Observations and Insight

Eris Goes Global with ICE Agreement; CDS and Euro- and Sterling-Based IRS Planned for 2015
Doug Ashburn – JLN
The Intercontinental Exchange (ICE) and Eris Exchange announced a licensing agreement this morning that will allow ICE exchanges in the U.S. and Europe to list futures and options on credit default swaps, as well as euro- and pound-denominated interest rate swaps using Eris’ patented construction methodology.

(See the press release below under “Exchanges”)

The first product to be launched under the agreement, pending regulatory approval, will be credit futures contracts based on investment grade and high-yield Markit CDX indices. Later in 2015, ICE Futures Europe will use Eris’ product design from its Standard Swap Futures and Flex Swap Futures in euro- and sterling-denominated IRS.

From Eris’ products, CME Group’s deliverable contracts and Eurex’s recently-launched Euro-Swap Futures, to OTC products such as market-agreed-coupon (MAC) swaps, the trend toward standardization continues. As Eris CEO Neal Brady pointed out this morning, as Basel III and other capital regulations come on line, capital and margin-efficient solutions will continue to dot the landscape.

The competition is heating up.


Stuart McClymont, managing director, JDX Consulting – Financial Services Infrastructure

“We’ve got lots of people and lots of different technologies, but we’ve got common problems; common issues that try to reduce the amount of duplication and operation processes for a common function.”

Stuart McClymont, managing director at JDX Consulting, explains the infrastructure for financial services. He gives a brief history of how the industry functioned without today’s technology, and then delves into how the technology boom in the 90’s created an influx of new opportunities for the markets and its participants. One key point was how companies needed to collaborate more together in order to use new technology efficiently. McClymont also touches on opportunities for the future and where the industry is headed from here.

Watch the video »

Lead Stories

Barclays sued along with options exchanges
Bob Van Voris and Jef Feeley – Bloomberg
In addition to Barclays, investors sued seven public exchanges, including the Chicago Board Options Exchange Inc., Nasdaq OMX BX Inc. and New York Stock Exchange. The investors claim the exchanges fraudulently provided private data feeds and co-location services to high-frequency traders, at the expense of other traders.
**JK – A huge case with massive ramifications for HFT and exchanges.

CBOE Futures Exchange to alter price calculation for CBOE Volatility Index futures contracts
Erine Sta. Ana – SNL
CBOE Holdings Inc.’s CBOE Futures Exchange LLC said Dec. 2 that it plans to eliminate the practice of rounding up the daily settlement price for the CBOE volatility index futures contracts to the nearest minimum pricing increment if the average of the final bid and offer is not at the minimum pricing increment for each respective contract.
**JK – CBOE’s calculator is so glad it doesn’t have to try and round up or down when the number is 5 anymore.

Allergan Bears Wary That Acquirer Actavis Becomes Prey: Options
Sofia Horta e Costa – Bloomberg
A protracted bidding war for Allergan (AGN) Inc. came to a close last month when Actavis Plc swooped in to clinch the deal for $66 billion. Options traders are concerned more twists are coming.
They’ve increased protection in Allergan in case Actavis itself becomes a target and the deal falls apart, says Keith Moore at MKM Partners LLC. Bearish puts in the maker of Botox cost the most ever versus bullish calls, data compiled by Bloomberg show.

State Street Exiting Swaps Clearing Business, Citing New Rules
Silla Brush – Bloomberg
State Street (STT) Corp. is closing down its swaps business after clients said new regulations steered them away for using the products.
The bank will shutter its U.S. business for clearing swaps early next year and will shelve plans to start a similar operation in Europe, Anne McNally, a spokeswoman for the Boston-based company, said in an e-mail statement today.
**JK – Listed options would be a good choice.

Weekly Market Commentary
Larry McMillan – CBOE Options Hub
The stock market, as measured by the Standard & Poor’s 500 Index ($SPX), sold off for a couple of days and then rebounded quickly to new all-time intra-day and closing highs.  However, sell signals and overbought conditions abound, so all is not bullish.

Videocast: Big VIX calls in January

India VIX Drops to Two-Month Low as Nifty Posts Weekly Decline
Santanu Chakraborty – BloombergBusinessweek
A gauge of Indian option prices used for protection against stock market swings fell to a two-month low as CNX Nifty (NIFTY) Index halted a six-week rising streak.
The India VIX Index slid 4 percent to 11.95 in Mumbai, the lowest reading since Sept. 22. The Nifty dropped 0.3 percent to 8,538.30, extending its weekly decline to 0.6 percent. Nifty futures for December delivery slipped 0.4 percent to 8,572.


BATS Faces Record SEC Fine Over Direct Edge’s Actions
Scott Patterson – WSJ
A three-year investigation by market regulators into allegedly unfair treatment of investors by stock exchanges could result in the largest fine ever levied against a stock exchange, according to people familiar with the matter.
Securities and Exchange Commission investigators are nearing a settlement of about $12 million to $13 million with BATS Global Markets Inc. over how its Direct Edge Holdings LLC exchanges handled customer orders, these people said. The current record fine for an exchange came in May 2013, when Nasdaq OMX Group Inc. agreed to pay $10 million to settle securities-law violations tied to its handling of the chaotic Facebook Inc. public offering a year earlier.

Intercontinental Exchange and Eris Exchange Announce Global Swap Futures Licensing Agreement
Press Release – ICE
Intercontinental Exchange (NYSE:ICE), the leading global network of exchanges and clearing houses, and Eris Exchange (Eris), a US-based futures exchange group, today announced a multi-year license agreement for ICE exchanges to list futures and options based on the Eris MethodologyTM, Eris’ patent-pending product design for constructing swap futures in a capital-efficient manner.
“By facilitating the unique contract design that has been developed by Eris, we will be able to bring our customers unparalleled access to the European and U.S. CDS markets and European interest rate markets through a regulated futures contract that can be cross-margined with ICE’s broad fixed income offering,” said Intercontinental Exchange Chief Strategy Officer David Goone.
Under the agreement ICE is licensing the rights to list European and U.S. credit default swap (CDS) futures and European interest rate futures based on the Eris Methodology.

MCX seeks buyers for its stake in MCX-SX
Business Standard News
Country’s largest commodity exchange MCX today invited expressions of interest from potential investors to divest its stake in MCX-SX and MCX-SX Clearing Corporation Ltd.

Nigeria: NSE to Commence Trading On Derivatives in 2016
Nkiruka Nnorom – allAfrica.com
Nigerian Stock Exchange, NSE, has disclosed plan to commence trading in financial derivative in 2016.
The proposed introduction is in fulfillment of the exchange’s decision to introduce five asset classes in five years on the assumption of office by Oscar Onyema as the NSE’ Chief Executive Officer.

Regulation and Enforcement

Wall Street Demands Derivatives Deregulation In Government Shutdown Bill
Zach Carter – Huffington Post
Wall Street lobbyists are trying to secure taxpayer backing for many derivatives trades as part of budget talks to avert a government shutdown.
According to multiple Democratic sources, banks are pushing hard to include the controversial provision in funding legislation that would keep the government operating after Dec. 11. Top negotiators in the House are taking the derivatives provision seriously, and may include it in the final bill, the sources said.

U.S. Probes Och-Ziff Fee Paid in Libyan Dealings
Michael Rothfeld, Christopher M. Matthews and Jean Eaglesham – WSJ
U.S. investigators probing Och-Ziff Capital Management Group LLC’s dealings in Libya are focused on a multimillion-dollar payment by the big hedge-fund firm they believe was funneled in part to a friend of Col. Moammar Gadhafi’s son, said people briefed on the inquiry.
The scrutiny is part of a broad, three-year foreign bribery investigation by the Justice Department and Securities and Exchange Commission into how Wall Street firms obtained investments from the regime of the former dictator, who was deposed and killed in the country’s 2011 revolution.

Barclays Hid Traders’ Role After Questions: Schneiderman
Bob Van Voris and Jef Feeley – Bloomberg
Barclays Plc (BARC) asked that a federal judge in New York handle claims it hid the role of high-frequency traders in its dark pool, saying the evidence in the case is “incredibly complex” and includes millions of trading records.
Barclays, the U.K.’s second-biggest bank by assets, is being sued by institutional investors in at least five federal lawsuits claiming it cheated customers by giving preference to high-frequency traders on its alternative trading venue, Barclays LX. New York Attorney General Eric Schneiderman sued Barclays in state court in June.


Nasdaq Launches Ultra-High Precision Time Stamping
Traders Magazine
If football is a game of inches, then trading is game of ultra-high precision timing measured in nano- and microseconds. Exchange operator Nasdaq has announced it has launched Perseus Telecom’s trade time ultra-precise time stamp offering, dubbed “High Precision Time,” at its U.S. data center in Carteret, N.J.

DTCC and FS-ISAC launch cyber threat “beacon” system » Banking Technology
Elliott Holley – Banking Technology
A platform for sharing cyber-security threat intelligence among financial services companies has been launched by US post-trade utility the DTCC and non-profit security organisation FS-ISAC. Called Soltra Edge, the platform gathers data about cyber-security threats and converts it into a standardised format for sharing.


Payrolls Pro Tip: Don’t Overreact to Rounding Errors
Adam Warner – Schaeffer’s Investment Research
Welcome to the (close) of the working week! We get to celebrate Friday with our monthly jobs report today. It’s probably already out by the time you read this. I’m going predict it’s a rounding error away from the estimate of 230,000 jobs.


Options Alliance Annual Conference Dec 8
Join us on December 8 for a deep dive into the exploding world of financial startups. Meet and mingle with your fellow entrepreneurs as you learn how to market, grow and fund a wide range of financial startups. The program begins at 1 pm at the Arditti Center for Risk Management at DePaul University’s Chicago Loop campus. The three panels cover the marketing, growth in AUM and funding of startup firms. A networking cocktail reception follows.
***Panelist firms include OIC, CME Group, Tradelegs, RCM Asset Management and more.

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