MAY 28, 2007
NEWS DESK
A pro forma snapshot of NYSE Euronext financials; Nasdaq’s Greifeld
in a pre-OMX moment; and more.
PAGE 3
Equity Option Growth Curve
Contracts in millions
2,000
Concern Mounts Over Prime Brokers’
Exposure to Hedge Fund Wrongdoing
PERSPECTIVES
COMMENT: At a high-level symposium on credit derivatives and their
risks, some of the smartest minds in
the business weren’t shy about admitting that they don’t know all the answers, which is probably a good thing.
PAGE 4
1,500 agreed that if the suits—one
stemming from a bankruptcy case,
1,000 the other filed by investors in a
failed hedge fund—are ultimate-
500
ly successful, prime brokerages
could be put in the uncomfortable position of having to closely
scrutinize their hedge fund
clients.
“This is not a business where
Equity Derivatives Are a Harder Case you are liable for the activities of
your clients,” asserted Michael
OTC cleanup slower than credit swaps, but risk less Rogers, principal and associate
BY JEFFREY KUTLER ago from what is now a group of general counsel at Banc of Amer-
The process that started last 18—Royal Bank of Scotland Group ica Securities. “If we have to de-Nov. 21 had a familiar ring: was new to the list—clearly indicat- termine if clients are running a
Seventeen major derivatives deal- ed that although the equity deriva- Ponzi scheme, you put the prime
ers signed a letter to Federal Re- tives post-trade mountain isn’t as broker in the position of having
serve Bank of New York president high as that of credit derivatives, it to shut the hedge fund down.”
Timothy Geithner, committing to is proving harder to climb. To start Rogers was referring to a de-substantially improve transaction Continued on page 29 Continued on page 34
processing workflows on over-the-
counter equity derivatives. In Reformed Pension Climate, a New Investing Approach
About 13 months earlier, a sim-
ilar missive marked the start of a Liability-driven investing ranges widely, with focus on funding
significant effort to reduce the BYCHRISKENTOURIS along with modeling tools to help
backlog of trade confirmations in I n February and March, JP pension plan sponsors forecast the
the larger asset class of credit de- Morgan Chase & Co. launched mortality and longevity of their
fault swaps (CDS). So much two products that at first glance plan participants. The higher the
progress had been evident that by appear dissimilar. One, the Hedge life expectancy, the longer pension
November 2006, the who’s who of Fund Altbeta Index, replicates the plan sponsors have to make pay-
Wall Street—from Bank of Amer- strategies and performance of ments, and the greater the poten-ica and Barclays Capital to UBS hedge funds and funds of funds tial for underfunding of the pen-and Wachovia Bank—were pro- with liquid market instruments sion liabilities.
viding an update on next steps “to such as equity, bond and com- They’re connected because, as
improve the efficiency of the equi- modity indexes. Guy Coughlan, managing director
ty derivatives market and to mon- The second, LifeMetrics, is a of JP Morgan’s pensions advisory
itor the interest-rate, currency and packaged international index, group in London, points out, the
commodity derivatives markets.” based on employee demographics goal is to reduce the pension fund’s
But a status report two weeks in the U.S., England and Wales, liabilities relative to its assets. “The
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Source: Options Price Reporting Authority, Aite Group estimates
Exchange-traded options volume indicates the asset class’ growing popularity.
ORIGINAL SOURCES: New York Fed
president Timothy Geithner says
that innovation in financial markets
has historically been
accompanied by risk
management challenges that should be
of concern to policy-
makers and industry players. Credit derivatives, a market that started
out “using 19th-century methods
of dealing with 21st-century financial instruments,” are no exception.
PAGE 6
BY CAROL E. CURTIS
Worries are mounting that
troubles in the hedge
fund industry could spill over into
the highly lucrative prime brokerage businesses of bulge-brack-et Wall Street firms servicing
those funds. At a Securities Industry & Financial Markets Association (Sifma) conference in
New York last week on hedge
funds and alternative investments,
much of the discussion revolved
around recent lawsuits in which
prime brokers Bear Stearns Securities Corp. and UBS Securities were charged with failing to
carry out responsibilities that conference panelists said they were
never meant to have.
Lawyers at the conference
SPECIAL REPORT
Financial institutions are addressing
their over-the-counter derivative risks
and challenges systematically. With
solutions to the credit derivative con-
firmation backlog effectively in place,
attention can now turn to such mat-
ters as a cash settlement protocol,
which former New York Fed presi-
dent Gerald Corrigan says needs to
be less ad hoc, and to equity deriva-
tives and other products. Also cov-
ered in this report: Bear Stearns Pric-
ingDirect, Markit Group’s RED, and
other specialized vendors. PAGE 15
Use of LDI Strategies
Immunization of liabilities
2%/3%
10% 7%
7% 24%
14% 14%
DEPARTMENTS
TECHNOLOGY: Activ Financial uses
field-programmable gate array tech-
nology to overcome chip performance
limits. PAGE 10
Asset liability duration
3%/6%
12% 12%
11% 37%
14% 14%
Source: Northern Trust, Greenwich Associates
Hedge Fund Altbeta Index increases the plan’s return on investment without paying the hefty per-
Continued on page 33
TRADING: High-frequency trading
strategies increasingly require customized algorithms with real-time risk
tools, says John Bates of Progress Software’s Apama unit. PAGE 10
Need for Standards Evident
As Loan Trading Takes Off
BY SHANE KITE
▼
“Exploded” is the word Pat Loret de Mola, CEO
of Trade Settlement (TSI), a New York-based
People in the News
Company Index
People Index
▲
On the Web
p3 syndicated loan processing firm, uses to describe the
p34
p34 growth of loan trading over the last several years. Fueled
by the private equity behind an increasing number of
leveraged buyouts, mergers and acquisitions—coupled
with investor demand from the likes of hedge funds and
traditional money managers—syndicated bank loan is-
suance and trading are surging. Collateralized loan oblig-
ations, which pool various types of corporate debt into
securitized products, are also helping push loan volume.
Yet there are no existing trading protocols or agreed-
Continued on page 32
Technology is key to Nasdaq’s
$3.7 billion purchase of OMX.
See Breaking News at:
www.securitiesindustry.com.
China Open to NYSE, Nasdaq
Long-awaited regulation allows rep offices
BY WANG FANGQING
After months of waiting, Nasdaq Stock Market
and NYSE Euronext will be allowed to open official representative offices in China this summer. The
two exchanges had applied for permission late last
year, but government approval was held up pending
regulations that the China Securities Regulatory Commission finally issued on May 20.
According to the rules, taking effect in July, overseas
exchanges will be allowed to use their China offices for
marketing and research. However, they will need to notify regulators of any large-scale promotional plans, and
at least half of the local staff must be Chinese.
