ICE Releases New Wash Trades FAQ

This month the Intercontinental Exchange (aka ICE) released a revised Wash Trade FAQ document.  This isn’t simply arbitrary guidance.  It comes after considerable review with the CFTC, who list it along with the previous edition on their site.  The last version was issued a little over 6 years ago and the new edition addresses washing in context of the take-over of electronic trading.  The old version referred to the “trading floor”, language entirely absent from the new version.  Lastly, it moves away from the more securities oriented term “wash sale” and fully adopts the term “wash trade”.

So what is a wash trade?  From the FAQ: “A wash trade is a transaction or a series of transactions executed in the same Commodity Contract and delivery month or Option series at the same, or a similar, price or premium for accounts of the same Principal.”  “A wash trade occurs when there is an act of entering into, or purporting to enter into, transactions with no intent to obtain a bona fide market position…”

In simple terms, if you make offsetting trades in a given product/contract month, you are giving the false appearance of activity in the market.  But this isn’t for a single trader…the “you” in this case is the corporate parent.  Say you have two traders across the pond from each other and trading under different entities.  One buys 100 lots of WTI at the market open and the other sells 100 lots at the market open.  The parent entity will have no net position and this could be considered a wash trade.  Two things stick out…

  1. This speaks nothing of intent of the two traders.  What it comes down to is that any open /close at the same price is automatically suspect. It’s the compliance officer’s job to establish whether there was proper intent to obtain a bona fide market position.
  2. The updated guidance refers to trades done at a “similar” price. This is much broader than the previous version which defined washing as trades at the “same” price.  It makes sense in context of electronic markets which move fast, but does broaden the scope of what could be a wash. Compliance officers’ job just got harder. Now we have to track everything within a penny? Two?

What does this mean for me or my firm?

It means you should have basic capability to monitor every suspect wash trade.  I would go further by saying this requires a substantive command of the data and the analytics to support it.  When the exchange or regulators inquire about possible suspicious trades, quickly producing data to substantiate activity along with a narrative around intent is your best foot forward.

Here is an example: Anytime we trade in and out at or near the same price…it shows up on this chart.

 

Euro Insanity

There’s an old saying that insanity is defined by doing the same thing again and again and expecting different reshutterstock_323387108sults.  There is no shortage of compliance pain under ESMA, REMIT, MIFID…etc:

ESMA recently released an updated EMIR reporting specification which increases the number of  report-able fields by 50% to 129.  Everyone has been a bit heads-down sorting out ACER II,  amidst a growing chorus of complaint about the existing complexity, cost, difficulty of their EMIR solution.

But there is hope for doing something different.

Trade Repositories –  It is a buyers market for TRs.  Some of the original choices have proved to be…well let’s just say “really bad.” And by ‘really bad” I mean an absolute black hole in terms of service, support and cost.  But there is good news.  There are other TRs that will really go a long long way to get your business and eliminate the nonsense and bloodletting.  With K3 switching TRs is a simple matter.

Automated Reporting – The area where you can get the biggest bang for your Euro. At least 98% of your reporting should be automated and not require human intervention.

Reporting Management and Updates – If anything is certain, regulations will change and reporting specifications will follow. You should be able to manage these changes in your reporting system without the need for digging down into code. As an example, level II updates took half a day with K3.

This is a golden opportunity to re-look at how reporting is done an off the shelf platform like K3.

#RegReporting2.0

The take away is this:  if your company took up a “Just Report It” approach to reporting and cobbled together a solution and TR that is giving you heartburn, now’s a good time to look at replacement.  We think you will be pleasantly surprised at how cost effective deploying an automated/off the shelf solution like K3 can be.  We have a crazy long list of referenceable clients and would be happy to connect you.

ACER Tidbits
So, we know a lot of people are headsdown on ACER Table 2 reporting. Did you know:

  • Table 2 trades submitted for confirmation on ICE eConfirm can automatically be reported to the ICE RRM?  If you can get your counterparty to agree to confirm there, it’s nice because it eliminates a lot of the 2 sided, USI, and other pains of table 2 reporting. Just match on eConfirm and you are done.
  • K3 automatically converts trades into ACER XML for reporting Table 1 and Table 2 trades.  Once in ACER XML it can be automatically sent to any TR.  If you’d like to see this just send us a note and we will set you up for a demo.  tje@broadpeakpartners.com

2016 | Be Prepared to STOP!

This is the time of year I get prodded to write up a pithy outlook for the year. It seems to be harder this year.  Seemingly, like everyone else I have had my “nose to the grindstone” far too long. That and the fact that my crystal ball looks mostly cloudy with a chance of rain.

So, let’s get the big variable out of the way: We have a weird global economy: fragile, exuberant, volatile and fractious.  Looks great, smells recessionary.  Feels improving, tastes deflationary.  It’s a setup for both some runaway successes and abject failures.

Amidst all this,  what should we expect in 2016?  I had a friend in college who, during a night of antics with her friends, stole a big road sign.  She put it above her bed.  It read: “BE PREPARED TO STOP.”  Got me thinking about 2016.  In this volatile year, whatever you are doing in 2016: BE PREPARED TO STOP.

Here’s what is ripe for the stopping in 2016???shutterstock_275958773

Another Unicorn

A lot of Unicorns will hit the bricks this year.  Don’t get me wrong, there are amazing products out there…Seriously, I can’t live without Uber.  

But what we can live without is the Unicorn capital structure.  Here’s why.. You know what happens when Unicorn investors are not happy with revenue growth?  They stop investing and start pulling the staff change slot machine lever,hoping for the magic combination to come up.  When that does not work they fall back on soaking their customers.  This starts the revenue downward spin cycle.  I’ve seen it again and again, and it always ends in application and company tragedy.

The Ivory Tower of IT Saying “NO”….Again.

The revenue generating part of enterprise have always had great ideas on how to do business better, more efficiently, and profitably.  And, for decades those ideas are pursued only to hit a  ubiquitous IT wall of “NO.”  “No” comes in many forms. Usually, something like, “We already have a gazillion dollars invested in (really, really old and custom) technology etc…”

The shift of operations spending IT dollars started years ago.  But the business is now pretty much fed up with legacy infrastructure.  It’s just too slow…too expensive.   Let me be blunt: We know you have large investment in older technology. We know it requires a lot of control to run. But business requirements and technology is evolving at breakneck speed.  In 2016, if IT is not solving business problems and just taking a disposition of saying NO …the business is going to go around you.

Someone Telling Us There Are No Servers Available

In the time it took you to read this far, I have spun up two enormous servers “somewhere else” for the cost of a salad in midtown manhattan.   What’s more, I have connected them to our network so they are indistinguishable from a server running in our own office. They are, for all practical purposes, absolutely secure.   I like to think of it as cloud reversal, because instead of running “stuff on the cloud” I have just pulled the cloud to me.

Today when you say there is no server space…  here’s what happens:

This developer/ analyst I know built a really awesome business optimization model.  He wants to test in full, but IT says that it will cost $150K in new servers just for a test instance.  In other words they said “NO”.  So what’s an enterprising analyst to do?  He independently set up all the servers he could ever want on Amazon for $200 per month and started testing it there. (Also, charged it to his company credit card.)  I’m sorry. But, this financial disconnect between what IT says servers cost and what any regular joe can get is just too wide to survive 2016.

In summary, my read on the market is that there will be plenty of money for projects.  Plenty of money for investment.  But I think that this is the year companies will really take stock at where they are blowing money on sustaining roadblocks.  If you think you are managing something that is super duper expensive and produces terrible results, BE PREPARED TO STOP.

Stay tuned for more 2016 discussions including:
“That Time You Hired Nate Silver and He Quit”

The Good Shepherd of Compliance Data

Post the financial crisis of 2008, financial firms that trade directly with other firms (as opposed to a listed exchange/marketplace) are subject to an ever-increasing number of regulatory requirements. Think Dodd-Frank, EMIR, REMIT, MiFID II, and their analogues in each regional jurisdiction around the globe. While some of these regulations are broad in scope, at the heart lies the responsibility of record-keeping and disclosure by trading firms. By shining a light on otherwise dark over-the-counter markets, regulators hope to provide systemic stability.

Let’s leave aside any concerns about whether or not regulators can even accomplish this herculean task (more on that to come). What I want to highlight is the impact of all this on today’s trading compliance officers.

Compliance officers tend to be from a legal background as the function requires quite literally, ensuring firms comply with the law. But what happens to that legal oriented mind when it has to design a process that take trade and order data from multiple systems (from inside and outside the firm), filter for a subset of activity, transform, enrich, and send it to regulators anywhere from every 15 minutes to every day.mind-blasting

Let’s also note that they must choose an approved market solution provider to which to report trades, once trades have been sent they must ensure all validations are passed, and they may have to reconcile all activity with counterparties. This is just a glimpse into the variables which of course vary by region. You get the picture…mental overload.

Inevitably, compliance officers have teams in IT handling all this and making it easy, but here’s where we see a major split.
Compliance professionals who can manage to stand up a Compliance view of trades, regulatory database if you will, covering all corners of the institution (yes even those exotic trades in a spreadsheet) will comfortably fold into the new world and use it to their advantage. Those who don’t will of course benefit from increased budgets towards compliance but for how long? The mantra remains…justify the spend by delivering insights for the business.
Because much of this data has remained siloed, understanding where it comes from, how it is sent/received, and how each source represents activity allows the new age officer to turn an otherwise costly project into meaningful insights. For example, bringing in order data into a single can produce reports that convey market behaviour in ways that a spreadsheet cannot.

Bids Report
All this change has opened the door for smart financial tech professionals to focus more heavily on compliance data and help firms develop increased capabilities. But resist the temptation to fully offload these complexities onto such professionals without an innate understanding yourself.  The new world inextricably unites data and the law and compliance officers who can make the jump will deliver much more with their budgets than those who do not.

BroadPeak at ETOT and FIA

The first week of November 2015 is a busy one for BroadPeak. We will be at the Energy Trading Operations & Technology Summit in London and the FIA Futures & Options Expo in Chicago.

 

ETOT – Come and see us at our stand in the main exhibition room and make sure to attend the session where Gordon Allott, BroadPeak’s CEO, is speaking. The main areas being covered at ETOT are REMIT, MiFID II and EMIR. We’re looking forward to getting the inside scoop and perspectives from REMIT participants now that reporting has been live for about a month.  Also curious to hear viewpoints on how firms are preparing to manage the onerous position limits requirements under MiFID II.

 

FIA – Similar challenges face US trading firms.  We’re excited to hear strategies from Compliance groups who are preparing to tackle Dodd-Frank position limits and those who have innovative approaches around Trade/Order Surveillance.  There are also some interesting sessions around Compliance systems automation and processes.  This is a fast moving area and I’d expect those sessions to generate good interest from attendees.

 

Are you attending ETOT or FIA? If you are and want a private demo of K3 – shoot us an email to reserve a time slot: info@broadpeakpartners.com

 

Deutsche Takes A Hit

Just saw this press release from the CFTC.  Deutsche Bank got fined $2.5 Million for failing to correctly report trades.

How Does This Happen?shutterstock_245736202

It’s guess work.  But a lot of large swaps dealers (and others) decided early on to build their own custom integration over to DTCC, ICE and CME reporting.  What they ended up with was a mixed bag of highly custom code.  The rub with this approach is that, under a tough deadline for meeting obligations, there is a huge incentive to take a shortcut or two. In this case it looked like the shortcut was not fully enabling trade cancellation messages to the SDR.

My guess is that the IT team that built it, moved off onto other things.  Operations is then left with code where they really have no idea what it is doing and probably had little to no idea that cancellations was not working.  That’s my guess at least. 

How’d it get to the CFTC?  Undoubtedly, the counter-parties to DB made the complaint.  The US is single sided reporting, and as a swap dealer, DB is usually has reporting seniority.  It probably became clear to some of them that their trade cancellations were not getting reported and got worried that since their deals were not being reported they were “compliance exposed.”

We’ve already seen some pretty brisk business of firms looking to replace their custom integration.  After a couple years of custom code and slow turnaround from IT, firms are finally coming around to say “we’ve had enough.”  Just don’t wait for the CFTC to tell you there are problems.

The Weekly Regulator- “Trust Me, I’m A Vendor”

So many exciting!  vendor!  press releases! about MiFID II total readiness.  But if you have not even started on MiFID II yet, don’t worry.  This is hype.

From what we gather…there will be not even be ARMs (Approved Reporting Mechanisms) under MiFID II.

MiFID II is going to have what are called Designated Reporting Service Provider (DRSP), it currently looks like every vendor that wants to shutterstock_254756605act as a reporting service under MiFID II will have to  to register as a DSRP.  That is ALL REPOSITORIES. Even if you are an ARM now you are going to have to go through the registration process de novo.  To boot, registration is probably not going to start until July 2016.

We’ve seen so many press releases about vendors who are “MiFID II ready,” “have total ARM connectivity” or “ are the preeminent MiFID II vendor.”  Please just stop.  This is fantasy and customers have just about had enough of vendors selling vaporware.

REMIT Rolls On

Current consensus is that ACER’s got minor troubles. Nothing unexpected, but right now it seems pretty clear that trade modifications are not flowing correctly into ARIS.  We are also hearing about sizing troubles, that ACER may not have correctly anticipated the amount of data coming to it. Interestingly, most brokers are (mostly) generating correct order and trade ACER XML.  My take is this is actually going better than I thought it would.  However, there are real gotcha’ issues, such as when the broker simply produces wrong information (but in the correct format) it’s just very, very difficult to catch.   For example, if you execute a profile deal, but the broker sends it over as a ATC deal…..yea, that’s a tough one to identify.  

This Weekend…
If you find yourself having difficulty sleeping, might I suggest the REMIT TRUM ANNEX II??  Aviv Handler deftly points out we’ve got 5 months to go until the next gauntlet.  In a nutshell, gas and power traders will have to sort out how to take complex/shaped OTC trades and populate them into ACER XML and report to an RRM. This is a far more complicated kit.  We’ve been hard at work getting our ETRM to ACER XML conversion for Annex II running and will keep you posted.

The MiFID II Beast

Last week we mentioned the fact that there are a lot of firms that  may unexpectedly get caught up in MiFID II.  Yes, there’s even more trade reporting.  But the real beast is the capital requirements.  Known as CRD IV (basically Basel type capital requirements) but now applied to non-banks. Do you fail the MiFID II Ancillary Test?  Sorry, you’ve got until the end of 2017 to adopt a “Basel Compliant” capital structure.  Some rumors about extending this deadline, but this is nothing but loose chatter in the hallway.  Now would be a good time to buy your CFO a coffee and break the news, because if you get caught up in this she’s going to be busy for a long, long time.

 

Aaaaand We Have REMIT Liftoff

There’s a real sense of exhaustion… REMIT is turning out to be like a second kid after EMIR reporting.  The first one, you go around all paranoid, making your house all safe. The second? Well, the kid’s just got to learn the hard way not to stick their finger in the wall socket. That’s what REMIT feels like right now. But hey, it’s not our first Rodeo.  We all know we are in for months of sleeplessness and dirty diapers…and there is just no sense complaining about it.shutterstock_234889843

And, just as we see light at the end of the REMIT tunnel, our spouse just dropped the old, “Honey, there’s something we need to talk about tonight.” That something happens to be round 3 or MiFID II.

MiFID II/MiFIR | 14 Months of Gestation

For commodity oriented firms, there are some similarities to other regimes: There’s a “de-minimis” type threshold that if crossed gets you “Trading Frequent Flyer Status.” And by Frequent Flyer Status, I mean higher capital and reporting requirements that will be as comfortable as Row 34E on United Airlines. There’s a real risk non-speculative firms could get caught up in this.

But there is something firms can do now. And it’s really important.

Absolutely, Positively and Correctly categorize every trade. The current Regulatory Technical Standard (RTS) does not count hedges toward Frequent Flyer Status. If there was ever a time for trading operations to start or bolster an existing program to clearly identify the nature of every trade (such as spec or hedge), that time would be now. I’ll go as far to say that every hedge should be tied back to the underlying transaction(s) it (they) is (are) hedging. The RTS indicates that data for Frequent Flyer status is based on data from the Mid 2015 to Mid 2016 period. Let’s face it. If a trade is not clearly established as a hedge there is a risk it will be categorized as speculative. Hence the risk of being caught up as a Frequent Flyer are much, much higher.

Polish Up Your Limits Process
You might be calculating an exchange limit today. But, limits surface differently under MiFID II. The RTS really only contemplates a “Spot Period” (spot period defined by product). What’s interesting is that there is another limit that talks about “Other Months.” From the RTS it sounds more like, what we in the commodity world, call “Single Month” limits rather than “All Months” limits, but it’s not entirely clear. Like the proposed Dodd-Frank limits, OTC equivalents will need to be rolled into the limits calculation. So if one is trading a position on exchange and OTC those will both be counted in the limits calculation. Surprise, this means that firms will have to tie in an additional integration to their ETRM to also capture the OTC positions.The RTS indicates that the limits are to be calculated based on a percentage of deliverable supply or open interest (depending on the period or product). Here’s a quick video of limits using K3.  If you are looking to validate your existing limits process, don’t hesitate to give us a call.  (FYI the first minute of the video explains how limits work in general if you are not familiar.)

 

REMIT | GAME of THRONES II

 

Just a couple months ago it might have been anyone’s game.   All the RRMs were out pitching and selling, with great gusto.  But as of right now we feel pretty comfortable saying that EFETnet is the round one winner.  You really have to hand it to them.  EFETnet’s done a spectacular job getting a good number of brokers lined up.  And EFETnet seems to have won the majority of MPs.  If you think about remit game of thronesit, just getting the brokers lined up is a herculean effort and, in the end, a job well done.

But Like Westeros, The Seeds of Discontent are Blooming

Fair amount of consternation by RRMs that the exchanges (pretty much across the board) won’t lift a finger to  connect to them directly.  It’s natural that RRMs would want exchange data. There’s a ton of it. And it seems a legitimate request, that MPs should be able to dictate where their data goes.

There’s just one problem: reality.  Exchanges have been handling client trade data for a long time and I can tell you from experience, they don’t fool around with this stuff.  There’s only two entities in the world that can extract data from behind the exchange fortress: Clients and Regulators.

What the RRMs are hoping for is a direct pipe to their RRM from the exchange.  I’ll eat my hat if I’m wrong, but this is never going to happen with any major exchange:  

It’s just insane potential liability there, and not a dime of revenue to offset the risk even if small.  It’s the real reason that major exchanges set up their own RRMs.  It certainly isn’t the money (RRMs are natural money losers).   An exchange RRM ensures data never has to leave their secure ecosystem. We can talk SFTP and API sharing with other RRMs until we are blue in the face.  The exchanges are not going to budge.  In the end, if the MPs want their data in another RRM, they are going to have to move it themselves.  

Competition Still Intensifies

Many RRMs have dropped their rates to …what is basically zero or some trivial amount. Even RRMs not yet approved have unbelievably cheap rates for reporting. It kind of makes one wonder how they will all survive.


We kept hearing that ICE is doubling down on its commitment to the European market by lowering eConfirm fees. The word is that ICE has lowered confirm rates down to €0.22.  When I heard this I pretty much spit up my coffee. So, I called ICE and asked.  The answer: “YEP.” This kind of move tends to spark the competitive pricing we usually see with mobile phones and airlines.  Right now I suspect companies average  €2.50-€3.00 per match.  No where to go but down from here.
By the way if you are looking to convert exchange data into ACER XML have a look at this video.  Its easy.

 

 

REMIT Criminal Investigation

Aviv Handler over at the CTR blog makes a great point.  Don’t be distracted by REMIT reporting when sanctions for insider trading and market manipulation are in force now.

See his article here.REMIT

We’ve been busy implementing K3 Surveillance Monitoring and would be happy to show you how K3 captures suspected wash trades, spoofing, slamming and other trading behavior.  Feel free to reach out for a demo:  info@broadpeakpartners.com

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