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Colombia: Trying to push forward the bond futures market




CamiloAlarcón, Fixed Income Trading Senior Associate of Credicorp Capital Colombia

Fintech evangelists claim that in the next 10 years, financial industry will be nowhere close to what we know today in terms of speed, efficiency and process optimization. What does that say about a country that is lagging the last 20 years of financial developments?

Technology is essential for traders and portfolio managers, if they want to be able to incorporate the cutting edge in financial instruments into their repertoire without compromising their ability to respond and execute said instruments in changing market conditions.  In a world where multiple asset classes and products interplay in real time, analytical tools are paramount for efficient and agile decision making. Nevertheless, if having the required technological infrastructure seems necessary, a regulatory framework that accommodates such changes and the basic knowledge among market participants to enact them is essential.

For Colombia, the case is not one of incorporating the latest financial innovations in to the market, conversely, is that of it being incipient despite currently passing the 10-year-old mark.Particularly, the futures market is in stagnation, with low trading volumes and few active participants. Most market agents agree that the explanation for this is twofold: technology (both in the back and front offices) and education.

Colombia’s most liquid market is the local sovereign bonds (COLTES), with 1.5 billion dollars of average daily traded volume, multiple investors (local and off shore) anda competitive market making scheme that provides sufficient liquidity to investors at a competitive cost.  However, the bond futures market remains illiquid with one twentieth of the cash’s market daily traded volume (73 million dollars) and few participants willing to intervene. Why?

For market making institutions and dealers, the reason appears to be that the operational capacity of their front office is unable to fulfill its duties in both cash (which is fiercely competitive) and futures markets. The prevailing argument is that given their current capital (both human and technological),these institutions don’t have the capacity to actively participate in both markets and quote prices in changing market conditions. Moreover, most instruments for risk management and trade analytics must be developed and funded in house, rising costs for trading desks and ultimately delaying the implementation of the necessary technological infrastructure many traders need to be active participants.

This problem has been solved to some degree by some banks and brokers, with intensive investment in developing proprietary tools and human talent. However, not all market participants have the know-how and budget to develop such instruments, and those institutions that have the capabilities to participate are too few to generate liquidity amongst themselves.

In a futures market with low volatility, where capturing the bid-ask spread is scarce, incurring in such costs is not an attractive investment for most participants and futures market making remains overly manual task prone to operational risk. The effect on the market is clear: the capacity of many agents to participate in the futures exchange is very limited, decreasing the competitiveness of quotes (in both bid ask spread and size), operated volume and volatility, making the market making business unprofitable. Clearly there’s a vicious circle in this dynamic.

Considering this situation, the local exchange has taken steps towards improving their technological infrastructure with the development of a new and consolidated platform. Whereas before traders had to place orders for bonds and futures in two separate systems, this platform will enable them to place orders in both cash and derivatives markets using only one system, improving their capabilities to hedge their positions with ease. Additionally, it will provide basic risk analytics such as bond sensitivities and derivates greeks; it will have improved connectivity with MS Excel for trading algorithms; and the matching engine will permit high frequency trading.

The main objectives are that market participants can have all the information they need to manage and execute their trades efficiently through a single platform and that the system engine will be able to handle new developments in proprietary algorithms and trading bots. Although these improvements will certainly enhance the capabilities of all participants, they are only part of the solution. Education is crucial to develop the necessary user base for new products. Colombia remains a market where most investors have developed an expertise mainly in the cash market and derivatives instruments are seldom incorporated into trading and portfolio strategies.

On the other hand, some buy side institutions remain inactive because their back-office software doesn’t have the capacity to liquidate the daily P&L of their futures positions and manage the required margins.  This task in some cases is done manually at the end of trading hours by their back office and is obviously prone to human error, discouraging portfolio managers to actively trade in the futures exchange. Some agents have proposed that this process is outsourced to a liquidating agent or a custodian that has the necessary infrastructure to handle such tasks, but the current regulatory framework doesn’t allow them to do so. Currently, only FIC’s (mutual funds) are required to outsource all their back-office activities to custodians, but it’s not unreasonable to expect that pension funds and other institutions will follow suit, given the operational limitations they currently face.

Regulation should promote and enforce the necessary changes to allow for more operational efficiency and increase investor’s capacity to incorporate futures into their portfolios. Urgency, however, doesn’t appear to be on the table, as most investors haven’t found a real need to hedge their portfolios in a decade of complacent local rates that have only moved downwards. The rates market may not be so complacent in the future.

There is a lot to be done if Colombia is to bridge the fintech gap. Although recent developments may hint that technology is pushing forward in some respects, both regulation and education need to catch up before any traction is gained. There is no need to argue how necessary the derivatives market is for both traders and investors.


Not company earnings, not data but vaccines now steering investor sentiment



Not company earnings, not data but vaccines now steering investor sentiment 1

By Marc Jones and Dhara Ranasinghe

LONDON (Reuters) – Forget economic data releases and corporate trading statements — vaccine rollout progress is what fund managers and analysts are watching to gauge which markets may recover quickest from the COVID-19 devastation and to guide their investment decisions.

Consensus is for world economic growth to rebound this year above 5%, while Refinitiv I/B/E/S forecasts that 2021 earnings will expand 38% and 21% in Europe and the United States respectively.

Yet those projections and investment themes hinge almost entirely on how quickly inoculation campaigns progress; new COVID-19 strains and fresh lockdown extensions make official data releases and company profit-loss statements hopelessly out of date for anyone who uses them to guide investment decisions.

“The vaccine race remains the major wild card here. It will shape the outlook and perceptions of global growth leadership in 2021,” said Mark McCormick, head of currency strategy at TD Securities.

“While vaccines could reinforce a more synchronized recovery in the second half (2021), the early numbers reinforce the shifting fundamental between the United States, euro zone and others.”

The question is which country will be first to vaccinate 60%-70% of its population — the threshold generally seen as conferring herd immunity, where factories, bars and hotels can safely reopen. Delays could necessitate more stimulus from governments and central banks.

Patchy vaccine progress has forced some to push back initial estimates of when herd immunity could be reached. Deutsche Bank says late autumn is now more realistic than summer, though it expects the northern hemisphere spring to be a turning point, with 20%-25% of people vaccinated and restrictions slowly being lifted.

But race winners are already becoming evident, above all Israel, where a speedy immunisation campaign has brought a torrent of investment into its markets and pushed the shekel to quarter-century highs.

(Graphic: Vaccinations per 100 people by country,


Others such as South Africa and Brazil, slower to get off the ground, have been punished by markets.

Britain’s pound meanwhile is at eight-month highs versus the euro which analysts attribute partly to better vaccination prospects; about 5 million people have had their first shot with numbers doubling in the past week.

Shamik Dhar, chief economist at BNY Mellon Investment Management expects double-digit GDP bouncebacks in Britain and the United States but noted sluggish euro zone progress.

“It is harder in the euro zone, the outlook is a bit more cloudy there as it looks like it will take longer to get herd immunity (due to slower vaccine programmes),” he added.

The euro bloc currently lags the likes of Britain and Israel in terms of per capita coverage, leading Germany to extend a hard lockdown until Feb. 14, while France and Netherlands are moving to impose night-time curfews.

Jack Allen-Reynolds, senior European economist at Capital Economics, said the slow vaccine progress and lockdowns had led him to revise down his euro zone 2021 GDP forecasts by a whole percentage point to 4%.

“We assume GDP gets back to pre-pandemic levels around 2022…the general story is that we think the euro zone will recover more slowly than US and UK.”

The United States, which started vaccinating its population last month, is also ahead of most other major economies with its vaccination rollout running at a rate of about 5 per 100.

Deutsche said at current rates 70 million Americans would have been immunised around April, the threshold for protecting the most vulnerable.

Some such as Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, highlight risks to the vaccine trade, noting that markets appear to have more or less priced normality being restored, leaving room for disappointment.

Broadly though the view is that eventually consumers will channel pent-up savings into travel, shopping and entertainment, against a backdrop of abundant stimulus. In the meantime, investors are just trying to capture market moves when lockdowns are eased, said Hans Peterson global head of asset allocation at SEB Investment Management.

“All (market) moves depend now on the lower pace of infections,” Peterson said. “If that reverts, we have to go back to investing in the FAANGS (U.S. tech stocks) for good or for bad.”

(GRAPHIC: Renewed surge in COVID-19 across Europe –

(Reporting by Dhara Ranasinghe and Marc Jones; Additional reporting by Karin Strohecker; Writing by Sujata Rao; Editing by Hugh Lawson)

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BlackRock to add bitcoin as eligible investment to two funds



BlackRock to add bitcoin as eligible investment to two funds 2

By David Randall

(Reuters) – BlackRock Inc, the world’s largest asset manager, is adding bitcoin futures as an eligible investment to two funds, a company filing showed.

The company said it could use bitcoin derivatives for its funds BlackRock Strategic Income Opportunities and BlackRock Global Allocation Fund Inc.

The funds will invest only in cash-settled bitcoin futures traded on commodity exchanges registered with the Commodity Futures Trading Commission, the company said in a filing to the Securities and Exchange Commission on Wednesday.

A BlackRock representative declined to comment beyond the filings when contacted by Reuters.

Earlier this month, Bitcoin, the world’s most popular cryptocurrency, hit a record high of $40,000, rallying more than 900% from a low in March and having only just breached $20,000 in mid-December.

Bitcoin tumbled 10.6% in midday U.S. trading Thursday.

Other U.S.-based asset managers will likely follow BlackRock’s lead and add exposure to bitcoin in some form to their go-anywhere or macro strategies as the cryptocurrency market becomes more liquid and developed, said Todd Rosenbluth, director of mutual fund research at CFRA.

“It’s easy to see how strong the performance has been of late and look at a historical asset allocation strategy that would have included a slice of crypto and how returns would have been enhanced as a result,” he said. “Large institutional investors are going to be able to tap into the futures market in a way that a retail investor could not do.”

There is currently no U.S.-based exchange-traded fund that owns bitcoin, limiting the ability of most fund managers to own the cryptocurrency in their portfolios.

BlackRock Chief Executive Officer Larry Fink had said at the Council of Foreign Relations in December that bitcoin is seeing giant moves every day and could possibly evolve into a global market. (

(Reporting by David Randall; Additional reporting by Radhika Anilkumar and Bhargav Acharya in Bengaluru; Editing by Arun Koyyur and Lisa Shumaker)

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Bitcoin slumps 10% as pullback from record continues



Bitcoin slumps 10% as pullback from record continues 3

LONDON (Reuters) – Bitcoin slumped 10% on Thursday to a 10-day low of $31,977 as the world’s most popular cryptocurrency continued to retreat from the $42,000 record high hit on Jan. 8.

The pullback came amid growing concerns that bitcoin is one of a number of financial bubbles threatening the overall stability of global markets.

Fears that U.S. President Joe Biden’s administration could attempt to regulate cryptocurrencies have also weighed, traders said.

(Reporting by Julien Ponthus; editing by Tom Wilson)

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