JLN Options: CME Eurodollar Bundle Futures and Options; Chinese options "could launch this month"; Guessing Game on Rates Lifts Bearish Bets on Financials

Aug 12, 2014

Observations and Insights

CME Eurodollar Bundle Futures and Options
Doug Ashburn – JLN

CME Group announced today it will be launching futures and options on Eurodollar Bundles on September 22 of this year, pending regulatory approval. This should serve to simplify not only the trading of these popular spreads, but also margining and settlement as well.

Bundles, basically strips of eight or more consecutive quarterly futures contracts, began trading in 1994 (has it really been 20 years?), and have grown steadily in popularity. The new contracts will be available in 2-year, 3-year and 5-year increments.

While the futures products will certainly generate some operational and margin efficiencies, it is in the option products where I see the most opportunity, especially for banks and other financial institutions who need to hedge large amounts of duration risk but who do not wish to juggle dozens of strikes over multiple expiry cycles.

The only question I would ask is “What took you so long?”

Link to fact page =>  http://jlne.ws/1yrHDSV

Lead Stories

Chinese options “could launch this month”
William Mitting, FOW
ETF options will be the first in a series of options launches in China
ETF options could be launched in China as soon as this month as the country gears up for the full launch of options trading, a leading lawyer has said.
China is undergoing a widespread reform of its financial markets as it seeks to build Shanghai as a global financial centre and develop its capital markets.
The launch of options is seen as a key step in that development and the country’s main derivatives exchanges have been running mock trading since 2012.

Guessing Game on Rates Lifts Bearish Bets on Financials
The guessing game over when the Federal Reserve will raise interest rates is underpinning bets for more volatility across shares of banks, brokerages and insurers. Traders are buying up options that pay off if the industry slumps and now own 2.2 puts for each call on the Financial Select Sector SPDR Fund (XLF), the most in almost a year. The cost of one-month bearish contracts is above the five-year average relative to bullish ones and puts make up nine of the top 10 options with the highest ownership, data compiled by Bloomberg show.

Investors move into cash, bracing for market sell-off
The number of investors buying crash protection against a sharp fall in stock markets over the coming months has risen to its highest level since October 2008, according to Bank of America Merrill Lynch’s fund manager survey for August.
***DA: Investor cash holdings moving up as well, from 4.6 percent to 5.1 percent.

A Historical Perspective on Current VIX Levels
Russell Rhoads – CBOE Options Hub
VIX has been fairly low for most of 2014. I can admit that. When I hear comments like, “VIX is broken”, due to the recently low levels for VIX then I get to work.
CBOE has data on VIX going back to January 1990. The average closing price for VIX from January 1, 1990 through August 11, 2014 has been 20.02. The average for VIX in 2014 has been about 13.65. That’s the kind of comparison that has people thinking something is wrong with VIX.   To show VIX is perfectly fine and behaving within the parameters of history I took a look at some different averages.   The chart below shows the daily rolling 1, 5, and 10 year average of closing prices for VIX from January 1, 2000 through August 11, 2014.

SEC allows Pimco Total Return ETF to trade derivatives
Financial Post
The U.S. Securities and Exchange Commission approved the use of derivatives in Pacific Investment Management Co.’s Total Return exchange-traded fund, allowing it to more closely track the world’s biggest bond mutual fund. The regulatory body’s approval of the Nov. 6 request to amend the ETF’s description means it will be able to invest in options, futures or swap agreements, according to the July 24 filing.

JPMorgan Joins Goldman in Designing Derivatives for a New Generation
Sridhar Natarajan and Alastair Marsh – Bloomberg
Derivatives that helped inflate the 2007 credit bubble are being remade for a new generation.
JPMorgan Chase & Co. is offering a swap contract tied to a speculative-grade loan index that makes it easier for investors to wager on the debt. Goldman Sachs Group Inc. is planning as much as 10 billion euros ($13.4 billion) of structured investments that bundle debt into top-rated securities, while ProShares last week started offering exchange-traded funds backed by credit-default swaps on company debt.


BATS Global Markets Becomes Largest Equities Trading Venue in July
Adil Siddiqui in Executing Venue – Forex Magnates    
The summer slowdown affecting financial trading monthly metrics was invisible in US equity markets as one of the largest ECNs saw a sharp jump in trading volumes. July became a historic month for the venue as it surpassed its previous value of trades and became the world’s largest stock exchange operator for the first time. The rise in activity comes as traders reinvest funds back into rising stock markets.

Regulation and Enforcement

The Supercomputer Set to Shed Light on Dark Pools: Video
Better Markets CEO Dennis Kelleher discusses the proposed SEC supercomputer that would be used to track orders and peer into dark pools. He speaks with Pimm Fox on “Taking Stock.”

Under SEC Questioning, Jokes and Jitters
Jean Eaglesham – WSJ
Former American International Group Inc. AIG +0.85% executive Joseph Cassano cited his Fifth Amendment right to avoid incriminating himself more than 200 times while declining to answer questions posed by the Securities and Exchange Commission in 2009.
Mr. Cassano’s refusal to answer questions is among the disclosures included in 12 transcripts released by the SEC in response to public-records requests from The Wall Street Journal. The transcripts, comprising hundreds of pages, were from interviews conducted under oath related to two high-profile probes from the financial crisis.

US to force swaps overhaul to improve wind-downs
Philip Scipio – Reuters
The way the world’s largest banks use derivatives is set for drastic change after the US Federal Reserve and Federal Deposit Insurance Corp moved to strip financial counterparties of early termination rights on new derivatives contacts in the event of some future bank failures.

Got a Tip from a Friend on a CFD? In Australia It Can Cost You a Huge Fine and Jail Time – See more at:
Forex Magnates
The Australian Securities & Investment Commission (ASIC) has announced that a 31-year old Sydney resident, Mr. Fei Yu, was brought before a court today to be charged with eight counts of insider trading related to his mother’s online CFD stocks account, following an ongoing ASIC investigation.

Caution regarding on-line trading platforms
The Autorité des marchés financiers (the “AMF”) is cautioning Québec investors about the use of Internet-based trading platforms, primarily in the currency markets (also known as FOREX), and the use of binary options. The work carried out by the AMF cybersurveillance team and the complaints received from investors who believe they have been defrauded through this type of trading over the past few months indicate the increasing popularity of platforms that nonetheless carry significant risks.


Singapore Management University Integrates X_TRADER in Master of Science in Quantitative Finance Program
Trading Technologies
Trading Technologies International, Inc. (TT) and the Singapore Management University today announced that TT’s X_TRADER software is now being used in the university’s Master of Science in quantitative finance program within the market microstructure course curriculum.

Japan’s FXTF Quenches Local Thirst for Binary Options with New Technical Analysis Tool
Forex Magnates
The Japanese broker, FXTrade Financial Co. Ltd (FXTF), has informed its clients of the launching of a new technical analysis widget for binary options developed by technical analysis provider, Autochartist. This is the first time this Autochartist widget has been introduced to the Japanese binary options market.

Santander joins third FinTech Innovation Lab
Anna Irrera – Financial News
Santander, the banking group that last month launched a $100 million financial technology fund, has emerged as a backer for Accenture’s latest fintech accelerator programme.


Hide Out from Volatility in … Biotech?
Small biotech companies with a promising pipeline are always fun to research. They are great for possible takeover plays as well, as large pharmaceutical companies search for the next big money-maker and many blockbuster drugs come off patent.

A New ETF That Is Like The VIX For High Yield Bonds
Seeking Alpha
In this article, I will be looking at a new ETF which I characterize as the “VIX” of high yield bonds, which I believe can and will be instrumental in reducing risk from holding high yield bonds. The recent launch of the ProShares CDS Short North American High Yield Credit ETF caught my attention for a couple of reasons.

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