First Impressions

Battle Royale Between SEFs and Exchanges

By Doug Ashburn

In this morning’s John Lothian Newsletter, John commented upon the defection of Laurent Paulhac from his role as head of OTC products at CME Group to ICAP, where he will be CEO of the inter-dealer broker’s swap execution facility, by saying “the SEF world just got more cut-throat.”

Actually, it has been cut-throat since day one. The SEFs have been fighting a war on three separate fronts. First, the regulators, beginning with Dodd-Frank and culminating with the CFTC’s final SEF rules, creates what the brokers called an unlevel playing field. From forced electronification, higher margin requirements and specific quoting requirements, to the two-year delay between proposal and finalization of the rules, the SEFs have been forced behind the proverbial eight-ball.

The extra head start and margin treatment has allowed exchanges to “futurize” certain swap products, specifically those in energy and interest rates. So now the SEFs are scrambling to keep their customers in-house, by offering execution quality of bespoke transactions, and offering their own versions of exchange-like products.

Finally, the SEFs have been battling with the bank dealers, who would also like to keep their platforms in the status quo. The so-called “Footnote 88” may force many-to-many dealer platforms to register even if they limit their offerings to products outside the mandate, but give relief to single-dealer platforms. Now we hear that another potential loophole, “Footnote 513” may allow foreign affiliates to sidestep regulations – the dreaded “regulatory arbitrage” we have all been hearing about since the passage of Dodd-Frank in 2010.

But I would not count these guys out. The IDB community is a massive infrastructure, and much of this structure cannot be shoehorned into the futures model. Loopholes were not within the spirit of Dodd-Frank, so these things should disappear in short order.

Quote of the Day

It’s JPMorgan’s turn to have its own types of concerns, albeit ones that are much less severe from a credit perspective than the others” and in an improved economy.

Pri De Silva, bank analyst at debt-research firm CreditSights Inc. in Bloomberg’s piece: “JPMorgan’s Eminence Seen Fading in Default Swaps.”


Lead Stories

Italy’s Government Looks to Tap Pensions Funds
Giovanni Legorano – MoneyBeat – WSJ
In a world of hefty debt piles, it makes sense for governments to make sure demand for their paper remains strong. The Italian government is doing just this, looking at how local money coming from retirement savings could be used to buy larger piles of government bonds.

**JK – If you want strong, hefty is the brand to do it.

VXST Short-term Volatility Index Fell 47% Since Oct 15
Matt Moran – VIX Views
Earlier this month there was quite a bit of worldwide apprehension over the wrangling in Washington D.C. regarding the partial government shutdown and possible U.S. debt default. Contentious governmental negotiations could resume in January 2014.

**JK – How low, can you go?

Russell Adds Volatility Control Methodology to Popular Fundamental Index Series
Press Release
The new Russell Fundamental U.S. Top 100 Volatility Control 7% Index provides investors with exposure to the 100 largest U.S. stocks based on three fundamental measures a”EUR sales adjusted for leverage, retained operating cash flow and dividends plus buybacks a”EUR within a volatility control framework designed to target a 7% realized volatility.

China to launch simulated trading in stock index options in Nov – report
China will launch simulated trading in stock index options on November 8, official media reported on Wednesday, as regulators move to enhance risk hedging options to support further financial reforms.

ICAP Names Laurent Paulhac CEO of ICAP SEF
Ian Walker –
Interdealer brokerage firm ICAP PLC said Thursday it has appointed Laurent Paulhac as managing director and chief executive of ICAP SEF (US) LLC, reporting to Michael Spencer, ICAP’s group CEO. Mr. Paulhac joins from the CME Group where he was senior managing director for interest rate and over-the-counter products and services, and responsible for CME Group’s global interest rate and OTC business strategies.

***** The CME has not had such a high level defection to such a marquee job since Satish Nandapukar left to become CEO of Eurex US. The SEF world just got more cut-throat.

ECB must fight on two fronts to aid eurozone
Ralph Atkins –
The great European bank clean-up has started. The European Central Bank has put its credibility on the line with its broad review of the region’s weakened financial sector.

**JK – What credibility would that be?

Paddling in the shallows of Shibor creek
David Keohane | FT Alphaville
The muddy waters of this particular creek have been known to drive good men mad… The seven-day bond repurchase rate, a key gauge of short-term liquidity in China, opened at 5 per cent, a four-month high and up 150 basis points from the end of last week. But we also get this:

JPMorgan’s Eminence Seen Fading in Default Swaps: Credit Markets
Callie Bost & Charles Mead – Bloomberg
JPMorgan Chase & Co.’s advantage over its Wall Street peers is fading in the eyes of credit-derivatives traders as fines and regulator probes hobble profits while firms from Citigroup Inc. to Morgan Stanley rebound.

**JK – JPM losing some of its Street cred.

Central Banks

Bank Of England Talks Itself Into a Corner
Alen Mattich – MoneyBeat – WSJ
The Bank of England is being backed into a tight corner. On the one hand, it has promised to keep interest rates lower until the unemployment rate drops to at least 7%–subject to a couple of caveats. On the other, it thinks the rate at which U.K. inflation will start to accelerate is 6.5%.

China central bank fuels fears of inflation clampdown
China’s central bank added fuel to fears on Thursday it was clamping down on inflation risks as it allowed cash to drain from the financial system for a second straight week, sparking a jump in short-term rates.

Draghi wants European banks backstop in place by 2015
A common resolution mechanism for dealing with troubled banks is a crucial part of the euro zone’s banking union and the European Central Bank wants it in place by 2015, ECB President Mario Draghi told Reuters on Wednesday.


CNH Tracker-Dim sum market set for a booster shot
As China makes important strides to expand the yuan’s footprint beyond Hong Kong, more favorable policies are expected to breathe fresh life into the moribund offshore yuan bond market in the former British colony.

Thomson Reuters And State Bank Of Vietnam Launch Real-Time FX Trade Monitoring System
Thomson Reuters, the world’s leading source of intelligent information for businesses and professionals, and State Bank of Vietnam today announced the launch of a real-time trade monitoring and post-trade system for collecting and extracting information in the interbank foreign exchange market.

Long yuan positions at 5-month high; players more bullish on most Asia FX
The Economic Times
Long positions in the Chinese yuan hit a five-month high in the last two weeks as investors grew more bullish on most emerging Asian currencies on growing views that the US Federal Reserve will keep its stimulus in place longer, a Reuters poll showed.

Indexes and Index Products

KCG Holdings Hires Chris Hempstead to Head ETF Sales

Chris Dieterich and Jacob Bunge – MoneyBeat – WSJ
KCG Holdings Inc. (KCG) hired former WallachBeth LLC exchange-traded-fund specialist Chris Hempstead to head its ETF sales team, the latest in a string of moves by some of Wall Street’s highest-profile ETF traders in the wake of Getco LLC’s acquisition of Knight Capital Group Inc.

Fidelity late but not too late with new ETFs
Megan Durisin – Investment News
Fidelity Investments is making its first big leap into the exchange-traded fund arena Thursday with the launch of 10 sector ETFs, but the question remains: Is it too little, too late? Several analysts are saying, “No.”

IPO Follies: Mistakes ‘R’ Us In New ETF
Dave Nadig – Index Universe
The recent launch of the Renaissance IPO ETF (IPO) on Oct. 16 generated an enormous amount of interest, gathering $31 million in the first few days of its life. It’s easy to understand the enthusiasm—investors remember the performance of stocks during the Internet boom, and there’s something very, well, American, about getting in on the ground floor of some scrappy upstart company and riding it to the moon.


Gold Rush’s Jack and Todd Hoffman Talk Gold, the Economy, and Beards
Paul Vigna – MoneyBeat – WSJ
Jack and Todd Hoffman of Discovery Channel’s “Gold Rush,” the network’s top-rated show, dropped in on the MoneyBeat set to talk about gold prices, whether it’s better to be gold miner or a reality TV star, thrill seeking, the “major crash” coming in the economy, and beards.

Tamil Nadu government on 400 kg gold hunt
CanIndia NEWS
The Tamil Nadu government is on gold hunt now. It is not digging for the yellow metal at any site. It has instead tendered out its intention to buy 400 kg of gold for around Rs.120 crore.

Pin It on Pinterest

Share This Story