Observations and Insight

The Road Ahead: Donohue Leads OCC In a New and Pricier Era
Sarah Rudolph – John Lothian News
After 40 years as a relatively quiet clearing utility, the [[OCC]] has recently been shaken up. In just the past couple of years, the organization has seen dramatic changes in its leadership, staff, board and structure as it responds to new, more demanding regulatory requirements and a changing environment.
***DA: In case you missed it, here is a link to Sarah’s piece on the changes and outlook at OCC, published yesterday.


SEFCON Snapshot 2014, Part II: Cross-Border Issues

The WMBA Americas hosted SEFCON V on November 12, 2014, and John Lothian News was there. We interviewed 14 SEF operators, regulators and participants and put together this three part series on the state of SEFs one year into the mandate.

Part II looks at the differences between U.S. SEF rules and those of other jurisdictions. The conference featured a panel on cross-border issues, moderated by ISDA CEO and former CFTC Commissioner Scott O’Malia, and also a keynote address by current CFTC Chairman Tim Massad.

Watch the video »

Lead Stories

Investors bulk buy bond default insurance options
Tracy Alloway – Financial Times
Big investors have been buying hundreds of billions of dollars worth of exotic credit derivatives to protect themselves against the possibility that growing numbers of corporate bond issuers will default.
Options that give investors the right to buy insurance against bond defaults have exploded in popularity this year as asset managers and hedge funds seek to affordably offset the risk of a big blow-up in credit.
***DA: Though you wouldn’t know by looking at the equity market these last couple days, they is plenty of fear out there.

Fed’s Dovish Stance Does Not Soothe Fear Gauge
Steven M. Sears – Barron’s
Be patient, but be cautious.
That is the message coming from the options market in reaction to Wednesday’s dovish policy statement from the Federal Reserve.
The takeaways for investors were that the Fed has no plans to raise rates anytime soon – the probability of a June rate hike decreased from 22% to 19%, according to futures markets – and that the Fed might proceed slowly once it does start hiking.
***DA: After a brief period when the market was driven by global fundamental shifts, it has returned to being driven by central bank policy.

Commodity Slump Leaves U.K. Stocks Among 2014’s Worst
Sofia Horta e Costa – Bloomberg
Plunging energy and mining shares have dragged the FTSE 100 Index (UKX) down with them, making investors in U.K. stocks among 2014’s biggest developed-market losers.
A five-year low in oil combined with slowing demand for industrial metals means the FTSE 100 will see little relief, said Ashcourt Rowan Plc’s Stephen Walker. Bets that the benchmark gauge will retreat further cost the most in three years relative to bullish options, one-month options data show.
***DA: Follow the trend until the market tells you otherwise.

RadioShack Kept Alive by $25 Billion of Swaps Side Bets
Jodi Xu Klein – Bloomberg
RadioShack Corp. (RSH) is finding an unlikely ally in its efforts to stay out of bankruptcy: credit derivatives traders who amassed more than $25 billion of trades speculating how much longer it can keep paying its bills.
After a 60 percent surge this year, the amount of credit-default swaps tied to RadioShack is 28 times its debt, more than any other U.S. company. When the retailer’s biggest shareholder arranged $585 million of funding in October to help it survive the holidays, much of the money came from hedge funds wagering on the company to avoid default, said people with knowledge of the trading. Those included DW Investment Management and Saba Capital Management, the people said.
***DA: Trading on the “when” not the “if.”

ICE Activated Circuit Breaker on Brent Crude Oil Contract
Georgi Kantchev And Nicole Friedman – WSJ
A sudden surge in oil prices in late London trade Wednesday led to a very brief suspension of trading on the global benchmark futures contract.
The Intercontinental Exchange activated a circuit-breaker at 11:56 EST for the Brent crude oil contract that paused certain trades for five seconds, a spokeswoman for ICE said.

Videocast: Huge bet on lower VIX

Breaking Down the ‘Loud’ VIX
Adam Warner – Schaeffer’s Investment Research
Speaking of volatility of volatility, check out how the CBOE Volatility Index (VIX) looked on Monday, via CNBC:
There’s a simple explanation, of course, and it didn’t involve fat fingers or major publications somehow believing a high school kid could earn $72 million out of the trading ether.
Yep, it was just good old-fashioned bad quotes!
***DA: Bad as in “wide” not bad as in “incorrect.”

Fed patience a virtue for equity bulls
Dave Shellock – Financial Times
Equity bulls were out in force in the wake of the US Federal Reserve’s pledge to be “patient” on raising interest rates, although participants were also keeping a wary eye on the oil markets as early gains for crude prices turned into sharp losses.
Switzerland’s central bank was also in the news as it introduced negative rates on sight deposits in a bid to halt the franc’s recent appreciation, which some have attributed to outflows from Russia following the rouble’s slide.

Russell Investments’ 2015 Annual Global Outlook
Press Release – Russell Investments
Russell Investments today released its 2015 Annual Global Outlook report, which outlines key investment insights, economic forecasts and market predictions from the firm’s global team of investment strategists for 2015.
In the report, Russell’s strategists explain how anticipated tightening from the U.S. Federal Reserve (Fed) and Bank of England, contrasted with expectations for easing from the European Central Bank (ECB) and Bank of Japan, will play a leading role in shaping the global capital markets through 2015.

Velocity And Confidence Are Inverse
Bill Holter – Investing.com
It is been said that the FOMC announcement was “the most important of Yellen’s tenure”. I could not disagree more. In the past I have written pieces regarding the potential announcements by the FOMC and come to the conclusion “what can they possibly say?”. This is more true now, Janet Yellen et al cannot “say” anything of substance because they cannot “do” anything of substance. The Fed backed themselves into a corner of their own making several years ago, I believe it is only a matter of time before the markets “test” them.
***DA: He may be right, but not today.

Regulation and Enforcement

Wall Street prepares Dodd-Frank assault
Peter Schroeder – TheHill
Banks and financial institutions are planning an aggressive push to dismantle parts of the Wall Street reform law when Republicans take control of Congress in January.
Fresh off a victory in the government funding debate that liberals decried as a giveaway to Wall Street, advocates for the financial sector aim to pursue additional changes to Dodd-Frank that they say would lighten burdens created by the 2010 law. Among the top items on the wish list: easing new requirements on mortgages, loosening restrictions on financial derivatives and overhauling the Consumer Financial Protection Bureau.
For a full breakdown, check out our recent interview with Washington insider Micah Green.

The Coin of the Realm: How Inside Traders Are Rigging America
Robert Reich – Huffington Post
A few years ago, hedge fund Level Global Investors made $54 million selling Dell Computer stock based on insider information from a Dell employee. When charged with illegal insider trading, Global Investors’ co-founder Anthony Chiasson claimed he didn’t know where the tip came from.
Chiasson argued that few traders on Wall Street ever know where the inside tips they use come from because confidential information is, in his words, the “coin of the realm in securities markets.”

Dark Pools in Spotlight as Europe Moves to Fortify Market
Jim Brunsden and John Detrixhe – Bloomberg
If you play poker with all your cards showing, you can’t bluff.
Traders accustomed to operating in Europe’s dark pools, where buy and sell orders are hidden, say a transparency drive by regulators may similarly deprive them of the secrecy they need to shield their trades from competitors. That could drain the liquidity, and the life, from some of the region’s biggest markets, they say.


EBS partners with First Derivatives to offer data analytics via Delta Stream – ICAP
Press Release – ICAP
EBS, ICAP’s market-leading electronic FX business, has selected First Derivatives, a leading provider of software and consulting services to the capital markets industry, to deliver its Delta Stream data analytics product through EBS trading platforms to all EBS customers.
The solution will further enhance EBS customers’ trading workflow with the provision of best-in-class tools, providing the ability to store and analyse high volumes of data in order to maximise execution rates at best prices.

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