First Impressions


NOTE: JLN Financials will be going on vacation starting Wednesday, December 24. We will not publish again till January 5, 2014. We wish all our readers (and everyone else too) a happy and safe holiday. See you in the new year!


SEFCON Snapshot 2014, Part III: The New Market Structure

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 III looks at the new market structure brought about by the creation of SEFs and the regulations that guide them.

While many of the pieces are now in place, this structure is still taking shape, and in some cases, the rules have led to uncertainty and unintended consequences in the market structure.

A key aim of Dodd-Frank and other regulations was increased competition, but is a true “all-to-all” market possible? Is there a cost in terms of liquidity from these and other regulations? Is aggregation of separate liquidity pools a viable option?

Watch the video »


Quote of the Day

“This is not going to prevent all mistakes or missteps in the future but it goes a long way to setting the platform and some standards. They’ve got a fairly clear articulation here that if they don’t do these things there will be consequences.”

Rev. Seamus Finn of the Missionary Oblates of Mary Immaculate, an active J.P. Morgan shareholder in the story, ” How J.P. Morgan Does Business, in 100 Pages”.

Lead Stories

Russia bails out Trust Bank in first rouble crisis rescue
Katya Golubkova and Oksana Kobzeva – Reuters
The Russian central bank on Monday announced the first bailout of the rouble crisis, providing up to $540 million to rescue Trust Bank and taking over supervision of the mid-sized lender.
The move prompted questions about the banking system despite the state having pledged a big capital boost for the sector.

China’s shadow banking adapts and grows as rules tighten
Jake Spring – Reuters
New players in China’s shadow banking sector are growing rapidly despite attempts to clamp down on opaque lending, taking advantage of a regulatory anomaly to prosper but also raising the risks of a build-up of debt in the slowing economy.
Authorities have sought to rein in the riskiest elements of less-regulated lending after a series of defaults, including a 4 billion yuan ($640 million) credit product backed by Evergrowing Bank in September, because of the danger such debts could pose to the health of the world’s second-largest economy.

How J.P. Morgan Does Business, in 100 Pages
By Emily Glazer
J.P. Morgan Chase & Co. released a report on how it does business Friday that acknowledges its mistakes and details how it is improving its culture and controls among other things. The report was initiated in response to a request from a shareholder group led by The Sisters of Charity of Saint Elizabeth, a member of the Interfaith Center on Corporate Responsibility. The shareholders had asked for J.P. Morgan to conduct a business standards review report.

ICE Has Unlikely Ally on Trading Proposal; Credit Suisse Executives Back Plan to Bring Trading to Exchanges
By Bradley Hope
Jeffrey Sprecher, chief executive of Intercontinental Exchange Inc. , recruited an unlikely ally in his efforts to revamp the U.S. stock market and bring more trading back onto exchanges.

China Investigates Possible Stock-Price Manipulation; Move Follows Recent Surge in Chinese Share Market
By Lingling Wei
BEIJING?China is investigating possible stock-price manipulation amid the recent run-up in the country’s equity market, according to officials with direct knowledge of the matter, a move that serves as a stark reminder of the problems that have long haunted Chinese stocks.

The $6.3 Trillion Frenzy That Vanquished Treasury Bears
By Daniel Kruger, Bloomberg
When it comes to the ability of the U.S. government to finance itself in the bond market, this year will go down as as one of the best on record — and dealers say 2015 will be no different.

Junk Bond Traders’ Hiring by Deutsche Bank Shows Need for Humans
Lisa Abramowicz – Bloomberg
Machines are having a hard time infiltrating junk-bond trading like they have the Treasury market. That means banks have to keep teams of human traders to remain relevant in this lucrative market.
Deutsche Bank AG (DBK) has spent a year rebuilding its U.S. team after several departures, and its latest addition, Mark Doria, is set to arrive in January from Citigroup Inc. (C) His move will bring the number of high-yield bond traders in New York to six after adding at least three others this year, according to Amanda Williams, a spokeswoman.

We Really Should Regulate High-Risk Bank Derivatives – Letters to the Editor
Thomas Hoenig, FDIC Vice Chairman – Wall Street Journal
In response to your editorial “Let’s Pretend Dodd-Frank Works” (Dec. 12): Those who believe in markets, as I do, should be concerned that Congress rolled back one of the few effective mechanisms in the Dodd-Frank Act to reduce government protections and subsidies for some of the highest-risk derivatives. Therefore, I take issue with a point in your editorial that implies that the swaps push-out requirement is insignificant.

US regulator probes ETF pricing structures
Tracy Alloway in New York, FT
Extreme movements in the prices of bonds, commodities and other assets have prompted regulators at the Federal Reserve Bank of New York to take a closer look at the inner workings of exchange traded funds.

Central Banks

How the NY Fed Bent the Rules for Citibank
Lynnley Browning – Newsweek
In spring 2009, a bank examiner inside the Federal Reserve Bank of New York called colleagues with worrisome news: Yet another crisis was brewing for Citigroup, the global banking giant that despite taking more than $476 billion in bailout cash and guarantees, the most of any rescued bank, was near collapse.

Don’t Politicize the New York Federal Reserve Bank
Stephen Matteo Miller – US News
The Federal Reserve Bank of New York has endured an uncomfortable amount of public scrutiny of late. New York Fed President William Dudley, for example, recently appeared before a less than amicable Senate Banking Committee. One member of that committee, Sen. Jack Reed, D-R.I., would like to require that any future New York Fed presidents appear before the committee as a prerequisite of the job. Reed introduced a bill that would require Dudley’s successor to be presidentially nominated and Senate confirmed. The bill aims to replace existing, indirect political accountability with direct political accountability, but it’s not entirely clear what that would solve.

If Only All Central Banks Could Be Like the Federal Reserve
The U.S. recovery is starting to look halfway respectable. Europe’s economies, meanwhile, face the risk of a third recession in seven years. There’s a lesson in that contrast: Good economic policy means never having to ask your central bank to be a hero.
It’s too soon to know how the story of the Great Recession will end. When the history is written, though, one theme will be paramount: It was the world’s central bankers, not its elected politicians, who had to deal with the crisis — a task for which they weren’t adequately equipped (and still aren’t). Some rose to the challenge; others didn’t.

Central Banks On Diverging Paths In 2015
Kitco News via Forbes
With the 2008-2009 global financial crisis finally fading into the rear view mirror, focus turns the Big Three global central banks —the U.S. Federal Reserve, Japan’s Bank of Japan (BOJ) and the euro-zone’s European Central Bank (ECB).
Is growth finally on solid enough footing to see a shift from the ultra-low interest rates and extraordinary monetary policy measures that have defined central bank activities in recent years? Let’s take a look.


Ruble Swap Shows China Challenging IMF as Emergency Lender
Ye Xie – Bloomberg
China is stepping up its role as the lender of last resort to some of the world’s most financially strapped countries.
Chinese officials signaled Saturday that they are willing to expand a $24 billion currency swap program to help Russia weather the worst economic crisis since the 1998 default. China has provided $2.3 billion in funds to Argentina since October as part of a currency swap, and last month it lent $4 billion to Venezuela, whose reserves cover just two years of debt payments.

Ruble’s Rescue Comes With Cost for Russian Economy
Ksenia Galouchko and Lyubov Pronina – Bloomberg
Russian policy makers are signaling they’re prepared to sacrifice economic growth in order to stabilize the ruble.
The Bank of Russia raised its benchmark interest rate by the most in 16 years last week and created a money-market cash squeeze, helping the ruble strengthen 45 percent from a record low on Dec. 16. The consequence of this means the oil producer’s economy may shrink 7.9 percent in 2015, Danske Bank A/S said on Dec. 19, revising a view for a 1.8 percent contraction.

Dollar Gains Evoke Connally’s ‘Your Problem’ Rebuke: Currencies
Liz Capo McCormick and Eshe Nelson – Bloomberg
Former Treasury Secretary John Connally summed up the U.S.’s attitude toward nations bemoaning the dollar’s gyrations in 1971 when he said “it’s our currency, but it’s your problem.” Today, the phrase is gaining new relevance with the greenback wrapping up one of its best years ever.
It’s gained versus all 31 major currencies tracked by Bloomberg, while an index of 20 emerging-market exchange rates fell this month to its lowest level in more than a decade. Nations from Mexico to India and Indonesia have intervened in markets in an attempt to prop up their currencies.

Research Firm Says Virtual Currencies Will Be a ‘Major Disruptive Force’ Within Five Years Inside Bitcoins
An analysis of the cryptocurrency industry by Canadian research firm Technology Strategies International (TSI) concludes that virtual currencies are likely to be a “major disruptive force” within five years. The report recommends that companies that could be impacted by “Bitcoin 2.0? applications should begin “preparing themselves now.”


Gold Drops Most in Two Weeks as Volatility Reaches 11-Month High
Debarati Roy and Nicholas Larkin – Bloomberg
Gold futures fell the most in more than two weeks as a slump in oil cut the appeal of the metal as an inflation hedge. Volatility in the metal rose to the highest since January.
The gauge of 60-day historical volatility reached 18.4, the highest since Jan. 10. Aggregate trading was 22 percent lower than the average in the past 100 days for this time, according to data compiled by Bloomberg.

UK to extend Libor manipulation laws to cover gold, oil, silver
Britain will widen the scope of laws which make the manipulation of market benchmarks a criminal offense to include seven more rates covering the currency, gold, oil and silver markets by April 1, the government said on Monday.

$300,000 in gold missing from Ukraine Central Bank after swapped for lead bricks
Cunning fraudsters have conned the Ukraine Central Bank branch in Odessa into buying $300,000 worth of gold which turned out to be lead daubed with gold paint.
“A criminal case has been opened and we are now carrying out an investigation to identify those involved in the crime,” a spokesman for the Odessa police force is quoted by Vesti.
The news was first reported by Odessa’s State Ministry of Internal Affairs.

Speculators Squaring Gold Trades Ahead Of FOMC
Hedge Funds and money managers squared their books ahead of the holidays and an uncertain Federal Open Market Committee meeting, according to the latest trade data from the U.S. Commodity Futures Trading Commission.

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