First Impressions

IDX 2015 Wrap-up: London’s Construction Boom, Algo Expansion, New Standards And So On
Doug Ashburn, JLN

Part of the allure of sending a team to London for the International Derivatives Expo each June is the ability to meet up with and receive updates from our European friends – subscribers, sponsors and market participants in general – on their turf. I came away with a new appreciation for just how much is happening in London and beyond.

And I am not just talking about the number of high-rise cranes dotting the London landscape (I stopped counting at 30; the property boom is for real). Progress is being made on the ground as well.

The London Metal Exchange is making progress on its move to Finsbury Square. The building will allow the exchange offices to consolidate under one roof and include a brand new ring, demonstrating the commitment to preserve the face-to-face trading system as necessary, even as the exchange (and the rest of the world) continues to electronify. I would call this the last trading pit to ever be built, but I recall saying the same thing when I moved to the CME’s upper trading floor in 1993, and again a couple years later when the CBOT added its new trading room.

Speaking of building, I had a chat with Cinnober CEO Veronica Augustsson about the Financial IT Quality Assessment (FIQA) standard they are promoting. The idea has merit, and if you would like to see for yourself, have a look at the paper they published on the topic

Also on the subject of building, as well as on the subject of research papers, Fidessa‘s Yuriy Shterk recently published the latest installment of the firm’s series on algos in futures markets and the challenges specific to derivatives markets. The upshot? Algos are getting smarter, on both the sell-side and buy-side, and that is not necessarily bad news. What’s good for the goose is good for the gander (my words, not his). View it HERE

Historically, open interest has been used to define the robustness of a contract or asset class. LCH.Clearnet’s Dan McGuire argues that the trend toward lower outstanding notional in interest rate derivatives is a good thing, because it means capital efficiency. Here are the numbers; do the math yourself. There was roughly $426 trillion outstanding at the beginning of 2014. About $643 trillion cleared last year, and about $300 trillion matured. But by the end of the year, there was only $362 trillion left outstanding, and that number has since been reduced to $295 trillion at last count. The difference is the effect of netting and compression.

As I continue with the “building” theme, perhaps the biggest takeaway from the conference (aside from the curry dinner we ate Thursday night), is the excitement around the adoption of blockchain technology to aid in the clearing, payment and settlement of financial contracts. One firm making the rounds, Cryex, generated a fair bit of buzz in its push to become a derivatives clearing organization and trade matching engine that uses a cryptocurrency such as bitcoin as a common denominator in cash and derivative transactions. Look for more on Cryex in an upcoming JLN Special Report.

Finally, and this piece is more of a remodeling project than new construction, FIA distributed the first issue of its newly-rebranded print magazine. Futures Industry is now called MarketVoice, and features a bit of the old, such as volume reports, but also a fresh new look at emerging trends as well as emerging firms. The futures industry is a whole lot more than the futures industry these days, if you get what I mean. MarketVoice attempts to reflect that trend.

***Addendum for JLN Options***

The above commentary appeared in this morning’s John Lothian Newsletter.

As is generally the custom, we would go through the newsletter and add a bit of color to the stories. Today, however, there seems to be only one comment applicable to pretty much every story in the newsletter. Volatility is low, abnormally low, considering the possible fallout from a Grexit.

Quote of the Day

“The market recognizes that the Fed has repeatedly erred on the optimistic side. Fool me 50 times, but not 51 times.”

Eric Lascelles, chief economist at RBC Global Asset Management in the story, “Why nobody believes the Federal Reserve’s forecasts”.

Lead Stories

Ex-A.I.G. Chief Wins Bailout Suit, but Gets No Damages
Dealbook – NY Times
Maurice R. Greenberg, the former chief executive of the American International Group, prevailed in his lawsuit against the United States government on Monday, but a federal judge declined to award any damages.
The lawsuit, brought by Mr. Greenberg on behalf of himself and other A.I.G. shareholders, contended that the Federal Reserve overstepped its bounds when it bailed out the giant insurer in 2008, taking 79.9 percent of the company’s equity in the process. They argued that the Fed did not have the legal right to take the equity and effectively become its majority owner as a condition for the bailout.

E.U. Urged to Plan for Greece to Default
NY Times
A chorus of voices on Monday called on European Union authorities to plan for Greece to default on its huge pile of debt after bailout talks between Athens and its creditors deteriorated over the weekend.
But while European leaders dialed up the sense of urgency, they did little to offer a way to break the deadlock. They instead put the onus on the government in Athens to prevent Greece from becoming the first to quit the eurozone in what would be a major setback to the nearly seven-decade project to unify the Continent.

Bond Swings So Extreme Even BlackRock Rewrites Risk Measures
by Eshe Nelson, Bloomberg
With $4.8 trillion in assets — or about the size of Japan’s economy — no one manages more money than BlackRock Inc. So, it’s worth paying attention when the firm says it’s time to cast aside its trusted models for assessing risk in bonds.

S.E.C. Finds Itself in a Constitutional Conundrum
Dealbook – NY Times
The Securities and Exchange Commission may soon be confronting the adage “be careful what you wish for.”
A federal district judge has for the first time found that the agency’s use of an administrative judge to hear an insider trading case is unconstitutional. The decision could hurt the agency in a number of administrative enforcement actions, including cases against prominent defendants like the financier Lynn Tilton.

Breaking up retail and investment banks is not so hard to do
Jonathan Ford, FT
Next to the hated bank levy, few of the UK government’s regulatory reforms are more calculated to bring even mild-mannered financiers out in angry hives than the requirement for institutions to ringfence their retail businesses.

Goldman: Washington Is Coming for All Those Share Buybacks
It’s no secret that U.S. companies have been repurchasing their stocks at a stunning pace.
In a new research note, Goldman Sachs, which clearly does not like stock buybacks, argues that the practice of returning billions of dollars to shareholders is facing increasing political scrutiny.
To some extent, the political backlash noted by Goldman’s Chief Economist Jan Hatzius and his team is already happening.

The Fed Won’t Ruin Bond Markets
By Mark Gilbert, Bloomberg
With the Federal Reserve poised to unleash its first interest rate increase in almost a decade there’s a debate among investors about whether the past is any guide to how markets will react to a monetary tightening. The to-and-fro brings to mind automobile entrepreneur Henry Ford’s famous insistence that “history is more or less bunk.” But traders might be better served to recall a quote attributed to Mark Twain — that even if history doesn’t repeat itself, it does rhyme.

Hedge funds and Draghi blamed for bond volatility
The Trade
Traders are bracing themselves for continued increased volatility in the bond markets, following warnings from numerous buy-siders in recent weeks.

London Stock Exchange Eyes Brydon As Chairman
Sky News, via Yahoo Finance UK
Donald Brydon, a former chairman of the London Metal Exchange (LME), is being lined up to take on the same role at its more famous cousin, the London Stock Exchange (LSE), Sky News has learnt. Mr Brydon is said to be in advanced discussions with the board of the LSE about the post, with an announcement possible within days, according to a person involved in the process.

Stock exchange link-ups need to prove their worth
John Sedgwick, FT
The Shanghai-Hong Kong Stock Connect, which provides offshore investors with direct access to the Shanghai stock exchange, has attracted fervent support from many global asset management companies that are gearing up to take advantage of it. But Asia is witnessing a flurry of such trading links, many of which are not likely to win the same interest.

SEC seeks views on ‘shocking’ auditor relationships
Madison Marriage, FT
Companies could soon be forced to disclose the length of their relationships with auditors amid concern that accounting firms have become too cosy with the companies they oversee.

Finra summons banks and asset managers over market fears
Robin Wigglesworth and Joe Rennison in New York, FT
A US financial regulator has summoned a clutch of senior executives from banks and asset managers for two meetings to explore potential solutions to a liquidity crunch confronting bond markets.

Central Banks

Fed on track for September rate hike as economy picks up: Reuters poll
The U.S. Federal Reserve is on track to raise interest rates for the first time in nearly a decade in September, according to a Reuters poll that suggests economists now are mostly confident about that timing.
Debate over when the first hike will come has been one of the main drivers of global financial markets this year and those expectations have propped up the dollar, now in the midst of a historic rally since last June.

Economists Push Back BOJ Easing Calls After Kuroda’s Yen Missive
Barclays Plc to Standard Chartered Plc are among a wave of economists pushing back their calls for a boost in stimulus by the Bank of Japan after Governor Haruhiko Kuroda put the brakes on a weak yen last week, a survey shows.
Sixteen of 35 economists surveyed by Bloomberg June 8-15 see the BOJ adding to its unprecedented easing by the end of October, down from 21 of 36 polled in May. While a majority still forecast eventual action, 13 now say the central bank will forgo further stimulus, up from 10 last month.

C’mon Greece, You’re Making It Tougher for the Fed to Hike Rates
So evidently we have to care about Greece again.
Debt negotiations are breaking down and perhaps this time the almost-bankrupt nation will actually get kicked out of the euro-area’s shared currency. While global bond markets have mostly been brushing off the threat of a Greek default this year, they’re starting to care quite a bit more.

A Federal Reserve Meeting, the Joust for Jet Orders and Fitbit’s Stock Market Debut
NY Times
The titans of the global aerospace industry will gather on Monday at Le Bourget Airport for the biennial International Paris Air Show. The traditional joust for jet orders between Airbus and Boeing, the world’s biggest commercial plane makers, will dominate the weeklong event as millions of dollars’ worth of hardware soars above the chalets and convention halls.

Why nobody believes the Federal Reserve’s forecasts
The Federal Reserve on Wednesday will unveil the latest version of its strategy for righting the American economy. But the question is: Will anyone believe it?
The nation’s central bank has repeatedly pushed back plans to raise its benchmark interest rate, known as the federal funds rate. The rate helps determine the cost of borrowing money for everything from a new home to a new factory. When the central bank wants to stimulate the economy, it lowers the fed funds rate. When the Fed wants to rein growth in, it raises the rate.


The future of blockchain is not Bitcoin!
Bitcoin technology has been the focus of some very large scale venture capital investments over the past year, representing a complete 180 degree turn from the previous year’s uncertainty in terms of values, and litany of high profile, reputation-damaging events including the downfall of MtGox, and the seizure by the US Government of anonymous marketplace Silk Road.

Don’t Worry Over Currencies
The U.S. dollar has staged an impressive rally over the past year. Although it has taken a bit of a breather recently, there are reasons to expect the dollar to remain strong, at least over the next year or two. The U.S. Federal Reserve is likely to raise rates in the next 12 months, which would be the first increase since 2006. The Bank of Japan and the European Central Bank, on the other hand, plan to maintain extremely low interest rates in their countries for the foreseeable future. Both central banks hope to stoke inflation and keep the yen and euro weak relative to the dollar in an effort to boost exports. These measures should support a stronger dollar, at least relative to the yen and euro.

Europe Asks if Greece Could Default Without Exiting Euro
With no deal in sight on Greece’s foundering international bailout, some policy makers are examining a new idea: Could the government in Athens default on its rescue loans and still keep the euro as its currency?

Bitcoin Exchange MonetaGo Launches in 40 Countries
MonetaGo, a new exchange with ambitions to take bitcoin “global”, launched across 40 countries today.
First announced in April, the platform offers bitcoin buying and selling in 28 local currencies. As a twist, MonetaGo users can also ‘fix’ or ‘peg’ their bitcoin to these various exchange rates.

Indexes & Index Products

China’s MSCI reality check is too big to ignore
In recent weeks, much of the debate on China has centered on the idea that it is “too big to be ignored,” meaning the rest of the world would inevitably need to own its equities and currency. But now it’s set for a reality check.In the same week that Chinese A-shares failed to be included in MSCI’s emerging-market benchmark, it was also revealed that global investors pulled $7.9 billion out of Asia. This was the biggest weekly withdrawal in almost 15 years, according to data provider EPFR Global, and the majority reportedly related to China.

Morgan Stanley: It’s Tough to Beat the S&P 500, and This Is Why
It’s no secret that active managers have struggled to outperform in the past five years while the S&P 500 and other benchmark indexes have seen big gains.
According to a Bloomberg report earlier this year citing Morningstar data, just 20 percent of mutual funds that pick U.S. stocks beat their main benchmarks in 2014, while 21 percent topped the indexes in the five years ended Dec. 31. (If you widen the time frame to 10 and 15 years, the winners rise to 34 percent and 58 percent, respectively). Unsurprisingly, investors have thus moved money to low-cost funds that mimic indexes.
So why is beating the benchmark seemingly so hard for the people paid to do so?

Look for lower passive ownership in a stock
There is no denying that the rise of exchange traded funds, which passively follow a stock market index, has made life harder for investors trying to make a living from buying individual stocks. First, they have caused a crisis of confidence. Why take the risk of picking stocks if one can get a guaranteed market return from an ETF? Second, by increasing correlations between stocks, they have reduced the opportunities to outperform the market.

S&P Dow Jones talking to 8 asset managers for IPO indices
Global index provider S & P Dow Jones Indices is in talks with 8 mid-sized and small asset managers in Saudi to launch IPO indices, reflecting a boom in the primary market, Charbel El Azzi, head of Middle East, Africa & CIS, S & P Dow Jones Indices told Gulf News.

Indices rejig to provide exposure to yield and China
Money Management
MSCI will added China A-shares into its global benchmark indices but has not indicated when it would do so stating it still needed to resolves issues relating to market accessibility with the China Securities Regulatory Commission (CSRC).

How did South African active managers perform against their benchmarks in 2014?
Daniel Ung – Indexology, S&P Dow Jones Indices
Following the success of the SPIVA (S&P Indices versus Active) in the U.S., Australia, Canada, India, Japan, Europe and Latin America, we are now starting coverage on South Africa. Like the reports covering other regions, we aim to shed some light on the ongoing active vs. passive debate. SPIVA South Africa will be published twice a year, mid-year and at the end of the year.
Let’s take a look at the results of the past year.

Eurex Exchange’s MSCI news – June 2015
May was again another successful month for Eurex Exchange and our MSCI derivatives. See below for the most important facts on volumes, open interest and other developments including interesting articles.


Texas Pulls $1 Billion In Gold From NY Fed, Makes It “Non-Confiscatable”
The lack of faith in central bank trustworthiness is spreading. First Germany, then Holland, and Austria, and now – as we noted was possible previously – Texas has enacted a Bill to repatriate $1 billion of gold from The NY Fed’s vaults to a newly established state gold bullion depository.
“People have this image of Texas as big and powerful, so for a lot of people this is exactly where they would want to go with their gold,” and the Bill includes a section to prevent forced seizure from the Federal Government.

Dubai’s gold trade works to win its shine back
Dubai’s gold and jewellery trade could do with some timely help from the government to tide over an extremely difficult retail environment that has set in since February, market sources say. Such measures could include — but not be limited to — a freeze on rental increases for the sector.

BitGold: Returning to the gold standard?
Communities Digital News
According to the latest figures published by the world gold council, the United States has 8,134 tons of gold in its reserves. Germany is next with 3,384. With 1,034 tons in its reserves, China is growing fast and is expected to become the largest buyer in the gold market.
Gold is a battered currency, no longer playing its old role of being the favored money of humanity. It is considered a barbarous relic of a dead economic order. Many have proclaimed the end of its role as currency, including the likes of John Keynes and Milton Friedman, and there are no major public figures calling for its return. Many, like Friedman, believe that central banking can solve every monetary problem. Friedman is a hero to the establishment, where there is the political and ideological desire to keep gold a relic of the past.
Yet the U.S. holds gold — not euros, yen or other currencies — as its primary reserves.

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