First Impressions

2016 Exchange CEO Series: Jeff Sprecher Talks Data, Clearing and Growth for ICE

For the Intercontinental Exchange (ICE), 2015 was about major investments in data and analytics services. Now in 2016, the exchange is looking to integrate recent data acquisitions into its business and grow well beyond traditional exchange trading and clearing services.

ICE CEO Jeff Sprecher spoke with John Lothian News at the FIA Boca Conference about how its purchases of SuperDerivatives, Interactive Data and S&P Analytics fit into its business model. ICE is also working with Blackrock, on exchange traded funds, to become its benchmark index provider.

“We started to pivot the company to get deeper into the data space,” Sprecher said. “We want to articulate a vision on how exchanges and data can come together into one holistic business that can serve customers.”

Quote of the Day

“Collateral transformation is a fantastic euphemism. It means, `We will take whatever you have got, and charge you an awful lot to convert it into something that is useful,’ almost to the point that you are thinking, `What is the point in trying to do it?’ You are giving up most of the credit spread.”

A fund manager in a DTCC white paper, from the story, “IOSCO predicts boom in use of collateral transformation”

Lead Stories

Banks Ordered to Defend Suit Claiming Benchmark Rate Rigging
Jef Feeley and Jennifer Surane – Bloomberg
Bank of America Corp., Barclays Plc and a dozen more banks must face investor claims that they rigged a benchmark used in the sales of interest-rate derivatives and other financial instruments.U.S. District Judge Jesse Furman in Manhattan Monday rebuffed the banks’ request to throw out antitrust lawsuits accusing the institutions of colluding to set ISDAfix, affecting trillions of dollars of financial instruments. The rate is used to set prices on interest-rate swap transactions, commercial real-estate mortgages and other securities.

Fed Chair Janet Yellen: Central bank should move ‘cautiously’ in raising rates
Ylan Q. Mui – The Washington Post
Federal Reserve Chair Janet Yellen said Tuesday that the central bank should move “cautiously” in raising interest rates in the midst of a weak global economy, though she expressed confidence that the U.S. recovery remains on track. The Fed raised its benchmark interest rate in December for the first time since the Great Recession, a critical milestone in the nation’s economic progress. But after a volatile start to the year that included wild swings in the financial markets, new lows for oil prices and a slowdown in growth abroad, the central bank opted not to raise rates again when officials met in Washington earlier this month.

BlackRock Joins Pimco Warning Investors to Seek Inflation Hedge
Wes Goodman – Bloomberg
BlackRock Inc. joined Pacific Investment Management Co. in recommending inflation-linked bonds and warning costs are poised to pick up. “Stabilizing oil prices and a tighter labor market could contribute to rising actual, and expected, U.S. inflation,” Richard Turnill, BlackRock’s global chief investment strategist, wrote Monday on the company’s website. “We like inflation-linked bonds and gold as diversifiers.” New York-based BlackRock manages $4.6 trillion.

Goldman Sachs and Bear Stearns: A Financial-Crisis Mystery Is Solved
John Carney – WSJ
It has been called the bombshell that blew up Bear Stearns. It happened on Wednesday, March 12, 2008, shortly after 9 a.m. in an interview broadcast on CNBC. There, reporter David Faber asked Bear Stearns chief Alan Schwartz to respond to reports that Goldman Sachs wouldn’t “accept the counterparty risk of Bear Stearns.” Mr. Schwartz said the firm’s counterparties still were trading with Bear Stearns. Hours later, CNBC reported that Goldman was indeed still doing trades with Bear Stearns. In the eyes of many on Wall Street, however, the damage was done. Confidence in Bear Stearns quickly evaporated—and with it the firm’s ability to survive.

****SD: In somewhat related news, Prosecutor in Bear Stearns Case to Leave U.S. Attorney’s Office

Rules to recoup US bank bonuses need tightening
Financial Times
Since the financial crisis, shareholders and regulators have taken aim at pay and bonuses. They have identified ill-designed pay packages as a factor in encouraging unnecessary risk-taking by bankers and have pushed for restrictions on future pay to deter such recklessness.

****SD: Also, Israel passes law to cap bankers’ salaries

IOSCO predicts boom in use of collateral transformation
The Trade
Demand for collateral transformation services will increase due to a need for high-quality liquid assets, according to the latest IOSCO report.

****SD: Need to brush up on collateral transformation? Check out Tracy Alloway’s take from 2013.

Traders Prepare for Death of a Junk Rally
Lisa Abramowicz – Bloomberg
Many traders don’t trust the rally in riskier debt right now, and some are plotting ways to bet against it. The credit cycle seems to be souring, with corporate earnings generally weakening, and central bankers are seemingly more desperate. Yet riskier corporate debt is surging again, especially U.S. junk debt tied to energy companies, which has experienced a record 16 percent rally so far in March. That’s fueled a 4 percent gain in the broader high-yield market, the biggest monthly gain since 2011.

Here’s how payments companies are using digital technology to reach the un- and underbanked
Business Insider
More than 2 billion adults worldwide, in both developed and developing countries, lack adequate access to banking services. Of this group, the majority isn’t excluded by choice; rather, cost, distance, need, and other variables make it challenging or impossible to access banking services.

Home Prices in 20 U.S. Cities Kept Climbing in January
Victoria Stilwell – Bloomberg
Home values in 20 U.S. cities kept climbing in January, a sign the limited supply of available properties may push prices out of reach for some buyers. The S&P/Case-Shiller index of property values increased 5.7 percent from January 2015, following a 5.6 percent gain in the year ended in December, the group said Tuesday in New York. That matched the median projection of 26 economists surveyed by Bloomberg. Nationally, prices rose 5.4 percent year-over-year.

Exclusive: UBS, Credit Suisse interested in advising on Russia privatization – sources
Swiss banks UBS and Credit Suisse are interested in advising the Russian government on several privatizations as long as the deals do not violate sanctions, three banking sources told Reuters.

About All That Money That’s Been Flowing into Emerging Market Debt…
Tracy Alloway – Bloomberg
The recent rally in emerging market bonds has been pretty good, but it could also be beta. Analysts at Citigroup Inc. point out that the recent surge in the price of bonds sold by companies in emerging markets has not been uniform, with more money gushing into securities sold by corporate issuers that have a history of selling large amounts of debt, as opposed to smaller issuers with less debt outstanding.

Central Banks

Flood of Central Bank Moves Can’t Lift World Out of Rut
Central bankers have managed to steer the world economy clear of a recession while leaving it stuck in the same rut that led to its troubles in the first place. A torrent of monetary stimulus in recent weeks helped spark a turnaround in financial markets by assuaging investors’ fears of an impending global downturn. Yet it did little to lift hopes among economists of a stronger pickup that would put growth on a more solid footing.

Federal Reserve will not raise rates in June
Business Insider
It’s official: June is off the table. On Tuesday, Federal Reserve Chair Janet Yellen delivered remarks before the Economic Club of New York. The tone was decidedly dovish, with the dollar falling, Treasurys rallying, and stocks moving higher after the speech’s release.

Yellen pulls a dove out of the Fed’s hat
Matt Weller – Futures Magazine
As we noted yesterday, market volatility was expected to pick up as we moved through the week as the top-tier data releases and traders at their desks gradually ramped up.

Bank of England Raises Buffer Rate as Stability Risks Grow
John Glover – Bloomberg
The Bank of England said banks should begin building up capital earmarked to support lending when the economy turns down, as the outlook for U.K. financial stability worsens. The BOE’s Financial Policy Committee raised the countercyclical capital buffer rate for U.K. exposures to 0.5 percent of risk-weighted assets from zero, becoming binding from March 29 next year. The buffer applies to U.K. banks and building societies, as well as to branches of other European Union banks that lend into the country.

****SD: Also in BOE news, BOE to Publish Review of Regulation Impact on Market Liquidity

Japan’s negative rate bounty sparks calls for fresh spending
Financial Times
Japan’s government has already locked in annual savings of Y80bn ($707m) thanks to negative interest rates as political debate turns to spending the money. According to an analysis by the Financial Times, interest savings have mounted rapidly in the two months since the Bank of Japan made its move to rates of minus 0.1 per cent, as the government refinances its vast pile of short-term debt.

Federal Reserve Bank of Chicago Annual Report
Chicago Fed
Welcome to the Federal Reserve Bank of Chicago 2015 annual report. This was an eventful year for the national economy.

Helicopter Money – Central Banks’ Last Resort
Seeking Alpha
Around the world, central bank leaders are warily peering into their toolboxes. Unfortunately, most of the fiscal and monetary policy options have been exhausted. The pressures of stagflation and deflation are growing, and the search for new solutions has run its course. So what happens next? Well, way down at the very bottom of the toolbox, a last-resort option remains: so-called “helicopter money.”

Market reaction to Yellen speeches
Business Insider
Federal Reserve chair Janet Yellen will speak at the Economic Club of New York later Tuesday. On days like this, when stocks are going nowhere ahead of the speech, many market headlines would suggest that investors are pausing to hear what Yellen says.

Yellen Says What Markets Want to Hear
Mohamed A. El-Erian – Bloomberg
Markets had a predictable immediate reaction to comments by Federal Reserve Chair Janet Yellen on Tuesday that they interpreted as relatively dovish signals about the thinking of the world’s most important central bank.

Casino agent in Philippines says high-rollers brought in heist money
Karen Lema and Andrew R.C. Marshall – Reuters
A Chinese junket operator in Manila said on Tuesday that two high-rollers from Beijing and Macau were responsible for bringing $81 million stolen by hackers from Bangladesh’s central bank into the Philippines.


Dollar Heads for Worst Month Since 2011 on Slower Fed Rate Path
Taylor Hall and Rachel Evans – Bloomberg
The dollar headed for its worst month in five years as Federal Reserve Chair Janet Yellen signaled the central bank would act “cautiously” as it looks to raise U.S. interest rates against a backdrop of deteriorating global economic growth.

Renminbi soon a global currency?
Lowy Institute for International Policy – The Interpreter
The financial press and market commentators focus on China’s stock market gyrations, tottering exchange rate, capital flight and imminent credit collapse as elements in an ongoing narrative of impending financial crisis. Meanwhile, the process of internationalising the renminbi (RMB) continues. If you want a balanced account of this underlying story without the daily drama, you should read Renminbi Rising, authored by William Overholt, Guonan Ma and Cheung Kwok Law for the Fung Institute in Hong Kong.

Yen’s losing streak ranks among worst
Peter Wells – Financial Times
The yen’s decline since mid-March is beginning to rank towards the upper end of losing streaks over the past two decades. The Japanese currency was sitting two-tenths of a percentage point weaker at Y113.64 around lunchtime in London, enough to put it on track for an eighth straight day of declines.

Pound Has Worst Quarter Since 2009 as `Brexit’ Risk Takes Hold
Eshe Nelson – Bloomberg
The pound is heading for its worst quarter since 2009 as traders brace for the U.K.’s referendum on membership to the European Union, preparing for the risk that investment inflows will dwindle. A trade-weighted measure of sterling has dropped 5.4 percent this year amid concern that Britain will vote to leave the world’s biggest single market on June 23, in a so-called Brexit.

Currency Wars, the Devaluation Delusion
The Market Oracle
In 2010, Brazil’s Finance Minister, Guido Mantega, coined the phrase “currency war” when he complained about the “cheap” Chinese renminbi (RMB). Mantega claimed this gave China an unfair trade advantage. As he put it to the Financial Times, “we’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness.”

U.S. to press Nigeria on foreign exchange rate flexibility
Lesley Wroughton – Reuters
The United States said on Monday it would press Nigeria in talks this week to adopt a more flexible foreign exchange rate to boost growth and investment in Africa’s largest economy. U.S. Assistant Secretary of State for Africa, Linda Thomas-Greenfield, told an audience at the U.S. Institute of Peace that Nigeria should ensure that the value of the naira currency versus the U.S. dollar was “more realistic.”

China Bull Who Beat 99% of All Bond Funds Says Yuan Drop Is Over
Justina Lee – Bloomberg
or an investor whose fortunes are tied to a currency that most forecasters warn is destined to decline, Andy Seaman is surprisingly upbeat. The manager of Stratton Street Capital’s Renminbi Bond Fund says the shock devaluation of China’s currency in August — and the raft of dire analyst predictions that followed — have failed to shake his confidence. He expects the renminbi, also known as the yuan, to gain against the dollar by the end of 2016 and keep climbing in the years to come, buoyed by China’s current-account surplus, the central bank’s efforts to burn bearish speculators and foreign inflows into the nation’s increasingly open bond market.

Problems with Bitcoin give challenger Ethereum an opening
Nathaniel Popper – Australian Financial Review
A new virtual gold rush is underway. Even as Bitcoin, riven by internal divisions, has struggled, a rival virtual currency — known as Ethereum — has soared in value, climbing 1,000 per cent over the past three months. Beyond the price spike, Ethereum is also attracting attention from giants in finance and technology, like JPMorgan Chase, Microsoft and IBM, which have described it as a sort of Bitcoin 2.0.

****SD: Ethereum sounds like the title of a sci-fi sequel.

Dutch central bank in digital currency plan
The Netherlands’ central bank, De Nederlandsche bank (DNB) could be planning to develop its own digital currency based on blockchain technology.

Asia’s Worst-Performing Currency May Be Your Best Bet This Year
Kartik Goyal – Bloomberg
Investing in Asia’s worst-performing currency is all about the interest rate. While the rupee fell 0.6 percent versus the dollar this year, flows from stock and bond investors both turned positive in March amid slower inflation, an improved current account and budgetary discipline. Including interest, investing in rupees will earn 2.9 percent from now until Dec. 31, according to strategists’ forecasts compiled by Bloomberg, the most in emerging Asia.

Indexes & Index Products

Retail Investors Sound Off About Proposed Limits on Leveraged ETFs
Chris Dieterich – Barron’s
Federal securities regulators last year proposed new rules that would curtail the use of derivatives in mutual and exchange-traded funds. The idea was to enhance investor protection. It’s no surprise that fund companies don’t like these rules. Regulators and lawyers from Wall Street firms will go back and forth before any changes are implemented. But a raft of retail investors say that they don’t like the rules, either. A slew of comment letters submitted in recent months offer insights into how do-it-yourself traders view the market for leveraged ETFs.

European ETF liquidity buoyed by new trading platforms
Tim Cave – Financial News
As misnomers in financial markets go, the term exchange-traded fund is possibly hard to beat – certainly in Europe at least. European ETFs predominantly trade over the counter, not on stock exchanges as their name suggests. That fact would appear to fly in the face of ETFs’ raison d’être: to allow investors to freely and cheaply buy into baskets of securities whenever they want, like a stock. Practitioners estimate that up to 70% of European ETFs are traded privately among large institutions.

Eurex Clearing to accept ETF collateral
The Trade
Eurex has extended its scope of acceptable collateral to include exchange-traded funds (ETFs), a move which could significantly boost the ETF market.

The Teleology of Smart Beta
S&P Dow Jones Indices: Indexology
As assets tracking factor indices grow, so does the attention paid to evaluating and promoting these so-called “smart beta” funds. Even the nomenclature attracts attention. Professor William Sharpe, famous among other things for introducing the concept of beta to academic finance, has said that the term “smart beta” makes him “definitionally sick,” and lesser lights than he have also voiced reservations about the terminology. Recently one of the financial community’s best journalists opined that smart beta may be less smart than many of its practitioners allow.

Finance blogger wisdom: smart beta bubble?
Abnormal Returns
Question: The ‘smart beta’ or factor-investing bubble seems to be in full bloom. Is ‘smart beta’ simply the new active investing? If so, what happens to the entire fund industry which was built on the high fees associated with active management?

****SD: Bloggers weigh in on the question.

Heed The Words Of Warren Buffett When Shopping For Smart Beta Solutions
In the last several years, a new approach to investing, called smart beta, has taken hold in the investment industry. Smart beta approaches often strike a balance between active and passive investing: the manager often passively follows systematic index rules, but those rules differ from traditional market capitalization based construction. Typically, smart beta emphasizes capturing an investment factor or objective.

Key technical level for S&P 500
Business Insider
It looks like the S&P 500 Index’s daily momentum may be grinding to a halt as it’s staying well below 2,085. Market breadth also appears to be waning, according to Bank of America Merrill Lynch analysts. Volatility has also been a serious drag on the S&P 500 Index, perhaps causing deja vu for those who remember the market’s action in 2011.

Indexing the Brexit
S&P Dow Jones Indices: Indexology
The central bank of England has said that the European Union referendum in June 2016 is the most significant near-term domestic risk to the country’s financial stability. Because of its separate currency, Britain is one of the countries that could disassociate itself most easily from the EU. It is a long time until June, and the question lingers: is this another Scotland situation with a heavy amount of press, but in which case, like Scotland, the U.K. will stay just where it is?

Are Index Funds and Passive Investing Really So Great?
Index funds and passive investing have revolutionized the investment world and provided a strong challenge to actively managed funds. But as we’ll explain, index funds aren’t perfect and could become threatened by an even newer investment paradigm.


Gold Bulls Cheer Yellen Caution With More `Easy Money’ Predicted
Luzi-Ann Javier and Joe Deaux – Bloomberg
It took two words from Federal Reserve Chair Janet Yellen to reignite a gold rally. Gold futures advanced as much as 1.6 percent, the most in seven sessions, after Yellen said it’s appropriate for U.S. central bankers to “proceed cautiously” in raising interest rates because the global economy presents heightened risks. She spoke Tuesday at the Economic Club of New York.

Russia becomes world’s top gold buyer
RT Business
The Central Bank of Russia bought 356,000 ounces of gold in February becoming the largest buyer of the precious metal among the world’s central banks, business daily Vedomosti reports, quoting the IMF data.


The way Americans use credit cards was supposed to change in October — here’s why we still haven’t switched
Business Insider
What are you supposed to do when you pull out plastic to buy something at a store these days?
You’ve probably noticed that plenty of stores have terminals that obviously have a slot for inserting a chip-enabled credit card, but when you try to do that, an anxious store clerk yells something like, “Nope, we don’t take chips yet. Please swipe.” Back in October, a much-ballyhooed deadline marked the great switch from old-fashioned magnetic stripe cards to newer EMV chip credit cards. Well, that was the plan anyway. Despite some slow, steady progress, most of us are still swiping our stripes instead of dipping our chips several times each week.

How a ‘CEO’ scammed everyone by laundering money through China
The Associated Press via Mashable
Gilbert Chikli was rolling in money, stolen from some of the world’s biggest corporations. His targets: Accenture. Disney. American Express. In less than two years, he made off with at least 6.1 million euros from France alone. But he had a problem. He couldn’t spend the money. A tangle of banking rules designed to stop con men like him stood between Chikli and his cash. He needed to find a weak link in the global financial system, a place to make his stolen money appear legitimate. He found it in China.

****SD: Based on recent news, he could have used the Philippine casino circuit too.

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