Derek Sammann. JSC Calls for Clearing Consultation. OUTLOOK 2010 P&L asks seven currency strategists for their EM forecasts.

Transcription

1 NOVEMBER 2009 VOL. 11 / ISSUE CME Group s Derek Sammann ON THE NEED FOR CONSENSUS AND HUMILITY The head of CMEʼs FX business talks about the exchangeʼs new FX clearing initiative; the lessons from the past 18 months; and his desire to be at the leading edge of change. EMERGING MARKETS OUTLOOK 2010 P&L asks seven currency strategists for their EM forecasts. JSC Calls for Clearing Consultation Hedge Fund Managed Accounts Is the debate on the right track? 10 Years Ago in Profit & Loss 10 th Anniversary MIXED RESULTS FOR FIXED INCOME BUSINESSES

2 NEED FOR CONSENSUS CME Group s Derek Sammann ON THE NEED FOR CONSENSUS AND HUMILITY The head of CMEʼs FX business talks to Profit & Loss about the exchangeʼs new FX clearing initiative; the lessons from the past 18 months; and his desire to be at the leading edge of change. Colin Lambert: It s been an interesting 18 months to say the least Derek, what is your take on events? Derek Sammann: I think the main take away from the last year is that there has been a structural shift away from speed towards risk mitigation. Until little over a year ago we were all talking about the race in technology, specifically reducing latency and the opportunities of co-location. The key question everyone was asking was, How can I be faster? In fact, since September 2008, we have invested in our matching Globex technology to reduce our FX futures matching speed from 12 milliseconds down to less than 4 milliseconds. However, in a post-lehman world, these questions very quickly became, How robust is my platform and how sound are my counterparties? Is my business sound from a regulatory perspective? CL: The regulatory outlook remains uncertain though, doesn t it? How do we, as an industry, and you as a business manager, prepare for such an uncertain outlook? DS: There is a lot of uncertainty out there. One thing that is clear is that the view of systemic risk now is much different from two years ago and our model is at the forefront of thinking. The easy thing for us to do would be to sit back and say, The market is coming to us in a regulatory sense, but we want to be one of the agents of change, we want to be at the leading edge and that means we have to be open and flexible in our approach and fully engage with the industry. CL: Speaking of change, at Forex Network Chicago, Craig Donohue went public with CME Group s view on the future of clearing for FX. What are the drivers behind this initiative? DS: There has been a lot of interest and a lot of speculation over CME Group s response to the evolving regulatory interest in foreign exchange. We have been listening to our customers and the key stakeholders in the global FX market and asking them what they want to see from us and, more importantly, what they do not want to see from us. What we ve heard very clearly is that the market would like to see CME provide a clearing service to the global OTC FX market, but purely at the post-execution level. We can accept trades at whatever point in the post-trade cycle people want, they can come directly from an ECN, from a prime broker or from someone s own back office. CL: The new service will use CME Clearport, how would you describe the value proposition to the industry? DS: CME Clearport is an open access, platform-agnostic, clearing mechanism that allows clients to control how, and with whom, they trade, and as such it mitigates risk and provide deeper efficiencies and counterparty risk control. The Clearport mechanism has operated successfully since 2002 in clearing transactions in the OTC energy market. It emerged in a post-enron world, when firms in the energy market couldn t trade with each other. The business model is being extended to other asset classes within CME Group, and it is an API-based service that can flexibly adapt to any execution venue or method. In FX, we will initially start with eight currency pairs and clear spot, forwards and swaps out to a maximum maturity of five years. In time, we will add FX options, more currency pairs and non-deliverable forwards (NDFs) to the service. Our intent is to provide a solution that combines the flexibility and choice of the OTC market with the risk mitigation benefits of a clearinghouse. We will provide full segregation of customer funds, which will deliver the financial safeguards package to end-users of the safety of the CME Clearing House. And, of course, a real benefit will be the cross-margin 14 November 09 I Profit & Loss I

3 NEED FOR CONSENSUS We recognise the need to be open and to work with the entire industry is a manner that might not have been considered two years ago I Profit & Loss I November 09 15

4 NEED FOR CONSENSUS What we are looking at here is a partial reconstruct of the industry in an uncertain environment... I am not sure the FX market has faced anything like this before Additionally, the market has told us they want us to offer the benefits of clearing severed from execution. CL: This does sound like a more collaborative spirit exists within CME FX. DS: It does exist. We recognise the need to be open and to work with the entire industry in a way that might not have been considered two years ago. We need to demonstrate the appropriate level of humility success in this world depends as much on knowing what you don t know, as well as what you do. We want to take a key stakeholder approach, rather than go-it-alone, which we may have done occasionally in the past. efficiencies that are currently only available in the exchangetraded futures and options space. CL: You mention the need to offer flexibility to the OTC FX market; at its most simplistic, the current evolution is often stripped down to OTC versus the exchange, but it isn t that simple, is it? I sense a real desire to stress the importance of the OTC market. DS: That is because a healthy OTC FX market is very important to us. At no time do we want to force cash players to futures. Our view is that future growth in the global FX market will be driven by both OTC and FX futures and, in certain markets, by a clearing solution to help scale and grow the OTC market. A deep, liquid cash market alongside a healthy and diverse CME FX futures market offers customers the best of both worlds, leading to a deeper and more diverse pool of liquidity. I think it is important to note that while market share may be a zero-sum game between exchanges and between ECNs, there is a high degree of synergy between OTC and FX futures. CL: Obviously this is not CME Group s first foray into the OTC FX space what makes you think you will succeed this time? DS: What we learned in 2006 was that what the market really wants is a clearing mechanism. It doesn t want to be forced to trade standardised products, and it does not want to be forced to access clearing tied to a single point of execution. This is why we are coming to market with a fully flexible postexecution OTC FX clearing solution. Based on the events of the past 12 months, the time is now right for an OTC FX clearing service focused on open, flexible clearing solutions to mitigate post-trade risks and rebuild volumes in areas of the market which have not yet recovered to pre-2008 levels (such as swaps and FX options). CL: Not wishing to be facetious, but what don t we know? DS: I am not sure anyone knows what the next successful model will be in this business. What we do know is that those models that are currently successful may not be the drivers of success going forward. We need to interact fully, across the breadth of the industry, and that will help us understand that the next model will be different. It is our responsibility, as an industry, to get the model right. If we do, as time evolves we will have the flexibility and scalability that enables us to look at the inevitable opportunities that will arise, rather than continue to fire-fight ongoing crises. What we are looking at here is a partial reconstruct of the industry in an uncertain environment. I am not sure the FX industry has ever faced anything like this before. The regulators are a big element in this shift, therefore we have to communicate effectively as an industry not as individual bodies or industry segments. We are all in this together and it probably helps that whilst it is a huge market, the FX industry is relatively small and incestuous this should help us to present a unified message to the authorities. CL: The evolution you describe would appear to need different thinking do you feel a new generation of business managers will emerge? DS: They are already emerging, or rather business leaders now understand that a different skill set is required. It needs to be much deeper and broader, in fact business skills are probably more important in a manager than a network. You need highly technical skills to succeed. The winners will be those businesses led by people able to provide a semblance of structure by bringing together the strands of technology, regulation and breadth of product offering. Of course, meeting that challenge is, in reality, probably the biggest opportunity out there. As long as you seek to solve the issue in a different fashion to the past, you have a great opportunity it is not about how we did things three years ago, 16 November 09 I Profit & Loss I

5 NEED FOR CONSENSUS it is about building one s understanding of how things could be done in the future. CL: Rewinding just a little, a few minutes ago you mentioned the relevance of a clearing solution to the growth of certain markets can you expand on that? DS: I think the crux of the issue is the discovery over the past year that the business is not infinitely scalable and that regulation was struggling to keep up. We were effectively victims of our own success the sheer scale of our growth was building systemic risk levels. If you look at the events of September 2008, it is clear that CLS did an admirable job and the system worked well. They also tell us that technology is not the constraint on the industry credit is. The numbers tell us that while spot volumes have partially recovered to pre-crisis levels, the forwards, options and emerging markets volumes are still significantly down and the problem is credit. Obviously, for a time, the sheer level of volatility was a real constraint but I would argue that volatility is now at reasonable levels. If that is the case, then why have volumes not rebounded? Because credit is still restricted. If we are to ease this bottleneck on growth we need to build a better framework that works for all participants. As I said at Forex Network, New York, Boring is the new sexy. CL: So within all this change, what are your plans and ambitions for CME Group s FX business? DS: The game plan since I joined CME Group in September 2006 has been to build and diversify our business across three planes: client base, product breadth and geography. These remain our key themes. We have adjusted our own realities in terms of what constitutes healthy growth and we have had to recognise the need to nuance our business model to meet the challenge of convergence of systemic risk mitigation and flexibility of execution venue, but this is really a growth opportunity rather than a new approach to the business. Our risk mitigation model has really helped build out our client base, and we have seen a dramatic trajectory in our volumes as a result. In 2004, we were trading around $24 yards a day in September 2009 we executed over $100 yards a day. I think this growth is directly attributed to the CME Group FX team and our customers who were quick to recognise the benefits of the model in that it provides a different pool of liquidity with a different set of participants. Our message has always been the same it is not about cash versus futures it is about people being able to use both. We have moved from being a Chicago-centric business to a global player. We have FX-dedicated staff in London, Tokyo, Singapore and Chicago, and we now have as many staff outside of Chicago as in it. This has helped us to create a credible global footprint. I envisage much of our growth potential coming from outside the US. As a case in point, Asia is our fastest growing region and to feed that growth you need local presence and expertise. The final piece of the puzzle is product growth. We have a much broader range of currencies on the platform that are offering relevant liquidity we have Mexican peso liquidity in Europe for example and we will continue to build our global view of liquidity across as many currencies as possible. We are also fully engaged in building out our FX options product suite. When I joined CME Group, we executed 8,000 options contracts a day in FX and 90% of volume was on the floor. Within six months, we modified the exercise methodology to reduce pin risk and we automated the market to make it relevant to OTC FX options players. Within a year we were seeing 21,000 contracts a day and 65% were electronic it was a huge reversion from the year before. As is the case with the entire market, we have seen our FX options volumes drift lower from September 2008 when we hit 35,000 per day, but our drop off is not as severe as in the OTC FX options market. The philosophy of our FX options product is very much the same as it was with the futures we want to offer an additional pool of liquidity that enables us to grow alongside the OTC FX options market. We need a successful OTC FX options market to be successful because it is complementary to our offering. CL: You sound confident about the future in spite of the uncertainties. DS: I think we are in a position to grow strongly and sustainably. We have the wide range of products and skill sets required to succeed and I think we benefit hugely from being a multi-asset class platform. We also have a risk mitigation model that is more relevant than ever. We want to be smart and actively engage in the ongoing dialogue that is re-shaping our industry. There is a selfselection process going on; some are waiting to see how the cards fall, but I want CME Group s FX business to be fully engaged and an agent of change. As Profit & Loss was going to print, Derek Sammann was appointed managing director, financial products and services, with additional responsibility for leading the development, execution and management of CME Group s interest rate, equity and foreign exchange product lines. Sammann will report to Rick Redding, managing director, products and services, in his new role. Prior to joining CME Group in 2006, Sammann, was managing director, global head of FX options and structured products at Calyon Corporate and Investment Bank in London. Prior to that, he worked as senior vice president and chief dealer, FX options, for Credit Agricole Indosuez in London, and as vice president and senior trader, FX options, at Banque Indosuez in Paris. I Profit & Loss I November 09 17