Observations & Insight
OCC: Moving from a Utility to an Influencer
Craig Donohue – OCC
I am very pleased by the fact that OCC was named Clearinghouse of the Year by Global Investor/ISF Magazine in June. This is a tremendous recognition of the dedication and hard work put forth each day by my OCC colleagues on behalf of market participants. They truly deserve this award! Thanks to them, OCC is evolving from a utility that processes trades for market participants to a market influencer that manages risk for the listed options industry and has taken on more of a leadership advocacy role for the industry with international and domestic policymakers.
Options Traders Brace for Big Moves from BoJ
Ben Eisen – WSJ
Investors are bracing for big things from the Bank of Japan when it announces its monetary policy decision Friday. How big? “In the FX markets, they are expecting this to be one of the most consequential BoJ meetings,” in recent years, said Mandy Xu, an equity derivatives strategist at Credit Suisse. That’s backed up by options market activity, which suggests traders are positioning for large moves in the value of the dollar against the yen. One-week implied at-the-money volatility of the exchange rate jumped to a seven-year high of about 25 last week, and recently lingered around those levels, suggesting the exchange rate could have daily moves of about 1.5% right after the BoJ meeting, according to Credit Suisse.
****SD: Barron’s — Traders Expect Big Currency, Stock Swings on Bank Of Japan. Bloomberg — Currency Traders Wary of Shorting Yen on Risk BOJ to Disappoint
Exploring Volatility With the Inventor of the VIX
Investing on behalf of clients is a challenge, but it becomes particularly challenging in periods of heightened volatility like what investors have experienced over the past six months. Recall how the stock markets plunged in January before recovering and how in June the Brexit vote sent the markets on a wild ride before they recovered within days — at least the equity indexes; bonds are another matter.
A Banker’s Guide To Derivatives Part 1: The Role of Derivatives in Risk Management
Celent report, commissioned by CME Group
This is the first of a three-part series of reports aimed at examining patterns of use of rate-based derivatives at US banks, determining how bank performance can be correlated with a more active utilization of derivatives to manage risk, and finally the role that derivatives will play in the future as an instrument for risk management for US banks. The role of futures and options in managing financial risk for banks dates back to 1971, with the collapse of the post-WWII Bretton Woods Agreement that sought to coordinate foreign exchange rates on a global basis by pegging the world’s currencies to the US dollar. The financial community responded to this emerging market uncertainty by launching the International Monetary Market (IMM) on May 16, 1972, which created a market for futures contracts in seven foreign currencies.
****SD: Lots to digest in these three reports.
A Banker’s Guide to Derivatives Part 2: Derivatives and Bank Performance
Celent report, commissioned by CME Group
This paper will review the use of rate-based derivatives by US banks and examine the correlation between the use of such derivatives and the overall financial performance of banks. All of the data presented in this paper is based on the statistics published by the Federal Deposit Insurance Corporation (FDIC) in its quarterly Statistics on Depository Institutions (SDI)
A Banker’s Guide to Derivatives Part 3: The Future Role of Derivatives in Banking
Celent report, commissioned by CME Group
This paper reviews the current economic environment in which banks operate in relation to the management of interest rate risk, examines the role that derivatives will play in allowing banks to manage IRR in the future, and suggests IRR management best practices that will serve banks well in the future.
Period of artificial calm distracts from potential for storms
Mohamed El-Erian – Australian Financial Review
While global economic and political developments point to the possibility of “jump conditions” once deemed improbable, financial markets have treated their influence as temporary and reversible. This divergence is understandable in the short run. Longer term, however, it sets up complex dynamics that call for investor adaptations.
Dog Days Chase Bulls in August
Michael P. Regan – Bloomberg
Tom Lee, the co-founder of Fundstrat Global Advisors, has been one of the more reliable and reassuring voices of optimism during the current bull market, rarely if ever finding a proverbial wall of worry that was too high to be climbed. So naturally it caught our attention to hear that the strategist was nervous about what may happen in the stock market during August, a month that has tested the resolve of bulls almost like clockwork over the past few years. Don’t worry, Lee fans, he hasn’t turned into a bear yet: He’s still expecting an 8 percent to 10 percent rise in the S&P 500 in the second half of the year.
What is Causing Market Volatility?
The dire predictions about the fate of global markets if the UK voted to leave the European Union remain to be fulfilled. Markets fell in the immediate aftermath of the vote for Brexit, especially sterling, but the anticipated collapse of equities has failed to materialise. The pan-European indices have declined by a mere 1% in euro terms, and, even at their worst, none of the major markets sank below their February lows.
Muted response to HK’s new system to calculate closing share prices
Enoch Yiu – South China Morning Post
The controversial relaunch of a new and improved system to calculate closing share prices in Hong Kong, met with muted market response on Monday. Hong Kong Exchanges and Clearing (HKEX) revealed 290 brokers took part and 282 stocks were traded during the new closing auction session’s debut, amounting to a turnover of HK$1.1 billion, or just 2.2 per cent of the full-day’s turnover of HK$49.39 billion. Brokers said the volume was way below overseas market levels, where the auction period normally accounts for 10 to 30 per cent of all turnover. The biggest difference between the old and new system is the added safeguard of a 5 per cent price cap during the option period, which HKEX hopes will stop big players with large volumes of orders from influence closing prices.
CME files for new direct clearing membership
Julie Aelbrecht – Futures & Options World
Eurex exchange announced the launch of a similar type of membership in April
The Chicago Mercantile Exchange is set to launch a new type of direct clearing membership at its various exchanges in September, marking the second such move by a large exchange group. The Merc has filed a proposed change to its clearing rules with the Commodity Futures Trading Commission (CFTC) which would create a new category of Direct Funding Participant (DFP). The new structure will come into effect on September 23 pending regulatory approval.
Deutsche Boerse gets shareholder approval for LSE deal
Deutsche Boerse (DB1Gn.DE) has won the necessary backing from its shareholders for the planned merger with the London Stock Exchange Group (LSE.L), with the German exchange operator reporting a 60.35 percent approval rate on Tuesday ahead of the 2200 GMT deadline. Deutsche Boerse had asked its shareholders to back the $27 billion merger and earlier this month lowered the acceptance threshold to 60 percent from an earlier 75 percent of its shares. It also extended the acceptance period to July 26.
Eurex Exchange’s Equity Index Derivatives news
The trading volumes in Q2/2016 show very robust interest in Equity Index Derivatives. The quarter started quietly with volatility as measured by VSTOXX at comparatively low levels (under 25 index points). However, due to the uncertainty relating to the U.K. referendum, the market volatility and trading volumes spiked dramatically in June. In fact, June 2016 was the strongest month in terms of volumes in five years. Over 245 million futures and options contracts were traded in the first half of this year.
Regulation & Enforcement
MPs call for Financial Conduct Authority to lose enforcement powers
Jill Treanor – The Guardian
The Financial Conduct Authority (FCA) should be stripped of its powers to fine and ban individuals for wrongdoing, according to a report by MPs that calls on new chancellor Philip Hammond to commission an independent review into whether an alternative investigatory body should be set up.
Mifid could challenge UK’s post-Brexit access to CCPs
Julie Aelbrecht – Futures & Options World
An equivalent regulatory regime to Mifid II may not suffice in certain areas – lawyer
The adoption of Europe’s Mifid II or the UK’s establishment of an equivalent regime to Europe’s may not guarantee UK firms access to European central counterparties, a legal expert has warned. Non-European Union firms looking to gain access to the European market can do so by establishing their regulatory regime as equivalent to Europe’s but there are specific clearing rules under Mifid that mean these measures may not ensure access to Europe’s central counterparties, according to a partner at law firm Morrison & Foerster.
India Regulator Plans Rules to Slow Down High-Speed Trading
Santanu Chakraborty and David Merritt -Bloomberg
India’s markets regulator plans to introduce steps to slow down high-frequency trading in the next three months, according to its chairman.
Stay Hungry: A Fintech CTO’s Advice To Interns
Drew Shields – Trading Technologies
Trading Technologies has spent the last few years working on the next-generation TT platform. Through the process, we’ve learned a lot about what makes a good team and how a product needs to challenge the status quo if to make a long-term impact. It’s fair to say that any great accomplishment has as its first ingredient the people themselves. This is absolutely the case at TT, and growing our team over the last two years has been one of our major focuses. When I think about the type of people we’re looking to add, the most important question I have about any individual is: are they hungry?
Market Update as Democrats Take Their Turn This Week
Steve Claussen – OptionsHouse
As the Democrats take their turn this week, traders will have a big week watching Hillary of course, but also the FOMC 2-day meeting concludes on Wednesday and Apple (AAPL) will post earnings Tuesday after the close. Other earnings this week include Boeing (BA), Coca-Cola (KO) and Whole Foods Market (WFM) on Wednesday, Dow Chemical (DOW), Ford (F) and International Paper (IP) on Thursday and Friday energy titan Exxon-Mobil (XOM), Merck (MRK) and UPS (UPS) will report.
Options Traders Expect Fewer Fireworks from Apple Shares After Earnings
Options traders don’t expect too much drama for Apple shares after the company’s earnings report on Tuesday.
****SD: Price story, but it’s Apple. Some 633k Apple options traded yesterday with a .59 P/C ratio. That volume represents more than 10 percent of all yesterday’s contracts.
Happy Birthday to Mick Jagger Who Told Us “Time is on our side”
Russell Rhoads – CBOE Options Hub
Today is the 73rd birthday for Rolling Stones front man Sir Michael Philip ‘Mick’ Jagger. His accomplishments would take up more space that I have available in this posting, but the statement, “one of the most dominant cultural figures of our time” about sums it up. One of my favorite Rolling Stones songs is “Time Is on My Side” which I believe is a great statement with respect to potential success trading options. I always think of that song when discussing my belief that individuals need to have time decay on their side when trading options. Right now we have Wednesday and Friday SPX options, but in less than a month SPX Monday Weeklys (pending regulatory approval) will debut.
Stocktake: Are markets irrationally exuberant?
Proinsias O’Mahony – Irish Times
The Dow Jones Industrial Average did something last Thursday it hadn’t done for almost two weeks – it declined, ending a run of nine consecutive daily gains and seven consecutive all-time highs. Is irrational exuberance taking hold?
Beware, this might be world’s most crowded trade
Anora Mahmudova – MarketWatch
When the world’s most crowded trade—long defensive U.S. large-cap stocks—unwinds, it will not be pretty, according to some analysts. Bulls on Wall Street likely felt thoroughly vindicated as the S&P 500 SPX, -0.02% and Dow industrials DJIA, -0.17% notched record highs this month, finally breaking convincingly to the upside after a year of largely sideways trading. But the defensive nature of the stocks leading the rally seems at odds with the robustness of the advance.