First Impressions

The Citadel Conversation; SEC Equity Market Structure Advisory Committee
Are U.S. equity markets operating efficiently? Can improvements be made to benefit investors? Recently the U.S. Securities and Exchange Commission (SEC) created the Equity Market Structure Advisory Committee to advise on potential reforms aimed at improving market integrity and advancing the interests of investors. To learn more about the Committee and the issues it is examining, we spoke with two Committee members, Citadel Securities’ Jamil Nazarali, Head of Execution Services and Joe Ratterman, Chairman, BATS Global Markets Inc.

***** In-house interview with Jamil Nazarali of Citadel and Joe Ratterman of BATS.

Quote of the Day

“The Fed is giving you expectations, and the market is giving you reality. The Fed has been a little bit optimistic about economic growth and has had to now come closer to the market.”

Todd Colvin, a senior vice president at Chicago’s Ambrosino Brothers, in the story, “Memo to Bond Market From Fed: You Were Right on Interest Rates”

Lead Stories

Greece needs to seize ‘last opportunity’ for deal
Greece needs to seize a “last opportunity” to reach a deal with its creditors, the head of the Eurogroup, Jeroen Dijsselbloem has said.
He was speaking after a meeting of European finance ministers that ended with no agreement on Greece’s debt.

Memo to Bond Market From Fed: You Were Right on Interest Rates
By Liz McCormick – Bloomberg
Federal Reserve policymakers are coming around to the bond market’s wisdom about where interest rates are headed.

UBS Gave Out ‘Instruction Manual on Fixing Libor,’ Hayes Said
By Liam Vaughan – Bloomberg
Thomas Hayes, a former trader on trial over charges he manipulated benchmark rates, told prosecutors in 2013 that UBS Group AG distributed “an instruction manual on fixing Libor” to suit their trading positions.

Liquidity pitfalls threaten parched markets
By Robin Wigglesworth – Financial Times
Welcome to the desert. The financial industry’s great debate du jour is “liquidity”, specifically how parched it looks at the moment.
Liquidity is tricky to define, but essentially means the ease of trading a financial security quickly, efficiently and without moving the price too much. Traders and money managers differ on the extent, but almost everyone agrees that liquidity has deteriorated across nearly every market, a downturn some fear could exacerbate or perhaps even spark another financial crisis. While that may be far too shrill, there is clearly cause for some concern.

Greece Has Already Cost Investors $897 Billion This Year
By Roxana Zega and Sofia Horta E Costa – Bloomberg
How much has the Greece saga cost European equity investors? Try $897 billion, more than the value of benchmark indexes in Spain, Portugal and Ireland, combined.

Paul Volcker: The financial world is ‘bigger than its britches’
By Ananya Bhattacharya – CNN
The American Dream is in trouble. And Paul Volcker knows a big reason why.
The former chairman of the Federal Reserve says the financial world has gotten “bigger than its britches.” Attempts to regulate the industry have failed, he says, and the pay of financial executives has gone way up.

All Hands to the Pump in Asia’s Search for Liquidity
By Wayne Arnold – Barron’s
It was reggae legend Peter Tosh who, on his mid-1970s classic album “Legalize It,” observed “you never miss your water, ’till your well runs dry.” Tosh then asked, “Whatcha gonna do when your well runs dry?”
That song — with its skank guitar and unanswered question — has been playing over and over in this columnist’s head since the Asia Securities Industry & Financial Markets Association’s inaugural conference yesterday on market liquidity here in Singapore. While this column has focused in the past on the evaporation of liquidity in Asia’s economies, liquidity is also drying up in Asia’s financial markets. That’s bad for Asian investors, markets and economies, but a potential opportunity for Asian banks and other institutions able to step in and get liquidity where it’s needed.

Capital markets have had time to prepare for Greek default: PIMCO CEO
By Emelia Sithole-Matarise – Reuters
Private capital has had ample time to prepare for a Greek default, but some “readjustment” in markets is probable if it happens, the head of PIMCO, the world’s biggest bond fund, said on Thursday.

Repo market faces structural challenge
By Joe Rennison and Philip Stafford – Financial Times
The primary market for short-term funding for banks in Europe stands on the cusp of deep structural change, but the touted solution faces obstacles.
For banks, the ability to borrow cash from investors such as money market funds in exchange for pledging bonds as collateral, known as a repurchase, or “repo”, agreement, remains integral to their daily funding needs.

Barney Frank – Yes, THAT Barney Frank – Joins a Bank Board
By Rachel Louise Ensign – WSJ
Barney Frank, a key architect of financial-crisis era legislation that reshaped the financial industry, is joining a bank board.

SEC, the Whistleblowers’ “Advocate”
By Catherine Foti – Forbes
After the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in 2010, speculation abounded as to whether the ambitious whistleblower bounty program would succeed and about how the Securities and Exchange Commission would support the program. But, in the four years since the bounty program became effective, the SEC has proved that it will do what it takes to make the program successful, including awarding payments totaling over $50 million to whistleblowers; appearing as amicus curiae in support of whistleblowers seeking protection under Dodd Frank’s anti-retaliation provisions; and pursuing companies that retaliate against whistleblowers or attempt to prevent whistleblowers from bringing tips to the SEC. In fact in a recent speech, SEC Chair Mary Jo White dubbed the SEC “the whistleblower’s advocate.”

Behind Chicago’s Rift With Moody’s: Rater’s Tough New Stance
By Timothy W. Martin And Mark Peters – WSJ
More than a year before Moody’s Investors Service downgraded Chicago’s bonds to junk status, one of its senior analysts asked top city officials to explain why the third-largest U.S. city was healthier than a troubled island commonwealth flirting with insolvency, according to people familiar with the conversation.
“Help me understand why Chicago is different than Puerto Rico?” said the Moody’s analyst, Rachel Cortez, during a February 2014 meeting that Mayor Rahm Emanuel attended, two of these people said. A spokesman for Moody’s and Ms. Cortez said the firm doesn’t discuss “private meetings with issuers or other capital-market participants.”

Central Banks

ECB says prospects for euro zone revival remain weak
By Michelle Martin – Reuters
The European Central Bank said on Thursday that the euro zone economy was expected to continue recovering but the outlook for a resurgence in potential growth remained weak.

Austria First to Say Game Over for Greece as Merkel Sees Chance
By Stephanie Bodoni and Karl Stagno Navarra – Bloomberg
With the Greek government approaching the June 30 expiry of its euro-area bailout and no alternative financing in sight, Austrian Finance Minister Hans Joerg Schelling was the first to declare the effort to broker an aid deal has failed.

Who’s Who in the FOMC ‘Dot Plot’
By Carl J Riccadonna and Michael McDonough – Bloomberg
The Fed remains on track for its initial rate increase at the September FOMC meeting. Despite a downgraded growth forecast for 2015, policy makers continue to retain the option of raising rates once or twice in the second half of the year. This was most broadly evident in the rigidity of the 2015 “dot plot,” at least with respect to the voting members. Prior iterations of the dot plot removed rate increases from 2015 but did not materially change the pace of tightening. The latest version held firm to the signal from March regarding a second-half liftoff, although it did show a slightly slower pace of rate increases in 2016.

Too big to fail is still a risk, Dutch central bank says
By Thomas Escritt – Reuters
A wave of consolidation among Europe’s banks in the aftermath of the financial crisis could end up creating banks that are considered too big to fail, the Dutch central bank warned in a report on Thursday.

ECB Hands 74 Billion Euros to Banks as Lending Shows Upturn
By Alessandro Speciale – Bloomberg
The European Central Bank handed 73.8 billion euros ($84.2 billion) to euro-area banks in the fourth round of a program designed to boost their lending to the real economy.

Bank withdrawals surge, revenue slumps as Greece defies creditors
By Robin Emmott and Angeliki Koutantou – Reuters
Bank withdrawals accelerated and government revenue slumped as Greece defied its international creditors on Thursday, escalating a debt crisis that may reach a climax at a European Union summit next week.

Greece: Even Moscow is modeling a Grexit
By Geoff Cutmore – CNBC
The current euro zone crisis may look like a game of “Crazy Ivan,”* but the Russians are already considering the consequences of a Greek departure.
Elvira Nabiullina, governor of the Central Bank of Russia (CBR), has told CNBC that it is analysing the threat: “We do consider this scenario as one of possible risks, which would increase turbulence in the financial markets in the European market, bearing in mind the fact the European Union is one of our major trading partners, and we are definitely worried by it.”

South Korea’s economic troubles
The Japan Times
South Korea’s central bank last week lowered its policy interest rate by 0.25 percentage points to a record-low 1.5 percent just as Asia’s fourth biggest economy faces a slowdown in both economic growth and price rises. The spread of Middle East Respiratory Syndrome (MERS) in the country threatens to dampen consumer spending. Given the difficult state of the economy, South Korean authorities need to flexibly mobilize fiscal and monetary policy tools.


Death Cross Staring Down Dollar Bulls After Fed Derails Rally
By Lananh Nguyen – Bloomberg
Dollar bulls are facing one of the scariest indicators in the world of technical analysis with the Federal Reserve embracing a more gradual approach to raising interest rates.

FX: The great internalisation debate
By Farah Khalique – Euromoney Magazine
For years, banks have boasted of their superior “flow internalisation rates” in the battle to be the number-one provider in FX.
Flow internalisation refers to the practice of dealers matching trades through their own internal books, rather than trading on the open market.

Pound’s Allure as Haven Supercharged by Bank of England Optimism
By Lukanyo Mnyanda and Anooja Debnath – Bloomberg
Traders seeking out the pound as the haven currency of choice as Greece roils world markets are getting, in effect, a kicker: fresh signs of Britain’s economic strength.

Bit-Everything: Applying Bitcoin Technology to Gold, Land, Cannabis, and More
By David Floyd – Nasdaq
Bitcoin is many things, depending on who you ask. For hacktivists in Guy Fawkes masks, it is a tool for democratization, the ultimate financial leveler and deregulator. For consumers in countries wracked by hyperinflation, it is—or could be—a way to hold onto some of your savings’ value. For Marc Andreessen and other VCs, it is another PC or internet: a technological juggernaut that will fundamentally alter the way we use money. For terrorists, drug traffickers (most famously the defunct Silk Road) and others who for professional reasons prefer unmarked, non-sequential bills, it is a way to move money without dealing with regulated banks.

Putin Backs Weak-Ruble Policy as Lifeline to Russian Producers
By Ilya Arkhipov, Olga Tanas and Paul Abelsky – Bloomberg
President Vladimir Putin said the nation’s weak-currency policy is throwing a lifeline to struggling Russian producers as the government runs out of options to counter a deepening economic slump.

Monetary divergence drives FX ETF growth
By Paul Golden – Euromoney Magazine
Demand for currency hedged ETFs is not just driven by currency volatility – US investors are looking overseas for equity returns, given the rally in US stocks from the financial crisis low and in the face of a mature bull market.

Africa Beats Yellen in Raising Rates as Currencies Tank
By Michael Cohen and Rene Vollgraaff – Bloomberg
Five sub-Saharan African central banks have bucked a global trend by increasing borrowing costs this year to ward off inflation and defend their currencies. They’ve had little success.

Indexes & Index Products

MSCI Completes Barra U.S. Total Market Equity Model Suite
Press Release – MarketWatch
MSCI Inc. has completed the roll-out of its range of next-generation equity risk models, with the release of the Barra U.S. Total Market Medium-Term Equity Model. The latest model joins MSCI’s new Barra U.S. Total Market Equity Model Suite, which was built to include factor structures that are aligned with multiple investment horizons, marking a new era for advancing the standard for measuring and managing risk.

Take two – volatility, variance and higher levels thereof
By Rex Jones and Axel Vischer – Eurex
In our first article of our “VSTOXX series” we highlighted VSTOXX Futures and Options and the properties of “vol of vol”, stressing the differences to equity volatility in relation to skew and kurtosis. This second article takes a step back to present the different forms of volatility. We then take two steps forward to show how these tools can be applied to measure volatility of volatility, and review products along their merits and nuances.

Emerging Markets Through a Factor Lens: FTSE Factor Index Analysis Suggests Value in Emerging Markets Year-to-Date
Press Release – MarketWatch
An analysis of the six market factors influencing performance for the FTSE Developed Index and FTSE Emerging Markets Index over the last five years suggests that the value factor may be emerging in 2015 as a key differential between developed and emerging markets.

Cheap and cheerful: Your quick guide to low cost passive investments
By Annabelle Williams – City A.M.
More and more people are shunning active fund managers and choosing to buy cheap “passive” market-tracking investments instead. The amount of money invested in these low cost alternatives has nearly doubled over the last ten years. Now 12 per cent of all money put into funds is invested in passives, according to the Investment Association.


The Glitter Of Gold In An Age Of Soaring Debt
By Frank Holmes – Forbes
Ever wonder how much gold has ever been exhumed in the history of the world? The GFMS Gold Survey estimates that the total amount is approximately 183,600 tonnes, or 5.9 billion ounces. If we take that figure and multiply it by the closing price on June 16, $1,181 per ounce, we find that the value of all gold comes within a nugget’s throw of $7 trillion.
This is an unfathomably large amount, to be sure, yet it pales in comparison to total global debt.

Gold doesn’t fall out of the sky — but it’s created in the heavens
By Alexandru Micu – ZME Science
For thousands of years gold has been the embodiment of wealth. Its chemical stability and scarcity make it ideal for coinage. In the USA, the link between gold and currency has only been weakened in 1933 when the gold standard fell out of use, and was fully separated from the dollar in 1971. While currently no country uses the gold standard any longer, money deriving its value from government regulation or law (called fiat currency), for much of human history gold has been the basis of most economic structures: everything had a corresponding value relative to the metal.


The great Moldovan bank robbery
By Tim Whewell – BBC
It’s a mystery that’s thrown Europe’s poorest nation into deep crisis – $1bn has vanished from three of Moldova’s leading banks, much of it passing through UK companies. A confidential report has blamed 28-year-old businessman, Ilan Shor, but in an exclusive BBC interview he proclaims his innocence.

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