Copper’s Options Paradox; Yen Swaptions Signal 2016 BOJ Redux

Jun 18, 2019

Observations & Insight

Electronic Derivatives Trading in South Africa Gears Up

A half decade’s worth of work at the Johannesburg Stock Exchange (JSE) to update its trading technology is bearing fruit. The exchange now has its equities, equities derivatives and foreign exchange derivatives trading on LSEG Technology’s Millennium Exchange platform, with interest rate derivatives and commodities the next asset classes to transition. In this video, JSE Head of Bonds, Currencies and Interest Rate Derivatives Udesh Moodley talks about the historic makeup of South Africa’s trading community, new participants who have been lured by electronification, developing the local bond futures market, and more.

Watch the video »


Derivatives house of the year: BNP Paribas
Energy Risk Awards 2019: Presence across full spectrum of commodity markets sets derivatives team apart
Stella Farrington –
Whether it was providing working capital finance for US refiners, marketing Australasian gas into Europe, enabling gold to move from Eastern Europe into Canada, or expanding its onshore China business, the diverse range of activities carried out by BNP Paribas over the past 18 months demonstrated the breadth and depth of its commodities franchise. “Commodities is a global business, and without that global presence you can’t serve commodity players with activities all over the world,” says Guillaume Picot, global head of commodity derivatives sales for BNP Paribas. “Likewise, you can’t be a serious commodities derivatives player unless you can trade physical.”

Lead Stories

Copper’s Options Paradox
Erik Norland – CME Group
Neither the escalation of the trade war between the US and China nor the intense debate regarding the direction of U.S. monetary policy have had much impact on the prices of copper options – at least not yet. Implied volatility on COMEX High Grade Copper options has rarely been lower (Figure 1). Copper options are hardly unique in this regard. While there has been a spike in oil options volatility and a modest rise in the implied volatility of equity index options, most other options markets, including those for gold, silver, currencies and U.S. Treasuries, remain in the doldrums. Like the other markets, the general level of copper options appears to be following a cycle related to U.S. monetary policy.

Yen Swaptions Signal 2016 Redux as Bets for BOJ Rate Cut Climb
Masaki Kondo – Bloomberg (SUBSCRIPTION)
An esoteric metric in the rates markets is indicating that the Bank of Japan may pull off a policy surprise, just as it did three years ago.
Three-month implied volatility on two-year yen interest-rate swaps has touched its highest since February 2017, with the advance outpacing a rise in volatility on 10-year swaps, according to data compiled by Bloomberg. The so-called two-year swaptions climbed above the longer tenor in 2016, when the BOJ surprised markets with the introduction of its negative interest-rate policy.

****SD: Reprint w/o paywall on Yahoo Finance.

China keeps yuan on even keel ahead of Fed, options in demand on G20 jitters
Reuters via Nasdaq
China’s yuan held largely steady against the dollar on Tuesday as the central bank once again set a firmer-than-expected official guidance rate, but most investors kept to the sidelines ahead of this week’s U.S. Federal Reserve policy decision.

Citi combines rates and currencies businesses
Citigroup Inc said on Monday it is combining its Foreign Exchange & Local Markets and G10 currencies businesses into one unit.

****SD: Other news sources with the story: Financial News and Bloomberg.

Deutsche Bank seeks breathing space by slashing trading arm; Germany’s biggest lender wins cautious support for plan to shift EUR50bn of unwanted assets into a ‘bad bank’
Stephen Morris – Financial Times (SUBSCRIPTION)
In the years after the financial crisis, many of the world’s biggest lenders set up vast “bad banks” to cleanse trillions of dollars in toxic assets from their balance sheets. Until now, very few of them have needed a second bite at the cherry.

****SD: Reuters has Deutsche Bank plans to pare U.S. equities business to skeleton operation: sources.

Gauge of Treasury market volatility hits highest since 2016
Joe Rennison – Financial Times (SUBSCRIPTION)
A widely watched measure of volatility in Treasury markets hit its highest level since 2016, as investors gird themselves for potential price swings ahead of an important Federal Reserve meeting on Wednesday.

****SD: In case you missed this news, which dominated yesterday’s newsletter.

Lakefront Futures & Options to market Trucking Freight Futures
Lakefront Futures & Options, LLC., a Chicago-based derivatives brokerage, has created a derivatives group focused on the U.S. trucking and freight shipping sector.

****SD: It’s just futures for now, but keep an eye on freight as an emerging asset class.

Exchanges and Clearing

OPINION: Everything Slow is New Again
Whether it is the Men in Black, John Wick, or the X-Men, the summer sequels are upon us. Some offer new characters and settings, but the filmmakers and studios want to keep some of the magic that the audience found in the original movies.
In this spirit, is not the time for the US Securities and Exchange Commission to develop and release Regulation NMS II: Electric Bugaloo?

****SD: Isn’t it boogaloo? What am I missing? (Either way, still some nice references in the intro.)

Options Regulatory Alert #2019 – Nasdaq ISE, GEMX, and MRX Adopt Rules Pertaining to Authorization to Give Up
Effective July 15, 2019, Nasdaq ISE (ISE), Nasdaq GEMX (GEMX), and Nasdaq MRX (MRX) will implement the Authorized Give Up process.

Euronext completes the acquisition of Oslo Bors VPS
Euronext, the leading pan-European exchange, announces today that it has completed settlement of shares under its offers launched on 14 January 2019 and 31 May 2019. Euronext now owns 97.8% of the total issued and outstanding share capital of Oslo Bors VPS and will fully consolidate Oslo Bors VPS accounts.

London Stock Exchange To Expand Footprint
“There is a huge opportunity for the UK bourse to do more in Asia and the Americas and substantially grow beyond our primarily European footprint,” said Schwimmer.


Global Head of FX Options Andrew Soper Leaves Crédit Agricole
Celeste Skinner – Finance Magnates
Andrew Soper, the global head of foreign exchange (forex) options trading at Crédit Agricole Corporate and Investment Bank, has left the French bank, according to a report by this Tuesday. Instead of working at Crédit Agricole, Soper is focusing on private investment and business opportunities. A spokesperson for the French bank has confirmed the departure, according to the article published.

Regulation & Enforcement

Sebi permits stock exchanges to introduce futures on commodity indices
PTI via Livemint
Capital markets regulator Sebi Tuesday permitted stock exchanges with commodity derivative segment to introduce futures on indices.


The bankers that define the decades: John Reed, Citibank
Peter Lee – Euromoney Magazine
It is with some quiet satisfaction that Euromoney finally sits down with John Reed in an old and exclusive private social club close to Boston Common renowned as home to New England’s traditional elite.
Spry and mischievous for an 80 year old, Reed advises his open-collared English guests straight off the plane on the choice of ties kept behind reception. These are required for all visitors.

A Horse Race of Liquid Alternatives
Nicolas Rabener, FactorResearch via AllAboutAlpha
Investing is challenging as it is complex and complicated, which requires continuous learning and updating of mental frameworks. Conflicts and contradictions are found everywhere. For example, data from the mutual fund industry shows that most funds fail to outperform their benchmarks, but investors in hedge funds allocate primarily for alpha generation as shown by the latest JP Morgan industry survey. If mutual funds do not generate any alpha, why should hedge funds?

****SD: I missed this last week – it’s a comprehensive comparison of varying liquid alts that includes option based ETFs and funds (which are two categories so broad, it’s hard to tell how to interpret the results…).

No alpha in hedge funds’ average short positions – research; A strategy betting against low conviction shorts beat a benchmark model by 6% in back tests
The best way to make money from hedge funds’ short ideas may be to bet against them. Piggybacking on the ‘best ideas’ of hedge fund managers is a popular strategy among exchange-traded funds that aim to replicate their returns. But when researchers tested a similar strategy using data on hedge funds’ favourite short ideas, they found it was more profitable to trade against the managers than with them.

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