What are the weekly options and the associated volatility.

Massimo Butti

Joel Winteregg, NetGuardians CEO’s was in Geneva for a short

interview. Data mining, fraud detection, complex data usage.

Trade reporting – towards convergence or equivalence?

By John Kernan

An extensive mkt analysis by Keith Grindlay for Q3 2016.

Do not miss our articles about Blockchain, Metals, CCP equivalency between US and EU, Energy in Brazil, Sustainability, weekly options

and much more inside this issue.

GENCOM Geneva 2016

Luis Colasante is providing is this issue an

extensive analysis of the European Power Market.

Newsletter Oct 2016. N°2

Shailesh Shoprah: what is operational excellence?

1st episode from our operational excellence corner.

2

GENCOM Geneva 2016

Newsletter N°2. 10/2016

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Blockchain. Thibault de Lajudie.

33

Table of contents

Editor: Xavier Perea.

Operational excellence: S.Choprah.

Norland.

Weekly options: Massimo Butti.

Interview: Joel Winteregg.

Watts. XaviPerea

FX Mkt review: Keith Grindlay.

27-30

Metals: Jochen Steiger.

Sustainability: Antoine Mach.

Energy in Brazil: Rafael Herzberg.

31-32

Gencom in brief.

Trade reporting: John Kernan.

Power mkt in the EU: Luis Colasante.

3

6-7

4-5

9&10

11&12

13-15

16-17

13 18-22

23&24

QCCP & Equivalency: Craig Donohue. 25&26

3

Xavier Perea spent over 25 years in the financial industry. Specialised in Stock

Exchange trades, post execution processes, complex settlements, process

optimisations, negotiations with Custodians and IT providers, he is also strongly

focussing in process re-organisations, technology and regulatory changes with

significant impacts on day to day operations.

Xavier Perea worked previously at Meeschaert Rousselle and Baring Securities

France, two brokers specialised in Bonds and Equities in Paris.

He then joined Instinet, the first electronic Broker, based in Paris and London. He

also worked at Deutsche Bank Geneva PWM as head of Settlements and Franco

department.

Dear Colleagues and Friends,

We are pleased to present to you the second issue of our newsletter (the third is already in the process of being finalized). An eternity compared to the first issue. Gencom was launched last month, but changing GENCOM’s format is permanent both from the standpoint of internal organization, the structural standpoint and vis-à-vis the member services. The newsletter is, in that respect, truly representative: changes of topics, editorial, colours, content.

Our first events have already been organized since our launch in September 2016, with a working session dedicated to Finfrag, a working session related to Operational Excellence, and the next one will be dedicated to Mifid II. Should you have other topics you would like to be covered either individually or in workgroups, do not hesitate to contact us.

We have, in the meantime, published two newsletters, met with a huge number of stakeholders of the banking and commodities world and Exchanges. Deliver, meet, stay tuned, this is the DNA of Gencom. And from this point of view, the topics to be covered will be numerous in the coming months: Workgroups, training, regulations!

The topic of 2017 for the industry and for Gencom will undoubtedly be Mifid II. It is fashionable (and very easy) to complain about the work performed by the regulators who “do not understand” the purpose of the business, the Mifid II framework is too complex (by requiring additional transparency and client protection), Mifid II is killing the business, it is too rigid, launched too late, in brief it was better before: let’s go back to the good old times.

But when were these good old times? Before 2008? We have seen where this took us.

The mission of GENCOM is obviously not commenting neither on the work of the regulator and the army of associated consultations, nor on the immense work of multiple stakeholders of our industries. Our mission is to help our members during these painful transition periods, to inform, to remain connected to regulation updates, to propose working sessions and valid long-term solutions. Mifid II is a big issue (some aspects will be truly painful) and will remain so until 2018. This means there remains still 15 months before the official launch.

Our mission is also to inform and this new issue is a good opportunity to talk about Blockchain, Metals, Energy Markets in Brazil and Europe, Operational Excellence, Transaction Reporting, Sustainable Finance, Options and Volatility. It was also an opportunity to meet Joel Winteregg, CEO of NetGuardians a growing firm specialized in banking security and data mining.

The entire team wish you a good reading.

Xavier Perea

Editor: Xavier Perea

4

Gencom. Dear Joel, thank you for welcoming us on your return from your trip. Who is behind the NetGuardians?

JW. NetGuardians was founded by Raffael Maio and myself, at the end of our engineering studies. This was also my

graduation thesis at the end of my studies. We both then spent time either in the laboratory or in the industry and

Raffael joined me during the creation of the company in 2007. We took the time needed to determine the scope and

business model, to make a lot of R & D; the gestation period lasted until 2011, the date of our first fundraiser. The idea

was therefore to replicate on a larger scale what we tested in Switzerland for domestic customers (Givaudan GIS) at

the time with the provision of IT security services, then directing NetGuardians to the banking industry.

GENCOM. Precisely, what are now the lines of development?

JW. The DNA of NetGuardians being highly technical, our solutions have integrated this DNA with a first line of

development that revolves around the fight against banking fraud and controls imposed by new regulatory standards

(Mifid). Common to both types of services is the "human mindset" with compliance checks, behavioural controls, fight

against fraud and against data leakage. The second line of development is geographical. We have opened units in

Nairobi, Singapore, we have strong ties with Cambodia, Africa. All turning around either the regulations or the anti-

fraud struggle.

GENCOM. It's a bit paradoxical, no, to have started in Switzerland and then to move immediately to export?

JW. It is paradoxical but we seized the good opportunities. 80% of our business is done abroad although our home port

is Yverdon. But we are strengthening the Swiss teams to boost our domestic market. At the start of this project, there

was no strategy about staying domestic or not: we were watching out for opportunities, they came from abroad which

enabled us to continue to develop both technology and services.

GENCOM: you were talking about technical orientation, what is your vision on technological developments?

JW. We partnered with some Core banking software firms by providing an operational risk management and human

risk management brick. We have driven product development so much and so far that we can now install it

everywhere. To give a simple analogy, we have a tool that could be compared to a big coffee machine, and in customer

terms, we apply some configurable capsules (with rules and complex algorythms). It's a somewhat simple but clear

picture when one is Suisse (laughs). And demonstrates the flexibility of our capsules despite their complexity.

Our business is about data mining and analysis of that data,

As NetGuardians CEO, Joël Winteregg both guides innovation of NetGuardians core

solutions and drives business development, with a focus on Europe and Africa.

He has headed the company since 2007, when he co-founded it with Raffael Maio. His

business intuition is matched by technical talent – it was Joël’s own research that led to the

prototype for the company’s intelligent behavioral analysis software.

As well as almost 10 years as an entrepreneurial business leader, Joël has solid experience

in R&D and as a software engineer, including as a security specialist with the Institute for

Information and Communication Technologies.

He holds both a degree in Software Engineering and a CISSP (Certified Information Systems

Security Professional) certification.

Interview: Joel Winteregg

Richard Watts

5

especialy by applying methods of predictive analytics, management and automation of complex controls or profiling.

All applied to the areas of fraud and regulation. The goal is to detect in real time through our algorythms and user logs,

fraudulent behaviour per institution. This level of automation of heavy complex controls and tasks (without added

value) allows the human to concentrate on high added value tasks.

The pillars of our business are human behaviour, the transactional and computer data. Finally, we are also investing

heavily in behavioural research. The technology investment is still coupled to the analysis of the human. You should

also know that 80% of bank fraud is internal. The relationship with the customer is very strong and we install our

system on their site. This requires us to be highly adaptable using open source technologies and Big data technology.

Since roughly four years, the Swiss industry has realised that technology is becoming increasingly important. The

awareness is high and competition from big players (Apple, Google) grows and evolves rapidly. When you think that

we just need to add an application to a mobile phone in order to be able to instantly pay for goods and services. This

changes the game.

GENCOM. If we look to the future, how do you see the next ten years?

JW. The human mind being what it is, that is to say very intelligent, there will be more work to do to fight against fraud.

The main topic moreover, is the collusion between two humans that divert the principle of the 4 eye control. Hence

the obligation to stay ahead technologically and automate the most tasks possible, including the Key risk indicators

(KRI) with synthetic views.

The data is existing, let’s analyse it in depth.

The great fear related to a reduction of head-count (this is one of the fears related to Fintech technology in general)

is not justified. However, we allow the skills to be redirected toward the detection and analysis sectors which above

all, reduces the operating loss partly or the risk of loss.

This is also applicable to other activities than banking such as Insurance or Industry for example. We test our system

with pragmatism and a positive opportunism in other segments. The future is prepared by exploring, even if the

Swiss banking world remains, from this point of view, to be explored.

GENCOM. How do you survive the start-up stage?

"Perseverance and listening!!! »

JW. This is a long term project, which comes from our studies, and what is exciting is the direction that is given to this

structure. We Raffael and me, were a coachable start-up originally and always remain attentive without being locked

into our bubble. It is also a question of perseverance to the extent that nothing is easy. What motivates us in the

morning, is the use by our customers of a technological baby that we allowed to grow, that changes every day, and

the path that lies ahead. It is also a baby that made us grow personally and humanly.

The coming years will be exciting, insofar as publisher of software, we are constantly confronted with technology

developments and export constraints, with the human being. Our next step is expansion of the teams including the

marketing part. The structure is being built and we participate in international forums.

Last Sibos (In Geneva) in this aspect was rather positive consolidating contacts and ideas that we develop. After all, we

went from two to forty people on three continents in a very short time.

GENCOM. Joel, last question, you are forced to go on a desert island and could take only one item with you. Which

would it be?

JW. My windsurfing board hoping for a wind between 4 and 6 Beaufort, side shore.

Gencom. Joel Winteregg, thank you for this interview.

Interview conducted in October 2016

6

Shailesh Chopra has held managerial positions for several years in electronics, automobile

and banking industry, with work experience in quality, process, production, works

engineering, and sales & marketing.

As Master Black Belt in Six Sigma and Lean, Shailesh is an experienced trainer, mentor

and coach in areas of efficiency and organisational excellence.

Shailesh has authored 2 books and is an active speaker in areas of quality, productivity,

client centricity and business excellence

Operational Excellence Corner. Episode 1

What's going on with operational excellence?

Experts at Wharton and elsewhere argue that what companies are experiencing now is not an indication of excellence

and probably a blanket prognosis for the rest of the economy. Bankruptcy, fines from regulators, job cuts, product

recalls etc instead highlight the weaknesses in the organization which were previously hidden.

This is regardless of the size, status or location of the organization. Lehman Brothers, General Motors, Toyota, Nokia,

Motorola, IBM, Kodak are a few examples of organizations which were once leading, but did struggle for existence.

The recent Edition of Samsung phone on fire, showcases the extent of damage. Until now, new products launch mess-

ups were handled by providing fixes, educating customers while bigger problems were followed by recalls and repair.

In case of increased severity, recalls were replaced. Scrapping the product itself inspite of recall // replace highlights

the extent of severity causing extreme damage to the organization.

It is unfortunate for a leading organization like Samsung to have such an experience. Their capabilities can't be

doubted, it is the same organization which challenged Apple by consistently selling more smart phone than iPhone.

Only capable organizations can lead and it would be naive to believe that Samsung doesn't have quality systems to

manage product life cycle. Samsung is a leading organization but can it be called excellent like many others? This

leaves us with a muted question:

Does excellence exist?

Let's give a thought and revisit this later. How to achieve excellence? Excellence means extremely high quality. It is

also understood as a superlative term meaning better than best. Some of the common practices adopted by

organizations to be on path of excellence are:

1) Excellence programs - 2) Best practices - 3) Talent programs - 4) Culture change

Excellence programs. These are usually company wide initiatives where top management carve out strategic focus

areas with the objective of achieving excellence. The common focus areas are productivity, cost, health, safety and

quality. There is commitment from top management and they closely monitor the progress. Organization structure

also reflects this and accordingly reward and recognition are aligned. To name a few:

Zero Defect Program: is one such program which is common in the manufacturing world. As the name suggest, the

focus is to eliminate defects.

Awards and certifications: industry has developed excellence frameworks which organizations tend to adopt. The

Malcolm Baldridge award, Shingo award, EFQM are few of such names. These frameworks are built on a holistic

approach with focus on sustainability, leadership, values and beliefs, processes. Such awards or certifications require

huge commitment across the organization.

Operational excellence: Shailesh Choprah

7

Best practices. As the name suggests, these are proven practices which are adopted by organizations, on their

journey to excellence. Lean, Six Sigma, Kaizen, CMMI, to name a few.

Lean: self-check out at supermarket, using iPad to place an order in restaurant are examples of Lean.

This is a breakthrough strategy adopted by organizations who wants to continuously improve and achieve excellence.

The name was coined in late 80s to share practices of Toyota Production System but as a concept it existed much

before. It is believed that Fords revolution of Model T was also based on same concept. Lean focuses on maximizing

customer value by improving flow in value streams and reducing waste. The Customer is placed in the center of

everything which helps in deciding if the activity is value adding or non-value adding. Efforts are made to increase value

from value adding activities and eliminate non value adding activities.

Cutting waste gets thing done faster and cheaper given the fact it will require less time, less people, less space etc.

The example of self-check out at supermarket vs traditional method of queuing, putting goods on conveyor belt,

waiting, scanning of goods by human cashier, bagging goods by cashier, handing over to customer, followed by

customer paying has waste in terms of movement, inventory and waiting time.

This is reduced or eliminated by self-check out which is faster and cheaper. Focusing on customers will make

organization more agile and proactive in catering to customers changing needs or demands. The traditional method of

ordering in a nice restaurant has inherent waiting time as once you are ready to order then have to get attention of

waitress, wait for her to come to your table and you have to repeat to her the order followed by additional waiting

time in passing the order to kitchen staff.

The waste in terms of waiting and movement are reduced or eliminated when the order is placed via iPad which links

directly to the kitchen.

It is a five step iterative process:

Identify value stream, Map value stream, Create flow, Establish pull and Make it perfect.

Six Sigma: On my way to the office, I purchase my takeaway breakfast from McDonalds. It usually takes average 15

minutes of time but I was really dissatisfied as today it took 29 minutes although yesterday it was very fast at 2 minutes

only. Customers feel variation and not average. It is very true as one foot on ice and other foot on fire will not be fine

on average.

Six Sigma is one such breakthrough strategy which focuses on reducing variations which in turn will deliver extremely

high quality. Variations leads to inconsistency thus driving up cost of poor quality. Six Sigma methodology unearths the

hidden factory which helps in building efficient and effective processes. A true six sigma process means having

probability of 3.4 defects per million parts or transactions.

DMAIC is a commonly used methodology for building capabilities of existing processes and DFSS is used for designing

new processes. DMAIC methodology consists of 5 phases

Define: the problem not solution.

Measure: the process capability

Analyze: for root cause by focusing on inputs that leads to defective outcome.

Identity: the alternatives and choose the most appropriate

Control: ensures sustainability of the improvement.

Six sigma is a thorough, systematic and rigorous approach which requires formal training across the levels.

Yellow belt is introduction, Green Belts is hands-on where they dirty themselves followed by Black Belts who are

experts and knowledgeable. Master Black Belt leads the initiative company wide and also trains, coaches and mentors

BBs, GBs & YBs. With this, we conclude this session of introduction to excellence and in next session will talk about

why leading organizations fail to excel.

8

9

New commodity bull market ahead of us!

Mining and commodities are a cyclical business and it looks like we move into the next uptrend despite low economic

growth in the world. It is time to come back actively in portfolios.

As SRC AG represents an extensive set of mining activities (17 companies) we know why those assets should come back

into portfolios. We handle those activities from the resource space, the exploration via TerraX, Advantage Lithium,

Birimian, Brazil Resources or Fission Uranium to development like MAG Silver, Rye Patch, Pershing Gold, Sulliden

Mining, Treasury Metals, Altona Mining or UEC up to smaller producers like Caledonia Mining and Sierra Metals or

midsize producers like Klondex and Endeavour Silver up to large gold producers like Sibanye Gold.

Our major focus is on quality, yield and dividends or future dividend payments as those are the new interest rates of

tomorrow. We strongly look at Copper and Lithium as those are the metals of future e-mobility and energy storage.

In addition comes silver, the number one metal for solar panels.

In addition, gold is obviously one of our main themes. Since 2008, who can safely guaranty our financial systems and

their integrity? This madness of negative interest rates is pure poison for our wealth today but also for the next

generations, Debts, non-secured assets, unstable financial systems.

Pension funds, life insurances and alternative savings for elder people will no longer achieve the yields they need for

their pay outs. Now it is probably the time for long term, serious and real investments meaning real values like physical

gold and silver and quality mining stocks as a diversification in portfolios.

Jochen Staiger was born in Stuttgart, Germany and is a trained banker and studied macroeconomics at University Lake Constance. After 13 years working in his own asset management company, he started a new venture in the professional Communication, Social Media, Online and IP-TV for mining companies. He is the founder & CEO of Swiss Resource Capital AG in Switzerland and also of Commodity-TV & Rohstoff-TV in Germany where he acts as a chief editor too and those Resource TV channels are currently one of the leading pure resource and mining TV-channels worldwide.

Mining stocks. Jochen Steiger

10

Precious Metals, Base metals and a lot other commodities like Uranium are is still very cheap and coming

into supply deficit 2016 and 2017 (nobody believes it so far so… ) . This is probably one of the big challenges

our industry is facing: people need to shift sleeping money from their banks into diversified, physical (real)

assets in opposition to complex, high risk products that sometimes you even leave in your portfolio forever

without looking at the real performance.

New commodity bull market ahead of us! Why?

Well the financial crisis dried the exploration financing completely out for years. All major players stopped or shrunk

exploration and as a consequence we have lost at least 5 years of exploration in the world. On the other hand statistics

told us that the demand shrunk during the financial crisis and we had an oversupply. This is only half of the truth as it

is correct for 2008 until 2013.

Economies are recovering slowly but surely and went back to small but significant growth! We can forget about former

growth rates in Europe and Japan as all the countries are in demographic trap. This is what we call for the future a

maintenance / replacement economy growth between 0.1 and 1% real growth p.a.

Shrinking population means everybody owns everything like 2 smartphone and TV´s, 2-­­3 cars, real estate etc. That

also means they only consume and spent money when they have to repair or replace something but people don´t

because they need it. In other words this adjustment happened in the commodity markets in the last 4 years and now

production shrunk to a level where we will see supply deficits like in copper and silver.

Copper and silver and also Lithium are the future energy storage metals and electric mobility metals.

That means demand will rise from 2017 onwards every year significantly: the experts formula 500+200 Kilometer

range (real 500 Km normal range + 200 Km reserve) for cars is getting more and more real in the coming years. This

means that the demand for e-­­cars will explode and with it the demand for the respective metals.

SRC AG in Switzerland is actively promoting this asset diversification, as well as other firm’s worldwide by delivering all the information about metals, mining, and investments opportunities that investors need. This via Commodity channels and TV (Commodity-TV & Rohstoff TV) by delivering permanently interviews with CEO´s, Funds manager, analysts, bankers and international experts. It is absolutely key that investors and mankind starts to take care about themselves in financial in order to be ready in case financial crash. Losing your savings and wealth by not controlling your assets diversification is no longer an option. Metals will help on maintaining yield and portfolio safety. When a financial disruption occurs, the first thing a bank wants from you is the monthly payment for your loans, credit and amortization. If you are unable to do so, your real estate is sold via auction. And this takes place very fast, far from the real price. Mining stocks and physical metal is a must have in this environment. It is also time to look at it and a perfect way to take care about your financial affairs: ask critical questions to your banker; do not hesitate to contact professionals. We are ready to help you with accurate and relevant information. The next bully cycle in commodities has started! For minimum 3-­­4 years we will see interesting developments. Participate in it with profits, dividends and wealth storage and much more security. In addition a nice wine cellar helps too….

11

Rafael Herzberg is a partner at Interact Ltda an energy consulting company based in

São Paulo, Brazil, since 1992.

From 1987 to 1992 he was the CEO for ELTEC one of the leading manufacturers of

electrical power connectors and accessories in Brazil, where he started his career as

an electrical engineer in 1976.

What’s changing in Brazil in the energy/power arena?

A BIT ABOUT THE RECENT PAST

Important changes are taking place in Brazil. For decades in a row, the Federal Government used to send strong

signals (basically using rates) to stimulate energy/power usage according to specific interests. In the 1980s the

country was facing a hard time when it comes to its balance of payments. Oil was imported and a large account. So

the Government decided to come up with very attractive power rates to stimulate the replacement of oil based

processes by electric power.

In the 1990s it was the TOU - time of use rates - that were introduced in a commercial scale. Corporate energy users

were stimulated to shed load during peak hours or operate gen sets so as to considerably reduce costs.

In the 2000s there was the commercial inception of the deregulated power markets. Industrial, commercial and

institutional energy users were stimulated to migrate from the regulated to the deregulated market given the hefty

savings to be captured.

More than a decade later, and there are no specific signals emanated by the Federal Government.

THE CURRENT CHALLENGE: Right now we are facing new times in Brail. It is up to each individual corporate energy user, “read”

the situation and accordingly decide what to do! Simply put because no one is sending firm, simple and plain signals that may be

easily understood and most importantly, transformed in actions. It is a huge difference actually. From a reactive posture to a

proactive one. It means that now it is up to the end user “go for it” or not!

THE NEW DECISION MAKING PROCESS: Historically, given the signals sent by the Government, the corporate world used to

operate in a very simple way. Let us assume the very low power rates that were offered in the 1980s. The technical guys would

calculate savings by replacing fuel oil (for example) by electric power and the required capital investment to acquire the

associated equipment. Most often than not, the payback was extremely attractive, so upper managers would easily bring this

opportunity to the C level for a decision, soon the deal was closed and savings happened as predicted. Everybody was happy!

So the decision making process started from the lower ranks and migrated till the upper management.

These day it is up to the upper managers to understand what’s going on with the energy/power markets, make sure they identify

the risks at stake and come up with strategies that may properly mitigate them. It is a whole new game! The decision making

process starts with the upper management and only after a solid evaluation of the whole scenario is made that the lower

managers are called to participate.

IT IS ABOUT RISK MANAGEMENT: we never have before, here in Brazil, faced such a new situation. As opposed to placing our bets

in a single move, now it is about risk diversification. It a completely new approach. The traditional way of checking opportunities

was comparing options using historical info. Now it is about simulating future scenarios involving regulated rates and deregulated

prices considering the list of energy sources available such as power, biomass, natural gas, diesel among other depending on each

specific situation. It is a lot more challenging! Accordingly, the “sensible” fashion is developing a portfolio of solutions so as to

diversify risks and have a consistent energy package that may be more resistant to the market’s mood swings!

Energy mkt in Brazil: Rafael Herzberg

12

How to craft a well-balanced strategy considering the boundary conditions and the external ones?

ABOUT THE POTENTIAL SOLUTIONS:

A full menu of options should then be considered:

Energy efficiency projects. From low-cost-or-no-cost ones to capital intensive ones. From energy management to power

projects including onsite generation, cogeneration and higher voltage access to the public grid

Energy contracting .Energy sources to be procured using strategies to cope with the volatility that are usually there

when it comes to deregulated markets

Produce in house and/or outsource strategies. Depending on the expected business conditions in Brazil vis-à-vis

competing countries, set up a strategy to combine the best cost-effective solutions using a global strategy.

NEW SKILLS ARE REQUIRED: Risk is the new animal in Brazil. Decision makers now have to go for well-educated processes

because the situation is way more complex than it used to be when it was merely about following signals emanated by the Federal

Government. Historically decision were made by technical guys. Now it is about risk management and this is basically a business

issue.

A WHOLE NEW WORLD, TO BE DISCOVERED AND EXPLORED: The energy/power arena in Brazil is now exposed to the global

competition. In-country solutions must show a competitive cost otherwise it doesn’t make sense from a corporate prospective.

Why should a company produce in Brazil if it can be cheaper elsewhere? Of course there may be other important factors to be

considered but in many cases this question will be raised and good answers must be there!

ENERGY IS ABOUT TECHNICAL, FINANCIAL AND MANAGEMENT ISSUES: Energy and power is about business! And as such

technical, financial and management aspects must be fully considered. The energy and power bill is a Top 10 cost for corporate

energy user, most often than not a Top 5. One important trend is that this cost will get its proper value in the board rooms and in

the upper management rooms as well. So far in Brazil, this cost was not really considered according to its size, because the

prevailing perception was that it was all set and nothing of importance could make a change.

From now on the energy and power bill will depend, and a lot, on the upper managers and board

members. Welcome to this new world!

13

Senior Fund Manager for US AM, Head of Fixed Income / Forex Derivative Teams and global

Macro Strategist and consultant, Keith Grindlay is delivering Macro Thoughts his independent

research tool drawing on his considerable experience in in Fixed Income, Futures, Derivatives,

Bond, Forex, Commodity and Equity Index markets and strong Global Macro investment,

trading and strategy background.

At top tier investment banks Keith has established and led Fixed Income and Forex teams,

and at JP Morgan he managed Global Macro Fixed Income investments as Senior Fund

Manager. Keith has strong analytical skills, aligned with a particular aptitude for anticipating

global economic events ahead of the majority of commentators.

For a decade prior to the crash, central banks talked of price stability and relied on low wage growth to maintain low

inflation, while allowing credit to get out of hand and commodity prices to balloon. Now they are trying to match their

data points to that same decade, suggesting that was the norm. The crisis, however, created structural adjustments,

changing US consumers from spenders to savers, and global growth contracted, ending the golden age of the BRIC

nations. Despite devaluations and trillions of dollars spent on QE, disinflation from competition, consumer deleveraging

and protectionism in trade has meant that, repeatedly, global GDP has been overestimated. There needs to be a change

in economists’ thinking and central bank policies, to understand that this is the norm.

Federal Reserve Labour Market Conditions Index

Following this month’s Non-Farm Payroll data, the release of the Fed’s LMCI (Labour Market Conditions Index), suggests

November’s and December’s meetings will be as close as September’s. Tighter financial conditions that have been warned

of by Macro Thoughts continue to impact globally. BOJ Governor Kuroda has said they do not intend to increase stimulus

in the near future, unless there is a shock, while the minutes of the FOMC’s September meeting showed how close they

came to raising and last week's US 10year Treasury auction was issued 10bp higher than last month’s, at a rate of 1.793%.

The Fed, that gave guidance of four rate hikes in 2016, has now reduced its long term growth expectations to 1.75%,

(post-crisis GDP has averaged 2% compared with a pre-crisis average of around 3%), and this, Stanley Fischer said,

reduced the long run equilibrium of Fed Fund rates by circa 120bp.

Macro Thoughts: Keith Grindlay

14

The Fed’s PCE target has not been achieved since April 2012, with growth for the first half of 2016 of around 1% and

Real Average Hourly Earnings being negative for the past two months, (-0.1% in September and only 1% yoy). There

is, therefore, no need to hurry with rate hikes, though Macro Thoughts believes a ¼% Fed Fund increase in September

would have had limited impact, especially as LIBORs were already elevated. Average GDP over the past 4 quarters

has dropped to around 1.3% and, unless a print of circa 3% for Q3 and Q4 is achieved, 2016 growth will be

substantially below even post-crisis levels (Macro Thoughts expects circa 2.6%, as some inventories that have

recently been drawn down are replaced).

Minutes of the Federal Reserve’s September meeting emphasized the importance of maintaining credibility,

therefore markets might have expected speeches from Janet Yellen and Stanley Fischer to give some semblance of

a coordinated policy. Instead, both went in opposite directions, using economic models and theory, rather than

considering the real economy. They are concentrating on the supply side as the driver of growth, failing to

understand that it is demand that now drives supply and therefore growth. With labour market conditions

deteriorating, higher oil prices, a Presidential election and Dollar strengthening, US consumers may start to feel

pressure heading into the Christmas and Thanksgiving holiday season and judging the employment situation will

become increasing difficult. Macro Thoughts highlights each year that there is a need to assess the average NFP

release from October to March, as the seasonal hires and fires over this period can make data inconsistent and

volatile.

Investment has been weak, despite low interest rates, but low levels of CAPEX can hardly be a surprise when CEOs

can see their companies’ share prices increasing without having to take any investment action. Globally, CPI data has

already started to move higher, mainly due to the base effect of increased energy prices feeding through. China’s

higher wholesale prices have been highlighted in Macro Thoughts since June, as coal prices have doubled and PPI is

positive (0.1%) for the first time since 2012, compared with April’s -3.4%.

Macro Thoughts has warned of the consequences the BOE’s policies that are aimed at weakening sterling. While the

MPC say they are willing to see through higher inflation (interestingly, only 12months ago they were arguing to raise

in anticipation of higher inflation), their inexperience is showing, as inflation in the UK is notoriously hard to

control. Next week, UK markets will be focused on the Industrial Trends survey of the CBI, (previously -5), as well as

on Mark Carney, listening for any hint on future BOE policy when he speaks on Tuesday. Preliminary GDP will also be

released, with 2.1% expected for Q3, unchanged yoy.

The confrontation between Tesco and Unilever, as well as comments and profit expectations from Nestlé this week,

suggest UK supermarket price competition is hurting the suppliers, and therefore food price increases may add to

the upturn in inflation. Macro Thoughts August 4, 2016 warned of higher inflation, despite markets not pricing this,

therefore considered 10year Breakevens at 2.36. A small balance might still be held for higher, as markets have

traded to 3.12.

Current EU leaders are now aligning themselves with the old guard politicians of the past in an attempt to maintain

their positions, whilst there are newer faces and emerging parties that are looking for change, some of which may

even have a degree of sympathy with the UK, even if they don’t wholly agree with Brexit.

Macro Thoughts forecast US 10year yields falling to

1.35% in the end of 2015 review, and has since

considered a range developing of between 1.25% and

1.75%. Globally there have been some significant flows

in Treasuries, mainly through central banks, which may

have pushed yields through 1.75%.

The BOJ policy freeze, targeting zero for 10year JGBs, has

implications, though more in the curve than duration.

Japan had the largest investment outflow since 1987 and

China’s currency devaluation reduced US Treasury

holdings to close to a 4year low.

Since the infamous ‘flash crash’ in GBPUSD, Macro

Thoughts has expected Sterling will ‘hold a range in the

mid-1.20s, and may well trade back above 1.30’, and

suggested monitoring AUDGBP for signs of volatility.

The move may now be in the Euro, reflecting Draghi’s

policies, the strengthening USD, and political uncertainty

in Europe.

Real money accounts appear to already be short of the

Euro, though Hedge Funds may still be on the sidelines.

15

UK CPI 12-month inflation September 2006 to September 2016 (ONS)

Greece is still negotiating debt issues and Portugal is just about holding on to its credit rating with DBRS, which allows

the ECB to continue its bond purchases. The ECB will not be sympathetic to any future possible downgrade and

pressure will be put on Portugal to prevent any further volatility in its bond prices, which have been the poorest

performing of peripheral European bonds this year.

Draghi has signaled to expect an extension to ECB QE, which will need some adjustment to its purchases, as 63% of German

Bunds are no longer eligible for purchase, since their yields are below -0.4%. As Bund futures volatility has recently dropped

towards a five year low, some hedging of risks might be considered, either in listed products or in OTC swaptions.

Keith Grindlay October 21, 2016.

Kgrindlay@macrothoughts.co.uk www.macrothoughts.co.uk

Disclaimer: Macro Thoughts are a commentary, not investment research or advice – they are for information only and should be

regarded as unregulated by the Financial Conduct Authority. While several people have my agreement to forward Macro Thoughts, I

would appreciate being contacted first.

Some would like to add to sanctions on Russia,

though Renzi, who is beginning to look ever more

isolated, was less inclined.

. The Italian aircraft carrier meeting with Hollande

and Merkel appeared to change Renzi’s mood,

making it likely that he was left in no doubt that

there was a need to prevent an Italian election

following the referendum, especially as the

election calendar in Europe was already full. Renzi

was once seen as the reformer, sweet-talking

Merkel, and essential for stability in Italy, but over

the past 6months the 5 Star Movement has gained

in popularity, pushing him onto the back foot.

16

Blockchain: Thibault De Lajudie

Herzberg

Thibaut de Lajudie is partner at Ailancy, a Paris based management consulting firm

specialized in the financial industry. After 10 years in consulting (in Odyssey and

Eurogroup), Thibaut joined Ailancy in 2008 where he became partner in 2009. He

is in charge of the Investment Services & Asset Management practice since 2015.

He has extensive experience in strategic positioning studies, in improved

operational performance and profitability, and in managing major information

system projects. He is recognized for his know-how of Market Infrastructure.

For the past two years he is especially involved in projects related to MIFID 2,

Target 2 Securities and Blockchain. He is in charge of managing the Blockchain

Working Group at AFTI the French post-trade association.

Prior to joining REGIS-TR, John was responsible for Clearstream's custody product

suite. He has worked in the securities industry for more than twenty years and

previous roles include Head of Custody Operations for State Street Custodial

Services Ireland. John has lectured on custody and registration for the Irish Funds

Industry Association, represents REGIS-TR on industry bodies and regularly writes

and speaks about European trade reporting regulation

What should I do with my 2017 Blockchain budget?

In 2016 “Blockchain” entered common stream language; meanwhile the number of

companies that allocated a budget to it stayed low.

The recent disappointment around The DAO and the difficulties met to design business application

slowed down the keen interest that was present in the beginning of the year. However, at the time of

the construction of the 2017’s budget, rare are the companies that didn’t plan a Blockchain budget.

The main issue to be addressed is the methodology and allocation of this budget: Where should I begin the transition

toward Blockchain’s technology? What are the business processes I should rethink? How will information system

architecture be impacted? Which is the most appropriate framework (Bitcoin, Ethereum, NXT …)? Should we

experiment alone, with clients, with competitors, or partners? What governance should we establish? Should we

choose a permissioned, permissioneless or hybrid model? What impact on compliance and client data protection?

What features of the business process should be designed in the upper layer (API) and in the lower layer (Blockchain’s

protocol)? What return on investment should I expect?

In the banking industry, the significant disintermediation and decentralization power of Blockchain brings real

benefit to players at either end of the chain; the issuers at one end and institutional and private investors at the

other. All activities related to transaction controls, position keeping and reconciliation, data quality management,

regulatory and client reporting will likely disappear.

It is difficult to anticipate the extent of the revolution at this stage, as many questions remain unanswered and the

benefits, particularly financial, are complex to model.

The technology has already been proven in relation to payments: Bitcoin, a public Blockchain, has demonstrated its

reliability and safety. Although concerns have arisen following the failure of certain intermediaries (MtGox

bankruptcy), the robustness of the technology has never been questioned. The control and reliability of the players

in the ecosystem should be included in the analysis.

The maturity to model other asset classes is currently low and a number of prerequisites need to be met, such as

legislative framework, confidentiality, volume management, processing costs associated with consensus methods

and the modelling of complex events.

Some of these prerequisites are already being addressed through the technological advances included in new

generations of Blockchain and thanks to the ecosystem of solutions that are developed around it. However, due to

certain constraints of public Blockchains, “private” or “federated” Blockchain initiatives are starting to emerge. In

particular, they allow users to define different access rights depending on the type of participant (read, write, control

and audit).

17

We believe two types of use cases will be developed:

1. “Reference” use cases, (KYC, contracts, products, financial instruments) that have relatively low constraints.

These use cases have already been tested and implemented in a number of establishments. The next step

in the medium term will be to establish a common protocol across multiple establishments.

2. “Transaction” use cases, whose modelling complexity varies according to the asset class considered. Thus,

working from the simplest to the most complex transactions, development should gradually include bonds,

private equity, unlisted securities, auction-only securities, and finally, continuously traded securities.

Asset classes for which it is not required to distinguish the trade date and the settlement date (cash

equity market) will be the most impacted due to gradual convergence between those two dates.

On the other hand, when two counterparties are dealing futures contracts, trade is not settlement. Furthermore,

at this stage, Blockchain is not able to net transactions in order to optimize deposits and variation

margins.

Blockchain will be more useful in the commodity industry to improve insurance processes. Smart Contracts are a

key concept of Blockchain technology. Their aim is to secure an automatic execution of guarantees between

anonymous counterparties.

Smart Contracts with IoT (Internet of Things) will allow automation of insurance expertise and premium payments.

For instance, weather insurance should automatically pay premium if a trusted third party called an Oracle (i.e.

Swiss Meteorological Institute) informs Blockchain that a condition has been fulfilled.

Similar processes could be implemented on freight ships, trains and trucks to assess in real time quality

or risks.

In preparation for this change, the industry need to have a critical understanding of the processes throughout the

entire value chain and anticipate the tasks that could disappear among all stakeholders; both internal and external.

Training efforts, in order to identify the potential practical cases, as well as experimentation through internal or

inter-establishment Proof of Concept (POC), should increase competence levels and allow the impact to be tested

on tools, organisations and service offerings.

18

Towards a single European power market.

On 25th February 2015, the European Commission has adopted its strategy for a European Energy Union.

The goal of a resilient Energy Union with an ambitious and challenging climate policy at its core is to give EU end-consumers a

competitive, reliable, sustainable, and affordable energy market. However, with aging infrastructure, insufficiently integrated

markets and uncoordinated energy policies, the end-users do not benefit of the large array of choices and lower energy prices. It

is time to create a single energy market in Europe without barriers between national borders, allowing EU energy consumers to

acquire their energy where the energy cost will be less expensive.

The European Commission aims for 2030 a minimum of 40 percent cuts in greenhouse gas emissions,

As well as 27 percent share for renewables energy and 27 percent improvement in energy efficiency. If so, the power market will

be one of the most affected by these measures and if one compares the power market today in relation to the power market five

years ago, one can conclude that the power market has evolved and its three main changes are:

I. Increase of renewable energy;

II. Reinforcement of the market price signal used by investor and;

III. New electricity market rules CACM voted in July 2015.

Figure 1 • Capacity addition in OECD Europe by technology, 1960-2014

Power in Europe: Luis Colasante

Luis Colasante is the Group Energy Manager and Head of Economic Research at

Sogefi Group. He is in charge of developing the Group energy strategies and

policies; as well as macroeconomic research for the Purchasing Commodity

Department of the Group. He provides analysis in forex, interest rates,

commodities as well as energy trading strategies and hedging.

Luis was previously the Lead International Energy Trader of Sogefi Group (2012-

2014). From 2009- 2012 Luis was Energy Manager at Exelcia, developing “Energy

Certificates” and he worked at EDF, Engie (GDF-Suez), Petroplus and other listed

energy companies. Luis has published works including paper concerning energy

saving (Ecole des Mines de Paris), and has also been invited as speaker in

different energy related meetings. Luis as a Master Degree in Quantative

Finance from the University Paris Dauphine, a Certificate in Quantative Finance

I & II Ecole Nationale de la Statistique et de l’Administration Economique

“ENSAE” and a Masters Degree in Energy Systems and Policies from the Ecole

Nationale Supérieure des Mines de Paris and Luis holds a Bachelor’s Degree in

Mechanical Engineering from University de Los Andes (Mérida-Venezuela).

Prior to joining REGIS-TR, John was responsible for Clearstream's custody product

suite. He has worked in the securities industry for more than twenty years and

previous roles include Head of Custody Operations for State Street Custodial

Services Ireland. John has lectured on custody and registration for the Irish Funds

Industry Association, represents REGIS-TR on industry bodies and regularly writes

and speaks about European trade reporting regulation

19

The year 1990 marks the beginning of the power industry restructuring in OECD Europe, with increased development of natural

gas and especially of renewables. Overall, since 2000, renewables have met 62% of growth in capacity in OECD Europe.

Source: IEA. Re-powering markets: Market design and regulation during the transition to low-carbon power systems (EC-IEA

Roundtable on electricity market design and regulation). February 18, 2016.

The two first changes have been a challenge for the power market and the third one is the response at the European level for

cross-border trading.

I. Increase of renewable energy.

The competitive power markets demands the need of decarbonizing. The rapid increase share of intermittent renewable power

generation has introduced new challenges for the electricity market.

Figure 2 • Expansion of renewable energy sources in Germany

The number of renewable power plants has grown exponentially over the past 14 years.

Source: Federal Ministry for Economic Affairs and Energy.

Innovative technologies to mitigate climate change.

Renewable electricity operators are subject to numerous factors that may alter the expected energy production for the time of

delivery, such as weather variations, e.g. less sun or wind. As this commodity is sold in advance, enough electricity must be

produced to ensure the supply to the end-users.

The increase of the share of renewable energy is a challenge for the spot market and the market needs flexibility, being

“flexibility” the key word. The share of renewable energy has created high fluctuation on the supply side, which brings high

volatility in the electricity prices. The answer of the market participant is to use flexible power plants as CCGT (Combined Cycle

Gas Turbine) that can be turn-on in short-time and the implementation of demand-repose mechanism that help to have

flexibility on the demanded side.

As result of the high fluctuations on supply side, the market forces the use on the spot and intraday electricity markets;

meaning more electricity trading occurs close to the time of consumption. In the last five years the volume traded on the spot

market has increased 31 percent and the last year the volume increased 6 percent.

On 2015, the electricity spot market represented 15 percent of the total wholesale market, included the exchanges and the

wider over-the-counter. In Europe the total whole market is 8.517 thousand TWh/year.

II. Reinforcement of the market price signal

Investors are more confident about the role of the price signal, despite of distortions of the massive and rapid introduction of

intermittent renewable energy on the market. Investors use more and more signal price markets to do new investments which

are needed to ensure the security of the power system. The market needs scarcity prices and to send the right signal price.

20

This signal has been reinforced in the last five years, even with the increase of renewable energy that produces distortions on the

market prices. Today with wholesale electricity prices that are low in all Europe as result of three key factors: Increase of

renewables, economic downturn and overcapacities. The operators of conventional power plants are forced to put offline their

assets. If a power plant sells its electricity on the market at 20€/MWh and the production cost is 30€/MWh, it will be compelled

to stop its production.

Figure 3 • Year-ahead forward market prices [€/MWh]

Long-term arrangements are still needed to make up the difference in low-carbon generation costs, and keep financing costs low

for capital-intensive investments.. Source: EnergyMarrketPrice/Luis COLASANTE

1. Production should not continue when there is oversupply as indicated by negative electricity prices;

2. Renewable operators will have to share the same level of responsibility as conventional operators do for the

balancing;

3. The priority for dispatching rule, i.e., renewal energy is the first one to be used. This priority should be

reconsidered, because both the feed-in tariff mechanism and the dispatching rule make it far more attractive than other

kind energies, such as nuclear, natural gas and coal power plant, which have made investments in the last 10 years.

It is necessary that renewable energies can be integrated

into the market.

The support of these technologies was made by a

mechanism of “feed-in-tariff” and the result was an

increase of the share of renewable on the production

park.

Therefore, it was necessary to kick-off this technology.

Five years later, the mechanism needed to evolve

because the technology was mature enough to be

integrate into the power market.

Therefore, some European countries envisage to

change to a “capacity-based funding” by a bidding

system.

The renewable operator will be asked to support its

capacity by a competitive way, and he will also have extra

revenues selling its electricity to the wholesale market.

In the last few years, the integration of renewable energy

has been dissociated from the power market. The

wholesale is under pressure due to a competitive power

market and in the other side, the government decreeing

the price of electricity for the next decade neither does

help.

I consider that the integration of renewable energy

should be carried out in four steps:

Renewable operators will have to offer their electricity at a

marginal cost, when is zero (0€/MWh) in the case of wind

power;

21

To optimize the power systems, the renewable operators will need to offer their electricity at a marginal cost, which is zero in

the case of wind power, the bid can be 0€/MWh. The operators need to turn off their production when they are an oversupply as

indicated by negative electricity prices on the market and the renewable operators have to take responsibility of balancing at the

same level of conventional operators and the priority of dispatched need to change.

Figure 4 • German day-ahead baseload [€/MWh]

Negatives prices appears when they are more production than consumption. Source: EnergyMarrketPrice/Luis COLASANTE

The new market design and the new support of renewable energy have to evolve to incorporate the competitive power market,

minimizing the distortion of market signal.

III. New electricity market rules CACM

On July 2015, The European Commission has adopted the new electricity market rules CACM (Regulation establishing a Guideline

on Capacity Allocation and Congestion Management) with an ambitious and challenging target in order to have a single European

power market. The new regulation creates a comprehensive legal framework for electricity trading in Europe and make the so

called “market coupling”, legally binding across the European market coupling essentially bringing all bids and offers from

different national power exchanges for cross-border trading into one basket (electronic platform) and allowing them to operate

in an optimal manner across borders, matching capacity managed by transmission system operator (TSO) of sold and purchased

volumes of electricity on the Day-Ahead and intraday power exchanges. Market coupling is estimated to save European customer

between €2.5 and €4 billion per year.

The regulation will help to increase trading of electricity over shorter period.

This will allow more efficient integration of renewables into the grid, while suppliers and traders can take into account better

forecasts on how much solar or wind energy will be produced. The European’s Commission new decision-making procedure,

which enables effective regional cooperation among grid operators, power exchanges and regulators, allows a «legal framework

for electricity trading in Europe». Until now, I have described the way the power market has evolved. However, it is important to

highlight some of the regulatory and market constraints faced by the power trading sector.

Not all European countries have the same flexibility issues. Germany being pioneer in the development and implementation of

renewable energies requires a more flexible regulation framework, whereas other countries; such as France, Belgium, UK, Spain

or Ireland, which are more concerned with spike consumption in the winter period. These countries have put into place Capacity

mechanisms but each one in a different way.

In France the mechanism is decentralized. It means that each electricity supplier has the obligation to justify that it has enough

production capacity to survive in the spike consumption period of their costumers’ portfolio.

22

In the UK on the other hand, the mechanism is centralized. It is the TSOs that have the obligation to insure the capacity for the

spike hours.

Figure 5 • Neighboring capacity markets in selected countries of Western Europe

Lack of coordinated European capacity mechanisms

Source: IEA. Re-powering markets: Market design and regulation during the transition to low-carbon power systems (EC-IEA Roundtable on

electricity market design and regulation). February 18, 2016.

Other difference is the type of support for each MW installed and available. There is a large price difference between each

country. For instance, in Spain the MW can be remunerated around 20,000 €/MW, in Ireland around 70,000 €/MW and in Greece

90,000 €/MW. The average fixed cost of O&M (Operation & Maintenance Services ) for an efficiency CCGT is around 20,000 €/MW

and the total fixed cost is around 120,000 €/MW. It means in some countries more that 50 percent of the fixed cost is covered by

the capacity mechanism.

As a main contradiction on the one hand, the European Commission wants to have a single power market and simultaneously on

the other, each European country is putting in place different policies of capacity mechanisms. These different polices will create

more distortion in the market price signal. If there’s confidence in the market price signal, the capacity mechanism will no longer

be needed and it would be rather redundant. However, if a country decides to implement this mechanism, the most affected will

be the end-users, as a result of the price increase. This mechanism should be a transitory measure, while the energy transition is

achieved. Paradoxically, there is a will at the European level to encourage the use of new technologies, but it seems hard enough

to let go old ones. The security of supply is also an important issue that Europe follows very closely. Europe plays an extraordinary

and ever-growing role to ensure the security of supply. The safer the cross-border trading is, the better the provision of power

will be, guaranteeing the security of supply.

A major advantage of Europe is the fact that the maximum demand for power for all countries never occurs at the same time;

therefore, at a given time power can be provided to or received from neighboring countries. The cross-border will make a decisive

contribution to satisfy energy demand. Europe needs continuing to invest in the expansion of the grid. One of the obstacles is the

local population in the affected areas do not welcome this fact. All players on the market have to act towards the new energy

design. This can only be done with a successful expansion of the grid. The expansion of the grid doesn’t only have a positive impact

in balancing and smoothing the price, but also in the C02 emission, since the energy will be sent from where it is abundant to

where it is needed.

Since European internal market is growing in all countries, individual markets in each state member are no longer isolated.

Therefore, there will be greater opportunities if the market coupling is abided by all countries from Portugal to Finland, increasing

the efficiency of the market and in the derivatives contracts. However, a single power market requires a common essential

understanding and coordination regarding the market design. This subject needs to be addressed at the European level because

at present, there are different approaches to a future market design. The best way to work will be: a customized model for all the

countries in a common single market, rather than to find individual answers for each country.

23

Trade Reporting: John Kernan

Herzberg

Trade reporting – towards convergence or equivalence? Since the financial crisis, the role of trade and transaction reporting as a guarantor of market transparency has grown

exponentially in the eyes of regulators around the world. Having said this, each regulator has had their own specific

agendas and focus points, leading to non-harmonised reporting standards globally.

The importance of addressing this variance is clear, and a requirement for the data reported to be meaningfully

comparable across jurisdiction. Having said this, there are alternative approaches to rectifying this data variance,

and in this piece I would like to highlight two approaches (which may or may not be mutually complimentary, and

both of which present their own challenges.)

Convergence The first approach is convergence or harmonisation. An example of this approach can be seen in the evolution of

MiFID into MiFID II/MiFIR. A European “directive” like MiFID II requires transposition into national law, and means

that national regulators can enhance the requirements laid out in the directive, leading to different approaches taken

by the member states. As a “regulation”, however, MiFIR is applicable in the same way across the entire EEA.

The new rules therefore take into account both the specificities of individual member states, while at the same time aiming to

bring harmonised standards across the whole EEA. For example, investor protection and governance issues appear in the

directive, as they could never be transposed without taking into account member states’ specificities in their financial system. On

the other hand, it would have been pointless to set up different transaction reporting templates, as the purpose is to monitor the

activity across the EU for a single issuer, hence their presence in the regulation rather than the directive.

As well as harmonisation across member states, there’s also an important harmonisation activity being undertaken among

other regulatory initiatives in relation with MiFIR. Certain realignment works have been made by regulators in relation to other

reporting regimes (e.g. EMIR) and we can see a convergence in terms of reporting formats, technical processes and required

data fields as many pieces of information are the same across different regulations.

However, it is impossible to completely harmonise the requirements given that the different reporting regimes exist for

different purposes. For instance, given distinct nature of EMIR and MiFIR reporting, the information required to be reported is

quite different and it would be hard to effectuate a joint reporting as it was initially planned.

John is Senior Vice President and Head of Product Management at the

European Trade Repository, REGIS-TR. He has executive responsibility for

product, marketing and communications strategy for the business across

multiple regulatory reporting requirements including EMIR, REMIT, FinfraG,

SFTR and MiFIR. Working closely with market participants, regulators and

industry associations, his team interprets key regulatory reporting banking

regulation, identifies business requirements and translates this into product

releases and sales strategy.

Prior to joining REGIS-TR, John was responsible for Clearstream's custody

product suite. He has worked in the securities industry for more than

twenty years and previous roles include Head of Custody Operations for

State Street Custodial Services Ireland. John has lectured on custody and

registration for the Irish Funds Industry Association, represents REGIS-TR on

industry bodies and regularly writes and speaks about European trade

reporting regulation.

24

Equivalence Harmonisation of standards therefore as we can see has limits – which are compounded even more so once you move out of

the single market area of the EU and into the world more widely. Again here there is still a need to have some level of

comparability across regulations in the field of trade reporting. In other words, across jurisdictions, there is also a need for

regulatory equivalence between the relevant regulatory bodies. We can see a current example of this in the implementation of

the Swiss Finanzmarktinfrastrukturgesetz, also known as FinfraG. As a brief background, FinfraG came into force on 1 January

2016. It regulates:

The organisation and the operation of financial market infrastructures, for example, stock exchanges and central

counterparties;

The trading of derivatives;

The conduct of business rules, for example, insider trading and market manipulations, shareholding disclosures and

public takeovers offers.

The main rationale behind FinfraG is to align the Swiss regulatory framework with international standards, in particular with the

EU regulations (MiFID II, MiFIR, EMIR and CSDR) with a view to preserving Switzerland's global competitiveness. Specifically

regarding derivatives trading, FinfraG introduces broad changes to the Swiss derivatives market and aims at increasing

transparency, reducing counterparty and operational risk in trading as well as enhancing market integrity and oversight. It

introduces four main duties for derivatives trading:

Reporting to a trade repository

Mandatory clearing through a central counterparty for large counterparties (for both OTC derivatives and ETDs)

Trading through a stock exchange or a trading system

Risk mitigation - OTC derivative contracts not cleared through a central counterparty will be subject to the following

obligations : Exchange of transaction confirmations between counterparties / Portfolio reconciliation / Dispute

resolution/ Portfolio compression / Daily valuation / Margin requirements and exchange of initial margin

On the trade reporting side, for FinfraG, full equivalency is not yet in place between the relevant EU and Swiss regulators (ESMA

and FINMA respectively). Whilst FINMA has recognized EMIR as “provisionally equivalent”, meaning that counterparties which

are subject to the reporting obligation under FinfraG may meet their obligation under European regulation if certain conditions

are met, reaching full equivalence between FinfraG and EMIR is likely to be a long and complicated process, requiring an

equivalence assessment from both the EU Commission and FINMA.

Even where regulations have a broadly similar intention, the manner in which they are implemented can differ – in this case the

major difference being the requirements for both counterparty sides of the trade to be reported (EMIR) versus a single-sided

hierarchical approach (FinfraG). Given the differences between single and double sided reporting, it is hard to see how mutual

equivalence could be reached between the two regimes without the risk of regulatory arbitrage. However, we can still see some

degree of convergence in terms of reporting formats, technical processes and required data fields as many pieces of

information are the same across different regulations (e.g. client data, instrument data, broker data, UTI, LEI etc.).

The majority of what’s been written here has been theoretical – but it’s important to bear in mind that it results in real-world

consequences. The required reporting places a significant operational and financial onus on a wide array of market participants,

who have to report under an increasing range of ever more granular and ever broader of scope regulations.

Fortunately, this can be largely alleviated through a centralization of reporting through a specialist provider of hub-based

reporting services, such as REGIS-TR. The modern TR is critical market infrastructure, providing carefully controlled snapshots of

sub-sections of data across multiple regulatory regimes to multiple national and international regulatory bodies, whilst

providing cost effective and intuitive solutions for market participants across all of their regulatory requirements.

For Switzerland, we are in the process of recognition by FINMA as a foreign trade repository, meaning that we will provide our

market participants with a service under the FinfraG framework. By utilising a single agency market participants will benefit

from an integrated solution with common connectivity and a single relationship across EMIR, FinfraG and other regulations. In

this way the regulators’ goal of greater transparency and stability can be achieved without crippling the ability of market

participants to conduct their business.

25

QCCP deadlines: Craig Donohue

Craig Donohue is Executive Chairman and Chief Executive Officer of OCC, the world’s largest equity derivatives clearing

organization and the foundation for secure markets. Mr. Donohue joined OCC as Executive Chairman in January 2014. Prior to

joining OCC, Mr. Donohue spent over two decades in global financial markets, most recently as CEO of CME Group from January

2004 to May 2012. During that time he led the successful completion of more than $20 billion in mergers and acquisitions,

including CME’s historic merger with the Chicago Board of Trade in 2007, and the acquisition of the New York Mercantile

Exchange and the Commodity Exchange Inc. in 2008. In 2010 Mr. Donohue was selected as one of the world’s 50 best-

performing CEOs by the Harvard Business Review. In 2009 he was named to Institutional Investor Magazine’s Power 50 list of

the World’s Most Influential People in Finance. Mr. Donohue holds a Masters of Management degree from Northwestern

University’s Kellogg Graduate School of Management, a Masters of Law degree in Financial Services Regulation from IIT

Chicago-Kent College of Law, a Juris Doctor degree from The John Marshall Law School, and a Bachelor of Arts degree

in political science and history from Drake University.

Extension of QCCP Deadline Shows EC and SEC Are Working Together To Achieve Common Approach on

Equivalency

OCC takes seriously its role as a Systemically Important Financial Market Utility (SIFMU), and we advocate on behalf

of the U.S. exchange-listed options industry to provide our exchanges and clearing firms with a strong and

competitive marketplace. In February, the U.S. Commodity Futures Trading Commission (CFTC) and the European

Commission (EC) announced an agreement on a common approach for the regulation of cross-border central

counterparties (CCPs). In March the EC released its equivalence determination for the CFTC’s CCP regulatory regime,

and in September the U.S. Securities and Exchange Commission (SEC) approved its clearing agency rules, which was

a critical step toward an equivalency agreement between the SEC and the EC. OCC submitted its recognition

application to the European Securities and Markets Authority (ESMA) under the European Market Infrastructure

Regulation (EMIR) process in 2013, and the application has been deemed complete by ESMA.

.

For OCC’s application to be eligible for approval, the SEC must reach an agreement with the EC regarding an SEC Equivalence Determination. We commend the EC for its earlier decision to extend the transitional period deadline for CCPs such as OCC to be recognized as qualified central counterparties (QCCPs).

We believe this announcement is an important indication that both sides are continuing to work through the issues and arrive at a common approach.

We look forward to continuing to work with the EC, ESMA and the SEC as they endeavor to come to an agreement on a common approach for the regulation of cross-border QCCPs. Recognition of U.S. CCPs subject to the SEC’s jurisdiction is important to OCC and market participants for several reasons, foremost among them that it would allow EU banks’ and EU bank affiliates’ exposure to those CCPs to be subjected to a lower risk weight in calculating their regulatory capital.

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Without such recognition, a CCP cannot admit firms established in the European Union (EU) to membership.

It cannot clear for trading venues established in the EU, nor can it clear products subject to the clearing mandate for market participants established in the EU. Based on our data from December 2015, OCC’s EU affiliate clearing members’ risk weighted asset exposures to OCC would increase to over $75 billion from approximately $924 million, requiring them to maintain additional capital of approximately $5.25 billion.

There are currently 18 OCC clearing firms classed as EU-affiliated firms that potentially would be impacted by the lack of QCCP recognition for OCC. They represent about 17 percent of OCC cleared

volume and 21 percent of open interest.

These firms also contribute significantly to OCC’s financial safeguards framework: about $9.5 billion (25 percent) in initial margin held by OCC, and about $3 billion of our clearing fund (25 percent). Outside of OCC’s equities options business, about 50 percent of all VIX futures volume that is cleared by OCC members would be impacted. As the only CCP in the U.S. for the exchange-listed equity options markets, the imposition of punitive capital charges on OCC’s EU-bank affiliate clearing members will trickle down to exchanges and market participants, and would adversely impact the entire marketplace. For example, if certain of these EU-bank affiliates could no longer serve as an OCC clearing member, other market maker clearing members of OCC would not be able to absorb the impacted market makers. Liquidity provisions in the options markets could be significantly impacted, resulting in increased spreads, greater volatility, and higher trading costs for investors. Final rules from the SEC that align the regulatory regime for CCPS that are systemically important with the standards that are in place by other U.S. regulators, as well as with international regulatory regimes, would be beneficial to U.S. financial markets. In addition to avoiding the potential market disruptions, these rules also would pave the way for impacted CCPs to further enhance their resiliency.

Craig Donohue. Chairman and Ceo.

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After their introduction in the US more than a decade ago, weekly options have now become part of the investment toolkit of many financial professionals worldwide. Volume growth has accelerated in the past five years, driven by investors’ need to manage more efficiently short-term risk and exposure. The popularity of these options also signals a shift in focus among users towards more short-dated strategies.

Weekly options traded on European derivative markets now account for 6-8% of total options volume. This is in sharp contrast with the US where weekly options volume as percentage of the total options volume on the SPX is now about 30% on an annual basis and on some days it can be as high as 47%. The difference between the proportions of volume in weekly options traded in the US and Europe indicates that there is scope for substantial growth for this product across European equity derivatives markets.

The role of exchanges: Short-dated options are now seen as a natural complement of any derivatives exchange product palette. For instance, weekly options on the FTSE 100 Index listed on LSEDM were the first short-dated options on a UK based underlying, listed on a UK exchange. They expanded the LSEDM product range on UK underlying that already includes standard options on the FTSE 100 Index with monthly expiration and FTSE 100 Index futures contracts with quarterly expiration.

As all other derivatives products offered by LSEDM, weekly options are cleared by LCH and benefit from margin offsets against corresponding futures positions. Liquidity in weekly options is developed in cooperation with market makers based on agreements between the exchange and market making firms. Market makers enter an arrangement to meet the dual obligations of maximum spread and minimum size across maturities and strike prices, providing substantial benefits to all the users. The success of weekly options on equity indices has incentivised derivatives exchanges to make them available on a variety of additional asset classes from interest rates to FX, and a selection of commodities including Oil, Natural Gas, Corn, Wheat and Soybeans.

What are weekly options: In this article we will focus on short-dated options and their properties using equities

as underlying asset class. However the same principles apply to short-dated options across different asset classes. Weekly options are short-dated usually with an eight calendar-day maturity. As an example, on LSEDM weekly options begin trading on Thursday and expire on Friday a week later. Exchanges can make available multiple weekly maturities, usually up to four weeks, starting and expiring on different days of the week. For instance in addition to weeklies expiring on Fridays, CBOE has introduced recently weekly options expiring on Mondays and Wednesdays. Although they can be considered just as options with very short-term maturities, the fact that they are made available on a weekly basis allow investors to take advantage of some specific characteristics that differentiate them from the standard monthly maturity cycle. Dealing in short-dated options require users to pay specific attention to parameters that might not usually apply to longer dated maturity options that are sold long before maturity or allow more time for desired outcomes to materialize. The interplay of implied volatility, changes in the underlying price and time decay provide ways to take advantage of short-term market dynamics.

Time decay: When trading short-dated options is worth noting that time decay is strongly related to the degree of ‘moneyness’ of the option.

Weekly Options: Massimo Butti

Massimo Butti, CAIA – Head of Business Development, London

Stock Exchange Derivatives Market. Massimo started his career in

Switzerland where he was sales/trader on SOFFEX, the first fully

electronic derivatives market. He moved to London in 1994 and

worked for Merrill Lynch in derivatives and structure products and

Euronext.Liffe as responsible of Single Stock Futures and BClear.

In 2006 he became Director of Strategic Development at Liquid

Capital, one of the largest options market makers in Europe.

After launching a financial software company in 2012, he joined two

years ago the London Stock Exchange where he is responsible for

the development of derivatives products.

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Another factor to bear in mind when trading short-dated option is the impact of time decay on the implied volatility

skew. As maturity approaches we observe a steepening of the skew due unwillingness of traders to sell cheap

downside protection or the so called “lottery ticket” as we observe in the graph below. The options with only 3 days

to maturity show a sharp increase in volatility for out-of-the-money strikes when compared with options with 10 days

to maturity.

This behavior is particularly relevant when considering short-term options. As the skew increases and maturity

decreases, this change in skew will increase the value of the long skew position and decrease the value of the short

skew positions. While the effect is negligible for long-dated options it has a substantial effect on short-dated options.

All things being equal time will decay faster and in a more linear fashion for in-the-money and out-of-the-money strikes. At-the-money options will preserve their time value longer but time decay will accelerate in the last two days before maturity as shown in the graph below.

This behaviour is in line with the expectation of most pricing models. Far out-of-the-money options have a lower time value than at-the-money options reflecting the small probability to be in-the-money at expiration and their decay is more linear than for at-the-money options. The linear time decay for options is due to their high delta and consequent high probability to return a positive outcome for the holder of long positions. Therefore, strike selection when using weekly options to hedge against, or take advantage of event risk, is fundamental.

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The small time component of weekly options represents challenges but also benefits. Compared to longer dated

maturity, directional trades can be implemented in an efficient way as users don’t need to pay for additional time

value that they might not need as the event is likely to take place long before the maturity of a long dated option as

illustrated in the graph below

A closer look at volatility: Above we have touched on the concept of implied volatility and it is worth having a better

look at different types of volatilities, how they relate and why they are particularly relevant in weekly options. As a

statistical concept, volatility represents the annualized standard deviation of returns of an asset. In this format,

volatility provides a measure of how much an asset return has deviated from its mean on a historical basis.

As such historical or “realized” volatility gives investors a picture of what has happened in the past and cannot be

directly observed.

However options markets have given investors the way to express predictions of how much returns could deviate in

the future. The volatility extrapolated from options prices is therefore “forward looking” and is termed “implied”

volatility as it reflects the outlook of investors of where the price of an asset will be compared with the maturity of

the option and its strike price.

Although the evidence from several studies shows that implied volatility is not a good predictor of future returns,

when we aggregate various discreet volatility points to form volatility curves or surfaces, we can gain valuable insight

of how the market might behave in the future.

This is particularly relevant when trading Short-dated options.

Interpreting what the volatility curve and its shape is telling us and how volatility changes depending on the time to

maturity and as a function of their exercise price might give valuable insight in terms of managing risk and taking

exposure to new opportunities.

For instance the changes in the slope of the skew can be taken advantage of by trading vertical spreads. For example,

an increase in the slope of the skew can be exploited by a long position in a low strike price call and a short position

in a higher strike call with the same maturity.

If the slope of the skew increases, the long call will increase in value while the value of the higher strike short call

should remain relatively stable.

However, at inception the vega of the short leg in this trade is bigger than the vega in the long leg and that could be

detrimental as volatility of short-dated option tend to change dramatically. This problem can be overcome by buying

a ratio call spread with an initial volatility exposure close to zero.

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Conclusion

In this short exposition we have tried to give a picture of how the introduction of options with weekly maturities has

led derivatives users and investors to focus on the short-term behaviour of financial assets.

Exchanges are keen to support the trend towards making available more flexibility to clients and at the same time

efficient instruments to take advantage of the trend towards managing risk and exposure on shorter cycles.

Volatility – rules of thumb

Empirical evidence indicates that volatility is mean reverting

Volatility is negatively correlated to changes in price of the underlying: in bull markets implied volatility tends to fall and in bear markets implied volatility rises as a reflection of increased uncertainty

In the short term volatility is mainly driven by market direction

In the long term it is influenced by economic cycles and risk premium

The skew: the reflection of market expectation, supply and demand dynamics in option markets and leverage. High volatility levels for OTM puts inequity markets tend to reflect the practice of investors to buy downside protection, thus lifting the implied volatility levels of out-of-the-money puts. At the same time investors buy ITM calls as a replacement for taking a position in the underlying and take advantage of the leveraged upside exposure offered by options. The typical slant in the volatility curve for out-of-the money calls is due to call writing for income against stock positions that increases the supply of volatility thus depressing its levels.

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Sustainable Finance: Antoine Mach

Antoine Mach is co-founder and managing partner of Covalence EthicalQuote, a

reputation index tracking the world’s largest companies on Environmental, Social,

Governance (ESG), ethics and sustainability. Covalence SA is a limited company

based in Geneva, Switzerland, founded in 2001.

Representing Covalence Antoine has been named in Ethisphere 2009’s 100 Most

Influential People in Business Ethics, finalist of the Social Entrepreneur of the Year

2005 award in Switzerland, and laureate of the Cantonal Sustainable Development

Prize (Geneva) in 2004. He’s a co-founder of Sustainable Finance Geneva. Holding a

Master in political science from the University of Geneva, Antoine is the author of

Swiss business and human rights: Confrontations and partnerships with NGOs

(Fribourg University Press, 2001).

Is Geneva really the world’s first sustainable finance center?

“Geneva is the world’s first sustainable finance center”, said Federal Councilor Doris Leuthard during a recent

speech at the Graduate Institute of International and Development Studies, where she defended the Swiss

government’s opposition to the popular initiative for a green economy (Geneva is the only canton having voted yes).

Sustainable finance, usually defined as the integration of Environment, Social, and Governance (ESG) factors into

financial decisions, has indeed been gaining importance in Geneva over the last years. For instance, the law

establishing the pension fund of the canton (CPEG) indicates that it shall operate in line with the principles of

sustainable development and responsible investment. In its economic strategy 2030, the canton intends to promote

the development of Geneva as an international crossroads of sustainable finance. This vision is at the heart of

Sustainable Finance Geneva (SFG), an association founded in 2008 by a group of professionals convinced by the

opportunity to connect the financial center with the locally-based international and non-governmental

organizations, this “research laboratory on global issues”, in the words of Ivan Pictet, former managing partner of

the Pictet Group.

Innovations: will trade finance be next?

In 2014, SFG published a book presenting 10 innovations in sustainable finance that were built in the Geneva area.

It features pioneer developments in shareholder engagement (Ethos), ESG assessments (Inrate, Covalence), thematic

funds (Pictet, Lombard Odier), microfinance (Symbiotics, BlueOrchard), impact investing (Bamboo Finance, Impact

Finance Management), public-private partnerships (UNEP Finance Initiative), social impact bonds (GAVI,

International Finance Facility for Immunisation), indices (GAIN, Access to Nutrition Index), and philanthropy advisory

(Wise). Interestingly, the 10th chapter of the book is a prediction: that the next innovation in sustainable finance in

Geneva will come from trade finance.

Yes, the potential of Geneva to embrace sustainable finance is impressive.

Is it the world leader in this field? This is true for microfinance: 38% of the world’s microfinance

investments are managed in Geneva and Zürich (Swiss Microfinance Report 2015).

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Considering sustainable finance globally, we must adopt a more contrasted view. Few of the innovations mentioned

above came from mainstream financial institutions. This resonates with the findings of “Sustainable Finance in

Switzerland: Where Do We Stand?”, a recent Swiss Finance Institute (SFI) white paper: “Apart from a range of

specialized institutions and initiatives, the Swiss financial sector as a whole is currently not an international leader in

terms of sustainable finance.” London, Luxembourg, Paris and Singapore are described as having shown more

dynamism lately.

Lack of high-level endorsement

While an increasing demand for sustainable finance products is observed, according to SFI, there is a need for high-

level endorsement from the big players in the Swiss financial sector as well as from mainstream industry associations

“in order to strengthen Switzerland’s international position in the sustainable finance world.” Specialized

associations such as Sustainable Finance Geneva and Swiss Sustainable Finance play a useful role, but stimulation

from the top is required as well. This is also indicated by Geneva banks which recently named sustainable finance

among strategic priorities for the years to come, together with asset management and fintech (Geneva Financial

Center, Enquête conjoncturelle 2016-2017).

Misperception and complexity

Many finance professionals and investors still think sustainable finance does not perform financially, although several

academic meta-studies find a neutral or positive correlation between ESG and financial performance at the level of

the firm. The persistence of this “deeply rooted misperception” (SFI) is striking. There are other informational

barriers to consider in addition to those relating to performance, especially in private banking. This is suggested by

Falko Paetzold, a researcher at the University of Zürich and Harvard Kennedy School. Among his findings are that

advisors often refrain from offering sustainable finance products to their clients because these products are too

complex and time-consuming, and represent a “nuisance” to their commercial narrative (“Sustainable Investing in

Private Wealth Management”, available online).

Education needed

Most client relationship managers only possess a superficial knowledge of sustainable finance products, which

refrains them from offering these products to their clients. Few had the opportunity to acquire this knowledge during

their studies. So far a small number of universities have integrated sustainable finance into their business and finance

cursus, as research by WWF-Switzerland and Sustainable Finance Geneva is showing.

The situation is evolving.

In 2012, the Graduate Institute of International and Development Studies established the Centre for Finance and

Development. In 2014, the University of Geneva has named an assistant professor of responsible finance. In 2015,

Swiss Sustainable Finance has set up a workgroup for developing training material to educate finance professionals

on sustainable finance. Since 2013, the Geneva School of Business Administration (HEG) has been offering a module

on sustainable finance within the Diploma of Advanced Studies in sustainable management, in partnership with

Sustainable Finance Geneva and Institut Supérieur de Formation Bancaire. HEG is currently developing a Certificate

of Advanced Studies in sustainable finance, including an important online component, to be launched in the fall of

2017.

Opportunities

Enriched education programs should help current and future professionals seize the opportunities offered by

sustainable finance. Geneva has a key role to play in this sector, and becoming the world’s first sustainable finance

center is an ambitious yet possible horizon. According to Charles Kleiber, former Swiss State Secretary for Education

and Research: “Validating the role of banks, which are essential to the real economy, represents a chance for

Switzerland.

After the excess and disappearance of the banking secrecy, there is now the opportunity to develop a

financial strategy rooted in universities, the humanitarian tradition and the international Geneva1.”

1 https://www.letemps.ch/economie/2014/10/30/finance-durable-prend-enfin-galon-universite

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Milestones:

Creation in September 2016.

Official Launch in September 2016.

Trainings launched

Newsletter launched

Workgroups:

Permanent workgroups starting in 2016 :

- Shipping. Commodities. Trading. Richard Watts.

- Banking-Finance. Xavier Perea.

- Sustainability. Jose Balmont.

Newsletter:

- 1st Newsletter released 4th week of September 2016. Completed. online

- 2nd Newsletter to be released 3rd week of October 2016. Completed.

- 3rd newsletter to be released 3rd week of November 2016.

Working sessions in 2016:

- Finfrag and trade reporting effects. Sophie Langlois from GRC. 26/09/2016.

- Operational excellence in process management. 03/11/2016

- Mifid II .Early December 2016. Sessions to be announced.

Trainings

- Laytime. Jan 2017. More information and online registrations at www.gencom-

geneva.com training section.

- More to come soon.

Connection to other institutions.

- To be communicated soon

Gencom 2016: in brief