A few themes always emerge at FIA Expo and this year Europe managed to steal the spotlight as the main topics of discussion on the first day were regulatory deference and the recent default on the Nasdaq Nordic exchange. Not surprisingly, cryptocurrencies and blockchain garnered quite a few mentions (and there will be many more of those on Thursday as no fewer than four panels are concerned with digital assets). Along the way, the exchange leaders were afforded the opportunity to work on a post-mortem in real time and Meet The Innovators panel presented a set of five rising fintech stars vying for the title of “Innovator of the Year”. Read on to see who I think might wear that crown this year.
As usual, FIA Expo kicked off with a few choice words from FIA President and CEO Walt Lukken. In addition to noting an attendance of over 4,500 this year, Lukken spent a good deal of time zeroing in on the topic of cross-border regulation and the possibility that the EU will follow through on their plans and expand their regulatory reach beyond their borders, upsetting a long-standing policy of mutual regulatory deference. The stakes are incredibly high with “fragmented markets and balkanized regulation” a clear possibility.
This theme was a major part of the presentation from CFTC Chairman Chris Giancarlo as well. The CFTC produced a white paper on the subject and Giancarlo recently returned from a world tour in which he promoted the concept of cross-border regulatory deference. His comments included a mea culpa for CFTC over-reach under Article 7 of Dodd-Frank around 2012 (the ghost of Gensler haunts us still!) and an apologia that deference must be protected or else the CFTC will be forced to take steps to protect the U.S. markets (i.e. retaliate). The EU is playing chicken with the world and we all stand to lose if they don’t change course, and soon.
Giancarlo had more to say as well, including a shout-out to the benefits of finally having a full slate of commissioners, a detail of fiscal year 2018 enforcement that was one of the most rigorous in history, and a renewed acknowledgement that he does not intend to advance Reg AT, the misguided proposal that included ill-conceived and potentially unconstitutional restrictions on intellectual property, in its current form. It was another bravo performance from the chairman.
Exchange Leaders: All For One and One For All, Mostly
The next panel was “Exchanges: Building for a Future of Growth and Innovation”. The panel, which was moderated by Jerome Kemp of Citi, may have intended to focus on the future but it started with a post-mortem in real time of the recent default of the power market at the Nasdaq Nordic exchange that was partly a defense of the industry and partly speculation on what went wrong. Nasdaq President and CEO Adena Friedman rightly got the first crack at the subject and she gave a candid and cogent recap of events. Nasdaq is being as transparent as possible in the aftermath and has hired consultants Oliver Wyman to assess every aspect of the clearing house. The other exchange heads varied their comments between support (Ed Tilly of Cboe Global Markets said this was one instance and the markets worked as designed in the default) to speculation (ICE’s Jeff Sprecher noted that power markets are complicated and wondered if the position was margined correctly while Terry Duffy from CME Group mentioned, more than once, that the CME doesn’t allow direct members to their clearing house). Underneath it all, the incident helped to reignite the debate about skin in the game (SITG), particularly because Nasdaq put up the initial €7 million towards the default but the clearing members had to pony up a whopping €107 million behind that. The nomenclature has changed somewhat since SITG was a hot topic a few years back with clearing firms now referring to “an alignment of incentives”. While the words have changed the argument is the same: the clearing members think that the for-profit clearing houses (CCPs) should be on the hook for a bigger part of losses. We can expect this argument to echo on for some time.
Another major topic of conversation for the exchange leaders was more focused on growth and innovation: cryptocurrencies. Since the last Expo, both Cboe and CME have introduced cash-settled bitcoin futures while ICE will soon launch physically-delivered, one-day bitcoin contracts through their Bakkt exchange. The Cboe and CME contracts have been mildly successful and Cboe clearly would like to expand their franchise by adding an ETP, something that the SEC has been loathing to do, but neither exchange group seems to have their whole heart committed to blockchain as a concept. Sprecher, however, signaled that they now believe that bitcoin may be able to function as a global, spendable currency while Friedman’s Nasdaq is more fully behind the technology, particularly where it may be able to bring greater speed, efficiency, and cost reduction to markets, with loan origination offered as one example. Thomas Book, CEO of Eurex, also spoke highly of digitization but did not elucidate specific ways in which Eurex will be involved at this point.
Hong Kong’s Charles Li was surprisingly passed over in the initial discussion of cryptocurrencies but he later offered the somewhat vague comment that his regulators don’t want him “visiting Las Vegas or Macau at this time” before going on to say, in order, that cryptocurrencies biggest impact might come in Africa, the players in China will move together “like wolves on the mountain” (they won’t do it unless forced and then it will be in unison), it is likely to be applied by government mandate to the warehouse system in China, and they are looking to build a crypto contract that is backed by physical gold because investors in China and India like to buy gold.
Beyond crypto, Li seemed to bring every comment back to current tensions between the U.S. and China and his comments were a mixture of bewilderment and frustration. Li has a gift for colorful examples and he likened U.S. / Chinese relations to a seven-year itch in marriage, saying that it was better to sleep in separate bedrooms for a while rather than slapping your partner in the face and precipitating a divorce. Wise and somewhat concerning words given the current state of things.
Meet the Innovators
This is the fourth year for the fintech focused “Innovators Pavilion”, which features 15 firms this year selected from 40 applicants. The top five were selected by a team of judges and faced off in “Shark Tank”-like competition before a panel of judges that included Russ Abrahamson of BAML, Catherine Clay from Cboe Global Markets, Geneva Trading’s Rob Creamer, Jan Bart de Boer from ABN Amro Clearing, Jared Delaney-Smith of Next Investors and Rumi Morales from Outlier Ventures.
Each firm was given five minutes to make their pitch and that was followed by eight minutes of questions from the judges. The five companies are:
- Drawbridge Lending: “DrawBridge Lending initiates Fiat loans secured by digital assets on a Blockchain.”
- FreightWaves: “FreightWaves, in conjunction with DAT and Nodal Exchange, are creating the first-ever Trucking Freight Futures contracts.”
- iComply Investor Services: “iComply Investor Services Inc. is a RegTech platform that automates compliance procedures for the issuance, purchase, and resale of tokens, coins, and digitized assets.”
- MSR Indices: “Investors can create virtually limitless numbers of custom portfolios via custom indices by drawing from our extensive library of algorithms (i.e. models).”
- Tookitaki: “Our DSS (decision support system) will empower businesses go beyond the barriers of existing statistical packages creating one-off solutions by offering production-ready, automated predictive modeling.”
All of the Innovators have a shot at winning this year and it’s harder to predict a winner because no one was clearly distinguished by a “wow” presentation (as Money.net was two years ago) or “super wow” technology (like TellusLabs last year). That being said, my inclination is to pick FreightWaves because they have a complete solution that very much fits in the futures world. I’m much less certain of my pick this year and we’ll see what the panel decides when the winner is announced on Thursday afternoon.
More on the Nasdaq Default
One afternoon session was entitled “Preparing CCPs for a New Regulatory Reality” but it, too, focused in large part on the Nasdaq Nordic default. Unfortunately, Nasdaq wasn’t represented on the panel which I suppose can happen when you program a panel months in advance only to have real-world events overtake your plans. Still, a last minute addition of Nasdaq to the dais might have been a good idea.
As it was, the battle lines, such as they were, were drawn between the CCPs, represented by Lee Betsill of CME Group, Matthias Gruelich from Eurex and the OCC’s John Fennell, on the one hand and FCMs (Chris Perkins of Citigroup) and customers (Courtney Garcia from PIMCO) on the other, with Travis Nesmith of the Federal Reserve Board as a sage commentator in between. The fact of the matter is that the system worked as it was designed to in the Nasdaq Nordic default and lessons will inevitably be gleaned from the wreckage, making the system more resilient and capable for the next black swan event that comes along. That is unless the perennial SITG/”alignment of incentives” debate spins out of control and the two sides dig in their heels, insisting on being right rather than finding a way to work for everyone’s mutual benefit. There seems to be far too much of the former in nearly every aspect of our lives these days. But I digress. Let’s hope that cooler minds prevail.
On to Day Two
The second and final day of FIA Expo features a hodge-podge of topics with an emphasis on crypto assets and it’s capped off with The Great Chicago Steak Out fundraiser (click for tickets) for the Greater Chicago Food Depository. I hope to see you there and I’ll file a report on the final to deliver to your inbox by Monday morning.
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