First Impressions

Direct Match’s Jim Greco and William O’Brien Talk Treasuries – Traded Electronically
Sarah Rudolph – JLN

Direct Match is a FINRA-registered broker dealer that recently announced plans to offer an all-to-all electronic trading platform for US Treasuries later this year – the first of its kind. JLN spoke with Jim Greco, the company’s CEO and co-founder, and William O’Brien, its new executive chairman, about the why and the how of the new platform.

Q: How did the idea of founding Direct Match come about?

Jim: I’ve been involved in the markets for a long time, on different sides. I worked for Getco and built the platform KCG Acknowledge, which was a bilateral streaming platform for trading US Treasuries. I was also a Treasury trader. I saw the deterioration in my ability to make markets with interdealer brokers.

To read more of the story, go here

Quote of the Day

“My one experience of running banks is that the longer they stay in the public sector, the greater the likelihood that you will lose value.”

Sir Nick Macpherson, outgoing head of the U.K. Treasury, in the story, “Sell RBS at a loss, says outgoing Treasury head”

Lead Stories

Sovereign-Debt Conundrum Sets Up EU for Banking-Union Stalemate
Rebecca Christie – Bloomberg
Europe’s drive to deepen integration of the euro-area banking system has bogged down as policy makers debate ways to rein in banks’ holdings of government debt. This sovereign-debt issue has gained in importance in recent months because of Germany’s insistence that the 19-nation currency bloc should reduce the risks banks are facing, including sovereign debt on their balance sheets, before creating a common deposit insurance system to round out the so-called banking union.

Credit Managers Most Pessimistic on Defaults Since 2009: Survey
Claire Boston – Bloomberg
Debt investors’ outlook for corporate-credit defaults is the most negative in almost seven years on weakening global growth, according to an International Association of Credit Portfolio Managers survey. The credit default outlook index, in which a negative number indicates an expectation of more defaults over the next 12 months, fell in March to minus 56.2 — the lowest reading since June 2009 — from minus 54.8 in December, according to the IACPM quarterly review released Thursday. Investors have economic concerns in every global region and across market segments including corporate, commercial real estate, and consumer and retail mortgage debt.

One Bright Spot for Bank Trading – Rates
Ben Eisen – WSJ
An otherwise grim recent history for bank trading revenue appears to be showing an unlikely bright spot: government bonds. Bank of America Corp. said Thursday that sales and trading revenue in its fixed income, currencies and commodities group dropped 17% last quarter from a year earlier due partly to low interest rates. But the “weak trading environment” for credit products and foreign exchange was “partially offset by improved performance in rates and client financing.”

Sell RBS at a loss, says outgoing Treasury head
George Parker – Financial Times
George Osborne will have to consider selling the public stake in Royal Bank of Scotland at a loss because keeping it in the public sector is bad for the bank and the economy, the outgoing head of the Treasury has claimed. Sir Nick Macpherson said it was “going to be tricky” for the state to sell all of its £19.2bn stake in RBS before the next election — a sale intended by Mr Osborne to deliver “the largest privatisation proceeds of all time”.

Bank of America first-quarter profits fall 18% on weak trading
The Guardian
Bank of America’s first-quarter profit fell more than 18% from a year earlier, hurt by weak performance in its trading unit. Shares of Bank of America Corp slipped about 1% before the stock market opened on Thursday after the bank announced trading revenue fell more than 15% to $3.3bn as it made less money from investment banking fees.

****SD: Other related big bank issues in the news today inlcude Wells Fargo Profit Drops as Energy Pain Spreads and US banks spell out toll of low oil prices. Plus we have some requisite layoff stories from today: Macquarie lays off 15 percent of U.S. investment banking group: sources, BNP Plans Up to 675 Job Cuts at Investment-Banking Division and then a good side to the cuts,Revenue Down? No Problem: Bank Stocks Climb With Cost Cuts

FHFA to Reduce Mortgage Balances for Some Delinquent Homeowners
The federal regulator for Fannie Mae and Freddie Mac approved a plan to reduce mortgage balances for some American homeowners who have been struggling to make payments in the aftermath of the real estate crash.

What does cutting rates on student loans do?
Susan M. Dynarski – Brookings Institution
Are lower interest rates the best route to a fairer, more effective student loan program? From the rhetoric heard in Congress and on the campaign trail, the answer appears to be “yes.” But both empirical evidence and economic theory show that lowering interest rates is a blunt, ineffective, and expensive tool for increasing schooling and reducing loan defaults. There are much better ways to achieve these important goals.

Only 1 Industry Group Is Trading Below 1x Book Value
Advisor Perspectives
Financials have been pretty beaten up in 2016. The worst performing developed world industry group YTD have been the banks. Banks have fallen by over 16% (in USD) YTD. Of the five worst performing industry groups, three are from the financial sector. Surprisingly, the best performing industry group is also from the financial sector: real estate.

Central Banks

Say Goodbye to the Fed You Once Knew
In the panic of 1907, a son of Italian immigrants turned American bank executive highlighted a truism of global finance. Having stockpiled liquid assets ahead of potential financial turmoil, Amadeo Giannini stemmed a run on his bank by displaying his bulked-up gold reserves to a nervous public, offering to convert customers’ deposits into the precious metal at a time when other banks were refusing to do the same. It was a move that insulated Bank of Italy, later to be renamed Bank of America Corp., from much market mayhem at the time and demonstrated the importance of maintaining liquid buffers in the financial system—an importance that was arguably forgotten in the runup to the recent financial crisis. In the years before 2008, reserves held at large U.K. banks had drifted from around 30 percent of their total assets to a mere 1 percent, for instance.

With plenty of punch, central bankers wait in vain for the world to drink
Howard Schneider, John O’Donnell and Leika Kihara – Reuters
Central bankers usually worry about when to remove the punch bowl of cheap finance but when they gather in Washington, D.C. this week they will face a different problem: how to force the world to drink.

Negative Rates Around the World: How One Danish Couple Gets Paid Interest on Their Mortgage
Charles Duxbury and David Gauthier-Villars – WSJ
Hans Peter Christensen got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative 249 Danish kroner. Instead of paying interest on the loan he got a decade ago to buy a house in this northern Denmark city, his bank paid him the equivalent of $38 in interest for the quarter. As of Dec. 31, his mortgage rate, excluding fees, stood at negative 0.0562%.

Negative Rates: How One Swiss Bank Learned to Live in a Subzero World
John Letzing – WSJ
Negative interest rates are rattling banks around the world, but one small Swiss lender has learned to stop worrying and lean in. Alternative Bank Schweiz AG late last year became Switzerland’s first bank to comprehensively pass along negative rates to all of its customers. Violating an almost religious precept in the financial world, ABS informed its clients that they would have to pay a charge of at least 0.125% to maintain their accounts at the bank starting in 2016.

Central Bank Lending in a Liquidity Crisis
Cleveland Federal Reserve
Solvent banks may appear insolvent in the midst of a liquidity crisis, due to the plunge of their assets’ value below their normal value. The responsibility of the central bank is to provide liquidity to the banks that would be solvent under normal economic conditions, at lending terms consistent with normal market conditions.

What Negative Interest Rates Mean for the World
Mike Bird – WSJ
Central bankers around the world are pushing deeper into the once-unthinkable world of negative interest rates — essentially charging customers to hold their cash. Denmark set negative interest rates as early as 2012, followed by the European Central Bank in 2014. Since then, they’ve been joined by Switzerland and Sweden.

Japan’s Negative-Rate Experiment Is Floundering
Eleanor Warnock and Mayumi Negishi – WSJ
Japan’s two-month experiment with negative interest rates is producing some unexpected results. Trading has withered in Japan’s money markets, where big banks and others usually park their excess cash hoping to receive some interest—despite predictions from the Bank of Japan that its latest easing of monetary policy would spark more activity. And there has been a rush in demand for Japanese government bonds even as many yields went below zero.

****SD: And yet, BOJ ready to ease monetary policy further: Kuroda

Regulatory News

U.S. Regulators Seek Probes Into Leak of Banks’ Living Wills
Elizabeth Dexheimer – Bloomberg
U.S. regulators have asked their internal watchdogs to examine how assessments of banks’ plans for winding down during a potential bankruptcy ended up in a news article.

The Art and Science of Bank Regulation
Jacob M. Schlesinger – WSJ
When two sets of regulators pored over the books of two Wall Street titans, they reached very different conclusions. Federal Reserve officials felt Morgan Stanley had flunked the assignment to shed its “too big to fail” label, but said Goldman Sachs Group Inc. passed. Federal Deposit Insurance Corp. officials cleared Morgan Stanley, but failed Goldman.

How Regulators Mess With Bankers’ Minds, and Why That’s Good
Peter Eavis – NY Times
Bank regulators on Wednesday sent a message that big banks are still too big and too complex. They rejected special plans, called living wills, that the banks have to submit to show they can go through an orderly bankruptcy. The thinking behind the regulators’ call for living wills is that if a large bank crash is orderly, there will be no need to save it and no need for taxpayer bailouts.

A Peek behind the Curtain of Bank Supervision
Liberty Street Economics
Since the financial crisis, bank regulatory and supervisory policies have changed dramatically both in the United States (Dodd-Frank Wall Street Reform and Consumer Protection Act) and abroad (Third Basel Accord). While these shifts have occasioned much debate, the discussion surrounding supervision remains limited because most supervisory activity— both the amount of supervisory attention and the demands for corrective action by supervisors—is confidential. Drawing on our recent staff report “Parsing the Content of Bank Supervision,” this post provides a peek behind the scenes of bank supervision, presenting a statistical linguistic analysis based on confidential communications from Fed supervisors to the banks they supervise.

Statement of Chairman Timothy Massad on the Senate Agriculture Committee’s Passage of Legislation to Reauthorize the CFTC
Via email
I would like to thank the Senate Agriculture Committee members and staff for their work on reauthorization. While I have concerns with parts of this legislation, I hope those can be addressed as the process moves forward.
I also welcome today’s efforts to address the CFTC’s significant resource needs. The funding language proposed by Senator Stabenow addresses the fact that we are the only federal financial regulator without some form of fee-based funding. I believe it could be implemented without doing harm to the markets we regulate. I also appreciate Chairman Roberts’ recognition that the agency needs the necessary resources to carry out its responsibilities.
I am committed to continuing to work with Congress throughout this process, particularly on making sure end-users like agricultural producers can continue to safely and affordably use the derivatives markets, while ensuring these markets do not generate excessive risk to our financial system.

New Treasury rule could make it easier to hide money in the US, critics say
Jana Kasperkevic – The Guardian
The US Treasury is re-examining its policies regarding shell companies, which can serve as tax havens for the rich, in the wake of the leak of 11.5m documents from the Panama-based law firm Mossack Fonseca. Experts, however, are worried that instead of limiting the ability to hide wealth, one rule under review could actually enhance it.

EU weighs stress tests for banks’ climate risk exposure
Reuters via CNBC
Financial firms in the European Union may have to undergo stress tests on their exposure to climate change risk, such as floods, and to energy intensive sectors where assets are more exposed to repricing, a document seen by Reuters showed.


Brexit marks pound as currency to avoid
Roger Blitz – Financial Times
The market’s version of the naughty step was a crowded place at the start of the year. Areas behaving badly and causing investors no end of worry included the oil price, China, the US economy and Brexit fears. Three months on, Brexit has been abandoned by its fellow troublemakers, now that their behaviour has improved of late.

The Pound Is Fed Up With Brexit Already
Jon Sindreu – WSJ
The prospect of the U.K. leaving the European Union has pushed sterling lower this year, but there are signs the British currency is growing a thicker skin when it comes to ‘Brexit.’ On Thursday, the Bank of England warned that the in-out referendum on EU membership scheduled for June—popularly known as Brexit—is already denting companies’ plans to invest in the U.K.

Singapore Surprise Policy Easing Spurs Asia-Wide Currency Rout
Netty Idayu Ismail and Lilian Karunungan – Bloomberg
Singapore’s dollar slumped the most since August, dragging down other Asia-Pacific currencies, as surprise easing by the central bank fueled speculation other policy makers in the region will follow suit. New Zealand’s dollar, Malaysia’s ringgit and Indonesia’s rupiah also weakened after the Monetary Authority of Singapore said it would seek a policy of zero appreciation against an undisclosed basket of currencies, returning to a neutral stance it adopted in the global financial crisis in 2008. Singapore’s central bank cited “a less favorable external environment” in its policy statement, adding to concern the outlook for global growth is worsening.

Saudi Arabia and its US dollar peg dilemma
The National
The fall in oil prices has strained Arabian Gulf countries’ cur­rency policy, and increased the cost of carrying a US dollar peg. Most GCC countries are pegged to the US dollar to avoid currency fluctuation and eliminate uncertainties in international transactions (Kuwait is pegged to a basket of currencies dominated by the US dollar). This comes at the expense of monetary policy flexibility. Stable domestic currency and a fixed exchange rate imply that traders do not have to face currency risks, and therefore will be more willing to invest and facilitate trade. Since oil is the chief commodity in the GCC, and the oil price is fixed in dollars, any exchange rate fluctuation could drastically reduce revenue if the currencies were unpegged.

Plan for Woman on $10 Bill in Question as Hamilton Fans Lobby
Margaret Talev and Angela Greiling Keane – Bloomberg
The debate over Alexander Hamilton’s place on the $10 bill is turning into a saga that may be worthy of its own stage production. The hit musical “Hamilton” provoked a wave of interest in the man who established the U.S. financial system and whose face has long decorated the note. That’s propelled a concerted effort the keep him there. Now Treasury Secretary Jacob J. Lew is facing a backlash from women’s rights activists over his remarks that suggested a possible change to his widely-touted plan to put a woman in the portrait on the front of the bill.

“Your Wall Won’t Stop Bitcoin, Mr.Trump!”
Finance Magnates
When it was revealed last week that Donald Trump is considering banning money transfers to Mexico, we predicted such a move will have an enormous benefit for bitcoin adoption in North America. Now cryptocurrencies advocates are taking that message to the streets.


$1 trillion bond bubble ready to burst
Business Insider
There’s a huge bubble at the bottom of the bond market, and when it pops it could put $1 trillion at risk. “In short, we believe there is a corporate credit bubble in speculative grade credit. And the structural downside risks for high yield bonds and loans are material, with non-negligible downside risks to growth,” UBS’ Matthew Mish wrote in a note to clients. Mish argued that below the surface of corporate bonds, all the way down at the bottom-most levels of junk, there is a bubble forming. “We believe roughly 40% of all issuers are of the lowest quality, and roughly $1tn which will end up ‘distressed debt’ in this cycle,” Mish wrote. “Much of the debt was bought to pick-up yield linearly, but the default risk is exponential.”

Duration Risk: The Bomb Ticking Inside Today’s Bond Market
Mike Bird – WSJ
Investors looking for big, bold returns in government bonds could have found them in two very different places over the past year: Venezuela and Japan. Venezuela’s case is a familiar story to those who rummage around the dicier corners of the bond market: There were substantial questions about whether Venezuela would have the cash to repay a bond that came due on Feb. 26. It did, and an investor who took the risk of buying it a year earlier would have earned a 27% return.

A Perfect Climate for Bond-Like Stocks
In a world where China is growing 5%, the U.S. is growing 2%, the euro area is growing 1.5% and Japan is growing 0.5% (our forecasts), it’s hard to argue we have enough growth to result in aggregate equity multiple expansion.

Indexes & Index Products

Active UK equity funds — are they an exception to the rule?
The Evidence-Based Investor
It might sometimes seem that advocates of evidence-based investing like me take delight in the deluge of data undermining the rationale for using actively managed funds. Actually I don’t. I’m not opposed to active management in principle. I would even consider using an active fund myself if I really thought I could identify a manager who was going to outperform the market after costs for at least the next 15 years. I was, then, interested to read that Citywire has just produced new figures which claim to show that UK active managers are “smashing” passive funds. Citywire’s data appears to contradict recent research from S&P Dow Jones Indices showing how most active UK equity funds have underperformed the index over the last ten years.

CBOE Introduces First in Series of Indexes Designed to Target Investment Outcomes
Chicago Board Options Exchange (CBOE) today announced it has created a series of 13 “Buffer Protect Indexes,” the first in a family of options-based strategy performance benchmarks that are designed to target the outcomes of specific investment strategies.

BlackRock’s Fink Sees Fixed Income ETFs as Big Growth Area
Sabrina Wilmer – Bloomberg
BlackRock Inc.’s Laurence D. Fink said fixed income exchange-traded funds, which have trailed their stock counterparts in asset growth, are becoming increasingly popular among investors. At BlackRock, more than $27 billion of first-quarter inflows came from bond ETFs, driving the firm’s $36.1 billion of net long-term inflows. Overall, the industry saw record inflows during the quarter of $43.7 billion to global fixed-income ETFs.


Gold’s $33 billion man predicts this price by year-end
Eric Rosenbaum – CNBC
Gold’s first-quarter rally was staggering: It was the best quarter for gold in 30 years. The State Street Global Advisors’ $33 billion SPDR Gold Trust (GLD) took in $7 billion, more than outweighing all it lost in shareholder redemptions in 2014 and 2015. Gold is up 18 percent year-to-date through April 12. So what’s next for the wise investor? After another few days of risk-on equities’ rallying, is it time to take profits in gold? Or follow Warren Buffett’s advice, repeated in various forms over the years, to steer clear of the precious metal?

Gold Demand Jumps in Japan as Sub-Zero Rates Spur Call for Haven
Masumi Suga – Bloomberg
Gold sales surged in Japan through March after the country’s move to set negative interest rates sent investors scurrying for a shelter, a further sign that global central bank policy of keeping borrowing costs low or below zero is stoking demand for bullion.

Deutsche Bank settles U.S. gold, silver price-fixing litigation
Deutsche Bank AG agreed to settle U.S. lawsuits accusing it of conspiring with other banks to manipulate gold and silver prices at investors’ expense, court papers show.

Why the LME is zeroing in on warehouse load-out charges (again): Andy Home
A huge amount of aluminum is heading for the exit door on the London Metal Exchange (LME). The amount of metal earmarked for physical load-out from LME warehouses has mushroomed over the last month from 561,450 tonnes on March 14 to a current 1,257,650 tonnes. So-called canceled tonnage now represents almost half of all the aluminum in the system.


Kaspersky Sees More Financial-Markets Hacking After Bangladesh
Ilya Khrennikov and Ryan Chilcote – Bloomberg
The founder of cyber-security firm Kaspersky Lab expects more attacks on financial targets after hackers recently stole funds from Bangladesh’s central bank and moved the Russian ruble’s exchange rate.

Exclusive: JPMorgan targets millennials via Snapchat ads
Business Insider
The world’s biggest banks no longer compete with just each other to rake in top talent — they now battle with the likes of Google, Facebook, and a burgeoning raft of upstart technology companies for the best minds.

Putin Sees U.S., Goldman Sachs Behind Leak of Panama Papers
Jake Rudnitsky and Ilya Arkhipov – Bloomberg
President Vladimir Putin acknowledged that information in the Panama Papers implicating people in his inner circle to offshore transactions was accurate, but dismissed the leak — which he tied to Goldman Sachs Group Inc. — as part of U.S. efforts to influence Russia’s upcoming elections.

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