During a panel discussion on the future of market structure at FIA's International Futures Industry Conference in Boca Raton, Fla., industry leaders discussed the impact of recent volatility as well as innovative trends that will impact business models in the future.
The panelists noted that derivatives markets appear to be at a turning point driven by new entrants, technology developments and a push for 24/7 markets.
The discussion began with a brief reference to events in LME's nickel market, as a recent example of challenges that can be posed by dramatic volatility or an unexpected crisis.
"As far as I'm aware, it's the first time that bona fide trades matched on an exchange were cancelled after the fact," said Dave Olsen, president and chief investment officer at Jump Trading. He noted, "It wasn't a technology malfunction. It wasn't a mis-hit. It was a buyer and seller agreeing on an exchange to make a transaction."
Olsen said the event has market participants thinking hard about clearing risk and exchange rulebooks, and proves how extreme events can cause dramatic volatility that creates serious stress on the global financial industry as well as end-users.
Brett Harrison, president of regulated crypto derivatives exchange FTX.US, noted that derivatives markets have proven to be resilient on the whole across the last few years of stresses. However, "they're also showing some cracks, places where we can benefit from technology and new methods to make markets more efficient and manage risk."
Mariam Rafi, managing director of Citigroup Global Markets, said that the industry responded well to the fluid situation with markets in 2022 amid the invasion of Ukraine and rapidly changing Russia sanctions. She also noted that Citigroup also tries to think beyond just the math of margin calls to truly understand the end-users using products for hedging to manage real risks.
"When we look at markets dislocating very rapidly, we're looking at balancing our risk as counterparties to the customer's real need for this product," she said. "They genuinely need the futures we offer them, and it's important to understand the clients' end business… because liquidity follows a crowd and in a crisis, it does dry up quickly."
Laura Klimpel, general manager of the Fixed Income Clearing Corporation (FICC) and head of SIFMU business development at DTCC, noted that the industry needs to continue this focus on serving customers by placing a priority on interoperability to help with these complex hedging needs.
"Market participants operate in different venues, across positions and CCPs and regulatory regimes," she said. "It's important that all positions are interoperable to facilitate that."
Improvements to settlement and operations
Michael Winnike, director of market structure at BlackRock, noted that "during a period of volatility and inflation shocks in 2022, investors have turned to well-regulated, transparent markets to manage their risks."
However, that demand means it's up to the industry to "decrease operational risk and increase efficiency" in support of market resilience. "This is particularly exciting with our clearing firms, with their ability to efficiently risk manage instead of having armies of people doing reconciliation work," Winnike said.
Citigroup's Rafi agreed with the need for operational improvements, noting "there are a lot of legacy processes ripe for allocations, and give up allocations are just one example of a pain point."
She also noted that FIA recently released a progress report on its effort to launch an independent standards body in second quarter. In that report, FIA said it will target the "most pressing pain points" in trading and clearing workflow, with the first set of standards focused on processing time for allocations and give-ups.
Blackrock's Winnike noted that data science and standardization are also important areas of innovation that will affect market structure in the future. "Data is the common language we're speaking when it comes to trading," he said.
Jump Trading's Olsen said the broader trend of technological innovation in financial markets allows for big ideas about efficiency and real-time risk management to finally come into fruition and ultimately build better and more resilient markets.
"The components of how markets are assembled are now in a granular enough form that the participants themselves can reassemble them," he said. "Using all the technology we now have at our disposal, it's possible to manage risk in a continuous fashion."
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