Observations and Insight

Boca Bits & Pieces
By John J. Lothian

Sunshine. Warmth. Industry Colleagues. We have it all in Boca Raton, FL at the Futures Industry Association International Conference. After a long winter in the U.S. and other venues around the world, many are pleased to be in the sun and warmth of Florida.

Jim, Doug, Patrick, Sarah and I all arrived safely and quickly went to work. Jim conducted an interview with LME CME Garry Jones yesterday as part of our CEO series.

My friends at Women in Listed Derivatives, or WILD, are distributing bright pink sunglasses. I am sporting a pair, which makes me feel downright WILD.

At dinner last night I learned that Gary DeWaal was a journalist for the New York Times when he was in college.

I also learned that Futures Industry Magazine deputy editor Joanne Morrison has an art showing at a DC restaurant for several of paintings. She is a very talented artist.

Finally, the four U.S. clearing houses, CME, ICE, OCC and DTCC submitted a letter yesterday to the Financial Stability Oversight Council, addressed to its chairman and Secretary of the Treasury Jacob Lew. The letter acts as a rebuttal to the January letter by the Clearinghouse Association, a consortium backed by a group of clearing banks. The letter is divided into four issues – transparency, certainty of clearing, collateral safeguards and recovery/wind-down procedures. See the intro to the letter and link below:

Dear Chairman Lew:
The undersigned companies all strongly support prudent risk management and transparency standards for central counterparties (CCPs), given their critical role in mitigating systemic risk. We welcome the opportunity to comment on the recent request by The Clearinghouse Association, an advocacy organization representing not CCPs, but the interests of the largest U.S. commercial banks,that the Financial Stability Oversight Council directly intervene in the ongoing regulatory oversight of CCPs.

The Dodd-Frank Act and comparable international legislation, together with comprehensive new regulatory rulemaking, has transformed many parts of the financial services industry. In particular, the clearing mandate for swaps has had a dramatic impact on all swaps market participants, introduced new asset classes to clearing and broadly expanded regulatory oversight of swaps trading and risk management activities. As market participants assess and accept these changes, they have raised new challenges concerning the ownership, governance and regulatory oversight of CCPs.

Read the rest of the letter to FSOC Chairman Lew

Lead Stories

Fed Spurring Hedges in U.S. Stocks as Call Index Drops: Options
Inyoung Hwang – Bloomberg
As the bull market in U.S. equities enters its seventh year, options traders are loading up on contracts to protect against losses if the rally loses steam.
The ISE Sentiment Index, which tracks the number of calls traded relative to puts, touched the lowest level since June 2013 last week after a surge in hiring fueled speculation the Federal Reserve will raise borrowing costs this year.

Startup challenges dominance of big banks in derivatives markets
A new trading exchange for derivatives is loosening the stranglehold that the world’s biggest investment banks have on the multi-trillion dollar market in a crucial test of financial reforms that attempt to reduce systemic risks.
The year-old trading venue, trueEX Group LLC, surprised many on Wall Street when it had nearly 20 percent of the trades in exchange-traded interest rate swaps in the U.S. for the week ending Feb. 20. Though it has not matched those numbers since, its 9 percent market share so far this year marks significant inroads for a startup vying against rivals backed by the most powerful banks, investors and traders said.

Volatility Creeps Its Way Back Into the Stock Market
Kristen Scholer – WSJ
Volatility is back.
After stocks quietly climbed in February, it’s been a rough start to March. The CBOE Volatility Index, often called the stock market’s “fear gauge,” is at its highest level in a month, rising nearly 30% in the last six sessions, including Tuesday.

Are We ‘Due’ for a Volatility Spike?
Adam Warner – Schaeffer’s Investment Research
News Flash: Telepundit on a mid-day financial TV show expects volatility to lift in March … or at least be higher in the month going forward versus the month looking backwards. OK, we’ve gone over this many times. Everybody always expects higher volatility looking ahead than what they see in their rearview. That is, unless volatility just spiked.

RMC Speakers – Volatility of Volatility Rose in Recent Months
Matt Moran – CBOE Options Hub
In the first two months of 2015, the CBOE VIX of VIX Index (VVIX) had an average daily close of 100.2, a higher level than in any of its previous eight full calendar years from 2007 through 2014.
On Thursday at the 31st CBOE Annual Risk Management Conference in Carlsbad, expert presentations on Volatility of Volatility (VOV) were delivered by Benn Eifert, Ph.D., Portfolio Manager, Mariner Investment Group and Kambiz Kazemi, Portfolio Manager, Picton Mahoney Asset Management.

Entry of long-term investors helps Japan shares see a ‘serene’ rally
Japan’s stock markets are again attracting foreign investors, and there are signs some of them will park their money for a long time rather than a brief stay…
The options market provides further evidence that the overall Japanese stock market is less driven by speculators than in the past.

India VIX Declines After Foreigners Buy Most Options in 7 Weeks
Santanu Chakraborty – Bloomberg
India’s benchmark measure of equity options fell in a volatile session after data showing foreign investors bought the biggest amount of protection against market swings in seven weeks.
The India VIX Index slid 1.8 percent to 15.5 at the close in Mumbai, erasing an intraday gain of 2.1 percent. Foreigners bought $473.4m of index options on Monday, the largest purchase since Jan. 15, data compiled by Bloomberg show. They also sold $303.1 million of index futures, the most since Jan. 6.


ICE delays Singapore launch amid legal threat -FT newspaper
Intercontinental Exchange Inc has pushed back the launch of its Singapore platform to the middle of the year from this month, with the Financial Times reporting that the delay was due to a Chinese bourse threatening legal action.

EU court upholds blocking of Deutsche Boerse/NYSE Euronext merger
A European Union court upheld on Monday the European Commission’s decision in 2012 to block a planned merger of Deutsche Boerse and NYSE Euronext.
The Commission blocked the deal to create the world’s biggest stock exchange because it said it would have created a “near monopoly” in European financial derivatives.

Regulation and Enforcement

NYSE Sees Progress In Push For Faster Active ETF Listings
Katy Burne – WSJ
The New York Stock Exchange’s Arca unit has reached a new turning point in its push to speed listing times for actively managed, transparent exchange-traded funds, an exchange official said.
Laura Morrison, head of global index and exchange-traded products at NYSE, said the Securities and Exchange Commission has formally recognized a February filing by NYSE Arca Inc., adding that a March 4 regulatory notice from the SEC was the final stage before such the proposal can be put out for public comment.


Fidessa partners with RBS for Global F&O trading
Press Release – Fidessa
Fidessa group plc (LSE: FDSA) has today announced that RBS has selected Fidessa’s futures and options trading platform to enhance its execution capabilities within the global derivatives business. Both firms will mutually benefit from the wealth of experience and talent they offer in the derivatives space as RBS invests in the technology necessary to continue to provide its clients with a top quality execution service.

Options Education

How Some Funds Give More Than 100% When It Comes to Asset Allocation
Adam Zoll – Morningstar
Question: The portfolio breakdown for one of the funds I own shows it having more than 100% long U.S. stock exposure. How is that possible?
Answer: It can be somewhat jarring at first glance to see that a fund you own has more than 100% exposure to anything. After all, there’s such a thing as being fully invested–but how can a fund be more than fully invested in a particular asset type?

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