FIA And FIA Japan Sign Formal Affiliation Agreement; Cleared SWAPs Derivatives Are Not Too Popular, Why?; Markets: How Broken Signals Are Leaving Investors in the Dark

Oct 20, 2016

Observations & Insight

Cubs Win Puts FIA EXPO in Better Mood
By John J. Lothian & JLN Staff

A late night win by the Chicago Cubs in the National League playoffs put the attendees of the FIA EXPO in a better mood last night. The day started with a rather somber speech by FIA CEO Walt Lukken, followed by another mesmerizing regulatory update from CFTC Chairman Tim Massad

For the record, Lukken did try to end his comments on an upbeat tone and Massad is a regulator who is not Bart Chilton. Attitudes about the industry from the people I talked to, including several overseas participants, centered around whether the world as we knew it was going to exist after the U.S. presidential election on November 8. Expo’s keynote speaker John Meacham, through humor and historical insight about the common decency demonstrated by past presidents, assured us that the nation will survive.

The conference seems very well attended this year, with no volcano or hurricane keeping participation down. There is genuine interest in what the FIA has done with its Innovator’s Pavilion concept. Of course, we are all innovators so the whole conference is an innovator’s pavilion of sorts.

Now for some bits and pieces from the exchange leaders panel.

  • Among the many topics discussed at the exchange leaders panel was MIFID II, which ICE’s Jeff Sprecher called “a terrible piece of legislation that imposes tremendous costs on the industry.” CME Group’s Phupinder Gill said MiFID, and Brexit on top of that, makes for a lot of confusion.
  • The exchanges agreed that FCMs are very important and have no desire to disintermediate them. Other challenges include banks’ need to reduce capital consumption, especially pertaining to back office operations.
  • Sprecher said people may complain about higher exchange data costs, but the price per unit cost of data is dramatically falling.
  • The leaders agreed that the recent Brexit “flash crash” was not really a flash crash, because it was not caused by “algos run wild,” but by the fundamentals of the surprising Brexit vote.

See you at the EXPO and Great Steak Out!

Lead Stories

FIA And FIA Japan Sign Formal Affiliation Agreement
Press Release
Walt Lukken, president and CEO of FIA, and Yasuo Mogi, Vice Chairman of FIA Japan (FIAJ) signed a formal agreement affiliating the two organizations today at the 32nd Annual Futures and Options Expo.

Cleared SWAPs Derivatives Are Not Too Popular, Why?
Mark Melin – ValueWalk
Cleared SWAPs – Where is product innovation in financial services going to come from? A panel of bank and independent hedge fund and market maker experts agree that cleared derivatives have become a logical path to the future, but the question is: when will it happen? Despite what participants recognized as advantages, there still has yet to be a “liquidity pop” in cleared versus non-cleared SWAP derivatives, JPMorgan’s Nick Rustad noted at the 32nd Annual FIA Futures and Options Expo.

Markets: How Broken Signals Are Leaving Investors in the Dark
Professional and amateur investors alike often look to data and statistics made available via market indicators to inform their trading decisions. Lately, however, many of these indicators seem to be sending mixed signals. Bloomberg reports that “broken” indicators are making it harder to spot potential troubles stirring in asset markets, leaving investors “flying blind”. Once reliable signals of risk no longer function the way they have historically. Here is a look.

U.K. Mulls Options to Help Banks After Brexit, Davis Says
The U.K. government is looking at “all possible options” to protect financial services from disruption after Britain leaves the European Union, Brexit Secretary David Davis said on Thursday.


Brexit Prompts London Trading Venue to Threaten Move to Ireland
John Detrixhe – Bloomberg
A currency-market operator has thrown down the Brexit gauntlet: Ensure market access to Europe or we’re moving to Ireland.
LMAX Exchange said Tuesday it will file with Irish regulators in January unless U.K. politicians take heed, joining the ranks of London-based firms looking to the island as a gateway to European Union access once the U.K. leaves the bloc.

The Coming ‘Spotification’ Of Futures Markets: The Market Fix For Retail Securities Trading
Kurt Dew – Seeking Alpha
Why does the performance of securities exchanges lag while that of futures exchanges goes from strength to strength? Otherwise put, Why is the CME Group (NASDAQ:CME) standing pat as The LSE (LSE:LON) (OTCPK:LNSTY) and BATS (BATS:BATS) are put into play?
Because the market for retail securities is broken. How will market forces drive the future of exchange trading? Will government regulators like the SEC stand in the way of progress?

Eurex supports market participants and regulatory change with Total Return Futures
Press Release – Eurex
As of Friday, 2 December 2016, Eurex, Europe’s largest derivatives exchange, will offer Total Return Futures on the EURO STOXX 50 Index. The new futures complement the Eurex suite of equity index derivatives and support the market in complying with new financial market legislation. Under the Basel III capital standards banks already face increased capital requirements when entering Over-the-Counter (OTC) transactions. From next year on, there will be additional standards. “The product is launched ahead of the bilateral margin rules on non-cleared swaps which are likely to be introduced in Europe in early 2017”, said Mehtap Dinc, Global Head of Derivatives Product Development at Eurex.

ASX Begins Listing of Weekly Expiring ETOs
Following large success in the United States and Europe (according to the ASX), the ASX is now offering exchange traded options (ETOs) with weekly expiry dates writes Sam Green, Advisor at Options Educator, TradersCircle.

Euronext is facing a bind over LSE’s Clearnet sale
Gulf Times
The London Stock Exchange’s move to sell off its French clearing business has left France’s stock market operator Euronext facing a dilemma.
The Paris-based exchange has begun talks with LSE to buy LCH Clearnet SA according to sources familiar with the negotiations.

Regulation & Enforcement

Automated Trading: CFTC’s Top Chief Wants Access To The Code
Mark Melin – ValueWalk
The Commodity Futures Trading Commission is moving forward on a controversial rule to require firms engaged in automated trading to provide access to source code and register what CFTC Chair Timothy Massad said were now the dominant players in markets.

SEC preparing large-scale review of exchange traded fund industry
Financial Times
The US Securities and Exchange Commission is gearing up for a root-and-branch review of the rapidly growing exchange traded fund industry amid concerns massive flows into ETFs may be exacerbating volatility in financial markets.

Remarks by Acting Assistant Secretary for Financial Markets Daleep Singh on Interest Rate Benchmark Reform at FIA’s 32nd Annual Futures & Options Expo
Press Release – US Department of the Treasury
LIBOR has been the dominant measure of how much it costs large banks to borrow from each other on an unsecured basis for a long time and continues to play an outsized role in our financial system. Interest payments on an estimated $350 trillion in notional value of derivatives contracts, and at least $10 trillion in loans, move up and down with LIBOR. Retail borrowers use LIBOR to evaluate the price of loans. Corporations and investors use LIBOR to hedge interest rate risks in their businesses and portfolios. Market participants rely on LIBOR as a gauge of stress in the banking sector and confidence in the financial system more broadly. Given the breadth and scale of LIBOR’s usage, its integrity and reliability is essential for all of us.


Vol Space: What To Do In VIX
Seeking Alpha
The S&P 500 has been trading in a relatively tight range over the last few months. Is this a sign of a new subdued market environment where the monetary forces have conquered cyclical drivers of volatility? We don’t think so – in this article we review some key volatility metrics and discuss our views on VIX positioning into the fall and year-end.

Using VIX In A Stock Portfolio – REX VolMAXX Long VIX Weekly Futures Strategy ETF
Stuart Barton – Seeking Alpha
Some of the strongest demand for VIX exposure comes from traders and portfolio managers looking for diversifying instruments that are uncorrelated to their present portfolios. Given that the VIX Index is ultimately an S&P 500 – based metric, much analysis tends to focus on the performance of VIX vs the broad US equity market. However, in looking at the market more granularly, we felt it might be helpful to consider how VIX performance has compared with the performance of 25 of the most highly traded US stocks.

Positioning Portfolios to Withstand Volatility: 3 Strategies
The evidence suggests that a long-term, strategic approach to investing generates the most attractive returns for investors over time. But we all—advisors and investors, alike—can get nervous, leading us to make impromptu readjustments to portfolio allocations during periods of market volatility, which is often the worst possible time. And with a contentious presidential election coming up, worries about market reactions are more top of mind than ever.

Risk – Dealing With Known-Unknowns
Ryan Shea – The Market Mogul
As any parent will confirm, teenagers know one thing. Unfortunately, it is “every”-thing. The rest of the population, by contrast, recognises and appreciates the complexity of the world and all the uncertainty that this necessarily generates. One of the key lessons life has to teach one is how to deal with the risks arising from uncertainty, and as often happens – albeit not always – what is true in life is also true in finance.

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