Treasury future and options trades favour lower yields

Jul 11, 2018

Jeff Bergstrom

Jeff Bergstrom


Observations & Insight

OCC Statement On Passage Of H.R. 5749
Press Release
“OCC and the U.S. Securities Markets Coalition applaud passage of H.R. 5749, the Options Markets Stability Act. Passage of this legislation, sponsored by Representatives Randy Hultgren (R-IL) and Bill Foster (D-IL), is an important step forward in helping ensure that market makers can provide vital liquidity for investors who use the U.S. equity options markets to help manage their financial risk. OCC appreciates the leadership of Representatives Hultgren, Foster, House Financial Services Committee Chairman Jeb Hensarling (R-TX), Ranking Member Maxine Waters (D-CA) and the other members of the Committee for securing passage of H.R. 5749.”

****SD: The Senate is the real question mark. The House was never really in question.

Lead Stories

Treasury future and options trades favour lower yields
Joe Rennison – Financial Times (SUBSCRIPTION)
Trading in derivative contracts that reflect the behaviour of the 10-year Treasury note yield suggests investors are seeking insurance against a summer shock that pulls market interest rates sharply lower.
As trade protectionism between the US and China has escalated, the benchmark US 10-year yield has steadily eased from a year to date high of 3.11 per cent in May to 2.83 percent on Wednesday.

Investors Pull $580 Million From Bill Gross’s Fund This Year
John Gittelsohn – Bloomberg (SUBSCRIPTION)
Investors pulled a total of about $580 million from Bill Gross’s bond fund in the first half of this year and he turned in the worst performance among his peers during the period.

****SD: It’s primarily a derivatives focused fund, and it dropped 3 percent on a single day in May. Apparently, the losses were due to a bet that the spread between US and German bonds would narrow. Unpaywalled version from Investopedia. Oh, and to add insult to injury, Gross is going through a difficult divorce. His wife claims he left dead fish in an air vent of one of their homes.

U.K.’s Alarm on $127 Trillion of Derivatives Rebuffed by EU
Alexander Weber and Silla Brush – Bloomberg (SUBSCRIPTION)
The Bank of England’s warning that Brexit threatens trillions of pounds of financial contracts is falling on deaf ears in Brussels.
Valdis Dombrovskis, the European Union’s head of financial-services policy, dismissed an alert issued by BOE Governor Mark Carney, who said the U.K.’s withdrawal from the bloc put as much as 96 trillion pounds ($127 trillion) of derivatives contracts at risk. Where Carney called for U.K. and EU authorities to step in, Dombrovskis said the onus is on firms to Brexit-proof existing contracts.

NYSE Opposition to Trading-Fee Review Puts Companies and Some Shareholders at Odds
Gretchen Morgenson – WSJ (SUBSCRIPTION)
The New York Stock Exchange is stirring tension between some of its big listed companies and their largest investors over a regulatory effort to analyze how a transaction-fee system affects U.S. stock trading.

Brexit threatens some swaptions trades
Helen Bartholomew – (SUBSCRIPTION)
A limited number of swaptions may stop working if the UK leaves the European Union next year without a deal on cross-border financial services, potentially forcing them to be terminated and leaving one or both sides unhedged.

****SD: Ahhh, force majeure clauses – everybody’s favorite, right?

Bitcoin Volatility, Skew, and Options Pricing, Part 2
Volatility Futures and Options
The market for BTCUSD options is not a recent phenomenon. There were several “startup” exchanges offering options since shortly after Bitcoin itself rose in popularity. Most them failed in contract design, particularly in their design of handling margining of short option positions, or failing to design decent interface to attract traders, or getting active market makers to provide liquidity. To digress, in my experience most of the cryptocurrency exchanges appear to be designed and operated by web-developers, with no knowledge of how modern financial exchanges work.

How will investors know if there’s a full-blown trade war? Here’s what Wall Street says
Mark DeCambre – MarketWatch
Since the start of 2018, Wall Street has been harried by the threat of the imposition of tariffs on products from some of the U.S.’s longstanding trade partners, with a recent escalation of tensions raising the question: Are we in a full-blown trade war? And, if not, when will investors know?

**** JB: Another take on the same story – World’s largest asset manager: It’s not a trade war yet — here’s when to really worry

Exchanges and Clearing

Cboe Global Markets Commends House Passage of Options Market Stability Act
Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, announced today that the U.S. House of Representatives has passed H.R. 5749, the Options Markets Stability Act, by a strong bipartisan vote of 385-0.

LCH’s ForexClear launches deliverable FX Options clearing
LCH Group
LCH, a leading global clearing house, today announced that it has launched deliverable FX options clearing. Barclays, Citi and J.P. Morgan are among the first participants to use the service, with further banks expected to shortly start clearing the product.
The move incorporates the first physical FX settlement service for cleared FX products, which LCH has developed in collaboration with CLS. Clearing FX Options extends LCH’s ForexClear service, a leading clearer of FX NDFs, clearing around $70 billion in average daily volume.

NSE: MCX, NSE in talks to team up for bigger exchange play
Ram Sahgal and Baiju Kalesh – The Economic Times
The National Stock Exchange (NSE) and Multi Commodity Exchange of India (MCX) have held exploratory talks to combine their operations and provide a onestop shop for trading in all kinds of products.
Two people close to the development said that the two exchanges have appointed global investment banks to help in the discussions. NSE has appointed Morgan Stanley while JPMorgan is advising MCX, these people said. The merger, if and when it happens, will help create a bigger exchange with 60 per cent market share spanning everything from equity derivatives to commodity futures.

Regulation & Enforcement

Leverage ratio harming US bank competitiveness – CFTC
Global Investor Group (SUBSCRIPTION)
Basel III leverage rules have resulted in a substantial shift of options clearing away from the US banks to their EU counterparts, the CFTC has said.
In a Policy Brief released last month, the US regulator published a study that analysed the impact of leverage rules on US banks on the S&P E-mini options on futures market.

****SD: This story is paywalled, but the CFTC report can be found here.


Stocks Quants Are Reeling From the Worst Run in 8 Years
Dani Burger – Bloomberg (SUBSCRIPTION)
Greenwich mutual fund suffers steepest loss since inception; Value portfolios underperform with no help from momentum
The dog days of summer have arrived for quants.
Systematic traders who tie their fortunes to the ebbs and flows of stock markets are experiencing some of their worst returns in eight years relative to a key benchmark, according to one Wall Street estimate.

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