First Impressions

Brazilian Bits
Jim Kharouf – JLN

The World Federation of Exchanges/IOMA Derivatives and Clearing Conference got underway in São Paulo, Brazil on Monday. Market regulation and clearing issues ruled the day’s panels. Here are a few bits from this beautiful, gritty and sprawling city which has more trees and traffic than expected, as well as graffiti that appears to be on almost every building, on every story. One could only ask two questions – why and how?

Stu Wexler, regional COO and general counsel of ICAP North America, made the point that the CFTC’s overreach, often dubbed extraterritoriality, essentially cut swaps trading between European and Asian customers with US clients, out of fear the CFTC would soon be knocking on doors in London and across Asia.

Cicero Augusto Vieira Neto, COO of the host exchange BM&FBovespa, said it has consolidated four clearing divisions, cash equities, futures, FX and bonds, into one-pot clearing. Why? Because of new international capital requirements that have forced it to provide more favorable margining for customers.

Many of the panel conversations were about systemic risk and the methods used to prevent massive failures. Mike McClain, president and COO of the OCC, outlined the traditional clearing models used there and added that OCC is also stress testing future scenarios its never tested for before.

Gaurang Desai, interim CEO of the Dubai Gold and Commodities Exchange, said his exchange is working to build a new “Silk Road” from China through Dubai to Africa for gold, diamonds and tea.

Panelists on the commodities panel, which I moderated, agreed that Africa has enormous potential in terms of its commodities exchange growth. Clive Furness, managing director at Contango Markets said the Chinese push into the continent for raw materials necessitates the need for more price transparency there.

The Nairobi Securities Exchange plans to open a derivatives market this year or next.

Juan Pablo Cordoba, chair of WFE and CEO of the Bolsa de Velores de Colombia, articulated the unintended consequences of Dodd-Frank and European regulation, which has driven up costs and requirements in developing markets, and driven down volumes. “We will end up with six or seven global central clearing parties and a second class world with domestic markets, with domestic players. This isn’t good for emerging markets.”

Stay tuned for more from the cloudy and rainy metropolis of 13 million, that is also known as “the land of drizzle.”

Quote of the Day

“The United States is at risk of losing its status as the world’s capital markets leader. I see it everywhere: Rather than thinking creatively about ways to promote capital formation, legislators and regulators are layering on law after law, regulation after regulation­—strangling entrepreneurs, their enterprises, and, of course, their employees and customers. We are not even resting on our laurels; we are actively throwing those laurels on a bonfire.”

Daniel Gallagher, a commissioner at the Securities and Exchange Commission in the story, “Why Elizabeth Warren Makes Bankers So Uneasy, and So Quiet”.

Lead Stories

Big Questions Hover Over HSBC
Dealbook – NY Times
HSBC’s revival is overshadowed by its existential angst.
Higher investment banking revenue and fewer bad loans helped bolster first-quarter results at the global bank, offering a welcome respite from restive shareholders and political uproar over Swiss tax. HSBC’s longer-term fortunes, however, depend on how it answers three big questions.

For Top 25 Hedge Fund Managers, a Difficult 2014 Still Paid Well
Dealbook – NY Times
For investors in hedge funds, like big pension funds, 2014 was not a lucrative year. But for those who managed their money, the pay was spectacular.
The top 25 hedge fund managers reaped $11.62 billion in compensation in 2014, according to an annual ranking published on Tuesday by Institutional Investor’s Alpha magazine.

Buffett and Ackman Hate U.S. Bonds and the Losses Are Piling Up
It’s taken just two weeks for U.S. government-bond investors to lose $195 billion.
Nothing materially changed in the outlook for global growth, and another Federal Reserve meeting came and went without anything particularly noteworthy happening.
So, why all the losses?

Bond platforms look to bury archaic phone trading
Robin Wigglesworth, FT
When bond traders fancy lunch, they can order from a panoply of smartphone apps and get a burrito or pad thai delivered promptly to the desk. When they want to buy some corporate bonds, an archaic landline phone is still usually required. But that may soon be changing.

Death of Deflation Trade Takes Hold as U.S. Bonds Breach Ceiling
The bond market may be seeing the death knell of a popular bet that inflation will stay low.
The 30-year Treasury bond’s yield rose above a key level that this week, breaking out of what’s know as its 200-day moving average. That may signal traders are done betting the collapse of oil prices will lead to deflation after pushing the longest-maturity debt to record lows in January.

Raises for Fannie, Freddie CEOs Draw Attacks From White House
President Barack Obama’s administration has joined Democratic and Republican lawmakers in attacking potential raises for the top executives of Fannie Mae and Freddie Mac.
“The reason these entities are different than some of the financial entities you see in the private sector is they benefit significantly from a backstop that is provided by the taxpayer,” White House press secretary Josh Earnest told reporters Tuesday at a briefing in Washington.

LSE Enters Contest to Build European Dark Pool Called Plato
by John Detrixhe, Will Hadfield, Bloomberg
London Stock Exchange Group Plc has entered the competition to build a not-for-profit European dark pool backed by a consortium of banks and asset managers.

Why Elizabeth Warren Makes Bankers So Uneasy, and So Quiet
by Katrina Brooker, Bloomberg
The rollback of financial regulation is stalled. Income inequality is a campaign issue. Americans are still angry about the financial crisis. Things aren’t shaping up the way the big banks expected, and an important reason is one laser-focused senator from Massachusetts.
Let’s assume that when he woke up on the morning of Dec. 12, Michael Corbat, CEO of Citigroup, was feeling pretty good. The day before, the House of Representatives had passed a bill that would save his bank and others lots of money and headaches.

EU lawmakers brace for fight over financial-whistleblower protection
Neil Roland, MLex
A push to give financial whistleblowers greater legal protection appears to be heading for a showdown between the European Parliament and national governments. Safeguards for whistleblowers are being considered by European Commission officials drafting rules to implement the market-abuse legislation approved last year.

Barclays Bank faces multimillion-pound legal challenge over Libor rigging
The Independent
Barclays Banking Group’s role in the Libor-rigging scandal looks set to fall under the microscope once again after a storage company launched a multimillion-pound legal claim against the bank.

Junk Bonds Are The New Haven Assets
by Anchalee Worrachate, Sally Bakewell, Katie Linsell, Bloomberg
The new fixed-income haven is, of all things, the market for junk bonds.

Central Banks

Greece seeks breathing room from ECB chief Draghi
Greek Deputy Prime Minister Yannis Dragasakis meets European Central Bank President Mario Draghi on Tuesday, as his government seeks financial breathing room to prevent a default and stay in the euro.
Talks between Greece’s leftist government and its international lenders are stumbling over disputes about pension and labor reforms as the country edges toward a debt repayment deadline to the IMF it will struggle to meet.

Justice Department Conducting Criminal Investigation of Leak at Federal Reserve
NY Times
The Federal Reserve said on Monday that the Justice Department was conducting a criminal investigation into the disclosure of confidential information in 2012 about a crucial meeting of the Fed committee that sets monetary policy.
The Fed acknowledged the investigation in a letter to House Republicans who are pressing for information about the leak and the Fed’s internal inquiry at the time.

The Fed’s Emergency Lending Powers Come Under New Congressional Scrutiny WSJ
A debate in Washington D.C. these days about the Federal Reserve’s emergency lending powers provides a window into the strange and transformative power of the nation’s capital to turn success into failure and vice versa.

The Texas Miracle And The Federal Reserve ‘Put’
Texas had a few nice years there. Economic growth was soaring and employment booming, and fortunes were multiplying and tax receipts cruising. On that last item, tax receipts, really cruising. For the fiscal year ending in March, the Texas government reeled in 6.7% more in total tax collections than in 2013, which itself was 8.4% more than in 2012, which was 13.4% more than in 2011. That’s a 30% nominal increase in three years.

The Shrinking Central Bank Reserve Stash
Seeking Alpha
The Bloomberg article posted here reports that after a decade-long 5-times increase, the worldwide stash of foreign currency reserves held by central banks has begun to shrink. Is this good, bad, or irrelevant?
The answer is no – it’s not good, it’s not bad, and it’s not irrelevant. To be more accurate, it would be good if it indicated a new long-term trend, but it almost certainly doesn’t indicate this. Instead, it is just part and parcel of the way the current monetary system works.


China knocks on door of reserve currency club
Gabriel Wildau in Shanghai, FT
The internationalisation of China’s renminbi faces its stiffest test yet as the International Monetary Fund debates whether to endorse the “redback” as a reserve currency alongside the dollar, euro, yen and sterling.

Venezuela’s Economy Suffers as Import Schemes Siphon Billions
NY Times
The government’s complex currency system has led to exorbitant schemes by importers, who wildly inflate the value of goods brought into the country to grab American dollars at rock-bottom exchange rates. Sometimes, they fake the shipments altogether and import nothing at all.
Then they just pocket the dollars that the government provides, or sell some of the money for a gargantuan profit on the soaring black market here for American currency.

CURRENCIES: The Dollar Is Losing Its Grip On The ‘Iron Throne’ Of The Currency Market
Its fortunes now more closely resemble those of the House of Stark
An apt comparison can be drawn between the dollar’s recent troubles and the most popular drama on television.
Much like the wildly popular HBO fantasy series “Game of Thrones,” some unexpected drama has recently rattled the power structure of the currency market.

Indexes & Index Products

It’s Not So Much the Current Weight, But the Weight That’s Put On
Indexology: S&P Dow Jones Indices
In addition to liquidity concerns in the credit markets, the rising amounts of debt have become a topic for discussion. The S&P U.S. Issued Investment Grade Corporate Bond Index has seen its market value actually decline from the beginning of the year’s USD 4.126 trillion to USD 4.077 trillion as of April 30, 2015.

‘Passive’ Doesn’t Always Mean ‘Index’
DFA, strategic beta funds prove that traditional indexing isn’t the only passive method.

TD Ameritrade’s Investor Movement Index: New Two-Year Low Marks Fifth Month of Decline in Seven Months
TD Ameritrade, Inc., a broker-dealer subsidiary of TD Ameritrade Holding Corporation is today releasing the Investor Movement Index reading for April 2015. The Investor Movement Index, or the IMXsm, is a proprietary, behavior-based index created by TD Ameritrade that aggregates Main Street investor positions and activity to measure what investors are actually doing and how they are positioned in the markets.

Russell Investments launches new fund for investors seeking yield-oriented investment strategies
Business Wire
To help investors balance the need for generating income today, while also aiming to drive portfolio growth to generate sustainable future income, global asset manager Russell Investments has launched the Russell Multi-Strategy Income Fund. The new fund, available via financial professionals, invests across a set of asset classes with both income and growth potential using a team of specialist money managers and strategies. Moreover, recognizing that market opportunities will likely change over the course of an investor’s time horizon, the fund has built-in flexibility to seek to adapt to risk and opportunities using dynamic portfolio management.

MSCI offers A-share flexibility over index inclusion
MSCI sees a more flexible timetable ahead for reviewing China A shares’ admittance to global indexes. Capital market reforms and launch of Shenzhen-Hong-Kong Stock Connect would likely help China’s cause.

FTSE Appoints New Director Of Australia And New Zealand
FTSE Group (“FTSE”), the global index provider, today announces that Justin Walsh has been appointed as Director of Australia and New Zealand. The new hire builds on FTSE’s existing regional presence, reinforcing its commitment to providing innovative indices to superannuation funds, asset managers and consultants. The strengthening of the team reflects the continuing growth in popularity of passive investment management across the Australian and New Zealand market.


Hayek: Cryptocurrency backed by gold
There’s a new cryptocurrency coming to the market.
What makes it unique to existing cryptocurrencies like Bitcoin?
It’s backed by gold.
Anthem Vault, the metals and technology company, will launch the coin on May 25.

Gold Withdrawals From NY Fed Vault Refuse To Stop: 200 Tons Of Gold Repatriated In Past Year
One month ago, when we commented on the latest monthly withdrawal from the gold vault lying on New York’s bedrock some 90 feet below the NY Fed building, which then saw another 10 tons quietly repatriated by unnamed foreign central bank(s) bringing the total held on behalf of foreign governments to below 6,000 tons for the first time in the 21st century, we made an observation:


At Sohn Conference, Masters of Moves Recognize the Good Ones
Dealbook – NY Times
William A. Ackman, the founder and chief executive of Pershing Square Capital Management, and Ian Bremmer, the president of the Eurasia Group, are used to commanding center stage and charming crowds. But on Monday afternoon at the annual Sohn Investment Conference, they stood transfixed just off the main stage at Avery Fisher Hall at Lincoln Center, watching something they had never seen before.

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