Symphony messaging: WhatsApp to business’ ears?

Jul 24th, 2015

It’s official, what many financial institutions have been saying for quite a while is becoming reality: they don’t want Bloomberg (or any third party?) to have access to all of their messaging, trading or not related, anymore and hence have decided to team up as equal partners, in a top-notch technology utility that serves the needs of its members, a key to its potential success, to fund a competitor messaging system called Symphony. The network, the link between the bankers and their clients and between their clients and their competitors is what enables them to be and stay in business: A third party cannot be invited around that table.

Not only, Symphony could be offered to other business sectors as a professional WhatsApp. Follow me here: financial institutions don’t trust anymore a third party to manage their messaging data, but think other business sectors will trust financial institutions to manage their messaging data.

Although I personally got annoyed when my bank asked me why I was spending some of my savings‎ on our family farm when I asked for a mortgage, I know they probably know my financial situation better than I do, and that I am not a potentially “good” client for them: I trade myself, have little savings, do everything online, so I guess it’s only fair for them to ask. Of course Big Brother is watching me – and so should he. But I am not sure if I would send all my WhatsApp messages on a bank-owned competitor system, would you run the risk that your bank could potentially see all your messages?

In the case of corporations and businesses though, things are slightly different: their relationship with their banks are usually extremely deep, their bank helped them get their first line of credit, maybe introduced them to private investors or helped them IPO. And when they wanted to take part in a big project with a new foreign client they bridged the financing of the project, they helped them offset their FX risk, invest their liquidity and manage their treasury… so if they started potentially seeing their employee’s messages to their clients or suppliers, would it really make a difference to them? Probably not.

Of course I am extremely simplifying the potentially extreme risk such a system could have; It has been created on the back of a highly secure encrypted internal system Goldman Sachs had developed and has been enhanced with the best of the best (it is said) technology, in an open source environment.

We’ll be make sure to test it as soon as it is offered to the public later this year and am waiting for the next Instagram for finance.

FX ECNs 2.0 getting gobbled up?

Brad Baliey

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Jul 23rd, 2015

It looks like a couple more of the second wave of institutional FX ECNs might become part of large exchanges. Last month unsubstantiated rumours circulated about 360T running a sale process-receiving bids from several parties, including Deutsche Boerse-and on Monday rumours circulated about Intercontinental Exchange (ICE) and FastMatch ECN. Generally, where there is smoke there is fire, but it is likely that in both situations, it is nothing more than market speculation, or wishful thinking. However, exchanges are the most likely strategic buyers; they are able to consummate deals in the current business and regulatory environment. Moreover, global exchanges need to scale across products, and they have ample currency to get large FX FinTech platform deals done.

There are still other FX ECN platforms available. In recent years, the last of the first wave FX venues have been acquired. Earlier this year BATS picked up Hotspot, and in 2012 Thomson Reuters acquired FXall. Considerable discussion has taken place around valuations for these deals. The valuations reflect the allure of asset class expansion, the scarcity of major independent e-FX venues, and overall FinTech valuations. Furthermore, foreign exchange, like all flow products is at a major inflection point. The gathering forces of regulation, transparency, combined with the necessity of many FX players to further automate their pricing and trading makes this trend inexorable.

And of course, scandal- $5.5 bln in fines already –a huge number. The foreign exchange scandal has been a major distortion in the FX world: creating an unusual opportunity to see change on a major scale. The scandal has been very expensive in terms of money and resources, but is producing a clear roadmap to a more open, transparent and automated FX market.

De-accumulation: why automated advice delivery makes sense

Will Trout

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Jul 22nd, 2015

In my last post, I rap the DoL and other regulatory bodies for focusing on accumulation at the expense of the payout function. The result of this imbalance has been to help blind retirement savers to the risks of running out of money.

But it’s not just regulators at fault. Part of the “payout problem” revolves around how the advisor gets paid. Namely, what advisor wants to help draw down client assets when his fee is based on AUM?

Some advisors are getting around this conflict or disincentive by working on retainer. But automated delivery of advice (whether via “robo advice” or a hybrid model) represents a cleaner (and ultimately more equitable) solution, in that it allows for low cost, transparent and scalable client servicing.

What’s more, the efficiencies inherent to the automated advice model are amplified by actuarial considerations. Today, the post retirement period can last 40 years, in many cases longer than a career. With a three or four decade service runway, the advisor can earn good money (even at reduced fee levels) while building relationships with successive generations. It’s an arrangement that works for all sides.

Lessons of Bondcube

David Easthope

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Jul 22nd, 2015

We have been following the development of Bondcube since early 2013 after its foundation in 2012. Founded by CEO Paul Reynolds and CTO Mark Germain, Bondcube had a unique vision to support trader workflow in fixed income to support greater liquidity in the market. While many FinTech start-ups focus on B2C and the client experience, Bondcube was squarely focused on B2B and workflow support for traders. While Bondcube leveraged new Web 2.0 capabilities such as chat and tracking, it was essentially a new tool for an existing audience with the vision created from former industry insiders trying to create something new.

The central idea was that Bondcube could revive large order execution, minimize the market impact of search, and be disruptive to existing marketplaces like MarketAxess, Bloomberg and Tradeweb. It planned to optimize trading via chat and by leveraging historical inquiries. We understand it was marketed at zero cost to buyside and (relatively) cheap connectivity for dealers. Bondcube decided to focus on both the Europe and the US, like existing competitors.

An investment by Deutsche Boerse AG suggested that Bondcube might have some legs to build traction, but today’s news on liquidation suggests that further funding was needed and the shareholders declined to do so.

Brad Bailey is compiling an updated report on the platforms in the market today, but this is clearly a sign that the market is still sorting through the various ideas and that incumbency (and inertia?) still has great value.

Also, sometimes the market asks for change but then does not actually adopt the change it’s clamoring for. All too often the buy side says “Yes! Yes!” but does not adopt new options rapidly, but only after long trials and testing. Capital (and patience) can disappear before the testing and optimization process is complete.

In the fiduciary fight, key players are biting off as much as they can chew

Will Trout

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Jul 21st, 2015

In my last post, I note the acceleration of Department of Labor (DoL) efforts to bring greater transparency to the DC business. The latest guidance from DoL attempts to boost clarity around sponsor obligations pursuant to the sale of annuities. This guidance is important because to date, regulatory attention has fallen disproportionately on the accumulation side of the DC business.

Helping participants to successfully manage the payout function is a noble and (as I discuss in my recent report on de-accumulation) challenging goal. Time is of the essence if the US is to forestall a doomsday scenario of retirees outliving their savings.

At the same time, it is important to keep in mind that economics are not the only consideration driving the DoL push. Rather, the newfound urgency underscores the Department’s desire to put its imprimatur on an issue that is being tackled by multiple actors (e.g. Treasury; the SEC, which announced last month its compliance-focused ReTIRE Initiative; and lobbying groups such as SIFMA and NAIFA) and from multiple standpoints. In particular, a torrent of litigation (the capstone of which was the Tibble vs. Edison verdict) appears to be shifting decision power to the courts.

Legal actions are also shining a spotlight on fees. This presents a cart-before-the-horse problem for DoL, in that excessive fees are an issue that a uniform fiduciary standard is supposed to address. Having assumed the mantle of defined contribution crusader, the DoL risks falling behind events.  The pressure on DoL will only become more acute as we enter the twilight of the Obama administration.

The upshot? Look for a wave of bulletins and other forms of guidance from the DoL, particularly in the wake of the upcoming August hearings. While the fiduciary debate to date has gotten less attention than it deserves, it will rise to the top of the political agenda this fall, despite resistance from industry lobbyists. Indeed, given the weight of the government and private sector entities (among them the AARP) behind reform efforts , the end result may actually have teeth.

At the height of summer, the defined contributions wars heat up

Will Trout

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Jul 21st, 2015

Amidst the summer lull, the Department of Labor (DoL) has issued Field Assistance Bulletin 2015-02, a clarifying document that aims to open the door to the broader use of annuities within defined contribution (DC) plans.


While annuities have been allowed within DC plans for some years, a lack of guidance as to fiduciary obligations post sale has tempered sponsor enthusiasm. The bulletin explains that while sponsors are considered under fiduciary obligation at the time of annuity selection and at each periodic review, they will not be held to this standard in the case of specific purchases by a participant or beneficiary.


This distinction is important in that it grants significant protection to sponsors, but the DoL leaves significant wiggle room as to the frequency of required reviews. Clearly, published reports of the pending insolvency on an issuing insurer would trigger the need for a review. Otherwise, the degree of diligence that must be exercised by the sponsor post-selection will need to be evaluated on a case by case basis:  first by the plan sponsor, presumably, and then by the DoL.


This may be a best effort solution to an irreconcilable problem, but such a measured response by the DoL is unlikely to eliminate what it describes as “disincentives for plan sponsors to offer their employees an annuity as a lifetime income distribution.” Plan sponsors have little incentive, in any case, to assume the risks of offering annuities when these are readily available for purchase outside the pre-tax space, and so the DoL will need to aim higher.


What is noteworthy here is not so much the narrow scope of the little noticed bulletin, or its limited reach, but the degree to which it signals an acceleration of DoL efforts to clean up the DC business.  To a large degree, this acceleration reflects a heightened jockeying for position among regulators and other industry actors with an interest in guiding reform. The recent Supreme Court case of Tibble vs. Edison International, which affirmed the nature of the fiduciary responsibility of plan sponsors to participants on an ongoing basis, appears to have brought issues of power and control to a head.


I’ll talk about this in my next post.

Battle of the messaging systems, and more

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Jul 20th, 2015

The introduction of the Symphony messaging service, backed by 15 large banks, should make things interesting in a space that has long been dominated by Bloomberg and to some extent Thomson Reuter’s Eikon. It is another example of cooperation between large banks after the recent introduction of an OTC derivatives collateral management utility, which was discussed in an earlier blog by this author. Banks are increasingly moving onto the turf of players such as Bloomberg and large IT firms involved in the capital markets through such ventures. It is an interesting business models where the buyers of services are coming together to create or back service providers, which would reduce prices of these services, put more competitive pressure on the other service providers in the space and create greater synergies and efficiencies for the industry overall. It does make things a little tougher for regulators, as the traditional boundaries of which firms are the service providers and which ones are the consumers are changing. But overall, it seems to be a positive move for the markets. The rising costs of complying with financial regulations and the tough market environment have possibly been important drivers for banks to cooperate in this manner.

Having the backing of large banks in itself does not guarantee success to Symphony. However, its open source platform offers it a strong chance of being a contender in this space, as it allows its users to add their own features to the messaging platform. What would also be interesting for the neutral observer is the reaction of players such as Bloomberg and Thomson Reuters. These have long dominated not just the messaging, but also the terminal space, and now there are efforts to break their stranglehold on this market. These are large technology-oriented firms that offer a wide gamut of services to the banking and capital markets industry. Their response (if any) to the launch of Symphony could give us valuable insights into how they would react if their control of the terminal space is challenged. Interesting times ahead for sure!

What comes first, OTC derivatives trading volumes or the CCP?

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Jul 20th, 2015

In a couple of recent discussions about central counter-party clearing for OTC derivatives in the global capital markets, we have come across the view that the move towards central clearing has not been as comprehensive as expected earlier. What this is referring to is the fact that the number of central counter-parties (CCPs) has not changed significantly when we look at the global markets. In the developed markets in the US and Europe, the presence of existing CCPs and the difficulty for new CCPs to break into the market has been an important reason. In the case of emerging markets, the fact that the volumes of OTC derivatives traded are quite low means that only CCPs in large markets such as Brazil and China are expected to be viable. Hence, not too many CCPs are going to crop up in the smaller emerging markets. This belief is understandable, but we must take into account the fact that the maturity of capital markets in these regions is low.

As the emerging markets evolve, the presence of CCPs would encourage more trading in OTC derivatives products and allow for greater innovation and also standardization in the long run. These could be factors that increase volumes for OTC derivatives trading in smaller markets in regions such as Latin America and Asia-Pacific. Also, until recently,  the emphasis for the respective regulators and governments with regard to derivatives trading  has been on exchange-based trading. The presence of a local CCP and the greater transparency that ensues in OTC derivatives trading would encourage both regulators and governments alike to allow for more trading and clearing of these products due to better oversight. Hence, this is a virtuous circle and decision-makers who are looking mainly at current OTC derivatives volumes before they decide whether to have or not have a CCP in their domestic market should also look at the potential for trading of OTC derivatives products in the long run. Similarly, the market participants also should take a positive view towards CCPs in smaller markets, as initial focus should not be whether the CCP would be profitable and competitive regionally and globally, but whether it fosters safer trading and clearing of OTC derivatives and allows for higher trading volumes in the region than before.

Betterment’s blast across bank bows

Will Trout

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Jul 16th, 2015

As I noted in an earlier post, banks and automated investment advisors largely have lived in two separate worlds. This is set to change as banks explore their robo options. In the meantime, it’s interesting to see robos treading on bank turf. Or, in the case of Betterment, poking the banks in the eye.

The NYC based firm’s new SmartDeposit feature lets customers sweep excess cash into their Betterment accounts by letting them cap the amount they keep in bank checking. Here, “excess” refers not to cash used for everyday expenses, or to pay bills, but to dormant funds that might as well be kept in a sock drawer.

While neither the sweep concept nor breadcrumb investing is new, such a frontal assault at bank checking accounts is remarkable. In terms of boldness, it’s akin to the rollout of money market funds in the 1970s. Retail banks already struggling to right-size their branch networks will not appreciate losing the dumb money that has propped up their bottom lines.

In the big picture, Betterment is still a small player, and it’s unclear whether these kinds of raids will gain traction. But rather than cry foul, banks should step up efforts to build out their own robo platforms. Here as elsewhere, innovation is the best form of response.

Volcker Rule compliance and expected impact

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Jul 16th, 2015

The compliance date of July 21 for the Volcker Rule is almost upon us. The broad aim of the regulation is to curtail the speculative trading of banks and there are several important aspects of the rule related to including controls on proprietary trading, emphasis on liquidity planning, limits on investment in covered funds and so on. Among the various areas related to the rule, the last aspect relating to the limits on investment in covered funds is possibly the greatest challenge, since it relates to banks’ investments in tens of thousands of securities and funds. This can be a significant operational hurdle in terms of identification of covered funds and divestment from these.

On the whole, the big banks are fairly well prepared to deal with the deadline but the regulation is expected to be difficult to comply with for mid and small sized banks as these have fewer resources to deal with such requirements. Some vendors have introduced automated tools to help banks meet Volcker Rule requirements for covered funds, but not all banks would be able to use such platforms or automate their processes sufficiently on their own.

Overall, the regulatory measure  is expected to reduce the overall liquidity in the markets. Once implemented, we can expect to have a more controlled approach to trading from market participants. The markets might well be safer after all these changes, but to some extent these will come at the expense of trading volumes and profitability.