Eurex Insights on Futurization, Risk and Markets

Eurex Group July 2013
Institutional
Insights
What is inside
(tap to get there)
Editorial 1
Thought leadership 3
Riding the next wave
of futurization
Trading insight 8
Clearing insight 9
In conversation 10
With Olivier Zeyssolff
about risk management
Market insight 16
Conversations...
I was told that writing the opening for
a new publication would be a therapeutic
and inspiring exercise.
With Imagine Dragons’ Night Vision
blaring in the background, the task
started. Where to begin? What to say?
What’s important? How long? What
tone? Sedate? Humorous? Contempla-
tive? Provocative? Irreverent?
What’s the story?
Three weeks ago it was my privilege to
spend a considerable amount of time
with Richard Hytner, Deputy Chairman
of Saatchi & Saatchi. And one of his
phrases fortuitously echoed in my mind
as I wrote this – “Always be genuine”.
Institutional Insights was conceived
following an accidental game of join the
dots. At Eurex Group we have a simple
yet incredibly genuine dream (yes you
read correctly – I just said dream).
Passionately shaping the derivatives
industry. We organize markets globally.
This was dot number one – this is what
we do and the spirit in which we do it.
Dot number two was the recognition that
shaping an industry means shaping ideas.
Ideas are only shaped if you’re having
EditorialDeepesh Shah
Olivier
Zeyssolff
Chief Credit
Officer,
Tudor Group
Clive
Tillbrook
Global Managing
Editor, MNI
Renaud
Huck
Head of UK
Buy Side
Relations,
Eurex Group
Kathryn M.
Kaminski, PhD
KTH, MIT
Deepesh
Shah
Vice President,
Business
Development
London,
Eurex Group

Institutional Insights July 2013
www.eurexgroup.com 2
conversations with all your partners and
from all parts of your industry.
The third and final dot was an awareness
that our role as an exchange is to bring
people and markets together – so why
not ideas? As an organizer of markets,
who better to bring together the various
constituents with the goal of sharing
ideas – by having conversations?
Next came the question of how?
To be authentic, stifling ideas through
censorship is clearly out of the question.
Not only is this against the principles
of stimulating writing, it’s also against
the principles of having a conversation.
We’ve therefore assembled a host of
spirited permanent writers who all share
at least one common trait – they are all
passionate about their work and their
respective fields. And they want to talk
about it from their unique perspectives.
Over the next months, we’ll also be
welcoming guest contributors with only
one mandate – be interesting, be open,
and be genuine. The goal here is not to
lecture but to catalyse debate.
And finally the question – what?
We begin this first edition with the
increasingly hot topic of futurization.
Some say futurization is the natural
evolution for over-the-counter deriv-
atives. Others believe it is impractical
due to inflexible constructs and liquidity
risks. Futurization is not a new topic,
but it is an underexplored topic and
therefore worthy of discussion.
We’re very pleased that our lead writer –
Kathryn (Katy) Kaminski of KTH Royal
Institute of Technology, MIT Sloan
and the Stockholm School of Economics
has been able to shed light on this
subject in her own unique and balanced
style. Katy will be tackling a number
of challenging and thought-provoking
topics in the months ahead for
Institutional Insights.
I’m also delighted to welcome Olivier
Zeyssolff, Global Head of Credit Risk
with Tudor Capital Management as our
guest interviewee for this first edition.
I have no doubt that you’ll find Olivier’s
views on the challenges faced by buy
side firms, his concerns about systemic
risk and thoughts about how the future
could evolve, both engaging and insight-
ful. The title of this publication is, after
all, Institutional Insights.
As Head of Buy Side Relations in London
at Eurex Group, Renaud Huck is keen to
share his thoughts about the state of
the industry, current trends, concerns
and reasons for optimism. And as you’ll
see later, he has an encyclopaedic knowl-
edge of the markets and strong views
on a range of topics. In this edition,
Renaud comments on asset protection as
well as sharing an update on the success
of French government bond futures.
Lastly, Clive Tillbrook, Global Managing
Editor at MNI, will leverage his network
of bureaus around the world to bring
you the latest news, analysis and intelli-
gence. In this edition, we cover the
June 2013 Global Economic Prospects
report issued by the World Bank.
Deepesh Shah
Vice President,
Business Development London,
Eurex Group

And now I turn the focus to you.
Conversations, by their nature, require
two or more participants. Therefore
I’m doing something I’ve been urged
not to do – I’m opening up my inbox:
deepesh.shah@eurexgroup.com
Please use it. Do you have an opinion
on something you’ve read? Do you
agree or disagree and why? Do you
have a hot topic that you’d like to see
us cover? What do you really care
about? Do you want to write something
yourself? Or do you simply want to say
hello and introduce yourself? Whatever
your reason for writing to me, please do
write. Like all creative processes, this
publication will evolve together with you.
I hope you enjoy reading this be it at
your computers, on the Tube (or sub-
way) on your iPads or in your bathtubs.
Let the “dots” be joined!
Deepesh, on behalf of the team
Thought leadership
Kathryn M. Kaminski
Riding the next wave
of futurization
The world of derivatives as we know it
is ripe with change. Prior to the credit
crisis, derivatives trading was taking place
on two very different fields: over-the-
counter (OTC) via dealer networks and
exchange-traded derivatives (ETD) via
centralized clearing houses. Although in
theory the nature of derivatives contracts
should be roughly the same, in application
the rules, as well as the structural way
these contracts change hands, varied
substantially. The mess that unfolded in
2008 led to a sharp review of the way
derivatives contracts are cleared, collater-
alized and change hands. In an attempt
to “level the playing field” on both sides
and create a more cohesive and less dis-
jointed approach to derivatives markets,
legislation such as the Dodd-Frank Act in
the U.S. and EMIR in Europe spearhead
the restructuring and reorganization of
how derivatives trading will be conducted.1
Setting the stage for futurization
The derivatives industry is a 700 trillion
dollar business. Historically, exchange-
traded derivatives have taken up a smaller
piece of the pie maintaining a small frac-
tion of the total notional value (roughly
10 percent). Most OTC derivatives con-
tracts are held by a few of the largest
1
John E. Parsons from MIT discussed this analogy and futurization in his blog: Betting the business, financial risk
management for non-financial firms. See bettingthebusiness.com
Kathryn M. Kaminski, PhD
CAIA, KTH Royal Institute
of Technology,
MIT Sloan and the Stockholm
School of Economics

clearing of most derivatives contracts will
be done through central counterparties
(CCPs) allowing for aggregation of
information for reporting, multilateral
position netting, and cross validation.
The share of derivatives that are not
centrally cleared will become low4
and
regulatory costs in the form of increased
reporting, operating, and collateral are
set to impact all users of OTC derivatives
products.
New players are also entering the swaps
markets by registering as swap execution
facilities (SEFs)5
, creating competition
for swap dealers. Transaction costs, oper-
ational efficiency and collateral manage-
ment should bring down differences
between OTC and exchange-traded
products. Despite this move, there are
still plenty of adjustments to be made
and room for growth.6
For example in
2012, 60 percent of all derivatives in
the U.S. were swaps. There is a migration
towards exchange-traded products but
it is happening gradually. For example,
today, futures/forward contracts which
are mostly exchange-traded have climbed
to 19 percent of total notional value in
derivatives from 11 percent in 2006.
2
OCC Q4 Report 2012
3
Title VII of the Dodd-Frank Act focuses specifically on swaps and in the U.S. there is a legal distinction between
swaps and futures. In the EU, EMIR attempts to deal with counterparty risks and transparency in a more pluralistic
manner by creating a list of all derivatives that must be centrally cleared as well as which derivatives should have
mandatory trading. The list includes the standard options, swaps, futures, cash settled commodity derivatives and
other exotics. Implementation in the EU will be phased in over the next few years.
4
Those which are not cleared will be possible via exception or with collateral constraints above the five-day margin
requirement for vanilla OTC swaps. Implementation in Europe is still in process and discussion.
5
In the EU, these include multilateral trading facilities (MTFs) and organized trading facility (OTFs).
6
This is especially true in Europe where implementation is delayed until 2014 or later.
The path leading to futurization
banks. A closer look at these banks,
or at least the top tier banks by size,
shows that only a very small percentage
(around 4 percent) is held in exchange-
traded derivatives. Reasons for this
distribution have been attributed to
the previously lower costs in trading off-
exchange and potential difficulties in
dealing with block trades on exchanges.
The core of the action, in both total
notional value and in banking trading
revenues (17 trillion in 2012 to be
exact)2
, is in OTC interest rate swaps.
New regulation aims to tighten control
regarding reporting, registration, and
mandatory central clearing of many,
especially vanilla OTC contracts.3
Central
Most derivatives are OTC
• Systemic risks
• Concerns over collaterization, transparency
Regulation
• Mandate central clearing of all vanilla OTC
• Increase reporting, registration, and collateral costs
Increased competition in the clearing/execution space
• Enhanced role of CCPs and exchanges
• New players entering registering as SEFs
Migration towards ETD
• Futurization of OTC products

moving a step closer to futures contracts.
As regulatory demands begin to stretch
the limits of OTC contracts, this is creating
further incentives for futurization which
may allow users to circumvent some of
these issues.
The new wave of futurization:
swap futures
Swap futures (or futurized swaps) are
new, exchange-traded variants of swap
contracts which are meant to mimic
swaps. To use an analogy, futures are to
forwards as swap futures are to swaps.
To appease users of swaps, these new
futures contracts are an attempt to keep
some of the customizable features of
swaps while maintaining some of the
advantages of a centralized exchange.
Exchanges will allow for more flexibility
on delivery options.7
Exchanges will
also allow for more flexibility on block
trades (something that was debated at
the recent CFTC discussion panel in
February 2013). Exceptions and modifi-
cations will make swap futures fit some-
where in the gray zone between tradi-
tional swaps and traditional futures
contracts. The key advantages of swap
futures include transparency, lower
collateral requirements, possibly reduced
registration requirements, and ease of
trade when highly liquid. The key
disadvantages may include lack of cus-
tomization, delivery limitations, concerns
for block trades, and the potential for
liquidity issues. A simplified comparison
of contracts is presented in the
following table.
7
For example in the U.S., deliverable swap futures were recently launched. These are futures contracts which provide
delivery of an OTC swap at maturity. The advantages of these contracts are that during the life of the future,
the contract, as a futures contract, is eligible for much less stringent collateral and margin requirements than the
delivered OTC swap contract.
Forwards/futures
Swaps
Notional value Q4/2006
I
I
Options
Credit derivatives
I
I
Notional value Q4/2012
Forwards and futures take a bigger piece of the pie –
development of the derivatives market in the United States
What is futurization?
Futurization is the migration of traditional
dealer based bi-lateral contracts into
similar standardized “futures-style”
contracts which are centrally cleared
and exchange-traded. This idea is by
no means novel. In fact, this is exactly
why futures contracts came about; to
mimic bilateral OTC forward contracts.
The futures market structure is meant
to address counterparty risks, lack of
transparency, and lack of transferability
(“non-fungible” structure) of bi-lateral
OTC contracts. An aggregated exchange-
traded structure allows for collateral
reductions, multilateral position netting,
and risk mitigation across pools of
counterparties. The new wave of futuri-
zation of swaps and other OTC deriv-
atives is occurring to adhere to some of
the same issues. By mandating centralized
clearing, OTC derivatives are already

8
This is even more evident in the U.S. where collateral and margin requirements for swaps are treated differently
than futures. In the EU, these distinctions are less clear as EMIR focuses on a contract by contract basis. The jury is
still out in the EU how this will play out.
Futures are to forwards as swap futures are to swaps
Exchange-traded
Cleared
Rare, ~2%
Standardized
Daily margin required
for collateral
Low
Futures
OTC**
(U.S.: exceptions,
EU: exception for
physical delivery)
Depends
Mainly delivery
Customized
Depends
Moderate (varied)
Forwards
exchange-traded
with exceptions
Centrally cleared
with exceptions
May depend,
contract dependent
Standardized with
some flexibility
1–2 days margin
required for collateral
Low
Swap futures
OTC*
(U.S.: SEFs,
EU: MTFs and OTFs)
Most cleared**
with exceptions
Mainly delivery
Customized, more
standardized*
5 days required for
collateral (may vary
as well)
Low*, moderate
(for bi-lateral,
uncleared contracts)
Swaps
Trading
Clearing
Delivery
Transparency
Collateralization
Counterparty
risks
*This characteristic will be in effect post regulation implementation of Title VII of the Dodd-Frank Act and EMIR.
**There are some exceptions for forward rate agreements and FX. Physical delivery and some customized swaps
may also be exempted.
parties are designated as systemically
important entities or entities that are
“too big to fail”. Critics of this structure
are weary of vertically integrated clearing
and execution. In addition, new users of
futures also have concerns about potential
basis risk and liquidity issues with new
products that may not be adequately
customizable. Issues related to block
trading, flexibility, and increased delivery
options are of high priority.
Proponents of futurization cite the long
and successful history of futures markets,
the benefits of more migration to futures,
and the potential for cost reduction
and flexibility in new futures products.
Core issues of contention: the pros and
the cons
There are some concerns about the appli-
cability of futurization in a market that is
focused on customization. General con-
cerns are related to regulatory arbitrage,
systemic risk, and potential issues with
lack of customization and usability.
Opponents screaming regulatory arbitrage
cite concerns related to the asymmetries
in fees and collateral across similar con-
tracts.8
Their concerns are that markets
driven by regulatory arbitrage may have
unclear consequences. Cross border issues
and differences in regulation across the
globe may complicate things even further.
Systemic risk is another key issue. In a post
Dodd-Frank and EMIR world, with man-
datory clearing and contract migration
onto exchanges, large central counter-

wave of futurization. The push towards
transparency and transferability has
already begun. Yesterday’s challenges
may be addressed, but the perils and
challenges that lie ahead in derivatives
markets remain unclear. Despite many
opposing views, it does remain evident
that the future of derivatives markets
is futurization.
References
Rodriguez Valladares, Mayra, Futures
and Futurization: Full Steam Ahead
on Dodd-Frank, MRV Associates,
19 November 2012.
Kurbanov, Rashad, Swap Futurization –
The emergence of a new business
model or avoiding regulation and
retaining the status quo?, DerivSource,
13 February 2013.
Acworth, Will, Futurization: Market
Participants Clash, Futures Industry,
10 March 2013.
Litan, Robert, Futurization of Swaps:
A Clever Innovation raises novel
policy issues for regulators, Bloomberg
Government, BGOV Analysis,
14 January 2013.
Parsons, John E., 3 points on
the futurization of swaps, Betting
the Business Blog, 31 January 2013.
Futures markets have a long-standing
relationship with regulation. They were
designed with a keen focus on transpar-
ency, transferability, reduction of counter-
party risk, optimized collateral costs,
and risk mitigation. Yet, it is important to
emphasize that futures gain much of
their success in numbers. Illiquid futures
contracts are not as popular and have
added liquidity risks especially with con-
tracts that are marked to market so
frequently. Proponents of futurization
suggest that increased volumes in futures
markets may help diversify product
offerings. For example, one positive sign
has been the relatively eventless 18 trillion
dollar migration from energy swaps into
futures in the fall of 2012. Increased
volumes may help make room for new
contracts which can better mimic longer
dated swap contracts. Consistent with
anecdotal comments from energy traders
who switched to futures, cost reduction,
lower collateral requirements, efficiency
and flexibility are the commonly cited
advantages for using futures. Lastly, similar
to how futurization of forwards created
futures, proponents of futurization can
argue that the current wave of futurization
in OTC derivatives is simply a natural
development of modern financial markets.
Consistent with futurization of the past,
this wave will help level the playing field
and increase flexibility.
Concluding remarks
The derivatives industry is a 700 trillion
dollar business. Regulatory forces
and demographics in this industry are
migrating contracts from dealer net-
works onto exchanges spawning a new

Following the 2008 financial crisis and
the resulting market volatility, the situation
led to a dramatic widening of yield
spreads. Eurex Exchange responded with
the introduction of the Italian govern-
ment bond (Buoni del Tesoro Poliennali –
BTP) segment in 2009 which has become
extremely successful with over 15 million
contracts traded since launch.
Then, in 2011, due to the continuing
European sovereign debt crisis, even
the spreads of core European countries
over Germany widened. Spreads remain
wide and volatile in this segment. In order
to react to the new market conditions
and the increasing market demand for
a dedicated French hedging instrument,
the 10-Year Euro-OAT Futures (with a
delivery window of 8.5–10.5 years) were
born at Eurex Exchange in April 2012.
On a more anecdotal note, it is the revival
of an old glory, the Notionnel futures of
the Matif, and it takes me down memory
lane to the “good old days” during
my time as a floor trader on the Matif
floor for JP Morgan – trading French
futures contracts.
The French government bond futures
offer market participants a listed futures
product which in terms of credit risk lies
between Germany and Italy. Customers
at Eurex Exchange can now replicate
and hedge most of the existing long end
interest rate/credit risks in Europe using
our Bund, OAT and BTP Futures.
The Euro-OAT Futures launch was
the most successful fixed income futures
launch in recent history across all ex-
changes globally. In May 2013, one year
after inception, the total cumulative
volume stands at approximately 9 million
contracts. In May 2013 alone over
1 million contracts were traded.
The next logical step was to expand
this successful segment – the majority
of market participants suggested Mid-
Term Euro-OAT Futures (with a delivery
window of 4.5 –5.5 years) in order to
facilitate hedging and basis trading on
Trading insightRenaud Huck
1,100
1,000
900
800
700
600
500
400
300
200
100
275
250
225
200
175
150
125
100
75
50
25
Order book volume Open interest
OTC volume
Jun 2012 Sep 2012 Dec 2012 Mar 2013
Euro-OAT Futures: traded contracts & open interest
(in thousands)
Renaud Huck
Head of Buy Side Relations,
Eurex Group

Clearing insightRenaud Huck
the mid-term segment of the French
yield curve. Launched in March this year,
we’ve experienced steady growth as
the Eurozone begins to stabilize.
To support all of these innovations, and
to offer our clients the full spectrum of
trading opportunities in the fixed income
yield curve, Eurex Exchange also supports
the short-term interest rate segment
with a new initiative of its three month
EURIBOR Futures. So far, the market
signals have been very positive – but i’ll
update you on this topic, as well as
our other plans in the next edition of
Institutional Insights.
An entirely new regulatory program was
initiated by the G20 in 2008 featuring
the shift from bilateral OTC trading to
OTC clearing. The details are still being
finalized but we’re not very far from
having a complete script.
One feature of this new era is that of
segregation models. This is quite an all-
encompassing term so what exactly are
we talking about here? We should be
more specific and define properly what
the models of segregation are, what
the purpose is and what will be its role
in this new world of OTC clearing.
There are several “definitions” of segre-
gation floating around so I’d like to
provide you with ours.
At Eurex Clearing, when we say segre-
gation we define it as a full segregation
model. A model where collaterals are
physically protected and which, in the
event of a Clearing Member default,
allows the positions and collaterals of
the end client to be ported. This is what
we have structured and what we offer
to our clients. And I mean “ported”, not
liquidated. There is a big difference here.
While some models theoretically claim
to be fully segregated, in practice both
positions and collaterals in these models
are liquidated (value seg model) and
a cash equivalent is returned to the
client. Which is fine for some clients –
but not all.
I don’t see where the value proposition
and interest of such a limited model
lies. It’s a rather heavy handed approach
which is even more disruptive during
very distressed market conditions.
The default of a Clearing Member results
not only in disruption to said Clearing
Member but also to their customers and
to market infrastructures as a whole –
thereby rendering it extremely difficult
to liquidate assets effectively.
Renaud Huck
Head of Buy Side Relations,
Eurex Group

In conversationDeepesh Shah and Olivier Zeyssolff
At Eurex Clearing, we thought long and
hard about this and recognized that
under these potentially difficult market
conditions, we needed to adopt a very
different approach and help our buy side
clients as much as possible in making
the transition from one Clearing Member
to another.
A more collaborative process was going
to be needed hence in our default man-
agement process, we considered that
a 5-day interim period where the end
clients can transition their clearing activity
was necessary – be this via porting or
liquidating. The choice is theirs.
But above all, the protection of collaterals
(away from the clearer and the clearing
house) placed in a CSD or ICSD (required
by regulators) such as Clearstream, was
a must-have in order to offer a practical
solution to the trading community in this
new world of OTC clearing.
The new world is a giant, unchartered
territory with new frontiers for Eurex
Clearing, and together with you, we’re
devising new and innovative solutions.
À bientôt!
Deepesh Shah, Eurex Group, spoke to
Olivier Zeyssolff, Chief Credit Officer
at Tudor Group, about the opportunities
and challenges in risk management.
Eurex: Could you tell us a bit
about yourself?
Zeyssolff: I am the Chief Credit Officer
for the Tudor Group, a multi-strategy
investment management company with
assets under managements of approxi-
mately USD 13 billion. I oversee global
counterparty risk and any non-trading
risk we take when we engage in trading
activities across all products. We have
relationships with FCMs, OTC counter-
parties, prime brokers, CCPs and cus-
todians. I look at a broad range of both
credit and operational risks.
Eurex: One of the topics that keeps us
busy is regulation, the two of the most
important being EMIR and the Dodd-
Frank Act. What are the effects of these
regulations on your business?
Zeyssolff: As you know, back in 2009
the G20 committed to implementing
new regulation that would reduce
systemic risk and make financial markets
more transparent. As an active market
participant, we are supportive of these
goals. These regulations will have a long-
Olivier Zeyssolff
Chief Credit Officer at
Tudor Group

term impact on all market participants –
and in particular on how the buy side
operates and transacts on a day to day
basis. We have a fairly long experience
both in clearing and in posting margin
and collateral across all facets of our
business. So it’s not really new for us.
However, it is a different way of doing
business especially in the OTC swap
space. The new legislation has had
a fairly significant impact in terms of
regulatory requirements. It is important
that we understand what rules apply
to us and that we comply. However,
the timing of the implementation of
the rules varies significantly between
Europe and the U.S. and can be confusing
and problematic for market participants.
Additionally, a number of rules have
yet to be finalized.
Eurex: How did you tackle that challenge?
Zeyssolff: Tudor has been trading futures
actively for a few decades and we have
used swap intermediation with our prime
brokers for a long time. We have an infra-
structure in place to manage these
changes. We already have the systems
and processes to support clearing.
OTC Clearing has become an extension
of those established protocols. We are
using our main FCM relationships for
clearing OTC swaps. We looked at
the trading documentation we needed
to have in place. These negotiations
were new for everyone – for us and for
the clearing members – so there was
a period of adaptation. There are also
a number of operational challenges that
need to be addressed, including estab-
lishing and testing connectivity with
CCPs, setting up legal entity identifiers
and upgrading trade management and
portfolio reconciliation systems in time
for the deadline. We started clearing
OTC swaps on 11 April this year.
Eurex: How was the experience?
Zeyssolff: The experience has been rela-
tively flawless so far. We are currently
only clearing eligible swaps that fall
under the mandatory clearing obligation
under the DFA. At the end of the day,
this represents only a modest portion of
Tudor’s portfolio. It will increase as more
products become eligible for clearing.
For the current universe, we did not
have any major issues with the CCPs or
clearing members. I think from an infra-
structure perspective we were well-
prepared to accommodate this change
and therefore it has been a fairly
smooth transition.
Eurex: What opportunities are you
seeing from the transition and what
are some of the challenges?
Zeyssolff: We now have a new type of
product on the marketplace. We trade
cash products, OTC derivatives, futures
and now OTC cleared swaps. So it is
an additional product class which has its
own specs and requirements – whether
it is margin, margin efficiency, collateral,
execution or reporting. We are still in
the early days, so if the system expands
and works well then I think everyone
will benefit from, for example, margin
efficiencies.
“We are still in the early days, so if the system
expands and works well then I think everyone will
benefit from, for example, margin efficiencies.”

But you could also ask “I used to trade
OTC derivatives with a very small
number of counterparties and then I had
very strong margin efficiencies across
products. Now I have to trade different
types of futures and swaps across differ-
ent CCPs which may not have adequate
portfolio margining across and between
them, so are you really in a better
position?” One could argue that you’re
not. So it’s not all strictly positive but
I would say the OTC clearing market
has high potential for operational and
capital efficiencies.
Eurex: What are your clients telling you?
Zeyssolff: One of the concerns of our
investors is how their assets are pro-
tected, but they know that this is high
on the priority list for us. On the OTC
derivatives side, we have always made
sure that we post initial margin, not
to the bilateral counterparty but to
an independent third-party custodian.
Obviously when we moved to the
cleared side whether in futures or OTC
cleared, there is some degree of comin-
gling with other customers. One could
argue that we are losing some of our
asset protection in moving to OTC
clearing. That’s certainly a drawback,
even though the LSOC model is going
in the right direction.
It is an improvement over the futures
model, but it is not as strong as the pro-
tection our collateral assets benefit
from on the OTC bilateral side. We are
talking to market participants and ex-
ploring any solution that would get us
to or close to full individual account
segregation on a fund-by-fund basis.
Eurex: You mentioned that you are losing
some efficiencies in cross margining,
having to spread yourself out between
different clearing houses. But what is
your view on the too big to fail aspect?
Zeyssolff: This really throws a spark
into the coals with the potential for an
unintended outcome. One of the main
issues that must be addressed is inter-
connectedness. Clearing does not elimi-
nate interconnectedness but creates new
connections to CCPs. While these new
connections do contribute to operating
and capital efficiencies to some extent,
concentrating risk at CCPs also creates
new nodes of risk across the financial
system. My view is that counterparty
risk is transformed and reallocated to
CCPs but counterparty risk does not
disappear from the system. These highly
concentrated nodes of risk at CCPs
mean that CCPs are in turn potentially
becoming “too big to fail”.
Eurex: So where do you strike the
balance between those two issues –
too big to fail vs. capital efficiencies?
Zeyssolff: Well, I am a risk person so
my perspective may differ from others’.
We are speaking mainly about tail risk
here. While there will be significant
improvements in capital and operational
efficiencies, if there is an issue that
does flare up, it could be catastrophic.
“One of the concerns of our investors is how their
assets are protected, but they know that this is high
on the priority list for us.”

And my role and what I believe the
market should be looking at and thinking
about is how can we make sure that
this tail risk is understood and then to
some extent provided for. You cannot be
complacent about the risk inherent in
trading cleared products, and the risks
do not disappear when trading on CCPs.
So, how do you manage that?
We are incentivized by regulators to
trade standardized products and move
our swaps onto exchanges and CCPs.
You try to increase efficiencies by con-
centrating them rather than spreading
your risk across CCPs. If something
happens there, you certainly can’t talk
about risk diversification. Is the financial
system better off as a result? I still struggle
to find an answer to that. There are
remaining issues around insolvency
laws, cross-border inconsistencies, and
it’s unclear whether the institutions
would benefit from government systemic
support. We should not be complacent
about systematically important financial
institutions (SIFIs), nor should we be
about CCPs.
Eurex: Moving onto the future of OTC,
with all the restrictions in place for
firms such as Tudor, what do you see
in terms of the size of the OTC space
going forward?
Zeyssolff: Well, again, in a world where
OTC clearing is working well with
a proven track record of operational and
capital benefits, then I think participants
will make a decision to direct as much
business toward cleared products as
possible. If you can replicate OTC swaps
in a more standardized format, with less
punitive requirements for capital, then
that’s what will happen. The jury is still
out: some say the end of the OTC swap
market is nigh and I do not share that
view; some say both exchange trades
and OTC derivatives markets will
reduce in size as a result of additional
regulation.
There are two types of buy side market
participants: the risk takers (the traders
who want to take a speculative position),
and the hedgers. These latter participants
make up a large part of the market so
they should not be forgotten. And these
professionals may not have the same
flexibility to move from a tailor-made
OTC bilateral contract to a standardized
futures contract, which may be totally
inadequate to hedge their specific cash
flows. I think there is a chance of creating
a two-tiered market.
One of the drawbacks of the bilateral
market is the lack of transparency where
it is difficult to see who does what.
But based on academic research and
the information out there, we see a huge
amount of OTC derivatives that are
originated by end users and asset man-
agers, who are using these contracts
more for hedging and risk protection
purposes. The amount traded by risk
takers and banks (for their own account)
is probably less than half of the total
OTC volume. We should keep in mind
when implementing regulation with
punitive aspects that there are likely to
be unintended consequences on the
real economy.
About the interviewee
Olivier Zeyssolff oversees global
counterparty risk as Chief Credit
Officer at Tudor Group, a multi-
strategy investment management
company with assets under
managements of approximately
USD 13 billion.

If you had to abide by certain of these
rules, you would have to change your
business model, mobilize liquidity that
would otherwise be used elsewhere,
and therefore think about the effects of
this on the bread and butter of your
investment. Ultimately, investors and
shareholders pay the price for it.
Eurex: Could you conceive that some of
these firms would see it as unviable and
exit the market?
Zeyssolff: One of the key proposals that
is not yet finalized is the margining
regime for uncleared swaps proposed
by BCBS-IOSCO. If it remains as it is,
then I probably would say yes. But it’s
not too late to amend it.
Eurex: One of the major topics of this
issue is the futurization. Have you given
any thought to this topic?
Zeyssolff: We’re entering an era where
you have regulators who are incentivizing
users to trade instruments which are
standardized and can be cleared, as
opposed to bilateral transactions. You
now have a range of products which
have their own margin regime. When
you are a company operating in a multi-
asset class environment, managing
a business can get really complex as
a result of the diverging regimes.
I wonder if at some point we will see
some convergence between these
regimes and move, for instance, from
a less punitive to a more favorable
regime for swap futures and for futures.
Eurex: Why hasn’t it happened before?
Zeyssolff: You really have to look at who
the participants in the OTC market are.
I think many of these participants just
need tailor-made products and have some
specific requirements. I think futurized
swaps is not anything new. It has been
experimented with for 5 to 10 years, but
has never really taken off. So why now?
Especially with the different types of
margin regimes, if you have some con-
vergence and maybe cross margining
across the CCPs that is transparent and
accepted by the market, then, yes there
is potential.
Another important aspect we have not
touched on and which is key from
a trading standpoint is liquidity. The depth
of the market is generally better on
the OTC side for a large number of
contracts. Some futures contracts may
exist but they do not have much liquidity,
which is what matters for market parti-
cipants. They need to have good depth
in the market, good price discovery and
good liquidity – and this won’t happen
overnight. Futurization may happen as
a result of the regulatory push toward
standardized products, but would it
happen naturally?
I think we have now gone far enough
and the entire market has been mobi-
lized around OTC clearing for three or
four years. Once the three categories of
eligible participants in the U.S. are trading
at full speed and they are joined by
European markets in late 2014 to 2015,
“One of the key proposals that is not yet finalized is
the margining regime for uncleared swaps proposed
by BCBS-IOSCO. If it remains as it is, then I probably
would say yes. But it’s not too late to amend it.”

we will then have a much better idea
of what to expect as far as depth and
liquidity of this market are concerned.
Eurex: What new innovations are
exciting you at the moment?
Zeyssolff: As a credit risk manager,
the safety of our assets remains my main
concern. As I said, we take great pride in
protecting our investors’ assets such that
we have negotiated and implemented
a robust solution on the OTC side. We are
constantly talking to our counterparties,
our prime brokers and our brokers to
enhance the standards for asset protec-
tion. So we support anything that moves
toward stronger protections. Asset pro-
tection is closely linked to insolvency
laws, and the extent to which these laws
permit such protection. EMIR, in partic-
ular, has clear rules about individual
client segregation that should be offered
by CCPs and clearing members at
a reasonable price. Of course not every-
one will want to take that route, cost is
an issue, but the option should definitely
be offered. However, these types of
rules are beneficial to market participants
if they add more certainty. These are
complex issues that will keep us busy for
a long time.
Eurex: What keeps you up at night?
Zeyssolff: Complacency and tail risks
of any kind. As we all know there will
always be another crisis, the question is
where and when? Complacency about
“too big to fail”, about large levels of
risk concentrated in ever larger institu-
tions, banks and CCPs. No participants,
whether large or small, can afford to
become complacent or less risk disci-
plined. This goes back to the tail risk
we discussed earlier.
Eurex: Are credit risk managers the new
rock stars of the hedge fund world?
Zeyssolff: If only. Risk management is
an integral part of what we do at Tudor
across departments as an investment
management firm and a market partici-
pant. Obviously managing market risk
is our primary focus, but credit and
counterparty risks have always been
high on the radar. We have dedicated
significant resources to analyzing and
trying to find ways to limit our counter-
party exposure, while at the same time
maintaining access to markets. I do not
see this focus on counterparty risk dimin-
ishing at all as a consequence of the new
regulation for OTC clearing; the new
regulation is only shifting the emphasis
somewhat. So we will continue to be
focused on that as we always have been.
To answer your question, I don’t think
we are rock stars, but counterparty risk is
a very important piece of the jigsaw and
it can be easily overlooked... particularly
in good times.
The opinions in this interview are those of Olivier Zeyssolff and do not necessarily reflect the opinion of Tudor Group.
“I don’t think we are rock stars, but counterparty risk
is a very important piece of the jigsaw and it can be
easily overlooked... particularly in good times.”

World Bank more upbeat
on global economic
prospects as risks wane
Washington – The World Bank offered
a refreshing view on the global economy
in June saying risks have diminished even
if growth forecasts are short of impressive,
and market volatility reflects uncertainty
over the potential end to quantitative
easing and should be short-lived.
In the semi-annual Global Economic
Prospects reports, Kaushik Basu, World
Bank Chief Economist and Senior Vice
President, stated the outlook is little
changed from January, and “in a turbulent
global economy that is good news.”
“Roughly our view is that the risk sce-
nario is better,“he said since the huge
downside risks that were a concern “we
don’t think that is there.”He described
the outlook as an “inverted plateau”
saying “We’re now at bottom with slow
pickup taking place. From next year
we’ll see some improvement.”
The report trims the world growth
forecast two-tenths to 2.2% from the
January forecast, with the biggest
downward revisions coming in the euro
area and China, as well as other large
emerging market economies, while
the U.S. was essentially unchanged.
World growth is expected to accelerate
next year to 3.0% and 3.3% in 2015.
The euro area forecast was cut a half
point to -0.6% from January, while
China's was slashed to 7.7% from 8.4%
previously. The report projects euro
area growth of 0.9% in 2014 and 1.5%
in 2015, while China is expected to
see expansion of 8.0% and 7.9%,
respectively, the report said.
Lead author Andrew Burns said the down-
grades are “by and large reflection of
what’s already happened rather than what
will happen,” including a very weak
fourth quarter, particularly in Europe.”
For China, Burns said, it is "not the
slowing that worries us, since we see
that as necessary. China has very high
investment rate, that is not sustainable,
and if maintained would sow the seeds
of future difficulties."
The World Bank predicts U.S. GDP of
3.0% this year, 2.8% in 2014 and 3.0%
in 2015, barely changed from the pre-
vious. But it cut the estimate for Brazil to
2.9% from 3.4% for 2013, while 2014 is
expected to improve to 4.0% and 3.8%
the following year.
India's expansion was cut to 5.7% from
the 6.1% forecast in the January report,
while 2014 and 2015 suffered smaller
downward revisions to 6.5% and 6.7%,
respectively.
Market insightMNI

Uncertainty, market volatility due to
U.S./Japan QE questions
There remains anxiety over the trajectory
of stimulus in the United States and
Japan – when and how the Federal
Reserve will begin to remove quantitative
easing, and whether and how much
Japan will increase theirs – although it is
not a major concern and expected to be
short-lived. Burns said there is a state of
“unconditional anxiety”, where they and
the markets are worried about everything.
“We’re worried about quantitative easing
rising in Japan and we're worried about
quantitative easing falling in the U.S. and
it almost doesn’t matter what happens
because what we're worried about is
change,” Burns said. “Markets are worried
about uncertainty of change and we’re
worried about the markets reaction to
uncertainty of change.” He said commu-
nications by central banks will be key
to signalling to markets “so that there
aren’t surprises, because it is those
sharp changes in expectations that
create volatility.”
The Fed is still new to the process but
“they understand they need to provide
guidance to markets since sharp changes
in expectations create volatility,” Burns
said. The Fed is “learning how markets
are reacting, so they will be fine tuning
going forward.” However, Basu said the
volatility – including deep depreciation
in emerging markets – is likely to be
a short-term issue. Despite the sometimes
breathless anxiety portrayed by some
in the media, he said he is not concerned.
“I think on balance the Fed doing well,”
he continued. “The point is no matter
what the form of communication, when
a change is anticipated market players
try to beat others to it, and take up posi-
tions in advance of other players, and so
there is always a period of turmoil be-
cause there is no way of neutralizing that.”
“Actually, I’m not very concerned about
this trauma because I don’t think it will
last for too long. My expectation is it’s
an adjustment trauma in anticipation
of what is to come, and as soon as the
policy changes ... I do expect this trauma
to go away."
In response to a query, Basu confirmed
he was referring to “trauma” not
“drama” in the markets, and in three to
six months "we will be in a less volatile
situation" though he cautioned that
there may be other kinds of trauma that
could impact markets.
Meanwhile, Bank of Japan QE and
Abenomics is providing a contrary impact
on markets, but Basu said it was “exactly
what Japan needed to do.” Although
the report acknowledges the policies have
led to yen depreciation, he added that was
a correction from the over-appreciation
of the prior six to eight years and “this
correction was needed.”
“It has given lift to the economy as
a whole,” and while there are undeniably
spillovers, other countries also will
benefit as Japan recovers so “some of
the consequences we will live with.”
Burns stressed that Japan eventually will
have to tighten fiscal policy to address
the debt levels but “it doesn’t have to
happen this year or next year.”

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Euro area turnaround hampered by
weak confidence
Burns said weak confidence in Europe –
following the long series of setbacks –
is impairing growth since companies and
individuals are reluctant to invest. “A key
question is when the turning point will
come. How strong that recovery is likely
to be is going to depend very strongly
on confidence,” he said. “People have
been disappointed in the expectations
of a recovery in the past and so they’re
being very cautious. And the fact that
they’re being cautious helps to under-
stand why growth is so slow to come.”
But there also is an upside risk to the
World Bank forecast “because as soon as
that confidence starts to return, as soon
as people start to recognize the economy
is recovering, that we’re past the worst
of the recovery – and that’s our very
strong view – then you will see them
returning to the market.”
Larger middle income countries adjusting
to new normal of slower growth
Large developing economies like Brazil,
Russia, India and South Africa are finding
it hard to return to high, pre-crisis growth
levels, Burns said. Although they have
recovered, those countries now find it
“hard to have strong growth without
creating inflation.” They are in the “pro-
cess of adjusting expectations to new
normal, slower growth.” Another group
of countries face a risk of overheating
and are showing signs of strain in terms
of the supply side keeping up with
demand side,” he said. These include
the Philippines, Thailand, Vietnam,
Colombia and Ecuador among others.
For more articles from MNI, please visit
www.mni-news.com
Neither Eurex Frankfurt AG, nor its servants nor agents, is responsible for any errors or omissions contained in this
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