a magazine for the exchange industry
Aview
pPortfolio margining pNew London derivatives market p
fromthe
topChile’s capital markets reach new heights
Trend:
Leveraging technology
Spotlight:
Cloud computing
Our economy, infrastructure, rules and taxes are among
the most favorable in the emerging markets.
Juan Carlos Spencer, CEO of Bolsa Electrónica de Chile
2 MarketView 2 MarketView
my view
contents 1:2013
Over the last few years, new regulations have been a source of uncertainty in the financial markets. The industry will have
to comply with new mandates and has been doing its utmost to prepare. How-ever, until the regulations are finalized and come into effect, their impact on market behavior is sti l l somewhat uncertain.
The mandate to centrally clear standardized OTC derivatives is a case in poi nt . I n gener a l , we understand the motivation and the benefits of the new requirements. But the industry is also going to face some serious challenges; among the most significant is the potential collateral crunch.
Going forward, market participants will be required to post initial and variation margin at CCPs or derivatives c lea r i ng org a n i zat ion s (DCOs) to protect against adverse market movements or an ultimate default. The problem is that under the new regulation only cash, gold and high-grade securities are considered eligible collateral, and there simply is not enough to go around. Various entities have estimated that the current shortage could be anywhere from US$20 billion to US$3 trillion, but no one knows for sure.
We do know, however, that market participants will hedge risk using instruments that will optimize their use of collateral and capital. Some will use futures, while others will use OTC derivatives. Until the rules are finalized, it will be impossible to determine which type of product will be optimal.
We also know that the collateral shortfall can be reduced significantly through cross-margining. Traditionally, exchanges and clearinghouses have had a one-to-one relationship with respect to products, with limited or no cross margin between different clearinghouses. In the U.S. we have seen some initiatives
to of fer cross m a rg i n between clearinghouses without having to set up ful l interoperabil ity. In general, interoperability between derivatives CCPs is complex and regulators have some concerns about such arrangements.
To th is end , m a rket participants need to be ready for a va r iet y of potential outcomes. Buy-side firms and clearinghouse members w i l l need to think about the post-trade implications before they execute a trade and how they can optimize and transform their collateral
to meet clearinghouse requirements. Clearinghouses will need to look for opportunities to help customers use their collateral and margin funds more efficiently, by offering cross margin between correlated instruments and between listed and OTC contracts. Software vendors will also play a role in ensuring their systems are updated to reflect the needs of the market.
R e g u l ators a re ju s t s t a r t i ng to i mplement f i n a l r u les , a nd understanding their true impact is important for market operators and participants alike. It is also important to do thoughtful analysis, keeping in mind that when it comes to readiness, time is of the essence.
Johan RudénSenior Vice President Transaction Services NordicNASDAQ OMX Clearing
04 Hot chile Latin America’s first electronic exchange dominates Chile’s currency and repo markets, and it is gaining share in equities.
07 Beyond matchmaking Exchanges can leverage technology to diversify their business and increase revenue streams.
08 one-stop shop CEO Charlotte Crosswell explains how NLX, a new derivatives exchange, will be cost-effective for traders.
10 netting effect Portfolio margining can help reduce col-lateral shortfalls, but it can be complex to navigate.
12 cloud coverage Firms can take steps to mitigate their risks and begin to realize the true potential of cloud technology.
Until the rules are finalized, it will be
impossible to determine which type of product
will be optimal.
MarketView 3
news
NASDAQ OMX chosen to power new East Africa ExchangeNASDAQ OMX announced that it has been selected as the technology partner for East Africa Exchange. This new marketplace aims to increase regional market efficiency and liquidity as well as to give the region’s
population of 130 million, especially smallholder farmers, better access to markets. The exchange will initially focus on establishing an auction facility and spot trading for agriculture and non-agriculture commodities but will also develop futures trading across the East Africa Community region. NASDAQ OMX’s X-stream technology will handle trading and clearing of equities and derivatives securities and is scheduled to roll out during Q3 2013.
ACER taps SMARTS Integrity to monitor EU wholesale energy marketsNASDAQ OMX has been selected to deliver its SMARTS Integrity market surveillance system to the Agency for the Cooperation of Energy Regulators (ACER). The system will help ACER, a central EU institution, to help create a Single Energy Market to monitor the European wholesale gas and electricity market. The system will cover both spot trading and derivatives markets across Europe in accordance with the obligations under the REMIT legislation, which prohibits market manipulation and insider trading in EU wholesale energy markets. SMARTS Integrity will provider ACER with a surveillance platform to address the ability to detect insider trading, market manipulation and attempted market manipulation across European markets.
Kigali, capital of Rwanda and home of east Africa exchange
SMARTS Broker launched for Trade Monitoring on LME with NewedgeNASDAQ OMX announced the launch of the SMARTS Broker market surveillance solution for commodities trading on the London Metal Exchange (LME). The launch includes the go-live of two global broker-dealer customers, including the global multi-asset brokerage Newedge. The solution gives brokers the ability to monitor, identify and flag trading activity across the three LME trading venues – Select, Phone and Ring. SMARTS Broker is certified to connect to the LME select data drop copy, allowing connectivity to the trading member’s order flow and trading executions.
NASDAQ OMX to combine Market Technology and Corporate Solutions businessesNASDAQ OMX announced that it will combine its industry leading Market Technology and Corporate Solutions businesses to improve client offerings and advance its technology leadership position. The Market Technology business provides technology and advisory services to over 70 marketplaces, clearing organizations and central securities depositories in over 50 countries as well as risk management and surveillance solutions to financial services firms. Corporate Solutions provides public and private companies with a portfolio of products and services that deliver critical market intelligence and communications solutions which help identify, target and communicate with stakeholders.
Bursa Malaysia selects X-stream INETBursa Malaysia announced that it has selected NASDAQ OMX to power its securities market trading through NASDAQ OMX’s industry leading technology, X-stream INET. The new platform will handle trading of equities, fixed income, ETF, funds and issuer warrants for Bursa Malaysia. Deployment is scheduled for Q1 2014. NASDAQ OMX was selected in competition with a number of global exchange technology providers.
4 MarketView
in focus Bolsa ElEctrónica dE chilE
big c
hile’s capital markets are more than a century old. The country’s first exchange was founded in 1893, and it has served the financial com-
munity ever since. About 30 years ago, the government introduced sweeping structural reforms, including priva-tizing the pension system and state-owned companies. This development contributed to a boom in the capital markets and created vast wealth due to a 21% domestic savings rate. The time was ripe to launch a new exchange, Bolsa Electrónica de Chile (BEC), to compete with the legacy venue.
According to the Bank for Interna-tional Settlements, economic growth in Chile soared between 1985 and 1995, averaging 7.7% annually. Stock trans-actions climbed to 18% of GDP. Fixed income transactions and commercial paper and other short-term securities
reached 129% and 95% of GDP respectively. Stock market asset valuation increased to 112% of GDP. It was boom time for pension, mutual and foreign investment funds as well as corporate bonds. Importantly, the growing volume of funds managed by institutional investors along with foreign capital inflows drove asset values higher. By the end of the period, the Chilean capital market became the most developed in Latin America and perhaps among all developing countries. The Chilean government had earned a Moody’s rating of Aa3, the highest in Latin America.
Against this backdrop, BEC commenced operations in November 1989 as Latin America’s first electronic exchange. BEC introduced real competition to the market through lower fees and longer trading hours. Moreover, it developed new trading solutions that transformed the Chilean capital market system. Today, 41 shareholders and 27 broker-dealers use BEC systems. It is the leader in the currency market, with a 99% market share and has a 50% market share in the repo market. In equities, it has a 12% market share with the goal of reaching 25% by 2015.
The dominant market players are the pension and mutual funds as well as foreign investors. Pension fund participation is mandatory in Chile, so these entities
currently have nearly $200 billion in assets under management. Pension funds are required to offer five portfolio styles along a spectrum ranging from aggressive equities to traditional fixed income. Meanwhile, 1.2 million Chileans invest in mutual funds.
Besides offering equities and fixed income securities, BEC has had a successful joint venture with SIF ICAP in foreign exchange since 2003. Banks, broker-dealers and other market participants can trade in foreign exchange electronically using ICAP’s Datatec real-time system. Further, the platform is integrated with the markets in Colombia, Perú, and México.
“When we started in 2003, our market share in currencies was only about 20%, but that has grown to where all the banks and broker-dealers trade foreign exchange on our platform,” notes Juan Carlos Spencer, CEO of BEC.
bigThink
Bolsa Electrónica de chile recognized the value of a strong business and technology partner to help it expand and attract global visibility.
photo nicolas wormull
MarketView 5
bigbigBec has become a significant force in latin america’s financial markets. Bec thinks big. “we want to highlight the advantages of investing in chile,” says Juan carlos spencer, ceo of Bec.
6 MarketView
in focus Bolsa ElEctrónica dE chilE
Increasing global visibility is a key principle of BEC’s long-term strategy. To execute successfully, it was necessary to procure a new technology platform and align rules and standards with international norms.
“The change of technology platform presents a good opportunit y to bring market practices in line with international standards,” notes Steve Phillips, Senior Managing Director, Latin America and Caribbean, Market Tec h nolog y at N A S DAQ OM X . “Nowadays, if you’re too much of an exception outsiders who do not understand the rules won’t bother trading.”
BEC decided the best way forward was to forge a link with a global business and technology partner. The exchange started preliminary discussions with various providers in 2007, just prior to the financial crisis. Eventually, BEC chose NASDAQ OMX because of its superior technology and Latin American experience, particularly in Colombia.
“In the beginning, BEC operated on proprietary technology known as Sitrel, but we have come a long way,” says Spencer. “Now we operate on the X-stream core matching platform, which we believe is the best technology available in the market.”
BEC signed its agreement with NASDAQ OMX in October 2011. The project was finished on time, within budget and was launched in December 2012 — despite certain challenges that arose along the way. In particular, it was necessary to work around some unique product and order types. In addition, BEC only has 30 employees, so efficiency was critical when it came to executing the project.
“Now brokers are connected to BEC directly via a FIX protocol, and we want to connect the DMA customers to the platform as well,” says Spencer. “In doing so, we will be able to provide a very good alternative for the financial community.”
So far, reaction from the broker-dealer community has been positive. They have a new user-friendly worksta-tion and more alternatives.
another initiative, currently awaiting regulatory approval, is to sponsor NASDAQ-listed securities on the Bolsa Offshore, which will allow for securities listed on a recognized exchange outside of Chile to be sponsored by a local entity for local trading. Initially, BEC expects to sponsor 20 companies also listed on the NASDAQ Stock Market. Going forward, any equity listed and overseen by an approved regulator
larrainVial is chile’s leading investment bank. BEc’s new technology platform supports the firm’s strategy to reinvest a large portion of its bottom line in technology and offer world-class solutions to its clients. the new technology being implemented by BEc provides larrainVial with access to the latest trading tools available in the market. With new, more sophisticated products being launched, larrainVial can offer exciting opportunities to its clients, access the international markets, increase visibility to global investors and offer the
best execution capabilities in the region.
“Keeping up with the latest changes, choosing the right solu-tions and teaming up with the best providers is a challenge,” says claudio larraín, Managing director at larrainVial. “another challenge is ensuring that we have the right people on our team. We are always looking for talent because this is the key ingredient to our success.”
the chilean equity market is becoming more sophisticated. institutional investors are looking for new products across all asset
classes and best execution from the broker community. partici-pants are moving toward deploy-ing more advanced technology solutions including dMa and algorithms as well as leveraging performance metrics.
“in the future, brokers will try to provide the best access and trad-ing tools available,” adds larraín. “Meanwhile, exchanges must pro-vide powerful matching engines and co-location. they must also strive to list new products, espe-cially derivatives, while complying with local regulations.”
a complete tool kit
anywhere in the world may be eligible for sponsorship on the Bolsa Offshore. Importantly, transactions will be tax advantaged for foreigners.
“Six or seven years ago, the Global Market on the Bolsa Mexicana exchange represented 2% of its trading value, but now it accounts for over 16%,” says Phillips. “Mexico’s experience has set a successful precedent, so this represents a good opportunity for Chile.”
Work is in progress to launch a Chilean peso/U.S. dollar futures contract on PHLX. The exchanges currently are recruiting market makers to sponsor the project.
BEC offers several benchmark indices; among the most popular are the Chile 65 and the ADR Índice de Acciones Nacionales (ADRián). It has indices on large, medium and small-cap companies and on utilities. BEC even has the Chile Gol Index comprising the companies that own soccer teams. BEC is currently evaluating its index business with a view toward developing an investable index or ETF enabling institutional investors to gain exposure to the Chilean equity market.
“We want to familiarize market participants with Chilean companies and capital markets and explain our rules,” says Spencer. “We also want to highlight the advantages of investing in Chile. Our economy, infrastructure, rules and taxes are among the most favorable in the emerging markets.”
In just over 23 years, BEC has risen from a fledgling exchange to become a significant force in Latin America’s financial markets. BEC thinks big, and the combination of vision and positive energy has resulted in great success. With its new technology platform and partnership with NASDAQ OMX, it has built a solid foundation for launching innovative new products and competing on the global stage.
claudio larraín, managing Director at larrainvial
MarketView 7
Trend Leveraging technoLogy
MaTching is core to what exchanges do, and mar-ketplaces should continue to prioritize market par-ticipant demands for fast,
robust, multi-asset platforms. How-ever, with decreasing equity volumes, exchanges would do well to consider diversifying their business to increase revenue streams.
“Exchanges are in a special position to understand their customer’s pain points,” says Lars Ottersgård, Senior Vice President and Head of Market Technology at NASDAQ OMX. “We have a real opportunity to leverage technology to develop innovative offerings that respond to market trends and make life easier for our own business and for our customers.”
New global regulatory requirements are putting high demands on the industry. However, this also provides an opportunity to think holistically, re-evaluate processes and technology infrastructure and leverage standards to achieve strategic goals. Exchanges and firms that go through this exercise will be on a stronger platform for innovation.
“The individual regulatory mandates are overlapping from an operational and technology point of view,” Paul Rowady, Senior Analyst at TABB Group, points out. “They all have a data management, technology and architecture compo-nent impacting the front, middle and back office. In addition, they all have legal and client facing components.”
Exchanges are well positioned to help their customers meet regulatory requirements. The financial services
More than matchingexchanges can leverage technology to grow their business through diversification.
Key indusTry Trends Uncertainty
surrounding new regulatory/capital requirements Decreasing
equity volumes and modest growth in other asset classes industry
combinations and consolidation rise in the
demand for data continuous
focus on lowering costs, increasing efficiencies
industry revolves around data, and there has been a huge increase in demand for data for both compliance and competitive purposes. Exchanges already provide real-time market data and reference data feeds. They can add value by offering products and services that help customers understand the data and use it to make better informed decisions.
as david KubersKy, Managing Director at SimCorp North America, says, “It’s not just about the data and where you put it; it’s really about understanding the data and how it’s consumed.”
For example, indexes and ETFs have grown faster than most asset classes globally. To build a successful index and ETF offering based on baskets of equities, fixed income securities and commodities, ETF providers need to leverage fast, scalable technology. They also need several years of back test data that can be used for analysis, which exchanges can offer. Data is also critical for managing risk throughout the trade cycle.
Market structure challenges are also requiring more cross-market trans-parency and control, increasing the need for more real-time surveillance and risk management offerings. In the U.S., new record retention require-
ments have opened to the door for new cost-effective ways to meet new needs. NASDAQ OMX responded by partner-ing with Amazon Web Services to launch FinQloud, a secure cloud-based storage solution that could potentially save 80% of storage costs and increase efficiency.
Listings are a major source of rev-enue for exchanges, so it behooves mar-ketplaces to find ways to increase and retain them. One way NASDAQ OMX does this is by offering a portfolio of technology-based market intelligence, corporate communications, investor relations and governance solutions that support issuers in their efforts to become more effective publicly traded companies. To fortify these offerings and help sell additional services to issuers, NASDAQ OMX is acquiring Thomson Reuters investor relations, public relations and multimedia ser-vices units.
“ O p p o r t u n i t i e s a b o u n d f o r marketplaces to leverage technology to develop new solutions that generate revenue, improve efficiency and help their customers compete successfully,” says Lars Ottersgård. “To successfully go beyond the match, exchanges need to create offerings that leverage technology to address market trends and solve business challenges.”
david Kubersky, Managing director at simcorp north america
8 MarketView
A new European derivatives exchange is being launched to bring competition and
efficiency to the market.
The mosT significanT regulatory changes in a generation are beginning to come into force following the financial crisis. This is creating a new
landscape for derivatives trading where transparency, efficiency, cost, clearing and competition are king.
Against this backdrop, NASDAQ OMX is launching NLX, the new London market for interest rate derivatives across the yield curve. Built to provide solutions to the evolving market structure, NLX will offer customers competitive fees, efficient execution on a single market and the unique ability to portfolio margin the long and short end of the curve in one clearinghouse.
Market View spoke to NLX CEO Charlotte Crosswell to gain insight into the rationale for the new exchange and its future prospects.
how would you describe the current landscape for listed interest rate derivatives?
In Europe there are two incumbent players that dominate the futures and options market in different parts of the yield curve – one with more than 99% of the short-term interest rate
(STIRs) contract volume and the other with more than 95% of the long-term interest rate (LTIRs) contract volume. These contracts trade on two different exchanges and are cleared through two different clearinghouses. For one, the exchange and clearinghouse are owned by the same entity.
What gap does nLX fill?Unlike the incumbent markets,
NLX will provide a one-stop-shop for execution by bringing the trading and clearing of both ends of the interest rate curve onto a single platform. Initially, NLX will list futures contracts on Euribor, Short-Sterling, Long Gilts, 2-Year Schatz, 5-Year Bobl and 10-Year Bund with options on the futures contracts to follow.
Since the products are correlated, there is the potential for portfolio-margining, which will enable members and customers to lower their initial margin requirement significantly. In addition, futures and options contracts traded on NLX will be cleared through LCH.Clearnet. Hence, they may be eligible in the future for a margin offset against other derivatives products cleared through the same clearinghouse.
W hereas the incumbents have opted for a silo model, NLX favors a more horizontal approach. We believe this is the route the regulators want the industry to take, and it is the one that offers the most potential for portfolio-margining.
how does nLX address some of the concerns and uncertainties around european market infrastructure?
The new regulations require firms to post more collateral at clearinghouses, and there will be a shortage of eligible securities that can be used for that purpose. Cross-margining – using margin offsets between clearinghouses – is not permitted in Europe. NLX can offer margin efficiencies and choice in clearing.
Why will it be cost effective to trade on nLX?
NLX will offer competitive execution fees compared to the incumbents. We plan to introduce a range of incentive schemes to encourage liquidity provision and market making on the platform. In doing so, we believe we are addressing the global demand for lower transaction costs. That said the bigger cost savings will come from the margin efficiencies.
Why did you choose a VaR model to calculate margin?
LCH.Clearnet currently uses VaR to calculate margin on interest rate swaps, and we plan to employ the same model. Most exchanges use the SPAN margining methodology, but we believe VaR is more efficient, and we
ChallengingINCUMBENTS
The european iR regulatory land-
scape is continuing to evolve rapidly:
Regulators have expressed the
desire to see more competition.
Margin offsets / interoperability across CCPs is
prohibited.
Pressure to clear OTC products through CCPs
has given incum-bents impetus to strengthen their clearing offering,
further entrenching vertical silos.
The compeTiTiVe Landscape
T H EPhOTO cLaudia gannon
Q&a ChARlOTTE CROsswEll
MarketView 9
“We built our business plan in conjunction with market participants, and we intend to work with them to ensure the successful launch of nLX,” says nLX ceo charlotte crosswell.
will be aligned with common practices in the OTC derivatives market.
how will market participants access the exchange?
NLX will operate on NASDAQ OMX’s Genium INET technology, and many market participants are writing to the platform. The servers will be located in the Equinix data center in Slough, making it easy for market participants to cross-connect and co-locate. The technology vendor and ISV community have been kept in the loop to ensure that firms can plug and play. Further, firms can use their existing LCH.Clearnet membership through an addendum, and a default fund already has been set up at the clearinghouse. NASDAQ OMX has a good amount of existing infrastructure in place, so it is easier for NLX to go to market than others that may be starting from scratch.
What types of products are in the pipeline?
We built our business plan in conjunction with market participants, and we intend to work with them to ensure the successful launch of NLX. We want to offer a comprehensive service that responds to their needs.
In the future, we may list more look-alike contracts already traded on other exchanges. We also have an opportunity to develop new products in consultation with our stakeholders for launch later this year and in 2014. That said, timing is critical because launching new products too soon could undermine their potential for success.
What challenges lie ahead?A key challenge is competition for
resources. Market participants are facing a heavy technology burden in the run up to the new regulations. Now they will have to build smart order routers to take advantage of fragmentation in the derivatives markets. But at the end of the day, they want to see more competition in Europe. Judging from the support we’ve received from the market, they think we have the right business plan to execute on that.
VINJETT VINJETT
10 MarketView
Balancing act
Clearinghouses can add
value to their members by
offering portfolio margining.IllusTraTIoN Valero DoVal
trenD porTfolIo margININg
MarketView 11
Beginning in 2013 in the U.S. and 2014 in Europe, standardized OTC derivatives will migrate to centralized clearing, and all positions must be margined
and collateralized. Eligible collateral will be in short supply, although esti-mates of the extent of the shortfall vary significantly.
Portfolio- or cross margining — combining positions in different products to offset margin — may help alleviate the problem, especially when combined with collateral optimization. Yet realizing the benefits of portfolio margining may not be straightforward.
For starters, there may be regulatory impediments. Clearinghouses often have separate default funds for equities, commodities, fixed income and OTC instruments. In Europe, clearinghouses must get permission from the regula-tors to cross-margin between products that are in different silos. Under EMIR, the overall cross-margin benefit can-not exceed 80% for a portfolio.
In the event of default, it may not be possible to use collateral posted in one clearinghouse against a position in another clearinghouse. Interoper-ability exists between European clear-inghouses in the equities market, but regulators are skeptical about such arrangements for derivatives because of the potential systemic risk. More-over, give ups are not possible because derivatives contracts typically are not 100% fungible.
In short, a firm, for example, that has a large OTC swaps portfolio and an offsetting interest rate futures position cleared through the same clearing-house, will achieve significant cross-margin benefits. But if the portfolio is split between two clearinghouses, there will be no benefits. In addition, if a firm's portfolio comprises all long posi-tions or all short positions, then there will be no netting effect.
"The numbers can be big, but you need to have the right portfolio in the right place," says Malcolm Warne, Vice President and Product Manager, Risk Management at NASDAQ OMX. "Cross margining is not a panacea for every-thing. It will help some people in some situations, but not everyone all the time."
A clearinghouse planning to offer cross margining must run a series of rigorous calculations to identify which products are correlated and to demon-strate the strength of the correlation.
"You want to see correlation that is stable over a reasonable period of time," explains Fredrik Ekström, Head of Risk Management - European Clearing at NASDAQ OMX. "In addition, you need to monitor the performance and back test to ensure that the correlation will hold up in current market conditions."
Some methodologies for modeling risk offer more cross-margin benefits than others. A lthough Standard Portfolio of Risk (SPAN) is widely used for l isted products, it does not lend itself to cross margining as well as Value at Risk (VaR), which is used for highly correlated OTC derivatives.
But there are drawbacks to VaR as well.
“Although the typical VaR model captures price dependencies in a good way, it may not fully take into account widening spreads under stressed mar-ket conditions," warns Ekström. "This and the market liquidity have to be taken into account. The risk is that, in the event of default, the clearinghouse may not be able to close out a portfolio at the market prices assumed in the model."
in 2001, naSDaQ oMX Clearing started using a yield curve model, Cash Flow Margin (CFM), for interest rate instru-ments. This model stresses market yield curves to capture future changes in market prices. Before implementing CFM, the improved cross margining was subject to extended stress testing and validation. Its introduction resulted in improved margin efficiency by up to 50% for some members.
LCH.Clearnet uses a proprietary VaR methodology called Portfolio Approach to Interest Rate Scenarios (PAIRS). This model takes into account
5 years of historical data and calcu-lates the maximum loss for a holding period (5 days for members, 7 days for clients). Then it is back tested against a stated confidence interval.
"This is not something that is static. We are constantly evaluating our risk methodology to use the most prudent approach," says Jeff Band-man, Head of Partnerships and Alli-ances at LCH.Clearnet. "For example, in the last couple of years we moved to Overnight Index Swap (OIS) discounting for certain purposes reflecting market conventions."
going forwarD, clearinghouses will likely try to tailor their risk models for specific products while sticking with a methodology that is familiar to members. At the same time, they will run a VaR model to calculate the members' portfolio margin and pass benefits on as credits when appropriate. There is already a prec-edent for this. New York Portfolio Clearing, a joint venture between the DTCC and NYSE Euronext, cross margins between eligible futures and treasury positions using a VaR model even though SPAN is used separately by both entities.
With new regulations taking effect, the total cost of clearing has come into the limelight. It encom-passes the cost of capital, margin efficiency, the ability to optimize collateral and the clearinghouse's waterfall structure. These are all significant factors when compar-ing clearinghouses, and increas-ingly firms will build them into the trading decision.
For many years, banks have been using VaR models to reduce their regulatory capital. Clearinghouses can apply the same approach to help their members achieve capital efficiency, as long as they have sys-tems that are computationally fast and powerful. Ultimately, market behavior will define the winners and losers. For clearinghouses, success will be contingent on the ability to adapt quickly and provide sophisti-cated tools and transparency to their customers.
Savings could be highaccording to TaBB group when all clearable interest rate swaps are eligible for portfolio margining, the additional margin requirements could be lowered by at least 32%, and the industry will see margin savings of at least $618 billion. That said, if the industry manages to create more linkages between derivatives clearing organizations and the central clearinghouses, the savings rate could be as high as 50%.
Jeff Bandman, Head of Partnerships and alliances at lCH.Clearnet
Market View A magazine from NASDAQ OMX, the world’s largest exchange company. It delivers trading, listing, exchange technology and public company services across six continents. Address NASDAQ OMX SE-105 78 Stockholm Sweden Phone: +46 8 405 60 00 Fax: +46 8 405 60 01 [email protected] www.nasdaqomx.com Publisher Lars Ottersgård [email protected] Editorial committee Ulf Carlsson, Peter de Verdier, Richard Hulit, Paul McKeown, Johan Toll, Ryan Wells Editor Lisa Selkin Lupo [email protected] Managing Editor Sherree DeCovny +1 215 493 5394 [email protected] Publishing agency Appelberg PO Box 7344, SE-103 90 Stockholm Project Manager Mats Falck Phone: +46 8 406 54 17 [email protected] Art direction Johan Nohr Phone: +46 8 406 54 67 [email protected] Layout and prepress Appelberg Language Editor Elizabeth P. Tierney Cover Photo Nicolas Wormull Print Trydells, April 2013 The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.
Cautionary note regarding forward-looking statements The matters described herein contain forward-looking state ments that are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements
about NASDAQ OMX Group’s subsidiaries, investments, cooperative arrangements, technology sales, new products and new services. We caution that these statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-
looking statements. Forward-looking statements involve a number of risks, uncertainties or other factors beyond NASDAQ OMX Group’s control. These factors include, but are not limited to factors detailed in NASDAQ OMX Group’s annual report on Form 10-K, and periodic reports filed with
the U.S. Securities and Exchange Commission. We undertake no obligation to release any revisions to any forward-looking statements. © 2013, The NASDAQ OMX Group, Inc. NASDAQ OMX® and other marks referenced herein are trade/servicemarks of The NASDAQ OMX Group, Inc.
sPotLight CLOUD COMPUTING
ost financial firms want core operations to remain under the control of their
own staff, networks, storage devices and data centers. However, migrating many non-core IT services that have been traditionally supported in-house to the cloud is a sensible alternative. The business case is often compelling, but before taking the plunge, firms must be satisfied that their data (and their customers’ data) is fully secure.
“There’s nothing intrinsically insecure about the cloud,” says Mark Graff, Chief Information Security Officer (CISO) at NASDAQ OMX. “It’s just a matter of identifying the intrinsic risks and finding the right combination of technological solutions to mitigate them.”
Putting data in the cloud is not the same as making it available on the public Internet. For example, cloud data cannot be indexed by search engines. Public access is prevented by controls that allow only authorized users to access the data storage repositories. Put simply, the data can be put in a place where no one can see it and in a format that cannot be understood or manipulated.
“The data can be encrypted at rest and in transit,” explains Joe Mahafee, CISO at Booz A l len Hamilton. “Further, identity management and access control technologies and processes, as well as other solutions, can ensure that environments are not reconfigured intentionally or unintentionally.”
Firms should do a thorough a ssessment to deter m i ne t he difference between actual risks and issues that simply make them feel uncomfortable. Risks should be prioritized, and plans should be established for mitigating the impact of each event technically and contractually.
Before signing on the dotted line, CISOs should meet with their cloud provider and carefully review all the documentation to evaluate the risks to their company and their customers. They should look at what insight the provider will offer regarding security events on the platform. Not all firms face the same threats. Some may be concerned about data theft while others may be worried more about somebody modifying the data or obtaining early access to it. The cloud provider may be an expert at
protecting data, but it may not be able to infer who is trying to attack it. It is important to understand the potential threats and how they will be mitigated.
Newcomers may want to initiate a trial by moving an email or collaboration environment to the cloud. Once firms gain confidence, they can progress to infrastructure components, such as servers. With some quick successes under their belt, firms can begin to realize the true potential of cloud technology and focus their efforts on innovating within their core competencies .
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NASDAQ OMX’s FinQloud, powered by Amazon Web Services (AWS), leverages cloud technology for data storage. The data enters through the exchange’s network and utilizes its filters, scanners, security measures and authentication before it is encrypted and passed to a Virtual Private Cloud within AWS. NASDAQ OMX maintains primary and back-up copies of encryption keys on behalf of clients external to AWS. FinQloud provides the first cloud-based Write Only Read Many (WORM) compliant data storage as required by SEC Rule 17a-4 and CFTC Regulation 1.31.
“With the resources available, CISOs can do their utmost to achieve sound security,” says Graff. “The journey over the next few years is going to be identifying the best practices with regard to cloud deployments. With FinQloud, NASDAQ OMX has put a stake in the ground as to one way to accomplish this.”
Checks and balances
Security first
Cloud computing offers many benefits as long as firms take steps to mitigate risk.
ILLUSTRATION: VALEro DoVAL
Mark graff, Chief information security officer at NAsDAQ oMX
