Observations & Insight

Dodd-Frank in Action: Swap Dealer Risk Management Reviews
Doug Ashburn – JLN
The first few years after the signing of the Dodd-Frank Act, the narrative was all about the future – how an estimated 400 rulemakings would be implemented and how participants would be affected.

The future is here, as financial entities begin grappling with the new regulations. One such newly-implemented rule requires swap dealers, major swap participants (SD/MSPs) and futures commission merchants (FCMs) to undergo risk management program reviews. If you are keeping score at home, the SD/MSP reviews are required under CFTC Reg. 23.600 and for FCMs, it is CFTC Reg. 1.11.

Jim Falvey, veteran derivatives attorney, now a regulatory compliance manager at McGladrey, was part of a team that just completed such a review, for a U.S. swap dealer, and he shares a few of his insights from the front lines. He says that the clock starts ticking based on the end of an entity’s fiscal year, and the annual report must be completed no later than 60 days after the end of the fiscal year. Though the regulations do not require the use of a third party such as McGladrey to conduct the annual review and testing, if a third party is not used, it should be done by “qualified internal audit staff that are independent.”

Read the rest of the column, including the steps involved in a review, plus a few tips, tricks and lessons learned from the first round of reviews, on JohnLothianNews.com

Lead Stories

OCC owners want dibs on half the pie
Lynne Marek – Crain’s Chicago Business
Options Clearing Corp. has acted as a low-fee industry utility in processing options trades for 42 years. Now the exchanges that own the Chicago-based company are demanding a raise.
OCC Executive Chairman Craig Donohue won regulators’ initial approval of a deal that calls on the four exchange owners, including Chicago-based CBOE Holdings, to bolster the clearing company’s weak capital reserves with $150 million; in return, they’ll have dibs on half the company’s profit.

***DA: A lingering issue is the effect of this capital structure on non-owner platforms – BOX, BATS and MIAX. Will this become a two-tiered system? Does this run counter to regulators’ intentions? Donohue says the argument is a non-starter. An executive at one of the non-member exchanges said to stay tuned, as “this is far from over.”

This is how one trader made millions on Disney
Alex Rosenberg – CNBC
Shares of Walt Disney have had a great year, rising more than 13 percent in 2015 and far outpacing the market as a whole. But for one options trader, the run must have felt especially magical.

Did Cantor Fitzgerald just legalize gambling in the US?
Andrew Saks-McLeod – LeapRate
The prohibition of OTC binary options trading in North America by the National Futures Association (NFA) has rendered the United States a very transparent region in which to trade fixed contracts which have a predetermined expiry date and a win or lose outcome.
US authorities insist that all binary options trades within the United States must be conducted through one of two dedicated exchanges, namely Cantor Exchange and NADEX.
Co-Founder and Director of Karinza, James Azar, explains how he considers the recent influx of binary options trading platforms onto North America’s exchanges.

***DA: Two things: First, gambling is legal in many places in the U.S., so long as such venues are regulated (and, let’s be honest, so long as government gets a piece of the action). Second, all financial instruments, including stocks and bonds, have elements of uncertainty, and thus can be viewed as a form of gambling.

UBS Exiting U.S. Automated Options Market-Making Business
Traders Magazine Online News
UBS is partially pulling out of the U.S. options trading business.
According to a recent report by the Wall Street Journal, the Swiss bank is exiting the automated options market making business. However, the firm will continue other aspects of its options trading business.

***DA: This is big news, considering UBS’ options business can trace its roots back to O’Connor & Associates.

Stock Volatility Simmers As “Fear” Measures Yanked From 2015 Lows
JJ Kinahan – Forbes
Stock investor sentiment was rattled Friday as worrisome headlines from overseas diverted attention from disappointing earnings from GE (GE), Honeywell (HON), and American Express (AXP) and economic data that did little to change Wall Street’s collective mind about go-slow interest-rate timing. Trading this week could prove a valuable test of bull market resiliency after late-week volatility.

***DA: That question was answered right out of the gate this morning.

Greek Drama Adds Volatility
MoneyBeat – WSJ
China’s latest monetary stimulus helped distract investors from concerns about Greece in early European trading. But the Greek drama hasn’t gone away.
Growing concerns about Greece’s future in the eurozone are adding a dose of volatility to the equity markets after stocks have moved with little direction the past two months. The Dow Jones Industrial Average and the S&P 500 shed 279 and 24 points, respectively Friday, their worst days in three weeks. The CBOE Volatility Index, otherwise known as the market’s fear gauge, spiked 19.2% to a two-week high.

Where Does VIX Stand After Friday’s Spike?
Adam Warner – Schaeffer’s Investment Research
Sure, the CBOE Volatility Index (VIX) is higher after Friday, but what does that really mean?

***DA: Here’s the answer sheet – though equities have rallied almost all the way back, the VIX has given back less than half Friday’s gains. So fear has not subsided.

Global trouble spots will fuel volatility
Stephen Pope – TradingFloor.com
When trading the VIX, will 2015 be like last year where the index slides lower until July or will the pattern resemble that of 2014 with a small push higher from mid-April to the start of May and then a longer drive higher from mid-May to mid-June.


BATS Names Industry Leader Laura Morrison Senior Vice President, Global Head of Exchange-Traded Products
Press Release – BATS
BATS Global Markets (BATS), the leading U.S. market for the trading of exchange-traded funds (ETF) and products, today announced the appointment of Laura Morrison as Senior Vice President, Global Head of Exchange-Traded Products, continuing its push in the ETF business.
Ms. Morrison is uniquely qualified to lead this opportunity for BATS, with 20 years of experience as an industry leader at the New York Stock Exchange. Over the past eight years, she served as NYSE’s Senior Vice President, Global Index and Exchange-Traded Products, leading the team which managed ETF listings and trading as well as the NYSE index business.

Regulation & Enforcement

Clearing houses hit back at European plans
Philip Stafford – Financial Times
A group of seven European derivatives exchanges operators have hit back at regulators’ plans to give investors greater choice to trading futures and options, saying law drafts underplay risks to financial stability.
The seven warned that advanced European plans to require derivatives clearing houses to link to each other — intended to stimulate competition and lower trading costs — pose a threat to market stability and customer protections, “especially in distressed conditions”.

***DA: It’s London vs. the Continent.


OptionsCity Software Attracts Industry Veteran
Press Release – OptionsCity
OptionsCity Software (www.optionscity.com), a global provider of electronic trading solutions for professional futures and options traders, today announced that Dan Rooney joined the company as the Vice President of Global Sales. At OptionsCity, Rooney will lead the company’s global sales force in Chicago, New York and London and be responsible for maintaining and growing the company’s broad client base. Rooney will also bring broad-based industry knowledge to OptionsCity’s leadership team, helping to define and execute the company’s strategic vision.

EnergyMatch Partners with OptionsCity to Provide Clients with Enhanced Transparency and Liquidity across Energy Derivatives
Press Release via MarketWatch
GFI Group (“GFI”) a leading intermediary and provider of trading technologies and support services to the global OTC and listed markets, announced today that it completed the integration between EnergyMatch, its electronic central limit order book for WTI, Brent and Natural Gas financial derivatives, and OptionsCity’s Metro, an end-to-end electronic trading and market making platform.


How to Play the Abercrombie LBO Rumors
Steven M. Sears – Barron’s
On Wall Street, it often doesn’t matter if a rumor is true or false, only that it is tradable.
This is the approach some traders are taking, yet again, with Abercrombie & Fitch (ticker: ANF). The troubled teen retailer remains the subject of leveraged buyout chatter, as it has been for years.

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