In relation to segregated accounts and margin, FICC’s proposed rule changes seek to address the Commission’s new requirements and the conditions for including margin in the broker-dealer reserve formulas.

The proposed rule change would provide for the separate and independent calculation, collection, and holding of margin for proprietary transactions of a netting member from margin submitted to FICC by a netting member to support the transactions of an indirect participant.

In addition, the rule change would establish segregated accounts for direct and indirect participants, including establishing a minimum $1 million cash margin requirement for each segregated indirect participant.

Elsewhere, the rule change seeks to consolidate the methodology for calculating the margin requirements.

Meanwhile, in relation to access models, FICC proposes to re-name, consolidate, and adopt additional provisions governing GSD’s existing correspondent clearing/prime broker services.

As part of the proposals, moving forward, the correspondent clearing/prime broker services would be referred to as the “Agent Clearing Service,” submitting members would be referred to as “Agent Clearing Members,” and executing firms would be referred to as “Executing Firm Customers.”

In a filing, FICC stated that it designed the proposed changes to the Agent Clearing Service to highlight the similarities between the Agent Clearing Service and other agent clearing models.

“We are pleased that the SEC took action to approve FICC’s rule filings related to access models and segregated accounts and margin. With these approvals, we are now ready to advance our implementation efforts with the industry, in preparation for next year’s deadlines,” DTCC said in a statement.

“We’re also appreciative of all of the comments and perspectives that the industry has shared with us on a range of matters, including default management, done away and porting. Additional work remains as we get ready for implementation, and we are committed to ensuring we deliver the best solutions with the best value for the industry.

“The expansion of US Treasury clearing is a significant industry-wide effort that promises to deliver critical benefits to the industry, including increased transparency and reduced risk.  We will continue to work closely with our clients and key stakeholders on ensuring safe, smooth and successful implementations in 2025 and 2026.”

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On 27 June the European securities markets regulator recognised for the first time the two CCPs which are also supervised by the US’ Securities and Exchanges Commission (SEC) and Commodity Futures Trading Commission (CFTC).

The development follows news on the 4 April that the European Commission had adopted amendments to the Commission Implementing Decision (EU) on the equivalence to EMIR’s requirements of the US regulatory framework for CCPs that are authorised and supervised by the SEC.

In contrast, UK CCPs LCH, LME and ICE Clear Europe have only been granted three-year temporary equivalence so as to reduce EU institutions’ reliance on them post-Brexit.

Speaking to The TRADE earlier this week, Deutsche Bank’s head of electronic fixed income, platform, and listed derivatives sales, Mario Muth, said derivatives clearing volumes had already begun migrating over to Europe despite the time limited equivalence.

“The efficiency of central clearing works best if all activity is in one clearinghouse, but the market is big enough to have multiple CCPs be liquid enough to be credible offerings. Each clearinghouse has a niche. CME is strong in dollar products of course,” he said.

“Eurex will be stronger in European products. LCH has traditionally been the leader in the overall share. There is no significant impact to liquidity if the current activity its split a bit more and of course we expect clearing volumes across the industry to grow.”

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According to the US regulator’s order, between April 2017 and November 2018, the clearing house failed in its requirements to have the correct procedures in place for holding sufficient liquid resources to meet its obligations if a large participant failed.

The SEC found that FICC failed to conduct the correct analysis of the reliability of its liquidity arrangements or conduct the correct diligence of its liquidity providers.

It also found that between 2015 and 2016 FICC did not adhere to rules that required it to have the correct policies in place around maintaining and reviewing its margin coverage. During this period, the SEC claimed that FICC failed to correct two “erroneous assumptions that inflated its coverage” despite these being flagged by the regulator.

As a substitute for both sides of every transaction that it clears, the SEC found that FICC’s actions could’ve resulted in significant costs for not only itself but other participants and the wider market.

“A failure by FICC to have proper risk management policies and procedures in place could adversely impact the broader U.S. financial system,” said Gurbir S. Grewal, director of the SEC’s division of enforcement. “Today’s order not only ensures that FICC maintains appropriate policies and procedures, but also that it is at all times prepared to fulfil its obligations to the financial markets.”

FICC agreed to the penalty and a censure without admitting or denying the findings of the SEC’s order.

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According to the FICC Markets Standard Board (FSMB), the use of execution algorithms offered by banks or dealers to clients on an agency basis for order execution remains lower in FICC, with fundamental issues around data and governance persisting.

Execution algorithms are typically implemented by the buy-side to reduce execution costs and market impact, as well as assisting in best execution efforts. While they have been used in cash equities far longer for those reasons, it’s improbable that execution algorithms will deliver the same benefits in FICC.  

“Execution algorithms should become very useful tools for driving efficiency in FICC market structure and to alleviate some of the cost pressures that the FICC industry faces, but they are unlikely to be a ‘magic bullet’ in the delivery and measurement of best execution,” the report from FMSB said.

Two fundamental issues that market participants should consider when rolling out execution algorithms in FICC were highlighted by FMSB, including potential conflicts of interest from providers. Banks largely trade in an agency role for cash equities, but they are more likely to act as principals with significant inventory in FICC, meaning clients could face competing interests of the bank or dealer provider.

Another issue is the lack of availability of data inputs in less liquid markets, compared to equities which dominates primary venues with continuous market data from various sources. For some fixed income products there is no primary venue, and some currencies may represent a small portion of the overall market, presenting considerable challenges in sourcing accurate market data.

According to the long-only results of The TRADE’s Algorithmic Trading Survey 2020, larger asset managers are likely to use several algo providers to manage multi-asset class portfolios. Beyond algorithms in equities, new regulations such as the uncleared margin rules, are fostering greater electronic trading in foreign exchange derivatives, and therefore the development of new algo trading solutions for that market.

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Now in its fourth year, JP Morgan spoke with more than 650 traders primarily trading foreign exchange, but also other products, to explore trends in electronic trading and the liquidity landscape. The US investment bank found that liquidity availability is the biggest daily concern for a third of traders, followed by other daily challenges such as workflow efficiency, price transparency and best execution.

“As the number of liquidity providers is shrinking, we’re starting to see a lot of recycled risk in the system,” Scott Wacker, global head of fixed income, currencies and commodities e-sales at JP Morgan, commented on the results. 

“Clients really value good and efficient access to liquidity so it’s not surprising that it’s the major concern again this year. Coupled with this, this year we’ve seen some liquidity providers stepping away from the market, which will always heighten the focus on liquidity sourcing.”

Elsewhere in the survey, traders mapped out predictions on the percentage of their trading volume that they believe will be executed via electronic channels. Traders anticipate an 11% increase in the proportion of credit and rates e-trading, according to the results, with commodities and FX expected to increase by 6% and 5% respectively.

The results are in line with a recent report from Greenwich Associates, which found that e-trading has grown to account for 45% of all European fixed income trading volume in 2019, compared to 38% the year prior. The research added dealers that have prioritised investment in technology to support the shift towards electronic trading have gained a significant advantage.

“Traders are acknowledging that electronification is rapidly increasing,” JP Morgan’s Wacker added. “For dealers, developing the electronic market making and the algorithmic trading capabilities is paramount… More and more tools traditionally applied to equities and FX are being applied to credit and rates, driven by increasing available data and better understanding of how to use that data for post-trade analytics.”

JP Morgan was also recently recognised as the clear winner of Greenwich Associates’ 2019 European fixed income market share leaders table. Citi ranked second behind JP Morgan, followed by Barclays, Goldman Sachs, and then HSBC, BNP Paribas and Bank of America Securities, which tied for fifth place.

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The expansion will also change how the service is used, with sponsors now able to let their clients trade with counterparties other than themselves. This will provide sponsored members the same execution flexibility as they have in the bilateral Treasury market.

The US Securities Exchange Commission (SEC) granted the approval to the DTCC’s subsidiary, Fixed Income Clearing Corporation (FICC).

“The greatest benefit of allowing different types of firms to be sponsors is that FICC has now made it possible to bring a much larger percentage of the market into clearing while maintaining our robust risk management standards,” said Murray Pozmanter, DTCC managing director and head of clearing agency services.

“This should create needed capacity for the market, while at the same time reducing systemic risk.”

The approval comes two years after DTCC expanded the sponsored clearing service beyond money market and mutual funds to include new buy-side firms. DTCC added it has since received interest from dealers, non-US banks and prime brokers that were not previously able to be sponsors.

Last year, DTCC processed its first buy-side cleared repo collateral exchange, through the FICC sponsored repo clearing service between State Street and Capula Investment Management.

“In order to create a robust cleared market, you need to be able to provide access to as many participants as possible on both the long and short sides of the equation,” added Jim Hraska, general manager, FICC Services, DTCC. 

“Buy-side participation, therefore, is crucial because they are the true cash lenders and cash borrowers the market needs, and many have struggled over the years to get capacity due to constraints on dealers’ balance sheets.”

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In a major coup for the Canadian bank, highly regarded market structure expert Michelle Neal will join in New York after three and a half years at BNY Mellon.

Prior to her most recent role, Neal held a number of senior market structure positions at Deutsche Bank, Nomura/Instinet, RBS and Goldman Sachs during her 20-year career. 

According to an internal memo seen by The TRADE, Neal will join up with RBC at the beginning of June.

Neal has also been widely recognised for her innovation and leadership in market structure, technology and electronic trading through a number of awards and nominations along with her coveted roles at some of the market’s largest institutions.

Neal has also received several other industry accolades, including being recognised as one of the 25 Most Powerful Women in Finance by American Banker in 2017 and 2018, and one of the 100 Most Influential Women in European Banking by Financial News in 2013 and 2014.

RBC said in the memo that Neal will be responsible for providing strategic leadership to its US FICC business in partnership with its global product, sales and regional heads.

Neal will have oversight for all strategic and execution-related aspects of the FICC business, and will sit on the Global Markets Operating Committee, FICC Leadership and US Regional Operating Committee.

At RBC, Neal will report into Jonathan Hunter, the bank’s global head of FICC.

“Michelle has a demonstrated track record in leadership and building scale businesses, with extensive experience in market structure, technology and electronic trading,” Hunter said in the memo.

“She has proven her ability to drive synergies and revenues between adjacent businesses, and to transform trading platforms to capture greater market share. Her skill set will be instrumental in helping drive the continued evolution of our overall platform, particularly in the US where there is a significant opportunity for growth.”

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Tracking the performance of the top 12 investment banks, Coalition’s third quarter index found that overall front office headcount for the period across the top investment banks fell 1%. Equities headcount suffered most year-on-year, as the number of staff in those units declined from 17,800 last year to 17,500 in the third quarter this year.

“The number of front office revenue producers continues to decline for the eighth year in a row. FICC headcount remained stable, as a decline in macro headcount was offset by continued selective hiring in spread, despite the strong decline in revenues. Reductions in equities headcount were led by cash equities,” Coalition said in a summary.  

Equities, including cash, derivatives, prime services and futures and options, saw a strong third quarter performance this year, with revenues across the 12 investment banks up 15% to $36.8 billion compared to the third quarter last year where revenues stood at $31.9 billion.

A lower headcount coupled with higher revenues helped equities and investment banking division productivity, whilst productivity in fixed income, currencies and commodities declined due to revenues in the third quarter.

Fixed income, currencies and commodities revenues declined slightly, although the declines in credit, securitisation and G10 rates were partially offset by strong recoveries in G10 FX, emerging markets macro and commodities. Sales in commodities-related business surged 32% year-on-year, supported by higher revenues in investor products.

Coalition’s index tracked the performance of the largest investment banks, including Bank of America Merrill Lynch, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Goldman Sachs, HSBC, Morgan Stanley, Societe Generale and UBS, in the third quarter this year.

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Yann Couellan, head of FICC trading, BNP Paribas Asset Management

Yann Couellan’s day starts early. He sets off from his home in a village near Versailles to the south of Paris at around 6.30 am, arriving between 7 and 7.30 at the headquarters of BNP Paribas Asset Management, on rue Bergère, near the Grands Boulevards metro station.

His office sits inside a 19th Century building that boasts a stunning facade and an imposing reception hall. Designed by Edouard Jules Corroyer and completed in 1881, it served as the headquarters of Comptoir National d’Escompte de Paris, one of the forerunners of BNP Paribas.

14 rue Bergère, which was entirely restored between 2007 and 2009, houses more than 1,700 BNP Paribas Asset Management employees today. The first thing the firm’s head of FICC trading does is to check market information for an overview of global movements, the US close and Asia overnight. His traders are responsible for looking after the liquidity of fund manager clients, to secure the best execution possible for them. “We are their eyes and ears” in the market, Couellan explains.

A native Parisian, Couellan started his financial career in 1992 when he joined the French broker Maison Roussin. He spent three years as a broker at Cantor Fitzgerald, followed by four years at IXIS Asset Management as a fixed income trader. Couellan joined AXA Investment Management in 2004 as a senior trader of fixed income and OTC derivatives, rising to become head of Fixed Income, Money Market & Repo Trading France. He is still new enough to BNP Paribas to bring a fresh perspective, having joined the business in October last year.

Couellan used to trade himself, but is now a manager of 16 traders, with responsibility for internal controls. He enjoys using analytics to come up with new ideas, and challenging trader perceptions of the market to improve their trades.

“It is crucial to understand where the liquidity is going,” he says, pointing out that unknowable market inflows ensure that every day is different and unpredictable. “Traders need to be curious, proactive. We need to explore every day.”

During his time at AXA IM, Couellan was responsible for fixed income execution for all of the firm’s fund managers and oversaw activity on the fixed income and over-the-counter derivatives trading desks. From 2016 he was involved in the development of a suite of trading tools for fixed income: two years later, AXA launched its market data axis tool for internal use by traders and fund managers, which addressed liquidity and price discovery challenges.

The application enabled traders to identify banks with a firm interest on a specific bond to reduce market impact – finding the other side for a given order.

New challenge

Having spent more than a decade at AXA, Couellan joined BNP Paribas because of the greater opportunities to trade in new and different ways, the chance to meet new people – in short, because of his curiosity for a new challenge: BNP Paribas Asset Management offered a strategy and the resources to grow.

The month after he joined, BNP Paribas partnered with market maker GTS in an effort to provide clients with improved pricing in US Treasuries using GTS trading tools. The accord was part of a trend for banks that used to rely on in-house systems to partner with technology specialists in fixed income trading, as the costs of reshaping legacy architecture for increasingly electronic markets became prohibitive.

The introduction of MiFID II in January this year is reflective of this process, as well as acting as an accelerant. The chief objective of the regulation is to increase transparency within the markets, create more structured marketplaces, lower the cost of market data, improve execution and ensure that trading costs are provided in a more explicit manner.

One of the biggest impacts of MiFID II has been the separation of research costs from execution fees. Previously, bank strategists and economists were able to freely interact with clients without any recognition of cost but now, under the new regulations, research can no longer be offered for free as part of a package of services. Even free trial periods for research have been ruled out.

This means that execution must stand or fall alone, creating pressure for continuous improvement, but it’s a challenge that Couellan eagerly accepts. There is now “clearly a need to demonstrate added value” which involves “changing the habits and skills of traders”. Part of the solution, he says, is to seek “mutual approaches, rather than being fragmented”.

Yet none of this, in Couellan’s eyes, will fundamentally change the nature of trading, where technology and human judgement will continue to be required to work in tandem. A key concern for Couellan is the “aggregation of data – getting ever more information into one place ever more quickly”. Human trading and automation are both essential aspects of this. When liquidity dries up, however, electronic systems become less helpful, and the human touch comes to the fore.

“Electronic trading platforms do not really create liquidity,” he argues. He gives the Italian crisis as a recent example. An atypical market meant that “prices were suddenly not available, and automated orders were rejected. Liquidity ultimately depends on your treatment of the market – treat it fairly and you will have liquidity. We need technology, but voice trading will remain essential.”

Tough job

FICC trading has been facing a difficult time at BNP Paribas this year, with second-quarter revenues declining 17.4% in the second quarter versus the previous year. The bank cited weak rates business in Europe and unfavourable market contexts in foreign exchange and credit, but it was by no means alone: Seven of the 13 banks sampled by S&P Global Market Intelligence reported lower FICC revenues in the second quarter.

Still, BNP Paribas was ranked number one for all bond issues in euros in the first half, and number eight for all international bonds. Couellan wouldn’t be drawn on market outlook issues. The bank, however, takes a sanguine view of the emerging markets crisis that has hit Turkey and Argentina, implying that volatility, the lifeblood of FICC, may not be set for a dramatic rebound any time soon.

BNP Paribas does not expect a prolonged period of contagion for emerging markets; indeed, given the value on offer a “compelling buying opportunity” exists for emerging fixed income assets. The relative lack of volatility that has hampered FICC trading in recent years may be with us for some time to come then.

FICC, in fact, has not been a growth industry for a long time. Following the financial crisis of 2008, many banks scaled back FICC desks due to tighter regulation, higher operating costs, and a shrinking revenue pool. In its 2018 Banking Industry Outlook, Deloitte predicts that global FICC revenues this year will be broadly stable. But the medium-term future for FICC may be brighter. Deloitte argues that front-office technology innovation, especially cognitive automation, has the potential to bring efficiencies.

“Once monetary policy tightens across global markets and volatility returns—there is no empirical reason for it to remain as low as it has been— we think that banks that build the right capabilities and make the strategic choice to ride out near-term pressures . . . to stay with the FICC business could see big pay-offs,” Deloitte says.

Since 2017, Couellan has cochaired the International Capital Market Association’s (ICMA) Secondary Market Practice Committee (SMPC), a forum open to ICMA sell-side and buy-side members active in the cross-border fixed income secondary markets. The SMPC meets four times a year to discuss market developments, regulation, market practice, and market functioning and liquidity.

Couellan defines his SMPC role as the quest to collaborate with the sell-side to find ways to make the buy-side more efficient. He gets a kick from trying to understand the psychology of his traders and of fund managers. He wants his traders to be “proactive on behalf of the clients”. They are encouraged to suggest ideas and timing strategies for a more efficient trading approaches, with Couellan challenging them to review their trades, even the ones that went well, from different angles. “How could it have been done better?”

FICC evolution

The profession has changed greatly since Couellan started out in the early 1990s. Electronic trading was still a recent innovation then, with the open outcry trading system having been replaced in Paris in 1986. Couellan’s career has coincided with the birth and growth to maturity of electronic trading systems and his enthusiasm remains undimmed. He would advise young people starting their careers to consider trading if they are curious and motivated – and recently gave such advice personally.

More quantitative skills are needed now than in the past, he argues, and that there is a greater need for traders to “play with data”. Ever-advancing automation means that trading won’t be the easiest career choice, but “human contact will remain one of the most important things”. The increasing levels of automation, and in turn, introduction of robots, sometimes make people afraid, but the challenge is to use automation to do things differently: “There are always new ways to be found.”

Outside of work, Couellan enjoys playing golf and has a passion for vintage cars and historical racing events such as Goodwood Revival or Le Mans classic. He says he could do without the masses of emails he has to manage and preparing PowerPoint presentations is a taste that he has yet to acquire.

The sense, though, is of a man who is here because he wants to be. He enjoys trying to make sense of a dynamic market. “I like people who like their jobs,” he says. Four of his traders are women, plus an intern: One of them is head of money markets, and another the head of convertible bond trading. Gender balance is needed, Couellan agrees, but the success of a trader, he believes, is ultimately determined by their level of individual curiosity and commitment.

That word again: curiosity. It has been the thing that has sustained Couellan through his long career. Einstein tells us that curiosity has its own reason for existing, and that the most important thing is not to let it go.

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The collaboration will see the ESA give Mosaic access to two algorithm sets focusing on data models used to identify patterns and correlations used by the agency for investigating anomalies of deep space satellite missions.

As well as application for market surveillance purposes, the technology may be effective in automatically identifying and creating hedging strategy recommendations, as well as giving sales and trading teams a much better indication of the market factors impacting their performance.

“From fighting climate change to improving financial market surveillance, data analytics technology has the potential to radically reshape the way we approach challenges in many different industries,” said Matthew Hodgson, CEO of Mosaic Smart Data.

“Through this collaboration we have an incredible opportunity to apply some of the world’s most advanced data analytics models to the problems our clients face in financial markets. Not only that, but we will also be sharing the results of this project with the European Space Agency to help advance their analytics development.”

In the initial phase of the collaboration, brought about through ESA Business Applications’ zero-equity programme, Mosaic will complete a joint-funded feasibility study to explore how ESA’s machine learning technology can benefit financial market participants. If successful, the technology will be built into Mosaic’s suite of analytics models.

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