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:


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.)




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:

Wash Trades | Your Questions Answered

We’ve been getting a TON of questions about our Wash Trade blog post.

Wash Trades Surveillance

Wash Trades FYI

What do you mean when you say my traders are trading as the FCM?
Let’s Say my company is ABC Energy. I have 100 Traders and an FCM called FCMBANK. When my traders execute trades via a trading platform like TT or even the exchange’s own platform there is a strong probability that my traders are executing as the FCM.

What happened was that when FCMBANK originally set us up, we took a shortcut and connected to the exchange using FCMBANK’s credentials rather than getting our own. This means that when one of my traders executes a trade, the exchange sees FCMBANK making the trade not ABC Energy.

From a position perspective its not a big deal because FCMBANK sees that my traders executed some trades in their name. They allocate those trades back to my account later in the day. The problem is that ABC Energy has zero visibility as to what our traders are doing on the market.

This causes problems:

Because my traders are executing as FCMBank, the trades are unlikely to flow directly into my ABC Energy trading system. Its a setup for confusion, because as ABC Energy I can’t see what my traders are doing on the exchange at all. Forget keeping real time track of position limits, wash trades, spoof, slamming etc…
But they are solvable:

We set up limits & surveillance monitoring all the time. The very first thing we do on a project is reset accounts from the FCM to the client to ensure that trades are executed in the name of the firm not the FCM.
Sometimes My Traders Execute Block Trades via Voice Broker, What Then?

There’s a trick to this. When a broker receives a voice order there is an exchange screen they can use to immediately allocate it back to ABC Energy. Here’s the thing: They have to do it right away. The trader has to tell them to either execute it in our name or allocate it immediately. If the broker delays we are just not going to automatically see the trade. We’ve seen an increasing number of clients put brokers into the penalty box for delayed allocation.

Wait, I Can Get a Direct Feed of My Traders Orders?

Yes…mostly. The large exchanges have a number of different means to get order information, varying in complexity. I’d say that we are somewhat still early days in terms of getting traders real time order information. Some exchanges it’s quite simple…others…more challenging.

Are the rules for wash trades the same in the E.U. as they are in the US?

Very Similar,

CFTC,“Entering into, or purporting to enter into, transactions to give the appearance that purchases and sales have been made, without incurring market risk or changing the trader’s market position. “


ESMA, “…entering into arrangements for the sale or purchase of a financial instrument where there is no change in beneficial interests or market risk or where the transfer of beneficial interest or market risk is only between parties who are acting in concert or collusion.”

I’m a broker do I need to check my client’s orders before I execute?

FCMs need to be really cautious that they are not getting caught up in a wash scheme. via the CME:

“The CFTC has held that firms, firm employees and floor brokers may be found to have knowingly engaged in wash trades if they facilitate a wash result without having made sufficient inquiry as to the propriety of such orders prior to their execution. The failure of a firm employee or floor broker to undertake such inquiry may support an inference of knowing participation in wash trades.”

We’ve built surveillance internally, but we’d like to get some external validation about our Limits, Wash, and other results.

Not a problem. We would be happy to run your data through K3. Or, if you prefer you can engage one of our consulting partners that use K3 for that very purpose. Feel free to give Tom Eisner a call and he will set it up.


Let’s Talk Wash Trade Compliance

We’ve had a lot of discussion with customers about how compliance should implement a wash trade compliance.  Let’s start from the top:

Wash Trade Compliance

What is a Wash Trade?

Well, the CFTC defines a wash trade as: Entering into, or purporting to enter into, transactions to give the appearance that purchases and sales have been made, without incurring market risk or changing the trader’s market position. “   See also Aviv Handler Here

Let’s synthesize this into a compliance guiding principle:  Compliance should inquire into behavior that has the “appearance of trading but is not.”   While trading and wash trading look the same there is one key element that concretely distinguishes the two: market risk.  So, lets take a look at some common scenarios.

The BSSP:  BSSP stands for Buy-Sell Same Price. Buying and selling a product at the same price is naturally a  suspect trade. Why? What makes it suspicious is that one  cannot immediately tell whether it was exposed to market risk.  You see, when a trader executes a buy and sell at a different price, there is prime facia evidence that the trade was exposed to market risk: the price is different!  Not so when the trade is at the same price.  Thus, we have to dig deeper to tell if it is a wash.

  • BSSP Same Trader:  When the same trader does a BSSP the compliance officer has to establish that there was some form of market exposure.  What happened in between the buy and the sell?  Was the open and close within seconds? Was this a liquid or illiquid product?  Were there others posting bids and offers in the market? What I’m getting at is that if a trader bought in the AM and sold at the same price in the PM but there is no activity in the market …it could be prohibited activity.
  • BSSP Different Trader: This one is a little more difficult because what we are really concerned about here is collusion.  Yes, one of your traders bought in the morning and another sold in the afternoon at the same price.  There is plenty of activity in the market giving the appearance of market risk.  However, if the traders colluded, then there was never any market exposure.  Thus, for different traders some inquiry needs to be made on who the traders were, whether they have been in contact, and whether this has happened before.  For large entities this happens on occasion.  A trader in Houston buys and a trader in London sells at the same price.  They are never in contact and may even be in different groups.  But this fact simply needs to be documented.
  • BSSP FCM Wash Hustle:  An FCM wash hustle is a risky proposition that will almost certainly draw wash scrutiny.   In an FCM wash hustle a trader creates a Paired Order where a buy and sell at the same price are placed through different FCMs.  The difficult thing about FCM Wash Hustles is that they are extremely difficult to catch.  The reason for this is that a lot of traders are able to trade via FCM accounts as opposed to the trading firm’s account.  In other words what the market sees is FCM1 buying  vs FCM2 selling.   But at the end of the day when the trades are allocated back to the trading company we see it was all executed by one trader.   I could go on for days about how traders trading on FCM accounts is creating compliance headaches around the globe.  However from a compliance inquiry any BSSP done with one or more FCMs goes into the “highly suspicious activity.”

What You Can Do

  1. Configure exchange Self Trade Prevention.  Most exchanges have self trade prevention functionality like ICE’s STPF.  This allows you to prevent your firm from trading with itself.  Its worth spending some time on configuration, but goes a long way to preventing a lot of BSSP.
  2. Consider eliminating trading via FCM accounts.  Again, this is a fairly simple configuration issue.  If executing trades using an exchange’s booking platform, then ensure each trader user account is setup with the correct clearing accounts.  When using execution platforms such as TT, you must ensure the FCM has all traders executing deals using your clearing accounts and not the FCMs.
  3. Ensure your FCM clearing accounts are setup correctly.  Each clearing account with the FCM must be setup in the exchange’s systems (e.g. CME uses RAV) such that trades flow automatically via your firm’s FIX connection.
  4. Get an orders feed connection.  The orders feed provides real time insight to trader’s exchange activity. We are an approved vendor for most exchanges orders feed.
  5. Make sure your compliance suite is fit for purpose. Is it reliable? Does it cover all your trades no matter how they are executed?  We’re always happy to show our compliance suite for wash, spoof, limits etc. so please give us a call.
  6. Use a compliance issues tracking system.  Some companies have formal systems others we set up on JIRA.  Its $10 bucks a month per user (no affiliation to us). But it’s a nice system to open up an issue, record what compliance did in its investigation and close it.

90 Days Til REMIT


Another great article [HERE] by Aviv Handler at the energytradingregulation blog…

Some takeaways if you are trading phys gas and power in Europe.

REMIT Trade Reporting Checklist

Tempus Fugit

  • 90 Days to Go!  Don’t forget to check into key personnel time off. Summer and the back half of September are full of holidays!
  • Talk to your OMPs (exchanges & brokers).  Find out how they will be reporting order & trade data.
  • Execute agreements with OMPs for the reporting of data.
  • Select an RRM and execute RRM agreements.
  • Don’t forget to register in your respective jurisdictions!
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