Continued from Part One on October 9

While the London Metal Exchange closure of the nickel market had major consequences for the exchange, its members like Sucden Financial and the commodities market more broadly, the January 2023 cyber attack on ION Markets has challenged the entire financial industry.

Some 42 futures brokers were left unable to process client trades for days after the attack, making cyber-security a top priority for derivatives regulators globally.  

Sucden Financial chief executive officer Marc Bailey said his firm “had very little exposure to ION” but the financial industry is now working through the consequences of the attack.

“We were relatively lucky in that our ION exposure was relatively modest but that’s not really the point. The point is that the industry relies on vendor solutions and we are all being challenged quite rightly by the regulator to consider operational resilience and cyber-security.”

London-based Sucden Financial hired in September Chris Roberts as its chief technology officer, partly, Bailey says, because of his expertise in IT security. Roberts was formerly the chief technology officer and chief information security officer at Clara Pensions and, before that, a head of infrastructure at the London School of Economics.

Bailey continued: “Part of the reason why I took a chief technology officer from outside of the industry was because the individual concerned is an expert in cyber-security and operational resilience. We have spent a lot of time building our GRC tool and that has given us a lot of visibility into our ops resilience, and where we’re doing well and where we need to improve.

“One of the things we have identified is that where we rely on vendors, what assurances can we get from vendors that their cyber-security and ops resilience programmes are robust enough to serve our needs.

He added: “This is something that regulation can help with and I think regulation should be able to mandate that vendors are required on request to provide certain levels of information to users about their operational resilience measures.”

Bailey said technology firms are not currently obliged to disclose their cyber-security precautions to customers, leaving firms like his in the dark about what is now a key security concern.

“As a consumer of vendor services, we might ask but they might say: “We’re not going to tell you” but that doesn’t take away that we still need that service to run our business. I do think this is an area where the regulator could help the users of vendor-based services to make the vendors more accountable to the user group.”

Asked about the industry’s reliance on a small handful of technology firms, Bailey said the barriers to entry are high: “The challenges with any piece of the financial services industry is that firms need a lot of resource to challenge the incumbent. If you look at the story of ION, the reason the industry was so reliant on ION was partly because ION consolidated in many other areas. If the regulator was unduly concerned about why there are not more alternatives, it should look at the consolidation of technology platforms that support the industry.”

While Sucden Financial plans to move into Europe with a new Hamburg office, the firm also wants to do more in China. The British broker was approved in March to trade on the Shanghai International Energy Exchange (INE), the Dalian Commodity Exchange and the Zhengzhou Commodity Exchange.

Bailey said: “We have an overseas intermediary (OI) status on the three international Chinese commodities exchanges, which allows our clients to trade on these markets in renminbi. We have non-residential accounts approved by China's central bank, and through these accounts, we can convert USD into renminbi to trade and then change the proceeds back to dollars.”

The Sucden Financial chief said his firm is trading copper every day on the INE which means clients can trade the LME, CME COMEX and INE arb on the same screen.

“The next step is to go for the Soy complex on the Dalian exchange which makes sense as our parent is a specialist softs commodity trading house and we expect to be able to offer them access almost immediately to arb against the soy on CBOT.”

He added: “We’ve not had any client enquiries to be involved in Zhengzhou but we can be client responsive as we have the OI access to all three Chinese exchanges.”

Looking ahead, Bailey said his team is looking to leverage its momentum in copper by offering clients an aluminium arb with China: “We would for example welcome access to the aluminium market in China but the discussions we have had suggest the authorities don’t think the market is liquid enough yet to open to overseas intermediaries. We respect that and hope in time that will change.”

Asked if the already gradual opening up of China’s vast onshore futures market is currently in effect slowing down, Bailey said: “The rationale for allowing access to onshore Chinese markets is, like everything in China, something they do very thoughtfully and very slowly. I wouldn’t expect anything retrograde, that is they take away what there is, but I do think the progress will be thoughtful and maybe at a slower pace than they have done before.”

Sucden Financial has in recent years been working to diversify its product coverage away from commodities focused on two areas: foreign exchange and bonds.

Bailey said: “With the global macro picture changing with higher interest rates this year, the two businesses that have benefitted have been the FX business and the STIR (short-term interest rate) business. We have seen an absenteeism from the metals market because I think they have all come to trade bonds and rates, and that has spilled over slightly to FX.”

He continued: “I think we are surprised that FX volatility has not been higher – we’ve not really seen moves in excess or one or two percent in a day – but, with the rates hikes in the Euro, from the Fed and in the UK, some of that has spilled into the currency markets where we have seen good opportunities on forwards and on bullion.”

The chief executive said the firm has also been working hard on FX options including first generation exotics including knock-ins, knock-outs and barriers, something Bailey describes as “a nice add-on to the core FX business”.

Sucden Financial became in October last year a market-maker on ICE Futures Europe, the London-based platform that is home to most liquid European and British STIRs contracts. That came after the firm acquired in July 2022 the trading and technology assets of Atlantic Trading London.

Bailey said: “We’re active market-makers on SONIA and Euribor, and we are now price takers on SOFR, formerly known as Eurodollars. That business has gone well, it’s been a volatile period. Last year they did reasonably well and they experienced high volatility in March when the SVB event happened and, since then, the conditions for market-making have improved again. STIRs have given us some portfolio diversity which is partly an add-on to the FX business but it’s a macro business.”

Deutsche Boerse market Eurex plans to challenge at the end of this month ICE Futures Europe’s dominance in European STIRs by relaunching its Euribor contract backed by an incentive scheme.

Bailey said: “If we get our European regulation, we would very much like to be a participant on Eurex. We have the technology, in fact we’ve still got the Co-Lo in Frankfurt as part of the Atlantic deal.”

Lastly, Bailey commented on the prospect of increasing competition in the futures commission merchant space in response to the news that New York-based Clear Street has applied to the US regulator to launch an FCM.

Bailey said: “We welcome competition because it keeps everyone honest. In terms of FCMs, there is room for more at the moment, but they would need to come with a more effective technology offering.”

He continued: “There are one or two new products that have come to market so you could be a little bit niche on certain things. Some FCMs may be saying we don’t want to do this or that kind of business and the combination of ED&F Man Capital Markets and Marex did take away for a while a bit of competition.”

Marex bought ED&F Man Capital Markets last year, effectively merging two of the main FCMs.

Echoing his comments about the industry’s over-reliance on a few technology firms, Bailey said there is now a real need for a next generation of clearing technology. “The industry has been using a handful of vendors for 50 years so you’ve got to believe there’s an opportunity for someone that uses technology in the right way,” he added.

Sucden Financial is celebrating this year its fiftieth anniversary with various activities aiming to raise £50,000 for an East London community charity.

To find out more about the Sucden Financial Community Fund, please click here, and to make a donation, please visit Sucden Financial’s JustGiving page.