First Impressions

Open for Business: Competition Heating Up in the New Market Structure
Swap execution facilities (SEFs) were given life by the Dodd-Frank Act, which requires over-the counter (OTC) swaps to be cleared and traded on this new type of regulated platform. The CFTC published its final SEF rules in mid-2013 and trading commenced on 18 registered SEFs. John Lothian News interviewed a dozen of the leading SEF operators, regulators and other participants and put together a three part series on SEF regulation, the changing market structure and the new technology required to make it all happen. Part II looks at the changes to the overall market structure brought about by new regulation. Though the swap execution facility is a new entity as defined by Dodd-Frank, an ecosystem of platforms and processes for the trading OTC derivatives has been in place for decades. The introduction of new requirements for quoting, clearing and data transmission significantly altered the competitive landscape among inter-dealer brokerage firms (IDBs) and dealer-to-client platforms.

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Quote of the Day

“The current environment is potentially very toxic for emerging markets. You have two very troubling things: uncertainty about the Fed policy, combined with concerns about growth, particularly in China. It’s difficult to justify that it’s time to go out and buy emerging markets at the moment.”

Eamon Aghdasi, a strategist at Societe Generale SA in New York in the story, “Contagion Spreads in Emerging Markets as Crises Grow”.

Lead Stories

Contagion Spreads in Emerging Markets as Crises Grow
Ye Xie and John Detrixhe – Bloomberg
The worst selloff in emerging-market currencies in five years is beginning to reveal the extent of the fallout from the Federal Reserve’s tapering of monetary stimulus, compounded by growing political and financial instability.

***DA: Don’t worry. If the problem gets bad enough, the Fed will “untaper.”

Investors, look beyond Davos to indebted Detroit
Gillian Tett –
The gritty streets of Detroit are more than 4,000 miles as the crow flies from Davos in Switzerland, where luminaries from around the world are this week breathing the rarefied mountain air. But if you want to understand the gloomy undercurrent to much of the debate at the World Economic Forum, Detroit is a good place to start.

***DA: The lesson will soon be learned, from Detroit to Davos, that taxing authority is neither an absolute nor unlimited claim on assets.

Signs of life in European commercial paper market as corporates return
Rebecca Brace – Euromoney magazine
European companies are beginning to return to the euro commercial paper market, potentially provoking a recovery in an asset class that provides corporates with crucial short-term funding.

***DA: Don’t speak too soon. The entire market is looking a bit ominous today.

What’s next for FX structured products, ETFs and indexes?
Srikant Dash, Bloomberg Indexes, Rick Harper, Sébastien Galy –
Structured Products convened a panel in December last year, sponsored by Bloomberg Indexes, in which the outlook for foreign exchange investing, especially in relation to the development and use of indexes, and their use as underlyings for ETFs and structured products were among the topics discussed.

Bankers assess once-in-generation reform
Martin Arnold in Davos –
Depending on who you believe, banks have either put the crisis behind them and are about to embark on a long-overdue recovery, or they have been seriously scarred and will limp along for several more years.

***DA: Or somewhere in between.

Mergers Could Clog Flow of Junk Bonds
Investors’ healthy appetite for “junk” bonds may be tested in coming months if two supersize corporate takeovers take place.

UBS at Davos: ‘We’ve swapped global imbalances for domestic disequilibrium’
FT Alphaville
According to a white paper released by UBS for this week’s World Economic Forum in Davos, the world economy remains as unbalanced today as it has been over the past quarter century – with big implications for the global economic recovery.

Why it’s tough being in an altcoin cartel
Izabella Kaminska | FT Alphaville
Cartels come in many shapes and sizes. There are Colombian drug cartels. Mafia protection cartels. Oil producer cartels. Diamond cartels. Commodity cartels. Central banks. Altcoin cartels. All sorts. All of them, however, extract value from potentially low-value things by means of organised collusion and discipline.

***DA: They left out a few examples of organized collusion.

Central Banks

Central Banks Withdraw Dollar Funding
The European Central Bank said Friday that it and other major central banks would gradually withdraw a crisis-era measure that ensured a steady supply of U.S. dollar-based funds to banks, reflecting improved economic and financial conditions in developed economies.

BOE to Consider Range of Factors in Rates Decision
Bank of England Gov. Mark Carney on Thursday said the U.K. central bank will look at a broad range of economic factors when assessing the need for higher interest rates, a sign that officials may be preparing to play down the link between BOE policy and falling unemployment.

***DA: I’ve heard that speech before, on this side of the pond.

BOJ shouldn’t ease more while inflation hopes intact: IMF’s Shinohara
The Bank of Japan should steer clear of further monetary easing as long as inflation expectations are on the rise, even though its 2 percent price goal is unlikely to be met in two years, a senior International Monetary Fund official said on Friday.

Swiss Franc Climbs After SNB’s Efforts to Limit Property Prices
Neil MacLucas – MoneyBeat – WSJ
The Swiss central bank’s efforts to prevent property prices from rising have prompted a jump in the country’s currency.

Don’t Expect Job Data Alone to Persuade Fed on Rates
Just over a year ago, the Federal Reserve changed its guidance on how long it planned to keep interest rates very low. The low rate, it said, would “be appropriate at least as long as the unemployment rate remains above 6.5 percent,” assuming that inflation and expectations for inflation also remained low.

***DA: Silly headline. Anyone who believes job data is the only criterion has not been paying attention.

US Dollar Liquidity-Providing Operations As Of 1 February 2014


Investors Shun Currency Benchmark Amid Forex Probe
Investors are shunning the main benchmark for global currencies amid a widespread probe into possible manipulation of foreign-exchange markets, according to several people who attended a high-level committee of currency-market participants that met in London this week.

***DA: Have you heard about the Integral FX Benchmark?

Argentine government adopts hands-off approach as peso slides
John Paul Rathbone in London and Jonathan Gilbert in Buenos Aires –
It is getting hot in Buenos Aires, and not just because the temperature is a steamy 44 degrees centigrade. On Wednesday, the Argentina peso fell to a record low; on Thursday it took another dive, dropping 15 per cent against the dollar in a day.

***DA: I knew I was right on my Argentina story from last week. I just didn’t expect it would be so soon. Read it here:

Argentina’s Circular Ruins
Justin Lahart – MoneyBeat – WSJ
Argentina is going from bad to worse. Again. The peso slid sharply against the dollar Thursday, as traders said the central bank stopped defending the currency – a sign it may be plumbing the bottom of its foreign-currency reserves.

Yuan Continues Its Rise as a Global Payments Currency
Erin McCarthy – MoneyBeat – WSJ
China’s yuan spent its second consecutive month as one of the 10 most-used currencies for global payments in December, according to data from the Society for Worldwide Interbank Financial Telecommunication, or Swift.

Investors Flee Developing Countries
Investors dumped currencies in emerging markets, underscoring growing anxiety about the ability of developing nations to prop up their economies as they face uneven growth.

Saxo Bank Launches Social Trading Floor
Timothy Bourgaize Murray – WatersTechnology
Copenhagen-based Saxo Bank has launched the beta version of its new social media-style trading floor.

Indexes & Index Products

NYSE Files to Allow ‘Nontransparent’ ETFs to List, Trade
Murray Coleman –
Exchange-traded fund managers got a boost to their efforts to capture a bigger part of the $7 trillion market for stock mutual funds. The operator of the New York Stock Exchange filed a request with the Securities and Exchange Commission on Thursday to adopt a new rule that would permit “nontransparent” ETFs to list and trade on its platform.

Markit Launches Global ETF Platform
Markit, a leading, global financial information services company, today announced that it has integrated its suite of ETF products into a new web application that delivers sophisticated capabilities required for navigating the increasingly complex and global ETF universe.


Reserve Bank’s decision to increase LTV will rebuild lost confidence
Business Standard
With the Reserve Bank of India (RBI) increasing the loan-to-value (LTV) ratio for gold loan companies, borrowers can secure loans of up to 75 per cent of the value of the gold jewellery pledged, against 60 per cent earlier.

Learn from Buba and demand delivery for true price of gold
Neil Collins –
A year ago, the Bundesbank announced that it intended to repatriate 700 tons of Germany’s gold from Paris and New York. Although a couple of jumbo jets could have managed the transatlantic removal, it made security sense to ship the load in smaller consignments. Just how small, and over how long, has only now become apparent.


Texas Junk-Bond Brokerage Founder Fights for Firm Control
Zeke Faux and Jef Feeley – Bloomberg
John Gorman IV, a Texas junk-bond salesman, is fighting for control of the brokerage he co-founded against executives who claim he wasted the firm’s money on escorts and private jets.

Blankfein Says Goldman Has Controls for Hiring of Connected Kids
Michael J. Moore – Bloomberg
Goldman Sachs Group Inc. (GS) has controls in place to avoid conflicts of interest when clients request jobs for their children, Chief Executive Officer Lloyd C. Blankfein said.

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