First Impressions

Pushing the Cross-Border Envelope
Doug Ashburn – JLN

At my pre-conference interview with ISDA CEO Scott O’Malia (Un Parti Québécois: ISDA 2015 Montreal, JLN, Wednesday, April 22), he noted that the big issue of the conference would be achieving cross-border harmony. The first panel included people on both sides of the issue, including Commissioners Michael Piwowar and Mark Wetjen of the SEC and CFTC respectively, plus the FSA’s Masamichi Kono, who has served as the chair of IOSCO and also serves as a regional chair of the Financial Stability Board. The final panelist was Kay Swinburne, Member of the European Parliament.

I asked O’Malia if we would see fireworks with these panelists seated together on the stage. He replied that we are not here this week just so everyone can tour Montreal, but rather to push the envelope on cross-border issues such as substituted compliance and mutual recognition of central counterparties. Of course, we also toured Montreal, and it is a thoroughly lovely city.

I can report that the panel delivered, and the envelope has been pushed this week.

No legislation or regulation is passed with the express purpose of fracturing the market, but that is exactly what has happened to the swaps market, almost from the day the SEF rules were finalized. In data studies and user polls published by ISDA, all the evidence points to fragmentation.

Read more at:

Quote of the Day

“BOE’s take on the matter appears to be that Buffett’s cachet and the sprawl of his insurance operations should make Berkshire an easy candidate for tougher scrutiny. But in the U.S., Buffett carries tremendous sway in Washington and Wall Street.”

Mark DeCambre of MarketWatch in the story, ” Is Berkshire Hathaway a Threat to the Financial System?”

Lead Stories

‘Flash crash’ charges spark alarm over regulation of US markets
Jane Croft and Philip Stafford in London and Barney Jopson in Washington, FT
A UK trader accused of contributing to the 2010 “flash crash” in equity markets began a fight against extradition on Wednesday as US lawmakers pledged to probe a case which raises questions over the fragility of markets and financial regulation.

US fears a European sequel to Lehman Brothers
Financial Times
Another week, yet another wave of Greek drama. But as investors speculate about a possible Greek default, they should take note of a striking split that has opened up between America and Europe.
On the eastern side of the Atlantic, policy makers are now at pains to suggest that a Greek default, or even a eurozone exit, would not be disastrous; at last week’s International Monetary Fund meetings German officials argued that the chance of a Greek exit had already been priced into the markets, and that shocks could be contained.

Deutsche Bank to Pay $2.5 Billion Fine to Settle Rate-Rigging Case
Dealbook – NY Times
Deutsche Bank will pay a $2.5 billion penalty to United States and British authorities to settle accusations that it helped manipulate the benchmarks used to set interest rates on trillions of dollars in mortgages, student loans, credit cards and other debt, officials said on Thursday.

Details in Deutsche Bank’s Libor Settlement Point to Acute Cultural Flaws
Dealbook – NY Times
Deutsche Bank has found a new form of Libor shame. The firm, Germany’s biggest bank, agreed on Thursday to pay a record $2.5 billion in a settlement of rate-rigging misdeeds with three United States authorities and the Financial Conduct Authority of Britain. On top of the manipulation, it misled the British regulator.
Part of the reason for the high sum — two-thirds more than UBS’s previous record for Libor issues — is the time it took Deutsche Bank to provide evidence. Over the last three years, fines have inflated for rate-rigging as well as other offenses.

The Most Cringeworthy Chat Messages From the Deutsche Bank Libor Transcripts
Deutsche Bank has just been hit with a $2.5 billion fine for manipulating Libor, the interbank lending rate that is linked to trillions of dollars of financial contracts.
Foreign central banks’ US debt holdings – Fed
For details of foreign central banks’ holdings of U.S. marketable securities held at the Federal Reserve, see:

Foreign central banks’ US debt holdings – Fed
For details of foreign central banks’ holdings of U.S. marketable securities held at the Federal Reserve, see:

As part of the investigation, US regulators trawled through years of chats between U.S. Dollar Libor submitters and traders to show how common manipulation had become.
Today they published some examples of the kind of misconduct they found.

Is Berkshire Hathaway a Threat to the Financial System?
Berkshire Hathaway CEO Warren Buffett European Pressphoto Agency/LARRY W. SMITH
Regulators periodically question whether Warren Buffett’s Berkshire Hathaway Inc. poses significant risk to the financial system and should be designated “systemically important.” The latest is the Bank of England, which recently asked the U.S. Treasury why Berkshire is not on a list of global reinsurance companies deemed too big to fail and therefore subject to special scrutiny.

William Barkshire: Will a Hong Kong-China ‘bond connect’ be next?
The Hong Kong-Shanghai Stock Connect scheme had a lackluster start in late 2014, but by the beginning of April, it was deemed a roaring success.
Beijing has already announced that the trading of Shenzhen and Hong Kong shares will also be linked, so commentators are now speculating as to which asset class could be the next to benefit from connected trading with the special administrative region.

The U.S. Economy Hasn’t Disappointed Analysts This Much Since the Great Recession
Following a quartet of weaker-than-expected economic data reports released this morning, Bloomberg’s U.S. economic surprise index has fallen to levels seen only during the Great Recession.
At -0.783, the 15-year-old index has been this far away from zero in either direction in only two other periods: in early 2009, when it hit a record-low -0.996, and in March 2011, when it climbed as high as 0.950.

Investors called on to give boardroom leaders greater scrutiny
After taking top executives to task over excessive pay and bonuses, investors are slowly turning their attention to the role of the chairperson, as concern about weak governance grows.
As the person responsible for hiring and firing the chief executive and ensuring company strategy is on track, the chair is crucial to protecting shareholder returns over the long term, even though few ever find themselves rejected at the company’s annual meeting.

Flash Crash’ Case Suggests Small Problems Can Cause Systemic Issues
The flash crash of 2010 resurfaced with an arrest on Tuesday. Prosecutors at the Department of Justice along with the Commodity Futures Trading Commission have accused one self-employed trader in Britain of manipulating futures markets so much that he played a significant role in the events that led to the five-minute, 1,000-point plunge in the Dow Jones industrial average on May 6, 2010.

Investors question whether banks’ robust profit growth will hold
Financial companies are among the standouts of the first-quarter earnings reporting season, but their dazzling profit growth has failed to impress investors, who are finding reasons for caution behind the headline numbers.

HSBC: Shrink and simplify
Martin Arnold and Patrick Jenkins, FT
A year after HSBC unveiled its $14bn acquisition of US subprime lender Household in 2002, Sir John Bond, the bank’s then chairman, penned an irritated memo to some of the group’s top managers.

BofA appeals $1.3bn ‘Hustle’ toxic loan penalty
Ben McLannahan, Tom Braithwaite and Kara Scannell in New York, FT
Bank of America has appealed against a $1.3bn penalty for selling toxic home loans, arguing that the court prevented it from putting up a robust defence to charges that it knowingly sold bad mortgages in the run-up to the financial crisis.

ISDA study: Continued fragmentation of global liquidity pools
According to a new research published at ISDA’s 30th Annual General Meeting in Montreal, global derivatives markets are continuing to fragment along geographic lines. This is a result of divergent regulations across jurisdictions. The International Swaps and Derivatives Association (ISDA) fragmentation analysis concludes: The cleared euro interest rate swaps market remains largely fragmented in U.S. and non-U.S. liquidity pools.

AIG bailout judge’s questions seen showing Greenberg’s edge
Former American International Group Chairman Maurice “Hank” Greenberg claims the U.S. bailout of the insurer cheated shareholders out of at least $25 billion.
On Wednesday, the judge presiding over his lawsuit heard final arguments in the long-running case. If previous rulings and questions posed to both sides are any measure, he may be leaning toward Greenberg.

U.S., E.U. Regulators Trade Barbs Over Swaps
Attendees at a derivatives industry conference in Montreal on Wednesday got a front-row seat to a continuing spat between international regulators over cross-border rules for the $700 trillion global swaps market.
Regulators in the U.S. and Europe have been divided over how far their respective rules should affect companies involved in swaps overseas that are already overseen by their home regulators, and whether to deem home-country rules equivalent across borders.

Central Banks

Bulls can thank ‘blinking’ central banks for 2015 stock gains
By William Watts, Deputy markets editor, MarketWatch
2015 is shaping up as “the year of the blink,” according to the title of a note sent out Thursday by Bank of America Merrill Lynch strategists led by Michael Hartnett.
Both the Federal Reserve and the People’s Bank of China have “blinked” this year, with the U.S. central bank effectively postponing a rate hike that investors had previously penciled in for midyear and Chinese monetary authorities aggressively easing.

The ECB Needs to Know Its Place
Foreign Policy
End the ECB dictatorship!” shouted Josephine Witt as she leapt onto the podium where Mario Draghi was giving a press conference on April 15, throwing confetti over the European Central Bank (ECB) president. While the lone protester’s “manifesto” was muddle-headed, she highlighted a genuine issue: The ECB is the world’s most extremely independent central bank and it abuses its vast, unaccountable power by acting in a brazenly political way on issues well outside its monetary-policy remit. It needs to be put in its place.

Stockman: Global ‘Mania’ in Govt Bonds Is Veering Toward Disaster
By John Morgan, NewsMax
The world’s central banks have managed to brew up a “planet-wide mania” in government bonds that are trading at dangerous negative yields and could lead to a meltdown, according to David Stockman, White House budget chief in the Reagan administration.
Stockman said the level of complacency in world financial markets is “downright astounding — even stupid.”

Foreign central banks’ US debt holdings – Fed
For details of foreign central banks’ holdings of U.S. marketable securities held at the Federal Reserve, see:


Nasdaq profit drops on restructuring charges, FX impact
Transatlantic exchange operator Nasdaq OMX Group on Thursday reported a drop in first-quarter profit, due mainly to restructuring efforts and a negative impact from changes in foreign exchange rates.

Turkish lira hits new low vs dollar as cbank holds rates
Turkey’s lira hit new lows on Thursday, hurt by political tensions and the central bank’s failure to deliver more currency-supportive measures, while emerging equity markets rose for a third day.

Genesis Trading Launches as Bitcoin Broker-Dealer
John D’Antona Jr., Traders Magazine
There’s always a first time for something – and now the industry’s first digital currency broker-dealer has opened its doors.
Genesis Trading, a wholly owned subsidiary of Digital Currency Group and a division of the broker-dealer SecondMarket, has just opened its doors and launched itself as the first U.S. broker-dealer to specialize in the trading of digital currencies, including bitcoin.

Indexes & Index Products

Slim’s Worst-In-Mexico Mining Company Poised for MSCI Removal
Minera Frisco SAB, the mining company controlled by billionaire Carlos Slim, has posted the largest equity loss in the Mexican mining industry this year. Should Banco Santander SA’s prediction for the company prove true, the rout may be just getting started.
Santander analysts Stefano Rizzi and Jesus Gomez have “high conviction” that Frisco will be removed from the MSCI LatAm Standard Index, a benchmark for regional equities, according to an April 16 research note. Rizzi and Gomez correctly predicted all six Latin American equities dropped last year from the MSCI, which is expected to announce new index changes May 12.

iShares MSCI USA Minimum Volatility ETF Experiences Big Inflow
Looking today at week-over-week shares outstanding changes among the universe of ETFs covered at ETF Channel , one standout is the iShares MSCI USA Minimum Volatility ETF (Symbol: USMV) where we have detected an approximate $62.1 million dollar inflow — that’s a 1.3% increase week over week in outstanding units (from 117,800,000 to 119,300,000).

Euro STOXX 50 Daily Short Index Licensed To Korea Investment & Securities
STOXX Limited, the market-moving provider of innovative, tradable and global index concepts, today announced that the EURO STOXX 50 Daily Short Index has been licensed to Korea Investment & Securities (KIS) to serve as the underlying for an exchange-traded note (ETN). The product will be listed on KRX Korea Exchange today.

Over 50% of IRD and 70% of CDS Indices Traded on SEFs During Q1 2015
More than half of interest rate derivatives (IRD) and over 70% of credit default swap (CDS) index average daily notional volumes were traded on swap execution facilities (SEFs) in the first quarter of 2015, according to a review of trading volumes published today by the International Swaps and Derivatives Association, Inc. (ISDA).


China’s secret gold stockpile may be world’s 2nd biggest
The People’s Bank of China may have tripled its gold stockpile since April 2009, when it last gave an official number, which Bloomberg Intelligence estimates to be 3,510 metric tons, second to United States 8,133.5 tons of gold.
The figure, almost triple the 1,054 tons of gold reported in 2009, was calculated based on trade data, domestic output, and China Gold Association figures by Bloomberg Intelligence.
China, which only reports its gold stockpiles every few years, made a similar move between 2008 and 2009, when it just about doubled the bullion stock. Including gold, China is estimated to have $3.8 trillion in currency reserves, which are also kept secret.

India’s Sensible Plan To Mobilise The Gold Reserves
Tim Worstall, Forbes – Commentary
This looks like a very sensible policy goal in India, a desire to mobilise the country’s huge stocks of gold in private hands. However, I’ve more than a sneaking feeling that the precise policies being offered to achieve the goal aren’t quite what is needed. The basic goal being that there’s an awful lot of capital and savings tied up in the gold hoards in that private sector. And it would probably be better if that capital were circulating, adding to the capital stock of the economy, rather than just sitting there and glittering. So, the idea of mobilising it sounds just great. But how to do so? I think I would argue that the best policy would be one that pretty much ignores gold: a policy of making sure that everyone is banked would be better.

Does any nation hold the gold it says it does?
China has 1,054.1 tonnes of gold in its official reserves. Yeah right! The USA has 8,133.5 tonnes in its reserves – the world’s largest. But forgive me if I treat this figure, and those reported by some other central banks, with about as much scepticism as I treat the official Chinese figure. Much is made of the fact that China has not updated its official reserve figure since 2009 – but then the US has not updated its figure for nearly 40 years. Something similar applies to many other central banks which report identical gold volumes year in, year out.

GTU: A Bad Way To Own Gold Unless The Activists Get Their Way
Reuben Gregg Brewer, Seeking Alpha
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
GTU is a CEF that owns physical gold.
GTU’s discount is roughly 7%, making an ETF like IAU a better gold proxy.
Unless activist investors get GTU to allow payment in kind.
Central Gold-Trust (NYSEMKT:GTU) was a good idea at one point in time. However, I think this closed-end fund, or CEF, has outlived its usefulness now that exchange-traded funds, or ETFs, are on the scene. Investors looking for physical gold exposure through an exchange-traded investment should go with an ETF-like product such as the iShares Gold Trust ETF (NYSEARCA:IAU). However, those looking for a special situation play might still be interested in GTU because of the fight going on with an activist investor.

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