Published 28 Jun, 2019
The regulations Basel III committee made in regard to leverage ratio, were not only out of touch with the commercial reality of the market, they The Basel III leverage rules were intended to make banks’ involvement in capital markets more stable by requiring them to hold higher capital buffers against client positions. However, there have been numerous unintended consequences caused in part by the difference of application of the rules across jurisdictions. SLR (supplementary Leverage Ration) regulations were actually opposed to commercial reality and caused some fund to shutter. Basel III leverage ratio failed to acknowledge the risk-reducing impact of initial margin that clearing members hold on behalf of clients. Currently, client margin, which is posted to reduce the risk in a trade, conversely increased the amount of capital a bank has to hold against that client’s position. In a statement late on Thursday, Walt Lukken, chief exec and president of the Futures Industry Association (FIA) welcomed the changes. “We are extremely pleased that global prudential regulators have recognized the exposure reducing impact of margin for client clearing. Additionally, we are heartened that these recommendations reaffirm the G20 2009 Leaders' commitment to provide greater clearing post-crisis as an essential and risk-reducing financial market reform.” The FIA also recommended considering additional necessary changes that have a negative impact on clearing, especially for end-users. Outgoing US Commodity Futures Trading Commission (CFTC) chairman Christopher Giancarlo similarly called for a quick implementation of the revisions, saying they address the “unfounded bias against cleared derivatives”. “Once the Basel Committee publishes its standards, I urge prudential regulatory authorities to expeditiously implement them in their respective rules,” he said. A CFTC study last July found the Basel III leverage rules resulted in a substantial shift of options clearing away from the US banks to their EU counterparts. Basel III leverage rules have resulted in a substantial shift of options clearing away from the US banks to their EU counterparts, the CFTC has said. In a Policy Brief released last month, the US regulator published a study that analysed the impact of leverage rules on US banks on the S&P E-mini options on futures market. CFTC study found that before the introduction of the Basel III leverage rules in the US in January 2015, 46% of E-mini futures options positions were held in customer accounts at US banks, which has declined to 36.5%. In contrast, EU domiciled banks, which are subject to a lower leverage ratio, increased their market share from 38.7% to 47.9%. The study also finds that US banks have lost out to their EU counterparts in low-delta options, which have a relatively small risk compared to other products.
Published 28 Jun, 2019
The Options Clearing Corporation (OCC) will start collecting additional margin from clearing members to cater for potential losses in closing out a defaulters’ position, and therefore avoid potential knock-on effects. On Monday, the US Securities and Exchange Commission issued an order approving the OCC’s proposal to identify and manage the potential cost of liquidating a defaulted clearing members’ portfolio. The Chicago-based clearing house will calculate its potential losses based on historical periods of market stress. Clearing members will then pay the appropriate level of additional margin to cover the OCC’s cost of closing out a defaulting members’ portfolio. This reduces the potential that the clearing house itself would incur a loss in the process. “While unavoidable under certain circumstances, reducing the potentiality of loss mutualisation during periods of market stress could reduce the potential knock-on effects to non-defaulting clearing members, their customers and the broader options market arising out of a clearing member default,” the OCC wrote. The new calculation model is based on the spread between the bid and the ask prices of financial instruments within the portfolio. This is different to the current STANS (System for Theoretical Analysis and Numerical Simulations) methodology, which attempts to address potential losses from changes in price over two-days. However it doesn’t account for liquidation costs. This comes amid several enhancements to the OCC’s margin model. Last month the largest US options clearing house changed its margin methodology for volatility index futures to better account for the term structure of futures and to avoid sudden margin increases.
Published 14 Jun, 2019
As gizmodo wrote, Spanish Soccer App 'La Liga' was Spying on users geopositioning and taping their microphones to learn when they were watching pirated games at bars without a license. While it was all spelled out in the Terms and Conditions, its clear the equation of free data and using customer data in a predatory manner is a trade customers will no longer accept..... "If you accept the specific and optional box enabled for this purpose, you consent to the access and use of your mobile device’s microphone and geopositioning functionalities so that LaLiga knows from which locations football is being streamed and thus detect any fraudulent behaviour by unauthorised establishments. Activation of both the microphone and geopositioning of your mobile device will require your prior acceptance of our pop-up window."We think differently on privacy and user data. Philosophically on the other side of the spectrum.
Published 31 May, 2019
CME Group, the world’s leading and most diverse derivatives marketplace, today announced it will launch the next generation of its industry-leading Standard Portfolio Analysis of Risk (SPAN) margin framework – CME SPAN 2. The new framework is slated for testing in the second half of 2019 and, pending regulatory review and approval, roll out in the first half of 2020. CME SPAN 2 will provide enhanced risk management capabilities in a single, unified interface by maintaining SPAN’s current calculations and functions while incorporating several new modeling, reporting and margin replication enhancements. As with SPAN, CME SPAN 2 will continue to be based on a Value at Risk (HVaR) framework, using historical data to model how a position or portfolio may gain or lose value under various risk scenarios. CME SPAN 2 will enable implementation of granular and dynamic adjustments to margins at a product and portfolio level. In addition, CME SPAN 2 will provide enhanced reporting of margining into different risk factors such as market risk, liquidity and concentration. “Incorporating insights gained from more than 30 years of market leadership, CME SPAN 2 provides unique enhancements that will streamline and standardize margin calculations across listed futures, options, and OTC products,” said Sunil Cutinho, President, CME Clearing. “By modernizing our technology, expanding the breadth of risk factors that can be analyzed, and improving the overall user experience, CME SPAN 2 will deliver greater transparency and operational efficiencies to clearing members and end clients.” CME Clearing plans to launch CME SPAN 2 in a phased, multi-year approach and in compliance with its regulatory responsibilities, beginning with energy products. CME SPAN 2 will launch after extensive pre-launch testing that will provide CME’s market participants the opportunity to perform comparative analysis relative to existing SPAN. The full rollout is expected to last up to four years, during which both SPAN and CME SPAN 2 will be available in parallel for end users. SPAN was originally launched in 1988 to calculate margin requirements for a wide range of derivatives by analyzing the “what-ifs” of virtually any market scenario and is utilized by more than 50 exchanges, clearing organizations, service bureaus and regulatory agencies worldwide.
Published 25 Apr, 2019
1. What is OptiMargin? Software as a Service product that optimizes your margin costs by running multiple scenarios and generating various recommendations for optimization (i.e. Switches between Nymex vs ICE would be one of those recommendations). OptiMArgin's goal is to reduce margin costs without affecting risk. For example, if you have 1 FCM/Clearing Broker and trade on 3 exchanges (ICE, Nymex, NDQ) your company can expect 25% savings on your margin (meaning if you margin was 10m, you can see it go down to 7.5mm) see more scenarios 2. How does OptiMargin Work? Imagine you ran a scenario to optimize your margin position, pulled up PC SPAN Tools and manually calculated the cost of the position on one broker, or one exchange - that would be considered one 'CALL'. OptiMargin runs 20,000 calls per night and again during the day using big data analysis tools. 3. How does it run optimization? 2-5 hours overnight and 5-15min during the day. It Optimizes your nominal margin as well as taking into consideration execution costs ('switch' prices) and overnight margin interest rates. output comes in the form of an Email and ChatBot for traders. For Operations/CFO we have a browser based GUI set up. 4. Do you have any current Customers? yes, several trading firms have signed up and proof of concept demonstrated cost saving of over 50%+ of margin. (individual results vary based on several factors) 5. We only use on clearing broker, how will OptiMargin affect our book? The problem is that every exchange margins differently, and that creates a great deal of inefficiency and money hidden in the fine print. Take a simple position like WTI-BRT ('arb') and compare how those were margined in 2018. The optimization is not in offseting look alike contracts across exchanges, but in the inter-commodity credit offset given how various exchanges margin differently. Imagine GEICO Charged 100% over StateFarm for the same risk? its the same idea. 6. What does Ulysses, a broker, have to do with FinTech? Instead of developing technology and getting Venture Capital money that would ultimately dilute the end product for you, we develop technology in house by re-investing to create a more consistent revenue stream (brokers volatility ranges in the hundreds of % from month to month and they are not allowed to have debt as per NFA/CFTC). OptiMargin generates margin saving recommendations, which the brokers execute in turn. 7. If I get OptiMargin do I have to execute with Ulysses? no. we only ask for the first look. If we don't have it, shop it away. 8. What about Data, you'll see my positions, right? No. We treat customer's position data as a liability rather than an asset. You can install OptiMargin on any server you like (under your desk, in company cloud, etc) and control access and custodianship of your data from there. We have xero access or custody of your data. it is connected directly from your FCM and updated as often or as seldom as you indicate. 9. How long is onboarding? If dedicated right internal staff, you can be up and running in a day. 10. How much does it cost? The cost of the software is free for 2019 (that's right fee holiday for 2019), while Ulysses charges its standard execution brokerage. 11. Can I invest in OptiMargin? We really want customers to be our investors, so post-2019; payment for the software can double as investments in the company and you can double dip for equity. This is a longer conversation, but you get the idea. 12. Why can't we build it ourselves? We have no doubt you can! you'll need to allocate 5-7 pple to this project and expect results after 18-24 months. Dealing with the archaic and minutia legacy exchange technology have around (they can afford not to innovate as everyone licenses PC-SPAN) can be very frustrating and slow. Its really just cost of wo/man hours vs benefit accrued. 13. Is this a Trading or Operations Software? This is a trading tool first-most, operation second most. Traders incorporate the information throughout the day and decide if and when they want to calibrate cost of funding, position limits, leverage ratios, and market volatility, by executing margin recommendations. MARGIN IS AN INTEGRAL PART OF TRADING. Operations and Finance would are included in the process, and receive periodic updates, but they do not react to the market on a daily basis. Its the traders taking the information in and making decisions.
Published 25 Apr, 2019
Not to Dwell on this point, but once again we see the environment in the market demonstrating that Data is a Liability and not an Asset. 1. German Data Protection Authority recently ruled that Facebook's Custom Audience tool is ILLEGAL without explicit user consent. German Data Protection Agencies (DPAs) are organized between the 16 federal states and the federal government. DPAs in other European countries have also expressed interest in the court’s decision, “and asked us for the basis of our prohibition of using Custom Audiences. So far we only received encouraging feedback. From our perspective it actually is a very clear matter anyhow.“ (Kristin Benedikt, head of the internet division at the Bavarian Data Protection Authority). 2. As sated in 1st quarter earnings for 2019, Facebook stated on Wednesday that it expected to be fined up to $5 billion by the Federal Trade Commission for privacy violations. The penalty would be a record by the agency against a technology company and a sign that the United States was willing to punish big tech companies. OptiMargin's practice of avoiding user data (aka 'data celibacy') altogether might have seemed extreme at first, and outlier in standard operating practice by software as a service companies; however in light of current regulatory environment, it stands out as the safe and customer friendly way to move forward
Published 13 Feb, 2019
As published by WIRED, on Feb 7th, Germany's Federal Cartel Office, FCO, prohibited Facebook's business model to collect unrestricted data unless granted explicit user consent. Andreas Mundt, President of the Bundeskartellamt: “With regard to Facebook’s future data processing policy, we are carrying out what can be seen as an internal divestiture of Facebook’s data. In future, Facebook will no longer be allowed to force its users to agree to the practically unrestricted collection and assigning of non-Facebook data to their Facebook user accounts. The combination of data sources substantially contributed to the fact that Facebook was able to build a unique database for each individual user and thus to gain market power. In future, consumers can prevent Facebook from unrestrictedly collecting and using their data. The previous practice of combining all data in a Facebook user account, practically without any restriction, will now be subject to the voluntary consent given by the users. Voluntary consent means that the use of Facebook’s services must not be subject to the users’ consent to their data being collected and combined in this way. If users do not consent, Facebook may not exclude them from its services and must refrain from collecting and merging data from different sources.” Facebook replied in its blog post that it intends to appeal, and that Germany's FCO overlooks the benefits of collecting data across services for improvement of user experience. Facebook has 32m monthly active users, and market share of 80% in Germany. The irony here is that not so long ago, between Feb 8th, 1950 through Nov 9th, 1989, offical date of falling of Berlin Wall, the East German secret police, the Stati, was one of the most notorious surveillance operations in history. It employed 100k employees, in addition to 500k-2m collaborators, spying on friends, neighbors and family by any means necessary, and maintained files on 6mm citizens, a third of population, with a budget of $1B/year. The point here is that when German gov't, with its own history of espionage, is essentially admiring the information collection operation Facebook built to the point banishment ('takes one to know one'), its clear that this model does not work. the UK gov't also banished Facebook in 180 page report, and we also see this in other instances OptiMargin is philosophically opposed to viewing data as an asset to hoard, rather we view it as a LIABILITY to avoid. It is with that frame of reference that we approach the business from a long-term view.
Published 12 Feb, 2019
In a few words let me share with you how we think about OptiMargin: 1. Customer is King. Period. 2. No Luggage Fees (airlines reference) - Look at Genscape/Vortexa/Kpler/ClipperData/Orbital Insights, etc – amazing companies (genuine fan), yet with every consecutive license sale the value of the ‘edge’ sold to the customer decrease, it’s a model that dilutes the customer in favor of paying a return to the VC. We'll take money from VC's but only if they are on board that customer and product come first. We don't invest in nascent tech and don't require years of cash burn, this is why we prefer early adopters to be early investors. Customers ARE the best investors. 3. Data is a Liability, Not an Asset - When deciding between exploiting customer data to enhance profits, and completely avoiding any customer data, we favor the customer. We don't want to guard customer data, we don't want access to customer data, we don't want to resell customer data, we just want to build a really good product. 4. We don't build a product and then hire salespeople - our salespeople are called Ulysses Commodities, an established IB. its those sales people that determine customer user experience, and launch insight into the next product. Our products are cross selling of existing relationships. Customer is King. Period.