First Read

New clearing model?
By Jim Kharouf, JLN – from the WFE/IOMA Conference in São Paulo

Have you been de-boarded? Get ready to swim.

Large institutions such as pensions, long-term funds and commercial hedgers might be about to get dumped, thanks in part to Basel III and other regulatory rules that have made such low volume, but high balance sheet firms no longer viable as customers. That’s the message from executives at the World Federation of Exchanges/IOMA conference in São Paulo, Brazil.

It’s no secret that the FCM model has been broken in the extended low/no interest rate environment that used to provide a major source of revenue for futures brokers. That has forced brokers to turn to commissions and high volume traders maintain positive cash flows. Now, with capital leverage ratios for banks, large commercial hedgers and institutions that trade infrequently are getting dropped by their banks. Jan Bart de Boer, chief commercial officer at ABN Amro Clearing, said firms are now having to price risk returns of customer accounts, the price of margin given the higher margin requirements at clearinghouses, and leverage ratio requirements as well.

“The leverage ratio will have to be priced in,” de Boer said. “Funds will be served and other service clients will go away.”

John McPartland, senior policy advisor, Federal Reserve Bank of Chicago, says he has a solution that could help such customers and free up valuable capital for clearing member firms – allow large institutional players to become members of the clearing house.

Here’s how it would work. Clearing member firms currently are required to put up 10 percent of the maintenance margin. As such, some of its largest customers – pension funds, endowments, corporate pensions, insurance companies – could be allowed to become clearing members, or “commercial clearing members.” This would serve a dual purpose. With huge balance sheets off their books, clearing FCMs would lower their capital requirements. Institutional firms, in turn, would help diversify the clearing house. And certain clearing services, outside simple initial margin and variation margin, will be outsourced back to clearing member firms along with compliance requirements to their former FCM.

Meanwhile, with commercial clearing members, clearing houses can further diversify its risk and make each settlement transactions much smaller.

McPartland argues that the current capital constrained environment is forcing market participants to think about new solutions. This could be one.


OIC Conference Preview: BOX CEO Ed Boyle on how the options industry is working to address market challenges

At this year’s Options Industry Conference in Miami Beach, participants will discuss such crucial industry issues as market quality and deteriorating volumes, the implementation of Dodd-Frank and Reg SCI, technology and risk management. The conference is hosted by BOX Options Exchange, whose new CEO, Edward Boyle, spoke with John Lothian News about some of these issues and what’s being done to address them.
Watch the video »

J.P. Morgan’s Barista-Turned-Banker Sees Good Things Brewing
For Starbucks worker Ivette Agosto, years of serving coffee to financiers got her noticed – and hired.

***DA: A friend of mine and fellow options market maker hired a few baristas from the Starbucks across from the old CME to clerk for him. One went on to become a rather successful trader. It has to do with the ability to think quickly, keep information sorted in one’s head and not get flustered when people are shouting at you.


GE sheds assets to sidestep G-Sifi status
Euromoney magazine
GE is to sell all non-captive finance assets within GE Capital. The market has greeted the move warmly, as it did the initial sale of $23 billion of real estate and financial services assets to Blackstone and Wells Fargo in April. The stock rose 10.8% when the news broke.

***DA: From diversified companies like GE, to agricultural giants like Cargill and, of course, clearing houses, dislocations related to capital rules will become the norm.


‘Flash Crash’ fight takes cash
Bart Chilton in USA Today
Five years ago on Wednesday, I turned down Jackson Browne’s Running On Empty on the car radio to answer a call from my office. The Dow Jones industrial average had dropped hundreds of points in a short time. As I spoke with surveillance experts, the market plummeted another 500 in 25 minutes (totaling nearly 1,000 points). Miraculously, within minutes it recovered almost completely. This freaky event became known as the “Flash Crash.”

***DA: Hands up who miss the music-themed musings of the former CFTC commissioner turned lobbyist.


U of I is letting you take all its MBA courses online—for free
Crain’s Chicago Business
Business-minded adults looking to squeeze in MBA classes will soon be able to skip the testing, paperwork, and interviews that entrance to business school usually requires and take all the classes that a full two-year MBA program typically offers. Perhaps the most important part: They can do it without paying a dime.

***DA: I am interested to see how this trend evolves. Colleges are giving the content away for free but still charging market rates for the actual degree – the only difference being whether one can add the “MBA” line item to one’s resume. I see further commoditization ahead.


Lead Stories

Accused flash crash trader tells UK court: I did nothing wrong
The British trader fighting extradition to the United States on charges of having contributed to the 2010 “flash crash” on Wall Street told a London court on Wednesday he had done nothing wrong and was just good at his job. Navinder Singh Sarao, 36, who traded from his parents’ modest home in west London, has been charged by the U.S. Justice Department with wire fraud, commodities fraud and market manipulation.

SunGard Prepares IPO, Aims to Raise Around $750 Million
Gillian Tan and Telis Demos, WSJ
SunGard Data Systems Inc. is preparing for an initial public offering, nearly a decade after a group of private-equity firms acquired it in an $11 billion deal that helped usher in a wave of megabuyouts before the financial crisis.

Wall Street group backs BATS exchange’s U.S. market reform proposal
A Wall Street trade group on Tuesday threw its support behind a proposal for regulatory reform of the U.S. stock market that exchange operator BATS Global Markets suggested earlier this year, including slashing exchange fees. The proposal would reduce complexity while making the markets more transparent and fair, the Securities Industry and Financial Markets Association (SIFMA), said in a letter to the U.S. Securities and Exchange Commission.

‘Flash crash’ overhaul is snarled in red tape
Bradley Hope & Andrew Ackerman, MarketWatch
The Consolidated Audit Trail, or CAT, originally was conceived as a way to enable regulators to monitor stock and options orders in real time and zero in on manipulators quickly. Yet the 10 organizations overseeing the process, including Nasdaq OMX Group Inc. and Intercontinental Exchange Inc. which operates the New York Stock Exchange, still haven’t chosen a firm to build and run it, and a final plan hasn’t been approved by the Securities and Exchange Commission.

Future is Fixed Income for J.P. Morgan, Citi
The three U.S. universal banking giants have largely stuck with their fixed income trading desks, despite poor returns and a constant flow of litigation. But according to research from Alliance Bernstein, the price of commitment will vary.

Bankers and Regulators Voice Fears on Bond Market Volatility
Wall Street chieftains, huge investment firms and top bank regulators are all sounding the same alarm. In recent months, they have been warning that the world’s bond markets, where companies and countries borrow trillions of dollars, are in danger of breaking down.

EU to review behaviour of web giants in digital market overhaul
The European Commission will conduct a comprehensive review this year of the role of web giants such as Google, Facebook and Amazon to decide whether it should regulate them more tightly, it said on Wednesday.

‘Let the best exchanges win’ declares BATS Options
The Trade News
BATS Options has laid down the gauntlet to its competitors as it prepares to launch its second exchange in the crowded US options market. The exchange operator plans to launch the additional platform – EDGX Options – in November 2015, after more than doubling its market share in US options over the past year.

BlackRock’s On a Mission to Save the Credit-Default Swaps Market
Bloomberg Business
BlackRock Inc. is leading a push to revive trading in a key part of the credit derivatives market that’s shrunk 57 percent as post-crisis regulations made it costlier to trade. The world’s biggest asset manager is targeting contracts known as single-name credit-default swaps — those tied to individual companies and countries.

This Is the First Person to Be Tried in the Libor-Rigging Case
Bloomberg Business
When Thomas Hayes walks into a London courtroom next week, he will be the first person to face trial for allegedly rigging the benchmark interest rates used to value $350 trillion of loans and securities. It only took seven years to get here.


Futures Watchdog Can’t Afford Routine Inspections, Massad Says
Bloomberg Business
The top U.S. derivatives regulator said his agency lacks resources to conduct even routine inspections of the exchanges and other companies it polices. “We simply can’t get into these entities on a regular basis,” Commodity Futures Trading Commission Chairman Timothy Massad told lawmakers in Washington on Tuesday, speaking two weeks after the arrest of a trader accused of manipulating a futures market over five years.

JPMorgan says currency probe settlement talks in ‘advanced stages’
JPMorgan Chase & Co said on Tuesday it is in “advanced stages” of settlement talks with the U.S. Department of Justice and Federal Reserve over previously disclosed investigations into its foreign exchange trading.

CFTC’s Wetjen says proprietary traders should be encouraged to trade on SEFs
Neil Roland, MLex
The US Commodity Futures Trading Commission should make it easier for proprietary traders to transact on swap execution facilities to increase volume on the electronic platforms, Commissioner Mark Wetjen said.

SEC Announces Outreach Programs to Help Firms Comply With Regulation Systems Compliance and Integrity
The Securities and Exchange Commission today announced it has opened registration for outreach programs to help firms comply with an SEC rule that aims to protect investors by strengthening the technology underpinning U.S. securities markets.

Regulator mulls pay hikes for Fannie Mae and Freddie Mac CEOs
The regulator of mortgage finance firms Fannie Mae and Freddie Mac could allow them to raise the pay of their chief executives in order to keep and attract talent at the government-controlled entities, company officials said on Tuesday.

Bank of Canada Overhauls Rules to Keep Markets Working in Crises
Bloomberg Business
Bank of Canada Overhauls Rules to Keep Markets Working in Crises – Bloomberg Business
Canada’s central bank is overhauling its rules to keep financial markets operating, incorporating lessons from the 2008 crisis, Bank of Canada Senior Deputy Governor Carolyn Wilkins said Tuesday.

European Securities And Markets Authority Board To Meet In Riga
The Financial and Capital Market Commission in close cooperation with the European Securities and Markets Authority (ESMA) will hold a visiting session meeting of ESMA Board of Supervisors in Riga on 6-7 May. The event will be devoted to current events in the financial instruments market.

Testimony of Commissioner Mark Wetjen before the U.S. House Committee on Agriculture Subcommittee on Commodity Exchanges, Energy, and Credit Subcommittee
Reauthorization provides Congress an opportunity to reflect on the work of the commission and determine legislative solutions to any identified inadequacies. I appreciate the subcommittee’s efforts to approach reauthorization thoughtfully by listening to all stakeholders, such as in the subcommittee’s hearing with end-users on March 24 and with market participants on March 25, as well as in today’s hearing.

Exchanges & Trading Facilities

BM&FBovespa Boosts Stake in Santiago Exchange Amid Expansion
Bloomberg Business
BM&FBovespa SA, the operator of Latin America’s biggest securities exchange, increased its stake in Chile’s Bolsa de Comercio de Santiago. BM&FBovespa paid 6.6 billion pesos ($10.8 million) for an additional 6 percent share in Santiago’s exchange, according to a regulatory filing Tuesday, pushing its stake to 8 percent.

Euronext appoints interim CEO as Cerutti exits
The Trade News
Euronext has named Jos Dijsselhof as its interim chief executive officer, after accelerating the departure of Dominique Cerutti who leaves the company just two weeks after announcing his resignation.

Euronext Publishes First Quarter 2015 Results
“Today we are announcing results that reflect the hard work we have put in to execute on our strategy and which demonstrate that we are on the right track. We have been able to over deliver on our promises, thanks to tight cost controls, robust volumes in our cash trading, strong tailwinds and a buoyant IPO market.”

Intercontinental Exchange profit, revenue beat
Intercontinental Exchange Inc.’s profit rose 21% in the first quarter as revenue grew across its segments and the exchange operator continued reducing its operating expenses. The results beat analysts’ expectations. ICE posted a profit of $315 million, or $2.80 a share, up from a year-earlier profit of $261 million, or $2.27 a share. Excluding certain items, earnings rose to $3.06 a share.

CBOE RMC, September 28-30, 2015, Geneva, Switzerland
The Chicago Board Options Exchange (CBOE) and CBOE Futures Exchange (CFE) will host the 4th Annual CBOE Risk Management Conference (RMC) Europe, from September 28 through September 30, 2015, at the InterContinental Hotel in Geneva, Switzerland.

***DA: That comes right on the heels of the FIA/SFOA Burgenstock conference, same location. Two birds, one stone?

Continued volume growth in SGX securities and derivatives markets for April
Singapore Exchange (SGX) saw continued growth in securities trading and record volumes in its derivatives market. There were 21 trading days in April 2015 as compared with 22 trading days in March 2015 and 21 trading days in April 2014.

TMX Group Consolidated Trading Statistics – April 2015
TMX Group Limited today announced April 2015 trading statistics for its marketplaces – Toronto Stock Exchange, TSX Venture Exchange, TMX Select, Alpha, Montreal Exchange (MX) and NGX.

MIAX Options Exchange Will Conduct A Disaster Recovery Test On Saturday, May 16,2015
MIAX will operate out of our disaster recovery site and participating customers must connect to the MIAX disaster recovery site IP addresses for all interfaces. All MIAX feeds will be published from the disaster recovery site IP addresses. Connectivity tests can be completed the week of May 11, 2015.

Hedge Funds & Managed Futures

Hedge fund pay down as top 25 managers bank total of $11.6bn
Miles Johnson, FT.com
The world’s 25 best paid hedge fund managers earned a combined $11.62bn last year even as the industry suffered from largely mediocre performance and growing criticism from some of its largest investors. Hedge fund pay, however, almost halved from a $21.5bn total in 2013 when surging equity markets helped the industry’s 25 highest earners rake in earnings roughly equivalent to the gross domestic product of Jamaica.

ECB set to decide on increasing Greek bank lifeline
The European Central Bank’s Governing Council on Wednesday may nudge up the amount of Emergency Liquidity Assistance teetering Greek banks can borrow, as Athens struggles to avert a potentially catastrophic funding crunch.

Virtu’s Currency Profit Doubles as HFT Firm Posts First Results
Bloomberg Business
Virtu Financial Inc. said its income from trading currencies has doubled, making foreign exchange the high-frequency trading firm’s fastest growing asset class. Profit from currency trading rose 103 percent to $42.2 million in the first quarter from a year earlier, Virtu said in its maiden results after becoming a public company last month.

Buffett and Ackman Hate U.S. Bonds and the Losses Are Piling Up
Bloomberg Business
It’s taken just two weeks for U.S. government-bond investors to lose $195 billion. Nothing materially changed in the outlook for global growth, and another Federal Reserve meeting came and went without anything particularly noteworthy happening.

Banks & Brokers

UBS: told you so
Is that a touch of swagger over at UBS? A knowing look of “I told you so”? As rivals fret about strategy – Deutsche Bank has just launched a new one as Credit Suisse welcomes a new chief executive – UBS looks most content with the plan it set out in 2012, based on a slimmed-down investment bank complementing a core wealth management business.

Goldman raises top end of ‘reasonably possible’ legal loss
Financial News
Goldman Sachs raised the top end of its range of “reasonably possible” legal expenses to about $3.8 billion, the Wall Street firm said Tuesday in a regulatory filing.

JPMorgan says currency probe settlement talks in ‘advanced stages’
JPMorgan Chase & Co said on Tuesday it is in “advanced stages” of settlement talks with the U.S. Department of Justice and Federal Reserve over previously disclosed investigations into its foreign exchange trading.

UBS Shows It Should Keep Clear of Old Habits
Even the best reformed characters can struggle not to be tempted back into their old ways. But UBS has cleaned up its act the most among European banks and the signs are

Tullett Prebon says revenue for four months to April rises 15 pct
Although level of activity in wholesale OTC financial markets in which we predominantly operate has continued to be subdued, it has been more stable

BGC Partners’ Newmark Grubb Knight Frank to Acquire Computerized Facility Integration, LLC
PR Newswire
BGC Partners, Inc., a leading global brokerage company servicing the financial and real estate markets, today announced that it has entered into an agreement to acquire Computerized Facility Integration, LLC (“CFI”). CFI is a premier real estate strategic consulting and systems integration firm that manages over three billion square feet globally for Fortune 500 companies, owner-occupiers, government agencies, healthcare and higher education clients.

ADM profit jumps on strong oilseed processing results
U.S. agribusiness Archer Daniels Midland on Tuesday reported a higher-than-expected quarterly profit on strong oilseed crushing margins and robust global demand for soybean meal. Chicago-based ADM reported a net first-quarter profit of $493 million, or 77 cents per share, up from $267 million, or 40 cents per share, a year earlier.

Clearing & Settlement

European Commission: Commissioner Hill Welcomes Agreement On The Revised Payment Services Directive
The European Commission welcomes today’s political agreement on the proposal for a revised Directive on Payment Services. The agreement follows so-called trilogue negotiations between the Commission, the European Parliament and the Council of Ministers. The revised Payment Services Directive (known as PSD2) brings a number of new important elements and improvements to the EU payment market.

Are OTC derivative rules a blessing or a curse?
The Trade News
Asia’s OTC derivatives markets have been both blessed and cursed by the fact they have implemented the structural reforms demanded by the Group of 20 in the wake of the larger European and US markets. Blessed, in the sense that they can learn from the mistakes and experience of those countries that went before.

Global OTC derivatives drop to $630tr
The Nation
The over-the-counter (OTC) derivatives markets contracted in the second half of 2014 by some nine per cent. OTC derivatives statistics for the second half ended December 2014 released by the Bank for International Settlements (BIS) showed that the notional amount of outstanding contracts fell by nine per cent from $692 trillion to $630 trillion between the end of June 2014 and the end of December 2014.

Indexes & Products

The Bloomberg Commodity Index (BCOM) increased 5.7% in April, with 14 out of 22 index constituents trading higher. Energy was the best performing sector, up 13.8%, led by WTI Crude (20.8%). Grains dropped 4%, led lower by Hard Red Wheat (-11.5%). Industrial Metals increased
7.8%, led higher by Zinc (12.9%) and Nickel (12.5%). Precious Metals moved 0.8% lower in April. Softs returned 7.8%, led by Sugar (11.3%). Livestock increased by 1.7%, led by Lean Hogs (7.4%). Commodity-linked ETPs saw relatively quiet outflows, losing less than 1% of market cap.

SGX seeks feedback on revised price limits for SGX MSCI Taiwan futures
Singapore Exchange (SGX) is launching a consultation on proposed revisions to price limits for the SGX MSCI Taiwan Index Futures contract traded on its derivatives market. SGX proposes to widen the range of the Initial Price Limits of the contract to 10% away from the previous trading day’s daily settlement price versus 7% currently. SGX also wishes to remove the Intermediate Price Limit.

Launch Of The Solactive Oekom Ethical Low Volatility Index – Used As Underlying For BNP Paribas Investment Products
Solactive AG has launched the Solactive oekom Ethical Low Volatility Index, which was created to track the price movements of low volatility stocks passing the ESG screenings of oekom research, a leading rating agency for sustainable investments. BNP Paribas has licensed the Index to launch a wide range of products, from capital protected to more complex structures designed for both retail and institutional clients in Germany, Austria and Scandinavia.

Fidelity Promotes Active Management Amid Index Funds’ Popularity – Mutual Fund Commentary
Recent Fidelity ads have been vocal about the “power of active management”. Mutual Fund behemoth Fidelity Investments has been a popular name in actively managed funds that have been managed by eminent managers. Fidelity has built a strong reputation, aided by stock pickers including Joel Tillinghast and Peter Lynch among others.

S&P DJI launches ‘Stock Connect Index’
Global Investor Magazine
S&P Dow Jones Indices has launched its first index tailored to the Shanghai-Hong Kong Stock Connect programme with its S&P Access China A Dividend Opportunities Index. The index tracks the performance of high-yielding common stocks traded on the Shanghai Stock Exchange that are available to foreign investors through the Shanghai-Hong Kong Stock Connect program. This is S&P Dow Jones Indices second China A shares index, its S&P Access China A Index launched in February 2015.


TIG Advisors Signs On To Eze Software Group’s Full Investment Suite
Eze Software Group, a premier provider of global investment technology, has brought TIG Advisors, an investment management firm with approximately $3 billion in assets under management, live on its investment suite. TIG Advisors, which operates multiple investment strategies on its platform, has chosen Eze Software’s order management and portfolio management systems to manage its investment workflows and is in the process of adding Eze Software’s execution management system. TIG is one of 17 Eze Software clients to sign on for its full investment suite.

EU regulators launches cross-border e-commerce investigation
European Union antitrust regulators opened an investigation into cross-border e-commerce on Wednesday in a move aimed at removing borders to online sales as part of a broad strategy to overhaul the bloc’s digital market.

SAP has zero interest in buying Salesforce.com – CEO
SAP Chief Executive Bill McDermott said his company has “zero interest” in acquiring software rival Salesforce.com. Bloomberg reported last week that Salesforce was approached by a potential acquirer and that it had hired financial advisors after receiving the offer, citing people with knowledge of the matter.

Financial upheaval from new payment platform to test government
Financial Review
Several federal and state government departments are facing a raft of policy issues and either modifications or massive overhauls of their back-end finance processing systems when a new, nationwide electronic payments platform begins arriving on the scene from next year.


CFTC sues two UAE traders for allegedly spoofing gold futures
The U.S. Commodity Futures Trading Commission (CFTC) sued two gold futures traders from the United Arab Emirates, alleging they engaged in unlawful disruptive trading practices known as “spoofing” by placing bids and offers with the intent to cancel them before execution.

Hong Kong’s Securities and Futures Commission Bans Wong Wai Hong For Six Months
The Securities and Futures Commission (SFC) has banned Mr Wong Wai Hong, former Chairman and Chief Executive Officer of Lyncean Securities Limited (Lyncean Securities), from re-entering the industry for six months from 4 May 2015 to 3 November 2015 for breach of the SFC’s Code of Conduct.

Environmental & Energy

SGX Progresses on Sustainability Reporting
Singapore Exchange (SGX) announced plans to increase the transparency of governance with sustainability reporting on a “comply or explain” basis”. This move also recognises increased global interests on sustainability issues. SGX is starting with a consultation exercise for “comply or explain” sustainability reporting with its listed companies.

Compressed Air to Challenge Batteries in Energy Storage Race
Bloomberg Business
A technology used in ancient Greece to power clocks and fire a cannon is undergoing a revival as the world searches for better ways to store energy from wind turbines and solar panels.

China to expand coal ban to suburbs
China will expand its bans on coal burning to include suburban areas as well as city centers in efforts to tackle air pollution, the top energy agency said on Tuesday.

European companies close to exhausting cheap U.N. carbon credits
European companies have used almost all of their quotas of cheap U.N. carbon credits to reduce emissions costs under the EU Emissions Trading System (ETS), which is likely to push up their compliance costs in later years, analysts said on Tuesday.


It’s Time to Get Ready for the End of China’s Bull Market
Bloomberg Business
For Chinese investors with a sense of history, the nation’s world-beating equity rally is looking long overdue for a reversal. The bull market turned 883 days old on Tuesday, topping China’s previous record by 56 days, after a 119 percent surge in the Shanghai Composite Index since December 2012.

Exclusive: China lets more government firms trade commodities derivatives overseas – sources
China has more than tripled the number of central government owned firms allowed to trade commodities derivatives overseas without regulator approval, sources told Reuters, in a move that will give China more clout in global markets for metals, energy and agricultural products.

Frontier Markets

Never Mind Oil, Iran’s About to Shake the World Pistachio Market
Bloomberg Business
Iran is ready to return to the global commodities market, flooding it with fresh supplies and risking a slump in prices. Oil? Possibly, but there’s a second industry that could be even more disrupted by a nuclear pact between Iran and the west: pistachio nuts.

The World’s Next Big Trading Block May Be India
Bloomberg Business
A new Common Market is being formed. It has a bigger economy than the whole of sub-Saharan Africa, more states than the European Union has members, and twice the population of North America. It’s called India.

India Closer to Landmark Sales Tax That May Boost Growth
Bloomberg Business
India’s lower house of parliament voted Wednesday to amend the constitution to allow for a national sales tax, a step toward creating a unified market for commerce.

Sebi notifies debt conversion norm for banks in distressed cos
Business Standard News
To help lenders deal with defaulting borrowers, Sebi has notified new norms for banks to convert their debt into equity in distressed companies — a move that may lead to a sharp rise in restructuring of bank loans.

READ MORE: John Lothian Newsletter: Accused flash crash trader tells UK court: I did nothing wrong; SunGard Prepares IPO, Aims to Raise Around $750 Million; Wall Street group backs BATS exchange’s U.S. market reform proposal.

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