While You Were Working - March 13

The curtain raises at FIA Boca

In his opening remarks at the 43rd Annual International Futures Industry Conference, FIA President and CEO Walt Lukken turned attendees’ attention to the dire days of the financial crisis that rocked the world a decade ago. Lukken, who was a CFTC commissioner at the time of the crisis, reflected on the dark days of dealing with the crisis and walked through the measures that have been taken since 2008 to help markets recovery and return to growth.

Lukken remarks also touched on the current regulatory landscape, where he cautioned policymakers against veering away from the tradition of cross-border recognition (aka substituted compliance).

“Regulators must work together to develop a framework that returns us to a more balanced deference approach for cross-border regulation. This may require all parties to rethink current practices of overseas direct regulation in order to achieve common ground.“

Lukken then got very specific and directed his comments at EU policymakers as they review CCP oversight:

“A good first step would be for EU to validate and uphold its recent equivalence determinations with the U.S. and others to ensure market clarity as it considers legislation to improve its oversight of CCPs.”

On China, Lukken noted the approach the government has taken in the rapid evolution of markets:

“President Xi is driving the modernization of China’s nascent financial markets so they can better serve the world’s second largest economy.”

Lukken’s overall comments were centered on urging policymakers to let the market do its thing:

“It’s important that markets, not politicians, set the price of goods and services in our economy. Backdoor policies that aim to regulate prices versus wrongful activity should be condemned.”

As geopolitical risks threaten to fracture the global regulatory collaboration that has been a hallmark of post-crisis reforms, it remains to be seen if regulators will heed Lukken’s call.

ICE opens up about market trends

A big part of Day One at FIA Boca each year is a series of InformationXchange forums, which are an opportunity for the various exchanges to talk more about their business and trends they see in the marketplace. During IntercontinentalExchange’s session, the leadership team from ICE focused on a couple of key topics:

  • Technology – Lynn Martin, the President and COO of ICE Data Markets, talked about how the evolution of instant messaging as a communication tool has helped ICE better serve its customers. ICE has seized on the closure of instant messaging services from AOL and Yahoo! and added “industrial strength” to its Yellow Jacket messaging platform. Martin explained how ICE as embedded artificial intelligence into the platform that can tell what is being discussed, including the ability to discern if a chat is about something social like sports or more necessary conversations like price discovery. Martin also noted how ICE’s link up with ICE’s instant messaging enhancements have helped its platform attract about 85,000 users in the energy/commodities ecosystem.
  • Regulation – Stuart Williams, president of ICE Futures Europe, says Brexit and MiFID II have stifled growth in the marketplace. However, Williams added that the clouds of regulatory uncertainty with regard to MiFID II are starting to lift:

“MiFID II is the most ambitious set of regulation the EU has ever put into place. … There has been a learning curve for the industry. … Now, it feels like we are moving into a new normal where customs are focusing back on their business, rather than regulatory change.”

  • Energy markets – The rapid rise of the US as an energy producer has revolutionized the global marketplace, according to Trabue Bland, the president of ICE Futures US. Despite obvious geopolitical uncertainty, Bland says there is a real need for markets to remain global and he is betting that they will.

SGX upbeat on outlook for Singapore, global markets

Singapore Exchange CEO Loh Boon Chye is upbeat about the state of the industry and is bullish about the role Singapore in general and SGX specifically will continue to play in shaping global markets. In comments at FIA Boca, Loh said he expects investors to remain calm with no major selloff in global equities markets.

With the Trump administration’s recently announced tariffs on steel and aluminum and looming talks between the US and North Korea, SGX’s location means it keeps a close eye on geopolitical risks.  

As one SGX executive noted on the sidelines in Boca:

“Cold Wars are good for commodities, trade wars are not.”

CME Group’s Putnam highlights volatility risks

During CME Group’s InformationXchange, Chief Economist Blu Putnam ran down a list of factors he sees as possible sources of market volatility. Putnam’s list included:

  • Population demographics and the strain baby boomers might put on the economy in their golden years.
  • Central bank quantitative easing moves over the next 5-6 years. Currently 23% of GDP (normally at 5-6%).
  • The impact of tax reform in the US – both near- and long-term.
  • Public debt as an analysis CME economists projected debts at much higher levels than what the CBO estimates.
  • Worldwide GDP growth as it absorbs the effects of the US’ withdrawal from the Trans-Pacific Partnership and possible withdrawal from NAFTA.
  • Inflation as Putnam sees the Federal Reserve taking interest rates up to 3-4% at a measured pace.
  • Oil: Technology has propelled the US to where it will the largest fracking and oil producer in the world in the next few years. How will that growth cope with demand fluctuations brought on by transportation technologies?
  • Agriculture markets will need to look at weather in the US, specifically whether droughts will creep north of Oklahoma.

During a panel discussion following his presentation, Putnam made some interesting comments about how trading strategies based on artificial intelligence might have a blind spot when price correlations detach. Putnam explained how most AI is based on gazillions of data points that often feature data from when price correlation is within "normal" parameters. And most strategies account for what to do when prices fall out of correlation. However, Putnam cautioned there might be blind spots in such programs because they might not have enough information about how long prices will remain detached.

Back to the birthplace of blockchainitis

I have a confession to make: FIA Boca is exactly where I coined the phrase “blockchainitis” a couple of years ago. Panel after panel over the last few years seemed to talk about little else other than blockchain. This year, cryptocurrencies sit poised to take the trophy from blockchain as the hot topic du jour. But that doesn’t mean all the talk about blockchain - or more accurately, distributed ledger technology (DLT) – has fallen by the wayside.

The last session at FIA Boca today was all about the future of markets and opened with insights from leaders in the DLT space. Blythe Masters, the CEO of Digital Asset, sees DLT as a genuine technology breakthrough that tackles the challenge of dealing with untrusted and sometimes anonymous counterparties. How DLT will be adopted has become a bit of a question in various markets, but Masters says the best “deployment point” is market infrastructure. That makes sense because market structure is where industry participants already convene and operate by ubiquitous standards.  And as Masters pointed out, adoption in the market structures area will encourage adoption in other areas. Masters also said the challenges that stand in the way of DLT adoption will be overcome because of industry need and the rapid development of DLT solutions that suit financial services.

Michael Bodson, the president and CEO of DTCC, agreed with Masters on the importance of DLT, but noted that DLT will be just part of an array of technology components, including AI and cloud computing, that are poised to revolutionize financial services. However, Bodson was very forthcoming about possible bumps in the road:

“It is going to be an ugly transition, but it is going to happen. How do we get from 55 million lines of COBAL to a place where we develop the new technology and deploy in an equitable fashion for customers.”

More from Boca

Trading Technologies CEO Rick Lane penned this insightful blog post about the evolution of his company.

Beyond Boca