The CAT Saga Continues; Treasury Swings Jump Like It’s 2016

Mar 26, 2019

Observations & Insight

The Industry Leader Series: Terry Duffy, CME Group
Every year, John Lothian News puts together an industry leader series filmed at FIA’s annual conference in Boca Raton. The number of interviews filmed this year is a JLN record and the footprint of the market participants involved is similarly far-reaching.

In the lead up to the conference, JLN sat down with CME Group Chairman and CEO Terry Duffy to discuss what 2019 holds for the world’s largest derivatives exchange, covering such topics as political uncertainty, the NEX integration, and following up on a record 2018.

Watch the video »


SG America’s FCM business aims to be different
Jim Kharouf, JLN
In today’s FCM world, it’s tough to be different.
The job is still pretty straightforward – help clients execute trades and manage the post-trade process. There are more steps and pieces that come with that than most participants know or want to know. Most just want to get a trade done and booked and move along to the next one.
The revamp of regulations over the past 10 years has made FCM brokerage more difficult in many ways and certainly more expensive from an audit and compliance perspective. The good news is that the industry has also become far more technology driven. Yes, this is old news, but the growth of FCMs is firmly embedded in technology – for connectivity, trading tools, access to more markets and even in the algorithms used by traders today.

Lead Stories

The CAT Saga Continues
Harshad Pitkar, RegEdge – Tabb Forum
Despite murmurs about Thesys’s ability to deliver on the Consolidated Audit Trail and several missteps along the way, the news that it would be replaced as the plan processor still came as a surprise to most industry participants. Though further changes to the current rollout plan under FINRA are not expected, the transition will be complex. RegEdge CEO Harshad Pitkar looks at what happens next, why there likely will be another delay, and what the industry should do now.

****SD: If it’s not delayed now I’d be surprised.

Treasury Swings Jump Like It’s 2016
Yakob Peterseil – Bloomberg (SUBSCRIPTION)
Rates vol index stages 2-day rally after hitting record lows; Market acting as the ‘release valve’ for macro pressure – BMO
The calm in Treasury markets has snapped. A measure of U.S. rates volatility just staged its biggest two-day surge since 2016 as the vanishing spread between short- and long-term borrowing costs — typically seen as a harbinger of a recession — intrudes upon the calmest rates market in a generation.

Oliver Wyman Misdiagnoses the Causes of the Commodity Traders’ Malaise, and Prescribes Nostrums to Treat It
Craig Pirrong – Streetwise Professor
There are many silly things written about commodity traders, and alas many of the purveyors of this silliness get paid large amounts of money for it. Case in point, this just-released Oliver Wyman study, “Commodity Trading Goes Back to the Future.” The piece begins with a well-recognized fact (that I’ve written about frequently in the past): commodity trading firm margins are down, relative to 2014-15, and especially 2008-9.

****SD: I was told very, very early in my derivatives reporting career to NEVER use “Back to the Future” references, but only after I’d done it once. I had the benefit of being 25. Wyman itself is 35, and the Marsh & McLennan group of companies, of which Oliver Wyman is a part, is 100+ years old. No excuses. (I’ve been very pleased to see Professor Pirrong has spent much of 2019 back on market subjects. For a while there it felt more like the Beltway-wise Professor.)

INTL FCStone accelerates growth in Asia-Pacific with Singapore deal
Will Acworth – MarketVoice
INTL FCStone, which owns one of the largest independent futures brokers in the U.S., has set its sights on Asia. On March 19, the firm announced a deal with Singapore’s United Overseas Bank to buy its futures trading and clearing business. Once the deal closes, INTL FCStone plans to establish a full-service brokerage in Singapore and use it as the foundation for expanding its presence in the region.

****SD: A lot more detail on the recent deal.

Traders scramble for sterling protection amid Brexit uncertainty
Christopher Whittall – IFR
Demand for protection against a steep slide in sterling has reached its most extreme level since the aftermath of the Brexit vote nearly three years ago, as concerns grow among the financial and business community over the outcome of the UK’s efforts to leave the European Union.

Hedge funds increase appetite for oil
John Kemp – Reuters
Hedge funds bought another 65 million barrels of petroleum futures and options in the week to March 19, taking total purchases over the last 10 weeks to 384 million barrels, according to reports published on Friday.

Regulation & Enforcement

Back to the Marc Rich Days as U.S. Probes Commodity Traders; Executives fear U.S. authorities are zeroing in on the industry once again
Andy Hoffman, Javier Blas and Mark Burton – Bloomberg via ThinkAdvisor
Not since the days of fugitive oil merchant Marc Rich has the commodities trading industry faced so much global scrutiny. The biggest independent oil and metals trading houses, including Vitol Group, Trafigura Group Ltd., Glencore Plc., Mercuria Energy Group Ltd. and Gunvor Group Ltd., are facing bribery and corruption investigations in jurisdictions ranging from Brazil to Switzerland and, most importantly, the U.S.

CFTC settles market manipulation case against food groups; Mondelez and Kraft were accused of ‘huge’ wheat futures purchases
Gregory Meyer – Financial Times (SUBSCRIPTION)
Lawyers for the US Commodity Futures Trading Commission have agreed to settle a high-profile futures manipulation case against the food companies Mondelez International and Kraft Heinz, less than four months after the regulator suffered a bruising loss in another case.

****SD: A case with big implications for the derivatives world.

FCA under fire after staff take 25,887 sick days; ‘Alarming’ figures come as the UK’s financial regulator faces a rise in bullying and harassment claims
Shruti Chopra and Chris Newlands – Financial News (SUBSCRIPTION)
Staff at the Financial Conduct Authority took 25,887 sick days last year, the UK regulator’s worst set of figures for six years and more than 60% higher than the national average, raising concerns about morale. The regulator lost more than 100 years of working days to sickness absence in 2018, figures obtained by Financial News via a freedom of information request show. The watchdog’s employees took almost 500 sick days per week last year, almost twice as high as the London average.

****SD: After being so used to seeing phrases like “Over 100 years combined industry experience” in corporate literature, it’s funny to think of over 100 years of lost industry experience.

Traders layering, spoofing gas, power order books risk fines: ACER
Siobhan Hall – S&P Global Platts
Gas and power traders layering or spoofing the order books of exchanges with non-genuine orders risk fines for breaching EU REMIT rules, even if they do not impact the market, according to EU energy regulatory agency ACER.

****SD: Speaking of spoofing – Citigroup Faces $1.2 Million Fine for Allegedly Manipulating Japanese Government Bond Futures.

Exchanges and Clearing

Eurex fosters transparency using cloud technology
Eurex Clearing, one of the world’s leading central counterparties (CCP) and part of Deutsche Bˆrse Group, extends the transparency of its real-time risk management Prisma based on cloud technology. As of 25 March, clients can simulate margin requirements for both exchange-traded derivatives (ETD) and over-the-counter (OTC) contracts, including cross-margining using Eurex’s Prisma Margin Estimator in Cloud (Cloud PME).

What Does the Future Hold for Securities Lending?
Matt Wolfe, OCC Vice President of Business Development
Strong personal relationships have always been a cornerstone of the securities lending marketplace. Market participants focus on developing a broad, reliable network of relationships, so they can be the first lender borrowers contact in the morning, or the first borrower to be offered hard-to-borrow securities by a lender. While strong relationships will always be important, there is a growing emphasis on data collection. Decisions are being influenced by data analytics. In my view, the future of securities lending will be data-driven and the leaders will be those that make the most effective use of data.

****SD: Given how integral the cost of borrowing stock is for options pricing, I’d say the simple answer to the posed question is, “Unsure, but whatever it holds will surely be important.”

SGX to report 3Q FY2019 results on 25 April
Singapore Exchange (SGX) is reporting its third-quarter (3Q) results for Financial Year 2019 (FY2019) after the market closes on 25 April 2019.


Investor spending on financial data jumps to post-crisis record
Philip Stafford – Financial Times (SUBSCRIPTION)
Investors’ twin demands for an edge over rivals and compliance with changing regulatory standards has propelled spending on specialist data to its fastest pace since the financial crisis.
Banks, asset managers, hedge funds and insurance companies spent a record $30.5bn on critical market information in 2018, according to a much-watched annual report of the world’s big data providers published on Tuesday.


Never Confuse Luck With Smart Investing
Barry Ritholtz – Bloomberg (SUBSCRIPTION)
What can we learn from the case of someone who turned $100,000 in short-dated call options into a $2.5 million profit? As detailed in MarketWatch earlier this month, trader Steve Oliverez was pretty sure the Republican tax overhaul was going to be approved by Congress. Working with a data set of one — the 1987 tax overhaul — he correctly surmised that passage would be bullish for stocks.

The Stock Market Is Just as Confused About a Potential Recession as You Are
Evie Liu – Barron’s
Investors have long used where we are in the economic cycle to decide which stocks to buy and sell. New research from Nomura’s Joseph Mezrich flips that on its head by showing how investors can use stock performance to help determine where we are in the cycle. Too bad the market is sending mixed messages right now.

Debt Ceiling Back in Play (VIDEO)
Bluford Putnam – CME Group
The twin threat of a technical debt default and potential government shutdown could resurface later this year, likely affecting equities and Treasuries.


Fed could build firepower for new Operation Twist: Harker
The U.S. Federal Reserve intends to shorten the duration of bonds it has on its balance sheet to build some firepower in case it needs to use it as a stimulus tool once again, Federal Reserve Bank of Philadelphia President Patrick Harker said on Tuesday.

Economists say the way Trump’s latest Fed pick wants to set interest rates is ‘fringe’ and ‘nuts’
Gina Heeb – Business Insider
A political ally to President Donald Trump and an outspoken critic of the Federal Reserve, Stephen Moore has raised a litany of concerns following his nomination for an open seat on the Board of Governors.
But among the most glaring for policymakers: Moore has pushed officials to target commodity prices when setting interest rates, an approach rejected by economists from across the political spectrum.

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