First Read

Philip Stafford, Financial Times – “The Most Valuable Commodity I Know of is Information”

“A market without information doesn’t trade, doesn’t move anywhere. It’s illiquid. Nothing happens and everybody goes away — [that’s] the last thing anyone wants. So information ends up being the most critical thing of all.”

Philip Stafford of the Financial Times is both an insider and an outsider in the financial world. He does not make markets, code risk management software or hawk new share offerings to prospective clients. On the other hand, he speaks with people from all corners of the the financial universe, from exchange executives to government policymakers, and does trade in that one commodity that Gordon Gekko values most — information.

Stafford notes that while information is powerful, how to disseminate and describe it is of just as much import. Markets are chaotic, confusing mechanisms, and it is in the interest of many market participants who are in the know to maintain that perception. If only a handful of people understand some corner of the Chinese rebar futures market, then it is in their best interest to keep it that way. Otherwise, they risk diluting the value of their skillset.

Besides analyzing the role of information in markets in this MarketsWiki Education video, Stafford touches on a variety of topics from how to deal with inquisitive journalists to methods for discovering your true interests.

Watch the video »


SGX Titan


Critical Year Ahead for Trading Rules
Next year could end up largely determining how derivatives trade across borders. As the European Union (EU) puts the finishing touches to its revised Markets in Financial Instruments Directive (MIFID II) ahead of implementation on January 3, 2018, the need for regulators to consider whether the rules align with those in the US will become critical. Failure to find agreement could change the nature of the global derivatives market forever, transforming what was a single pool of liquidity into smaller, shallower, more fragmented pools.

****** Every subsequent year I still breath is a critical year. Funny how that works.


Lawrence Kudlow in Running to Take Top Economic Adviser Post
Economic commentator Lawrence Kudlow has emerged as a leading candidate to chair the White House Council of Economic Advisers, according to people familiar with the transition, a move that would place an establishment Republican who served in the Reagan administration in charge of shaping economic analysis in the Trump White House.

***** Can he bring Jim Cramer with him? It would be worth it just to get Cramer off the air.


Send Everyone Home for Christmas. Nobody’s Working Anyway; Seriously, just go home.
Chris Stokel-Walker – Bloomberg
If you’re running a business, you might as well shut up shop for Christmas now. More than half your employees might be there, but they’re not putting their heart into it.

***** What a good idea! Reminder: we are not in our offices during the Christmas break starting Monday as we are having the office refurbished. If you need to call us, call us on our cellphones. We can still be reached by email. We return to suite 1602 in the CBOT Building on January 9, complete with a new CEO.


Should ION and FIS be worried?
Jim Kharouf – JLN
Just days after our column about Cinnober’s plans to move into the post-trade space with plans to take on legacy system giants, an upstart from Switzerland says it is ready, willing and able to do just that.
Revendex, a consulting and IT firm based outside Zurich, says that its post-trade settlement system is ready to take on ION Trading’s Rolfe & Nolan system and FIS’s Stream (formerly GMI) platforms.

**JK: In case you missed it yesterday.


Thursday’s Top Three
Our top three stories of the day yesterday included the FT’s piece on CHX’s potential new owner in Chinese consortium wins approval for Chicago Stock Exchange takeover. Second went to the John Lothian News piece on Swiss upstart Revendex, Should ION and FIS be worried?, which aims to disrupt the back office sector. Third went to ICE’s peculiar move in Reuters’ article NYSE to acquire NSX amid U.S. exchange consolidation


Lead Stories

Chicago retains role as capital of derivatives industry; Open-outcry pits are becoming a thing of the past, but the expertise has stayed
by: Gregory Meyer
When the Chicago Mercantile Exchange launched its electronic transaction system, its chosen name of Globex was a clear indication of how it saw the business developing.

Fintech Firm Could Help Unravel Mysteries Behind Flash Crashes
by John Detrixhe – Bloomberg
Bank is an investor in currency market fintech firm Cobalt DL; U.K. is still investigating the pound’s October flash
Sudden jolts in the currency market may be becoming more frequent, with at least three flash crashes over the course of 14 months. But there is some hope in finding out their causes more quickly.

Who Cares About the Fed? Not the World’s Biggest Bond Fund
Rachel Evans – Bloomberg
After 30 years of trading and collecting $172 billion of assets in the process, it’ll take more than this week’s U.S. rate increase to derail the world’s largest debt fund. Vanguard’s Total Bond Market Index Fund has weathered storms far worse than rising interest rates — from the savings and loan debacle in the late 1980s and the tech bubble a decade later to the subprime housing collapse and sovereign debt crisis of the last 10 years. The fund has gained 6 percent annually on average since it began in 1986, and Josh Barrickman, the money manager who’s shepherded the fund through the last three years, is optimistic about the future.

ICE Benchmark Administration Selected For ISDA Credit Determinations Committees Secretary Role
Intercontinental Exchange (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today announced that the International Swaps and Derivatives Association, Inc. (ISDA) has chosen ICE Benchmark Administration (IBA) to be the Secretary to the ISDA Credit Derivatives Determinations Committees (DCs).

Deloitte audit finds lapses in NSE algo system; Placement of servers on NSE’s premises might have given some unfair advantages to brokers
Shrimi Choudhary – Business Standard
Deloitte India’s forensic audit of the allegations against the National Stock Exchange (NSE), of unfair access to brokers using algorithmic (‘algo’) trading, has found instances of technical lapses. The audit found the placement of servers on NSE’s premises might have given some unfair advantages to brokers, said a person with knowledge of the development.

Montréal Exchange Sets New Record, Surpasses One Million Contracts in Open Interest on BAXA- A+ Print
TMX Group today announced that Montréal Exchange (MX) achieved a new open interest record on the Three-Month Canadian Bankers’ Acceptance Futures (BAX)*, reaching 1,003,916 contracts on December 13, 2016 and surpassing 1 million contracts for the first time ever.

LME says no cuts to main trading fees in 2017 despite criticism
By Eric Onstad – Reuters
The London Metal Exchange (LME) will not cut its main trading and clearing fees next year, it said on Thursday, despite criticism that high charges were driving business away from the exchange.

Relocating euro clearing will damage liquidity, warns ICE; Moving clearing out of London would raise costs for banks, according to ICE working paper.
By Joe Parsons – The Trade
Intercontinental Exchange (ICE) has warned that banks will be hit by a lack of liquidity if clearing of euro-denominated derivatives is relocated from London.

Investment Banking in Dallas? Goldman Sachs Spreads Banker Web Beyond New York; Firm sees satellite offices as a way to develop brokers, improve relations with clients
In “Liar’s Poker,” his memoir of 1980s Wall Street, Michael Lewis wrote that young bankers at Salomon Brothers feared getting assigned to “equities in Dallas,” peddling stocks in a satellite office far from New York.

FINRA Enforcement Chief Brad Bennett Announces Departure
The Financial Industry Regulatory Authority (FINRA) announced today that J. Bradley (Brad) Bennett will leave FINRA early next year. Bennett has served as FINRA’s Chief of Enforcement for nearly six years, overseeing 300 enforcement staff in 14 district offices across the United States responsible for investigating potential violations of FINRA rules and securities laws. Susan Schroeder, Deputy Head of Enforcement, has been named the Acting Head of Enforcement. FINRA will undertake a search for a replacement head of Enforcement that will consider both internal and external candidates.


Why clearing matters to the City of London
Philip Stafford – Financial Times
European efforts to force the business of clearing euro-denominated derivatives into the EU as Britain prepares to leave pit the will of politicians against that of the market. This unflashy, but critical part of financial markets, has become a key battleground as it threatens to erode one of London’s great strengths and a key part of the City’s success over the past decade.

Euro clearing may move from London but only after Brexit: source
Francesco Guarascio – Reuters
The European Union is considering legislative measures to move London’s euro-denominated clearing business to the euro zone, but the changes would apply only after Britain leaves the bloc, an EU official told Reuters on Thursday.

May seeks ‘early’ deal to protect expats’ rights after Brexit; EU leaders make no response to PM’s unexpected overture at Brussels summit
by: Alex Barker, George Parker and Jim Brunsden in Brussels – FT
Theresa May made an unexpected overture to EU leaders on Thursday night with a request for an “early” deal to protect expats’ rights after Brexit, as she attempted to come in from the cold at a summit in Brussels.

Brexit effect brings good and bad tidings for consultants; Companies need advice but uncertainty means a fall in deals
by: Catherine Belton – FT
The UK’s decision to leave the European Union has seen companies call on consultants to help them prepare for the change.

Exchanges, OTC and Clearing

CME seen needing second wind in EU wheat battle with Euronext
By Gus Trompiz and Valerie Parent – Reuters
After a brisk start, falling volumes in CME Group’s new EU wheat futures show the size of the task in challenging Euronext’s established benchmark, making the next harvest key to gaining a foothold in Europe, traders said.

French Wheat Set for Comeback After Worst Harvest in Decades
by Agnieszka De Sousa – Bloomberg
After the worst French wheat crop in decades this season, the European Union’s largest producer looks set to return to global export markets.

Euronext closes acquisition of a 20% stake in EuroCCP
Euronext today announced it has completed the acquisition of a 20% equity stake in EuroCCP, for an amount of EUR13.4m, after having received regulatory approvals. This follows the announcement of August 17th on the signing of a definitive agreement with the existing shareholders of EuroCCP.

Trends in IRD Clearing and SEF Trading
This report examines the dynamics of US swap execution facility (SEF) trading by looking at cleared interest rate derivatives data and analyzing which products are traded on a SEF and which are not.

LME and LME Clear announce 2017 fee schedules
Trading and clearing fees unchanged, retaining fee reductions for short-dated carries and position transfer caps; LME Clear warrants as collateral and compression service fees significantly reduced; LME base metals usage licence fee waived for physical market participants
The London Metal Exchange (LME) and LME Clear today announce their 2017 fee schedules. Trading and clearing fees will remain unchanged, including the continuation of fee discounts for short-dated carries and position transfer caps as announced in August 2016. In addition, LME Clear will reduce fees for key services introduced in 2015 and the LME will introduce a waiver for the base metals usage licence fee for physical market participants.

Agriculture, Coal, Equity, Ethanol, Interest Rates, Metals, Natural Gas, Power, and Refined Products – Effective December 16, 2016
CME Group
As per the normal review of market volatility to ensure adequate collateral coverage, the Chicago Mercantile Exchange Inc., Clearing House Risk Management staff approved the performance bond requirements for the following products listed in the advisory at the link below.

New Product Summary: Ethanol T2 FOB Rdam Including Duty (Platts) Average Price Option contracts
CME Group
Ethanol T2 FOB Rdam Including Duty (Platts) Average Price Option contracts.

Metals Margins – Effective December 16, 2016
CME Clearing
As per the normal review of market volatility to ensure adequate collateral coverage, the Chicago Mercantile Exchange Inc., Clearing House Risk Management staff approved the performance bond requirements for the following products listed in the advisory at the link below.

ASX technology chief Tim Thurman to depart
James Eyers , Paul Smith – AFR Weekend
The Australian Securities Exchange is looking for a new technology boss, after the resignation of chief information officer Tim Thurman was announced internally on Thursday.


Republican National Committee Security Foiled Russian Hackers; Investigation calls it a less aggressive and much less persistent effort than the hacks of the Democratic National Committee
Russian hackers tried to penetrate the computer networks of the Republican National Committee, using the same techniques that allowed them to infiltrate its Democratic counterpart, according to U.S. officials who have been briefed on the attempted intrusion.

Long-Shot to Block Trump Lands at Electoral College Monday
by John McCormick – Bloomberg
Meetings will be held in all 50 states to formalize election; Sixty-two electors have asked for briefing on Russian hacking
The Electoral College’s 538 members gather Monday at 50 state capitols to cast the ballots that matter the most when it comes to electing a U.S. president.

Wall Street’s 2017 Forecasts Are Doomed If Trump Doesn’t Follow Through On Campaign Promises; There’s a lot of room for error.
by Julie Verhage – Bloomberg
President-elect Donald Trump. Photographer: David Paul Morris/Bloomberg
It’s a good thing that Wall Street analysts didn’t finish up their year-ahead outlooks prior to the U.S. Presidential election, because in the words of Deutsche Bank AG’s Chief U.S. Economist Joe LaVorgna, Donald Trump is “a game changer.”

The Market and the ‘Trump Effect’: What Do the Tea Leaves Say?
So much for the “January barometer.” During the first five trading days of this year, the Dow Jones industrial average dropped more than 6 percent, the worst start to a new year ever for investors.

Donald Trump Should Know: This Is What Climate Change Costs Us
Last week, Donald J. Trump’s transition team sent a startling questionnaire to the Department of Energy. Among other things, the questionnaire asked for the names of all employees and contractors who attended meetings of the Interagency Working Group on the Social Cost of Carbon, as well as all emails associated with those meetings, and the department’s “opinion” on the underlying issues — a request it essentially refused.

Investing and Trading

Surging US Dollar
David Blitzer – S&P Dow Jones Indices
The US dollar continues to advance against most developed market currencies as analysts point to rising US interest rates and expectations of tax cuts and increased federal spending as reasons to expect further gains.

Interest rates, inflation, and Trump: Is this the end of the bond boom?
David Yanofsky and Jason Karaian – Quartz
After seven years on hold, the US Federal Reserve has raised interest rates twice in the past year. This will have cascading effects on the rates of everything from credit cards to mortgages and many other financial products. It may not sound like much—a 0.25% increase in the Fed’s benchmark rate yesterday, following an identical hike in December last year—but there is a growing sense that a profound shift in financial markets is underway. Namely, an end to the 30-year bull market for US government bonds.

It’s Almost Dow 20000: Where’s the Party? Where Are the Hats?
Corrie Driebusch and Aaron Kuriloff – WSJ
After the Dow Jones Industrial Average reached 10000 for the first time in 1999, New York City Mayor Rudolph Giuliani and New York Stock Exchange Chairman Richard Grasso gaveled the session to a close and tossed Dow 10000 hats, commissioned by the NYSE, to cheering traders on the floor. The Dow is now flirting with its first close above 20000 on a pace that would represent the fastest 1000-point jump in history. But where is the irrational exuberance? Where is the celebration? Where are the hats?

Specialized Funds Fail Investors
John Rekenthaler – Morningstar
As a first approximation of the truth, it’s fair to state that specialized funds are useless. By “specialized funds,” I mean any funds that are not core holdings. Examples include sector funds, regional or country funds, niche bond funds, and most alternative-investment funds. By “useless” I mean that such funds do not make money for their shareholders. They might perform well on paper, but they fail their owners in the real world, because investors typically buy those funds high and sell them low.

The real shock in global markets in 2016; Markets have broadly navigated upsets and potential concerns with less damage than feared
by: Dan McCrum – FT
Shock is a matter of perspective and expectation. Imagine a time traveller stepped through the door a year ago and said the UK would vote to leave the European Union, a presidential candidate who advocated debt renegotiation would be headed for the White House, and Italy would reject the reforms of Prime Minister Matteo Renzi.

Investor optimism, global economic reality may clash in 2017
By Ross Finley – Reuters
Investors sound optimistic about a breakout for the world economy next year, but for all the talk of huge tax cuts from the incoming U.S. presidency of Donald Trump, the economic outlook looks similar to 2016: uneven and unspectacular.


Profit Replaces Risk as Big Worry Among Europe Bank Regulators
by Stephen Morris – Bloomberg
BOE concerned low returns starting to undermine bank stability; Top bank executives urge policy makers to introduce targets
After years spent clamping down on risky behavior at banks and punishing them for past misdeeds, Europe’s regulators have awoken to a new worry: lenders aren’t making enough money.

Big Banks $70 Billion Short in Fed Push to Prevent Bailouts
Jesse Hamilton – Bloomberg
Wall Street banks are about $70 billion short in building up funds the Federal Reserve says they’ll need to tap following a collapse, down by almost half from the central bank’s earlier estimates.

U.S. banks must pay up to $2 bln more per year to shield Wall Street -Fed
The largest U.S. banks will have to pay as much as $2 billion more a year to insure against a future market collapse, the U.S. Federal Reserve said on Thursday, as it outlined a new rule designed to further protect the financial system.

Deutsche Bank Said Last Lender to Stop Angola Dollar Clearing
by Henrique Almeida , Candido Mendes , and Steven Arons – Bloomberg
Frankfurt-based bank said to have stopped services last month; Angola ranks among 20 most corrupt nations in the world
Deutsche Bank AG stopped providing dollar clearing in Angola, leaving one of Africa’s biggest oil-producing nations without a lender to supply the service, according to three people with knowledge of the matter.


THE FINTECH REPORT 2016: Financial industry trends and investment
The explosive growth of the financial technology industry continued in 2016 thanks to new financial industry trends and a slew of fintech investments.

Bahrain Aims To Become Regional Fintech Hub To Boost Its Financial Services Sector
Bahrain is to try and inject some much-needed momentum into its financial services industry—which is increasingly overshadowed by near-neighbour Dubai—by putting a new focus on fintech and related services.

Bitcoin’s Rally Crushed Every Other Currency in 2016. Here’s Why
by Olga Kharif – Bloomberg
The digital coin’s 79% gain four times that of real, ruble; Capital controls, slowing supply growth are boosting demand
Bitcoin, that nebulous digital currency that trades in cyberspace and is “mined” by code-cracking computers, emerged as a better bet this year than every major currency, stock index and commodity contract.


Advisers’ most outlandish regulatory blunders of 2016
Greg Iacurci – Investment News
This year was certainly not lacking for regulatory and other blunders made by brokers and advisers. Following are some of the stand-outs that had readers talking.

CFTC Staff Issues No-Action Relief from the Inter-Affiliate Exemption from Required Clearing for Affiliated Counterparties Located in Australia or Mexico
The U.S. Commodity Futures Trading Commission’s (CFTC) Division of Clearing and Risk (DCR) today issued no-action relief to swap market participants to permit a provision of the inter-affiliate exemption from required clearing to be relied upon for swaps executed between certain U.S. swap market participants and their affiliated counterparties located in Australia or Mexico. This relief offers counterparties located in Australia and Mexico the same relief that has been available to counterparties located in the European Union, Japan, and Singapore.

Archer Daniels Midland fined $25,000 for corn trading violations
Archer Daniels Midland Co , one of the world’s biggest agricultural trading houses, has agreed to pay $25,000 to settle charges it broke rules in the U.S. corn futures market, exchange operator CME Group Inc said on Thursday.

Notice of Disciplinary Action: Archer Daniels Midland Company
CME Group
Pursuant to an offer of settlement in which Archer Daniels Midland Company (“ADM”) neither admitted nor denied the rule violations upon which the penalty is based, on December 13, 2016, a Panel of the Chicago Board of Trade (“CBOT”) Business Conduct Committee (“Panel”) found it had jurisdiction over ADM pursuant to Rules 400 and 402 as the conduct occurred while ADM was a CBOT member. The Panel also found that on December 1, 2014, ADM, through two of its subsidiaries, executed two Exchange for Physical (“EFP”) transactions in the Corn Futures market. Each transaction consisted of the simultaneous exchange of futures positions without the exchange of related cash positions, thereby executing non-bona fide EFPs. The Panel further found that ADM executed the transactions for the purpose of transferring positions between ADM subsidiaries, and that ADM maintained ownership and control of the accounts on both sides of the transaction. The Panel concluded that ADM thereby violated CBOT Rules 538.C and 534.

Notice of Disciplinary Action: DV Trading LLC
CME Group
Pursuant to an offer of settlement in which DV Trading LLC (“DV”) neither admitted nor denied the rule violations upon which the penalty is based, on December 13, 2016, a Panel of the Chicago Board of Trade (“CBOT”) Business Conduct Committee (“BCC” or “Panel”) found DV was subject to the BCC’s jurisdiction pursuant to Rules 400 and 402. The Panel also found that at the close of business on June 29, 2016, DV held a futures equivalent position of 985 long July 2016 Soybean Oil futures contracts, which was 445 contracts (82.41%) over the spot month position limit in effect. Within milliseconds of the opening of trade date June 30, 2016 (between 7:00:00.018 PM and 7:00:00.023 PM of calendar date June 29, 2016), DV liquidated its overage position, resulting in profits of $2,670. The Panel found that as a result, DV violated CBOT Rule 562.

Notice of Disciplinary Action: SIMON POSEN
CME Group
Pursuant to an offer of settlement Simon Posen (“Posen”) presented at a hearing on November 21, 2016, in which Posen neither admitted nor denied the rule violations or any of the findings or conclusions herein upon which the penalty is based, a Panel of the COMEX Business Conduct Committee (“BCC”) found that Posen was a COMEX member and therefore subject to the jurisdiction of the Exchange pursuant to Rules 400 and 402, and that on multiple dates from November 2014 through March 2015, Posen entered orders or layered orders in the Silver and Copper futures contract without the intent to trade but to encourage market participants to trade opposite his smaller orders that were resting on the opposite side of the book. Typically within seconds after receiving a fill on his smaller orders, Posen would cancel the resting orders he had entered on the opposite side of the order book. The Panel also found that on multiple dates between February 2015 and March 2015 in the Silver and Copper futures market, Posen engaged in a pattern of disruptive trading in which he entered orders on one side of the market and smaller orders on the other side resulting in other market participants trading his smaller orders. Posen typically would trade on the side of the market where his smaller exposure existed and then reverse the pattern, resulting in alternating buy-side and sell-side market imbalances.

The European Securities and Markets Authority (ESMA) has published an updated questions and answers document (Q&A) on the application of the Alternative Investment Fund Managers Directive (AIFMD).

ESMA Publishes Its CRA Market Share Calculation
The European Securities and Markets Authority (ESMA) has published its annual market share calculation for EU registered credit rating agencies (CRAs).

ESMA Updates MIFID II Q&A Investor Protection
The European Securities and Markets Authority (ESMA) has added new Q&As to its Questions and Answers (Q&A) document on the implementation of investor protection topics under the Market in Financial Instruments Directive and Regulation (MiFID II/ MiFIR).

SIFMA Statement on Fed’s Final TLAC Rule
Today, SIFMA issued the following statement from Kenneth E. Bentsen, Jr., SIFMA president and CEO, on the Federal Reserve’s final total loss absorbing capacity (TLAC) rule. The final rule requires designated global systemically important banks to maintain additional resources for loss absorbing capacity and imposes new structural and legal requirements that serve as an important component in ending ‘too big to fail.’:


With His Family Fortune at Stake, Congo President Kabila Digs In
Michael Kavanagh, Thomas Wilson, and Franz Wild – Bloomberg
In his only public speech this year, Joseph Kabila, president of the Democratic Republic of Congo, was defiant about his refusal to hand over power when his final term ends on Dec. 19. “I cannot allow the republic to be taken hostage by a fringe of the political class,” he told parliament last month as members cheered.

Japan Dethrones China as Top U.S. Foreign Creditor; China’s holdings have been falling since hitting a record high of $1.317 trillion in November 2013
Japan surpassed China in October as the largest foreign owner of U.S. government bonds for the first time in nearly two years, reflecting continued sales of Treasury securities by the world’s most populous nation.

Japanese banks warn of leaving London without Brexit clarity; Financial groups suggest relocating functions within 6 months to mainland Europe
by: Katie Martin and George Parker in London and Leo Lewis in Tokyo – FT
Japanese financial institutions have warned they need clarity on the UK’s future relationship with the EU or they will begin moving some functions from London within six months.

Revised TRACE Corporate and Agency Debt API Specification
FINRA has updated the TRACE Corporate and Agency Debt Web API Specification to now include a Convertible Flag in the Security Master and Daily List files and to also eliminate the Fitch rating heading and value in the Most Active Print Media files.

Update: FINRA Board of Governors Meeting
This week, the FINRA Board of Governors met to discuss a number of items, including two rule proposals, which are provided below.


Companies follow millennials to downtown Chicago; Trend of moving out to the suburbs is now being reversed
by: Patti Waldmeir – FT
For decades, Midwestern US businesses fled to verdant, antiseptic suburbs from inner cities blighted by grit, crime and racial tension.

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