August, usurping Deutsche Securities with just over A$1 billion, when in May were ranked sixth on just A$485million. Instinet continues to hold the smallest order size of any broker at just A$417 followed by Citi and Deutsche Securities at A$1,643 and A$1,740, respectively.

Centre Point Top 5 By Value

Firm

Value AVG Trade (A$ Million) Size A$

UBS

1,613.6

4,177

Merrill Lynch

1,253.8

2,349

Deutsche Sec

1,031.5

1,740

Morgan Stanley

878.3

2,899

Getco

695.6

2,761

Centre Point Top 5 By Trades

Firm Trades

AVG Trade Size A$

Instinet

668,585

417

Deutsche Sec

592,816

1,740

Merrill Lynch

533,759

2,349

Citi

392,696

1,643

UBS

386,306

4177

*Centre Point data for Aug 2013

Asia Etrader z Q4 2013 z www.asiaetrading.com

www.asiaetrading.com z Q4 2013 z Asia Etrader

$12,564,844,733

$62,772,598,141

$1,068,956,160,253 546,040,176,571

$1,129,701,237,532 569,684,970,604

$162,930,998,185

$160,188,444,222

5,316,728,293,499 3,254,035,183,907 2,062,693,109,592 63.39% 4,064,532,290,901 2,425,321,162,827 1,639,211,128,074 67.59% 977,943,912 784,618,209 193,325,703 24.64%

PSE

SGX

SSE

SHSE

TWSE

SET

Total

4,077

475

1,041

ASX

BSE

13,521

2,866

HKEx

3,303

1,221

5,457

KRX

KOSDAQ

BMB

6,594

962

3,340

15,262

3,119

13,351

2,474

954

465

5,767

Q3 2012 (USD)

% Change

Shares Q3 2013

-1,137 -17.24% 11,578

260 27.00% 280

-37 -1.11% 303

545 3.57% 1,827

-253 -8.12% 24,126

169 1.27% 24,597

561 22.68% 3,626

87 9.11% 2,772

10 2.18% 265

12,060

343

425

1,997

25,335

23,062

3,580

2,376

262

2,378

Shares Q3 2012

% Change

-481 -3.99%

-63 -18.41%

-121 -28.60%

-170 -8.50%

-1,208 -4.77%

1,535 6.66%

46 1.28%

396 16.69%

3 1.28%

-584 -24.55%

Change

546,704,646,690 221.67%

12,475,921,200 10.11%

311,914,285,985 77.50%

394,497,120,914 86.48%

116,169,853,375 129.42%

-33,732,782,384 -29.93%

708,389,219 1.80%

227,562,058 26.90%

5,125,618

Average Trade Size

246,628,835,010

123,341,264,400

402,452,974,083

456,195,658,589

89,760,070,447

112,693,793,422

39,322,278,915

845,861,529

Average Trade Size

793,333,481,700

135,817,185,600

714,367,260,068

850,692,779,503

205,929,923,822

78,961,011,038

40,030,668,134

1,073,423,587

5,125,618

-1,690 -29.30% 1,794

Change

Average Trade Size

103,457,268,286 182.36%

5,629,641,108 3.58%

560,016,266,928 98.30%

522,915,983,682 95.77%

5,536,985,030 9.67%

4,136,696,038 49.08%

2,630,937,469 2.27%

652,286,057 33.26%

23,740,168,200 43.69%

9,813

1,271

7,793

8,945

3,309

9,523

12,668

5,266

NZX

NSE

PSE

SGX

SSE

SHSE

TWSE

SET

Asia Etrader z Q4 2013 z www.asiaetrading.com

4,937

15,050

6,839

2,691

10,945

7,000

1,225

10,570

328 6.65% 26,078

-2,381 -15.82% 10,560

2,684 39.24% 6,022

618 22.95% 2,633

-1,999 -18.27% 29,346

793 11.32% 48,972

45 3.70% 430

-757 -7.16% 4,030

21,464

11,800

4,831

2,248

17,164

93,599

416

4,558

4,614 21.50%

-1,240 -10.51%

1,190 24.64%

385 17.11%

12,182 70.97%

-44,627 -47.68%

13 3.22%

-528 -11.59%

MCX SX 714 NA NA NA 100 NA NA NA

15,806

JPX

IDX

3,036

HOSE

Hanoi SE

Q3 2013 (USD)

Average Trade Size

56,731,175,936

157,301,357,077

57,235,613,111

8,428,148,695

115,749,771,273

1,961,423,234

Exchange

$118,380,708,742

NSE

$2,613,709,291

36,505,412

54,337,193,000

6,743,341

NZX

78,077,361,200

-18,990,581,862 -46.52%

119,013,323

$36,505,412

7,087,524,386 23.85%

40,826,264,971

78,012,761

MCX SX

29,711,389,199

21,835,683,109

-12,313,893,143 -34.43%

84,208,264

$36,798,913,585

-19,174,945,453 -16.75%

35,767,195,096

77,339,707

BMB

114,457,246,878

23,453,301,953

51,549,094

$95,282,301,425

-25,797,850,522 -9.17%

85,363,807,001 82.93%

103,059,988

KOSDAQ

281,280,330,859

102,937,967,441

60,233,072,147 35.83%

6,634,878

$255,482,480,337

188,301,774,442

168,091,603,726

9,463,810

KRX

842,281,168,824 107.06%

228,324,675,873

158,772,966,940 35.89%

19,183,073

$1,629,016,805,292 786,735,636,468

6,426,228,521 31.05%

442,395,878,127

24,440,932

JPX

20,697,060,102

601,168,845,067

359,807,200 16.21%

620,072

$27,123,288,623

74,337,227,071 29.02%

2,220,166,920

711,445

IDX

256,117,067,029

2,579,974,120

-364,109,100 -39.70%

386,091

$330,454,294,100

625,309,300 40.76%

917,239,400

51,124 NA

0 185,571 94,470,007 1,204,012 5,229,504 202,896,192 83,300,071 10,452,231 11,490,546

51,124 266,364 93,173,823 1,612,382 7,017,380 323,067,545 118,631,347 12,861,455 30,421,727

18,931,181 164.75%

2,409,224 23.05%

35,331,276 42.41%

120,171,353 59.23%

1,787,876 34.19%

408,370 33.92%

-1,296,184 -1.37%

80,793 43.54%

2,237,606 49.66%

4,505,735

-41,000,562 -34.45%

-6,868,557 -8.16%

51,510,894 99.93%

2,828,932 42.64%

5,257,859 27.41%

91,373 14.74%

-186,564 -48.32%

-8,759,924 -17.53%

10,339,633 26.30%

199,527

HKEx

1,534,297,143

553,130,300

-2,152,904,549 -16.47%

-4,407,327,435 -4.71% 49,969,885

$2,159,606,443

-160,711,540 -43.61%

13,070,777,606

93,516,140,145

39,319,660

HOSE

368,501,872

10,917,873,057

89,108,812,710 41,209,961

$207,790,332

-3,655,477,495 -15.73%

-24,287,933,510 -10.71%

49,659,293

Hanoi SE

23,238,771,987

226,762,245,869

% Change

$19,583,294,492

Q3 2012 Net

Q3 2013

$202,474,312,359

% Change

BSE

Q3 2012 Net

Share Volume Number Trades Number Trades

ASX

Share Volume

% Change Q3 2013

Q3 2013 (USD)

Q3 2012 (USD) Net

Value Share Trading Value Share Trading

Exchange

40 equities

Equity Trading Recap Q3 2013 Source: Thomson Reuters Equity Market Share Reporter

equities

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equities

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technology

Fast deploying, flexible systems sought in trading A panel discussion between heads of technology that took place at the Trading Technology and Architecture Conference, demonstrated the pull of adaptable technology. By Steve Price

n 28 August in Hong Kong a roundtable discussion got underway at the Trading Technology and Architecture Conference, focusing on the challenges that heads of technology face. For Ashok Kalyanswamy, chief information officer (CIO) for Asia Ex-Japan at Nomura Securities, include continuously managing operational risk through operational excellence and working across silos. “We have different teams and groups, and they work well in silos, but recently we have gone through to a true global market structure; so there’s no more concept of equity technology, or fixed income technology,” said Kalyanswamy. “Those words have gone from our vocabulary. We look at how teams think and act in ways that are multi-asset, and across silos and how they collaborate and drive innovation for the franchise.”

But for Iosif Ziman, chief technology officer (CTO) at multi-strategy hedge fund BFAM Partners, the main challenges are changing markets and priorities. “We are constantly looking for ideas as to where to invest and how to invest. One of our main challenges is to come up with tools to support the strategies we run,” he said. “Our fund, being a multi-asset fund, comprises both equity and fixed income; so we need to focus on one or the other, depending on where the market takes us. We can only do this with the resources we have. If we have operational consistency across the platform, that’s very important. I came from the sell-side, what is different on the buyside is the three-way, front-to-back operation between the fund and the fund administrator, which is an important piece in the architecture, and the prime brokers and brokers. We need to keep everything in synch.”

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“We need to discuss within the business how to strike the right balance between business growth and risk...” Samson Chan Head of Equities IT

Barclays Capital

technology

Next, discussion turned to the capital expenditure (capex) pressures that technology heads are under, and how spending is prioritised as a consequence. Samson Chan, managing director and head of equities IT - Asia, Barclays addressed the dichotomy around supporting legacy hardware. “While we want to continue to build the business and buy new machines for it, at the same time the old ones need to be replaced, to save power, to save costs, etc.,” he said. “But there’s always a limited budget. So how do we strike that balance? For me that has always been very challenging. We need to discuss within the business how to strike the right balance between business growth and risk, and to look two years into the future. Development must become much more forward looking.” Moving from a capex model to an operational expenditure (opex) model is key for managing costs efficiently, said Kalyanswamy. “So you go to utility-based storage, which means taking a private cloud,” he said. “For that we understand what the fixed costs are. We look historically and understand that you have to spend a minimum amount on that. But operational flexibility is important, so we can both shrink and grow with the business, and can respond very quickly. If a client or user comes to us and says I suddenly need ‘X’ amount of machine hardware, any amount of resources, how can we deploy that very quickly and then again pay just for usage and reduce it very quickly when it’s not being used.” “The cloud is the right direction,” said Chan, “but the challenges include architecture. Probably 70% of firms are going in that direction; when we go into low-latency performance, and some of the trading platforms. However high frequency traders usually go through private switches, and private networks, which moves away from the cloud. That 20-30% will always be the exception.” Turning to how architecture could be tailored for flexibility, and not just for cost reduction, Chan highlighted the conflict between the two considerations. “I usually cut it off at what I call trading apps, and exchange trading apps,” he said. “The trend with trading apps is we are not just talking about the application, we’re talking about application layers, and all hardware layers. At this stage we are talking about private switches to improve performance, and reduce latency. That becomes a unit by itself. It cannot be stripped out of the hardware completely. So it also involves discussion about the hardware. Then we can talk about flexibility, buy versus build and standardisation.”

losif Ziman Chief Technology Officer

BFAM Partners

“One of the unifying factors is third-party vendors, who help in abstracting some of the layers that sell-side firms offer.”

“From an architecture perspective you can talk about physical architecture and servers, but a different perspective is working across silos and building trading applications across silos,” said Ashok. “We looked at all our electronic trading applications. Historically we had silos. Then we all came together and to ascertain the common factors, for example connectivity to the market. Is there client connectivity there? Is there EMS? Is there an algo framework on which to build algos? In terms of the ecosystem, we broke it down by function. We identified duplication and reduced it. How many of these functions are asset class-specific, and how many are not? Then we have a target functional

architecture which is optimal, cost-efficient, multi-asset and therefore flexible.” “In the past few years our challenge has been integration,” said Ziman. “We need to interact with our counterparties as there’s scope for potentially unifying some of the supporting tools. Oftentimes we don’t find that these layers are consistent from firm to firm; so we have to deal with these layers ourselves. One of the unifying factors is third-party vendors, who help in abstracting some of the layers that sell-side firms offer.” Attention then turned to the pros and cons of buy vs. build, which, said Ashok, “boil down to several factors.” “It depends on whether there is a competitive advantage,” he said. “For most third-party clients, we use third-party products. Flexibility is also an issue. For example if you’re building an OTC derivative trading system, your traders need to customize the risk models and parameters, and their own strategies. Maybe there is a third-party product that could do that, maybe not. Other issues include whether you go with a vendor, but if you want a new feature added, you have to get in the queue with the rest of the people who are using the product. If you’re going to build, you have to understand the cost of ownership: the developers, the hardware, the software, the support staff, the licenses.” “Initially it’s dependent on the market,” said Ziman. “Markets are cyclical, and some are better than others. We invest in markets that are on trend. When volatility is on trend, that’s what we are going to invest in. It’s always the main opportunity that determines whether we build something as opposed to buy something. Over four to five years we have built a number, and they need to continue to be adapted. Now our challenge is to keep all of these running. “One factor is talent,” said Chan. “Whether I have the people, resources and the knowledge to manage the risk properly on the project. We assess whether we can bear that risk.” As to where the panellists see deficiencies in technologies and where they would like to see improvements, Ziman said his firm “needed to go, by and large, to the lowest common denominator that we deal with, within reason.” “One party may have great features that we can use to interact easier, or use more information, or interface, in a way that is beneficial to us and our counterpart,” he said. “But if we concentrate on that, we leave other people out. I’d definitely be a sponsor for the sell-side and buy-side to have a conversation about where these features would be most useful vs. what would be the lowest common denominator.”

Asia Etrader z Q4 2013 z www.asiaetrading.com

technology

“From a buy-side perspective, when you deal with multiple brokers, one selection criteria is ease of onboarding and working with the broker,” said Ashok. “Sometimes you’ve got all these great technologies and we get carried away with architecture, but just in terms of overall processes, it’s sometimes just overloaded. From a tech perspective, say you want to onboard a new client, the multitude of things that may need to be set up internally, it could be pre-trade, it could be connectivity, risk limits, booking, getting compliance to sign off, and reporting; there are a multitude of things that need to be done quickly. That comes down to operational excellence.” “To translate this into numbers, we’ve had parties on boarding for less than a week, and some for six weeks, or more,” said Ziman. “If we go into somewhere, we have to find our way. When the organisation has a blueprint as to how to execute this, everything is much easier.” Panellists then considered whether there is a need for multi-asset trading platforms. “If I were asked that a few years ago, my answer would be ‘absolutely’ as we have the ability now, after a few cycles of developing systems, to build cross-platform tools,” said Ziman. “But I’ve slipped back a bit in the area that there’s certainly scope for specialised tools in most areas. But one area I wouldn’t compromise on is the risk side. We can have any tools we want, in terms of trading or compliance, decision-making tools, specialised by area, but once we’re talking about managing risk, understanding where we are, where we come from, margining, all that needs to be brought together.” “In terms of risk management, and margining, you need to look at efficiency across the firm and across asset classes,” said Ashok. “From a global trading system perspective, and from a tech perspective, you break down the back end. From an architecture perspective, if you have a lightweight front end, which is flexible, and you have an architecture framework that is flexible, what you see on the screen can be customised for your client. On the back end, if you have automated systems, a quoting system and EMS, and connectivity, they should be as multi-asset as possible. Obviously some things are very asset-class specific, just in terms of how you calculate risk, and pricing models, etc. You have to look at who the end users of your systems are and whether they truly want multi-asset service. If you are looking at an equities trader, they’d be looking to use futures to hedge, so equities and futures make sense. Would he need FX? Maybe. Would he be trading bonds? I doubt it. If you look at a fixed income trader, who just trades futures or bonds for a

Ashok Kalyanswamy Chief Information Officer

Asia Ex-Japan at Nomura Securities

“...don’t lock yourself into an architecture that is not flexible, where the cost of change is large and you are locked in.”

living, would he want to trade equities too on the same screen?” The next topic up for consideration was the influence of external factors on the future direction of trading technology. “I don’t know where it is heading,” said Chan. “Regulation is going to drive the direction, much more than technology. You could call it push and pull. Regulation is pulling on one side, and what technology can offer is pushing. Where does it end? I don’t know. But these are the two main factors at the moment.” “The only constant is change,” said Ashok. “Asset classes, rules, regulations, customer

www.asiaetrading.com z Q4 2013 z Asia Etrader

trends — there’s always going to be change. So don’t lock yourself into an architecture that is not flexible, where the cost of change is large and you are locked in.” To end, the discussion was thrown open to questions from the audience, the first of which probed panellists’ thoughts on protecting talent. “When I look at protecting talent,” said Ziman, “I look at how we bring fun to work. Across any application, we are not just talking about the technology that is on the application, there are also algos, etc., which are fun. But when it comes down to production issues, and regulations, they are not fun. It’s not about the application itself, it’s about the process, about the ecosystem and how you release the product.” “Team engagement, and team morale are really important,” said Ashok. “In terms of senior managers, one of things we have to do is have a really tight governance process. You can’t have multiple people coming in and pulling other people in multiple directions. If you have a tight process you channel and manage the requests, and then even technology has a seat a table if they want to build automation tools for regression testing, for on-boarding or to make the software cycle more stable.” A second questioner queried how panellists take innovation forward. “In an ideal world I’d like to have a separate innovation team, conduct many surveys and consult many people,” said Ashok. “Right now I don’t have that luxury. From an architecture perspective, if you have some innovative ideas you want to implement, we just have to try to factor that into the book of work and show how this innovation makes the business case.”

post-trade

One-stop repository The DTCC’s ubiquity offers a path to cross-border trade reporting in Asia; however distrust will make breaking away from national reporting a challenge, writes Lynn Strongin-Dodds.

global trade repository (TR) for each derivative asset class would create significant efficiencies, yet in Asia the industry seems to be moving in the other direction. Competition and not consolidation seems to be the order of the day. Nevertheless, many expect to see US post-trade services giant the Depository Trade and Clearing Corporation (DTCC) emerging as a regional force in the longer term. “There is a lot of debate in the region but what is obvious is that the DTCC is one step forward,” says Simona Catanescu, director for Post-Trade Markets, Asia-Pacific at Swift. “It has more than just a regional presence, it has a global warehouse which adds more value. The HKMA TR in Hong Kong already links into its global warehouse and I think we will see greater cooperation between DTCC, SWIFT and regional TRs.” The DTCC global trade information warehouse was first established in 2000 as a ‘golden source’ for credit default swaps. Its role was crucial in unwinding positions during the Lehman collapse, as the vast majority of contracts executed by global derivatives dealers and more than 1100 buy-side firms in

31 countries were registered there. The result was that the DTCC was able to net down the US$72bn of Lehman Brothers credit default swap (CDS) contracts that were outstanding at the time of its failure, and calculate the amount owed by net sellers of protection to net buyers of protection. Post-Lehman, the creation of one global trade repository (TR) for each derivatives segment – interest rates, credit, equity, foreign exchange and commodities – where transactions

can be reported under a common set of data standards became a core plank in the International Swaps and Derivatives Association (ISDA) and the Group of 20 (G-20) plans. The goal was to establish a single reference point for both financial derivatives players and their supervisors while facilitating regulators’ ability to gain timely access. I’m not sure if the next paragraph follows the previous one very well: is there some sort of project going on towards delivering a single

“The original intention when we built our trade repository was to create a utility that increased operational efficiencies and mitigated risk for OTC swaps...” Peter Tierney Regional Head DTCC

Deriv/SERV Asia

Asia Etrader z Q4 2013 z www.asiaetrading.com

post-trade

reference point or just a hope that this will fall into place? The hope is that closer co-operation between regulators will harmonise data reporting standards as well as address client data confidentiality issues. Also the opportunity for inappropriate disclosure of information would diminish if different jurisdictions had the same standards of what trade elements are made public in their respective repositories. To date, though there have been no widely accepted agreements and regulators tend to share data with each other on an ad hoc basis relating to specific events. “The general view is that a common framework for trade reporting is a good thing, mainly because it reduces the workload and creates operational efficiencies,” according to Conor Cunningham, head of futures & OTC clearing Asia Pacific, at broker and custodian BNP Paribas. “If there are multiple trade depositories, then it becomes a huge exercise. I think it will take time but there will be a natural evolution where people recognise each other as equivalent regimes.” Peter Tierney regional head of Asia for DTCC Deriv/SERV, responsible for its trade repository initiatives in the region, says, “The original intention when we built our trade repository was to create a utility that increased operational efficiencies and mitigated risk for OTC swaps. Today, post crisis, the regulators have placed great importance and focus on the value these services bring for transparency and visibility however, the opportunity for increased operational efficiency and risk mitigation are still as relevant.”

Split decision This plan is not shared by regulators in Asia, who have adopted different approaches to the reporting of OTC trade data. A framework to share data from swap dealers and major swap participants has yet to be formulated. Many have opted for a phased approach to reporting with the first stage covering standardised interest rate swaps (IRSs), CDSs and foreign exchange transactions followed by equity and other asset classes. Japan was first out of the starting gate launching its trade repository in April, while Singapore, Hong Kong and Australia are all looking to launch their own versions by the end of the year, although deadlines may shift. The DTCC has been active in many markets; it made history in Japan as the first trade repository to offer OTC derivatives reporting services in Asia, and it opened a data centre in Singapore at the end of last year. It has also agreed in principle with the Hong Kong Monetary Authority to be an agent to its trade repository when it goes live. Other local TR contenders are expected to

muscle in but few are likely to match the DTCC in terms of its global reach and cross border reporting experience. “DTCC has the tools and infrastructure plus they have significant linkages with the sell side which will give them a head start,” says Philip Popple, derivatives product specialist at custodian BNY Mellon. “I also do not see any other repositories with the same global prominence.” Matching the cost efficiencies of a firm like DTCC would be difficult given the scale of its existing investment. Tierney notes that it is an expensive proposition to build an infrastructure as well as to have the legal and compliance systems to meet the new regulatory requirements. “This is a scale initiative and it is not easy for a local or regional player to realise the economies or transparencies that a global initiative can offer” he said. “Moreover, the region is not without its challenges particularly in terms of sharing data and confidentiality. Every regulator will bring its own set of rules and there may be an issue with fragmentation in terms of their immediate ability to assess systemic risk. We hope we can be part of the solution by offering a common, multijurisdictional response.”

Long division In the short term, conflicts of interest are likely to widen rather than diminish under the burden of the new OTC rules. For example, the Hong Kong Monetary Authority in its preliminary assessment stated that there is no barrier for local entities to fulfil their reporting obligation in Hong Kong, but for cross-border transactions it is a different story. Client confidentiality and bank secrecy obligations under certain overseas laws may prevent reporting entities from providing their overseas counterparties’ information. As Michael Steinbeck-Reeves, Japan-based managing consultant at post-trade consultancy Catalyst puts it, “I am not sure a one size fits all model in the region can work. In Europe, there is a precedent for cross-border reporting but that doesn’t exist in the Asia Pacific region. One answer is because people are protective of their data and there are concerns if there is too much transparency, it may cause leaks and people will be able to trade off the data.” The situation is best summed up by a recent report commissioned by the International Swaps and Derivatives Association (ISDA). It noted that while the US and European regulation will affect the region, especially on clearing, these disparate markets are “united in their diversity”. It added, “Local factors are overwhelmingly important, with local regulations, local market drivers, and local customs having a strong impact on each country and thus on market participation.”

www.asiaetrading.com z Q4 2013 z Asia Etrader

Philip Popple Derivatives Product Specialist

BNY Melon

“DTCC has the tools and infrastructure plus they have significant linkages with the sell side which will give them a head start.”

This could change though as the market develops and matures. For now, the region represents around 8% of the total US$648 trillion OTC derivatives market. However, last year witnessed a healthy 25% hike from 2011 to US$42.6tn in notional outstanding while turnover jumped to a five-year high of US$186tn. Singapore was the dominant player followed by Australia, Hong Kong and Japan although Tierney believes that there are significant opportunities in the so-called tier two countries such as Malaysia, Indonesia and Thailand. “We are targeting those smaller countries and conducting an open dialogue,” says Tierney. “They want trade reporting but it is at the very early stages and at the moment our main focus is on sharing experiences and education around data standards, privacy and confidentiality.”

back pages

Events Date

Event Where

Type

17 October

Asia Etrading Forum

Hong Kong

Forum

24 October

Asia Independent Research Summit

Hong Kong

Conference

4-6 November

Asia Pac Financial Information Conference (APFIC)

Hong Kong

Conference

7-8 November

3rd China Derivatives Focus

Shanghai

Conference

12 November

FISD Sydney

Sydney

Forum

20-21 November

Trade Tech Asia

Singapore

Conference

3-6 December

FIA Asia

Singapore

Conference

Dates Date Country Holiday

Date Country Holiday

14-Oct

Hong Kong

The Day Following Chung Yeung Festival

25-Nov

Japan

Labour Thanksgiving Day

14-Oct

Japan

Health-Sports Day

30-Nov

Philippines

Bonifacio Day

15-Oct

Indonesia

Eid al-Adha

05-Dec

Thailand

The King’s Birthday

15-Oct

Malaysia

Hari Raya Haji (Date subject to change)

10-Dec

Thailand

Constitution Day

15-Oct

Pakistan

Eid ul-Azha Day 1

23-Dec

Japan

The Emperor’s Birthday

15-Oct

Philippines

Eidul Adha

25-Dec

Australia

Christmas Day

15-Oct

Singapore

Hari Raya Haji

25-Dec

Hong Kong

Christmas Day

16-Oct

India

Bakri Id

25-Dec India

Christmas

16-Oct

Malaysia

Hari Raya Haji (Date subject to change)

25-Dec

Indonesia

Christmas Day

16-Oct

Pakistan

Eid ul-Azha Day 2

25-Dec

Korea

Christmas Day

23-Oct

Thailand

Chulalongkorn Day

25-Dec

Malaysia

Christmas Day

28-Oct

New Zealand

Labour Day

25-Dec

New Zealand

Christmas Day

01-Nov

Philippines

All Saints Day

25-Dec

Pakistan

Birthday of

02-Nov

Malaysia

Diwali (Date subject to change)

Quaid-e-Azam Muhammad Ali Jinnah

Diwali

25-Dec Pakistan

Christmas

03-Nov Singapore Deepavali

25-Dec

Philippines

Christmas Day

04-Nov

Culture Day

25-Dec

Singapore

Christmas Day

05-Nov Indonesia

Muharram

26-Dec

Australia

Boxing Day

05-Nov

Malaysia

Awal Muharram

26-Dec

Hong Kong

The first weekday after Christmas Day

09-Nov

Pakistan

Birthday of Muhammad Iqbal

26-Dec

New Zealand

Boxing Day

14-Nov India

Muharram

30-Dec

Philippines

Rizal Day

14-Nov Pakistan

Ashura

31-Dec

Philippines

New Year’s Eve

17-Nov

Guru Nanak Jayanthi

31-Dec

Thailand

New Year’s Eve

03-Nov India

Japan

India

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