A panel discussion at the FIA International Futures Industry Conference in Boca on 15 March focused on risks that have impacted derivatives markets over the past year, and how the industry has managed them.
Setting the scene, moderator Richard Berliand, chairman of both the TP ICAP Group and FIA Tech, pointed to five major events that have disrupted the markets recently.
“If we look just at the last year, there have been a number of events – Silicon Valley Bank, FTX, LME nickel, ION cyber, and Russia-Ukraine – that came in formats that were a surprise and exposed a number of vulnerabilities to our industry,” he said.
Trabue Bland, senior vice president of futures exchanges at Intercontinental Exchange, said that an exchange’s role is to give the public confidence and act in a predictable manner. However, exchanges are also subject to external constraints, pressures and political policy beyond their control. These factors could potentially increase future risks for the market.
To illustrate this point, he pointed to the European Commission’s cap on the price of gas, known as a “market correction mechanism”, which will be triggered if prices exceed 180 euros/MWh for three days on the front-month contract at the benchmark Dutch Title Transfer Facility (TTF) gas hub.
“We put forward a lot of arguments to the European Commission explaining that the price cap would affect risk and have an impact on margin. And yet, in December, they passed the market correction mechanism,” Bland said. “We have rules in place where we can comply with that, but being as predictable as possible we telegraphed to both legislators and to the market that we were going to list a parallel contract in our UK futures exchange not captured by EU rules, and we've followed through on that.
“Unfortunately, you can't control that type of stuff and governments haphazardly interfering in markets gives me a lot of fear.”
Concentration risk
Don Wilson, CEO and co-founder of DRW Holdings, expressed his concern about the over-reliance of financial firms on too few cloud providers, given the disruption this could cause if a provider serving many clients went down.
“Obviously, there's a limited number of cloud providers. Some people argue that the cloud providers have so much more money to invest in their systems, that those systems are going to become more resilient and less prone to cyber-attack,” he said.
“I'm sympathetic to that argument, but the flip side is if everybody puts their matching engines into AWS [Amazon Web Services] and AWS goes down, then the global market infrastructure is going to break. That seems pretty problematic.”
ICE’s Bland agreed with Wilson and said ICE has no plans to outsource any critical infrastructure to the cloud.
“We really want to control that technology, and we think we do a very good job of that. I can't even imagine the thought of outsourcing critical infrastructure to the cloud. There are places where it's more efficient, maybe in data storage and things like that, but for critical infrastructure we think that's a bad idea,” Bland said.
His comments follow several announcements by major exchange groups that they are embarking on cloud-based projects.
At the end of 2021, CME Group announced that it was moving its technology infrastructure to Google Cloud. Nasdaq also announced plans to move its North American markets to the AWS cloud-computing platform.
At the end of 2022, the London Stock Exchange Group said it had signed a 10-year deal with Microsoft to bring together the exchange’s data sets and analytics with Microsoft’s cloud services. Deutsche Börse said it had partnered with Google Cloud, while the Options Clearing Corporation said it had received a no-objection notice from the US Securities and Exchange Commission to use the AWS cloud for clearing, risk management and data management applications.
