First Impressions

It’s a MAD MiFID II world now, and US firms should prepare
By Erik Donelson, special contribution to John Lothian News

Note: Erik has been working as a regulatory intern at John Lothian News since April 2015. On the last day of his internship, he attended an FIA event in Chicago – “What Every Market Participant Should Know about MiFID II.” Below are his thoughts and observations from the event.

MiFID II enforcement is coming, and it’s going to affect all market participants, including those in the United States. As ESMA and the European Commission finalize the technical standards ahead of January 2017, when the directive and accompanying regulations come into force, it is becoming clear that markets in Europe will be radically altered.

On July 30, the FIA hosted a panel in Chicago of “victims,” as they labeled themselves, of MiFID II rules. Chief among the regulations is a definition of high frequency trading and the regulation of algorithms. According to the panel, the commission seems to prefer a system based on the median daily lifetime of cancelled/modified orders. Under this regime, any entity that falls above the median threshold would be classified as HFT.

Additionally, any firm with direct electronic access will be deemed a MiFID regulated firm, and this definition will include those trading for their own account. Clearing firms and others that provide direct access to their clients will be subject to an entire slate of new risk controls.

Given the short turn-around time between the finalization of the technical standards and implementation of the rules, firms will be scrambling to implement necessary compliance systems. ESMA “Q&A” documents will give guidance on its implementation. However, given the complexity and scope of these new regulations, industry members will need to move quickly to meet these new regulatory demands.

The panel also discussed whether U.S. rules would be deemed equivalent under the directive.

Read the rest of the commentary at

Quote of the Day

“You can blame him all you want for his comments, for his political plans, for his bad taste in shirts, for his holidays on the island of Aegina. But you can’t say that he is a crook, you can’t say that he stole the money of the Greek people, you can’t say that he had a secret plan to lead the country on to the rocks.”

Alexis Tsipras, the Greek prime minister, on Yanis Varoufakis, the former Greek finance minister, in the story, “Alexis Tsipras defends Yanis Varoufakis over secret Grexit plan”

Lead Stories

Chicago Mulls Borrowing That Puerto Rico Rejected as Too Risky
Elizabeth Campbell and Darrell Preston – Bloomberg
Chicago is considering selling a type of debt that’s fallen out of favor in other municipalities because it saddles taxpayers with higher costs by delaying payments.
Mayor Rahm Emanuel proposed issuing $500 million of bonds this week in an ordinance that would permit the use of capital appreciation bonds, where borrowers postpone interest and principal payments into one big sum at the end of the term. Emanuel’s pitch also allows for the more common current interest bonds, which the city said it expects to use.

Who needs the Fed? The rate hike cometh on its own
Richard Leong and Jonathan Spicer – Reuters
As traders, market pundits and economists jaw over whether the Federal Reserve this year will lift its benchmark lending rate for the first time in almost a decade, several corners of the U.S. bond market are not waiting around.

U.S. Banks Take Global Lead
Justin Baer and Max Colchester – WSJ
In the trans-Atlantic rivalry for investment-banking supremacy, the Americans are running up the score.
European bank executives over the past week have delivered a series of dour proclamations about their need to shrink and further dial back their global ambitions. Meanwhile U.S. banks are preparing to pounce, with executives touting the gloom emanating from their European counterparts as a big opportunity to press their newfound advantage.

Alexis Tsipras defends Yanis Varoufakis over secret Grexit plan
Heather Stewart and Julia Kollewe – The Guardian
Alexis Tsipras, the Greek prime minister, has launched a staunch defence of his former right-hand man Yanis Varoufakis following revelations that the ex-finance minister drew up secret plans to ditch the euro if bailout talks failed.
Varoufakis, who was a controversial figure during his tenure in Athens, courting publicity and provoking his eurozone counterparts, has admitted he formulated a scheme for leaving the euro, which involved hacking into the Greek tax system.

Will Japan Survive Its Great Big Debt Disaster?
Scott MacDonald – The National Interest
Greece, China, Puerto Rico. Is Japan the next hotspot on the financial wall of worry? Probably not. But the world’s third-largest economy faces substantial challenges, and the reform program of Prime Minister Shinzo Abe, referred to as Abenomics, needs to accelerate.

Japan and Europe Funds Continue to Rake Assets – Focus on Funds
Chris Dieterich – Barron’s
Investors continue to pump money into markets where central bankers have their feet on the gas pedals.
Meanwhile, they’re pumping the brakes on emerging-market and commodities.

Shares in Mainland China End Worst Month in 6 Years
David Barboza – NY Times
Stock prices in China fell modestly on Friday, but ended July with their worst monthly decline in six years, despite repeated government efforts to stabilize the market and prop up prices.
Share prices were volatile for much of the past week, with wild intraday swings, as investors weighed the direction of a government intervention plan and the authorities vowed to root out short-sellers, or traders who bet a stock will fall, and to crack down on stock manipulation.

Investor stampede out of emerging markets, gold continues -BAML
Jamie McGeever – Reuters
The stampede out of emerging markets and commodities continued last week as investors dumped yet more billions of dollars worth of assets sensitive to higher U.S. interest rates and worries over China, Bank of America Merrill Lynch said on Friday.

Zero Sector of Treasuries Market Gets Big Boost From Oil Plunge
Susanne Walker Barton – Bloomberg
An obscure section of the $12.7 trillion Treasury universe is beating the rest of the market this month as sinking oil prices lured buyers convinced inflation is nowhere on the horizon.

Hedge Fund Risks May Be Bigger Than Regulators Know, Despite Dodd-Frank
Owen Davis – International Business Times
Hedge fund holdings have surged past their pre-recession levels in recent years and despite new regulations imposed by the Dodd-Frank Act, managers of the funds are still able to mask the risks they pose to the financial system, according to a new federal study.

RPT-S&P leaves Brazil wobbling on edge of junk
Paul Kilby – Reuters
Struggling Brazil took another blow to the chin this week when S&P put the country’s BBB- credit rating on negative outlook, setting the stage for a potential downgrade to junk.

Elizabeth Warren’s Crusade to Separate Investment and Commercial Banks
William D. Cohan – NY Times
For reasons that are mystifying, the idea of separating investment banks from commercial banks — once the law of the land for more than 60 years — is again the rage among certain politicians.

Slovenia issues 30-year 300 mln euro bond
Marja Novak – Reuters
Slovenia issued a 300 million euro bond with maturity of 30 years, the longest maturity of any Slovenian bond to date, the Finance Ministry said in a statement on Friday.

China Rate Swaps Have Best Monthly Gain This Year on Policy Bets
China’s one-year interest-rate swaps posted this year’s biggest monthly gain on speculation the scope for monetary easing will be reduced as the nation turns to fiscal measures to boost the economy.

Central Banks

Russian central bank cuts key rate by 50 basis points, leaves options open
Jason Bush and Alexander Winning – Reuters
Russia’s central bank cut its key interest rate by 50 basis points to 11 percent on Friday, as expected, citing a cooling economy that it said outweighed inflation risks.

ECB Will Welcome Higher Core Inflation
Richard Barley – WSJ
Will the real eurozone inflation rate please stand up? Headline inflation remains ultralow at 0.2%, data released Friday showed. But under the surface, there are some signs emerging that inflation is picking up.

IMF is participating fully in Athens debt talks: European Commission
Francesco Guarascio – Reuters
The International Monetary Fund is participating fully in the ongoing talks for a new bailout program for Greece, a spokeswoman for the European Commission said on Friday, dismissing reports the IMF could be abandoning the rescue plan.

How Central Banks Nurture the Zombie Economy
Mat Spasic – The Daily Reckoning
Central bankers, the world over, share a conviction when it comes to interest rates. If there’s one thing that unites them, it’s the belief that the lower the rates, the better.
For much of the last decade, the banks have been on a monetary easing binge. Some banks, like the US Federal Reserve, have lowered rates to near zero. Others, like the European Central Bank, have taken things to a whole new level. Following the ECB’s lead, a number of European central banks have lowered rates into negative territory. That’s forced many commercial banks to pass these negative rates onto customers.

Rajan in chains
The Economist
A few years ago, when Alan Greenspan was boss of the Federal Reserve, a central banker in Europe remarked how much he disliked it when he saw a headline such as “Greenspan cuts rates”. The Fed’s standing was hurt by such a personalisation of its policymaking, he explained. After all, it is actually all 12 members of the Federal Open Market Committee (FOMC) who decide America’s interest rates, not just its chairman.
In India the Reserve Bank of India (RBI) and its present governor, Raghuram Rajan, are as closely entwined in the popular mind as the Fed was with Mr Greenspan. Yet on July 23rd the government published an external commission’s draft of a new financial code, which would reduce Mr Rajan’s authority over interest rates. It proposes to set up a new monetary-policy committee (MPC) with seven members: four government appointees, the governor of the RBI and two other representatives of the central bank.

Mexico’s Central Bank Holds Rates, Steps Up Peso Defense
Juan Montes – WSJ
The Bank of Mexico stood pat on rates on Thursday for a ninth consecutive policy meeting, amid slow economic growth and low inflation, while authorities took fresh measures to support a weak peso through increased dollar auctions.
The country’s foreign exchange commission, formed by officials of the central bank and the Finance Ministry, said shortly after the rates announcement that it is increasing the amount of dollars to be sold at auctions to address continued exchange market volatility.

The Economist
When Alina, a Moldovan student, had her bank card rejected by a cash machine last week, her first thought was to wonder whether the bank had quietly gone under. Happily, the cause was a fleeting technical glitch—but her reaction was not far-fetched. The country’s financial system is limping badly. In November, thieves stole $1 billion from Moldova’s three biggest banks through a series of fraudulent loans and transfers. Moldova, sandwiched between Romania and Ukraine, is the poorest country in Europe; the theft amounted to more than an eighth of GDP. It has set in train a series of events that will leave the government unable to pay salaries by the end of the summer, according to the recently departed finance minister.


Swiss franc shock hits central bank for $50B
Matt Clinch – CNBC
The Swiss National Bank (SNB) revealed on Friday that abandoning its currency cap on the euro in January cost the central bank 50.1 billion Swiss francs ($52 billion) in the first half of the year.

The world gears up for a surge in the US dollar
Financial Times
As a symbol of how the US punches above its weight, nothing beats the pre-eminence of its currency. The US may account for just a fifth of global gross domestic product, but dollar assets make up three times as great a proportion of global reserves. Most commodity trading uses the greenback as the medium of account.

China Plans to Allow Use of Foreign Currencies for Oil Trading
China will let overseas investors trade its domestic crude futures using the yuan or foreign currencies as it seeks greater influence over prices.

Top FX banks brace for disruption wave
Paul Golden – Euromoney
PaaS provides a platform for developers to build applications and services over the internet without having to worry about the underlying infrastructure. Compared with other segments of the cloud computing market, it has developed slowly. However, as smaller cloud computing and IT solution providers have started to develop applications, growth has accelerated and the market is predicted to be worth $7 billion by 2018.

What Now Following 360T Sale?
Profit & Loss
There has been more big M&A news in the FX world this week with the announcement that Deutsche Boerse Group is set to buy trading platform 360T for EUR 725 million.
With the acquisition of Hotspot by BATS Global Markets, 360T by Deutsche Boerse and, if the rumours are to be believed, FastMatch by the Intercontinental Exchange (ICE), there is a clear trend of accelerating M&A activity in the FX market, currently being driven by exchange groups.

Emerging Market Central Bankers Are Getting Nervous About Their Plunging Currencies
Katia Porzecanski – Bloomberg
The biggest decline in emerging-market currencies since the global financial crisis is quickly turning from a welcome event for countries seeking to make their economies more competitive into something destructive.

Central European currencies stuck in tight ranges, waiting for more Fed signals
Reuters – Economic Times
Central European currencies and bonds were stuck in tight ranges on Friday, with investors waiting for further signals about the timing of an expected rate increase in the US that could cut appetite for the region’s higher-yielding assets.

Indexes & Index Products

1/5 Of US Stocks And 63% Of EM Stocks Are In A Bear Market
Equity markets are quite tumultuous underneath the headline indices recently. For example, 21% of all MSCI USA stocks are at least 20% of its 200-day high. This is only the third time since the summer of 2012 that this many stocks are in a bear market.

FTSE Russell expands SRI family with new “ex coal” index series
James Lord – ETF Strategy
FTSE Russell, a leading global index provider, has announced the launch of the FTSE Russell All-World ex Coal Index Series, a new suite of indices tracking the performance of various broad equity market exposures while excluding firms operating in the coal mining industry and general miners with proved and probable coal reserves.

CBOE to List VIX ‘Weeklys’ Options Beginning October 8
Press Release – CBOE
The Chicago Board Options Exchange (CBOE) today announced that it plans to list options with weekly expirations on the CBOE Volatility Index (VIX Index) beginning Thursday, October 8, 2015.


The 178,000 tonnes of gold in the world might be worth more in 2016
Ben Moshinsky – Business Insider
Most of the world’s gold is out and has been turned into jewelry.
A chart from Macquarie shows we’ve mined about three-quarters of the planet’s gold (that we know about), with only about 55,000 tonnes left to dig out.

Precious metals funds worldwide bleed $1.2 bln, most since Dec. ’13 – BofA
Sam Forgione – Reuters
Investors worldwide pulled $1.2 billion out of precious metals funds in the week ended July 29, marking the biggest weekly outflows from the funds since December 2013, data from a Bank of America Merrill Lynch Global Research report showed on Friday.

Falling gold and copper prices slam these countries
Matt Egan – CNN
Just a few years ago, life was very good for countries like Peru that have a lot of copper and gold.
China’s explosive economic growth fueled seemingly-insatiable demand for industrial metals like copper, which represents a fifth of Peru’s total exports. Prices for these natural resources surged as part of a commodities super cycle.


Cyber attack hits RBS and NatWest online customers on payday
Patrick Collinson – The Guardian
The RBS banking group has revealed it suffered a cyber attack on its online services that left customers struggling to log on for nearly an hour – just as monthly pay cheques were arriving in accounts.

Wheatley, cropped
The Economist
“Britain needs a tough, strong financial-conduct regulator,” said George Osborne, the chancellor of the exchequer, on July 17th as he announced that he had effectively ousted Martin Wheatley, the City’s tough, strong financial-conduct regulator. Financiers quietly toasted the departure of the figure they had come to see as Britain’s bank-basher-in-chief since his appointment in 2013. Whom Mr Osborne selects to replace Mr Wheatley at the helm of the Financial Conduct Authority (FCA) will be a strong indicator of how much more lenient he is prepared to be towards the country’s bruised bankers.

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