First Impressions

Mary McDonnell, Simon Compliance – How to Manage (and even Succeed) in the Current Regulatory Marketplace

“It’s a lot harder to do something than to tell somebody else how to do something.”

Mary McDonnell got her start in the financial markets as a regulatory auditor for the Chicago Board of Trade, and though she has spent most of her career on the compliance and regulatory side, she did spend some time as a floor trader. She says this experience taught her to empathize with the traders she would be overseeing over the ensuing years. With that backdrop, she looks at the current regulatory environment and what it means in terms of opportunities, but also in terms of limits.

“If you understand what you cannot do, it leads you to what you can do – legally!”

Watch the video »

Quote of the Day

“Why do we want to be in wealth management? Because the world is getting wealthier. That’s a huge opportunity.”

Credit Suisse Group AG Chief Executive Officer Tidjane Thiam, in the story, “Thiam Sees Possibility of `Traumatic’ Event as Rates Increase”

Lead Stories

Why are swap rates below bond yields?
Michael Mackenzie and Joe Rennison – Financial Times
US interest rate swaps, popular derivatives that track government bond yields, have experienced a spectacular collapse this month with an array of reasons being suggested by traders.
This market emerged during the 1980s and has become a fundamental part of finance. Like bonds sold by companies, swap rates have historically traded at a premium over Treasury yields — seen as the risk-free rate for pricing other types of debt and derivatives.

Goldman Sachs Says Corporate America Has Quietly Re-levered
Tracy Alloway – Bloomberg
You might choose to whisper it softly, but the balance sheets of U.S. companies are yelling it loudly, while wielding a baseball bat:
Corporate leverage is now at its highest level in a decade, according to a new analysis from Goldman Sachs.

Regulators Propose New Rules to Ease Strain of Bank Failures
Chad Bray – NY Times
A group of financial policy makers has outlined a new framework intended to keep banks around the world from becoming “too big to fail” and requiring government bailouts in a future financial crisis.

Middlemen the key to corporate bond market’s electric dreams
Sinead Cruise, John McCrank and Davide Scigliuzzo – Reuters
Goldman Sachs, the biggest standalone U.S. investment bank, shuttered its GSessions electronic bond-trading platform in 2014. BlackRock, the world’s biggest asset manager, closed its Aladdin bond trading network after less than a year in 2013. Last spring, Deutsche Boerse, owner of the Frankfurt Stock Exchange, pulled its funding for a platform called Bondcube.

Banks May Get Extra Time to Soften Up EU Financial-Market Rules
Julia-Ambra Verlaine – Bloomberg
Financial companies pushing back against Europe’s post-crisis market rule book for the past five years may get more time to chip away at regulations they say threaten their businesses.
The European Commission said on Tuesday that there’s probably not enough time to put the rules known as MiFID II into practice by the January 2017 target, and a one-year delay may be needed to give the industry time to adapt its businesses and systems. The technical work may be accompanied by ramped-up lobbying, particularly against rules on bond-trade transparency and payment for investment research.

A Step Forward for Sovereign Debt
Joseph E. Stiglitz and Martin Guzman – Project Syndicate
Every advanced country has a bankruptcy law, but there is no equivalent framework for sovereign borrowers. That legal vacuum matters, because, as we now see in Greece and Puerto Rico, it can suck the life out of economies.
In September, the United Nations took a big step toward filling the void, approving a set of principles for sovereign-debt restructuring. The nine precepts – namely, a sovereign’s right to initiate a debt restructuring, sovereign immunity, equitable treatment of creditors, (super) majority restructuring, transparency, impartiality, legitimacy, sustainability, and good faith in negotiations – form the rudiments of an effective international rule of law.

US banks said to hold $10tn of ‘risky’ trades
Barney Jopson and Ben McLannahan – Financial Times
The repeal of part of the Dodd-Frank financial reforms has left big US banks holding $10tn of “risky” derivatives trades on their books, according to an investigation by Democrats.
Senator Elizabeth Warren, a liberal Wall Street foe, said the repeal — which sparked a firestorm when it was slipped into a budget bill in December 2014 — had left federally insured banks exposed to dangerous swaps trades.

A Bad Way to Make Banks Safe
Bloomberg View
Global regulators say they’re making progress in reducing the threat that the world’s largest banks can pose to the economy. Actually, new rules may be making things worse.
Regulators want to create a second layer of protection against financial disaster, beyond the equity that comprises banks’ first line of defense against losses. It would consist of a special kind of long-term debt, issued by financial holding companies to investors willing and able to bear losses.

U.S. charges three in huge cyberfraud targeting JPMorgan, others
Jonathan Stempel and Nate Raymond – Reuters
U.S. prosecutors on Tuesday unveiled criminal charges accusing three men of running a sprawling array of hacking and fraud schemes, including a huge 2014 attack against JPMorgan Chase & Co, that generated hundreds of millions of dollars of illegal profit.

Deutsche Says Credit Cycle Not Turning Yet as Volatility Wanes
Michelle Davis – Bloomberg
A turn of the credit cycle for the worse may not be as near as previously thought, according to Deutsche Bank AG credit strategists.
The strategists led by Oleg Melentyev point to two indicators that have retraced the risky levels they reached in late September. That still may not be enough to prevent a further selloff in high-yield debt, they wrote in a Nov. 6 client note.

Should banking be easy?
Izabella Kaminska – Financial Times
The Financial Stability Board wants banks to raise up to EUR1.1tn in so-called “total loss absorbing capital” (TLAC) to make the banking system less risky.

Traders watch bond market yields on notes for Fed rate rise signals
Patti Domm – CNBC
Stocks had been spooking bonds all summer. Now it’s the bond market’s turn.
Even before Friday’s jobs report made it much more likely the Fed could raise rates in December, stock traders have been keeping an eye on the bond market for clues on the Fed’s first rate hike. Yields on the 2-year note, the most policy-sensitive, rose to the highest level in more than five years Friday, after the October payrolls came in at 271,000, well above Wall Street’s forecast of 185,000.

Environmental Financial Products, LLC (EFP) and CBOE Holdings (CBOE) Announce December 11 Launch of American Financial Exchange (AFX)
Environmental Financial Products, LLC (EFP) and CBOE Holdings, Inc. (CBOE) today announced plans to launch the American Financial Exchange (AFX), an electronic marketplace for small and mid-sized banks to lend and borrow short-term funds, on December 11. The interbank loan market’s initial contract will be for an overnight loan.

Exclusive: Deutsche Bank poised to name investment banking leaders – sources
Olivia Oran and Anjuli Davies – Reuters
Deutsche Bank could announce a new executive structure at its investment bank as soon as this week, as part of chief executive John Cryan’s shake-up of Germany’s largest lender, sources familiar with the matter told Reuters.

Millennials Ditch Big Banks and Go Local With Their Money
Ali Donaldson – Bloomberg
Millennials are increasingly shunning big banks and going local with their money.
Community banks won with younger customers last year, netting a 5 percent increase in account holders ages 18 to 34, while credit unions recorded a 3 percent gain, according to data compiled by Accenture Plc. By comparison, large national and regional banks struggled to retain millennial clients — losing 16 percent of them over the same period.

Beyond Banking: under attack on all sides
Patrick Jenkins and Martin Arnold – Financial Times
In the first of a three-part series, the FT looks at the turmoil and decline of the banking industry

Thiam Sees Possibility of `Traumatic’ Event as Rates Increase
Jeffrey Voegeli and Francine Lacqua – Bloomberg
Credit Suisse Group AG Chief Executive Officer Tidjane Thiam said he sees the risk of a “traumatic event” in global markets once the current period of low interest rates comes to an end.

Small Price for Banks to Combat ‘Too Big To Fail’; European, U.S. banks should be able to meet new bond requirements at relatively little extra cost
Paul J. Davies – WSJ
Banks have been hit with another big, scary number in the battle to end “too big to fail”: $1.2 trillion. This is the headline number for how many bonds the world’s biggest lenders need to meet rules unveiled on Monday.

EU Nations Advancing Rapidly on Plan to Revive ABS, Hill Says
Julia-Ambra Verlaine – Bloomberg
European Union nations may have a common plan by year-end for reviving asset-backed securities markets, European Financial Services Commissioner Jonathan Hill said in Brussels today.

A scammer’s charter for European capital markets
Daniel Davies – Financial Times
For investors of a certain age, there are some names that vividly bring back the atmosphere of Europe in the late 1990s and early 2000s. Gigabell, Comroad, EM.TV: these were among the largest and most vivid flame-outs associated with the Neuer Markt , Deutsche Börse’s ill-fated attempt to create a technology-focused junior market for growth companies. Now it seems that Europe may be in danger of accidentally bringing back some of the worst practices of the era.
For a long time, European policymakers have been peeved at Europe’s equity market capitalisation, which is no more than half that of America, despite the two continents’ similar economic heft.

Hedge Funds + Leverage Are Hot Formula for Canada Pension Plans
Ari Altstedter – Bloomberg
The words “bold” and “pension fund” don’t always go together easily. Then again, neither do bold and Canada.
But Canadian public pension funds are once again employing bold strategies in a world where interest rates have remained persistently low at the very moment that aging baby boomers are increasingly drawing down their retirement funds.

Eastern Europe Faces Investment Shortfall Warns EBRD
Paul Hannon – WSJ
Eastern Europe faces a shortfall in investment of $75 billion a year, and must place a new emphasis on attracting equity capital rather than accumulating more debt if it is to avoid long-term damage to economic growth, the European Bank for Reconstruction and Development said Tuesday.

Central Banks

Exclusive: ECB rate setters converge on December deposit rate cut
Paul Taylor and Balazs Koranyi – Reuters
A consensus is forming at the European Central Bank to take the interest rate it charges banks to park money deeper into negative territory in December, four governing council members said, a move that could weaken the euro and push up inflation.

Astonishing report from the Fed says US banks are not “sound”
Late last week, a consortium of financial regulators in the United States, including the Federal Reserve and the FDIC, issued an astonishing condemnation of the US banking system.
Most notably, they highlighted “continuing gaps between industry practices and the expectations for safe and sound banking.”
This is part of an annual report they publish called the Shared National Credit (SNC) Review. And in this year’s report, they identified a huge jump in risky loans due to overexposure to weakening oil and gas industries.

Neel Kashkari Named New Minneapolis Fed President
Michael S. Derby – WSJ
The Federal Reserve Bank of Minneapolis has named former banker, government official and unsuccessful California gubernatorial candidate Neel Kashkari to become its new president and chief executive officer.

The Fed Just Can’t Stop Hiring Former Goldman Sachs Bankers
Ben Walsh – Huffington Post
The Federal Reserve is in a bit of a rut — it keeps hiring former Goldman Sachs executives. On Tuesday, the Minneapolis Fed named Neel Kashkari as its new president.

Bank of Japan Mounts Bold Bid for Revival
Takashi Nakamichi, Tatsuo Ito and Phred Dvorak – WSJ
New Bank of Japan Gov. Haruhiko Kuroda quickly and dramatically put his stamp on the long-beleaguered central bank, implanting a policy grand in substance and simple in presentation—a stark contrast with his predecessor, who favored incremental steps, emphasizing the complexity and the risks.

The real reason the Fed is eager to raise interest rates now
Matt Phillips – Quartz
Americans are borrowing big again.
The Federal Reserve’s credit numbers showed American consumers borrowed at an all-time record of $28.9 billion in September, besting the previous high-water mark set in November 2001.

The Most Expensive Dodd-Frank Rule Adds to Law’s Burden
Sam Batkins and Meghan Milloy – American Action Forum
Two new Federal Reserve rulemakings in the last month have pushed Dodd-Frank’s aggregate financial costs past $35 billion, with $29.3 billion in final rules. With more than five years of implementation, it’s clear that regulators still have dozens of new measures left to propose and finalize. The most expensive portions of the law could ultimately lie ahead for consumers.

The Only Solution To The U.S. Treasury’s Debt Crisis
Peter Knight – Seeking Alpha
The Fed has purchased $4.216 trillion in US debt at non-competitive rates with money it created with keypunch entries to force and hold rates at artificial, historic lows.


What If Banks Didn’t Create Money?
Leonid Bershidsky – Bloomberg
A Swiss initiative to ban private banks from creating money has gathered enough signatures to put the matter to a referendum. This looks like another cranky economic idea that Swiss voters will throw out, as they did last year’s proposal to require the country’s central bank to keep at least a fifth of its balance sheet in gold. Yet perhaps such an experiment needs to be held somewhere to put to rest all the theoretical arguments about 100 percent reserve banking.

Are Currencies An Asset Class And Do Currency Managers Deserve Their Fees?
Radovan Vojtko – Seeking Alpha
The recent global financial crisis led many institutional investors to rethink their asset allocation. Prior to the crisis, a core-satellite investment approach was largely adopted, where the satellite portfolios (hedge funds, real estate, and commodities, for instance) were supposed to have little or no correlation with equity returns (making up a large proportion of the core), and therefore provide diversification of equity beta. However, in the times of markets turmoil, the various asset returns became much more correlated and the diversification turned out to be practically ineffective. Investment professionals therefore started to look for additional less-correlated alternative assets and currency investing seems to offer a cure.

China to Allow Direct Conversion Between Yuan and Swiss Franc
Fion Li – Bloomberg
China took another step to boost the yuan’s global usage, saying it will start direct trading with the Swiss franc, as the nation pushes its case for reserve-currency status at the International Monetary Fund.

The Weak Euro Is Back, And So Are German Stock Bulls
Sofia Horta E Costa – Bloomberg
German stocks, in a bear market less than two months ago, are back in favor.
Investors have piled into the biggest exchange-traded fund tracking the country’s equities in the past two weeks, pushing its market capitalization back up to values last seen in April. Germany’s benchmark DAX Index has regained two-thirds of its losses, and bulls are speculating on further gains via the options market, sending the cost of bullish contracts to the highest levels since at least 2010 relative to bearish ones.

Cross-Border RMB Flows And Capital Market Connectivity Between China and Singapore To Strengthen
Press Release
Initiatives to strengthen cross-border Renminbi (RMB) flows and a commitment to collaborate on capital market connectivity between China and Singapore were the key outcomes in financial co-operation arising from the recent State Visit to Singapore by the President of the People’s Republic of China, Mr Xi Jinping.

Switzerland’s Ambition for a Weaker Franc Seen as a Forlorn Hope
Lukanyo Mnyanda and Jennifer Surane – Bloomberg
Currency markets just won’t cooperate with Thomas Jordan.
When the Swiss National Bank president repeated a warning for buyers to steer clear of the “significantly overvalued” franc last week, the impact of his words was blunted by a European Central Bank pledge to reassess its stimulus plan. Switzerland’s currency reacted by jumping the most since mid-October. Then Friday’s better-than-forecast U.S. jobs report undermined the euro and pushed the franc to a two-month high. Options traders are more bullish on the franc versus the shared currency than any major peer.

Thomson Reuters Reports Modest Contraction in October FX Trading Volumes
Victor Golovtchenko – Reuters
The total average daily volume (ADV) of foreign exchange trading across Thomson Reuters platforms in October totalled $353 billion daily. The figure is lower by 3 per cent when compared to the previous month amid stagnant major currency pairs.

Indexes & Index Products

For The First Time There Are Now Over 6,000 ETFs/ETPs Listed Globally With Over 3 Trillion US Dollars In Assets At The End Of October 2015, According To ETFGI
Press Release
Globally there are for the first time now over 6,000 ETFs/ETPs with over 3 trillion US dollars in assets at the end of October 2015. ETFs/ETPs listed globally gathered US$35.6 billion in net new assets in October 2015. This marks the 21st consecutive month of positive net inflows, according to ETFGI’s Global ETF and ETP insights report for October 2015.

BlackRock Fee Cuts Usher In The Cheapest ETF Yet
Chris Dieterich – Barron’s
BlackRock (BLK) on Tuesday announced fee cuts to seven iShares exchange-traded funds as part of series of moves designed to counter inroads made by low-cost rivals including Vanguard Group.

S&P Dow Jones launches futures index
The index tracks the returns generated from an investment in the front-month S&P/ASX 200 index futures, calculating both excess return and total return, a statement issued by S&P Dow Jones Indices said. S&P Dow Jones Indices director of global equity indices Michael Orzano said: “As understanding and use of passive investment continues to take hold in Australia, we are seeing increasing demand from investors for more sophisticated index solutions.”


Fallen Gold May Help India’s Diwali and Monetisation Plan Shine
Indexology – S&P Dow Jones Indices
Could India’s gold obsession be over? The Indian government seems to think so, since they are betting that their people are willing to part with their precious metal to earn just 2.5% interest. Last Thursday, Prime Minister Narendra Modi launched three programmes aimed at reducing physical gold demand and luring tonnes of gold from households into the banking system. That’s a big bet considering gold in India is a status symbol of wealth, and is widely used for wedding gifts, religious donations and as an investment.

Gold Assets in World’s Biggest ETP Fall to Lowest Since 2008
Joe Deaux – Bloomberg
Gold assets held in the world’s biggest exchange-traded product backed by the metal fell to the lowest since the financial crisis.

If You Want to Learn About Gold, Speak to an Indian Sugar Farmer
Eddie Van Der Walt and Swansy Afonso – Bloomberg
To gain insight into the weakening gold market, talk to an Indian farmer.
In a country where an estimated 800 million people depend on agriculture and many revere gold as an ornament and store of wealth, growers flush with cash during harvest season have helped India vie with China as the world’s largest buyer of bullion. Sales usually surge this month in the main festival season of Diwali, with farmers buying gold as religious offerings and elaborate wedding adornments that serve as a bride’s dowry.

Yakuza linked to Hong Kong gold smuggled over porous Japanese borders in a trend of underworld tax cheating
Julian Ryall – South China Morning Post
Incidents of gold being smuggled into Japan are soaring, with authorities struggling to get a grip on the scale of the illegal trade and admitting they have no idea how much gold is being trafficked into the country.

Nazi Gold Train: Polish Treasure Hunters Begin Detailed Scans of Hillside
Ewa Galica – CNBC
Two treasure hunters began detailed tests Tuesday in the hope of revealing a fuller picture of a Nazi train they claim is buried in a hillside.


Satoshi Nakamoto, the anonymous creator of Bitcoin, is nominated for a Nobel Prize in Economics
Ian Kar – Quartz
No one knows exactly who Satoshi Nakamoto is (though many have tried to find out). That hasn’t stopped a UCLA finance professor from promising to get the pseudonymous bitcoin creator nominated for the Sveriges Riksbank Prize in Economic Sciences—or, as it’s more commonly called, the Nobel prize in economics.

When Financial Markets Misread Politics
Dani Rodrik – Project Syndicate
When Turkey’s Justice and Development Party (AKP) defied pundits and pollsters by regaining a parliamentary majority in the country’s general election on November 1, financial markets cheered. The next day, the Istanbul stock exchange rose by more than 5%, and the Turkish lira rallied.

The Strange, True Story of How a Chairman at McKinsey Made Millions of Dollars off His Maid
Nilita Vachani – The Nation
In 2009, Anil Kumar was arrested for his role in a lucrative insider-trading ring. That was not his biggest crime.

Bitcoin’s place in the long history of pyramid schemes
Dan McCrum – Financial Times
General Gregor MacGregor returned to Britain in 1821 an exotic war hero, dubbed a Cazique, or prince, of Poyais by the Latin American kingdom’s royal family. His stories of the democratic and fertile land prompted investors to snap up land certificates and £200,000 in Poyaisian sovereign bonds.

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