Fed G-Sib plan threatens 50bp jump in FCM capital
Louie Woodall – Risk.net
A below-the-radar move to tweak the way the US Federal Reserve assesses systemic risk could force banks to raise billions of dollars in extra capital to support their client clearing businesses, critics claim.
A rule change proposed by the Fed on August 24 would require banks to include all cleared derivatives transactions in its Banking Organization Systemic Risk Report, known as FR Y-15. The report is used to calculate the capital surcharge for the eight US global systemically important banks. The new reporting requirement would result in an estimated $46 trillion of client-cleared notional being factored into the complexity component of the G-Sib calculation for the first time.
****SD: Ahhhh! As if the big banks with substantial options clearing businesses didn’t have enough onerous regs to deal with… This quote from the article hits the nail on the head – “Fed governor Jerome Powell talked about the need to align capital regulations with the goals of central clearing, and this rule is completely contrary to that.” The 2016 US G-sib surcharges – State Street and BNY Mellon in the 1.5% bucket; Wells Fargo in the 2% bucket; Goldman, Morgan Stanley and BAML in the 3% bucket; Citi in the 3.5% bucket and JP Morgan in the 4.5% bucket.
Shorting volatility: Rising risks mean itchier trigger fingers
Saqib Iqbal Ahmed – Reuters
A long stretch of low volatility for U.S. stocks has made betting on continued calm a popular and lucrative trade, but traders and strategists warn that risks to the trade have mounted, while the potential for profits has shrunk.
****SD: I just hope folks have the safety engaged.
Exclusive: Macquarie leapfrogs Goldman to join top tier of commodity banks
Eric Onstad – Reuters
Australia’s Macquarie Group Ltd has overtaken Goldman Sachs to break into the top three banks for commodities business, having significantly expanded its U.S. energy operations in recent years while rivals cut back.
****SD: “Oi Oi Oi!”
Binary Options are Here to Stay
Daniel P Collins – Futures Magazine
Binary options are based on a simple proposition; will X market reach Y level by Z time. Binary options ask a “yes” or “no” question, the answer of which creates a certain outcome. Binaries trade between 0-100, if the answer to the question is yes at expiration, the option settles at 100; if the answer is no, it settles at zero.
****SD: There was a ton of options related material in this month’s edition of Modern Trader. So this is a “reprint,” I guess, but not at all stale.
Options on ETFs & ETFs on options
Daniel Collins – Futures Magazine
There is a growing demand for options on exchange-traded funds (ETFs) as well as ETFs that deliver options-based strategies. It is the result of the endless pursuit of yield in a period of shrinking volatility along with the long-term trend toward passive investment strategies.
****SD: See the above comment.
SEC Hacking and Secret Accounts
Matt Levine – Bloomberg
Look, it doesn’t rise to the level of a Law of Insider Trading, but really, if you can insider trade by hacking into the computer systems of the Securities and Exchange Commission itself, without being caught, then … I am not saying that you should do that, of course, but it would be pretty cool if you did.
OPEC’s ‘Problem Children’ Are Holding Down Oil Prices
Benoit Faucon, Summer Said, and Sarah Kent – WSJ
The Organization of the Petroleum Exporting Countries is scrambling to contain output from its strife-torn members Libya and Nigeria, where surging production could threaten to derail the oil cartel’s efforts to withhold crude supply and raise its price.
Exchanges and Clearing
Are We too Reliant on Exchanges for Data?
Jonathan Bloch, Exchange Data International – TABB Forum
Technology has released a torrent of data that has led to more accurate analysis, more efficient placement and faster global execution. As a result, financial markets have changed beyond recognition over the past 30 years. But there is a risk that markets are unintentionally harboring a data provision oligopoly.
****SD: Exchanges don’t think of themselves as just exchanges anymore. They are technology companies and data providers. Let’s just say the cats that started collecting market data decades ago just because they thought “why not, this could be useful” are looking pretty smart. Returns are way better than collecting comic books…
Pay capped for top Deutsche Boerse execs
John Bakie – The Trade
Deutsche Börse has announced it is capping executive pay for board members from this financial year onwards.
Regulation & Enforcement
Mnuchin’s Incomplete Treasury Staff Could Be a Risk in Crisis
Saleha Mohsin – Bloomberg
The Treasury Department still lacks permanent officials in half of its highest-ranking political jobs more than eight months into Donald Trump’s presidency, leaving Secretary Steven Mnuchin shorthanded as he tries to carry out the administration’s ambitious economic agenda.
CFTC Chair Giancarlo: Embracing Blockchain Is in the ‘National Interest’
Aaron Stanley – Coindesk
Blockchain is in America’s “national interest.”
That’s according to J. Christopher Giancarlo, chairman of the Commodity Futures Trading Commission (CFTC), who issued the bold proclamation in remarks at a gathering of government technology executives in Washington, D.C. Wednesday morning.
First Derivatives launches major machine learning investment in Kx technology
Institutional Asset Manager
First Derivatives (FD) has launched a raft of initiatives to put machine learning (ML) capabilities at the heart of future development for the Group’s Kx technology, in direct response to increasing interest from current and potential customers.
JPMorgan Taps Warsaw for Operations Center, Heralding Thousands of New Jobs
Jeff Patterson – Finance Magnates
European lenders have already been aggressively publicizing plans to relocate their operations within the bloc out of the UK, having resulted in high personnel turnover. In light of this shift, JPMorgan has taken a different course, opting to install a new operations center in Warsaw.
Put-Call Parity and Dynamically Hedging Stock Options
Doug Ashburn – The Ticker Tape
A recent article introduced negative theta—that is, options positions that lose theoretical value each day due to the passage of time. The article demonstrated how this theta “cost” actually provides a potential benefit in the form of long gamma.
Can Amazon keep this pace?
Dan Keegan – Futures Magazine
On July 5, 1994, Jeff Bezos founded Amazon.com Inc. It was based in Seattle but its reach was worldwide. It started out as an online bookseller and eventually Amazon drove Borders Books into bankruptcy. It was a short life for Borders, which was portrayed as an evil predator to mom and pop bookstores, but Amazon would grow to become the real Death Star to brick and mortar retail stores. Amazon now sells just about everything online and it is even looking to deliver most of its products via drones.
VIX-Tracking ETPs Are a Risky Bet Over the Long Haul
Adam McCullough – Morningstar
While most investors focus on stock market performance, it is also possible to bet on expected market risk using instruments tied to the CBOE Volatility Index, or VIX. Long VIX positions are essentially a bet on higher market risk, which often coincides with poor market returns. Conversely, being short the VIX conveys a view of lower expected market risk and higher market returns.
Are Ups and Downs in Equities Seasonal?
Sage Anderson – tastytrade blog
Having grown up in a household with both parents in the financial industry, my awareness of the stock market started at an early age.
I can remember during my first few months in college I would ask people around me “how the Dow Jones is doing today” and be met with blank stares.
My background also meant that I had heard a lot about (and lived through) “Black Monday,” a market crash in 1987 that saw the Dow Jones Industrial Average drop roughly 23% in one day.
Notably, Black Monday occurred in the month of October, which was coincidentally the same month that captured another famous crash (“Black Thursday”), which occurred in 1929.
Strategy: Why risk premiums have collapsed and why this may change
On Wednesday, the FOMC took an historic step and began the long process of unwinding its balance sheet. Financial market volatility rose slightly following the decision but the reaction was short-lived and the VIX volatility index closed on Thursday at lower levels than just before the FOMC decision. Interestingly, at a time when geopolitical risks keep popping up and central banks are moving towards exit, market volatility is at rock bottom. This year is the first year since 2005 that the S&P 500 has not seen a single daily move of more than 2% (see Chart 1), while the VIX volatility index is close to an historical low (Chart 2).
FIA announces 20 fintech startups chosen for Innovators Pavilion
FIA announced that 20 companies have been chosen to exhibit in the Innovators Pavilion at the 33rd Annual FIA Expo in Chicago October 17 – 19.
Theresa May urges EU to retain trade terms for two years after Brexit
PM Theresa May has said there should be a two-year transition period after Brexit, during which trade should continue on current terms.
North Korea Ramps Up International Rancor With H-Bomb Threat
Jonathan Cheng – WSJ
North Korea’s latest threat—to detonate a hydrogen bomb over the Pacific Ocean—if carried through would mark a new level of defiance in the face of warnings from the U.S. and the international community.
****SD: Not to be confused with the monstrous rancors of Star Wars fame (Jabba kept one as a pet if you recall). Reuters has the related price action – Wall Street pushed down by rate expectations, North Korea, Apple. And this is a fun one from Reuters too – What’s a ‘dotard’ anyway? Kim’s insult to Trump
Another event to study
One of the ways economists have tried to estimate the effects of the Fed’s program of large-scale asset purchases (LSAP) is using event studies of how the market responds in the thirty minutes following Fed statements of changes in the program. Yesterday’s announcement from the Federal Reserve that it is starting a gradual process of reducing its balance sheet gives us one new data point for such efforts.
****SD: Also see the WSJ’s $2 Trillion Later, Does the Fed Even Know if Quantitative Easing Worked?
What’s a tier 1, tier 2 and tier 3 investment bank now?
Sarah Butcher – eFinancialCareers
Once upon a time, people used to talk about “bulge bracket investment banks,” a term that loosely meant top US banks like Goldman Sachs, J.P. Morgan and (then) Merrill Lynch. The bulge bracket passed with the 2008 financial crisis, and since then it’s become more common to talk in terms of banks that are tier one, tier two, or tier three – but which is which? Today’s release from research firm Coalition offers an insight. Things are not what they used to be.