Observations and Insight

Pipelines: Nick Solinger talks market infrastructure for SEFs

It’s been a historic year for swap execution facilities as more were launched in the wake of Dodd-Frank rulemaking by the Commodity Futures Trading Commission.

Nick Solinger, head of product strategy and chief marketing officer of Traiana, said that its been a good year for firms getting connected to SEFs and for SEFs getting off the ground. The firm connected 16 FCMs to 16 SEFs with six more on the way.

“The typical FCM has been able to clear, three, four, five, six different venues with that one connection to our hub,” Solinger said. “Buy-side firms can similarly trade across multiple SEFs with one-credit line. So we really have realized that initial vision we had as an industry.”

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Lead Stories

Troubling Rift Emerges Between ‘Oil VIX’ and the Market’s ‘Fear Gauge’
Chris Dieterich – Barron’s
Oil prices have careened lower, but stocks (until today) have enjoyed a mostly placid ride.
Bouts of big price swings tend to happen at the same time in oil and stocks. Yet a yawning gap between these two has emerged, a warning for some on Wall Street who argue that something’s got to give, either a rip higher for crude or a slump for stocks. Typically, oil and stock-market volatility moves in tandem.
***DA: Oil is trading on fundamentals; the stock market is trading on central bank helium.

Russian Firms Lost Billions on Ruble Derivatives, Interfax Says
Lyubov Pronina, Natasha Doff and Ye Xie – Bloomberg
Russian companies lost tens of billions of rubles on foreign-exchange derivatives amid a rout in the ruble, Interfax reported, citing Sergey Moiseev, the head of financial stability at the central bank.
Companies were forced to close out the contracts after the central bank’s move to a free-floating exchange rate exposed them to the world’s highest currency volatility amid a slump in oil prices, Moiseev said, according to Interfax. Most of the transactions were terminated ahead of schedule, triggering penalties, or were restructured, the report said.

Oil traders buy $100 options, betting on a rebound – eventually
Catherine Ngai – Reuters
Oil traders have been quietly buying cheap, far out-of-the-money call options at $100 a barrel, betting that the biggest sell-off since the financial crisis has gone too far and that crude is likely to rebound by this time next year.
Open interest in U.S. crude oil $100 calls for December 2015 has jumped 13 percent in the last two weeks to nearly 37,000 on Wednesday, with a premium of around 40 cents.
***DA: Cheap insurance on a possible supply-side catastrophe. Or a squeeze engineered by “evil speculators.”

Watch out for ‘ouch’ potential of global volatility
Ralph Atkins – Financial Times
Greece’s stock market crashes. Shares plunge in Shanghai. Tumbling oil prices hit junk bond markets and emerging market currencies. The trend seems clear: this year is ending in a burst of volatility.
In fact, 2014 will go down in financial history as a year of exceptional calm. For all the worries about economic fragilities and geopolitical risks, measures of market choppiness have, mostly, remained low. The closest watched is the Vix index of expected US share price volatility, known as the “Wall Street” fear gauge but really an indicator of global investor nervousness. The Vix has averaged the lowest since 2006, a year of halcyon calm.
***DA: Now that the “Panic of Dec 9-10” has subsided, will the VIX downtrend resume?

Agreement for New Global Risk Management Products – CBOE Options on MSCI Indexes
Matt Moran – CBOE Options Hub
On December 10 CBOE Holdings, Inc. announced that it has entered into a licensing agreement with MSCI Inc., a leading provider of investment decision support tools worldwide, to offer options trading on several MSCI indexes.  Under the agreement, in the U.S., options on the MSCI indexes will be solely listed for trading on the Chicago Board Options Exchange (CBOE). The six indexes included in the agreement are the MSCI EAFE Index, MSCI Emerging Markets Index, MSCI ACWI Index, MSCI USA Index, MSCI World Index and the MSCI ACWI ex-USA Index. CBOE plans to offer options trading in the first quarter of 2015, pending regulatory approval, on two of MSCI’s best-known indexes: the MSCI EAFE Index and the MSCI Emerging Markets Index.
***DA: Two great firms getting together to list products. Like a Reese’s Peanut Butter Cup for the options industry.

Is is Time to Fade the VIX Spike?
Adam Warner – Schaeffer’s Investment Research
Remember VIXMO? It’s actually CBOE Volatility Index (VIX) with the old methodology. Until recently, VIX only included two S&P 500 Index (SPX) monthly options cycles in the calculation. The Chicago Board Options Exchange (CBOE) changed it to include the nearby weekly series, as well. In my humble opinion, it was a good change, as adding more classes can only help VIX give a better picture of implied volatility.
***DA: No. The time to fade the VIX spike was eight hours ago.

Videocast: Huge selling in volatility

FIA Merges Chicago and Futures Services Divisions
In early 2014, the boards of FIA Chicago and FIA Futures Services began plans to merge both divisions in 2015. In November, the leadership of both boards submitted a proposal for the merged division to the FIA parent board. The new set of by-laws was approved, and it was agreed that on January 1, 2015, FIA Chicago and FIA Futures Services would merge to become the FIA Operations Americas Division.
(via email)
***DA: If you are a member of one or both divisions, would like to join, or have questions, contact Mary Freeman at mfreeman@fia.org


ICE CEO says no immediate plans to sell New York Stock Exchange
John McCrank – Reuters
Intercontinental Exchange Inc has no immediate plans to sell the New York Stock Exchange, which it expects to become more profitable as a result of extensive ongoing restructuring, ICE Chief Executive Officer Jeffrey Sprecher said on Wednesday.
The NYSE, which exchange and clearing house operator ICE bought for $11 billion in November 2013 in order to gain control of Liffe, Europe’s No. 2 derivatives market, may have the fastest earnings per share (EPS) growth of all of the businesses ICE operates, Sprecher said at a Goldman Sachs conference.

Euronext makes OTC market push
Philip Stafford – Financial Times
Euronext is to make a grab for the emerging market to clear over-the-counter equity derivatives as a regulatory overhaul takes effect.
The European exchange operator will offer a service from next year that treats certain trades negotiated privately between brokers as exchange-registered deals. It will begin with equities but aims to add other asset classes at a later date.

Eurex waives fees for EURIBOR futures
FTSE Global Markets
International derivatives market Eurex Exchange has introduced a four month fee holiday for EURIBOR futures, an initiative designed to enhance the appeal of its short-term interest rate derivatives suite. The zero fees period on trading and clearing of EURIBOR futures will be available from today until the end of March next year.

CEO of CME hints of more products to come with hybrid qualities
Renee Caruthers – FierceFinanceIT
CME Group may be weighing the introduction of a hybrid product that with some qualities of swaps and some of other exchange-traded derivatives, the company’s chief executive suggested at a conference this week.
“Dodd Frank did something very significant on the OTC side, it brought in a class of clients to us that up to that point we had not seen,” said CME Group CEO Phupinder Gill, speaking at the Goldman Sachs U.S. Financial Services Conference in New York this week. “That class is in conversation with us about ideas they have for product innovation very much along the lines of the deliverable swap futures contracts that we rolled out about a year ago.”

Regulation and Enforcement

SEC Lacks Reliable Tools to Monitor Employee Trades, Audit Says
Dave Michaels – Bloomberg
The U.S. Securities and Exchange Commission lacks a reliable system for ensuring that its employees don’t trade stocks of companies under investigation, the agency’s watchdog said.
The SEC’s computer program for monitoring employee trades approved eight transactions from 2009 to 2011 that violated the agency’s ethics rules because they were in shares of companies being probed by the regulator, according to an audit released today by SEC Inspector General Carl Hoecker.
***JB:  Who watches the watchers?  Apparently not the watchers.

Congress could enact rollback of Dodd-Frank limits on derivatives
Jim Puzzanghera, Lisa Mascaro – Los Angeles Times
Congress is poised to enact the first significant rollback of the sweeping 2010 overhaul of financial regulations by including in a government spending bill a provision that eases bank trading of complex derivatives.
The provision sparked controversy as lawmakers prepared to vote on the $1.1-trillion package that must pass before a Thursday night deadline to avoid a federal government shutdown.

Swap Talk: Why Are People Fighting Over Dodd-Frank and Derivatives? – Washington Wire
Victoria McGrane – WSJ
A fight over a change to an obscure-sounding derivatives rule is roiling the prospects for the $1.1 trillion spending bill negotiated by Congress. Here’s what you need to know.

Court reverses insider-trading convictions
Eric Garcia – MarketWatch
An appeals court on Wednesday overturned the 2012 convictions of two hedge-fund managers, saying the government failed to prove they willfully engaged in insider trading.
A three-judge panel at the U.S. Court of Appeals for the Second Circuit said Todd Newman and Anthony Chiasson were several steps removed from the corporate insiders who gave the initial tip.

SEC Fines Morgan Stanley $4 Million for Violating Market Access Rule
John D’Antona Jr. – Traders Magazine
The Securities and Exchange Commission has penalized Morgan Stanley & Co. $4 million dollars for violating the market access rule when it failed to uphold credit limits for a customer firm with a rogue trader who engaged in fraudulent trading of Apple stock.
The announcement was made Wednesday via the SEC’s website.
The market access rule requires broker-dealers to have adequate risk controls in place before providing customers with access to the markets.


Trading Technologies Wins “Prop Traders’ ISV of the Year” at FOW International Awards
Press Release – Trading Technologies
Trading Technologies International, Inc. (TT), a provider of high-performance professional trading software, was named “Prop Traders’ ISV of the Year” by FOW magazine at the FOW International Awards yesterday in London. TT was selected for this award by proprietary traders who voted in FOW’s annual proprietary trading survey.

Euronext expands derivatives services using Cinnober’s technology
Press Release – Cinnober
Cinnober Financial Technology today announced the signing of a prestigious order with Euronext, the pan-European exchange group. The deal is for a trade validation and confirmation solution that will run on the proven TRADExpress technology and be adapted to Euronext’s specific requirements.
The service, planned to be launched with equity derivatives in the spring of 2015, enabling bilaterally agreed trades in derivative products with certain flexible parameters to be reported to Euronext and cleared by their central counterparty, LCH.Clearnet SA.


Traders Hedge Oil ETF While Energy Stocks Lure Buyers
Callie Bost, Inyoung Hwang and Jonathan Morgan – Bloomberg
Options traders are signaling energy companies have become too cheap to pass up, even as they build up protection against a further drop in oil prices.
A collapse in global demand means oil may have more to fall, and hedging costs on an exchange-traded fund tracking crude climbed to the highest levels since June 2012. Yet wagers on the Energy Select Sector SPDR Fund haven’t kept up: They’re about 19 percent cheaper and reached a two-year low versus the United States Oil Fund LP (USO), data compiled by Bloomberg show.


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