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.

Perhaps the biggest change has been the OCC’s new designation in the wake of massive regulatory changes since the financial crisis. In July 2012 the Financial Stability Oversight Council, established under the Dodd-Frank Wall Street Reform and Consumer Protection Act, designated the OCC as a “systemically important financial market utility” (SIFMU). OCC was one of several clearinghouses and institutions to be marked as such, a major market structure reform that is designed to help prevent the “too big to fail” financial firms that led to the 2008 crisis.

That also means that the OCC is under increased regulatory scrutiny, overseen by three regulatory entities: Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Reserve

In October 2013, the SEC sent the OCC what Bloomberg called a “hair raising” letter chastising the organization for systemic weaknesses in its risk management and operations and saying it had not done a good enough job managing conflicts of interest on its board. The letter didn’t charge the clearinghouse with any wrongdoing but said its organizational structure had led to a lapse in oversight, according to the Wall Street Journal. Organizational changes have followed.

The OCC was already preparing for its first leadership change since its inception in 1973. Wayne Luthringshausen, who served as both executive chairman and CEO, retired at the end of 2013 after running the OCC for its entire 40 years.

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Lead Stories

Russia Crisis Hits Pimco Fund, Wipes Out Options
Vladimir Kuznetsov, Ksenia Galouchko and Ye Xie – BloombergBusinessweek
After the single worst day in Russia’s nine-month-old financial crisis, the fallout is spreading across global markets.
Pacific Investment Management Co. (PEBIX:US) is facing mounting losses on its Russian bond holdings; almost every bullish ruble option contract registered in the U.S. has been made worthless; and foreign-exchange brokers in New York and London told clients they’re no longer taking ruble trades. Sergey Shvetsov, a first deputy central bank governor, expressed astonishment at the scope of the collapse during a conference in Moscow.
***DA: After top-ticking at about 73 yesterday, USD/RUB has settled down and is back below 60 today. Though it took a day, yesterday’s seven percentage point rate hike is having an effect. For now.  

VIX Bets Surge Amid Biggest Stock Swings Since October
Callie Bost – BloombergBusinessweek
Traders trying to protect themselves from the wildest fluctuations in U.S. stocks since October are turning to advanced weaponry: options on options.
More than 1 million contracts tied to moves in the Chicago Board Options Exchange Volatility Index have changed hands each day since Dec. 10, the most since mid-October, data compiled by Bloomberg show. Contracts on the VIX amount to bets on stock volatility that pay off when swings in shares are at their most violent.
***DA: What the author is trying to say is that the market went nuts and VIX volume and open interest went up. You’re welcome.

Wall Street’s ‘fear gauge’ may not recede before year-end
Saqib Iqbal Ahmed – Reuters
Just when it looked like Wall Street’s fear gauge would settle down for the holidays, it has been on the rise again, and a jump in the cost of hedging suggests that volatility might be here to stay at least until year-end.
The spike in the CBOE Volatility Index, which by Tuesday had sent it to a two-month high of 25.20, has come within a span of eight days. Past surges in the VIX would suggest that it may continue to rise for a few more days.

Why the VIX went haywire—and how it got fixed
Alex Rosenberg – CNBC
Market participants who peeked at the widely watched CBOE Volatility Index during Monday and Tuesday’s rocky market sessions were treated to a wonky chart that looked a bit like an accordion, with volatility appearing to rise precipitously and then fall back every minute.
***DA: Every veteran options market maker will tell you that, during a panic, everyone pulls their offers until another seller appears. If the market is to remain this volatile, and the index stays tied to mid-market spreads, there will be more of these VIX vapor-locks.

Brent ends below $60, U.S. crude settles up, then dips
Barani Krishnan – Reuters
Brent crude futures fell for a fifth straight day on Tuesday to end below $60 a barrel while U.S. crude finished a volatile session slightly higher as trading of expiring options helped defend the price above $55.
U.S. crude dipped again after settlement after an industry group reported growth in domestic crude inventories, which analysts had expected to shrink in the latest week.
***DA: Up two bucks this morning.

Market Stress Reaches 15-Month High on Oil Contagion Fear
Callie Bost – Bloomberg
Oil plunging below $55 a barrel, the biggest drop in Russia’s ruble in 16 years and nine straight days of selling in junk bonds have investors rushing for protection.
The price of insurance against declines across asset classes has risen to a 15-month high, according to an index of financial stress compiled by Bank of America Corp. The Market Risk Index, which tracks volatility in equities, U.S. Treasuries, currencies and commodities, climbed to the highest level since September 2013 on Monday.

The VIX Pop: Bullish On the Margins?
Adam Warner – Schaeffer’s Investment Research
Ah, the CBOE VIX Volatility Index (VVIX), voted the most confusing gauge ever by … well, everyone, if they really voted on such a thing. It proxies the implied volatility of options on the CBOE Volatility Index (VIX) itself. It uses the VIX methodology to index the implied volatility of said options.
***DA: And given how volatile those options on the VIX have been, perhaps we need an index to track them. Call it the VVVIX.

Santa is not visiting the S&P 500 this Christmas
Erik Tatje – Futures Magazine
As sinister as this may sound, Santa doesn’t appear to be coming this year…at least not in the form of the infamous “Santa Claus Rally” that traders have been accustom to, in which the stock indices typically rally in the month of December.
***DA: Game theory 101 – if everyone expects a December rally, they front-run it in November, which shifts it to a “Thanksgiving Rally.” Once that takes hold, it migrates to become a “Halloween Rally,” and so on. Of course, that assumes efficient markets, which assumes rational investors with perfect information, so never mind.

FIIs increase their short positions sharply
Mobis Philipose – Live Mint
Foreign institutional investors (FIIs) have been heavy sellers of Indian equities this month, although this isn’t evident from the numbers reported by the capital markets regulator. Reported numbers suggest FIIs made net purchases worth Rs.2,723.68 crore so far this month. But if one were to exclude the investment of Rs.5,200 crore or so they made through block deals in Infosys Ltd, it turns out they sold shares worth nearly Rs.2,500 crore.


CBOE, C2 and CFE Trading Schedule For the Christmas and New Year’s Holidays
Press Release – CBOE
CBOE Holdings, Inc. (NASDAQ: CBOE) announced the following trading schedule for Chicago Board Options Exchange (CBOE), C2 Options Exchange (C2) and CBOE Futures Exchange (CFE) in observance of the Christmas and New Year’s holidays:

ICE Futures Europe Sets Daily Volume Records in Brent Crude Options, Low Sulphur Gasoil Futures and Coal Options
Press Release – ICE
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, announced that several daily volume records were set in energy including Brent Crude options, Low Sulphur Gasoil futures and coal options on December 16, 2014:
Brent Crude Options – 151,354 lots traded (the previous record of 127,237 was set on September 26, 2012)
Low Sulphur Gasoil Futures – 138,590 lots traded (the previous record of 110,602 was set on December 10, 2014)
Coal Options – 12,390 lots traded (the previous record of 8,190 was set on October 15, 2014)

Regulation and Enforcement

New FIA PTG Whiteboard Series Will Examine Market Data
The FIA Principal Traders Group announced the release of a new analytical series called Whiteboard. As an advocate for data-driven decision-making, FIA PTG developed Whiteboard to demonstrate how the application of data and rigorous analysis can illuminate the complex questions and issues confronting our industry.  The first Whiteboard paper is being released in partnership with the FIA European Principal Traders Association (FIA EPTA). It examines frequent batch auctions and identifies areas where the application of additional data and analysis can help clarify the tradeoffs, benefits and costs associated with this idea.
***DA: Front-running the regulators.

Market Turmoil Will Test the Post-Crisis Financial System
By Peter Eavis, New York Times    
Washington has been trying to bolster the financial system for the last five years so it can deal with mayhem in the markets. The turmoil this week will test those rebuilding efforts.


High Frequency Trading or High Frequency Technology
Automated Trader
Fuelled by technological and regulatory developments, the markets are evolving rapidly. The majority of the market is already automated today, and recent legislation in Europe is encouraging further automation across the markets to ensure trading transparency and accountability. Similarly, there’s no single type of ‘high frequency trader’: trades at high speeds occur across many types of participants, not just principal traders. Automation in the markets will continue to grow, and use of high speed technology will spread until in a few years’ time, the whole conversation will be entirely irrelevant, as the majority of the market will trade at the same ‘high speeds’.


Inverse ETFs to Hedge a Bearish ‘Warren Buffett Indicator’
Tom Lydon – ETF Trends
Large money managers are bracing for a market correction. Exchange traded fund investors can also hedge against a turn in equities through inverse or bearish ETF options.
The so-called Warren Buffett Indicator, or the Total Market Cap to GDP Ratio, is triggering sell-alert warnings, and Warren Buffett is already trimming his U.S. stock exposure, MoneyNews reports. [A Short ETF Idea for Developed Markets]

Fade the VIX Index Super Spike With VXX
Tyler Craig – InvestorPlace
Mr. Market seems to have forgotten that December is supposed to usher in good tidings and higher stock prices sprinkled with low volatility. All its done this year is punch the bulls in the face.
Perhaps Santa Claus’s arrival will mend the situation, but for now the number of knockouts is climbing.
While the selling sickness had been focused overseas and in commodity land, it’s finally reached our shores in the U.S. The S&P 500 is now down some 5% while the popular CBOE Volatility Index (VIX) is extending its super spike.


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