First Impressions

Editor’s Note
Due to the Memorial Day holiday, JLN Financials will not be published tomorrow (Friday, May 22) nor Monday, May 25, 2015. We will begin again on Tuesday the 26th.

Smart beta: 2015 global survey findings from asset owners
FTSE Russell

In 2015, FTSE Russell conducted a follow-up survey to the well-received 2014 survey of institutional asset owners. The results are based on responses from 214 asset owners representing various types of institutional investors across the globe. The goal was to better understand how the perception and adoption of smart beta have continued to evolve globally.

Review the results and comprehensive analysis for greater detail and insight into the growing interest in and adoption of smart beta among asset owners.

From the report – Three things you should know about the adoption of smart beta

Smart beta interest and usage continues to grow. The results of the 2015 survey indicate an increased interest in and adoption of smart beta strategies.

More education is needed. With more choice, and greater flexibility in the construction of portfolios, further education is required to make informed decisions.

There is a movement towards combining multiple factor and strategy indexes. Overall, most asset owners are focused on a combination of smart beta strategies.

The findings above represent a few highlights from the survey. For a more complete analysis, please request the complete report

CME-LCH Basis Spread
By Amir Khwaja – Clarus Financial Technology
Recently I noticed that the view statistics for my June 2014 blog on LCH-CME Switch Trades were running at 5 times their weekly average, which I thought was odd. Then on 15-May, I read the Risk article, Bank swap books suffer as CME-LCH basis explodes (subs required) and I understood why. So this is a good time to revisit this topic. First, for the time pressed folks, here is a concise summary:

***DA: Though it seems a bit “inside baseball” this interest rate swap clearing battle is rather interesting as it unfolds. With differing cost structures and profiles among dealers and buy-siders, and different value propositions depending on geographic location, imbalances between fixed payers and fixed receivers were inevitable. How does one price the value of collateral efficiency via portfolio margining? Is the pricing discrepancy an arbitrage that will eventually work itself out? Will there be a compromise, or a clear winner and loser?

Quote of the Day

“What is not surprising is that most ruled out a rate hike in June; what is more surprising is that most would not rule it out. It affirms the point that the threshold to raise rates is very low and the bias to do so very high.”

Eric Green, head of economic research at TD Securities, in the story “Fed Minutes Show Policy Makers Lean Toward a Rate Rise After June”

Lead Stories

Fed Minutes Show Policy Makers Lean Toward a Rate Rise After June
By Binyamin Appelbaum –
Economic weakness in the early months of the year has persuaded most Federal Reserve officials that June is probably too soon to start raising the Fed’s benchmark interest rate. But they are not planning to wait much longer.

Federal Reserve proposes letting banks use some muni bonds in liquidity rules
By Sarah N. Lynch and Tim Reid – Reuters
The U.S. Federal Reserve did an about-face on Thursday and proposed allowing banks to count certain municipal bonds as liquid assets in order to comply with new rules designed to ensure banks can survive a cash crunch. The Federal Reserve’s revised plan comes after growing pressure from federal lawmakers, cities and states who all have complained about a rule the Fed adopted in September that tightened the restrictions on which assets banks can sell if they are facing a credit crunch.

***DA: As an Illinois resident and taxpayer, I see the phrase “some munis” and think, I bet they won’t allow some of ours.

Five global banks to pay $5.7 billion in fines over rate rigging
By Karen Freifeld – Reuters
Five of the world’s largest banks, including JPMorgan Chase & Co and Citigroup Inc, were fined roughly $5.7 billion, and four of them pleaded guilty to U.S. criminal charges over manipulation of foreign exchange rates, authorities said on Wednesday. A fifth bank, UBS AG, will plead guilty to rigging benchmark interest rates, the U.S. Justice Department said.

***DA: I am guessing I will get 0.001 percent interest in my passbook savings account until these fines are paid off.

Bank FX Fine Scorecard (Follow Along at Home!)
By Matt Levine – Bloomberg View
The foreign-exchange settlements are very hard to keep straight so I made a little scoreboard of the various fines that various banks have paid to various regulators:

***DA: Before you click over, take a guess – is the grand total $6 billion, $10 billion, or $18 billion this far?

Mary Jo White’s SEC Is the Agency That Barely Moves
By David Michaels and Robert Schmidt – Bloomberg Business
As the Justice Department, Federal Reserve, and other regulators across the globe prepared the final details of a multibillion-dollar criminal settlement with five Wall Street banks over currency rate rigging, all eyes were on one agency that had the power to throw a wrench into the entire deal. Though a bit player in the negotiations, the politically divided Securities and Exchange Commission had to approve waivers each bank needed to continue to do normal business.

CFTC takes aim at Isdafix manipulation with Barclays case
By Michael Mackenzie, Joe Rennison and Philip Stafford –
Barclays has become the first bank to be fined in the long-running investigation into alleged manipulation of US interest rate swap contracts, through a global derivatives benchmark known as Isdafix. On Wednesday, the US Commodity Futures Trading Commission fined Barclays $115m for attempting to manipulate the benchmark over a five-year period ending in 2012.

Central Banks

Central bankers, economists to take long view at ECB forum
By Marie Julien – Business Insider
Central bankers from across the world gather in Portugal on Thursday to try to see past pressing issues such as Greece and market turbulence, and take a longer view of the global economy. The European Central Bank has invited leading economists, academics, financial market players and central bankers from across the globe to a secluded luxury resort in Sintra, around 25 kilometres (15 miles) from Lisbon, for a three-day think-fest.

ECB says QE working, but government reforms needed – minutes
By Balazs Koranyi – Reuters
European Central Bank rate setters agreed last month the bank’s asset buying programme was working as intended but its full benefit would only be felt if governments implemented reforms, minutes of April’s monetary policy meeting showed. ECB Governing Council members concluded risks about the scarcity of bond market supply linked to the quantitative easing scheme had been overstated, and there was no need to consider any change in the bank’s monetary stance.

Central Banks Make Waves on Liquidity Risk
By Richard Barley – WSJ
For financial markets, deciphering the message from central banks is often a case of being able to separate the forest from the trees. One densely wooded and potentially thorny area centers on how much compensation investors should demand for risks related to liquidity.

ECB ‘told Ireland’ to stand with failing banks
By Sarah Bardon – The Irish Times
The European Central Bank told Ireland it must stand with its failing banks, the banking inquiry heard today. Former Central Bank governor John Hurley told the committee about the lead up to the decision to introduce the blanket bank guarantee on the State’s banks in 2008.

U.S., euro zone business growth slower, China contracts
By Jonathan Cable and Michael Connor – Reuters
U.S. and euro zone business growth slowed in May while China’s factory sector contracted again, reinforcing the need for major central banks to continue supporting economic growth.

Don’t Expect China Stimulus to Have Same Effect as the Fed’s
By Simon Kennedy – Bloomberg Business
When it comes to spiking the global punch bowl, Zhou Xiaochuan doesn’t come close to central bankers in the U.S. or Europe. After central bank stimulus from the Federal Reserve and European Central Bank had a ripple effect in foreign financial markets, economists from UBS Group AG are advising investors not to expect a similar lift as Zhou’s People’s Bank of China cuts interest rates and encourages banks to lend.

All bets off as Bank of Japan prepares to meet
By Toru Fujioka and Masahiro Hidaka – Australian Financial Review
The challenge is trying to project what governor Haruhiko Kuroda will do after his history of surprises since taking office in March 2013. After the most recent policy meeting, Kuroda led his board in keeping the BOJ’s stance unchanged, even as it abandoned its original two-year time frame for reaching 2 per cent inflation.

South Africa Central Bank Warns of Higher Rate as CPI Risks Rise
By Amogelang Mbatha, Xola Potelwa and Michael Cohen – Bloomberg Business
South Africa’s central bank gave its strongest indication yet that it will raise interest rates in coming months as higher energy costs and a weaker rand threaten the inflation target.

Libor’s Relevance Rising Again When It Comes to Fed Rate Outlook –
By Liz McCormick – Bloomberg Business
After dropping off the radar since its fall from grace during the financial crisis, the rate at which banks say they borrow from one another may be becoming relevant again.
The three-month London interbank offered rate, known as Libor, rose this week to a more than two-year high. That may be foreshadowing an interest-rate increase by the Federal Reserve by the end of year while other indicators such as futures provide more skeptical outlooks on the timing of tightening.


Currency control sits uneasily in trade deal
By Tracey Samuelson –
Congress is debating whether or not to attach some new rules about what countries can and can’t do with their currencies to a pending “fast track” trade bill, which would allow Congress to vote on free trade deals but not filibuster or amend them.

Trader transcripts: ‘If you ain’t cheating, you ain’t trying’
By Mark Odell –
They were known as the “Cartel” or the “Mafia” among their peers. The unsubtle nicknames were given to a group of traders who at one time worked for five of the six banks that reached settlements on Wednesday with regulators over allegations they rigged the foreign exchange markets.

**JK – My high school gym teacher PJ Pfannerstill used to say that, but I doubt he meant Libor and FX markets.

Banks to get SEC waivers following forex guilty pleas -sources
By David Henry and Steve Slater – Reuters
Citigroup Inc and JPMorgan Morgan Chase & Co are receiving regulatory waivers to allow them to continue to quickly issue new securities and continue doing business with mutual funds and exchange-traded funds, according to two people familiar with the matter.

India’s central bank seeks to simplify forex rules
By Manoj Kumar – Reuters
India’s central bank is working to liberalise its foreign exchange rules to make it easier to do business with Asia’s third-largest economy, Deputy Governor H.R. Khan said on Thursday, a step that could support flagging exports.

Hedge Funds Seek the Next Big Shorts After Dollar Rally Fizzles
By Netty Idayu Ismail – Bloomberg Business
Hedge funds are scouring for the right currencies to bet against as the opportunities to profit from wagering on the dollar’s strength ebb, according to a money manager, which invests in the funds.

Greece should quit euro ‘temporarily’: Ifo’s Sinn
By Dhara Ranasinghe – CNBC
Cash-strapped Greece should be allowed to leave the euro zone temporarily, the president of Germany’s influential Ifo Institute for Economic Research told CNBC on Thursday.

Yen’s Stealth Depreciation Disguised by Resilience Versus Dollar
By Hiroko Komiya, Kazumi Miura and Chikako Mogi – Bloomberg Business
Don’t be fooled by the yen’s recent resilience against the dollar — it’s dropping against the rest of its major peers at the fastest pace in six months. Japan’s currency slumped 3.5 percent over the past four weeks against a basket of nine developed-nation counterparts even as it traded in a range of just two yen around 120 per dollar.

New York Soon to Unveil Fresh Bitcoin Licensing Rules
By Michael J. Casey – WSJ
In one of his final moves as New York’s top financial regulator, Benjamin M. Lawsky will soon unveil a set of new licensing rules that could have long-lasting effects on businesses using bitcoin and other virtual currencies.

Indexes & Index Products

Vanguard launches HK’s first S&P 500 ETF
By Min Ho – AsianInvestor
Vanguard will today launch Kong Kong’s first S&P 500 exchange traded fund. A lack of liquidity for non-China ETFs in the city could be addressed via future access to StockConnect.

Right Now You Can Buy the Whole U.S. Stock Market and Zero Out the Fee
By Eric Balchunas – Bloomberg Business
Every ETF has room for improvement. Except, perhaps, for one. It’s the Vanguard Total Stock Market exchanged-traded fund (VTI). While it has always provided dirt-cheap access to the full breadth and depth of the U.S. stock market, it is now returning the exact same amount as the stock index it’s based on.


Dealing Desk: Gold emerges as the anchor in uncertain waters
By Kelly-Ann Kearsey – GoldMoney
It has been a good week for gold on the wordwide markets, although GoldMoney customers have been indulging in a spot of speculation and profit taking.

CME developing European gold futures contract
By Clara Denina and Jan Harvey – Reuters
The Chicago Mercantile Exchange (CME) is developing a European gold futures contract to serve customers in London, three sources familiar with the matter said, which could present a direct challenge to London’s traditional cash market.

One Canadian fund made a $700m bet on gold
By Frik Els –
The US Securities and Equities Commission (SEC) last week released the latest figures of major asset management companies’ holdings.

PBOC Gold Purchases: Separating Facts from Speculation
By Koos Jansen – Goldseek
As we are approaching the moment the PBOC unveils they have more physical gold in reserve than what has been disclosed since 2009, 1054 tonnes, we will again analyze everything there is to find about PBOC gold purchases. Grasping the exact size of their current official gold reserves is unfortunately impossible, but if we understand why, “not-knowing” actually forms a piece of the puzzle. The purpose of this post is to get an overview of all data and clues in order to separate the facts from speculation. From there we’ll estimate how much above ground gold is held in China mainland – official (PBOC) and private reserves.


Government Intermediate Bond Mutual Funds for Steady Yield – Mutual Fund Commentary
Mutual funds investing in debt securities are among the most secure investment options which provide regular income while protecting capital invested. Funds which are part of this category bring a great deal of stability to portfolios with a large proportion of equity, while providing dividends more frequently than individual bonds. U.S. government bonds funds usually invest in Treasury bills, notes and securities issued by government agencies. They are considered to be the safest in the bond fund category and are ideal options for the risk-averse investor. Meanwhile, intermediate-term funds usually provide a safer option for investors, when compared to small-term funds. Fixed income securities having average maturity period between 3 and 10 years are classified as intermediate securities. These funds are believed to assure more stability and provide higher return than what short-term funds offer.

Propose to your beloved with this Bitcoin engagement ring
By Daniel Cooper – Engadget
Much like the idea that Santa Claus wears red, the notion that you should spend a fortune on a diamond engagement ring is the invention of advertisers. So, since the act is already about ostentatious displays of wealth, why not invest your money in something more useful than a big rock — like Bitcoin? That’s the idea behind the Bitcoin ring, a 3D-printed piece of jewelry with a QR code that lets anyone with the corresponding app see how much cash you’ve really got.

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