First Read

Hits & Takes
JLN Staff

The CFTC’s Technology Advisory Committee showed me a few things yesterday. One, the CFTC Commissioners seem to like and respect each other and get along. That has not always been the case. Two, there is a lot of work to be done on crypto-assets regulation. Three is that there is a tremendous spirit of cooperation in the industry to figure all this out.

I learned from an AI expert that AI will take over the world. I learned from a cyber-security expert that I am not paranoid enough. I saw the CME Group’s Bryan Durkin knock the ball out of the park as he explained the breadth of the market protections, systems and functionalities the CME has put in place over the years.

I learned a lot about Bitcoin trading from the presentation from Rich Gorelick, now head of market structure for DRW. He spelled out the DRW experience with cryptomarkets and the risks traders need to address.

In the end, the CFTC’s Dan Gorfine organized and executed a very good Technology Advisory Committee meeting that set the agenda for work to be done by yet to be named TAC sub-committees. I look forward to the opportunity to contribute to one of them.~JJL

IMC Chicago has been certified as a great place to work by @GPTW_US.~JJL

The second Cboe bitcoin (XBT) futures settlement occurred yesterday. The price was $9195 and, per the press release, more than 282,000 total contracts have traded since launch.~SD


JPX taps Cinnober for updated clearing system; The newly launched JPX clearing system includes real-time clearing and risk technology services.
By Hayley McDowell – The Trade
Japan Exchange Group (JPX) has launched its new clearing system for exchange-traded derivatives (ETD) using Cinnober’s post-trade technology.

**** Two John Lothian News sponsors working together. It is a beautiful thing.~JJL


DRW calls for physical settlement of bitcoin futures
Prop shop’s head of market structure says underlying spot exchanges are not transparent enough

**** Yes, he did.~JJL


Wednesday’s Top Three
Our top read story by a long shot yesterday was JLN’s piece by Spencer Doar, What’s the Deal With the VIX Manipulation Letter? Inaccuracy and Misunderstanding, about the whistleblower letter to regulators on the VIX. Second went to another JLN piece, from Chuck Mackie, Highlights from the International Blockchain Conference. Third was the Livemint piece on the Indian index story, FIA seeks talks with Indian exchanges; SGX shares down 7%



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Lead Stories

Should Congress Create a Crypto-Cop?
Peter J. Henning – NY Times
Cryptocurrencies like Bitcoin and Ether have seeped into the public consciousness. Colleges including Duke and the Massachusetts Institute of Technology are offering classes in the blockchain technology that undergirds these virtual currencies to crowds of eager students.

The New Wizards of Wall Street; Private-equity firms are doing more of their own investment banking work, which brings fees but also risks and costs
Paul J. Davies – WSJ
The $3.7 billion buyout of a Dutch parking lot company doesn’t sound like the most exciting deal—but the way it was done shows that big private-equity firms can now behave like old fashioned investment banks. They can use their own balance sheets to move quickly, make big bets and earn fees from partners. But as they become more powerful on Wall Street, there are greater risks of conflicts and scrutiny.

House Votes to Require SEC Subpoena for Traders’ Source Code
Yueqi Yang – Bloomberg
The code is a secret sauce that fuels firms’ profits; Bill also applies to trading algorithms from hedge funds
The House voted Wednesday to ensure the U.S. Securities and Exchange Commission would continue to have to seek a subpoena before accessing proprietary source code from high-frequency traders, the secret sauce that fuels profits.

IRS to Ban Hedge-Fund Tax Dodge on Carried Interest
Miles Weiss – Bloomberg
Treasury secretary says agency to issue guidance in two weeks; Senator Ron Wyden calls new carried-interest limits a ‘farce’
Treasury Secretary Steven Mnuchin said the Internal Revenue Service plans on closing a loophole that hedge-fund managers had been trying to exploit to avoid paying higher taxes on carried-interest profits.

Don’t bet on Mifid II’s quiet start lasting; Studies this week from UK regulators suggest they are serious about enforcing the rules
Philip Stafford – FT
The biggest overhaul of European financial markets arrived with a whimper. Six weeks after the introduction of Mifid II, and you’ve got to really hunt for any evidence of the rules actually changing anyone’s behaviour.

Harvard, Hawaii Gambled on Market Calm—Then Everything Changed; Harvard, Hawaii and others, pressed to improve returns, made risky bets that depended on low stock-market volatility
Gregory Zuckerman, Gunjan Banerji and Heather Gillers – WSJ
A decade of low bond yields pushed some of the most stability-minded investors to dabble in risky investments that depended on markets being orderly. Now, those bets are looking problematic.

Worries over exotic exchange traded funds deepen; Market volatility adds to scrutiny over ETFs’ use of derivatives to juice up returns
Robin Wigglesworth – FT
Activist investor Carl Icahn and BlackRock founder Larry Fink have clashed over the merits of exchange traded funds, but they agree on one subject: ETFs that use derivatives to juice up returns for investors are a bane.

Out of 250,000 cryptocurrency traders, less than 100 paid taxes, according to survey
Aaron Hankin – Marketwatch
As nearly all major digital assets on Wednesday were rallying, the cryptocurrency market was contemplating a notable climb in Litecoin and questions about which digital-asset traders are forking over money to the Internal Revenue Service.

Sorry, not sorry: Wall Street not quitting ‘vol’ products
Trevor Hunnicutt – Reuters
One bank has expressed its regrets for the unraveling volatility trade.
But in general Wall Street is offering up apologia – rather than an apology – for the dramatic windup last week of investment products that had profited from calm stock markets.

Austrian Bitcoin ‘Scam’ Triggers Police Search Across Europe
Boris Groendahl – Bloomberg
Interpol asked to find suspects in Denmark, Latvia, Germany
Police got ‘hundreds’ of complaints from Austrian investors
Austrian authorities are asking Interpol to help them track down suspects in an alleged Bitcoin scam that blew up last year and may have hit hundreds of investors in the country and abroad.

Bitcoin Charity Donations Increased 10-Fold in 2017
Jeff John Roberts – Fortune
Bitcoin owners had a very good year in 2017 as the cryptocurrency leapt from $1,000 in January to nearly $20,000 by end-of-year—which is probably why some of them are sharing their financial windfall.

FX trading volumes rise sharply in Jan, early Feb – CLS
Reuters Staff
Foreign exchange trading volumes jumped 24 percent in January from a year earlier, data from CLS showed on Thursday, as investors ramped up bets on a weaker dollar and uncertainty about the end of the era of cheap money stoked volatility.

Welcome to the Post-New Normal Era in Markets; With higher U.S. wage inflation, market participants will begin to doubt the Fed can remain committed to “gradual normalization.”
Larry Hathaway – Bloomberg
Get ready for the post-new normal. Recent market volatility reflects more than just an unwinding of positions or the failure of a few esoteric volatility products. The catalyst for the sell-off arrived on Feb. 2 in the form of higher-than-expected U.S. wage inflation. Although a few data points aren’t conclusive evidence, it won’t be long before market participants begin to doubt the Fed can remain committed to “gradual normalization.” The implications of such a shift in sentiment cannot be overstated.

Hartfield, Titus & Donnelly’s Chris Ferreri; Electronification of the Municipal Bond Market: Chris Ferreri, Hartfield, Titus & Donnelly
TABB Forum
While the municipal market typically features illiquid, infrequently traded bonds, the market mechanisms are in some ways more advanced than in other, more developed institutional markets. But there still is a role for the voice broker in trading less-liquid products, says Chris Ferreri, COO, Hartfield, Titus & Donnelly. Speaking with TABB Group founder and research chairman Larry Tabb at our recent Fixed Income conference in New York, Ferreri explains the unique workings of the muni bond market, the advent of the MuniBrokers platform, and the state of electronification in municipal bond trading.

Exchanges, OTC and Clearing

Japan Exchange Group Live with Cinnober’s Clearing and Risk solutions
Financial IT
Japan Exchange Group (JPX) successfully launched its new clearing system for exchange traded derivatives, based on Cinnober’s TRADExpress RealTime Clearing, and a CCP Risk solution. The JPX ETD derivatives market is operated by the Osaka Exchange (OSE) and cleared by the Japan Securities Clearing Corporation (JSCC), both part of JPX.

FC Bari becomes first Italian club to join blockchain-based London Football Exchange
FC Bari 1908 has agreed (subject to contract) to become the first Italian club to join the London Football Exchange (LFE) in order to access the LFE Fan Experience platform by trading football equity on the blockchain and giving thousands of ordinary fans a level of access that they have never seen before.

Intercontinental Exchange and Magellan Midstream Successfully Launch Auction for Short Term Crude Storage Capacity at Magellan East Houston Terminal
Intercontinental Exchange
Intercontinental Exchange, a leading operator of global exchanges and clearing houses and provider of data and listings services, and Magellan Midstream Partners, L.P.announced the launch of a new auction for a portion of multi-month Permian WTI storage capacity at the Magellan East Houston Terminal. Recently, a total of 1.5 million barrels of Permian WTI storage at the Magellan East Houston Terminal were leased on the ICE trading platform, with an average of 400,000 barrels leased per month. The auctions are designed to help bring additional transparency and efficiencies to the storage and transportation of crude oil in the U.S. Gulf Coast.

Canadian Securities Exchange unveils blockchain clearing platform; Exchange operator aims to offer investors securities token offerings which are regulated by securities commissions, unlike ICOs.
Hayley McDowell – The Trade
The Canadian Securities Exchange (CSE) has developed a securities clearing and settlement platform using blockchain technology.

Canadian Stock Exchange Launches ‘Fully-Regulated’ Token Funding Platform, ‘Unlike’ ICOs
Molly Jane Zuckerman – Cointelegraph
The Canadian Securities Exchange (CSE) announced yesterday, Feb.13, that they will soon launch a securities clearing and settlement platform based on the Ethereum (ETH) Blockchain that lets companies raise capital with security tokens.

Bursa Malaysia extends trading hours, contract months for crude palm futures
Malaysia’s derivatives exchange said it would extend the trading hours, tenure of contract months and position limits of its crude palm oil (CPO) futures contract effective Feb. 26, according to a document posted on its website on Wednesday.

Decommissioning of old 10 Gbit/s Eurex Co-Location infrastructure
After the successful introduction of Co-Location 2.0 in June 2017 and the announcement of the ordering stop of the old 10 Gbit/s Eurex Co-Location infrastructure (hereafter referred to as Co-Location 1.0) in December 2017, Eurex Frankfurt will decommission Co-Location 1.0 by 30 September 2018. After this date, it will only be possible to connect to the Co-Location 2.0 infrastructure.

ASX Ltd Half-Year Media Release
ASX Ltd Half-Year Results Analyst Presentation
Appendix 4D and ASX Ltd Half-Year Financial Statements

SMU team beats 109 others in NUS-SGX Stock Pitch Competition 2018
A team from Singapore Management University (SMU) has emerged as the winner of the NUS-SGX Stock Pitch Competition finals held last night at the Singapore Exchange (SGX) auditorium.

Deletion from the JPX-Nikkei Index 400
Tokyo Stock Exchange, Inc. and Nikkei Inc. will make the following deletion from the JPX-Nikkei Index 400 constituent in accordance with the constituent selection rule.


Are fintechs making an impact on treasury functions?
Euromoney Magazine
Technology may be creeping into every aspect of banking and corporate treasury, but there seems to be a low appetite for working with fintechs and more demand for a focus on traditional banking relationships and business understanding.

It’s Getting Harder to Tell Banks From Tech Companies; Just imagine the day that Goldman Sachs offers an Uber-for-mergers app.
Matt Levine – Bloomberg
You know, someone invented the XIV ETN. And someone invented the VIX, and VIX futures. And when you read the technical specifications for all of those things, it is clear that they are not trivial feats of engineering. Teams of marketers and traders and quants and technologists and lawyers put many hours into getting them just right, so that they would work as intended. They are technologies, highly engineered tools designed to help customers do things that they couldn’t have done before. They are financial technologies, built not out of screens and circuit boards but out of formulas and hedging strategies and legal documents, but that is what you’d expect: Financial firms ought to innovate in financial technology.

Supercharge Your Spoofing Surveillance with TT Score
Jay Biondo and Morgan Trinkaus – Trading Technologies
On January 29, 2018, the CFTC and the DOJ coordinated announcements regarding the filing of civil enforcement actions by the CFTC, naming five corporations and six individuals, and the filing of criminal actions by the DOJ against eight individuals (including six of the same persons named in the CFTC actions), for engaging in, or aiding and abetting, spoofing in the U.S. futures markets. The CFTC actions imposed fines ranging from $1.6 million to $30 million, which was the highest CFTC spoofing penalty to date. The announcement also marked the largest futures market criminal enforcement action in the history of the DOJ.

Fintech Won’t Keep the Loan Sharks from the Door; Would non-bank lenders really be any kinder to borrowers?
Mark Gilbert – Bloomberg
“There can’t be all this smoke without some fire,” lawmaker Andrew Tyrie complained at a 2014 hearing into whether Royal Bank of Scotland Group Plc mistreated 5,900 business customers. For incendiary material, how about a leaked internal memo suggesting clients should be given enough rope to “hang themselves?”

Berkshire’s Charlie Munger calls bitcoin ‘totally asinine’; Warren Buffett’s long-time sidekick speaks on tech, healthcare and his advancing years
Tim Bradshaw in Los Angeles – FT
There cannot be many nonagenarians who spend their time worrying about cryptocurrencies.

Interactive Brokers fined $4.5 million for algo trading system failures; Hong Kong authorities found Interactive Brokers breached code of conduct for execution of algo and electronic orders.
Hayley McDowell – The Trade
Financial authorities have fined the Hong Kong-based arm of Interactive Brokers $4.5 million due to failures relating to its algorithmic and electronic trading systems.

Coincheck hit by lawsuit as investors seek restart of cryptocurrency withdrawals
Thomas Wilson – Reuters
Cryptocurrency investors launched a lawsuit against Coincheck Inc on Thursday, seeking to force the Tokyo-based exchange to allow them to withdraw assets worth $183,000 frozen after last month’s $530 million heist of digital money.

Number of crypto hedge funds doubles in four months: Autonomous NEXT data
Hedge funds focused on trading cryptocurrencies more than doubled in the four months to Feb. 15, hitting a record high of 226, showed new data from fintech research house Autonomous NEXT on Thursday.


House Backs Bill That Would Benefit Fintech Partnerships With Banks; Legislation would ensure bank loans retain original interest rate even if sold to nonbanks
By Lalita Clozel – WSJ
The House on Wednesday approved a bill that would make the resale of high-interest loans more attractive to third-party buyers such as debt collectors—and bolster fintech firms’ partnerships with banks. The bill passed 245-171. Nearly all Republicans voted for the measure, while Democrats were divided.

ISDA CEO Scott O’Malia Testimony to US House Financial Services Committee

When Trump’s SEC Punishes Wall Street, It’s Often Done Quietly
Matt Robinson, Benjamin Bain – Bloomberg
Cases against hedge funds, banks came with no press releases; Former SEC enforcement officials say they’ve noticed a shift
Under President Donald Trump, a top financial regulator isn’t embarrassing Wall Street as much as it used to.


Opening Statement of Commissioner Rostin Behnam before the Technology Advisory Committee Meeting
I’d like to begin by wishing Commissioner Quintenz a Happy Valentine’s Day; and equally important, thanking him for convening today’s meeting, and for his sponsorship and leadership of the Technology Advisory Committee (TAC).

Opening Statement of Commissioner Brian Quintenz before the Technology Advisory Committee
Good morning and welcome to the first 2018 meeting of the Technology Advisory Committee (TAC or Committee). I want to take a moment to thank you all very much for taking the time to be here today, particularly those of you traveling from across the country. I would also like to thank Dan Gorfine, the Acting Chair of the Committee and the Director of LabCFTC, as well as Jorge Herrada, for their hard work in planning this meeting and putting together such a robust agenda for our discussion.

ESMA launches Interactive Single Rulebook
The European Securities and Markets Authority (ESMA) is launching its Interactive Single Rulebook, which is a new service for market participants and other interested stakeholders across the European Union. The tool is launched today with the Level 1 text of the UCITS Directive, and links to all relevant Level 2 and Level 3 measures already available elsewhere on ESMA’s website.

Extension of Time Requests Relating to FINRA Rule 4210
FINRA is updating the Regulatory Extension (REX) system to include enhanced functionality that will better enable firms to request extensions of time related to FINRA Rule 4210, inclusive of requests for extensions of time in connection with the margin requirements for Covered Agency Transactions that will become effective beginning June 25, 2018. This Notice contains information about the REX system update, including a REX Customer Test Environment (CTE) that FINRA will make available to assist firms in testing their systems to ensure their readiness for the updated system.

SIFMA Testimony on Legislative Proposals Regarding Derivatives
Kenneth E. Bentsen, Jr., President & CEO of SIFMA, testified before the U.S. House of Representatives Committee on Financial Services Subcommittee on Capital Markets, Securities, and Investment at a hearing entitled “Legislative Proposals Regarding Derivatives.”

FCA explores creation of global sandbox
The UK’s Financial Conduct Authority is looking into the creation of a global regulatory sandbox, enabling fintech firms to carry out tests in different countries at the same time and helping watchdogs to identify and solve common cross-border problems.

Investing and Trading

Hedge funds outperform stocks and bonds on risk-adjusted basis
Hedge funds have produced more consistent and steadier returns than equities or bonds over both the short term and the long term, according to new research by Preqin and the Alternative Investment Management Association (AIMA).

Charlie Munger urges regulators to ease off Wells Fargo, blasts bitcoin
Jonathan Stempel, Jennifer Ablan – Reuters
Charlie Munger, the longtime business partner of fellow billionaire Warren Buffett, said on Wednesday it is time for regulators to “let up” on Wells Fargo & Co (WFC.N), which will end up “better off” as it corrects a series of mistakes in how it treated banking customers.

Hottest U.S. Bond Trade of 2017 Is Heading Across the Atlantic
By John Ainger – Bloomberg
Curve flatteners increasingly in demand on ECB Rate Hike Bets; German five- to 30-year yield spread is narrowest since 2016
The flattener fever is spreading to Europe. Investors are betting that the difference between long- and short-dated yields in European government bonds will narrow this year in an echo of a similar trade on the U.S. curve that was among last year’s most lucrative. Allianz Global Investors is positioned to benefit from a further flattening of the bund curve, while HSBC Holdings Plc is recommending a similar wager in the euro swap market.

Time Heals All Wounds as VIX Curve Improves by Most Since 2008
Luke Kawa – Bloomberg
Spread between contracts posts biggest shrinkage since 2008; Return of contango should help remaining inverse-VIX products
For the VIX futures curve, time has healed all wounds. The enormous spread between front and second-month VIX futures contracts, which are tied to the Cboe Volatility Index, was a barometer of just how roiled the market was during the recent downturn. It also caused severe pain (and in one case, death) for some products linked to the VIX.


Bunge CEO: Board backs management after company earnings miss
P.J. Huffstutter and Karl Plume – Reuters
Agricultural merchant Bunge Ltd reported a worse-than-expected loss for the fourth quarter on Wednesday, the latest in a string of poor results that has left the company’s management fending off takeover bids from rivals.
Several years of abundant grains supply on global markets have made it tough for Bunge and its rivals to turn a profit on their core business: buying, processing and selling corn, soy and wheat.

Banks Told They’re Lagging on Response to Climate Change Risks
Jeremy Hodges – Bloomberg
Under 50% of banks have hard targets for low carbon products; Most banks failing to ingrain climate strategy into business
Fewer than half the world’s biggest banks are doing enough to forestall climate change that poses risks to their markets and economies.

ETF Investors Might Not Really Know What They’re Buying Anymore
Rachel Evans – Bloomberg
ETNs, like XIV, shouldn’t be confused with other securities; Industry executives are calling for better classifications
What’s in a name? When it comes to exchange-traded funds, the answer could mean the difference between surviving a volatile market and getting wiped out.

New Trick to Pitching Hedge Funds Is to Call Them Anything Else
Hema Parmar, Somali Basak, John Gittelshon – Bloomberg
Money managers try cryptic names to avoid negative stereotypes; Many investors are abandoning hedge funds for cheaper options
When Jonathan Hook, chief investment officer at the Harry and Jeanette Weinberg Foundation, appears before the board to push investments in hedge funds, he chooses his words carefully.

Here’s an Idea for Goldman: Buy Bank of New York Mellon
Antony Currie – NY Times
There’s a potentially ideal merger partner for the $104 billion Goldman Sachs. The Wall Street firm’s chief executive, Lloyd C. Blankfein, told shareholders on Tuesday that it was already having some success turning around its stumbling fixed-income, currency and commodities trading unit. But buying $56 billion Bank of New York Mellon could be a better fix — if only the asset-management and custody specialist weren’t in a different league.


Navigating a China Dip
Mark Harrison – CFA Enterprising Investor blog
Visiting Hong Kong for the first time in two decades, I see evidence of breakneck economic transformation everywhere: swathes of new skyscrapers, enticing shopping malls, filled with outlets selling nothing but luxury watches, and everywhere a crush of cheery tour groups from China’s booming mainland.

PNB scam: How India’s 2nd largest bank fell victim to one of biggest frauds; The finance ministry has issued an advisory to all banks to review their large customer exposures, according to media reports
India’s Punjab National Bank, the second-biggest state-run lender, stunned the country’s financial sector when it announced this week it had discovered fraudulent transactions worth $1.77 billion at a single branch in Mumbai.

Soyabean prices hit 7-month high on Argentina drought worries
Emiko Terazono – FT
Grain and oilseed traders are on tenterhooks as Argentina drought concerns continued to push soyabean and soya meal prices higher.

French companies complain of skills shortages; As growth picks up employers struggle to find trained staff
Anne-Sylvaine Chassany in Valenciennes – FT
In Valenciennes, the northern French automotive bastion where Aurélien Martel was born, unemployment is a daily struggle for many, but not for the 37-year-old maintenance worker, whose skills are in short supply.

Iran holds 100 traders and freezes accounts in dollar crackdown; Operation to halt slide in rial viewed as signal of economic trouble
Najmeh Bozorgmehr in Tehran – FT
Iranian authorities have detained almost 100 currency traders and frozen bank accounts reportedly worth 200tn rials ($5.3bn) in the biggest crackdown on foreign exchanges in six years.


EU wants power to raid financial firms in Britain after Brexit
James Crisp – Telegraph
The European Union will demand the right to raid financial services firms in Britain after Brexit and hand its regulators sweeping new powers, as Brussels moves to shackle the City of London with red tape after the UK leaves the bloc.

How can London keep its doors open after Brexit?
Helen Cahill – City AM
The government will put forward its immigration plans later this year (Source: Getty)
The future of the UK’s immigration system after Brexit will be decided this year when the government brings forward its Immigration Bill.

Brussels eyes corporate tax to fill EUR15bn Brexit hole in EU budget; Juncker’s warning to member states sets scene for hard bargaining in negotiations
Jim Brunsden and Mehreen Khan in Brussels – FT
Brussels is urging EU leaders to consider radical options such as raiding corporate tax receipts and money raised from selling carbon emission permits to fill a EUR15bn a year budget hole left by Brexit.


At Thomson Reuters, Tensions Between Family and Board Ratchet Up With Blackstone Deal; David Thomson was concerned the board didn’t do enough to seek a higher price for a stake
Jacquie McNish and David Wighton – WSJ
The board of Thomson Reuters Corp. TRI 0.85% recently pressed ahead with plans to sell a piece of its business to Blackstone Group BX 0.69% LP for $17 billion despite its chairman’s concerns that directors had failed to seek a higher price or consider other potential buyers, people close to the deal said.

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