First Impressions

We Like Big Brother! Why Options Exchanges Want OCC’s Eyes
Jim Kharouf – John Lothian News

Is this the holy grail of risk management? Maybe.

The OCC is the sole clearing house for the US options industry, what many would call a shining example of centralized clearing in today’s marketplace – with low clearing fees (even with the recent fee change), a straightforward focus on clearing – and with a new directive to take on a greater risk management role.

An interesting discussion percolated during the Options Industry Conference last week in Austin, Texas, where several exchange leaders promoted the concept of having OCC as THE central risk manager across the 13 US options markets.

Since it clears every US options trade, it is in the unique position of having a view of risk across the 13 different equity exchanges – every trade, every participant. That also means it could theoretically stop a rogue trader or algorithm before it sinks a firm or multiple firms.

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Quote of the Day

“It’s a nice Goldilocks situation. You have decent enough growth, strong enough earnings that are good for high-yield bonds, but not so strong that rates are going to rise dramatically or quickly. It’s not a time to be an aggressive buyer, but the spreads are moderately attractive.”

Alan Higgins, chief investment officer for Coutts & Co. in the story, “Junk-Bond Traders Pile Onto Hedges Amid Fed After Rally”.

Lead Stories

Weak renminbi fails to deter strong appetite for dim sum bonds
Josh Noble in Hong Kong –
The offshore renminbi bond market has long been a simple beast. When the Chinese currency rose, such credit would perform well. When the renminbi fell, the bonds – known better as “dim sum bonds” – would falter, and new issuance would evaporate.

***DA: It is, at this point, still a relative value play. Even when adjusted for currency devaluation, the yield is attractive at this point.

Covered Bond Talks Intensify as Bank Liquidity Rules in Play
Peter Levring and Jim Brunsden – Bloomberg
European talks on how to treat covered bonds in banks’ liquidity buffers intensified this week as nations with the most at stake fought to ensure Basel III rules don’t hobble their markets.
Denmark, home to the world’s biggest covered-bond market per capita, is moving closer to winning some concessions from the European Union that would help avert a sell-off of the nation’s mortgage-backed securities, Karsten Beltoft, head of the Mortgage Bankers’ Federation in Copenhagen, said yesterday.

Junk-Bond Traders Pile Onto Hedges Amid Fed After Rally
Namitha Jagadeesh and Inyoung Hwang – Bloomberg
With the Federal Reserve getting ready to boost interest rates, investors are adding hedges to junk bonds as they grow ever more expensive versus stocks.
There haven’t been this many bearish options on an exchange-traded fund tracking high-yield debt in almost a year, relative to bullish contracts, according to data compiled by Bloomberg. Puts protecting against a 4.3 percent decline in the ETF by June had the largest ownership, the data show.

***DA: Chase yield, but cover your tail. These things can unwind rather quickly.

Regulators must act on coco bond risks
Alberto Gallo –
When Lloyds Group bankers issued the first bail-in bond in 2009, they did not expect it to turn into the new hottest area of bond markets. Today, sales of contingent convertible (coco) bonds have reached €75bn in Europe, and at this rate will probably reach €100bn by year-end. But without a swift effort to standardise and regulate the market, coco bonds threaten to make a future bank crisis worse, rather than being part of the solution.

***DA: Yes they do.

Wipe out rentiers with cheap money
Martin Wolf –
High-income economies have had ultra-cheap money for more than five years. Japan has lived with it for almost 20. This has been policy makers’ principal response to the crises they have confronted. Inevitably, a policy of cheap money is controversial. Nonetheless, as Japan’s experience shows, the predicament may last a long time.

***DA: You say rentiers, I say “savers.”

Chicago’s Biggest Bondholders Torn on City’s Future: Muni Credit
Brian Chappatta and Tim Jones – Bloomberg
The biggest holders of Chicago general-obligation bonds are diverging on the city’s outlook as it stares down $590 million in extra pension payments. State lawmakers invoke Detroit as the consequence of inaction.
A month after Mayor Rahm Emanuel won the legislature’s approval of a plan to stabilize two of the city’s four pension systems, Governor Pat Quinn hasn’t signed the measure into law, objecting to the possibility that city officials would raise property taxes.

The Fed’s riposte on short v long-term unemployment
Robin Harding | FT Alphaville
This table is the Fed’s response to researchers who say that only short-term unemployment puts downward pressure on inflation. It comes from a newly published research paper by Michael Kiley, a senior economist on the Fed staff.

***DA: The new conondrum – if inflation were to present itself it would require a policy response, and such response is not forthcoming any time soon.

This is What Low Volatility Has Done to Macro Hedge Funds
Laurence Fletcher and Chiara Albanese – MoneyBeat – WSJ
The financial markets have fallen into a slumber. The euro has never been so steady against the dollar. Big trends such as the rise in Japanese stocks and the slide in the yen have stalled. U.S. government bonds are flat-lining.

Covered Bond Talks Intensify as Bank Liquidity Rules in Play
Peter Levring and Jim Brunsden – Bloomberg
European talks on how to treat covered bonds in banks’ liquidity buffers intensified this week as nations with the most at stake fought to ensure Basel III rules don’t hobble their markets.

Central Banks

Whispers From Fed Could Lead to Wild Swings, Internal Critic Says
Jeremy Stein is in the final weeks of his role as the Federal Reserve’s most important internal critic, and Tuesday night in New York he renewed his warnings that the Fed’s retreat from its stimulus campaign may yet roil financial markets.

China’s Swap Rate Climbs as PBOC Refrains From Signaling Easing
China’s one-year interest-rate swaps climbed for a second day after a quarterly report from the central bank failed to signal potential policy loosening even as the world’s second-largest economy cools.

Federal Reserve Bedeviled By Naïve Forecasting
Martin Sosnoff – Forbes
Economists term the assumption that nothing changes as the naïve forecast, but it’s what we have from the Federal Reserve Board currently. Invariably, when the market flirts near new high ground, death doctors surface and spout the good times can’t possibly last.

Czech Central Bank Upholds Currency Ceiling on Inflation
Peter Laca – Bloomberg
The Czech central bank kept a lid on koruna gains for a fourth policy meeting today as inflation remains near zero while an economic recovery gathers speed.


Draghi’s Euro Angst Rising as Rally to $1.40 Pummels: Currencies
David Goodman – Bloomberg
The case for European Central Bank action to curb the euro’s gains is getting stronger after the 18-nation currency jumped to within a half-cent of $1.40.
“A print of $1.40 is a psychologically important level which may set off some alarm bells to officials,” Neil Jones, the head of hedge-fund sales at Mizuho Bank Ltd. in London, said in a May 2 phone interview.

Bitcoin Breakthroughs Studied by Banks the Currency Is Out to Replace
Olga Kharif – Bloomberg
While Jamie Dimon and Warren Buffett express doubts about bitcoin, executives running the financial industry’s back offices are looking at mimicking the virtual currency’s methods of moving money quickly and cheaply.

PBOC Warns Major Banks on Bitcoin
The Wall Street Journal
China’s central bank recently summoned senior executives of the country’s major banks, urging them to cut off all bitcoin-related business and hardening its already-tough stance on the virtual currency.

Indexes & Index Products

Speed, Listing Exclusivity Promote New Volatility Index Options
Timothy Bourgaize Murray – WatersTechnology
Patrick Fay, director of listed derivatives at Russell Investments’ index arm, says the way to a successful volatility index option is through the buy side. The rub? Not every buy-side firm understands derivatives the same way.

ProShares ‘Temporarily’ Suspends Shares Creations in 11 ETFs
Chris Dieterich –
Exchange-traded fund issuer ProShare Capital Management LLC “temporarily” suspended shares creations in 11 of its ETFs on Friday due to a regulatory filing issue the company expects to be resolved in a few days, according to a spokesman.

Value Stock ETFs See Big Inflows in April, Growth Gets Whipped
Chris Dieterich – MoneyBeat – WSJ
April’s exchange-traded-fund money trail highlights the wildly divergent performance between large stocks and their “momentum” counterparts as investors found renewed demand for value.


China Gold Consumption up 0.8% in First Quarter
First-quarter consumption of gold in China rose compared with a year ago even as consumers exited gold investments.

Gold falls after Putin says he’s ready to talk
Victor Reklaitis and Shawn Langlois – MarketWatch
Gold dropped Wednesday but held above the key level of $1,300 an ounce as traders reacted to reports of talks aimed at resolving the Ukraine-Russia conflict.
Investors also waited for remarks from Federal Reserve Chairwoman Janet Yellen later Wednesday.

Gold likely to reach four-year low in 2014 – consultancy
Jan Harvey – Reuters
Gold prices have probably peaked this year and could sink to their lowest since 2010 at $1,100 an ounce as the U.S. economic recovery gathers pace, consultancy Metals Focus said on Wednesday.
Weakness is likely to set in after an impressive start to the year, it said, when gold rallied to six-month highs. But a replay of last year’s 28 percent plunge, triggered by the U.S. Federal Reserve’s tapering of extraordinary stimulus measures, is not on the cards.

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