First Impressions

Riders on the Storm: Orc Group’s Troels Philip Jensen Looks at Consolidation in the Vendor Space

The financial sector has been feeling the squeeze over the past few years. Lower trading volume, sustained low volatility and added expense from new regulations have combined to create a precarious situation for independent service vendors serving the listed derivatives space, and has led to a wave of consolidation among its players. Orc Group’s Troels Philip Jensen says the trend will eventually subside, but only the most strategic-thinking firms will survive and thrive.

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Quote of the Day

“The biggest surprise for me is the lack of interest from the buyside for [central limit order books or CLOB]. The best way to break up the dual market structure and boost transparency is through using a CLOB and I’m surprised at how slow progress has been.”

Michael O’Brien, director of global trading at Eaton Vance in the story, “Swaps dealers warn on market transparency”.

Lead Stories

Swaps dealers warn on market transparency
Gina Chon in Washington and Michael MacKenzie in New York – Financial Times
Swaps market dealers are warning that efforts to reform the vast over-the-counter derivatives industry in the US are not delivering the greater transparency and increased competition desired by regulators.

***DA: Nor have they mitigated systemic risk. In fact, what have they done, except make everything more expensive for participants?

Fed and ECB drive bond market divergence
Michael Mackenzie in New York – Financial Times
Not for the first time, central banks have moved the markets. Now, ahead of next week’s Federal Reserve meeting, investors are scrambling to adjust to the prospects of a rise in US interest rates.

***DA: I remember a day when fundamentals drove the market. Seems rather quaint now.

Swedish CoCos Meet Huge Investor Interest as Risks Parsed
Frances Schwartzkopff and Charles Daly – Bloomberg
After enduring some of the world’s toughest capital requirements, banks in Sweden are finding that a more onerous regulatory environment has its own rewards.

***DA: I prefer Swiss cocoas.

Argentina concedes creditors do not want in on bond swap
Alejandro Lifschitz – Reuters
A majority of Argentina’s creditors are opposed to their bonds being moved to a new jurisdiction under a government proposal that would sidestep a U.S. court ruling that toppled it into default, the country’s economy minister said on Tuesday.

***DA: The U.S. legal system is something we all complain about until we consider the alternatives.

LSE bond platform hires Amanda Meatto from ICE
Sarah Krouse – Financial News
MTS, the London Stock Exchange Group’s electronic fixed income trading venue, has made a senior hire from IntercontinentalExchange as it continues its push for growth in the US.

Europe has to do whatever it takes
Martin Wolf – Financial Times
In the second quarter of this year, real domestic demand in the eurozone was 5 per cent lower than in the first quarter of 2008. The eurozone’s unemployment rate has risen by just under 5 percentage points since 2008. In the year to July 2014, consumer price inflation in the eurozone was 0.4 per cent. From these telling facts one can conclude three simple things: the eurozone is in a depression; lack of demand has played a crucial role; and the European Central Bank has failed to deliver on its own price-stability target. This is not just sad. It is dangerous.

Should Mario Draghi Spend More Time on Twitter?
Todd Buell – MoneyBeat – WSJ
Should European Central Bank President Mario Draghi spend more time checking out social media to help him gauge the state of the economy. Two scholars from the Dutch national statistics agency CBS, Piet J.H. Daas and Marco J.H. Puts, argue in a recent paper that following social media might be a faster way for policymakers to gauge consumer confidence that waiting for more conventional surveys.

***DA: He had better practice his duckface pose. Oh, wait. That’s Instagram.

Central Banks

The Federal Reserve’s Too Cozy Relations With Banks
Stephen Haber And Ross Levine – WSJ
The Federal Reserve was established in 1914 as independent of the president and Congress—and for good reason. The Fed’s founders understood that politicians had to be blocked from using monetary policy to juice the economy before elections. Extensive research supports the wisdom of the Fed’s political independence; monetary policy works best when it is insulated from the vagaries of election cycles.

***DA: If you read Andrew Ross Sorkin’s “Too Big to Fail” you know exactly how monetary policy works in this country.

Big banks need to run for cover
Darrell Delamaide – USA TODAY
Regulators are coming down harder than ever on big banks, and a Senate hearing Tuesday indicated they are all out of friends to defend them on Capitol Hill.
The Senate Banking Committee once again convened the six main financial regulatory agencies to testify about progress in implementing the Dodd-Frank reforms.

***DA: This would be a good time and place for Elizabeth Warren to kick off her Presidential campaign.

Fed Weighs Change to Rate Guidance for Added Flexibility
Jeff Kearns, Christopher Condon and Steve Matthews – Bloomberg
Federal Reserve officials are considering whether to alter their guidance on the likely path of interest rates to give them more flexibility to react to changes in the economy.
The Fed has said since March that its benchmark rate would stay low for a “considerable time” after it completes monthly bond buying intended to boost growth. With purchases set to end late this year and the Fed nearing its full-employment goal, that assurance will soon become obsolete.

Carney Can’t Escape Housing as Debt Colors Rates Policy
Neil Callanan – Bloomberg
Bank of England Governor Mark Carney can’t get away from the housing market.

Chinese Central Bank Adrift Without Policy Anchor Amid Credit Slump
China’s central bank chief is learning you can’t control what you can’t cut.
The People’s Bank of China’s removal of state controls on borrowing costs last year has left Governor Zhou Xiaochuan struggling to influence rates with tools such as adjusting some banks’ reserve requirements and targeted liquidity injections. Those steps haven’t stopped new credit and money-supply growth from slowing.

Speech Given By Mark Carney, Governor Of The Bank Of England At The 146th Annual Trades Union Congress, Liverpool 9 September 2014 – Rate Rises Can Be Expected To Be Gradual And Limited


FX vol is back, say relieved FX analysts
David Keohane – Financial Times
FX vol is edging back and we have the notes to prove it. The question is whether they are reflecting an overreaction to a small jump, after a period of slumped volumes and returns, or a real shift with further to go?

***DA: Or a shift from premium selling for what has been free income to option buying for insurance purposes.

Barclays Cuts Euro Forecast to Most Bearish on Economy Slowdown
John Detrixhe – Bloomberg
Barclays Plc lowered its one-year euro forecast to the most bearish of Wall Street banks as the currency union’s economy deteriorates and as increasingly aggressive monetary policy signals further depreciation.
Europe’s common currency will weaken to $1.27 in a month, to $1.22 in three months and to $1.10 in a year, strategists led by Jose Wynne said in a report today. That compares with forecasts of $1.30 by the end of 2014 and $1.27 in a year, according to the median estimate of economists and strategists surveyed by Bloomberg. Morgan Stanley projects the euro weakening to $1.20 by the end of the third quarter of 2015, according to data compiled by Bloomberg.

***DA: Goldman last week said dollar parity by 2017. Why stop there? There is a technical gap down at 85.00 from 2001 that still needs to be filled. I still have my order in.

BitBeat: Nakamoto vs. the Hacker; Apple’s Bitcoin Killer? – MoneyBeat
Paul Vigna and Michael J. Casey – MoneyBeat – WSJ
We’re still trying to dig into this Satoshi Nakamoto-hacker story, and while it seems credible to believe that somebody somehow broke into Nakamoto’s email account, that’s about all that’s clear.

Indexes & Index Products

London Stock Exchange Shareholders Approve Deal for Russell Investments
Chad Bray – NY Times
The London Stock Exchange said on Wednesday that its shareholders had voted overwhelmingly in favor of its acquisition of Russell Investments, the owner of the Russell 2000 stock market index.
In June, the exchange agreed to acquire Russell for $2.7 billion in cash after confirming a month earlier that it was in discussions with Northwestern Mutual, Russell’s majority owner, about a possible sale.

S&P, Markit finalists for $1 billion-plus Barclays index unit – sources
Mike Stone and Jessica Toonkel – Reuters
Index provider Standard & Poor’s and financial information services provider Markit Ltd (MRKT.O) have emerged as final bidders for Barclays Plc’s (BARC.L) index business, which could fetch more than $1 billion, according to people familiar with the matter.
The British bank has narrowed the list of bidders to McGraw Hill Financial Inc’s (MHFI.N) S&P Dow Jones Indices and Markit after an auction that also drew interest from several parties including MSCI Inc (MSCI.N) and Bloomberg LP, the people said on Tuesday.

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