conference recap - FIA Boca 2018

INTERNATIONAL FUTURES INDUSTRY CONFERENCE MARCH 13-16, 2018

M A R C H 1 3 -16 , 2 0 1 8 B O C A R ATO N R E S O R T & C L U B | B O C A R ATO N , F LO R I D A

CONFERENCE RECAP Key Themes of the 2018 International Futures Industry Conference

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Optimistic Outlook

Increased M&A Activity

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Fintech in Capital Markets

8 10

Gender Diversity

Cross-Border Conflict

Cryptocurrencies Grab Attention

CONFERENCE RECAP

INTERNATIONAL FUTURES I N D U S T RY C O N F E R E N C E

This year’s annual FIA Boca conference, attended by more than 1,100 delegates from 30 countries, highlighted several important trends affecting the global markets for listed and cleared derivatives. With the financial crisis now 10 years in the past, the conference provided a platform for taking stock of the progress made since then and the major sources of growth and innovation going forward. The conference also provided an opportunity for industry leaders to discuss their top concerns before an audience that included senior market regulators from Europe, Asia-Pacific and the Americas.

FIA President and CEO Walt Lukken’s opening keynote highlighted three trends for that will shape the next ten years: technology driving innovation, China opening up and the revolution occurring in the energy sector. Read his full remarks.

OPTIMISTIC OUTLOOK This year’s conference was notable for the generally positive tone of the discussions about business trends. Regulatory issues continue to be a focus, but exchange leaders and business heads put more emphasis on business strategy issues and recent market dynamics. The conference took place against a backdrop of improving metrics for trading activity, with rising volume and open interest in many of the benchmark contracts. Although recent spikes in volatility have raised some concerns, exchange leaders expressed the view that this trend should be seen as a return to “normal” levels of volatility after several years of abnormal calm. This year FIA introduced real-time audience polling to give instant feedback to the panel sessions. The polls revealed some important insights on the major forces shaping the industry. For example, during the opening session, several questions were posed about potential growth opportunities and the impact of technology. When asked what type of technological advancement would have the biggest impact on the listed and cleared 2

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derivatives industry, 50% of the attendees picked artificial intelligence and another 31% picked distributed ledger technology. When asked what offers the biggest growth potential over the next two years, 39% picked the opening of new markets such as China and India. 28% picked increased volatility and 25% picked rising interest rates. What technology advancement is likely to have the biggest impact on our industry?

What technology advancement is likely to have the biggest impact on our industry?

Cloud Computing

DLT

5%

New products such as cryptocurrencies

15% 31%

50%

Artificial intelligence

What is the biggest growth potential for the industry in the next 24 months?

What offers the biggest growth potential for the industry in the next 24 months?

New products such as cryptocurrencies

Rising interest rates

7% 39%

25%

Opening of global markets, such as China and India

28%

Increased volatility The VIX is currently at a long-term average level of

around 19. Six months from now, where will the VIX be?

The VIX is currently at a long-term average level of around 19. Six months from now, where will the VIX be?

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Roughly the same

Lower

15% 24%

61%

Higher

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With its forward-looking agenda, the conference reflected the appetite for innovation across the industry. This was further encapsulated in the keynotes on second day. The ICE-sponsored breakfast heard insights from Michael Casey, co-author of The Truth Machine: The Blockchain and the Future of Everything, about how innovations ranging from blockchain to artificial intelligence and bitcoin are shaping the world and we function in it. Meanwhile, Walter Isaacson, whose works include biographies on Leonardo da Vinci, Steve Jobs and a range of geniuses and innovators, enthralled the lunchtime audience with accounts on the creative energy resulting from the intersection of art and science. Smart people are a dime a dozen, he said; but it is creative people who get things done. Innovation equals creativity, and creativity is a team sport. Another keynote speaker, Wang Mingwei, the chairman of the China Futures Association, provided attendees with insights on the rapidly changing market landscape in China. Wang said policymakers are focusing on improving the quality and efficiency of market operation, improving the ability of financial intermediaries to provide risk management tools, and promoting stronger links between China’s futures markets and the rest of the world.

INCREASED M&A ACTIVITY This year’s FIA Boca featured a notable increase in discussions about mergers and acquisitions, both on stage during the panel discussions and in private conversations on the sidelines. A larger number of investment bankers and private equity investors were in attendance this year, and several investment bankers commented that the current environment is especially conducive for deal-making. Stock valuations for exchanges and other market infrastructure players have risen dramatically, giving them more currency for acquisitions, yet the cost of borrowing to finance a deal has remained relatively low. As Caroline Silver, a managing director at Moelis & Company, commented during the opening panel, “money is chasing opportunities.” At the same time, the rise of fintech has sparked interest in using acquisitions to ramp up expertise in new technologies such as artificial intelligence. During one of the fintech panels, Rana Yared, a managing director at Goldman Sachs, pointed to the recent move by S&P Global to acquire Kensho Technologies, a company that uses a combination of new technologies to create a new class of analytical tools, as an example of this trend.

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Adena Friedman, chief executive officer of Nasdaq, speaks during the panel, “Exchanges: Building the Markets of Tomorrow.”

This trend came into full view during the second day of the conference, when the news broke that CME Group was preparing an offer for NEX Group. Over the following 24 hours, both sides confirmed that talks were underway. If the two companies reach an agreement, the combination would unite two large OTC markets operated by NEX— BrokerTec for cash treasuries and EBS for foreign exchange—with the largest futures markets in those same two asset classes. On the other hand, consolidation among exchanges, one of the main M&A themes in the past, seems to be less likely. During the exchange leaders panel, Adena Friedman, the chief executive officer of Nasdaq, said political and regulatory obstacles make large crossborder exchange combinations very difficult, and Thomas Book, the chief executive officer of Eurex, referenced the difficulties that his parent company faced when it attempted to combine with LSE Group.

GENDER DIVERSITY Jerome Kemp, global head of futures, clearing and collateral at Citi, used his position as the moderator of the opening panel to bring up the issue of gender diversity in the industry. Kemp cited a recent study by PwC showing that women in financial services in the U.K. earn 34% less than men, a larger pay gap than in any other U.K. industry, and asked members of the panel to comment on what it will take to change this. Blythe Masters, chief executive officer of Digital Asset Holdings, a blockchain company, responded that the problem is in the pattern of advancement. Women are well represented among new hires, but the balance erodes as each incoming cohort moves to higher levels of the organizations. Career sponsoring and mentoring are critical to changing this, she said. Moelis’ Caroline Silver commented that the purpose of the organization is important if

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the industry wants to capture the interest of the next generation. Bill De Leon, global head of portfolio risk management at Pimco, added that diversity and inclusion are very high priorities for his firm, and commented that having a diverse workforce has been demonstrated to add value by giving an organization access to more ideas and more points of view.

FINTECH IN CAPITAL MARKETS Two panels on Thursday discussed the potential for fintech to impact the listed and cleared derivatives markets. Rather than focusing on “blue sky” potential, the speakers shared examples of real applications of new technologies already in use at banks, exchanges and service providers, and discussed the obstacles to more rapid adoption of innovative technologies across the industry.

During the “fintech in the real world” discussion, Andres Choussy of NEX Optimisation listens as Rana Yared of Goldman Sachs and Catherine Clay shared their thoughts on fintech applications within their organizations.

The discussion kicked off with a presentation by Matthias Voelkel, a partner at the consulting firm McKinsey, who recently completed a survey of fintech in capital markets. Voelkel commented that this branch of fintech is not as “sexy” as consumer-focused fintech, but it has been growing very fast in recent years in terms of both the number of companies in the space and the amount of money being invested in this sector. Data and analytics is the area where McKinsey sees the greatest amount of activity; distributed ledger technology accounts for only one-fourth of these companies. Two relatively young fintech companies participated in the discussion—CloudMargin and Symphony Communications. Steve Husk, the chief executive of CloudMargin, described the efficiencies that his company’s innovations are bringing to collateral management but also offered some sobering comments on the amount of time it takes for a startup to 6

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break even. Symphony’s managing director of global programs Goutam Nadella offered a similar view. Even though his company is backed by a consortium of banks, getting those same banks to adopt Symphony’s cloud-based collaboration technology has been hindered by their risk-adverse culture. That said, he commented that he has observed a big change over the last two years. Banks are much more willing to work together and share information than they used to be, he said. Their comments were buttressed by an audience poll. Only 8% of the audience said lack of awareness of new solutions is the biggest hindrance to the adoption of new technology; 82% pointed instead to either integration problems or legacy technology. What is the biggest hindrance to adoption of new technology?

What is the biggest hindrance to the adoption of new technology?

Lack of awareness of new solutions available Lack of budget

10%

8% 45%

Legacy technology

37%

Integration into existing technology

During the second panel, two banking industry executives – Rana Yared, a managing director at Goldman Sachs who works in the principal strategic investments group in the securities division, and Ziad Iskandar, head of digital solutions, Americas, in the global markets division of BNP Paribas – shared their thoughts on the fintech trend. Both confirmed Nadella’s comment about the increased willingness of banks to work together and use collaboration technology such as Symphony, and pointed to client onboarding and fixed income sales and trading as examples of functional areas being transformed by this new approach. Yared also offered some insights on the application of artificial intelligence through a description of Kensho, a company in New York that is using a combination of artificial intelligence techniques to accelerate quantitative analysis. Andres Choussy, head of NEX Optimisation, added that his firm is using AI to streamline the onboarding of new clients, and Catherine Clay, global head of data solutions at Cboe Global Markets, noted that one of the exchange’s partners, a startup called TradeLegs, is using deep learning techniques to develop options-based investment strategies. The discussion also touched on distributed ledger technology; the panelists discussed several examples of market infrastructure providers that are developing use cases for this technology and predicted a “slow journey” towards widespread adoption.

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Further evidence of fintech’s potential came from another audience poll. When asked which areas will benefit the most from the adoption of fintech, more than half of the attendees picked post-trade processes such as clearing and collateral management.

CROSS-BORDER CONFLICT In addition to bringing together industry officials, FIA Boca provides a platform for senior regulatory officials from around the world to discuss current issues. This year the dialogue turned testy, as U.S. and EU officials clashed over the degree to which European authorities should be able to oversee U.S. clearinghouses that provide services in Europe. CFTC Chairman Chris Giancarlo alluded to this issue during his keynote address, and then CFTC Commissioner Brian Quintenz raised the level of rhetoric by several notches. Quintenz, a Republican, criticized the EU for proposing a new approach to supervising clearinghouses that would conflict with an agreement on equivalency that the two sides agreed to in 2016. “In the proposed legislation, the European Commission is unilaterally abandoning the ‘recognition conditions’ set forth in the 2016 equivalence agreement. The CFTC sees this as a clear breach and violation of our agreement,” Quintenz said. He warned that he will vote against any additional EU equivalence determinations until the European authorities promise to honor their commitments to the U.S. and added that he will not support any effort by the CFTC to provide exemptive relief requested by EU authorities. Patrick Pearson, the head of financial market infrastructure unit at the European Commission, a panelist on the session that followed Quintenz’s speech, attempted to allay concerns about the apparent break down in relations. The CFTC should have nothing to fear from sharing oversight of CCPs, he said. The European Commission’s approach on third-country market structures was part of the EU’s desire to have a greater view of Europe’s exposure to non-EU CCPs.

CFTC Chairman Chris Giancarlo called on regulators in Europe and the US to join together in an effort to cooperate on key regulatory issues

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The issue of cross-border regulation has been further complicated by Brexit, of course, and a panel on the subject illustrated the ongoing uncertainty around the short-, mediumand long-term impact the UK’s departure from Europe will have on the operation of financial markets in the region, and beyond. Kay Swinburne, member of the European Parliament, started the panel by providing an overview of the Brexit process and the current status of the negotiations. Representatives from the London Stock Exchange Group, Eurex, KPMG and Intercontinental Exchange each then discussed the impact of Brexit on access to clients and to market infrastructure, industry contingency planning, the need for and structure of a transition period and the potential future UK/EU relationship. LSEG, Eurex and ICE each gave a brief insight into their Brexit contingency planning. What is the biggest threat to the industry over the next 24 months?

What is the biggest threat to the industry over the next 24 months?

New products such as cryptocurrencies Rising interest rates

Increasing regulatory/ capital costs

15% 41%

17%

Cyber threat

27%

The dispute over equivalence highlighted the potential for regulatory fragmentation as the post-crisis consensus on derivatives regulation moves farther back into the past. That is a major concern for the industry. During the exchange leaders panel, several exchange leaders noted the difficulties they face in trying to keep their markets accessible globally and emphasized the need for global consistency in regulation. As Jeff Sprecher, chairman and chief executive officer of Intercontinental Exchange, commented, the regulatory pendulums between Europe and the U.S. are out of sync, with Europe now implementing MiFID II and the U.S. rolling back its rules. Conference attendees agreed; when asked what they would like regulators to address, 39% voted for more consistent rules and 31% for easier access to global markets. Conference attendees also remain hopeful that the two sides will find a way to preserve the 2016 equivalence agreement. 78% said they expect the agreement to remain valid after the EU finishes its revisions to its clearing regulations. However, nearly half of that group said they are not confident that the agreement has a long-term future. Another hot topic in the regulatory arena was the impact of capital requirements on clearing firms. There was widespread acknowledgment that the capital requirements are 9

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reducing the availability of clearing for end-users. Nick Rustad, global head of clearing at J.P. Morgan, explained during the opening panel that the Basel III requirements rely on risk measurement methodologies that are out of date, and pointed in particular to the inclusion of the notional value of derivatives exposures in the GSIB calculations as something that “limits what you can clear.” Bill De Leon, global head of portfolio risk management at Pimco, commented that this issue is one of the few areas where he finds himself in agreement with the banks, and said regulators need to “rethink the model” so that clearinghouses bear more of the risk. John Davidson, president and chief operating officer, OCC, added that options market makers are particularly vulnerable to the reduction in clearing capacity because the capital requirements do not accurately measure the risk offsets within a portfolio of options positions. He commented that there has been a “huge reduction” in the number of options market makers over the last 10 years and warned that this will hurt liquidity in the large number of options that have relatively low volume.

CRYPTOCURRENCIES GRAB ATTENTION One of the hottest topics this year was the rise of bitcoin and other cryptocurrencies. The conference program featured a panel discussion with exchanges and trading venues seeking to capitalize on this trend as well as a special session with Cameron and Tyler Winklevoss, the founders of Gemini Trust. The general consensus was that the crypto market urgently needs the kinds of institutional infrastructure that the listed and cleared derivatives industry can provide. This includes custodial solutions for institutional investors, a higher level of regulation, protections against market manipulation, and even a self-regulatory organization similar to NFA and FINRA. Several speakers also noted that the recent introduction of bitcoin futures has not only provided a regulated path into this market but also may have helped dampen the extreme volatility that has characterized this What is the best regulatory approach to young market. cryptocurrencies?

What is the best regulatory approach to cryptocurrencies?

Let people buy & trade these without regulation and let the buyer beware!

I like the technology underlying these and would like to see banks using such technology but why again do we need cryptocurrencies? Ban these! Total fraud, no real underlying for price discovery and subject to hacking.

10

9%

17% 23%

51%

Moderate regulation will help these markets develop and let’s see where this goes.

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Tyler and Cameron Winklevoss share their insights into how bitcoin and cryptocurrencies have developed as an asset class and next steps for developing the institutional infrastructure for the crypto market.

The lack of regulation in the cryptocurrency market was a key concern for conference attendees. When asked what the best approach would be, 51% voted for “moderate” regulation that would help these markets develop. A significant minority remains completely opposed to these new market, however. 23% voted for an outright ban. Several new entrants to the cryptocurrency market used the conference as an opportunity to promote their offerings. TrueEX, a swap execution facility founded by Sunil Hirani, announced a partnership with blockchain tech company ConsenSys to create a benchmark for Ether, the second most actively traded cryptocurrency, and said it plans to launch trading in bitcoin non-deliverable forwards. Coinbase, the largest cryptocurrency trading venue in the U.S., announced a plan to speed up deposits and withdrawals in the U.K. through a partnership with Barclays. Coinfloor, which runs the largest cryptocurrency trading venue in the U.K., discussed a plan to launch bitcoin futures with physical delivery. And Hehmeyer Trading + Investments, the Chicago-based company founded by Chris Hehmeyer, announced the launch of a cryptocurrency index fund that will operate as a commodity pool under the oversight of the Commodity Futures Trading Commission and NFA.

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CONCLUSION While the aftermath of the financial crisis has been a decade of necessary rule making, advocacy and implementation – and the resulting impact on the industry’s ability to progress – Boca 2018 marked a turning point as market practitioners looked forward to an era of innovation and growth. Visit Boca2018.FIA.org to watch video highlights and to access audio recordings of the sessions. Login is required to access the audio recordings. FIA hopes to see you at the 44th International Futures Industry Conference, March 12-15, 2019!

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FIA is the leading global trade organization for the futures, options and centrally cleared derivatives markets, with offices in London, Singapore and Washington, D.C. FIA’s membership includes clearing firms, exchanges, clearinghouses, trading firms and commodities specialists from more than 48 countries as well as technology vendors, lawyers and other professionals serving the industry. FIA’s mission is to: ■■ support open, transparent and competitive markets, ■■ protect and enhance the integrity of the financial system, and ■■ promote high standards of professional conduct. As the leading global trade association for the futures, options and centrally cleared derivatives markets, FIA represents all sectors of the industry, including clearing firms, exchanges, clearing houses, trading firms and commodities specialists from more than 48 countries, as well as technology vendors, lawyers and other professionals serving the industry.

LONDON Level 28, One Canada Square Canary Wharf London E14 5AB Tel +44 (0)20.7929.0081

SINGAPORE Level 18, Centennial Tower 3 Temasek Avenue Singapore 039190 Tel +65 6549.7333 FIA.org

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WASHINGTON 2001 Pennsylvania Avenue NW Suite 600 Washington, DC 20006 Tel +1 202.466.5460