Observations & Insight

Pushing the Cross-Border Envelope
Doug Ashburn – JLN

At my pre-conference interview with ISDA CEO Scott O’Malia (Un Parti Québécois: ISDA 2015 Montreal, JLN, Wednesday, April 22), he noted that the big issue of the conference would be achieving cross-border harmony. The first panel included people on both sides of the issue, including Commissioners Michael Piwowar and Mark Wetjen of the SEC and CFTC respectively, plus the FSA’s Masamichi Kono, who has served as the chair of IOSCO and also serves as a regional chair of the Financial Stability Board. The final panelist was Kay Swinburne, Member of the European Parliament.

I asked O’Malia if we would see fireworks with these panelists seated together on the stage. He replied that we are not here this week just so everyone can tour Montreal, but rather to push the envelope on cross-border issues such as substituted compliance and mutual recognition of central counterparties. Of course, we also toured Montreal, and it is a thoroughly lovely city.

I can report that the panel delivered, and the envelope has been pushed this week.

No legislation or regulation is passed with the express purpose of fracturing the market, but that is exactly what has happened to the swaps market, almost from the day the SEF rules were finalized. In data studies and user polls published by ISDA, all the evidence points to fragmentation.

Read more at: http://jlne.ws/1HYThx1

Lead Stories

SGX’s Big Derivatives Bet
Isabella Zhong – Barron’s
China’s stock markets are booming and Singapore Exchange wants its piece of the red hot action.
While Hong Kong Exchange and Clearing has enjoyed an explosion in trading volumes as money from mainland investors flooded into the city’s undervalued H shares, Singapore Exchange has shown its northern rival that it too can make money from the surge of interest in trading China’s markets.
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Roots of ‘flash crash’ go back further than you thought at CME
Lynne Marek – Crain’s Chicago Business
More than a year before the May 6, 2010 “flash crash,” CME Group noticed questionable trading in its E-mini market by a particular electronic trader who was placing orders and canceling them.
As the crash whipsawed the futures and stock markets in 2010, CME saw the suspicious activity again and warned the trader that day that orders must be placed “in good faith,” without an intent to cancel. The trader responded two weeks later: “Kiss my ass.”
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The ‘flash crash’ guy is not the problem
David Weidner – MarketWatch
If you think investors’ shattered confidence in the markets is about a single trader who may have ignited the 2010 “flash crash” by “spoofing,” you may be Wall Street’s perfect customer.
And no, that’s not something to be proud of.
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Who Else is to Blame for the Flash Crash?
Adam Warner – Schaeffer’s Investment Research
It’s hard to say if the trader who may have caused the flash crash will be convicted — but who else should be held accountable?
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The (Daily) Weekly Option Report
CME Group
A daily overview of CME Group’s Weekly options complex, including volume, open interest and open interest change. Data will be displayed for any product that has weekly options with open interest. An empty chart will be shown for products with weekly options and no current open interest while an empty message will show for products with no current weekly option offering.
Product groups can be selected by clicking on the blue “Products” menu item located on the top left section of the tool. Individual products within the selected group are then displayed on the horizontal light grey menu directly to the right of the Products menu.
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VIX ETFs Show Investors Grow Complacent in Sideways Market
ETF Trends
U.S. equities have been oscillating, but CBOE Volatility Index and VIX-related exchange traded funds investors have been growing increasingly complacent.
So far this year, the S&P 500 chart reveals a market with plenty of tops, bottoms and in-betweens, and at times, a 6.3% difference between the index’s intraday highs and lows, reports Jeff Fox for CNBC.
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Omega Sees Stock Bull Market Lasting Longer Than One Year
Kelly Bit and Arie Shapira – Bloomberg
Leon Cooperman’s Omega Advisors is betting that the U.S. stock market will continue to rise for more than a year.
The $9.5 billion New York-based hedge fund firm expects the bull market in equities to “last quite a while longer than the next 12 months,” it wrote in a letter to investors, a copy of which was obtained by Bloomberg News.
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Trader’s Arrest in ‘Flash Crash’ Raises Concerns About Market Rigging
Dealbook – NY Times
The arrest of a little-known futures trader this week drew back the curtain on one of the pernicious-sounding practices that have been linked to the distortion of global financial markets.
In the criminal complaint filed against a British trader on Tuesday, prosecutors said that a trading strategy known as spoofing was used to manipulate prices and helped lead to the 2010 “flash crash,” in which the biggest markets in the United States were thrown into disarray in minutes.
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Findings in Derivatives Research Reported from West Virginia University (Market making and risk management in options markets)
Insurance News Net
Investigators discuss new findings in Derivatives Research. According to news reporting from Morgantown, West Virginia, by VerticalNews editors, the research stated, “This article examines the personal trading strategies of member proprietary traders in the natural gas futures options market. Trading activity is found to mirror previous findings in futures markets, specifically high frequency trading, with low risk exposure.”
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Exchanges

CME Group says flash crash was not caused by futures market
Reuters
CME Group Inc on Wednesday denied allegations that the futures markets, which prosecutors are accusing a London-based trader of having illegally manipulated, caused the May 2010 Wall Street “flash crash.”
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CME Group Statement
Press Release – CME Group
CME Group today released the following statement in response to the Navinder Singh Sarao case:
Nothing is more important to CME Group than the integrity of our marketplace. Following the Flash Crash on May 6, 2010, together with other regulators, we did a thorough analysis of all activity in our markets during the Flash Crash, and concluded – along with regulators – that the Flash Crash was not caused by the futures market. If new information has come to light, we look forward to reviewing it with the Commission. We fully support the CFTC’s actions to prosecute those who attempt to engage in fraud or manipulation. We are prohibited by law from releasing information about any individual’s trading behavior, including Mr. Sarao’s, so we are unable to comment further at this time.
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Nadex clone raises regulatory concerns in British Columbia
LeapRate
Corporate cloning – the malpractice of misusing brands, logos and contact details of authorized companies by unauthorized businesses, is gathering pace. The British Columbia Securities Commission (BCSC) has just published a warning against Nadex Pro Signals, a company falsely claiming to be associated with North American Derivatives Exchange, Inc. (Nadex).
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Regulation & Enforcement

Deutsche Bank to Pay $2.5 Billion Fine to Settle Rate-Rigging Case
Dealbook – NY Times
Deutsche Bank will pay a $2.5 billion penalty to United States and British authorities to settle accusations that it helped manipulate the benchmarks used to set interest rates on trillions of dollars in mortgages, student loans, credit cards and other debt, officials said on Thursday.
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Delayed flash crash arrest may herald future spoofing detection woes
Reuters
The five years it took regulators to bring high-profile charges against a UK trader underscore how hard it is to spot wrongdoing in fast-developing markets, and may herald problems in detecting future mishaps.
Navinder Singh Sarao, 36, was arrested in London on Tuesday, charged with market manipulation and wire fraud. Authorities sought to link his activities to the May 6, 2010, so-called flash crash when about $1 trillion was temporarily wiped out from U.S. stock markets in a matter of minutes.
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Business Newswires : euronews : the latest international news as video on demand
Mike Kentz – Euro News
The European Union is looking to again postpone imposing new capital rules on EU banks that trade derivatives through non-EU clearing houses, according to a document seen Tuesday.
Amid an ongoing test of wills between European and U.S. regulators, the EU has scheduled a vote Friday to delay the decision until December, a draft of Friday’s agenda says.
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Strategy

Your post-trade diet for your collateral workout
Ted Allen for Futures & Options World
Like many a desk-bound, middle-aged professional, I work off my stress through triathlons. One important thing I have learned about training and racing, is that to maximise your performance you need the right diet to complement your hard work. But what is more important – the pre or post workout meal? In collateral optimisation many professionals are faced with the same question. While the benefits of pre-trade optimisation are intuitive, a recent study by SunGard and Sapient Global Markets has demonstrated the proven cost reductions from post-trade collateral optimisation can be impressive too.
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Options in the Energy Sector: Put-Sell Your Way to Profits
Karim Rahemtulla – Wall Street Daily
Despite the recent rally in energy shares, it’s continuing to look bleak out there. Most shares in the energy sector are still down 20% to 50% from their highs.
But one of the best things about a bear market is that it provides the opportunity to generate income from high-quality options plays.
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Education

Derivative Duels
James H. Nolt – World Policy Institute
Many of the most successful investors leverage their own capital with borrowed wealth to magnify their profits. Capital they own is supplemented by capital they owe to creditors. Strong use of leverage is a characteristic of bulls. Many financial crises occur when the most leveraged bull positions are undone, typically when creditors become bearish.
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