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The LIBOR manipulation scandal has led regulators to recommend new money market benchmarks. This article briefly reviews LIBOR and what the potential replacements will be. LIBOR LIBOR, or London Inter-Bank Offered Rate, is a money market benchmark/index, less than one-year, that has been used throughout the financial/capital markets since 1986.…

Volatility in the stock market was subdued through 2017 as can be seen in Figure 11. Many people began to sell volatility to capture this “non-movement.” In trading parlance, it is referred to as a short vol trade. But in February of 2018, the VIX had a massive move up…

Settlement risk has been part of the capital markets since its inception. Blockchain is the new kid on the block. Can Blockchain, sometimes referred to as Distributed Ledger Technology (DLT), help mitigate settlement risk or is it all a pipe dream? Speaking of pipes, the industry infrastructure (sometimes referred to…

Part I of this article discussed electronic trading, the differences between algorithmic trading (AT) and high frequency trading (HFT), types of systems/platforms, exchange traded versus OTC transactions, and other considerations such as colocation. In Part II, we will address different strategies and the three main flash crashes/events. Automated Strategies Strategies…

The Rise of Blockchain 2016 was the year that saw the rise of blockchain. Increased interest from the mass media, corporate titans across America, and the US government all led innovative approaches to using the technology. And one thing is certain – 2017 heralds much of the same trend. By…

Quite often, the media has pointed its fingers at electronic trading as the cause of various flash crashes. When delivering training on Electronic Trading, I often find that people are confused by the various terms and intricacies of this market. I thought it might be a good idea to give…

On April 6, 2016, the U.S. Department of Labor (DOL) issued its final rule expanding the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA), modifying the complex of prohibited transaction exemptions for investment activities in light of that expanded definition (the “Rule”).[1] This is…

Introduction to Counterparty Credit Risk The evolution of counterparty credit risk started with counterparty (credit) limits, settlement limits and exposure measurements such as potential future exposure. This progressed to the use of unilateral collateral, then the bilateral exchange of collateral. To assist in the pricing for the cost of dealing…

Overview of T+2 Settlement The late J. Carter Beese Jr., former SEC commissioner, gave a speech in 1993 where he famously said, “Nothing good ever happens to a trade between trade date and settlement date.” His remarks were meant to encourage the industry to shorten the existing T+5 settlement cycle…

Introduction to STACR and CAS Fannie Mae and Freddie Mac now have issued numerous credit risk transfer notes in this ever evolving market. This article summarizes some of the highlights of the issues/securities called Structured Agency Credit Risk or STACR, which are issued by Freddie Mac, and Connecticut Avenue Securities or CAS, which…

Enterprise Risk Management (ERM) Introduction Enterprise Risk Management (ERM) is one of the hottest areas in the risk management discipline today, with new advances in technology and communications creating both opportunities and challenges in the area. Experts have conducted considerable research in the field of ERM in the last fifteen…

Central counterparty clearing houses, or more simply central counterparties (“CCPs”), have emerged from the 2008 financial crisis as lynchpins of the global derivatives markets, and therefore, a critical part of the infrastructure of the global financial system. This article addresses the following questions: What are CCPs, and what role do…