First Impressions

Bits and pieces from IDX
Jim Kharouf – John Lothian Newsletter

If this year’s International Derivatives Expo (IDX) in London reflects one thing, it is that regulation continues to dominate the conversation. Phupinder Gill, CEO of CME Group sounded the alarm at the exchange leaders’ panel about regulatory arbitrage.

He said that futurization of swaps and margin requirements for non-US entities trading on futures markets is pushing that order flow out of US exchanges and back over to European bourses and elsewhere.

And that is just one of many issues that are cropping up for firms who are dealing with capital and reporting requirements.

So what is an FCM, bank, broker or trading firm to do? IDX’s exhibit hall is loaded with vendors that are offering any number of risk management and post-trading services. Contango Markets unveiled its tool to reconcile post trade swaps, while any number of vendors are pushing compliance functionality on their trading software. Others are trying to reduce clearing costs in a variety of ways. Other firms such as OpenGamma and Sungard, for example, are trying to help clearing member firms cut clearing costs and provide capital allocation tools.

David Hardy, chairman of GCSA, is pushing an insurance product for clearing houses that would ultimately help clearing member firms reduce the amount of capital needed in the default fund.

In short, firms continue to look for two things – reporting and compliance technologies to meet requirements, and ideas, discussions and products that will ultimately free up capital.

If Gill is correct about the regulatory arbitrage issue, firms may be looking for the next technology that gives them the regulatory edge.

Quote of the Day

“The whole situation has created a lot of uncertainty. The Fed is increasingly stepping into what had been a private-sector function.”

Karl Haeling, head of strategic debt distribution at Landesbank Baden-Wuerttemberg in the story, “ Fed Prepares to Maintain Record Balance Sheet for Years”.

Lead Stories

Liquidity: When the flood subsides
Peter Lee, Louise Bowman – Euromoney Magazine
Fund managers are pouring into primary bond issues because of lack of secondary liquidity. But what happens if that herd mentality remains, or even grows, when the market turns?

Cyprus eyes first post-bailout public bond
Elaine Moore and Robin Wigglesworth – Financial Times
Cyprus is set to become the latest peripheral eurozone country to return to global debt markets just one year after its controversial EUR10bn bailout by international lenders.

Morgan Stanley Cutting Jobs From Currency and Rates Trading Businesses
Morgan Stanley is cutting jobs from its currency and rates trading businesses in response to the slowdown in those markets, the firm’s chief executive said Tuesday.

Volatility Traders Have More to Fear than Fear Itself
The latest big worry to hit markets is an unusual one: calm. With stock prices high and various gauges of risk low, investors appear to have thrown caution to the wind. That isn’t entirely true, though. Exchange-traded notes that profit handsomely from market-shaking events have boomed since the financial crisis. But they have two big shortcomings:

Equities should be as boring as bonds
Miko Giedroyc – Financial Times
Is the equity market a sober reflection of companies’ future profitability, or is it crazy? It is crazy.

Norway Prices Blast Through Lagarde’s Lowflation Cycle
Saleha Mohsin – Bloomberg
The cycle of disinflation gripping much of the developed world has bypassed Scandinavia’s richest economy. While Sweden grapples with deflation and euro-area price growth hovers at well below half the European Central Bank’s target, inflation in Norway is outpacing forecasts.

***JM: I’m so grateful prices are rising here. Really I am.

Central Banks

Hungarian Central Bank to Auction First Interest-Rate Swaps on June 26
Hungary’s central bank will hold its first interest-rate swap tender on June 26 to help banks reduce interest-rate risks under the transformation of its main monetary-policy tools.

Bank Of England Launches New Framework To Test For Cyber Vulnerabilities
In a speech today at the British Bankers’ Association, Andrew Gracie, Executive Director, Resolution at the Bank of England, formally launched a new framework to help identify areas where the financial sector could be vulnerable to sophisticated cyber-attack.

Fed Prepares to Keep Record Balance Sheet for Years to Come
Craig Torres and Matthew Boesler – Bloomberg
Federal Reserve officials, concerned that selling bonds from their $4.3 trillion portfolio could crush the U.S. recovery, are preparing to keep their balance sheet close to record levels for years.


Former Rabobank trader pleads guilty to Libor manipulation
A former Rabobank NV trader on Tuesday pleaded guilty for his role in manipulating the Yen Libor benchmark interest rate, the U.S. Department of Justice said.

Trading Offshore Chinese Yuan? Try Vancouver
Katie Martin and Chiara Albanese – MoneyBeat – WSJ
Major financial centers around the world are jostling for position in the list of offshore Chinese yuan trading hubs. Hong Kong and London stand out. Luxembourg wants a piece of the action, as do Paris and Frankfurt. Prepare to add an unlikely new name to the list: Vancouver.

Euro falls as ECB measures sink in
Delphine Strauss – Financial Times
The euro fell against the dollar and yen on Tuesday as investors renewed bets on the eurozone maintaining looser monetary policy than other major economies.

Azerbaijan’s sovereign wealth fund to invest up to $1.8bn in renminbi
Jack Farchy in Baku – Financial Times
Azerbaijan’s sovereign wealth fund plans to invest up to $1.8bn in renminbi this year, in what would be one of the largest investments in the Chinese currency to be made public – and a further indication of its rapid move towards reserve currency status.

Indexes & Index Products

MSCI leaves Chinese stocks out of indices
Josh Noble in Hong Kong and Nicole Bullock in New York – Financial Times
MSCI has chosen not to press ahead with a controversial plan to add mainland Chinese equities to its global benchmark indices, while South Korea and Taiwan will no longer be considered for a developed markets ranking.

Equity strategy launches turn post-crisis corner
Last year was the best for net launches for long/short equity and market neutral equity strategies since before the financial crisis


Gold price benchmark open to manipulation-London Metal Exchange CEO
The global gold price setting benchmark or “fix” is open to manipulation, said the head of the London Metal Exchange (LME), which is competing to offer an alternative to the silver fix when the system is disbanded in August.

***JM: Today’s “You Don’t Say!” award winner.

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