First Impressions

2016 Exchange CEO Series: CME’s Gill Looking For Customer Efficiencies PART 2 of 2

With new capital requirements of banks and other institutions, John Lothian News sat down with CME Group’s CEO Phupinder Gill at the FIA Boca Conference to talk about CME’s new cleared swaptions service through its clearinghouse, and a repo futures contract.

CME is now well-focused on developing products that do two things – provide tradeable contracts and also reduce the overall costs constraints on market participants. In interest rates, the exchange is expanding beyond traditional futures and options products into the so-called repo market, or Treasury repurchase transactions space, which has struggled in recent months.


Quote of the Day

“Either trades were fraudulent and traders should be fired or senior management should take responsibility for allowing excessive risk-taking to happen. To simply say ‘we were out of the loop’ is not acceptable.”

Mark Williams, a former Federal Reserve bank examiner who teaches risk management at Boston University, in the story, “Credit Suisse Confusion on Costly Trades Adds to CEO’s Woes”

Lead Stories

Banks’ Leeway on Credit Risk Narrows as Basel Tightens Rules
Banks’ latitude in assessing their biggest source of risk is set to be curtailed as global regulators try to prevent the financial industry from gaming capital requirements. The Basel Committee on Banking Supervision proposed on Thursday to remove the option for lenders to use their own models to determine how much capital they need to fund exposures to financial firms, equities and large corporations, forcing them to use a standardized method set by the regulator. The plan also envisions a floor to limit how far risk assessments using the models still allowed for assets such as mortgages and small-business loans can diverge from those obtained with the standardized approach.

Oil Mystery Solved? Interest-Rate Effect Upends Usual Growth Benefit
Greg Ip – WSJ
One of the economy’s big puzzles is why lower oil prices have done so little to help economic growth. The correlation between oil and stocks is now strongly positive. The opposite should be true since cheaper oil is a tax cut for oil-importing countries like the U.S. Three economists at the International Monetary Fund have advanced an intriguing theory: lower oil prices drive down actual and expected inflation, which would ordinarily also pull down interest rates. But in most big economies, interest rates are already at or near zero, and can’t go any lower. Thus, as expected inflation falls but nominal interest rates don’t, real interest rates (nominal rates minus inflation) rise, “very possibly stifling any increase in output and employment.”

An Inside Look at Wall Street’s Secret Client List
There’s a secret list that Citigroup Inc. keeps on its equity-research desk at its swank campus in Tribeca. And if you’re not on it — well, you might as well be nobody. At the top is a handful of hedge-fund giants, the “Focus Five,” that bring in big money for Citigroup: Millennium, Citadel, Surveyor Capital, Point72 and Carlson Capital, according to a person with direct knowledge of the list. It represents a growing trend on Wall Street where the most-lucrative clients get the best service: the top trade ideas, hours-long calls with analysts, intimate soirees with executives, bespoke trading models, on and on.

Credit Suisse Confusion on Costly Trades Adds to CEO’s Woes
Credit Suisse Group AG Chief Executive Officer Tidjane Thiam dropped a bombshell on investors: Caught off guard by a buildup of illiquid trading positions, the CEO said the bank will probably post a second straight quarterly loss as it unwinds the trades and deepens cuts at that business.

CoCos: Too Good to be True?
The Market Mogul
The financial crisis of 2008 spurred questions over the stability and security of banks. The BASEL III is the latest in ongoing regulatory measures for banks to be able to weather shocks to the system and prevent insolvency. A key part of the accords stipulates banks must hold 6% of tier one capital (the core capital that absorbs shocks while still allowing the bank to operate) risk-weighted assets. To meet these obligations and to provide greater security, European banks have turned to a relatively new financial instrument; CoCo bonds.

We knew it was bad on Wall Street ? now we’re finding out just how bad
It should come as no surprise that first-quarter results will be pretty horrendous for Wall Street. A collapsed oil price, concerns around Chinese growth and negative rates combined to create “a perfect storm”, according to Macquarie’s banks analyst, David Konrad.

Support for EU membership ebbs in Britain as Cameron’s party rows
Guy Faulconbridge and Kylie MacLellan – Reuters
Support in Britain for membership of the European Union has declined, two polls showed, suggesting a dispute within the ruling Conservative Party may be undermining Prime Minister David Cameron’s campaign for the country to stay in. Three months before Britons vote on whether to remain in the EU, bookmakers upped the chances that a British exit would follow the June 23 referendum. The pound fell, while the cost of hedging against sharp swings in sterling soared.

Exclusive: Goldman Sachs’ head U.S. inflation trader put on leave: WSJ
Goldman Sachs Group Inc has put Josh Schiffrin, its head of U.S. inflation trading, on leave while it reviews certain trades, the Wall Street Journal reported on Wednesday.

Central Banks

What tools does the Fed have left? Part 2: Targeting longer-term interest rates
Ben Bernanke – Brookings Institution
Although the U.S. economy appears to be on a positive trajectory, history suggests that at some time in the next few years we may again face a slowdown, with a weakening job market and possibly declining inflation. Given that the historically low level of short-term interest rates is likely to limit the scope for conventional rate cuts, how would the Federal Reserve respond?

Monetary policy: The central bankers’ dilemma
The Economist
Central banks have taken the brunt of supporting the global economy, ever since 2009, the last time that governments made any concerted attempt to indulge in a fiscal status. Low interest rates, quantitative easing, forward guidance and now negative rates have all been wheeled out.

ECB Nearing the Limit of Monetary Policy, Dutch Governor Says
The European Central Bank is approaching the limits of its monetary policy, and further expansion of its asset-purchase program could give rise to legal and financial stability concerns, Governing Council member Klaas Knot said.

A Strange Signal from the Markets: Stagflation?
Central banks may be worrying about the lack of inflation, but some investors are fretting that the U.S. is heading for the wrong type of inflation: stagflation-lite. The concern comes from a closely watched part of the bond market from which inflation expectations are derived.

Central banks may be curbing oil price boost to global growth, says IMF
Financial Times
The world’s central banks and the wave of unorthodox monetary policy may be offsetting what ought to be a boost to global growth from cheap oil, according to research by the International Monetary Fund. The IMF has hinted heavily that it will next month lower its 3.4 per cent growth forecast for the global economy with one of the main reasons being the failure of cheap oil to deliver a widely anticipated fillip to major economies.

The One Economic Question Nobody Is Answering
Paul Vigna – WSJ
Traders and speculators have their eyes laser-focused on the punch bowl at the party. They should give some attention to the dance floor as well. The two go hand-in-hand, really. The “punch bowl” in this metaphor is central-bank policy. The dance floor is economic growth. Since the financial crisis, the Federal Reserve and other central banks have been holding out an unlimited punch bowl, hoping that enough stimulus will get the economy, finally, moving again. It hasn’t happened yet. The problem is, the central banks are in serious danger of running out of punch, and there’s no good replacement in sight.

Hans Parisis: Don’t Count on an April Fed Rate Hike
St. Louis Fed President James Bullard said he was in favor of raising rates next month. He said that the dot-forecasting process was silly and that he thought of making some kind of economic unilateral Declaration of Independence and just walk away from the dot forecasts.

New York Fed Enhances Disaster Recovery Requirements for Primary Dealers
The Federal Reserve Bank of New York is requiring primary dealers to ensure their backup trading systems are more spread out in case of disruptive events. The revised policy for primary dealers—institutions that are authorized to trade directly with the government—includes “new geographic dispersion standards and a few minor clarifications,” the New York Fed said in a statement on its website Thursday.

‘Helicopter Money’ Won’t Provide Much Extra Lift
Global central bankers’ quest for unconventional ways to stimulate weak economies has generated a lot of excitement about “helicopter money,” a policy that entails creating money and giving it directly to people or the government to spend.

The Decline of Dissent at the Fed
Jon Hilsenrath – WSJ
Dallas Fed President Robert Steven Kaplan, a former Harvard Business School professor and Goldman Sachs Group Inc. executive, is part of a widening consensus taking root inside the nation’s central bank on interest rates. During much of the post-financial-crisis era, many regional Fed bank presidents challenged views coming out of the Federal Reserve Board in Washington about monetary policy. Now Fed Chairwoman Janet Yellen has more of the institution marching behind her in agreement with her strategy of raising rates slowly in the months and years ahead.


What is the new normal for FX markets? | Blog
When it comes to assessing the outlook for foreign exchange, markets need to start adjusting to a new normal — if they haven’t already. Interest rates in negative territory and a lower oil price that hurts equity markets rather than boosts performance have been challenging the usual set of rules and assumptions.

Why it’s too early to declare an end to the currency wars
There may be a “lull” under way in the currency wars that have seen the world’s central banks taking action to weaken their currencies in a bid to gain an advantage against their global trading counterparts.

Offshore Yuan Drops as PBOC Cuts Fix, Pimco Warns of 7% Decline
The offshore yuan dropped to a one-week low after China’s central bank weakened its daily fixing and Pacific Investment Management Co. said it sees further depreciation for the currency.

Goldman to Fed: Stop Worrying About the Stronger Dollar
Bloomberg Business
It’s time for the Federal Reserve to end its dollar fixation. That’s the takeaway from a Goldman Sachs Group Inc. report Wednesday that suggests the U.S. currency poses little threat to the Fed’s inflation goals, challenging policy makers’ comments to the contrary.

Brexit fears add to pressure on pound
Financial Times
Investors are showing greater concern over the outlook for sterling than at any time in the last six years in a sign of increasing nervousness about the outcome of June’s referendum on Britain’s membership of the EU.

Does a Tobin Tax on Foreign Currency Trades Make Sense for China?
The problem with introducing a tax on currency transactions in China: It’s probably too late. Taxing foreign exchange transactions – sometimes known as a Tobin tax – aims to limit short term currency transactions by making them more costly. That may appeal to China, where a financial regulator said this week a tax is an option as the central bank fights to reduce opportunities to sell yuan.

China central bank head says opposes competitive currency depreciation
China opposes competitive currency depreciation and there should be increased global coordination on foreign exchange policies, central bank governor Zhou Xiaochuan said on Thursday. Premier Li Keqiang and other Chinese officials have repeatedly said the country will not rely on yuan depreciation CNY=CFXS to spur exports.

Regional Integration and Monetary Unions in Africa
With a land mass of over 30 million square kilometers, Africa is as big as India, China, the US and most of Europe combined. Betrayed by a Mercator map projection, the common view of the size of the continent has been diminished, pretty much the same way as other characteristics of the continent.

Indexes & Index Products

Clipped: The Downside of Funds That “Hedge” Currencies
ABC News
It seemed like a can’t-miss idea at the time. Investors scrambled last year to get into a new breed of exchange-traded funds, ones that own foreign stocks and use complicated trading strategies to insulate investors from the swings created by changing currency values. But a year after this new style of ETFs drew billions of dollars and become one of the hottest trends in investing, some investors are now leaving after seeing the strategy’s downside — and locking in losses.

The Dow vs the Dollar
The Reformed Broker
The Dow Jones Industrial Average is made up of 30 US-based companies that do an extraordinary amount of business in countries around the world. Exports, foreign revenues and overseas profits are a big ingredient in the mix for this narrow group of names. The massive rally in the US dollar that took place over 2014 and 2015 served as a bit of a headwind for DJIA companies that sell overseas in weakening currencies.

Long-Term Underperformance of European Active Management continues to play out in the active versus passive debate
Daniel Ung – Indexology
Every six months, S&P Dow Jones Indices publishes the S&P Indices Versus Active (SPIVA®) Europe Scorecard, which seeks to compare the performance of actively managed equity funds across different categories, and in the SPIVA Europe Year-End 2015 Scorecard, we expanded it to cover more individual countries and regions. Among the new additions are Italy, the Netherlands, Poland, Spain, Switzerland, and the Nordic region, with specific data for Denmark and Sweden. This is also the first year-end report in which 10-year data is published for Europe.

OFAC, indexing and the “axis of evil”
FTSE Russell Blog
The OFAC is hardly a household acronym, and yet many of FTSE Russell’s clients have grown increasingly aware of this little-known division within the US Treasury Department. That’s because the Office of Foreign Asset Control, or “OFAC”, enforces trade and financial restrictions against “rogue” countries, groups, or individuals.[1],[2] And financial institutions that assist these entities—however unwittingly—can risk heavy fines and a reputational smudge. Recognizing its importance to our clients, FTSE Russell continuously monitors the OFAC’s sanction programs as a key consideration for our ever-evolving index inclusion criteria.

Fidelity strikes back at view that passive index funds beat active managers
Boston Globe
In defense of its mutual fund managers, Fidelity Investments is striking back against the predominant view that passive index funds beat active managers over time. The Boston-based investment giant released research Wednesday it said shows that among the five largest mutual fund families, the average actively managed U.S. large-stock fund outperformed its benchmark in 2015, after fees, by 0.70 percent.


Tirupati temple wants gold rather than cash
News Today
The world’s richest Hindu temple is asking to be repaid in gold for longer-term deposits it makes under the Indian government’s monetisation scheme in order to make the plan more attractive to the temples that are sitting on thousands of tonnes of the metal. The Sri Venkateswara Swamy Temple, popularly known as the Tirupati, has requested repayment of their deposits of longer than three years under the Gold Monetisation Scheme in the metal rather than cash, D. Sambasiva Rao, the executive director of the temple operator Tirumala Tirupati Devasthanam (TTD) said.

Newcrest resurrects hedge policy as Australian dollar gold rises
Newcrest Mining, one of the world’s biggest gold producers, will hedge more than half-a-million ounces of gold over the next two years, abandoning a long-held opposition to cap its exposure to market bullion prices.

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