J.P. Morgan’s view on the key trends in listed derivatives

Last year’s volatility in the wake of the spread of Covid-19 caused unprecedented volatility in global futures markets. JP Morgan won Risk Magazine’s Client Clearing award in part for how your business performed during the crisis. What was behind that?

EH: We’ve always prided ourselves on being a port in a storm, but we were particularly proud of our stability during last year’s Covid-volume volatility when investments we had made several years previously enhanced our ability to cope during intense market stress. We had invested in several areas including automating collateral movement and in our in-house risk monitoring, where we developed tools that monitor moves in our client portfolios on a real-time basis. This meant that when we saw intense volatility in February and March, our treasury team had a real time view of what margin calls would be coming in and the process around funding positions at CCPs was very smooth considering the pressure the market was under. Ultimately, we found that the investments we had made over time to increase automation paid off in 2020.

What lessons do you think should be learned at an industry level from the volatility last year?

EH: From an industry perspective, I think we need to focus more on solving the problem of the pro-cyclicality of margin schedules at CCPs. This is something Nick Rustad who runs JP Morgan’s global clearing business is taking a lead on at the Futures Industry Association. We are advocating that there needs to be more stable margin requirements in times of margin stress.

In addition, while there was a good spirit of partnership within the industry when the market came under pressure last year, we experienced significant divergence among CCPs as to how they dealt with trade breaks and that process wasn’t anywhere near as automated as it could be. We are therefore working with CCPs on this issue as there is certainly room for improvement here.

What trends have you seen coming out of Covid?

JP: On the execution side we have seen an acceleration of the trend towards greater electronification in listed markets. If you look at treasuries market at the CME, 97% of treasury futures are traded electronically. The closure of the CBOT floor during the Covid crisis forced options on-screen, with trading up to 90% on screen. That has reverted to around 40-50% in the order book but a long-term change is in the fact that traders have got more comfortable trading on-screen with 24-hour access and we expect this to further grow electronification not just in treasury markets but across the listed universe.

How does this impact the services you are offering clients?

JP: This electronification of futures markets is driving greater sophistication of our algo suite. We have moved past the vanilla VWAP and TWAP algos to develop customizable solutions for clients providing them not just with sophisticated algorithms but also the ability to analyze performance post-trade. This enables them to customize and tweak the algorithms to suit their needs. We are soon to expand our flagship algo suite, Aqua, with the launch of a range of algorithms for calendar spreads. This will include using Artificial Intelligence to help clients optimize the timing of their execution in calendar spreads.

Where are you seeing growth in the exchange traded derivatives markets?

JP: Over the past decade there has been a significant expansion in the universe of listed products. Currently we are seeing significant expansion of interest in ESG-related instruments, in particular with regards to the emissions market, where Europe has the most liquid offering. We are seeing a large and much more diverse universe of clients trading these products from systematic hedge funds to utility companies. The recent launches in the US of the California Carbon Allowances and the Regional Greenhouse Gas Initiative have added more depth to what was previously a niche market.

The growth in listed products means we must continually innovate to ensure we offer the broadest reach when it comes to exchange memberships, electronic access and liquidity provision. As a full-service bank, we have to be there to offer access to new products whether that is the new MSCI listings or ESG-related instruments. We have to be able to meet demand in terms of how the client wants to trade and how the market trades.

How has JP Morgan dealt with Brexit?

JP: Our strategy has been consistent with the ultimate goal of making the transition as seamless as possible for our clients. For more than two years, we have planned which people to move and where so there would be no surprises for either our team or our clients. A huge part of our client base is in continental Europe and we now have a fully functioning futures and options team in Paris. Our Paris team is an experienced team with experienced managers and the feedback from our key European clients has been very positive.

EH: We were ready for the original date in 2019. We couldn’t take the risk that it would be anything other than seamless for our clients and did a lot of work to achieve that. For example, when we were moving our continental clients over to our German entity, we spent significant resources ensuring that the client money protections were replicated as far as possible in comparison to those offered under our UK entity.

Finally, improving diversity has been a key challenge for firms in the derivatives markets over the past decade. How much progress is JP Morgan making in this respect?

EH:  40% of our global clearing leadership team is female - there is always more than we can do to keep driving this positive momentum. If you look at the senior women in Clearing at JP Morgan, most of them have grown up in the business and have been nurtured over the past 10 years. We are now focused on doing the same in terms of promoting ethnic diversity. 

JP: Deirdre O’Sullivan, my boss, who runs our Global Futures Execution business, has ensured that we are extremely diligent on diversity when it comes to hiring and retaining talent. Inclusion is important but so too is flexibility. That is one of the good things to come out of Covid. Highly transactional businesses like futures execution is always to some extent going to tie technology and therefore staff to the office but there has been a major appreciation that you can operate with greater flexibility in terms of how and where people work, which will allow a more diverse cross-section of people to have a career in futures.

We look forward to discussing these and more topics at the upcoming Derivatives Forum Frankfurt on 23-24 March.