First Impressions

New clearing model?
By Jim Kharouf, JLN – from the WFE/IOMA Conference in São Paulo

Have you been de-boarded? Get ready to swim.

Large institutions such as pensions, long-term funds and commercial hedgers might be about to get dumped, thanks in part to Basel III and other regulatory rules that have made such low volume, but high balance sheet firms no longer viable as customers. That’s the message from executives at the World Federation of Exchanges/IOMA conference in São Paulo, Brazil.

It’s no secret that the FCM model has been broken in the extended low/no interest rate environment that used to provide a major source of revenue for futures brokers. That has forced brokers to turn to commissions and high volume traders maintain positive cash flows. Now, with capital leverage ratios for banks, large commercial hedgers and institutions that trade infrequently are getting dropped by their banks. Jan Bart de Boer, chief commercial officer at ABN Amro Clearing, said firms are now having to price risk returns of customer accounts, the price of margin given the higher margin requirements at clearinghouses, and leverage ratio requirements as well.

“The leverage ratio will have to be priced in,” de Boer said. “Funds will be served and other service clients will go away.”

John McPartland, senior policy advisor, Federal Reserve Bank of Chicago, says he has a solution that could help such customers and free up valuable capital for clearing member firms – allow large institutional players to become members of the clearing house.

Here’s how it would work. Clearing member firms currently are required to put up 10 percent of the maintenance margin. As such, some of its largest customers – pension funds, endowments, corporate pensions, insurance companies – could be allowed to become clearing members, or “commercial clearing members.” This would serve a dual purpose. With huge balance sheets off their books, clearing FCMs would lower their capital requirements. Institutional firms, in turn, would help diversify the clearing house. And certain clearing services, outside simple initial margin and variation margin, will be outsourced back to clearing member firms along with compliance requirements to their former FCM.

Meanwhile, with commercial clearing members, clearing houses can further diversify its risk and make each settlement transactions much smaller.

McPartland argues that the current capital constrained environment is forcing market participants to think about new solutions. This could be one.


Clearing Evolution: Michael McClain on the changes at OCC

Industry players are gearing up for this year’s Options Industry Conference. One of the key speakers at the event is Michael McClain, president and COO of The Options Clearing Corporation. We talked with McClain in advance of the conference about the changes at OCC and their effect on its resilience and risk management capability. He also looked at securities lending, options education, and the controversy over OCC’s capital plan.
Watch the video »

Quote of the Day

“The latest sign the market is attempting to fortify itself against a Greek default is playing out in the FX market. The market has increasingly become aggressive in preparing for a Greek default and in protecting itself from the potential financial impact.”

Mark Williams, a former bank examiner for a Federal Reserve bank in the story, ” Greek Banks Are Having Trouble Trading Foreign Currencies”.

Lead Stories

German-Bond Investors Just Lost 25 Years of Yield in 14 Days
Over the past couple of weeks, investors in German government bonds have received a crash course in “duration,” a geeky concept that is nevertheless a driving force in fixed income.
Buying longer-dated bonds with longer duration has been a popular strategy for investors seeking higher returns in an era of low interest rates. It can be risky, given that such debt is extremely sensitive to changes in interest rates and yields. When they go up, the price of bonds with a greater duration will fall a lot more than that of shorter-dated debt.

There Have Been Some Big, Mysterious Moves in Markets Lately
It has been a busy period in markets across the globe, with trends (and trades) breaking down everywhere.

The Bull Market in Bonds Is Over, Says Fortress’s Novogratz
The bull market in fixed income is over after prices of the securities peaked over the last few weeks, according to Michael Novogratz, principal at Fortress Investment Group LLC.
“In the last two weeks, the bull market in fixed income has ended and the bear market has started,” Novogratz said in a Bloomberg Television interview with Stephanie Ruhle and Erik Schatzker. “We’ve seen probably a low yield in 30-year treasuries.”

German Bund Slump Sends Volatility Soaring to Highest Since 2012
European bonds are experiencing the biggest price swings in almost three years as investors consider whether yields near record lows are justified given rising oil prices and a deadlock in Greece’s debt talks.
Implied volatility on 10-year German bund futures, the region’s benchmark debt, has surged in the past week to the highest since August 2012, data compiled by Bloomberg show. The gauge of price swings was pushed higher by a jump in bond yields since the start of May, which ended months of declines driven by the European Central Bank’s quantitative-easing program.

Proxy firms recommend JPMorgan shareholders vote against pay plan
Two major proxy advisory firms recommended that JPMorgan Chase & Co’s (JPM.N) shareholders vote against the bank’s executive compensation plan, saying Chief Executive Jamie Dimon’s pay was not fully aligned with his performance.
ISS said the reintroduction of a large discretionary cash bonus in Dimon’s pay mix without a compelling rationale had weakened the performance-basis of his pay.

‘Flash Crash’ fight takes cash
Bart Chilton in USA Today
Five years ago on Wednesday, I turned down Jackson Browne’s Running On Empty on the car radio to answer a call from my office. The Dow Jones industrial average had dropped hundreds of points in a short time. As I spoke with surveillance experts, the market plummeted another 500 in 25 minutes (totaling nearly 1,000 points). Miraculously, within minutes it recovered almost completely. This freaky event became known as the “Flash Crash.”

Future is Fixed Income for J.P. Morgan, Citi
The three U.S. universal banking giants have largely stuck with their fixed income trading desks, despite poor returns and a constant flow of litigation. But according to research from Alliance Bernstein, the price of commitment will vary.

BlackRock’s On a Mission to Save the Credit-Default Swaps Market
Bloomberg Business
BlackRock Inc. is leading a push to revive trading in a key part of the credit derivatives market that’s shrunk 57 percent as post-crisis regulations made it costlier to trade. The world’s biggest asset manager is targeting contracts known as single-name credit-default swaps — those tied to individual companies and countries.

Bankers and Regulators Voice Fears on Bond Market Volatility
Wall Street chieftains, huge investment firms and top bank regulators are all sounding the same alarm. In recent months, they have been warning that the world’s bond markets, where companies and countries borrow trillions of dollars, are in danger of breaking down.

SunGard Prepares IPO, Aims to Raise Around $750 Million
Gillian Tan and Telis Demos, WSJ
SunGard Data Systems Inc. is preparing for an initial public offering, nearly a decade after a group of private-equity firms acquired it in an $11 billion deal that helped usher in a wave of megabuyouts before the financial crisis.

Wall Street group backs BATS exchange’s U.S. market reform proposal
A Wall Street trade group on Tuesday threw its support behind a proposal for regulatory reform of the U.S. stock market that exchange operator BATS Global Markets suggested earlier this year, including slashing exchange fees. The proposal would reduce complexity while making the markets more transparent and fair, the Securities Industry and Financial Markets Association (SIFMA), said in a letter to the U.S. Securities and Exchange Commission.

SEC Announces Outreach Programs to Help Firms Comply With Regulation Systems Compliance and Integrity
The Securities and Exchange Commission today announced it has opened registration for outreach programs to help firms comply with an SEC rule that aims to protect investors by strengthening the technology underpinning U.S. securities markets.

Goldman raises top end of ‘reasonably possible’ legal loss
Financial News
Goldman Sachs raised the top end of its range of “reasonably possible” legal expenses to about $3.8 billion, the Wall Street firm said Tuesday in a regulatory filing.

Central Banks

Yellen Calls Stock Prices ‘Quite High’
NY Times
Janet Yellen, the Federal Reserve chairwoman, said Wednesday that stock prices were “quite high,” stronger language than she had used previously.
Ms. Yellen reiterated the Fed’s view that risks to financial stability remained modest, despite years of near-zero interest rates, in part because there had not been a marked increase in the use of borrowed money, or leverage, to fund investments.

Falling Productivity, Low Job Creation, When Is The Fed Going To Change Interest Rates
The economic news today is best described as, well, if we’re honest it’s probably best to say that it sucks. Because if the economy is really working as these numbers say it is then this is about as good as it gets. Now, it might be just one off items causing what is being reported. But if this is the general state of the economy then it’s very difficult to see what the Federal Reserve can or will do about interest rates.

ECB Gives Greece Another Week Before Discussing Tighter Funding
The European Central Bank will await the outcome of next week’s meeting of finance ministers before reassessing whether to restrict Greece’s access to emergency liquidity, people familiar with the matter said.


This Is the First Person to Be Tried in the Libor-Rigging Case
Bloomberg Business
When Thomas Hayes walks into a London courtroom next week, he will be the first person to face trial for allegedly rigging the benchmark interest rates used to value $350 trillion of loans and securities. It only took seven years to get here.

JPMorgan says currency probe settlement talks in ‘advanced stages’
JPMorgan Chase & Co said on Tuesday it is in “advanced stages” of settlement talks with the U.S. Department of Justice and Federal Reserve over previously disclosed investigations into its foreign exchange trading.

Virtu’s Currency Profit Doubles as HFT Firm Posts First Results
Bloomberg Business
Virtu Financial Inc. said its income from trading currencies has doubled, making foreign exchange the high-frequency trading firm’s fastest growing asset class. Profit from currency trading rose 103 percent to $42.2 million in the first quarter from a year earlier, Virtu said in its maiden results after becoming a public company last month.

Greek Banks Are Having Trouble Trading Foreign Currencies
Greek banks are increasingly being hampered from trading currencies, one of most liquid markets, as international dealers cut back credit lines and costs soar, according to people with knowledge of the trades.
International securities firms are curtailing trading with Greece’s major lenders that may expose them to the risk of a default by the nation and the possible use of capital controls to stem outflows from banks, the people said, asking not to be named because they are not authorized to speak publicly.

Indexes & Index Products

The Bloomberg Commodity Index (BCOM) increased 5.7% in April, with 14 out of 22 index constituents trading higher. Energy was the best performing sector, up 13.8%, led by WTI Crude (20.8%). Grains dropped 4%, led lower by Hard Red Wheat (-11.5%). Industrial Metals increased
7.8%, led higher by Zinc (12.9%) and Nickel (12.5%). Precious Metals moved 0.8% lower in April. Softs returned 7.8%, led by Sugar (11.3%). Livestock increased by 1.7%, led by Lean Hogs (7.4%). Commodity-linked ETPs saw relatively quiet outflows, losing less than 1% of market cap.

SGX seeks feedback on revised price limits for SGX MSCI Taiwan futures
Singapore Exchange (SGX) is launching a consultation on proposed revisions to price limits for the SGX MSCI Taiwan Index Futures contract traded on its derivatives market. SGX proposes to widen the range of the Initial Price Limits of the contract to 10% away from the previous trading day’s daily settlement price versus 7% currently. SGX also wishes to remove the Intermediate Price Limit.

Launch Of The Solactive Oekom Ethical Low Volatility Index – Used As Underlying For BNP Paribas Investment Products
Solactive AG has launched the Solactive oekom Ethical Low Volatility Index, which was created to track the price movements of low volatility stocks passing the ESG screenings of oekom research, a leading rating agency for sustainable investments. BNP Paribas has licensed the Index to launch a wide range of products, from capital protected to more complex structures designed for both retail and institutional clients in Germany, Austria and Scandinavia.

Fidelity Promotes Active Management Amid Index Funds’ Popularity – Mutual Fund Commentary
Recent Fidelity ads have been vocal about the “power of active management”. Mutual Fund behemoth Fidelity Investments has been a popular name in actively managed funds that have been managed by eminent managers. Fidelity has built a strong reputation, aided by stock pickers including Joel Tillinghast and Peter Lynch among others.

S&P DJI launches ‘Stock Connect Index’
Global Investor Magazine
S&P Dow Jones Indices has launched its first index tailored to the Shanghai-Hong Kong Stock Connect programme with its S&P Access China A Dividend Opportunities Index. The index tracks the performance of high-yielding common stocks traded on the Shanghai Stock Exchange that are available to foreign investors through the Shanghai-Hong Kong Stock Connect program. This is S&P Dow Jones Indices second China A shares index, its S&P Access China A Index launched in February 2015.


J.P. Morgan’s Barista-Turned-Banker Sees Good Things Brewing
For Starbucks worker Ivette Agosto, years of serving coffee to financiers got her noticed – and hired.

The Greatest Trick the Devil Ever Pulled
…was convincing investors that volatility and risk were the same thing.
This idea that risk cannot truly be measured by looking at volatility (as measured by standard deviation) is well-trod territory in the financial blogosphere so I won’t go into it at length again.

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