First Impressions

SEFCON Snapshot 2014, Part I: Technology and Innovation
JohnLothianNews.com

The WMBA Americas hosted SEFCON V on November 12, 2014, and John Lothian News was there. We interviewed 14 SEF operators, regulators and participants and put together this three part series on the state of SEFs one year into the mandate.

Part I looks at the state of innovation in SEF technology and market structure. The creation of the swap execution facility really forced a collision of the bilateral and listed worlds, and necessitated an entirely new workflow. Some of the technology is still being invented. Furthermore, the need for capital efficiency and product standardization have led to new product design.

Watch the video »

Quote of the Day

“When push comes to shove they’re going to look and say: ‘It’s a pretty weak world economy out there, we don’t see any inflation, and the risk if we raise rates and it turns out we were mistaken is just so huge’. It’s certainly a real possibility that they’ll go ahead and do it, but probably not, and for what it’s worth I and others are trying to bully them into not doing it.”

Paul Krugman, Nobel laureate in the story, “Krugman, Fighting Consensus, Says 2015 Fed Rate Increase Is Unlikely”.

Lead Stories

Netherlands Asks Bankers to Swear to God
By Liz Alderman
The sinners of the banking industry seem so uncowed by regulators and prosecutors that one country is trying a higher deterrent: the fear of God. In the financial industry equivalent of the Ice Bucket Challenge, executives in the Netherlands have been taking the bankers’ oath.
“I swear that I will endeavor to maintain and promote confidence in the financial sector,” the oath reads in part. “So help me God.”
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Meet the SEC’s Brainy New Crime Fighters; ‘Quants’ Are Agency’s Latest Weapon Against Financial Misdeeds
By Scott Patterson, WSJ
Long outgunned by Wall Street’s legions of Ph.D.s, the Securities and Exchange Commission is arming itself with mathematicians and computer programmers of its own to catch bad market actors.
The question is whether this is an arms race government regulators can hope to win.
jlne.ws/1AcoaaV

Energy Bonds Breach Distressed Level Amid Oil Selloff
Sridhar Natarajan – Bloomberg
The average borrowing cost on junk-rated energy bonds reached distressed levels for the first time in at least three years as plunging oil prices threaten to cut into the revenue of companies exposed to the commodity.
The extra yield premium investors demand to hold energy company debt rather than government securities surged to 10.2 percentage points today in New York, past the 10 percentage-point limit considered distressed, according to data compiled by Bloomberg. About $280 billion of securities linked to 488 bonds across all industries trade as distressed compared with about 150 bonds six months ago.
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Bond Investors Are Writing Off Inflation for Years, If Not Decades, to Come
Susanne Walker – Bloomberg
An obscure corner of the $12.4 trillion market for U.S. government debt is providing one of the clearest signs yet that bond investors are writing off the threat of inflation for years, if not decades, to come.
Demand for Strips, created when Wall Street banks separate the interest payments from the principal of U.S. debt and sell each at a discount, has boosted the amount outstanding to an average $211 billion this year, the most since 1999, data from the Treasury Department show. The securities, the most vulnerable to inflation of all U.S. government bonds, posted the biggest returns this year by rallying almost 50 percent.
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Gross Says TIPS ‘Look Great’ as Federal Reserve Seeks Inflation
Mary Childs – Bloomberg
Bill Gross, who used to run the world’s biggest bond fund before joining Janus Capital Group Inc. (JNS) in September, said Treasury Inflation Protected Securities are attractive as the Federal Reserve seeks 2 percent inflation.
“TIPS look great,” Gross, 70, said in a CNBC interview that also discussed his exit from Pacific Investment Management Co. and outlook for the economy. “You can buy a 10-year TIP with inflation expecations of 1.5 percent,” he said.
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SocGen Defies Industry Retreat in Pompidou-Sized Venue
By Fabio Benedetti-Valentini, Bloomberg
In a new building on the edge of Paris, Societe Generale SA (GLE) moved 3,000 employees this year onto five trading floors each longer than a football field. The glass-faced edifice, roughly the size of the city’s Centre Pompidou, signals an increasing reliance on corporate and investment banking, even as many of the firm’s biggest European competitors scale back their securities businesses.
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Central Banks

Krugman, Fighting Consensus, Says 2015 Fed Rate Increase Is Unlikely
Alaa Shahine – Bloomberg
Paul Krugman, challenging the consensus of economists and the Federal Reserve’s forecasts, said policy makers are unlikely to raise interest rates in 2015 as they struggle to spur inflation amid sluggish global economic growth.
“When push comes to shove they’re going to look and say: ‘It’s a pretty weak world economy out there, we don’t see any inflation, and the risk if we raise rates and it turns out we were mistaken is just so huge’,” the 2008 Nobel laureate said in Dubai. “It’s certainly a real possibility that they’ll go ahead and do it, but probably not, and for what it’s worth I and others are trying to bully them into not doing it.”
jlne.ws/13rBrCx

Riksbank Seen Prolonging Zero Rate to Escape Deflation Trap
Johan Carlstrom and Amanda Billner – Bloomberg
Sweden’s central bank is seen pushing back planned interest rate increase beyond mid-2016 as it seeks to wrest the largest Nordic economy out of deflation.
Policy makers, who meet today in Stockholm, will tomorrow announce they kept their repo rate at zero for a second meeting, according to all 20 economist surveyed by Bloomberg. They may delay estimated increases to the end of 2016, from mid-2016, analysts at Swedbank AB (SWEDA), Danske Bank A/S and Royal Bank of Scotland Plc said.
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Currencies

1998 Comes Calling in Currency and Credit Plunges From Russia to Venezuela
Boris Korby – Bloomberg
Emerging markets are ending the year much like how they began it — in freefall.
From Russia to Venezuela, Thailand to Brazil, stocks, bonds and currencies across the developing world are plunging.
The Russian ruble tumbled past 60 for the first time on record today while Venezuelan bonds sank below 40 cents on the dollar and Thai stocks fell the most in 11 months. Brazil’s corporate debt market is reeling as a graft probe of state oil producer Petroleo Brasileiro SA infects the market.
jlne.ws/13rDjLy

HKEx Launches Incentive Programmes For RMB Currency Futures Amid Record Trading Volumes
HKEx
RMB currency futures contracts have proven themselves as an effective risk management tool for market users amid increased USD/CNH volatility, and Hong Kong Exchanges and Clearing Limited (HKEx) is introducing additional measures to solidify the development of the RMB currency futures market.
jlne.ws/1AcjvpI

Dealers face FX front-running battle
Euromoney
Banks face a tough task proving to regulators that foreign-exchange traders are not front-running clients, as they respond to the government’s consultation on reinforcing confidence in the fairness and effectiveness of fixed-income, currency and commodities markets (FICC).
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Bitcoin Bears Say Told You So
Olga Kharif – Bloomberg
If you think oil had a rough 2014, consider bitcoin. The digital currency has plunged 54 percent since the beginning of the year. By contrast, Brent crude has fallen 44 percent; the ruble is off some 46 percent against the dollar.
Bitcoin’s collapse comes as governments around the world consider regulating or prohibiting the virtual currency to prevent criminals from using it to trade contraband. Meanwhile, bitcoin is facing competition from a slew of rivals striving to be more palatable to regulators.
jlne.ws/13rEZEP

Indexes & Index Products

Vix Futures Extended Trading Hours Volume Hits New Single-Day High
CBOE
CHICAGO, IL – December 12, 2014 — The CBOE Futures Exchange, LLC (CFE®) today announced that trading volume in CBOE Volatility Index® (VIX® Index) futures during extended trading hours (ETH) – from 3:30 p.m. CT yesterday to 8:30 a.m. CT today – established a new single-day volume record.
jlne.ws/1IT5EdE

VIX Note Volume Proving Prescient as Volatility Surges
By Inyoung Hwang and Callie Bost, Bloomberg
Turbulence is reappearing in the stock market. For traders in exchange-traded notes that rise and fall with market volatility, it’s like it never went away.
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Annual changes to Nasdaq-100 index announced
By Chuck Mikolajczak, Reuter
Nasdaq OMX Group announced late Friday the results of its annual re-ranking of the Nasdaq 100 index, which will cause a reshuffling of several constituents.
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Miscellaneous

Elvis Lives in Graceland Bonds Due 67 Years After King’s Death
Margaret Newkirk and Carlton Purvis – Bloomberg
Every year, 600,000 people pay as much as $74 to tour Elvis Presley’s Memphis mansion, gaping at animal skulls and stained-glass peacocks, lime-green shag carpet on the Jungle Room’s floor and lime-green shag carpet on its ceiling.
Now a development authority plans to sell as much as $125 million in bonds in January to finance improvements at Graceland. They’re counting on the curious to keep streaming to the privately owned estate for decades, generating sales, property and special tourism taxes to pay the debt over as long as 30 years.
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