First Impressions

Reg AT Stirs Concerns Ahead of CFTC TAC Meeting
Sarah Rudolph – JLN

The CFTC’s Technology Advisory Committee (TAC) was scheduled to meet on Tuesday to discuss three issues important to the trading industry: 1) the CFTC’s proposed Regulation Automated Trading (Reg AT); 2) swap data standardization and harmonization; and 3) the potential of blockchain and distributed ledger technology to the derivatives market.

Unfortunately, winter storm Jonas, aka Snownado, hit Washington DC with a record two feet of snow, and the meeting has been postponed.

In the weeks leading up to the meeting, there has been a steady stream of stories about blockchain, which is seen as a bit “sexier” than a 500-page regulatory proposal. But Reg AT has been a big topic of discussion in the trading industry, as some of its elements have sparked concern and could have a profound effect on the industry.

John Lothian News addressed the topic a while back in our article called “Trying to Stop the Next Flash Crash,” which can be found here. (Also click here for a complete summary of Reg AT and here to see a selection of comment letters on automated trading regulation.)

One of the people interviewed for that piece was Leslie Sutphen, president at Financial Markets Consulting, who was on the FIA committee that drafted responses to the CFTC proposal. We followed up with her last week to see what people in the industry are talking about regarding Reg AT ahead of the TAC meeting.

Read the rest of the commentary on John Lothian News.com

Quote of the Day

“When you add a lot of cold water into the pot, the firewood we have is for sure not enough.”

Hedge fund manager Huang Weimin, talking about slowing Chinese growth and the limited options available to the PBOC, in the story, “The Trader Who Made 6,200% on China Stocks Has Some Advice For Investors”

Lead Stories

EU botched billion euro bail-outs during financial crisis, says spending watchdog
Mehreen Khan – The Telegraph
The European Commission mishandled the bail-outs of debtor nations, imposing harsher conditions on member states as contagion spread across the continent, the EU’s Court of Auditors has found. Brussels was unprepared for Europe’s spiralling debt crisis as it failed to spot dangerous deficit levels in member states, said the EU’s spending watchdog In the first major assessment of the Commission’s role as part of the “Troika” of lenders, the ECA studied five bail-outs from 2009 to 2011: Hungary, Romania, Latvia, Ireland and Portugal.
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Banks are ‘too big to prosecute’, says FSA’s Andrew Bailey
Harry Wilson – The Telegraph
The largest banks have become too big to prosecute because of the impact criminal charges would have on confidence in them, Britain’s most senior bank regulator has admitted. In a variant of the “too big to fail” problem, Andrew Bailey, chief executive designate of the Prudential Regulation Authority, said bringing a legal action against a major financial institution raised “very difficult questions.”
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JPMorgan pays almost $2.5bn to settle legal disputes
Laura Noonan and Ben McLannahan – Financial Times
JPMorgan Chase will be left almost $2.5bn out of pocket after the US bank finally settled two of its biggest legal headaches left over from the financial crisis. Insurer Ambac said on Tuesday that it would receive almost $1bn from the bank to settle a long-running lawsuit about the sale of mortgage-backed securities.
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The fintech revolution that promises to finish off the big bad banks for good
Jeremy Warner – The Telegraph
They survived the explosive growth of the capital markets, and ended up harnessing it – disastrously, in some respects – to their own ends; thanks to taxpayers, who bailed them out, they also survived the financial crisis; and so far, they have largely survived the regulatory backlash that followed in its wake. But can the established banking industry outrun “fintech”?
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Deutsche Boerse urges banks to overhaul amid cheap funds
Reuters
Financial services firms must take advantage of rock bottom interest rates to make investments and takeovers and rethink business models, the chief executive of German exchange operator Deutsche Boerse said on Monday.
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A top Chinese official was arrested just hours after talking about the biggest threat to its economy
Linette Lopez – Business Insider
A key Chinese official was just arrested. On Tuesday Wang Baoan, the head of China’s National Bureau of Statistics was arrested for “serious violations of party discipline,” according to CNN. That isn’t that unusual, you might think. Lots of Chinese officials have been taken down as part of China’s anti-corruption campaign. What is especially newsworthy about this arrest is what Baoan said right before his arrest. He was giving a speech about the risks of capital outflows, which government data showed climbed to $1 trillion in 2015.
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****SD: Also, see The man in charge of China’s economic data is under investigation from CNN

Morgan Stanley Analyzed 43 Bear Markets and Here’s What It Found
Julie Verhage – Bloomberg Business
U.S. stocks may be looking a bit better after one of the worst starts to the year on record, but a number of markets, especially the emerging kind, have already entered or come within points of a bear market.
goo.gl/2UwiXC

‘Devastating’ Brexit will consign Europe to a second rate world power, warns Deutsche Bank
Mehreen Khan – The Telegraph
Britain’s exit from the European Union would have a “devastating” impact on the continent, relegating Europe to the status of a second-rank world power, a leading investment bank has warned. David Folkerts-Landau, chief economist at Deutsche Bank, said a Europe without British influence would greatly diminish the EU’s diplomatic clout at a time when it faces an unprecedented security threat from a revanchist Russia.
goo.gl/GDgOFs

A Fix for Italy’s Banks Can’t Wait
Bloomberg
In recent years, Europe has grown accustomed to financial panic — but the latest scare wasn’t about Greece or Cyprus or Ireland. The cause for alarm was Italy’s troubled banks. In case you’d forgotten, Italy is the European Union’s fourth-biggest economy.
goo.gl/nKL9Ep

Tradeweb’s 2015: A Year In Market Milestones
Press Release
2015 will go down in history as a milestone year for global financial markets. Consider the list of monumental, one-of-a-kind market events, which reads like the résumé of an outrageous political candidate known for their liberal use of superlatives.
goo.gl/3TX3jg

Central Banks

Fed risks looking out of step on rates ahead of first 2016 meeting
Sam Fleming – Financial Times
Federal Reserve officials will hold their first meeting of 2016 against a tumultuous backdrop of an oil price slump, sliding equities, a strengthening dollar and renewed questions about the stability of the Chinese economy. Further complicating the picture are murkier signs about domestic US growth, as labour market resilience is set against disappointing retail sales, falling inflation expectations and a probable slowdown in gross domestic product expansion in the fourth quarter of 2015.
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Wall Street sees next rate hike in May now: Survey
Steve Liesman – CNBC
Global economic weakness and recent market volatility will prompt the Federal Reserve to delay, but not cancel, rate hikes this year, according to the most recent CNBC Fed Survey.
goo.gl/5AHWWb

Bets on Negative U.S. Rates by End-2017 Jump Above 10% Chance
Matthew Boesler and Liz McCormick
Federal Reserve officials are expecting to raise interest rates this year and next. Options markets show some investors are taking out protection in case rates instead go negative.
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Why the Fed Is the Root of Much Market Turmoil; Fed is a key reason markets have plunged and risk of recession rising
Greg Ip – WSJ
Not long ago, this week’s Federal Reserve meeting looked like a nonevent. Having begun to raise rates from near zero in December, the central bank was expected to stand pat in January while signaling more increases later on.
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The ‘Fed put’ to be tested
James Saft – Reuters
The idea that the Federal Reserve stands as a kind of unpaid insurance agent to investors faces a stern test this week.
With the Fed signaling four rate hikes this year but the market betting there will only be one, the U.S. central bank faces two-way pressure when it announces policy after its meeting ends on Wednesday: to show that it is aware that things have changed, perhaps for the worse, in the opening weeks of the year, while keeping its options open and its power respected.
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Draghi Says ECB Credibility Hinges on Meeting Inflation Goal
Alessandro Speciale and Jana Randow – Bloomberg Business
Mario Draghi hit back at critics of his policies, saying the European Central Bank must fulfill its inflation mandate in order to maintain its credibility.
goo.gl/aiAKi3

Unexpected downturn in markets puts time on Fed’s side
Andy Uhler – Marketplace
At the Federal Reserve’s first meeting since raising interest rates in December, they’re sure to talk about whether another rate hike is in the pipeline. But since then, the markets have taken a beating. The interest rate increase played its part, but it’s not like the Fed writes monetary policy in a vacuum.
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The Five Scenarios Now Facing the Federal Reserve
Timothy A Duy – Bloomberg
Federal Reserve policymakers are likely enjoying this month about as much as market participants are. Central bankers at the Fed don’t like fast-moving markets to begin with, and they especially won’t like the implication that their supposedly inconsequential 25-basis-point interest rate hike in December was a mistake. The only saving grace for the Fed is that January was off the table for a rate hike anyway, so the volatility on Wall Street will have little impact on this week’s policy outcome, due to be announced on Wednesday.
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China’s Central Bank Can’t Be Jack Of All Trades
Valentin Schmid – Seeking Alpha
In the new normal of investing central banks run the economy. If growth slows down, the central bank will fix it. If the currency is too high, the central bank will fix it.
Especially the Chinese central bank (PBOC) was very adept at managing small or large glitches in China’s planned economy, at least until recently and without worrying about the long-term effect. In 2016, however, managing the economy and the exchange rate became too tall of an order.
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BOJ does not signal monetary easing in advance – Amari
Stanley White – Reuters
Japanese Economy Minister Akira Amari said on Tuesday that the Bank of Japan does not signal in advance whether it will ease monetary policy, when asked about the chance of additional easing this week.
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Oil prices to stay near current level throughout 2016, World Bank says
Phillip Inman – The Guardian
The World Bank has slashed its forecast for oil prices this year, saying the cost of a barrel of crude will stay near its current lows for the rest of 2016.

Currencies

Waiting for Janet — currencies market in thrall to Fed
Roger Blitz – Financial Times
Central banks have begun the year dancing to a Duke Ellington classic. Imagine US Federal Reserve chair Janet Yellen crooning “Do Nothing Till You Hear From Me”, and a host of governors, from Mario Draghi to Mark Carney, dutifully obeying. Because until Ms Yellen and her colleagues have their say this week on oil, China and whatever other factors are contributing to 2016’s frantic start in the markets, policymakers’ best — and probably only — course of action around the world is, indeed, to do zip.
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Wider China-Hong Kong Discrepancy Revives Fake Trade Doubts
Bloomberg
The gap between China’s reported exports to Hong Kong and the shipments registered by the territory widened in December, suggesting currency-market swings may have spurred a fresh round of fake trade invoicing. China recorded $1.94 of exports to Hong Kong last month for every $1 in imports Hong Kong registered from the mainland, leading to a $22.3 billion difference between the two data sets, according to Bloomberg calculations. That’s the highest gap in both dollar terms and by ratio since March 2013.
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Dollar’s Gain Is Companies’ Pain as Currency Woes Extend to 2016
Thomas Black and Lananh Nguyen – Bloomberg
Last year was painful for U.S. companies with overseas sales as the dollar soared by the most since the 1970s. Less than one month into 2016, many of those same firms are already bemoaning the greenback’s strength and the impact on profits for this year. “At current spot rates, we would expect a significant impact to revenue and profit again in 2016,” Martin Schroeter, the chief financial officer at International Business Machines Corp., said during a Jan. 19 earnings conference call with analysts.
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Chinese communist mouthpiece takes aim at billionaire investor George Soros as PBOC confronts tough choice
Zhou Xin and Wendy Wu – South China Morning Post
China’s state-run media has escalated its rhetoric against market speculation on its currency and economy, with a top mouthpiece claiming billionaire investor George Soros had “declared war against China”. The strong words come amid a policy dilemma for Beijing’s central bankers. One one hand, they face expectations of further interest rate hikes by the US Fed and further monetary easing in Japan. On the other hand, they face a slowdown in the domestic economy that has come at the same time as China tries to restructure its economic drivers. So the central bankers face a stark choice – keep the yuan stable or revive the economy.
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****SD: The Financial Times’ take can be found here

Capital controls won’t rebuild confidence in China’s handling of yuan: Cornell’s Prasad
Leslie Shaffer – CNBC
China faces pressure to impose capital controls to stave off large-scale depreciation of its currency, but the mainland should seek out other options, the former head of the International Monetary Fund’s (IMF) China division said. Concerns over the mainland’s economic slowdown, compounded by fears that the yuan would depreciate further after policymakers intervened recently, spurred massive capital outflows last year. That in turn spurred concerns that China might turn to capital controls to stem the capital flight.
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Why Chinese stocks are unlikely to be hit hard even if yuan falls further
Jessie Lau – South China Morning Post
Chinese stocks will not be significantly affected if China’s currency sees further drastic depreciation, say analysts, with the energy sector expected to be a key driver of growth. The 12-month US dollar to yuan rate is forecast to fall to 6.78, according to a January report by Credit Suisse analyst Vincent Chan. Still, analysts expect MSCI China earnings to grow 31 per cent this year and energy-sector profits to increase threefold following a rebound in energy prices.

Indexes & Index Products

Benchmarks Turned Emerging Markets Into a Giant Blob
Tracy Alloway – Bloomberg
“The Fragile Five,” is a term coined by a Morgan Stanley analyst named James Lord back in 2013, as he attempted to describe the emerging market economies most prone to flighty foreign investors. A former International Monetary Fund economist later suggested “The Sorry Six,” which would have added Russia to the original mix of Turkey, Brazil, India, Indonesia and South Africa. Meanwhile, Deutsche Bank analysts proffered up the questionable “Biits” to encapsulate the same group.
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JPMorgan Cuts S&P 500 Forecast, Citing ‘Earnings Recession’ Risk
Oliver Renick – Bloomberg
JPMorgan Chase & Co. cut its forecast for U.S. stocks by 9.1 percent, saying heightened market volatility could damage the broader economy and bring about an earnings recession.
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Markit Selected By UBS For Index Management in Bid to Streamline Compliance
Jeff Patterson – Finance Magnates
Markit (Nasdaq: MRKT), a global provider of financial information services, has been selected by UBS Investment Bank to help calculate and leverage the bank’s investible indices, according to a Markit statement.
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Traders Dump Tech ETF, Discounting Any Boost From Apple Results
Joseph Ciolli – Bloomberg
Investors are fleeing technology stocks at a pace not seen in over a year, and Apple Inc.’s earnings today has done little to change their mind. So far this month, $1.1 billion has left the largest exchange-traded fund tracking technology stocks. That puts January on pace for the biggest monthly outflow since October 2014. Short interest in the ETF also jumped last week to a four-month high, data compiled by Bloomberg and Markit Ltd. show.
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The Trader Who Made 6,200% on China Stocks Has Some Advice For Investors
Bloomberg Business
Huang Weimin, the hedge fund manager whose Chinese stock-index futures wagers returned more than 6,200 percent last year, has some advice for investors in 2016: Sell your shares now, before it’s too late. The 45-year-old former worker at a state-owned company, a virtual unknown until last year, has become a star of the Chinese futures market after timely bets on the direction of share prices propelled his Yourong Fund to the top of the country’s performance rankings. He’s carried the winning streak into 2016, returning 35 percent through Jan. 22 after selling stock-index futures just days before the market’s worst-ever start to a year. The Shanghai Composite Index plunged 6.4 percent on Tuesday, bringing losses this year to 22 percent.
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University of Miami Selects S&P Dow Jones Indices to Calculate New Custom Hybrid Index PRNewswire
The School of Business Administration at the University of Miami, a private research university, has selected S&P Dow Jones Indices (S&P DJI) to be the custom calculation agent for a new custom hybrid index – University of Miami’s Florida 50 Index. Custom hybrid indices are client-owned, white label custom indices that use an S&P DJI index to screen for constituents and/or as an actual constituent of their index.
prn.to/1VnyHuo

The Trader Who Made 6,200% on China Stocks Has Some Advice For Investors
Bloomberg
Huang Weimin, the hedge fund manager whose Chinese stock-index futures wagers returned more than 6,200 percent last year, has some advice for investors in 2016: Sell your shares now, before it’s too late.
goo.gl/DzfTY1

Innovative Indexing Approach to Manage Uncertainty of Retirement Income Launched by S&P Dow Jones Indices
PR Newswire
In response to the need for income focused benchmarks within defined contribution plans, S&P Dow Jones Indices (S&P DJI) has announced the launch of the S&P Shift To Retirement Income and DEcumulation (STRIDE) Index series. The S&P STRIDE Index series are a multi-asset class solution designed to transition from growth assets to a hedged stream of inflation-adjusted retirement income based on target retirement dates.
goo.gl/Z8yYUe

Capital Index Launches Islamic Trading Accounts
Victor Golovtchenko – Finance Magnates
Capital Index, a brokerage house that recently acquired a license from the Financial Conduct Authority (FCA) to provide financial services has announced that the firm is launching a new service aiming at clients from the Middle East and North Africa (MENA).
goo.gl/JmzHVB

Traders Are Pulling Money From VIX Funds Like Never Before
Camila Russo – Bloomberg
While stocks are having a chaotic start to the year, investors are withdrawing money from securities that profit from higher volatility at the same time as short sellers are piling into bets that tranquility will return.
bloom.bg/1PAn5WD

Gold

Gold’s prospects are dull
Swaha Pattanaik – Reuters
Gold isn’t behaving like a safe haven should. While investors have endured torrid times as global equity markets have slumped, even worse tribulations may be required for the precious metal to regain its past lustre as a safe haven.
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****SD: Or really bright. Or in the middle. We should just ask the 8-ball.

Miscellaneous

Here’s the far-fetched scenario that Mike Bloomberg thinks could take him to the White House
Jake Flanagin Tim Fernholz – Quartz
Advisors to Michael Bloomberg insist that his consideration of a campaign for the US presidency is for real—and, somewhat amazingly, that the liberal former mayor of New York could potentially draw on Republican support to win the White House.
goo.gl/SRyOoS

Economic uncertainty slowing art market as Christie’s and Sotheby’s record declining results
Vivienne Chow – South China Post
The global art market shows signs of slowing down amid a grim economic outlook, as leading auction house Christie’s reported its first decline in annual sales since 2009 and Sotheby’s warned of a loss in net income in 2015.
goo.gl/jysJgY

‘Snowzilla’ Blizzard Was No Monster for the Economy
Jeffrey Sparshott – Wall Street Journal
The big snowstorm that socked the East Coast, shut down schools, the government and some businesses and disrupted the daily routine for millions will have only a small impact on the U.S. economy.
goo.gl/stcjD0

FT journalists vote for 24-hour strike over pension dispute
Mark Sweney – The Guardian
Financial Times journalists have voted in favour of a 24-hour strike over proposed changes to the newspaper’s pension policy, which would be the first strike in 30 years if it goes ahead. FT members of the National Union of Journalists have already voted overwhelmingly in favour of taking some form of industrial action over plans to scrap the final salary pension scheme. They have now voted to call for a 24-hour strike following a breakdown in talks with the newspaper’s management.
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