First Impressions

Open for Business: SEFs Navigate the New Regulatory Environment
JohnLothianNews.com
Swap execution facilities (SEFs) were given life by the Dodd-Frank Act, which requires over-the counter (OTC) swaps to be cleared and traded on this new type of regulated platform. The CFTC published its final SEF rules in mid-2013 and trading commenced on 18 registered SEFs. John Lothian News interviewed a dozen of the leading SEF operators, regulators and other participants and put together a three part series on SEF regulation, the changing market structure and the new technology required to make it all happen. Part I looks at the state of SEF regulation. Though the final rules are out, the industry is still working on a few lingering issues such as new staff guidance and no-action letters on certain aspects of the rules. Also, as the CFTC begins making classes of swaps “available to trade” and subjecting them to mandatory execution on SEFs, the industry is expected to quickly adjust and comply.

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Quote of the Day

The problem with QE is that it works in practice, but it doesn’t work in theory.

Outgoing Fed chairman Ben Bernanke, from the Reuters story “You Must be Joking, Mr. Bernanke.”

Lead Stories

COLUMN-You must be joking, Mr. Bernanke
James Saft | Reuters
Well, now we know: monetary policy certainly isn’t rocket science. Asked on Thursday if he was confident before implementing quantitative easing that it would work, outgoing Federal Reserve Chairman Ben Bernanke quipped: “The problem with QE is that it works in practice, but it doesn’t work in theory.”
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***DA: It works in the short term. Hopefully we get a chance to ask the question again ten years from now. I doubt we will get the same answer. No joke.

Keep open minded about QE’s effects on bubbles -Fed’s Williams
Reuters
While the Federal Reserve is dialing down its bond-buying based on economic improvements, policymakers need to keep “open minds” about how such stimulus affects asset prices and could lead to bubbles, a top U.S. central banker said on Thursday.
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***DA: I do not think we have much choice.

Where art thou inflation?
Izabella Kaminska | FT Alphaville
Bond vigilantes might want to turn away. The following analysis is not pretty for those who have bet everything on a taper-related spike in US yields. As HSBC’s Steven Major notes on Friday, he is doubtful that the short-term path for US yields will be anything other than lower.
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***DA: The velocity of money is still falling. Fed stimulus is doing all it can to keep up. Until that changes, inflation will be hard to achieve.

Hellwig prescribes stricter recipe for banks to avoid financial meltdown
Business Standard
Martin Hellwig, a co-author of a book on wrong notions about the banking sector, has suggested increasing equity requirement for banks to 20%-30% of total assets against 3%, prescribed by the Basel III to avoid recurrence of financial meltdown.
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***DA: Good luck with that. We have already seen relaxation of capital requirements from the initial proposal. More is out of the question.

Detroit Judge Rejects $165 Million Swaps Deal as Too High
Steven Raphael and Steven Church – Bloomberg
A Detroit bankruptcy judge rejected as too costly a proposal by the city to pay UBS AG (UBSN) and Bank of America Corp. about $165 million to end interest-rate swaps that have cost taxpayers $202 million since 2009.
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***DA: Detroit judge rules that blood cannot be extracted from a turnip.

Greece’s Bond Plans May Be Wishful Thinking
Emese Bartha – MoneyBeat – WSJ
Boasting its first primary budget surplus in a decade, the country at the center of the European debt crisis wants to sell government bonds–possibly in the second half of the year–for the first time since the spring of 2010.
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***DA: Slow down, there, boys.

Rev-repo rising
Cardiff Garcia | FT Alphaville
As expected, the end of the year brought the large-scale test of the Fed’s reverse repo facility, and the surrounding operations have dwarfed prior tests.
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FX: A Superhero-Free Zone
Katie Martin – MoneyBeat – WSJ
Remember Bernieman? This time last year, he was Citigroup’s very own superhero in cartoon form. Ripped, lycra clad, tongue-in-cheek, exhorting the bank’s foreign-exchange staff to badger clients for votes in the FX market’s answer to the X Factor: Euromoney’s market share poll. Now, the annual poll is live again, for the 36th time, but Bernieman is not being brought out of retirement, people familiar with the matter say.
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Central Banks

RBC Calls for ECB Rate Cut as Euribor Advances
David Goodman and Max Julius – Bloomberg
The European Central Bank will cut its main refinancing rate to a record 0.1 percent in March to curb an increase in the euro area’s money-market rates, Royal Bank of Canada said.
The rate at which European banks say they see each other lending in euros for three months climbed to the highest since August 2012 today as ECB liquidity fell.
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***DA: Do I sense an uptick in fear?

The Bank of England must go slow on tightening
Martin Wolf – FT.com
Should the Bank of England soon start tightening monetary policy? My answer is no. As important, rates might remain surprisingly low even when the tightening cycle begins.
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***DA: That would be fun to watch – BoE tightening and ECB cutting on the same day.

BOJ Silence on Exit Plan Stokes Concern as Prices Rise
Andy Sharp and Masaaki Iwamoto – Bloomberg
Japan’s success in rekindling inflation is raising the stakes for policy makers to map out the endgame for monetary stimulus, given the risk of a surge in yields when the Bank of Japan winds down bond purchases.
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***DA: While the BoJ sits back and watches. They got an early seat to this movie – 23 years ago.

Currencies

JPMorgan Sees Asian Currencies Extending Rout on Economy
Ye Xie – Bloomberg
Asian currencies are poised to extend declines amid concern an increase in borrowing costs in China and a weakening yen threaten economic growth in the region, JPMorgan Chase & Co. said.
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From Space Travel to Pizza, Your Bitcoin Goes Quite Far These Days
Michael J. Casey and Paul Vigna – MoneyBeat – WSJ
You can’t get much more mainstream than professional American sports. In that sense, Thursday’s news that the Sacramento Kings basketball team will let its fans use bitcoin to purchase tickets, jerseys, hot dogs and anything else from its selection of products may go down as a key moment in the digital currency’s coming of age.
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HSBC, Citigroup Said to Suspend Traders as Currency Probe Widens
Liam Vaughan and Gavin Finch – Bloomberg
HSBC Holdings Plc (HSBA), Europe’s biggest bank by market value, and Citigroup Inc. (C) suspended four traders amid a global probe into the alleged manipulation of currencies.
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Metals, Currency Rigging Is Worse Than Libor, Bafin Says
Karin Matussek and Oliver Suess – Bloomberg
Germany’s top financial regulator said possible manipulation of currency rates and prices for precious metals is worse than the Libor-rigging scandal, which has already led to fines of about $6 billion.
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Aussie dollar slides to multi-year lows
Delphine Strauss – FT.com
The Australian dollar fell to a three-and-a-half year low against its US counterpart on Thursday after a dismal labour market report prompted speculation that the central bank could cut interest rates again to boost the economy.
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Banks and regulators ‘must take Bitcoin more seriously’
Jessica Meek – Risk.net
Banks need to take Bitcoin more seriously, one legal expert has warned. While the digital currency becomes more and more popular with merchants as a method of payment, in particular because it avoids banks’ fees, banks are not paying as much attention as they should to this, says Washington, DC-based Barrie VanBrackle, co-chair of consumer financial services at law firm Manatt, Phelps & Phillips.
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Czech Central Bank to Keep Currency Weaker Through 2014
WSJ.com
The Czech central bank intends to keep the country’s currency weaker at just above 27 korunas to the euro through the end of the year, but after that the bank won’t prevent it from strengthening, the bank’s governor said late Thursday.
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A little case of commodities/FX fragmentation
Izabella Kaminska | FT Alphaville
Magic mirror on the wall, where’s the fairest value for commodities overall? Or, as BoAML notes on Thursday: Commodities may be soft in USD terms, but for anyone living in South Africa or Turkey they are back to the record highs of the ominous summer of 2008 (Chart of the Day). In contrast, in PLN and RUB they are as low as they have not been since 2010.
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Beware the mania for Bitcoin, the tulip of the 21st century
Jean-Pierre Landau – FT.com
Its anonymity is appealing but the authorities are wising up
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Indexes & Index Products

Senior women in ETFs launch working group
Sarah Krouse in New York – Financial News
A group of senior female executives working in exchange-traded funds is launching a women’s network for the fast-growing industry, which saw assets rise to a record $2.39 trillion last year.
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Another Look at ETF Industry Growth
Todd Shriber – ETF Trends
The indomitable growth of the exchange traded products industry continued in 2013 with inflows reaching $247.3 billion on a global basis. That marked the second consecutive year ETF asset growth topped $200 billion.
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ETFs Concentrating Risk In Time For The Next Crisis
Seeking Alpha
Back in 2007/08, AIG faced large problems. I won’t go into detail as most people are well aware of the financial crisis. Needless to say the company was more or less a concentrated pool of risk that blew apart when the CDS’ they sold en masse turned out to be more correlated than they had previously envisaged.
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Gold

Deutsche Bank to withdraw from gold fix amid probe
Reuters
Deutsche Bank will withdraw from gold and silver benchmark setting, or fixing, amid an investigation by German regulators into suspected manipulation of precious metals prices by banks.
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China’s Central Bank May Be Stocking Up On Gold: Report
Nat Rudarakanchana – International Business Times
China’s secretive central bank may have stocked up heavily on gold in the past few years, and could own about 2710 tons as of the end of 2013, according to an industry expert.
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Debunking five gold industry myths
Peter Koven – Financial Post
Forget what you’ve heard about the gold mining industry over the past several months. According to analysts at BMO Capital Markets, it’s largely nonsense. They laid out five important misconceptions about the gold sector and explained why each one is wrong. Their findings could have major long-term implications for the business.
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Miscellaneous

Former FX Concepts Executives Savage, DiRusso Start Citic Fund
Lucy Meakin – Bloomberg
Former FX Concepts LLC executives Robert Savage and Ron DiRusso started a hedge fund with Citic Capital Holdings Ltd., the company backed by the sovereign-wealth funds of China and Qatar.
Savage, formerly chief strategist at bankrupt FX Concepts, is Chief Executive Officer of CCTrack Solutions and DiRusso is chief investment officer, Citic Capital said today in a statement.
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Ex-Goldman Sachs Head Loan Trader Meeker Joining Allen’s Vulcan
Mary Childs – Bloomberg
Sean Meeker, who departed Goldman Sachs Group Inc. last month as the head of loan and loan credit-default swap trading, is joining Microsoft Corp. co-founder Paul Allen’s Vulcan Capital fund.
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