Lead Stories

SEC Approves Rules for Clearinghouses Deemed Too Big to Fail
Dave Michaels – WSJ
Clearinghouses that guarantee trades in equity, fixed-income and derivatives markets will have to maintain a capital buffer that would allow them to meet their obligations in the case of a failure, under new rules approved Wednesday by U.S. securities regulators. The rules, approved on a unanimous vote by the Securities and Exchange Commission, target clearinghouses including the National Securities Clearing Corp., the Fixed Income Clearing Corp., and the Options Clearing Corp., entities that ensure one party to a trade gets paid if the other side defaults. Policy makers mandated wider use of clearing in the wake of the 2008 financial crisis, but centralizing so much risk at clearinghouses has fed worries that one entity’s collapse could jolt the stability of the financial system.

****SD: OCC supports the rule — see its statement in our ‘regulation’ section. It’s far from the only regulatory news to digest today.

Want More Proof Markets Aren’t Efficient? Look at EM Hedging
Jon Sindreu – WSJ
As investors across the globe scramble to squeeze out whatever returns they can get, the cost of hedging currencies has become an increasingly important factor in driving decisions. But evidence suggests markets aren’t placing hedges very efficiently. Aggressive stimulus policies by central banks in developed economies have left investors with barely any yields to collect. Flows to emerging-markets, the only place where some returns can be found, have surged. In Japan, yields are so punitively low that similar flights of money also happen towards U.S. Treasurys or euro assets

The mystery of high-frequency trading
Zachary Warmbrodt – Politico
Something mysterious rattled one of the world’s most stable financial markets for 12 harrowing minutes on Oct. 15, 2014. During that brief window, the yield on the 10-year Treasury note—a benchmark security critical to funding the federal government—dropped dramatically and then surged, and no one could tell why. It was, said JPMorgan Chase CEO Jamie Dimon, “an event that is supposed to happen only once in every 3 billion years.

****SD: Also see How High-Frequency Trading Is Conquering Emerging Markets

Investors Are Trading All Things Deutsche Bank Amid Woes: Chart
Cecile Vannucci – Bloomberg
As Deutsche Bank AG battles concerns about mounting legal costs eroding capital buffers, traders are rushing to deploy different securities to bet on the trajectory of the beleaguered lender’s stock and dividends. The number of options on the firm surged to a record, while dividend futures expiring in 2019 fell to an all-time low after 1,000 changed hands on Tuesday.

Top Analyst Sees No Easy Win for Yuan Bears as Calm Endures
Justina Lee – Bloomberg
Bears betting that the yuan will soon resume its steep descent look set to be disappointed. That’s according to Svenska Handelsbanken AB, the currency’s top forecaster in a Bloomberg ranking, who says policy makers will maintain stability in the yuan after its inclusion in the International Monetary Fund’s reserves basket on Saturday. The exchange rate has barely budged against the dollar this quarter after slumping in the previous three months by the most since the nation unified official and market rates at the start of 1994.

FIA Releases SEF Tracker For August
Total trading volume on SEFs averaged $430.4 billion per day during the month of August, with an increase of 5.7% from the previous month and 14.6% from August 2015.


Moving Euro Clearing out of the UK: the $77bn problem?
Clarus Financial Technology
There has been a lot of coverage in the press recently, particularly by Bloomberg, on what could happen if EUR clearing were to be forced out of the UK upon Brexit. But let’s approach this from a data angle. Can we estimate the effect on the market from bifurcating Interest Rate Derivative portfolios in a way that leaves non-EUR business in London and EUR-denominated business elsewhere?

EU warns Deutsche Boerse, LSE deal could harm competition
Foo Yun Chee and Jonathan Gould – Reuters
EU antitrust regulators on Wednesday raised a raft of concerns over the proposed $28 billion merger between Deutsche Boerse (DB1Gn.DE) and the London Stock Exchange (LSE.L), saying it could hinder competition in key financial market activities. The European Commission said it would investigate over the next four months whether the deal would sharply reduce competition in clearing, derivatives and index licensing.

Europe refers DB-LSE merger to in-depth probe
Luke Jeffs – FOW
EC said DB-LSE merger could impact clearing and derivatives competition
The European Commission said it is opening a full in-depth investigation into the planned merger between Deutsche Boerse and the LSE Group, citing derivatives and clearing as two areas where competition may be restricted. The European authority said in a statement on Wednesday afternoon: “The European Commission has opened an in-depth investigation to assess, under the EU Merger Regulation, whether the proposed merger between Deutsche Boerse and London Stock Exchange Group would reduce competition in several financial market infrastructure areas.”

CBOE Steps Up to Bats
Evercore ISI – Barron’s
CBOE Holdings announced that it intends to acquire Bats Global Markets for $32.50 a share.
CBOE (ticker: CBOE) will finance the deal with $1.65 billion of debt (through a bridge initially and to be replaced with a mix of term-loans and bonds) and as well as equity (31% cash/68% stock).
Expected synergies of $65 million are expected to be realized over five years with $50 million by year three. The deal is anticipated to close in second-half 2017.

Direct Clearing For Dummies
Tod Skarecky – Clarus Financial Technology
Back in July of 2016, the CME submitted a proposal to the CFTC for a new class of clearing membership which they call “Direct Funding Participant” (“DFP”). I was drawn to the topic last week when Bloomberg wrote an article about its imminent effective date of Sep 23, 2016. As it happens, it appears that date was just a requested date, as I cannot find any mention of it on the CME website. Perhaps this might require a more formal blessing from the CFTC.

****SD: CME’s plan, submitted in July, is still under CFTC review. For some more on direct clearing, here’s some content from Katten Muchin Rosenman’s Gary DeWaal.

Deal of the Week: CBOE’s $3 Billion Bats Purchase is Actually a Tech Deal (PODCAST)
Alex Sherman – Bloomberg
CBOE’s $3.2 billion acquisition of Bats Global Markets may sound like a wonky financial transaction. That isn’t really the case, Bloomberg M&A reporter Matt Monks tells Deal of the Week host Alex Sherman. Actually, you can view it as a technology deal. Monks and Sherman discuss why stock and options exchanges are consolidating and explain why technological changes have upended the industry.

SGX Collaborates With Member Firms To Address Market Misconduct
Singapore Exchange (SGX) today launched two initiatives in collaboration with Member firms to detect and stop market misconduct, foster good trading practices and maintain a fair, orderly and transparent marketplace. The initiatives complement SGX’s existing real-time trade surveillance, Member inspections and enforcement actions. SGX also regularly discusses with Members any unusual trading behaviour.

NSE extends concessional transaction fee in equity derivatives
CNBC MoneyControl
Leading stock exchange NSE said it has extended concession of up to 40 percent on transaction charges for trading in its equity options segment for three months till December 31. The move is part of NSE’s effort to improve the liquidity in the equity options segment.


Hanweck Expands Marketing, Sales and Client Services Teams
Hanweck, the leading provider of real-time risk analytics on global derivatives markets, announced new team members in the areas of Marketing, Sales and Client Services. The new appointments are as follows: Molly McGregor joins Hanweck as Chief Marketing Officer where she will build out and manage Hanweck’s marketing strategy and corporate communications efforts. Molly has over fifteen years of experience in financial services including ten years at the International Securities Exchange, where she most recently served as SVP of Communications, Marketing and Government Relations.

Regulation & Enforcement

U.S. prepares bevy of rule proposals on asset management, trading
Lisa Lambert – Reuters
The top two U.S. securities regulators on Tuesday outlined rule proposals ranging from asset management to swaps dealing they will take up in coming months, indicating the agencies will be at full throttle through election season to the end of the year. The Securities and Exchange Commission and Commodity Futures Trading Commission are working to enforce mandates from the 2010 Dodd-Frank Wall Street reform law, comply with international regulations and respond to technology changes as part of efforts to keep markets running smoothly and protect investors.

EU Banks Eye $5 Billion Capital Respite on SEC Clearing Vote
Silla Brush, Benjamin Bain – Bloomberg
A decision by the U.S. Securities and Exchange Commission may bring European Union banks a step closer to avoiding billions of dollars of capital charges on their trades in derivatives and other securities. The U.S. regulator is set to vote Wednesday on final clearing rules that would apply to firms including the Options Clearing Corp. and Depository Trust and Clearing Corp. Once the stiffer standards are in place, the SEC and the European Commission, the EU’s executive arm, could accelerate talks on the equivalence of their regulations.

****SD: That’s a lot of money, though not as much as Deutsche Bank faces in potential fines.

U.S. Securities Markets Coalition Comments on Senator Wyden’s Discussion Draft of the “Modernization of Derivatives Tax Act of 2016”
Comment Letter
OCC and the U.S. Securities Markets Coalition provided preliminary comments on the discussion draft of the Modernization of Derivatives Tax Act of 2016. While OCC and the Coalition agree with Senator Wyden’s stated interest in creating “one fair system with simple and straightforward rules,” they do not believe the discussion draft would advance those objectives, but instead would create results that are neither fair, nor simple, nor straightforward as applied to exchange-traded options.

OCC Supports SEC Decision on Covered Clearing Agency Rules
OCC, the world’s largest equity derivatives clearing organization, today released the following statement from Executive Chairman and Chief Executive Officer Craig Donohue regarding the U.S. Securities and Exchange Commission’s (SEC) decision on covered clearing agency rules.

The Regulation of Commodity Markets: Part Five
Liz Bossley and Valerie Pivkina, Consilience Energy Advisory Group – OilVoice
This is the fifth and final article in a series that takes a critical look at the application of financial regulation to the commodity market. We foresee a problem down the road when the regulators begin to assimilate the hecatombs of new data that will be reported to them by Dodd Frank Swap Data Repositories (‘SDRs’) and EMIR Trade Repositories (‘TRs’). This article focuses on the consequences of new US and European regulation for hedging price risk in the commodity market.

Sebi allows options in commodity trading
Anirudh Laskar – LiveMint
The Securities and Exchange Board of India or Sebi, on Wednesday, allowed commodity derivative exchanges to launch “options” contracts for trading on exchange platforms, with an aim to enhance liquidity and broad base participation in the commodity market.


Gator Trading migrates to Rival risk platform
Chicago-based Rival Systems (Rival), a trading software company established last year, announced today that Gator Trading, an operator of dozens of trading groups specializing primarily in futures and options, has successfully migrated onto the Rival Risk platform for all of its risk management needs.

****SD: Gat-r dun.

ITG Launches New Forecasting App, Utilizing Data, Volumes Analysis
Jeff Patterson – Finance Magnates
ITG’s new forecasting tool will be available for market participants to better predict the trajectory of volatility.


New Paper by Fund Evaluation Group Analyzes CBOE Russell Benchmark Index Suite with Strong Performance by PUTR Index
Matt Moran – CBOE Options Hub
This week a new paper by Fund Evaluation Group (FEG) — Evaluating Options For Enhanced Risk-Adjusted Returns: CBOE Russell 2000 Option Benchmark Suite and Case Studies on Fund Use of Options (2016) – was released and presented at the Fifth Annual CBOE Risk Management Conference (RMC) Europe.

What is correlating in FX? – Nomura
Sandeep Kanihama – FXStreet
“With uncertainties around key events now out of the way (Fed and BOJ meetings), and with the recent bear-steepening moves in DM curves having proven to be a temporary hiccup in the wake of some notable dip-buying, previously strong GBP correlations (with interest rates) have firmly taken a backseat. For instance, the correlation between EURGBP and nominal rates differentials collapsed from hovering in the high 80%’s to barely around 30% on average currently.

The Election and Futures Market Movement
Sarah Linane – OptionsHouse
As the election season is officially upon us with the first Presidential Debate this past Monday, traders should be braced for possible volatility in the marketplace. The stock index futures market is just slightly below the all-time highs. With the exception of Brexit, the entire summer saw a constant bullish trend, with minor pullback buying opportunities. So now what’s next? Well, much like the election outcome, we do not know the answer. However, the fact that futures markets trade almost 24-6 and can be shorted just as easy as going long, this could be a reason to get involved in futures trading….


Presentation at CBOE RMC on Hedging with VIX Options
Russell Rhoads – CBOE Options Hub
Rocky Fishman, Equity Derivatives Strategist from Deutsche Bank Securities and Andrew Warwick, Managing Director from Blackrock teamed up to discuss Hedging with VIX Option at CBOE’s Risk Management Conference in Ireland Tuesday.

Discussions Focusing on Short Volatility Strategies Today at RMC
Russell Rhoads – CBOE Options Hub
Stephen Crewe from Fulcrum Asset management and Dhvani Gupta from Barclays shared the presentation duties during a session titled Implementing Systematic Short Volatility Strategies at the 5th Annual European CBOE RMC this afternoon.

Long Volatility Alternatives Discussed at RMC
Russell Rhoads – CBOE Options Hub
Daniel Danon from Assenagon Asset management and Nicolas Vanhoutteghem from Argentiere Capital teamed up for a discussion around Implementing Long Volatility Exposures at CBOE RMC in Ireland this afternoon.

SEC To Hold Forum To Discuss Fintech Innovation In The Financial Services Industry – Forum To Be Held On November 14 At SEC
The Securities and Exchange Commission today announced it will host a public forum to discuss financial technology (Fintech) innovation in the financial services industry. The forum is designed to foster greater collaboration and understanding among regulators, entrepreneurs and industry experts into Fintech innovation and evaluate how the current regulatory environment can most effectively address these new technologies.


Economics and markets: China worries subside
The Economist
Opinion polls have taken a bit of a reputational battering in recent years. In Britain, they underestimated the strength of the No campaign in the Scottish referendum and failed to predict a Conservative majority in the 2015 election; while in America, polls underestimated Obama’s margin of victory in 2012 and the Republicans’ mid-term success in 2014. In economics, there is still a debate about the usefulness of surveys of consumer and business sentiment (relative to the hard data). Polls of investor sentiment are generally seen as useful, if only as a contrarian indicator. If fund managers are bullish about emerging markets, that means a lot of good news is priced in. The risks are thus skewed; further good news is thus unlikely to have a positive effect on asset prices while bad news will have an adverse impact.

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