First Impressions

Let’s Pause a Moment: Keith Ross Talks Dark Pool Rules and IEX

The addition of high speeds and multiple execution venues has altered the equity market structure in recent years. Now, the SEC is weighing in with newly proposed rules on dark pools. Meanwhile, IEX, which rose to fame with Michael Lewis’ “Flash Boys”, is trying to move from dark pool to full-fledged exchange. Keith Ross of PDQ ATS says transparency is a good thing, and a market pause has its benefits in alternate venues, but as an exchange, could create chaos.
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Quote of the Day

“Whilst there were reasonable grounds to suspect the commission of offenses involving serious or complex fraud, a detailed review of the available evidence led us to the conclusion that the alleged conduct, even if proven and taken at its highest, would not meet the evidential test required to mount a prosecution for an offense contrary to English law.”

The Serious Fraud Office in the story, “British Authorities End Criminal Inquiry Into Currency Markets”

Lead Stories

Report finds ‘no evidence’ of banks manipulating risk models
Laura Noonan – Financial Times
There is “no evidence” to support regulators’ suspicions that under-pressure banks exploited a controversial risk measure to make themselves appear healthier, a new industry-funded report from the consultancy Europe Economics has found. The report — which was researched independently but funded by finance industry group AFME — looked at how European banks changed the models they used to calculate their most important capital ratios from 2013 and 2014. Global banking regulators have long suspected that these models were being manipulated to flatter troubled banks, and new rules are already being drafted that give banks less flexibility to do so in the future.

BOJ Move Backfires as 0.001% Deposits Lure Cash of Fund Managers
Gareth Allan and Shingo Kawamoto – Bloomberg
It’s a strange world when bank accounts earning almost no interest are one of the most attractive investments around. Despite the Bank of Japan’s efforts to spur risk-taking with negative rates, cash is flowing out of funds targeting bills and commercial paper in favor of 0.001 percent savings plans, according to Deutsche Bank AG and Monex Group Inc. Eleven money-market funds stopped accepting new investment in February as banker association data showed deposits climbed almost 6 percent.

****SD: What’s even worse than your bazooka running out of ammo? It blowing up in your face.

U.S. banks make cool technology, realize it can be sold
Olivia Oran – Reuters
Big Wall Street banks, after spending massive amounts of money and time to get their old, creaking systems in better shape, are now trying to sell technology they’ve developed in-house to other companies. U.S. banks including Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N) and JPMorgan Chase & Co (JPM.N) are spinning out or selling a range of tools that pertain to data security, mobile applications and “systems integration,” the process of flattening layers of aging technology.

****SD: I’m partial to the final subsection of the article about “industry skeptics” leery about using a potential competitor’s software and the challenges of a bank delving into technology sales. But if banks are to continue marketing themselves as tech firms, they’re going to have to figure this out. (Unless they’re Remember Flooz?)

Lenders Are Getting Choosier When It Comes to Risky Real Estate Deals
Sarah Mulholland – Bloomberg
Lenders are getting stingier when it comes to funding risky U.S. real estate developments, putting pressure on landlords in need of fresh funding to keep their projects afloat. Banks are proceeding with caution as the specter of slowing economic growth rattles financial markets and shakes investor confidence in a six-year recovery that’s helped lift property values to records. Lenders are going to be more selective and discriminating as the year progresses, said Mark Myers, the head of the commercial real estate business at Wells Fargo & Co., the largest U.S. commercial-property lender.

Mohamed El-Erian: We’ve reached the end of the road
Business Insider
Mohamed El-Erian, the former PIMCO CEO and current chief economic advisor to Allianz, has an eye-catching prediction. Within the next three years, the global economy will hit a “T-junction.” Policymakers will either watch helplessly as the world sinks into a mire of financial volatility and political collapse or they’ll find a way to unlock the piles of corporate cash sitting on the sidelines, reinvigorating growth. At the moment, it’s a coin flip.

****SD: What happens at the end of Cormac McCarthy’s award-winning book? Spoiler alert, the dad dies.

State Street to pull out of global futures business
Alice Attwood – Futures & Options World
State Street is set to pull out of its global futures trading business, following a strategic review by the bank that started in January. A spokesperson for the US custodian confirmed to FOW, and added that 50 employees globally would be affected by the closure, though adding that some of the team will be retained in other areas of the business.

****SD: Also State Street to Book up to $400 Million in Restructuring Charges

Can the CFTC Improve Swaps Data?
Tod Skarecky – TABB Forum
The Commodity Futures Trading Commission has been receiving swap trade reports for a few years, but it can’t seem to make sense of some, or much, of it. In order to fulfill the Commission’s regulatory mandates of monitoring systemic risk, market abuse and general oversight, the data has to be much better. The Commission realizes that it needs more details than it originally asked for and that the currently requested data is not being reported well enough. Unfortunately, perfect quality data may not be attainable.

Buy-side told to expect higher clearing fees
Joe Parsons – The Trade
Buy-side firms are facing a hike in fees from clearing banks seeking to pass on the financial pinch from ultra-low interest rates and post-crisis regulation. Research out this week shows clearing banks are facing increasing pressure from post-crisis reforms. Rules on derivatives clearing and other reforms have shifted additional risk onto clearing banks and custodians.

Central Banks

Stanley Fischer and Lael Brainard Are Battling for Yellen’s Soul
Timothy A Duy – Bloomberg
Federal Reserve Vice Chairman Stanley Fischer sits on Chair Janet Yellen’s left shoulder, muttering: “… we may well at present be seeing the first stirrings of an increase in the inflation rate …” Fed Governor Lael Brainard perches on the right, whispering: “… there are risks around this baseline forecast, the most prominent of which lie to the downside.” Yellen is caught in a tug of war between Fischer and Brainard. At stake is the Fed chair’s willingness to embrace a policy stance that accepts the risk that inflation will overshoot the U.S. central bank’s target. At the moment, Brainard has the upper hand in this battle. And she has a new weapon on her side: increasing concerns about the stability of inflation expectations.

****SD: Are you not entertained?!?!

Fed seen holding rates for now, leaving door open for June hike
Federal Reserve policymakers are seen leaving short-term interest rates unchanged at a two-day policy meeting that began Tuesday, but also to signal that a rate hike is not too far off as long as the job market and inflation continue to improve.

****SD: But, Four Economists See a Surprise from the Fed This Week

If the Fed wasn’t already thinking of holding rates steady, it certainly ought to now
Matt Phillips – Quartz
As a share of GDP, US personal consumption accounts for roughly 70%. So if consumers aren’t consuming, you’ve got a problem. Which brings us to today’s update on US retail sales. The headline number was flat, driven by a large decline in sales of gasoline (due to lower prices) and a slowdown in auto purchases.

ECB buying set to distort corporate bonds
Gavin Jackson and Thomas Hale – Financial Times
Before the European Central Bank announced its plans to buy corporate bonds last week, something peculiar happened in another corner of Germany. Berlin Hyp, a German bank, was paid to borrow money. It sold a EUR500m covered bond, a type of European debt instrument backed by mortgages, priced at a yield of minus 0.16 per cent. The sale marked the first time a non-government issuer had been able to sell a bond in euros at a negative yield. It was made possible by the ECB’s covered bond purchases — EUR161bn since late 2014 — which have dramatically pushed down the cost of borrowing.

Central Banks’ Frankenstein Bonds
Lisa Abramowicz – Bloomberg
Good luck trying to find a debt investor who views negative interest-rate policies in a positive light. More often than not, words like “scared,” “cautious” and “worrisome” are used to describe reaction to a distortion of markets that is defying conventional investing logic. As BlackRock CEO Larry Fink put it in a recent article, “Let’s be clear: Negative interest rates are terrible.”
This fear and concern have taken on new urgency in the past few months after Japan jumped on the bandwagon with a negative-yield policy in January. While European central bankers first started experimenting with this tool in 2014, the volume of such notes has ballooned in recent months, now accounting for more than 46 percent of all non-U.S. sovereign bonds, according to an analysis by Jim Bianco, president of Bianco Research in Chicago.

****SD: So many bonds that no torch-wielding mob can destroy them.

Monetary policy is not enough to beat deflation
Financial Times
Monetary policymakers are on the defensive. After a decade in which central banks steered the global economy out of crisis, faith in their powers is waning. In the past week, the European Central Bank and Bank of Japan governors have fought back against the sceptics, underlining their resolve to defeat deflation and revive anaemic growth. Mario Draghi and Haruhiko Kuroda are right to contend that their policies are having an effect. Yet as they delve ever deeper in the toolbox of unorthodox policy, the risks of unintended consequences are increasing, and the need for governments to play their part is ever more apparent.

BOJ keeps policy steady, offers gloomier view on economy, inflation
Leika Kihara – Reuters
The Bank of Japan said on Tuesday it would maintain its massive asset buying program at existing levels but offered a bleaker view of the economy, suggesting it may roll out more stimulus as it struggles to reach an elusive inflation target.

Bank of England Sees Threat From Hackers
Kit Chellel – Bloomberg
The Bank of England is frequently faced with cyber threats as hackers probe for vulnerabilities in the central bank’s computer systems. The revelation was made in a response by the U.K. central bank to a Freedom of Information request by Bloomberg News. The BOE declined to release data about the number of times it’s been attacked and its spending on external cyber-security companies, citing an exemption from requirements linked to the prevention of crime.

****SD: Hackers eh? Let’s check in on Bangladesh…

Man in Manila gets $30 million cash from cyber heist; Bangladesh central bank governor quits
Bangladesh’s central bank governor resigned on Tuesday over the theft of $81 million from the bank’s U.S. account, as details emerged in the Philippines that $30 million of the money was delivered in cash to a casino junket operator in Manila. The rest of the money hackers stole from the Bangladesh Bank’s account at the New York Federal Reserve, one of the largest cyber heists in history, went to two casinos, officials told a Philippines Senate hearing into the scandal.

Don’t Blame the Fed: Bangladesh Seen at Fault for Bank Heist
David Tweed and Arun Devnath – Bloomberg
Instead of blaming the U.S. Federal Reserve after $101 million went missing, Bangladesh should look in the mirror. That’s the conclusion of cyber security experts after a breach that saw funds from Bangladesh’s account at the New York Fed transferred to the Philippines and beyond. Attempts to withdraw another $850 million were foiled in part because the hackers misspelled the name of one of the recipients.

****SD: Also, Bangladesh bank boss Atiur Rahman quits over $100m cyber-fraud


British Authorities End Criminal Inquiry Into Currency Markets
Chad Bray – NY Times
British authorities said on Tuesday that they had closed a long-running criminal investigation into the potential rigging of the foreign currency market without bringing any charges.

China Drafts Rules for Tobin Tax on Currency Transactions
China’s central bank has drafted rules for a tax on foreign-exchange transactions that would help curb currency speculation, according to people with knowledge of the matter. The initial rate of the so-called Tobin tax may be kept at zero to allow authorities time to refine the rules, said the people, who asked not to be identified as the discussions are private. The tax is not designed to disrupt hedging and other foreign-exchange transactions undertaken by companies, they said.

****SD: Also see Big Money Gets on China’s Lifeboats

Central banks: Has Super Mario brokered a currency war cease-fire?
Karen Tso – CNBC
It has been a brutal race to the bottom for currencies. And there have been very few winners as economies remain bruised and battered after interest rates were slashed, the lower bound tested through negative deposit rates and monetary policy re-written to explore more inventive options. But in the latest chapter, as Europe’s central bank gets more abstract, action has swung to credit easing rather than the hefty burden born by rate cuts This maybe, just maybe, could signal the end of the road for not only negative rates but currency wars.

Study: Policy Improvements Needed to Avoid Currency Crisis
Profit & Loss
Policy improvement and cooperation between monetary and fiscal policy is essential in order to avoid a major currency or debt crisis, according to a new academic paper. Written by Richard Preschern, co-founder and chief risk officer at FX Vision, and Friedrich Schneider, a professor at Johannes Kepler University in Austria, the paper argues that the current monetary fiscal policies being enacted by governments and central banks in response to the financial crisis are waning, possibly to the point of becoming counterproductive. “Today, we generally perceive a decreasing positive effect from loose monetary policy and it’s widely reported that central banks are running out of tools to accommodate various economies,” Preschern tells Profit & Loss.

Egypt’s Central Bank Seen Escalating War on Dollar Black Market
Ahmed Feteha – Bloomberg
Egypt’s central bank Governor Tarek Amer is stepping up the war on the black market for dollars, seeking to build confidence in the Egyptian pound after the biggest devaluation since 2003.

Emerging-Market Currency Rally Is Too Good to Last
James Mackintosh – WSJ
Emerging markets have been caught between expectations of a stronger U.S. dollar and fear that China will allow a much weaker yuan.

On its First Day Trading Ethereum Bitfinex Controlled 25% of ETH/USD Volume
Finance Magnates
Cryptocurrency exchange Bitfinex only started supporting Ether trading on Monday (March 14th at noon UTC) and it has already made a big splash. Bitfinex very quickly snapped up the number two spot in terms of USD to ETH trading volume with about 25% of the total market share.

Markit Launches FX Trade Affirmation Service
Press Release
Markit (Nasdaq:MRKT), a leading global provider of financial information services, today announced the launch of a new service that enables banks to affirm FX trades executed by inter dealer brokers. Seven inter dealer brokers and eight banks have signed to use the service, which expands Markit’s centralised solutions for the FX market.

Indexes & Index Products

Fund managers lose out from benchmarking
John Plender – Financial Times
The past year has not been a happy one for value managers who invest on the basis of fundamentals. Momentum traders who chase short-term trends have, by contrast, been making hay. Yet there is a conundrum about precisely where their profits come from, or rather, at whose expense. Value managers have no interest in buying the momentum folk out of their overvalued stocks. So who is on the wrong side of what, in the short run, is a winning trade for the momentum brigade?

SGX plans to list contracts on MSCI China Free Index
Singapore Exchange (SGX) today announced its intention to list contracts on the MSCI China Free IndexSM. These new SGX MSCI China Free contracts will further broaden the suite of China-linked risk management products available on SGX, with specific relevance to global institutional investors in China equities.

Where’s the S&P 500 going? Watch the yuan
Matt Clinch – CNBC
Jittery investors searching for ideas on where major U.S. equity benchmarks are heading might want to take a look at the Chinese yuan, according to new research by Societe Generale. “China’s economy and the yuan remain a major source of uncertainty for markets, a sharp weakening in the RMB (yuan) would likely cause a rebound in volatility and decline in the S&P 500,” Laure Fauchet, a thematic strategist at Societe Generale, told CNBC via email. The research looks at the percentage change, from the month before, for both the S&P 500 and the yuan, rolled every day. While the French bank caveats that it is not necessarily a robust forward indicator for the S&P, it does show a correlation between the two assets with the Chinese currency often moving ahead of the U.S. index.

ETFs/ETPs Listed In The United States Have Gathered 1.53 Billion US Dollars In Net New Assets In February 2016, According To ETFGI
Press Release
In February 2016, ETFs/ETPs listed in the United States gathered net inflows of US$1.53 Bn in February 2016, according to preliminary data from ETFGI’s February 2016 global ETF and ETP industry insights report.

ICE Clear Credit launches Asian corporate index and sovereign CDS clearing; YTD buy side single name notional amount cleared surpasses total 2015 notional
Press Release
Intercontinental Exchange (NYSE: ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, introduced credit default swap (CDS) clearing today for the iTraxx Australia and iTraxx Asia ex-Japan Investment Grade indices, and the following sovereign names: Australia, China, Indonesia, Korea, Malaysia and the Philippines.


BOJ’s negative rate move proving a gold mine for bullion retailers
The Japan Times
The nation’s negative interest rates are boosting demand for gold, according to its biggest bullion retailer. International prices have rallied 18 percent this year as investors seek a haven from financial market turmoil. For individual investors, the Bank of Japan’s surprise move in January is adding to gold’s allure, according to Takahiro Ito, chief manager at Tanaka Kikinzoku Kogyo K.K.’s store in Tokyo’s Ginza shopping district. That’s helped lift retail prices to their highest since July.

For gold, it’s 1999 all over again: Technician
Alex Rosenberg – CNBC
Gold prices have risen nicely this year, but market history suggests that those expecting further gains will be badly disappointed, Oppenheimer technical analyst Ari Wald warns. “It’s time to take profits in gold,” Wald wrote to CNBC on Monday. For the technician, gold’s recent breach of its long-term downtrend calls to mind 1999, when gold rose powerfully in a short period of time to break out of a period of progressively lower prices.

****SD: Stock up for Y2K.

BlackRock Global ETP Landscape Report
Press Release
Gold And Treasuries Drive Global ETP Flows Amid Concerns Over Growth, Oil And Volatility
In the BlackRock Global ETP Landscape report, the Industry Highlights provides commentary on the global Exchange Traded Product (ETP) industry as of February 2016.


In Financially Distressed Chicago, Public And Private Lines Are Blurred
International Business Times
May 15, 2015, was an important day in the world of Chicago’s city finances. On that day the city reached a deal with Barclays to take over a $100 million soured bet on an interest rate swap. Inked mostly in the early 2000s, these specialty financial products backfired after the 2008 financial crisis, saddling Chicago taxpayers with hundreds of millions of dollars in fees.

Morgan Stanley’s guide to surviving in an investment bank until 2018
With most banks still not meeting their costs of capital, pruning senior staff, weeding out juniors, and looking for ways to cut infrastructure costs, it’s harder than it’s ever been before to have a career that endures in investment banking. If you want to survive for the next two years – let alone the next ten or twenty – Morgan Stanley’s banking analysts and Oliver Wyman have some suggestions for you. The researchers and the consultancy firm have just released their annual ‘Blue Paper’ on banking for 2016. If you’re looking for a strategic road map to banking career survival, this is probably as close as you’ll come.

At Dizzying Heights, Prices of Luxury Apartments May Have Found Ceiling
Charles V. Bagli – NY Times
It’s a question of supply and demand. On a seven-block stretch of 57th Street and nearby, there are at least 300 apartments in seven buildings priced at a billionaire-friendly $5,000 a square foot either for sale or scheduled to go on the market in the next 24 months. But despite a record $100 million sale of a penthouse last year, the volume of sales at that level topped out two years ago, at 55 transactions. In 2015, there were just 47 sales, according to CityRealty, a real estate data and listings website. And with China’s economy markedly slowed and prices for oil and other commodities falling, brokers and developers think the number could be even lower this year.

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