Category Archives: Derivatives

CME Group to Launch Micro WTI Futures on July 12

CME Group, the world’s leading and most diverse derivatives marketplace, today announced it will expand its suite of micro-sized futures contracts with the introduction of Micro WTI futures.  The contracts are expected to launch on July 12, pending regulatory review.

Micro WTI futures will be one-tenth the size of the company’s global benchmark WTI Crude Oil futures contract and cash-settled. They will enable market participants – from institutions to sophisticated, active, individual traders – to fine-tune exposure to crude oil markets and enhance their trading strategies in an efficient, cost-effective way.

“As U.S. crude continues to gain global significance, we are seeing increasing demand for tools that help a broader range of clients access these markets,” said Peter Keavey, Global Head of Energy Products at CME Group. “WTI futures have always been a top product for active traders around the world, and the smaller size of Micro WTI futures will offer more flexibility and greater precision to market users – all while enabling them to benefit from the transparency and liquidity of the world’s most robust crude oil contract.”

“Interactive Brokers’ advantage has always been our low cost, advanced technology, and breadth of products offered,” said Steve Sanders, Executive Vice President, Marketing and Product Development at Interactive Brokers. “We are excited to add Micro WTI futures to our product roster, which will allow more of our sophisticated individual investor and active trader clients to participate in the global oil markets.”

“We continue to see demand from retail active traders for micro sized futures products like this that provide access to attractive markets with greater flexibility and efficiency,” said J.B. Mackenzie, Managing Director at TD Ameritrade Futures and Forex, LLC.  “The launch of Micro WTI futures brings the crude oil markets to our clients in a more cost-effective way and is one more tool to help our clients diversify their exposure and hone their trading strategies.”

“As a growing audience of self-directed investors and traders continues to gravitate to the futures markets, we are excited to introduce the new Micro WTI Crude Oil contracts to the NinjaTrader user community,” said Martin Franchi, CEO of NinjaTrader Group, LLC.  “The smaller contract size available through this product innovation will significantly increase accessibility for more traders to this dynamic market and the opportunities available through futures.”

“TradeStation Securities, Inc. is proud to continue our strong relationship with CME through the launch of Micro Crude Oil Futures. As a platform for retail and institutional investors, we’re excited to offer our clients access to U.S. crude at a lower barrier of entry,” said John Bartleman, President of TradeStation Group, Inc., TradeStation’s parent company. “As day-one supporters of this new product, we’re continuing to prioritize our clients access to the latest Futures products and technology.”

Micro WTI futures will be cash-settled based on the daily settlement price of NYMEX WTI futures. The contracts will be listed on and subject to the rules of NYMEX. For more information or for product specifications please see: https://cmegroup.com/micro-wti

As the world’s leading and most diverse derivatives marketplace, CME Group (www.cmegroup.com) enables clients to trade futures, options, cash and OTC markets, optimize portfolios, and analyze data – empowering market participants worldwide to efficiently manage risk and capture opportunities. CME Group exchanges offer the widest range of global benchmark products across all major asset classes based on interest ratesequity indexesforeign exchangeenergyagricultural products and metals.  The company offers futures and options on futures trading through the CME Globex® platform, fixed income trading via BrokerTec and foreign exchange trading on the EBS platform. In addition, it operates one of the world’s leading central counterparty clearing providers, CME Clearing. With a range of pre-and post-trade products and services underpinning the entire lifecycle of a trade, CME Group also offers optimization and reconciliation services through TriOptima, and trade processing services through Traiana.

Cboe Options Exchange to Extend Global Trading Hours for VIX and SPX Options to Nearly 24 Hours-a-Day

  • Expansion of current GTH session planned for fourth quarter 2021, subject to regulatory review
  • Will provide global investors the ability to trade Cboe’s flagship U.S. index options during local trading day and around the clock
  • Builds on growing customer demand, combined ADV for SPX and VIX options during current GTH session increased 76 percent in 2020 over the prior year

Cboe Global Markets, Inc. (Cboe: CBOE), a market operator and global trading solutions provider, announced plans to extend the global trading hours session (GTH) for its S&P 500 Index options (SPX) and Cboe Volatility Index (VIX) options to nearly 24 hours each business day on Cboe Options Exchange in the fourth quarter of 2021, subject to regulatory review.

Cboe’s move to offer a nearly 24 hours-a-day, five days-a-week (24×5) trading model aims to provide global market participants with expanded access to trade Cboe’s exclusively listed U.S. index options products based on the S&P 500 Index (SPX), the global benchmark of large-cap U.S. equities, and the Cboe Volatility Index (VIX), recognized as the world’s premier gauge of U.S. equity market volatility. The lengthened global trading hours are designed to help meet growing investor demand for the ability to manage risk more efficiently, react to global macroeconomic events as they are happening and adjust SPX and VIX options positions around the clock. 

“The S&P 500 and VIX Indices are widely tracked globally, with Cboe’s SPX and VIX options used by investors both domestically and internationally looking to trade, hedge or gain exposure to the broad U.S. market and global equity volatility,” said Arianne Criqui, Senior Vice President, Head of Derivatives and Global Client Services at Cboe Global Markets. “As financial markets around the world become more interconnected, it is crucial that market participants have the ability to trade products that meet their investing objectives when and how they need, no matter the time of day. Cboe continues to focus on broadening its geographic reach and extending access to its unique product set to investors around the globe to meet this demand.”

Cboe’s expansion of its GTH session is expected to complement its planned entry into the Asia Pacific markets, where it sees opportunity to further broaden its distribution network and offer a wide range of its core product offerings, including its proprietary products and global market data service, to customers in the region. On March 24, Cboe announced its plans to acquire Chi-X Asia Pacific Holdings, Ltd., operator of Chi-X Australia and Chi-X Japan. 

SPX and VIX options are currently available in a GTH session that runs from 3:00 a.m. ET to 9:15 a.m. ET. In 2020, the combined average daily volume (ADV) for SPX and VIX options during the current GTH session increased 76 percent over 2019. VIX futures are currently available in nearly 24×5 trading. In 2020, over 15 percent of total VIX futures volume occurred in GTH, up from 13 percent in 2019. 

The planned expanded GTH session would commence at 8:15 p.m. ET and run until 9:15 a.m. ET the following morning. Regular trading hours (RTH) then run from the U.S. market open at 9:30 a.m. ET until the market close at 4:15 p.m. ET. The RTH session will also be followed by a new curb session – an extra half hour session for electronic trading beginning at 4:30 p.m. ET– which will be added Monday through Friday in the third quarter of 2021. For each Monday business day, trading in GTH would begin Sunday evening.

The extended GTH session will not impact operations of regular trading hours on the Cboe Options Exchange trading floor in Chicago. For additional information on the extended global trading hours for SPX and VIX options, please click here.

ASIC bans the sale of binary options to retail clients

ASIC has made a product intervention order banning the issue and distribution of binary options to retail clients.

The ban will take effect from Monday 3 May 2021 after ASIC found that binary options have resulted in and are likely to result in significant detriment to retail clients.

ASIC reviews in 2017 and 2019 found that approximately 80% of retail clients lost money trading binary options. ASIC found that binary options are likely to result in cumulative losses to retail clients over time because of their product characteristics:

  • the ‘all or nothing’ payoff structure, where one of the two possible outcomes for a binary option contract is that the retail client will lose their entire investment amount;
  • short contract duration (the average contract duration of binary options traded with one provider was less than six minutes); and
  • negative expected returns (that is, the present value of the expected payoff for a binary option contract is lower than the initial investment).

Commissioner Armour said, ‘Binary options’ product characteristics make them incompatible with investment or risk management use by retail clients. ASIC’s product intervention order will protect retail investors from these harmful products at a time of heightened vulnerability.’

ASIC estimates that retail clients’ net losses from trading binary options were around $490 million in 2018. The size of the market in Australia has since reduced significantly after ASIC issued a warning in April 2019 against providing unlicensed or unauthorised services to clients located in several foreign jurisdictions. Australian retail clients are estimated to have made net losses of more than $6.7 million in 2019.

ASIC’s binary options ban brings Australian requirements into line with prohibitions in force in comparable markets and follows the commencement on 29 March 2021 of ASIC’s product intervention order imposing conditions on contracts for difference offered to retail clients.

The order will remain in force for 18 months, after which it may be extended or made permanent. Civil and criminal penalties apply to contraventions of the product intervention order.

Background

A binary option is a cash-settled, over-the-counter (OTC) derivative entered into by two counterparties—the binary option issuer and the client. The ‘all-or-nothing’ payout under a binary option contract is determined by the occurrence or non-occurrence of a specified event in a defined timeframe. This can include an event related to movements in the price of a financial product or a market index (for example, the price of gold increasing in 30 seconds) or an economic event (such as a central bank interest-rate decision).

Regulatory Guide 272 Product intervention power provides an overview of ASIC’s product intervention power, when and how ASIC may exercise the power and how a product intervention order is made.

On 22 August 2019, ASIC released CP 322, seeking feedback on proposals to use its product intervention power to address significant detriment to retail clients resulting from binary options and CFDs (refer 19-220MR). CP 322 attracted more than 400 responses from consumers, consumer groups, CFD issuers, industry bodies and other stakeholders.

On 23 October 2020, ASIC made a product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients (refer 20-254MR). From 29 March 2021, ASIC’s order strengthens consumer protections by reducing CFD leverage available to retail clients and by targeting CFD product features and sales practices that amplify retail clients’ CFD losses.

In addition to the product intervention orders, ASIC’s actions to address concerns about binary options and CFDs include:

  • enforcement action to address misconduct
  • public warning notices and other statements
  • surveillance projects and thematic reviews
  • stronger regulations
  • extensive retail client education campaigns and guidance for binary option issuers.

More information about ASIC’s supervision and enforcement work is available on our website. ASIC’s Moneysmart website has further information about binary options.

ASIC’s CFD product intervention order takes effect

ASIC’s product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients takes effect from today.

The order strengthens protections for retail clients trading CFDs after ASIC found that CFDs have resulted in, and are likely to result in, significant detriment to retail clients.

ASIC’s order reduces CFD leverage available to retail clients and targets CFD product features and sales practices that amplify retail clients’ CFD losses, such as providing inducements to become a client or to trade. It also brings Australian practice into line with protections in force in comparable markets elsewhere.

The maximum CFD leverage available to retail clients will range from 30:1 to a 2:1, depending on the underlying asset class. Before now, a retail investor’s CFD exposure could be as much as 500 times their original outlay.

ASIC Commissioner Cathie Armour said ‘We will closely monitor compliance with the product intervention order and won’t hestitate to take appropriate action to enforce the order.’

‘We are also paying careful attention to changes in CFD providers’ reported holdings of retail client money and any mis-classification of retail clients as wholesale clients, which would risk denying them important rights and protections. Protecting retail investors from harm, particularly at a time of heightened vulnerability, is a priority for ASIC,’ Commissioner Armour said.

The maximum penalty for a contravention of a product intervention order is five years’ imprisonment for individuals and substantial pecuniary penalties of up to $555 million for corporations.

If a court finds that a person has contravened a product intervention order, a retail client may recover the amount of loss or damage suffered because of the contravention.

The product intervention order will remain in force for 18 months, after which it may be extended or made permanent.

Background

A CFD is a leveraged derivative contract that allows a client to speculate in the change in value of an underlying asset, such as foreign exchange rates, stock market indices, single equities, commodities or cryptoassets.

Regulatory Guide 272 Product intervention power provides an overview of ASIC’s product intervention power, when and how ASIC may exercise the power, and how a product intervention order is made.

On 22 August 2019, ASIC released Consultation Paper 322 Product intervention: OTC binary options and CFDs (CP 322) seeking feedback on proposals to use its product intervention power to address significant detriment to retail clients resulting from over-the-counter (OTC) binary options and CFDs (refer 19-220MR). CP 322 attracted over 400 responses from consumers, consumer groups, product issuers, industry bodies and other stakeholders.

On 23 October 2020, ASIC made a product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients (refer 20-254MR).

In addition to the product intervention order, ASIC’s actions to address concerns about CFDs include:

  • enforcement action to address misconduct (for example, refer 21-051MR20-246MR, and 20-161MR)
  • public warning notices and other statements
  • surveillance projects and thematic reviews
  • stronger regulations
  • extensive retail client education campaigns and guidance for binary option issuers.

More information about ASIC’s supervision and enforcement work is available on our website. ASIC’s MoneySmart website has further information about forex trading and CFDs.

ASIC’s proposal in CP 322 to ban the issue and distribution of binary options to retail clients is still under consideration and a decision has not yet been made.

CME Group to Launch Micro Bitcoin Futures on May 3

CME Group, the world’s leading and most diverse derivatives marketplace, today announced it will expand its suite of crypto derivatives with the introduction of a new Micro Bitcoin futures contract on May 3, pending regulatory review.

Micro Bitcoin futures will be one-tenth the size of one bitcoin. The smaller-sized contract  will provide market participants – from institutions to sophisticated, active, individual traders – with one more tool to hedge their spot bitcoin price risk or execute bitcoin trading strategies in an efficient, cost-effective way, all while retaining the features and benefits of CME Group’s standard Bitcoin futures.

“Since the launch of our Bitcoin futures contract in 2017, we have seen steady, ongoing growth of liquidity and market participation in our crypto derivatives, especially among institutional traders,” said Tim McCourt, CME Group Global Head of Equity Index and Alternative Investment Products. “The introduction of Micro Bitcoin futures responds directly to demand for smaller-sized contracts from a broad array of clients and will offer even more choice and precision in how participants can trade regulated Bitcoin futures in a transparent and efficient manner at CME Group.”

Micro Bitcoin futures will join CME Group’s growing suite of cryptocurrency derivatives, including Bitcoin futures and options and recently launched Ether futures. In 2021-to-date, 13,800 CME Bitcoin futures contracts (equivalent to about 69,000 bitcoin) have traded on average each day. In addition, CME Ether futures have seen 767 contracts traded (equivalent to 38,400 ether) on average each day since launched on February 8.

The new contract will be cash-settled, based on the CME CF Bitcoin Reference Rate, which serves as a once-a-day reference rate of the U.S. dollar price of bitcoin. Micro Bitcoin futures will be listed on and subject to the rules of CME.  

For more information on this product, please see: www.cmegroup.com/microbitcoin.

As the world’s leading and most diverse derivatives marketplace, CME Group (www.cmegroup.com) enables clients to trade futures, options, cash and OTC markets, optimize portfolios, and analyze data – empowering market participants worldwide to efficiently manage risk and capture opportunities. CME Group exchanges offer the widest range of global benchmark products across all major asset classes based on interest rates, equity indexes, foreign exchange, energy, agricultural products and metals.  The company offers futures and options on futures trading through the CME Globex® platform, fixed income trading via BrokerTec and foreign exchange trading on the EBS platform. In addition, it operates one of the world’s leading central counterparty clearing providers, CME Clearing. With a range of pre- and post-trade products and services underpinning the entire lifecycle of a trade, CME Group also offers optimization and reconciliation services through TriOptima, and trade processing services through Traiana.

Murban Crude Oil Futures – ADM

The Murban Crude Oil Future is a physically delivered contract, basis FOB Fujairah (ADNOC) loading terminal, UAE.

The contract will provide users with an effective hedging instrument for Arab Gulf crude oil and other grades trading into the Asia Pacific Region. The underlying physical market is for Murban crude oil available without the local Abu Dhabi resale restriction.

Trading Screen Product Name

Murban Crude Futures

Trading Screen Hub Name

Abu Dhabi

Product

Murban Crude Oil, as defined in the Exchange and Clearing House rules.

Contract Symbol

ADM

Contract Size

1,000 barrels

Unit of Trading

Any multiple of 1,000 barrels

Currency

US Dollars and cents

Trading Price Quotation

One cent ($0.01) per barrel

Settlement Price Quotation

One cent ($0.01) per barrel

Minimum Price Fluctuation

One cent ($0.01) per barrel

Last Trading Day

Trading in the prompt delivery month shall cease at 16:30 Singapore Prevailing Time on the last Trading Day of the second month preceding the delivery month.

If the day on which trading is due to cease is the Trading Day preceding New Year’s Day, then trading shall cease on the next preceding Trading Day.

Daily Settlement

The Daily Settlement Price will be published at 19:30 London Prevailing Time every Trading Day with the exception of the Last Trading Day where no such prices for the expiring contract month will be published.

The Daily Settlement Price is the volume weighted average price of trades between 19:28 and 19:30 London Prevailing Time, or as determined by the Exchange, as detailed within the Trading Procedures of the IFAD Rulebook.

Exchange Delivery Settlement Price

The final settlement price, as determined by the Exchange on the Last Trading Day of the expiring contract month, will be the Marker Price published at 16:30 Singapore Prevailing Time and shall be the basis for delivery.

Markers

The Exchange will publish daily Marker Prices at 16:30 Singapore Prevailing Time and 16:30 London Prevailing Time (or as otherwise determined and communicated by the Exchange from time to time).

Each Marker will be a volume weighted average price of trades in the one minute preceding the marker time and will be published for the front three contract months.

There will be no Marker Price published at 16:30 London Prevailing Time on the Last Trading Day for the expiring contract month.

Delivery Date

Delivery shall commence no earlier than the first Terminal Loading Day of the delivery month and no later than the third Terminal Loading Day prior to the end of the said delivery month. Futures delivery shall be completed within the delivery month.

Delivery Methods

Delivery shall be made by the Seller to the Buyer on a F.O.B. basis at the Fujairah (ADNOC) loading terminal and shall be made in accordance with all applicable State and local laws and regulations. Delivery is to be made into Buyer’s Vessel during the delivery month.

A loading volume tolerance of plus or minus 0.2% of the contract volume is permitted.

There is no specified minimum quantity of Murban Crude Oil to be delivered for the purposes of this Contract. However, parties should be made aware that in relation to each Vessel the Terminal Operator imposes a minimum loading requirement (which may be amended from time to time) of two hundred thousand (200,000) Barrels for deliveries at the Terminal.

For the purposes of complying with the minimum limit imposed by the Terminal Operator, Members may co-load Barrels resulting from over the counter (OTC) transactions with Exchange traded transactions relating to the Contract.

Contract Series

Up to 48 consecutive months

Business Days

ICE business days

MIC Code

IFAD

Clearing Venues

ICEU

MiFID II position limit regime

The EU has recently adopted amendments to the position limit regime for commodity derivatives in Directive 2014/65/EU (MiFID II), which in Norway has been implemented in Chapter 15 of the Securities Trading Act. The European Securities and Markets Authority (ESMA) has issued a statement on the consequences these changes should have for the supervisory follow-up of the commodity derivatives markets in the EU until they have been implemented in national law.

The amendments to the position limit regime are part of the EU’s ‘Capital Markets Recovery Package’ (CMRP), which aims to reduce the negative impact of the Covid-19 pandemic on the European financial market. An important reason for the amendments is that the current rules have proven to inhibit the development of new and less liquid commodity derivatives markets. In addition, there have been few liquidity providers in the commodity derivatives market. The EU countries shall implement the changes in their respective national law with effect from 28 February 2022.

Pending the upcoming regulatory changes, ESMA has expressed an expectation that national competent authorities will not prioritise their supervisory actions towards:

  • natural or legal persons holding positions in commodity derivatives, other than agricultural commodity derivatives (including seafood derivatives), with a net open interest below 300,000 lots
  • positions that are objectively measurable as resulting from transactions entered into to fulfil obligations to provide liquidity on a trading venue as referred to in point (c) of the fourth subparagraph of Article 2(4) of MiFID II

Finanstilsynet has taken note of ESMA’s statement and will not prioritise such supervisory actions.

Read ESMA’s statement:

Data Spotlight – US options volume nearly doubles over the last 12 months

Nasdaq leads single stock options market share; MIAX growing fast 

By Chris Mendelson

In February 2021, single stock options on US options exchanges reached a total volume of 572.4 million contracts, an increase of 91.3% from February 2020. That growth comes after a significant increase in the prior year, too, with a 51.8% year-over-year increase between February 2020 and February 2019. 

Before May 2020, single stock options on US options exchanges had never surpassed 300 million contracts in total volume. But every month since then has recorded more than 300 million contracts in total volume. Single stock options surpassed 400 million contracts in total volume for the first time in June, and in December volume topped 500 million contracts. The highest volume on record was January 2021, with 583.4 million contracts bought and sold on exchanges. 

On an annual basis, 2020 was a record year for single stock options volume, with 4.44 billion contracts transacted across the 16 exchanges that list options. This was a 68.1% increase from the previous record year of 2019 which was 2.64 billion contracts. The latter half of 2020 was the stronger half in terms of volume, with 2.56 billion contracts recorded and an 88.2% increase from the second half of 2019. 

Single stock options volume by exchange 

Nasdaq exchanges held 37.2% of single stock options volume in February 2021, by far the biggest market share and virtually unchanged from its market share last year. Among individual US options exchanges, Nasdaq PHLX held the biggest share with just under 13.3%.  

Cboe exchanges held the second highest market share as a group at nearly 24.8%, a decrease from 31.0% in February 2020. Its largest venue, Cboe Options Exchange, held about 10.5% of the market, placing it third among individual exchanges — down significantly from a 14.6% share last year when it ranked as the No. 1 single stock options exchange.  

NYSE exchanges held the third-highest market share with about 19. 6%, up from 17.1% last year. NYSE Arca held 11.3% of the market, ranking it second among individual exchanges and up from 10.4% the prior year when it ranked fourth. 

MIAX exchanges held the fourth-highest market share at 14.2%, up from its nearly 11.0% share last year and the biggest market share gain year-over-year. 

BOX ranked last in market share in February 2021 at just under 4.3%, though that was up from 3.5% in February 2020. Its sole venue, Boston Options Exchange, ranked 12th out of the sixteen US options exchanges. 

FIA survey shows strong outlook for cleared derivatives markets

China, bitcoin and operations are key focus while pandemic and political risks top concerns

16 March 2021

By Will Acworth

FIA conducted a survey at the beginning of 2021 to assess the outlook for the global cleared derivatives industry. The survey gathered feedback from people working at banks, brokers, exchanges, technology vendors and other firms that support the trading and clearing of derivatives such as futures and options.

Download the full survey results.

The purpose of the survey was to gauge sentiment in four areas:

  1. The outlook for trading activity, profitability and competition over the next 12 months.
  2. Current political, regulatory and technology issues facing the industry.
  3. The degree of interest in two emerging areas of growth — China and bitcoin.
  4. The need for modernization and innovation in the trading and clearing workflow. 

FIA conducted the survey during January and February. Responses were collected on an anonymous basis. A total of 274 responses were received, with 57% from the Americas, 31% from Europe and the Middle East, and 12% from the APAC region.

The responses came primarily from firms that are directly involved in supporting the infrastructure of the global cleared derivatives markets, with 22% from exchanges and clearinghouses, 34% from banks and brokers that serve as intermediaries for customers accessing these markets, 22% from technology vendors and service providers, and 14% from asset managers, commodity suppliers and proprietary trading firms.

The intermediary category includes three types of firms: banks that provide trading and clearing services for their customers, non-bank firms that provide trading and clearing services, and brokers that provide execution services only.

Main findings:

  • Optimism on volume: The survey found that two-thirds of respondents expect trading volume, one of the main drivers for growth in this industry, to continue rising in 2021. Derivatives based on commodities and equities, both of which set records for the number of contracts traded in 2020, are seen as the areas with the highest potential for growth.
  • Pandemic concerns: The survey also found deep concern about the pandemic’s impact, with half of respondents ranking it as the top concern facing the industry this year. Political risk came in second on the list of concerns, followed by technology disruption. Capital requirements, one of the biggest concerns for many firms after the financial crisis, ranked fourth.
  • Brexit challenges: The survey found that Brexit is viewed primarily as a regulatory challenge. Relatively few people expressed concern about its potential to disrupt derivatives markets, which may reflect the fact that many firms have already relocated staffing and reoriented their systems. Instead, the respondents flagged the potential for regulatory conflicts and compliance issues as a more critical problem for the industry, given that many firms will need to comply with both UK and EU rules in order to continue serving their customers.
  • China opportunities: The survey also assessed the industry’s level of engagement with the Chinese futures markets, which are among the largest and fastest growing in the world. Access to these markets is limited, but 24% of the respondents reported that their firms are already actively participating, and another 9% said that their firms are likely to enter by the end of this year.
  • Digital assets: The survey found a similar level of engagement with digital assets. Among respondents, 31% said their firms are already participating in markets for bitcoin and other digital assets, and another 10% said their firms are likely to enter by the end of this year. The responses showed a marked split by type of firm, however. Exchanges, independent brokers and technology vendors were the most engaged with this new asset class, while banks and asset managers tended to be “watching with interest” from the sidelines.
  • Technology trends: Looking inward at the industry’s use of technology, respondents pointed to several areas in the trading and clearing process where innovation and modernization are needed. Post-trade processing was at the top of the list, followed by regulatory compliance and then risk management and collateral management tied for third.

Outlook for trading volume

The survey asked for feedback on expectations for trading volumes in derivatives markets over the next 12 months. Results showed 66% of the respondents said they expect trading volumes to increase, 23% said they would stay the same, and 11% said they would decrease.

Breaking down responses by type of firm, bank-owned clearing firms were not as optimistic as other segments of the industry. Only 44% of respondents working at bank-owned clearing firms thought volumes would increase, compared to 76% of respondents working at independent clearing firms and 71% of respondents working at exchanges and clearinghouses.

Regionally, respondents in the Asia Pacific region and the Americas were more confident of growing volumes over the next 12 months, with 72% and 70% expecting an increase, respectively. In contrast, only 56% of the respondents in the EMEA region expected trading volume to increase.

When asked which region has the greatest potential for growth, 45% of all respondents said Asia Pacific and 36% said the US. This finding is in-line with recent trends in trading activity. In 2020, the total number of contracts traded on exchanges in the Asia Pacific region jumped 39% from the previous year, with exchanges in China and India accounting for most of that increase. Meanwhile, trading on North American exchanges rose 25% from the previous year, with a surge in retail trading of equity futures and options offsetting a decline in the trading of interest rate contracts.

Not surprisingly, respondents in Asia Pacific were the most optimistic about that region, with 82% seeing APAC as having the highest potential for growth over the next 12 months. On the other hand, respondents in the Americas were more split, with 49% favoring the US and 36% favoring APAC. The EMEA region’s participants were the most evenly balanced in their views, with 45% favoring APAC, 23% EMEA and 22% the US.

When asked which asset classes have the greatest potential for growth, 33% of all respondents said derivatives based on commodities and 27% said equities. These two categories both set records in 2020 for the annual number of contracts traded. In addition, these two categories are likely to gain as economic activity returns to normal over the course of 2021.

Breaking the asset class responses down by type of firm, respondents working at exchanges and clearinghouses saw equal potential for growth in commodities and equities. Clearing firms, on the other hand, were split. Bank-owned clearing firms were more optimistic about equities, while independent clearing firms were more optimistic about commodities. This may reflect differences in their client bases; asset managers that use equity futures and options as investment tools typically use bank-owned clearing firms, while companies involved in the production and processing of commodities often rely on independent clearing firms.

The survey also asked for views on other growth trends. The survey found that industry professionals generally are optimistic about the outlook for profitability at their firms, with 61% expecting it to rise over the next 12 months and only 12% expecting it to decrease. On the other hand, most people expect the level of competition to intensify. When asked about the competition that their firms face in the derivatives markets, 53% said they expect competition to increase over the next 12 months, 34% said they expect it to stay the same, and only 13% said they expect it to decrease.

Industry Issues

The FIA survey asked respondents to name the top three most important issues currently facing the global markets.

The most cited issue was the pandemic’s impact on business. Although the derivatives markets were able to continue operating during the pandemic without significant disruption, the health of these markets is closely tied to the level of economic activity. Many institutional investors pulled back from trading derivatives during 2020, particularly interest rate derivatives, and commercial hedging was curtailed in several important commodity markets.

Second on the list was political risk, a sign that many industry professionals are worried about the potential impact of new legislation and regulation. This is especially true in the US, which at the time of the survey was undergoing a transition to a new administration. It also may reflect ongoing concerns about economic disputes between the US and China, which have led to new restrictions on certain types of cross-border trading.

Third on the list was technological disruption. Although this issue is not new, several recent developments have brought it to the fore, notably the emergence of new forms of retail trading, rapid advances in the use of the cloud, and greater use of artificial intelligence in many parts of the trading lifecycle.

Drilling down to responses by type of firm, respondents working at bank-owned clearing firms listed capital requirements as their top concern, ahead of the pandemic, political risk and technological disruption. This reflects the impact of the Basel III capital requirements on the cost of providing clearing services to clients. These requirements apply only to banks, but they also have an indirect effect on clients by reducing the capacity of bank-owned clearing firms to take on more risk. That helps explain why market-making firms, many of which rely on banks to clear their trades, cited capital requirements as the second-most important issue facing the industry after political risk.

The survey also revealed several insights on the impact of Brexit. Only 16% of the respondents cited market disruptions related to Brexit as one of the top three issues facing the industry. This may reflect the fact that at the time the survey was conducted, many firms had already relocated staffing and reoriented their trading and clearing systems in anticipation of the UK’s departure from the European Union.

Instead, the respondents flagged the potential for regulatory conflicts and compliance issues as a more critical problem for the industry, given that many firms will need to comply with both UK and EU rules in order to continue serving their customers. When asked to identify their top concern about the impact of Brexit on the derivatives industry, 51% said regulatory conflicts and compliance costs, 23% said market fragmentation, and 19% said higher costs to run their businesses.

The survey revealed significant concerns about two other issues facing the industry — cyber risk and market data. Roughly one third of all respondents ranked cyber risk as one of the top three issues facing the industry, a sign that people in the derivatives industry are worried about the risk that cyber criminals will penetrate networks, access confidential files, and disrupt markets. Another 24% included the cost of market data in their list of the top three issues facing the industry. Market data is essential to trading and clearing operations, and the exchanges that produce these data derive a large and growing part of their revenues from the sale of these data. That is leading to friction between market participants and the exchanges over the cost of these data.

Emerging opportunities – derivatives industry

The survey included several questions to gauge industry sentiment around emerging business opportunities in two areas: the rapidly growing futures markets in China, and the emerging markets for digital assets such as bitcoin.

The survey asked how firms are responding to the gradual liberalization of access to the futures markets in mainland China. Among respondents, 24% said their firms are already active in these markets. Another 9% said their firms plan to enter in the next 12 months. 46% said their firms are “watching with interest” but have not yet decided to enter, and 21% said China’s futures markets are not relevant to their firms.

Breaking this down by type of firm revealed important differences. Two thirds of the respondents working at commodity firms said their firms are already active in China’s futures markets, more than any other segment of the industry. Asset managers, on the other hand, are mainly watching with interest but have not yet committed to entering these markets. Among intermediaries, 44% of the people working at clearing firms, both bank and non-bank, said their firms are already active in these markets, and another 7% said they expect to enter in the next 12 months.  

Turning to digital assets, the survey revealed a very similar level of interest among respondents. 31% said their firms are already active in digital asset markets, and 10% plan to enter these markets in the next 12 months. The level of engagement was highest with independent clearing firms and technology vendors, with 44% and 43% of respondents, respectively, saying their firms are already active. Bank-owned clearing firms, on the other hand, are much less engaged, with only 29% saying that their firms are active currently and none saying that their firms plan to enter these markets in the next 12 months.

The survey also asked respondents for their views on the regulation of digital assets. Uncertainty around this issue has been one of the main obstacles to greater involvement by firms in the derivatives industry. 40% said policymakers should clarify regulatory jurisdiction and oversight of these products and write new rules accordingly. 37% said regulators should treat these assets like other financial instruments and enforce compliance of existing rules and regulations. 17% called for the industry to set its own standards and regulate itself. Only 6% called for a laissez faire “do no harm” approach and allowing this sector to develop without regulation.

Part 4:  Modernization and Innovation

One of the key lessons that the derivatives industry learned from the pandemic is that the burst in trading volume that took place during March put a heavy burden on operational capacity, leading to delays in the settlement of trades. The experience highlighted the need for more investment in the technologies used to process trades after execution.

To gather more information about this trend, the survey asked respondents to identify the areas in the trading and clearing process that are most in need of innovation and modernization.

Post-trade processing was at the top of the list, reflecting the awareness in the industry that legacy technology has become a significant obstacle to the efficient processing of trades. Although the vast majority of trades are processing on a straight-through basis, a small number require manual intervention to correct errors and allocate positions properly.

Regulatory compliance came in second. In recent years, reporting requirements have increased in complexity, making it more important than ever to gather data efficiently. In addition, the explosion of trading volume has intensified the need for advanced tools to sift through millions of transaction records.

Two areas tied for third — risk management and collateral management. Risk management refers to the systems that firms use to monitor risks in trading. Although some firms have developed systems to manage risks on a near-real-time basis, this area continues to be a challenge for the industry. Collateral management refers to the movement of cash and securities to meet margin requirements. Some firms have begun transforming key elements of this process through the use of cloud computing and distributed ledger technology, but this trend is still in its infancy.

FIA announces 2021 Futures Hall of Fame inductees

FIA today announced the induction of eight new members into the FIA Futures Hall of Fame. This year’s class joins 157 other honorees in the Hall of Fame, which was established in 2005 on FIA’s 50th anniversary. The new members will be honored at an awards ceremony during FIA’s annual flagship Boca International Futures Industry Conference.

Walt Lukken, president and CEO of FIA said: “We established the FIA Futures Hall of Fame to recognize the people who have made exceptional contributions to the growth and development of the futures, options and listed derivatives industry. This year’s inductees represent business leaders, advocates, policymakers, and visionaries who have provided the leadership and support necessary to keep growing our industry. FIA is honored to present them with this recognition.”

The following individuals were inducted into the Hall of Fame:

Brooksley  Born 

Bryan Durkin 

Gay Huey Evans 

Jeffrey  Geldermann   

Douglas Harris   

Jerome Kemp   

Charles Li   

Jim Newsome 

The Hall of Fame celebrates and recognizes the significant contributions individuals have made to the listed and cleared derivatives industry. Inductees are chosen by a panel of industry veterans and Hall of Fame members who consider nominees long-time experience and contributions to the industry over the course of their careers.

Learn more about the Futures Hall of Fame.