Jonathan Hunter, global head of fixed income and currencies at RBC Capital Markets, talks about the changes required to comply with forthcoming margin rules, the need for standardisation, and the role of technology in the derivatives market
1IQ: What do you expect to be the biggest area of focus for derivatives market participants this year?
Jonathan Hunter (JH): The focus should be on adopting processes that enable the support of margining for non-cleared swaps. This can involve everything from pricing, margin calculation, modelling regulatory approvals and market education. The industry and regulators are taking a phased approach, so not everyone will be required to post margin for non-cleared swaps at the same time. Over the long term, I would expect there to be focus on how business models need to change to adapt to these processes.
2IQ: What is the biggest challenge for the derivatives industry at the moment?
JH: I believe it is the shift to more standardised solutions in the derivatives market. One of the things that made derivatives so successful was the creation of bespoke instruments that helped clients manage their risks and the coincidental creation of bilateral terms in support of those instruments. However, while that provided effective risk mitigation, it had a number of consequences in terms of creating more complexity in managing the credit, funding, capital and correlation risks of transactions. Now, due to regulatory reform and industry trends, we are moving to more standardised terms and processes.
Every participant in the derivatives industry is at different levels of knowledge, implementation and adoption, and so the challenge is providing standardised solutions to fit bespoke situations. If you can do that, I think that will be a real differentiator.
3IQ: In what way will derivatives markets change over the next five years?
JH: I think we will see an acceleration of the shift to a standardised framework.
4IQ: In what way can technology drive evolution of the derivatives market?
JH: Generally speaking, technology can help reduce complexity and cost. More specifically, technology can manage complex documentation, which will help to reduce operational risk; it can be used for settling derivatives, which we are beginning to see with the distributed ledger; and it can help to improve transparency for all market participants and regulators, which is already occurring.
In addition, although not operational yet, the formation of utility-type infrastructures will likely reduce costs and improve processing efficiency for all participants.
Technology is also driving more extensive and improved novation and compression-type services developed by central counterparties and vendors, which are enabling banks to better manage their current footprint.
5IQ: What ISDA initiative/initiatives are most important from your perspective?
JH: There are a number of initiatives that ISDA is working on right now that I believe are very important, including margin for non-cleared swaps and the standard initial margin model (ISDA SIMM), the Fundamental Review of the Trading Book, and the work on capital and regulatory engagement following various quantitative impact studies. There are a host of others, including managing cross-regional implementation risks. Ultimately, our broad focus is on identifying processes that make the markets safer and more efficient and make it easier for participants in the marketplace to do business.
6IQ: How long have you served on the ISDA board?
JH: I have served on the board since 2009. I joined following the financial crisis, when ISDA was looking to add Canadian representation on the board. I can tell you that the board composition, the developments I’m seeing in the industry, and ISDA itself, is night and day from when I first joined. I think there is more balance in representation from both the sell side, the buy side and industry utilities, and a greater focus now on ensuring the infrastructure is sound.
7IQ: Other than your current role, what job have you enjoyed most and why?
JH: I have had the opportunity to work in different locales in which RBC has offices, and in operations at different stages of development and position within the market. I started my career in Canada, where we are a full-service bank and have a very well-established brand – Canada’s largest financial institution, and one of the largest employers. I went to London in 2000, after we had bought Hambros Bank – we were still building our brand and were not well known. I moved to New York in 2006, where I had opportunity to grow our franchise in the US and grow our US dollar franchise globally. It’s the challenges of operating in those places where you have to build the franchise, the team and the culture that I really enjoy. It’s been an incredible journey.
8IQ: If you didn’t work in the derivatives markets, what do you think you would be doing?
JH: I would say playing golf, but one of my most recent scorecards confirms I should not quit my day job! I would have liked to have been a school teacher because I’ve always enjoyed explaining complex issues to people. One of my biggest joys with clients and colleagues is that moment when what you are explaining to them resonates and they understand the point you are making. I believe that if you can’t explain an issue to a person with limited knowledge of the topic, then you probably don’t understand it that well either. However, I’m not so sure the pace of teaching compared to the pace of this business would suit me as I’d get a little impatient!
9IQ: What’s your favourite memory of your time in the derivatives market?
JH: What’s most interesting given all of the challenges that we are facing with regards to regulatory reform, changes in the underlying business structure and how the market operates, particularly as it relates to derivatives, are those moments when we’ve worked hand in glove with a client to solve issues together. Whether they are documentation issues, exposure issues, regulatory issues, or jurisdictional issues – it’s those moments when both parties come to the table and recognise that each has slightly different drivers, but each equally understands and respects the other’s position. That creates the aha! moments when you arrive at a solution together. One of my favourite movie scenes is from Apollo 13, when Ed Harris’s character instructs his engineers to get together to brainstorm how to make a round filter fit into a square opening on the disabled spacecraft. The derivatives business and what’s been going on is very similar to that ‘square peg in a round hole’ analogy, and I think people are working towards that.
10IQ: What do you like to do in your spare time?
JH: I spend a lot of time with my family – my wife and three children, and our dog and cat. We have a cottage in Northern Ontario, and spend a fair amount of time there in the summer. I am fascinated with antique wooden boats. I’m not an expert, but I do own an antique boat. The biggest thing I like to do is just unwind a little. This is a fast-paced business with a lot of stresses and challenges, so family time is ever more important. I am also quite heavily involved in my local community through volunteering with the United Way, and through my board work at the Bishop Strachan School in Toronto. ■