Observations & Insight
Squeezing Pennies: Clearing Houses Reach For Compression, Margin Relief and Netting
By Sarah Rudolph and Jim Kharouf, JLN
When it comes to clearing and settlement today, the name of the game is capital efficiency.
With a host of regulations hitting the market, particularly with bank capital requirements under Basel III, exchanges and clearing houses are moving quickly to find ways for banks and clearing FCMs to lower the amount of cash they need to hold onto in the name of lower systemic risk.
It is an interesting time to be in the clearing space, as clearing firms offer a number of new services and some oldies aimed at clearing FCMs. Portfolio margining, which has been done more or less in a fragmented way by individual clearing houses in recent years but with limited success, may be finally finding an audience in today’s market environment. Clearing houses such as CME Clearing, LCH.Clearnet, Eurex Clearing, ICE Clear, OCC and others have all offered some form of portfolio margining services in recent months or years. LCH.Clearnet is attempting to push that concept further with its so-called “open access” on clearing, which essentially allows customers to choose where they would like to clear transactions with the markets it services. A London Stock Exchange–Deutsche Boerse merger could help, or depending on the German approach, alter the concept.
Sunil Cutinho, the president of CME Clearing, said the top priority for clearing house customers is finding that capital relief.
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2016 Exchange CEO Series: LSE’s David Weisbrod Talks Clearing And Openness
Weisbrod, who serves a dual role as US country head of the USA for LSEG and CEO of LCH.Clearnet US, has been focused on providing more access to customers to the London market and its clearing facility.
“We’re a big believer in open access, which enables market participants to use whichever clearing house they want or whichever exchange they want as it meets their own needs,” Weisbrod told John Lothian News at the FIA Boca Conference. “We don’t have a vertical silo which binds the participants to use the clearing house, the exchange, or vice versa.”
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Stock loan CCP interest on the rise
Global Investor Magazine
Chicago-based clearinghouse OCC cleared close to 1.4 million new stock loan transactions last year, up 16% from 2014’s figure. The group, which recently had a controversial capital plan approved by the US Securities and Exchange Commission, is the only central counterparty in the US that clears stock loan trades. In its annual report published on Wednesday, OCC president Michael McClain said transaction volumes have grown “steadily” and notional values have “increased sharply” over the last two years. “We are seeing an increase in requests from agent lenders on behalf of their beneficial owners for information on the benefits of central clearing of stock loan transactions,” he added.
****SD: If you missed the OCC’s annual report, check it out here
ISE Announces First Implementation of a Securities Exchange on Amazon Web Services Cloud Computing Environment
International Securities Exchange, LLC
The International Securities Exchange (ISE) is the first regulated securities exchange to build and operate cloud-based disaster recovery infrastructure as part of disaster preparedness requirements established by the U.S. Securities and Exchange Commission’s (SEC) recent Regulation Systems Compliance and Integrity (Reg SCI) initiative.
****SD: For more on the state of cloud warfare, check out this recent piece from The Telegraph. Currently, Amazon is winning with some 31% market share; number two is Microsoft with 9% market share.
Citadel Securities in push to bolster electronic trading
Citadel Securities, the market making arm of the hedge fund, has hired a senior banker to bolster its bid to use electronic trading to break open traditionally dealer-dominated markets. Nicola White is to join the group from Morgan Stanley where she was global head of electronic rates trading. At Citadel Securities she will become global chief operating officer for fixed income, currencies and commodities, reporting to Paul Hamill, global head of FICC, who moved from UBS in January 2015.
****SD: Reuters on the Nicola White move
Jacob Wohl Is Moving From Milk To Tequila — And Eating The Worm For Protein
Jacob Wohl might not have this level of patience right now, but I want to see his NFA audited track record over a five year period of time. Once this happens, then his strategy might be viewed without the dog whistles of concern. There are dog whistles among those who understand algorithmic trading and derivatives. Certain words and phrases, such as “always staying delta and gamma neutral with naked options” in the face of crisis markets, can be said that can be heard by a select few, and this was the case with ValueWalk’s recent “Wohl of Wall Street” article. The Wohl was first spotlighted by a local TV station. But when credit or blame for creating The Wohl phenomena inside financial circles is assigned, it was the counter-culture financial insight on ZeroHedge, where the article was first published, that first claim for broadcasting The Wohl lies. ValueWalk, sensing a funny story with dry humor, followed up.
****SD: Don’t worry, 18-year-old Wohl is not actually hammering the agave derivative, but he is lapping up risk to a degree that will likely leave him flat on the floor should some black swan hit.
Nasdaq Building on the Blockchain
The enthusiasm in the capital markets for blockchain, although still in its infancy, continues to build as firms search for the best application of the technology. Nasdaq, which is on the forefront of those efforts, explores the steps in blockchain’s evolution toward becoming a core, foundational technology in capital markets and some of the ways it will affect the financial industry.
ASX problems just got worse
Australian Financial Review
The timing couldn’t be worse for the ASX. The man who has been preparing Australia’s stock exchange for the onslaught of competition, global mergers and the emergence of blockchain, resigned last week under the cloud of an Australian Federal Police investigation. ASX CEO Elmer Funke Kupper wants to “fully focus” on the police investigation into a $200,000 payment made in 2009 to the family of Cambodian PM Hun Sen when Funke Kupper was the chief executive of gaming giant Tabcorp.
****SD: If you’re curious about the state of Kupper’s former company, check out this story from today’s Sydney Morning Herald about Tabcorp.
Dalian Commodity Exchange Trading Volume Ranks 8th Among Derivatives Exchanges Globally
According to the 2015 Volume Survey recently released by the Futures Industry Association (FIA) for futures and options in 78 derivatives exchanges worldwide, in 2015,all three commodity futures exchanges in China’s mainland ranked amongst the top 10 in terms of number of contracts traded, with Dalian Commodity Exchange (DCE)’s position up from the 10th in 2014 to the 8th. DCE’s trading volume was 1.116 billion contracts in 2015.
Euronext Lisbon, Interbolsa Appoint New CEO
Euronext, Europe’s largest exchange, has appointed a new Chief Executive Officer (CEO), adding Maria João Borges Carioca Rodrigues as the head of the group’s Lisbon operations, who is slated to join the exchange in Q2 2016, according to a Euronext statement.
Regulation & Enforcement
Deutsche Bank agrees to pay $4 mln for trading violations
A Deutsche Bank AG unit will pay more than $4 million to settle allegations that it failed to properly report data on millions of options trades, according to a Financial Industry Regulatory Authority (FINRA) document.
****SD: Keep in mind that DB, of course, did “not admit to or deny FINRA’s findings.”
SpotOption Founder: Binary Options Will Remain Financially Regulated
After a flurry of seemingly anti-binary options news recently the industry feels as if it is under attack. Under these unfortunate circumstances Finance Magnates sat down with one of the most important figures in the binary options world, Pini Peter – the founder of leading software developer SpotOption – for an exclusive first interview about the international regulatory landscape. The full length interview will be published next week, stay tuned for many more interesting details!
BlueSkyBinary Official Reacts to Potential Ban on Binary Options in Israel
In the previous fortnight, articles from official news sources such as the Times of Israel (article published on 23/3/2016) and Financemagnates (article published on 25/3/2016) have been circulating about Israel’s ISA watchdog banning Binary Options. Should this happen, according to BlueSkyBinary, it may serve to reduce fraud in the sector dramatically. This is welcome news for Binary Option trader safety and for ethical Binary Option brokerages, an opportunity to capture significant market share. The bans, should they come in force, may hit two birds with one stone
Andrew Larkin rejoins ITG as managing director
Investment Technology Group Inc, a broker and financial technology provider, said Andrew Larkin would rejoin the firm on April 11 as managing director in charge of its POSIT alert client coverage.
Leveraging Technology to Fight Financial Crime
Anna-Lisa Toth – TABB Forum
Financial crime, whether in the guise of cyber fraud, money laundering, terrorist financing, rogue trader, bribery, corruption, or market abuse, presents a clear and present danger for the financial services industry. The main issue across all types of financial crime is how to follow the various bread crumbs back to the perpetrator, no matter how good they are at covering their tracks.
****SD: It’s a bird, it’s a plane, it’s, it’s… leveraged technology! To be fair, tech now is way faster than a speeding bullet. (Though how a bullet can “speed” always puzzled me.)
Fidelity uses call options to weather pharma sell-off
Taha Lokhandwala – FT Adviser
The Fidelity Global Enhanced Income fund has been using market volatility to increase its use of call options on stocks, as it attempts to ride out market bumps. The GBP135m fund uses the same stock selection as Dan Roberts’ GBP309m Global Dividend fund, but sees co-manager David Jehan implement call option overlays to boost income. The Enhanced Income fund sells call options against stocks it believes are less likely to rise sharply, and collects the premiums.
Volatility Update: Can Market Waters Stay Calm through Q1 Earnings?
The Ticker Tape
The underlying market tone, in terms of volatility, has certainly changed a lot during the first three months of this year. Although the S&P 500 finished the first quarter little changed, many measures of market volatility are probing 2016 lows. The landscape stands in stark contrast to the situation a few months ago and the generally disappointing fourth quarter earnings reporting season. The question now: can market waters stay calm through the upcoming first quarter reports?
****SD: Also see TradingFloor’s Volatility fades as a hectic quarter ends
Here’s the best way to hedge stocks: Options expert
Stocks have enjoyed a substantial run over the past month and a half, leading the S&P 500 to hit its highest levels of the year on Wednesday. But it may be time to hedge some of those recent gains, and a great hedging strategy suggests itself in the options market, according to Susquehanna head of derivatives strategy Stacey Gilbert. Gilbert acknowledges that in calm periods for markets, such as the present, stocks do often perform rather well. Yet she warns that the speed of the recent bounce makes current levels rather more precarious.