BNP Said to Lose $80 Million on S&P 500-Linked Derivative Trades
Donal Griffin, Harry Wilson and Alastair Marsh – Bloomberg (SUBSCRIPTION)
BNP Paribas SA, the biggest French bank, lost $80 million in derivative trades linked to the U.S. stock benchmark late last year as turmoil gripped global markets, according to people familiar with the matter.
Antoine Lours, the New York-based head of U.S. index trading, has yet to return to the bank since going on his Christmas vacation after positions he took on the S&P 500 Index went awry, the people said, asking not to be identified because the details are private. The majority of the losses came over several days in the run-up to the holiday, the people said.
****JB: In related news, BNP Paribas to close U.S. commodities trading desk
OCC Appoints Chris Isaacson of Cboe Global Markets to Board of Directors
OCC, the world’s largest equity derivatives clearing organization, announced today that Chris Isaacson, Executive Vice President, Chief Operating Officer of Cboe Global Markets, Inc., has joined OCC’s Board of Directors as an Exchange Director. He replaces Edward Tilly, Chairman, Chief Executive Officer and President of Cboe Global Markets, who resigned from OCC’s board earlier this month.
One options trader made a million-dollar bet that GE’s darkest days are over
Tyler Bailey – CNBC
General Electric shares were under pressure Tuesday after longtime J.P. Morgan analyst Stephen Tusa said to avoid the stock into earnings later this month.
Mark Carney warns of volatility after MPs vote down Brexit deal
Caroline Binham – Financial Times (SUBSCRIPTION)
Mark Carney, the governor of the Bank of England, said a surge in the pound following parliament voting down the government’s Brexit deal was caused by markets predicting there was now less chance of the UK crashing out of the EU without an agreement.
“The market is waiting,” Mr Carney told MPs on Wednesday, adding that he expected continued volatility. He said he put “little weight” in short-term market moves.
Bets on pound volatility point to Brexit delay
Cost of protecting against near-term swings in sterling have fallen since May defeat
Eva Szalay – Financial Times (SUBSCRIPTION)
Currency markets have reacted to the defeat of Theresa May’s Brexit plans with a shrug, with sterling barely budging on the basis that any scenario — from a no-deal divorce to no Brexit at all — still remains in play.
Brexit Reaction: Here Are Market Players’ Key Takeaways on Saga
Adam Haigh – Bloomberg (SUBSCRIPTION)
After Britain witnessed the biggest defeat for any government in modern history in the voting down of Theresa May’s Brexit deal, finance professionals are positioning for what’s next.
Many believe there’s an increased chance Britons will get to vote again in a national ballot on Brexit — a repeat of the 2016 vote that triggered May’s rise to the helm in negotiating the U.K.’s exit. Below, lightly edited insights from market strategists, investors and analysts on what happens now.
Quants Take Beating as Momentum Strategy Lags Stock Rebound
Justina Lee – Bloomberg (SUBSCRIPTION)
Equity investors are fleeing the darlings of yesteryear, hit by valuation fears and spiking correlations.
In a sign of vanishing confidence in the bull market’s biggest anchor, $275 million fled the iShares Edge MSCI USA Momentum Factor ETF on Tuesday — the biggest one-day withdrawal since May — even as the broader index edged higher.
Oil Dips as U.S. Production Surge Stokes Fears of Global Glut
Alex Nussbaum – Bloomberg (SUBSCRIPTION)
Oil tumbled on a report that U.S. production surged and fuel inventories climbed, but signs that OPEC’s plan to drain a global glut is taking hold eased the losses.
Exchanges and Clearing
A tale of two CCPs
Louie Woodall – Risk.net
Clearing houses are designed to manage the derivatives market’s systemic counterparty risks, by centralising them, collecting margin and applying rules for the orderly sharing of losses. In theory, when a default hits, the pain is kept within the thick walls of the central counterparty, rather than spilling out into the wider markets.
Two recent episodes have shed some light on how this works in practice. Last September, Nasdaq Commodities consumed EUR114 million ($131 million) to plug the default of a single trader, Einar Aas. Of that total, EUR7 million was a slice of the CCP’s own capital, and the rest came from its default fund – last-ditch reserves contributed by each member.
****SD: (Not paywalled.) From the story: “Ice Clear Europe’s futures and options service incurred a whopping $1.2 billion peak breach of its own, nearly 20 times larger than anything on record prior.” According to Risk.net sources, the Ice breach was due to a single member’s carbon futures trading activity ? that member was able to meet Ice’s margin call.
December Options Review
Record average daily volume (ADV): 3.94M contracts traded per day, a sixth consecutive record year
Record Interest Rate options ADV: 2.4M contracts/day
Record Equity Index options ADV: 823K contracts/day
Record Agricultural options ADV: 263K contracts/day
Record Metals options ADV: 58K contracts/day
Record total volume: 994 million contracts traded
Record electronic volume: 66% traded electronically
Record open interest: 78 million contracts on November 21, 2018
Record weekly options ADV: 723K contracts/day, representing over 18% of total options volume
Fixed Income Highlights – January 2019 edition
Starting the year off with good momentum is always a step in the right direction and last year was a good year for Eurex across Fixed Income. The standout performance of the year was the Italian BTP segment where the short-term Italian futures alone saw a volume increase of 48.6%. H1 2018 saw average daily volumes (ADV) for the ten and two-year BTP futures of 130,269 and 70,639 contracts respectively. None of this would have been achievable without the continued support of our members. The success is testament to those liquidity providers and clients. I am thankful for their ongoing support, which allows me to look forward to 2019 with even more energy and optimism.
Eurex Clearing Appoints Dimitrij Senko as Next CRO
David Kimberley – Finance Magnates
Eurex Clearing, a subsidiary of Deutsche Boerse, announced on Wednesday that it has chosen Dmitrij Senko its next Chief Risk Officer (CRO).
Regulation & Enforcement
FIA Urges Regulators to Eliminate Barriers to Clearing
FIA today filed a response to the Basel Committee on Banking Supervision urging the adoption of FIA’s suggested modification to the leverage ratio and recognize the exposure-reducing nature of client collateral in order to align regulatory incentives. Central clearing of derivatives was a key pillar of the G20 countries response to the post-2008 financial crisis reforms to reduce systemic risk in the financial system. However, to date, the leverage ratio’s failure to recognize collateral has had a direct negative impact on the ability of banks to provide clearing services to customers.
Hedge Funds Reluctant to Back Brexit Optimism as Fog Swirls
Ruth Carson – Bloomberg
While strategists argue U.K. Prime Minister Theresa May’s Brexit bill defeat sets up some bullish scenarios for the pound, few hedge funds remain willing to go all in.
AMP Capital Investors Ltd. bought sterling through its dynamic markets fund on Tuesday as Sydney-based portfolio manager Nader Naeimi wagered on a temporary relief rally in the beaten down currency. But Naeimi, whose firm oversees the equivalent of $135 billion, has since taken profit on the trade.
Volatility Risk Premium Or VIX Futures Premium? Knowing The Difference
Stuart Barton – Seeking Alpha
Following a recent RIA Channel Webinar we presented with VelocityShares, we received a series of questions that reminded us of the many facets of volatility trading that people feel far from comfortable with. Beyond the simpler questions, like whether or not the VIX is an investable index (it is of course not), there seemed to be a general misunderstanding of where the returns in popular VIX-linked Exchange Traded Products (ETPs) like SVXY and ZIV come from. This misunderstanding seems to stem from a confusion of terms like contango, roll yield, Volatility Risk Premium (VRP), and Futures Risk Premium (NASDAQ:FRP). This article will try and explain the source of these returns by more clearly describing the difference between VRP and FRP.
Goldman Says U.S. Stock Drop to Hit Growth as Rich Curb Spending
Joanna Ossinger – Bloomberg
The stock-market sell-off is going to be a significant drag on the U.S. economy this year as wealthy households feel its impact, according to Goldman Sachs Group Inc.
Lower equity prices could take half a percentage point off U.S. gross-domestic product growth in 2019, with overall tighter financial conditions restricting expansion by around 1 percentage point, Goldman economist Daan Struyven wrote in a note Tuesday. In October, he had said the positive wealth effect from equity gains in 2017 and early 2018 had likely evaporated.
JP Morgan Feels Market Volatility Despite Record Q4 Profit
Rey Mashayekhi – Yahoo Finance
JP Morgan Chase became the latest Wall Street bank to report the damage of December’s volatile market conditions, disclosing a decline in revenues and profits in its investment banking business driven by a weaker fixed income markets sector.
The nation’s largest bank still reported largely positive results overall, with total net revenue up 4% year-on-year in the fourth quarter, to $26.8 billion, and a 67% hike in quarterly net profits, to nearly $7.1 billion. JP Morgan noted that the $7.1 billion profit represented a record for the fourth quarter, as did its full-year 2018 net profit of $32.5 billion.
`Dude, How Can You Know That?’ Eisman Wondered as Pound Rallied
Charlotte Ryan and Shoko Oda – Bloomberg
“Dude, they just voted, how in the world can you know that?”
That was the thought flashing through Steve Eisman’s mind as he was peppered with analyst recommendations in the minutes after Theresa May’s Brexit deal was roundly rejected by the U.K.’s Parliament.