First Impressions

A Marginal Victory – for the Time Being
Doug Ashburn – JLN

Yesterday, a U.S. Government entity took a giant step that will have far-reaching effects on the global financial ecosystem.

Oh, yeah, and the Fed raised interest rates for the first time in 10 years.

While most eyes in the financial world were glued to the talking heads blathering about the rate hike, I was watching the CFTC as it approved two rulemakings – a proposed rule that would require exchanges, clearing houses, swap execution facilities and data repositories to conduct specific cybersecurity tests. It also issued a final rule requiring swap dealers to exchange initial and variation margin with financial institutions. (For a look at a summary of the final margin rules, with links to commissioner statements, related documents and other information, go to the page in MarketsReformWiki HERE).

The new cybersecurity testing rules, approved by unanimous consent, cover five elements – vulnerability, penetration, controls, security incident response and enterprise technology risk assessment. These rules are straightforward and, in this day and age, should really be considered industry best practices anyway.

The margin rules, however, were accompanied by fireworks. Under the rules, swaps traded between affiliated entities will not be required to post initial margin. This marks a change from the proposed rules as well as rules approved by the Federal Reserve, FDIC and other prudential regulators, and prompted CFTC commissioner Sharon Bowen to vote against the rulemaking. In her dissent, Bowen, who sees this as a gaping loophole for banks to revert back to the days before the crisis, states:

“The large financial institutions that benefit from this exemption have tremendously complicated organizational structures, webs of hundreds, sometimes thousands, of affiliates spread across the globe. These complicated structures allow these banks to shift risk across the globe through different legal entities in their quest to earn higher returns on capital.”

CFTC chairman Tim Massad and commissioner Chris Giancarlo, the other two sitting members, see the protections built into the rule, such as margin segregation, prohibition of rehypothecation, and the exchange of variation margin between affiliates, as adequate protections.

Massad, who replaced Gary Gensler in 2014, has proven to be more pragmatic than his predecessor. Gensler, the chief architect of the original Dodd-Frank Act rulemaking, took a much stricter approach. He specifically singled out inter-affiliate swap margin as a necessary piece of the new structure.

This rule could set up an interesting showdown. Gensler, you see, is down but far from out. As finance director for Hillary Clinton, the presumptive Democratic nominee for the 2016 Presidential race, he could very well be named as Secretary of the Treasury under Clinton should she win.

In fact, Clinton’s recent New York Times opinion piece, How I’d Rein In Wall Street, Dec. 7, looked to have Gensler’s fingerprints all over it. The opening paragraphs, for example, were a verbatim copy of nearly every speech he gave while chairman.

With the CFTC down two commissioners from five – the last two to leave the commission, Scott O’Malia and Mark Wetjen, have yet to be replaced – the CFTC could have an entirely different makeup after the election, with a number of Massad’s pragmatic rollbacks “unrolled.”

In the words of the late movie star tough guy Charles Bronson, “Dis ain’t ovah.”


Sweet 16: The Tops For 2016 – Economics

From the Federal Reserve Bank moves on rates to the supply and demand for crude oil, 2016 is expected to be a big year for the derivatives industry. In our JLN Sweet 16 Series, we spoke with industry executives who gave us their top economic trends to watch in 2016. Here’s what Don Wilson, Terry Duffy, Christian Hauff and Derek Sammann had to say.

Watch the video »
Sponsored by Cinnober

Quote of the Day

“Like with the web, there is no one thing to rule them all. There is no one blockchain to rule them all. There will be multiple implementations of the blockchain. And it will be a sin if they don’t interoperate and work together.”

Jerry Cuomo, vice president and chief technology officer of IBM’s software group, in the story, “Tech and Banking Giants Ditch Bitcoin for Their Own Blockchain”

Lead Stories

IMF head Lagarde to face French trial over Tapie affair
Kim Willsher – The Guardian
Christine Lagarde, managing director of the International Monetary Fund, is to stand trial in France over a multimillion-euro government payment to a controversial tycoon who supported former president Nicolas Sarkozy.
Lagarde has been accused of “negligence by a person in a position of public authority” over the award of more than EUR400m to Bernard Tapie.

Day 1 After Fed Liftoff Shows Move Catapults Money Market Rates
Liz McCormick – Bloomberg
After the Federal Reserve raised its benchmark interest rate for the first time in almost a decade, the Day 1 follow-through in money markets shows the policy move looks to be working.
The overnight U.S. dollar London interbank-offered rate, known as Libor, fixed at the highest in more than six years Thursday. The rate, which signals where banks think they can borrow from each other, was posted by Intercontinental Exchange Inc. at 6:45 a.m. in New York at 0.3614 percent, the highest since March 31, 2009. It’s up from 0.1315 percent a week earlier and 0.0852 percent at the end of last year.

Discovering the destructive force of excess capital
Dan McCrum – Financial Times
For examples of the strange spot the financial world is in, let us examine the desks of investment banks which help companies raise money.
Look left and it is megadeals, giant mergers and acquisitions, which need tens of billions of dollars sunk as foundations for corporate empires.
Look right, however, and the clients are miners and energy companies desperate for capital to pour into holes in the ground, dug when demand for commodities seemed insatiable. It’s boom times or the of end times, depending on which desk takes the phone call.

The butterfly effect: how investments will react to US interest rate rise
Vanessa Desloires – Sydney Morning Herald
The US Federal Reserve has raised interest rates for the first time since 2006, a move that will affect almost every financial market in the world.
It will also mark a divergence between the countries cutting interest rates; particularly Europe, Japan, China and even Australia. It will mean the world’s largest economy is again the powerhouse for global growth.

Beijing Probes Architects of Stock-Market Rescue
Lingling Wei – WSJ
Having already investigated investors and brokerages in connection with a bungled summer stock-market rescue totaling more than $200 billion, Beijing is now probing the rescuers.
Communist Party graft busters are investigating whether officials inside the China Securities Regulatory Commission used their knowledge of the rescue effort to enrich their friends or themselves, say agency officials familiar with the probe. In recent weeks, they have been taking officials, one by one, to a hotel close to the agency’s headquarters to press them to come clean or report on others, the officials say.

CFTC Adopts Final Margin Rules for Uncleared Swaps
The CFTC has approved a final rule on margin requirements for uncleared swaps for swap dealers (SDs) and major swap participants (MSPs). The new regulation addresses margin requirements for uncleared swaps entered into by SDs or MSPs that are not subject to regulation by the prudential regulators — Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration or the Federal Housing Finance Agency. The entities subject to the rules are referred to as covered swap entities (CSEs).

BlackRock, Pimco among group to begin clearing credit swaps
John McCrank – Reuters
A group of 24 investment management firms, including BlackRock Inc (BLK.N), Pimco and Eaton Vance (EV.N), will begin clearing certain credit default swaps in an effort to revive a flagging part of the market used to hedge risk, several trade groups said on Wednesday.
The effort comes amid renewed worries over the ability to trade debt following the collapse of Third Avenue’s Focused Credit Fund on Dec. 7, which jolted Wall Street and sparked a sell-off in high-yield bonds. Low oil prices have also been putting pressure on some funds and companies.

Tech and Banking Giants Ditch Bitcoin for Their Own Blockchain
Cade Metz – WIRED
Several major companies from across both the technology and financial industries—including IBM, Intel, and Cisco as well as the London Stock Exchange Group and big-name banks JP Morgan, Wells Fargo, and State Street—have joined forces to create an alternative to the blockchain, the global online ledger that underpins the bitcoin digital currency.
Overseen by the not-for-profit Linux Foundation, this open source project aims to build blockchain-like technology that can bring a new level of automation and transparency to a wide range of services in the business world, including stock exchanges and other financial markets.

Cash May Not Be So Cushy
Lisa Abramowicz – Bloomberg
Here’s some common wisdom on Wall Street: Mutual funds can safely own infrequently traded debt and promise investors easy cash withdrawals as long as the funds have a big pool of cash-like assets.
There’s only one problem: It may not be true.

“Sticky” sales
Phil Davies – Federal Reserve Bank of Minneapolis
Sales are ubiquitous in the U.S. economy. Black Friday, President’s Day, Mother’s Day, the Fourth of July; almost any occasion is cause for price cutting, accompanied by prominent signage, balloons and ads in traditional and social media to make the savings known far and wide. Retailers also put on sales ostensibly to clear out inventory, celebrate being on the sidewalk and go out of business.
Economists are interested in sales, not because they want cheap stuff (well, maybe they’re as partial to a deal as anyone), but because the role of sales has a bearing on a question central to macroeconomics: How flexible are prices? Price flexibility—how quickly prices adjust to changes in costs or demand—is crucial to understanding how shocks of any kind, including fiscal and monetary policy, affect economic performance.

Iceland Bank to Pay $3.8 Billion After Krona Controls Lifted
Omar Valdimarsson – Bloomberg
Iceland granted an exemption to capital controls for the first of its three failed banks, a key step for creditors that have been trapped since the island walled off its currency in the wake of the banking collapse in 2008.

Are You Ready to Buy Bonds From Iran?
Asa Fitch – WSJ
Iran hopes to raise hundreds of billions of dollars needed to repair its sanctions-hit economy, but first it must win over global investors who have shunned it.

Central Banks

Fed rate rise is first step to rebalance US financial system
Gillian Tett – Financial Times
All eyes are focused on the US Federal Reserve. By announcing a 25 basis point rate rise, Janet Yellen, Fed chair, has started weaning the American economy from its addiction to cheap money. Given the recent mixed economic data, economists are divided about the merits of this decision.

Confident and clear, Yellen says rate path will be well signaled
Ann Saphir – Reuters
The unanimous backing Federal Reserve Chair Janet Yellen got for the Fed’s first rate hike since the financial crisis let her deliver a clear message: Don’t expect further rate hikes for a while, and when we are ready, we’ll tell you.
Yellen’s confident and measured performance – she even managed a joke about the Fed’s forecasting record – came as she ended the “extraordinary” measures that revived the U.S. economy from the worst recession since the 1930s.

Fed turns to new tool to lift US interest rates
Joe Rennison – Financial Times
The Federal Reserve has lifted the cap on a crucial monetary tool which allows investors to park cash at the central bank, clearly signalling its determination to drag interest rates up to its new target. The Fed’s so-called “overnight reverse repo” programme, or RRP, is considered one of the more arcane features of its monetary policy but has become arguably the most powerful tool in its arsenal.

Bank of England not expected to hurry to follow US Fed
Chris Giles – Financial Times
The Bank of England is not expected to hurry to follow the US Federal Reserve and raise UK interest rates, financial markets and economists predicted on Thursday, saying that the first rise is not expected until well into 2016.
Although the Fed’s decision to raise rates gives the BoE cover to act sooner, financial markets, which bet on official interest rates, hardly moved on Thursday, expecting the first rise next autumn, and the level to reach 1 per cent only by the end of 2017.

In Hong Kong, zero interest rate lives on
Liz Mak – South China Morning Post
Savers in Hong Kong will continue to receive zero or near-zero interest rates on their deposits as banks in the city have chosen to leave both lending and deposit rates unchanged even as the city’s de facto central bank increased its base rate offered to banks by 25 basis points on Thursday.

Asia policymakers spared Fed jolt, look to support shaky economies
Nicholas Owen – Reuters
Asian policymakers on Thursday applauded a historic turn in U.S. monetary policy, but analysts warned the region’s economies face vulnerabilities, with Taiwan cutting interest rates, although markets took the Federal Reserve rate hike in their stride.

Bernanke says Fed likely to add negative interest rates to recession-fighting tool kit
Greg Robb – MarketWatch
The Federal Reserve should consider using negative rates to counter the next serious downturn, said former chairman Ben Bernanke in an interview with MarketWatch.

Alan Greenspan discusses the U.S. economy. (VIDEO)
Council on Foreign Relations
Alan Greenspan discusses the U.S. economy.


Forex investors ready to bid farewell to ‘last look’ abuses
Philip Stafford – Financial Times
Investors who use the foreign exchange markets are putting pressure on banks and market makers to justify one of its most common — and potentially abusive — practices.
The $150m fine levied on Barclays by the New York Department of Financial Services last month for abusing so-called “last look” in forex trading has added to doubts over the way the market polices itself.

Swiss Regulator Bars 6 Former UBS Workers in Currency Inquiry
Chad Bray – NY Times
A Swiss regulator said on Thursday that it had barred six former managers and traders at UBS from the financial industry in an investigation into manipulation of the foreign currency markets.
UBS was among a group of the world’s largest banks that paid a combined $4.25 billion in November 2014 to settle with British and Swiss regulators and the Commodity Futures Trading Commission in the United States over their role in manipulating foreign currency markets.

FT explainer: currency trading algorithms
Paul McClean – Financial Times
Algorithm has been a dirty word this year. In September, Volkswagen admitted to installing a “sophisticated software algorithm” on certain vehicles to cheat emissions tests, and in November Barclays was fined $150m for alleged misuse of its foreign exchange algorithm.
New regulation will soon be in place to manage the potential for “market distortion” as a result of the increased use of algorithms in financial markets.

Dollar Bulls Celebrate as Fed Shift Fuels Rally to Decade High
Lananh Nguyen and Rachel Evans – Bloomberg
With the decade-long wait for higher U.S interest rates finally ended, investors are piling into the dollar.
A gauge of the greenback reached the highest in data going back to early 2005 on a closing basis after the Federal Reserve unanimously voted to raise its benchmark for the first time since 2006. The currency surged to an 11-year high against its Canadian counterpart and rallied almost 2 percent against the Australian dollar and South Africa’s rand.

Hong Kong’s currency peg problem: It hurts but we are stuck with it
Enoch Yiu – South China Morning Post
The problem of Hong Kong’s 32-year-old currency peg have come to the fore again with the latest interest rate rise by the US Federal Reserve.
Even though Hong Kong is in the middle of a downturn as a result of an economic slowdown in mainland China and a drop in the number of tourists coming to the city, the Hong Kong Monetary Authority yesterday said it will still need to track the US interest rate under the currency peg arrangement by increasing the local official rate by 25 basis points to 0.75 per cent.

Currency options warm to clearing
Joel Clark – Futures & Options World
Central clearing in foreign exchange has proven much more complex than other asset classes. A new service developed by LCH.Clearnet and CLS may see the first FX options cleared in 2016 despite there being no regulatory mandate on firms to do so, Joel Clark reports.

FX: Charities – here’s how not to get screwed on spread
Farah Khalique – Euromoney Magazine
A new range of foreign-exchange service providers and P2P fintech disruptors are coming to the aid of international charities, to help them get the most bang for their buck when donating money abroad and potentially save millions.

Indexes & Index Products

ETFs survive test of junk bond market stability
Trevor Hunnicutt – Reuters
After a year that has reignited concerns about how exchange-traded funds work during volatile periods, junk bond ETFs came through a test this month, registering their highest trading volumes ever without any major disruption.

We Can’t Even With This Millennial ETF
Eric Balchunas – Bloomberg
Millennials are about to be able to invest in one of their favorite things: themselves.
As companies from every industry trip over each other to appeal to a generation of 18-to-33-year-olds, we can all look forward to an exchange-traded fund focused on this very demographic as ETF provider Global X just filed for the first millennial generation ETF, according to

Vietnam boom fuels MSCI dreams
Jame DiBiasio – FinanceAsia
Finance-sector executives in Vietnam, encouraged by the government’s reform agenda and a surge of global investor interest, hope the country will enter MSCI’s emerging-market stock index by the end of 2017.

ICBC Europe and ICBC Credit Suisse Celebrate Authorization of S&P China 500 Index Fund
Press Release
Industrial and Commercial Bank of China (Europe) S.A. today announced the authorization of ICBC Credit Suisse S&P China 500 Index Fund under the ICBC (Europe) UCITS SICAV umbrella, by the Luxembourg regulator Commission de Surveillance du Secteur Financier.

New Risk-Off: More Fear Today Than Tomorrow
Jodie Gunzberg – S&P Dow Jones Indices
It has been over nine years since the Fed raised interest rates, but today, the Fed raised rates just as expected. While the Fed actions have been well telegraphed, and interest rates are probably the least of worries for commodities, there is one measure that might be worrisome.


Gold Options Show Sellers Lose Sizzle as Rate-Rise Dread Recedes
Luzi-Ann Javier and Joe Deaux – Bloomberg
What gold bulls feared the most — the end of the U.S. zero-rate era — wound up bringing some relief as traders backed away from bearish bets on metal.
A put giving owners the right to sell January futures at $1,000 an ounce, the most-traded option on Wednesday, plunged 46 percent after the Federal Reserve raised interest rates for the first time in almost a decade. Gold prices held earlier gains after the Fed announcement.

Gold Falls to Six-Year Low
Ira Iosebashvili – WSJ
Gold prices closed at a fresh six-year low Thursday, as traders grew concerned that the Federal Reserve’s first rate increase in almost a decade will cut demand for the precious metal.

Dubai pioneers uniform gold price display system
Issac John – Khaleej Times
Customers in Dubai can make jewellery purchases without the fear of being cheated through a pioneering initiative that provides them with regularly updated uniform gold prices. By early 2016, jewellery retail outlets in Dubai will be featuring centrally-controlled display units to ensure price transparency.


Founder of Fanya, China’s defaulting metal exchange, missing since October
Xie Yu – South China Morning Post
The founder of a Chinese online investment platform that defaulted on more than 36 billion yuan (HK$43.04 billion) in July, leaving thousands of retail investors out of pocket, has gone missing.
Shan Jiuliang, founder of Fanya Metals Exchange, cannot be contacted, said Imagi, a Hong Kong-listed animation studio, which is also controlled by Shan. Imagi made the revelation in a stock exchange filing.

The Economist
The latest chapter in the “Star Wars” saga, “The Force Awakens”, was due to open in cinemas worldwide on December 16th, after The Economist went to press. Most fans will queue up to watch nail-biting lightsaber duels and catch up on the lives of beloved characters. Economists, who can render the most exciting of material dull, will be more interested in the state of the galactic economy. Did the destruction of the Death Star at the end of the sixth film in the series trigger a massive financial crisis, as a recent paper* by Zachary Feinstein, a professor of financial engineering at Washington University in St Louis, speculates? What sort of structural reforms might the new galactic government adopt?

****SD: If you are averse to spoilers, Google Chrome has a “Force Block” add-on that blocks “Star Wars” spoilers.

In New ‘Star Wars,’ Empire Strikes Back Because the Rebels Stink at Finance
Paul Vigna – WSJ
The Empire is back. Or at least, something that looks an awful lot like the Empire.
The trailers for “Star Wars: The Force Awakens,” have featured plenty of stormtroopers, TIE fighters, and really evil-looking guys who are the apparent heirs to the Evil Galactic Empire from the original trilogy. But the last we saw, the Emperor was dead, the second Death Star was destroyed, and the Dark Side was vanquished. So how’d those guys come back?
It’s the economy, stupid.

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