Observations & Insight

The Future of the Future in Asia
Lewis Richardson – Derivatives Business Development Manager – Fidessa

Asia continued to be front and centre on the world stage throughout last year, in futures terms at least. The Asian markets, bolstered by the entry of ICE and pending entry of Eurex, have become the only region in the world to see a growing number of Futures Commission Merchants setting up shop. Healthy volumes were helped by Chinese institutions looking to combat the decline in domestic markets by venturing further afield.

The rise of the Asian superbroker, a trend we noticed some years ago, continues unabated. Former domestic retail banks – Maybank, CIMB and RHB among them – have invested heavily in technology that allows them to compete head-to-head with the global banks who have gradually withdrawn from the region. These superbrokers are growing strongly. They all see excellent opportunities in the near and medium term to service both domestic firms with global trading ambitions, and global firms desiring local expertise.

To read more of Richardson’s views for 2016 and beyond, click here. Note: the paper is free to download but you must register your name and email address.

2015 US Options Market in Review: Higher Volatility, Stagnant Volume
Callie Bost – TABB Group
2015 was a puzzling year for the US listed options market.
Traders, who had been waiting years to capitalize on market swings, were dealt the most volatility since the European debt crisis, with the CBOE VIX Index reaching its highest level since August 2011. But even as prices swung violently across assets, options trading volume tumbled, leaving the industry wondering if volume will ever climb back to levels last seen in 2011. While a lack of market turbulence was a plausible excuse for lackluster volume growth in years past, that reasoning was not as tenable in 2015.
Volatility re-emerged in dramatic fashion in 2015, providing bursts of options volume for a few days at a time. The S&P 500 Index posted its first correction since the European debt crisis as investors grappled with tepid economic growth around the world, a slide in commodity prices, and the Federal Reserve’s first interest-rate hike in nearly a decade.

***DA: Looks like we need a new narrative. Lots too choose from — regulatory uncertainty regarding the tax treatment of options, or perhaps a number of options players were blown out of the water when the market turned ugly last year that they are out of the game. Or maybe there will be a delayed reaction to spiking vol, and 2016 will be a watershed year.

Lead Stories

U.S. Banks And Derivatives Risk
Sebastien Couvidat – Seeking Alpha
Every quarter the Office of the Comptroller of the Currency (the OCC) releases a report on U.S. bank derivatives activities. Derivatives trading (i.e. regarding financial instruments not held for hedging purpose) is an especially risky part of universal banks’ activities. Yet the accounting of derivative contracts is relatively opaque in the bank quarterly financial reports, as the information is scattered over several sections and these items are partly taken off-balance sheet and therefore remain hidden from the casual observer or the investor uninterested in seeping through piles of abstruse documents. This lack of transparency remains despite the fact that credit derivatives like collateralized debt obligations (CDO), credit default swaps (CDS), and asset-backed securities, played a big role in the financial crisis of 2007-2008 and resulted in huge losses for many banks. Derivatives trading is risky, and it is still hard to estimate the amount of risk taken by individual banks.

Bets Against Yuan Face Rocky Road
Mia Lamar and Anjani Trivedi – WSJ
PBOC’s successful fight back against ‘speculators’ will test markets and central bank’s resolve
In mid-November at the Grand Hyatt hotel in midtown Manhattan, prominent hedge-fund investor David Tepper told an audience gathered to hear money-making ideas that “the problem with China right now is they have a very overvalued currency.”

OptionWeb Targets French Market via Partnership with Paris St. Germain
Victor Golovtchenko – Finance Magnates
OptionWeb has announced a partnership with French Ligue 1 champions from Paris Saint Germain. The deal is focused on the French market which is a big challenge for any binary options brokerage.
Commenting on the announcement, the CEO of Sports Media Gaming has said: “The French League continues to be an attractive market to binary brokers. From 24option being the first in market with a deal at Olympique Lyonnais in August, deals have followed swiftly by Interactive Option (Nice), Investor Area (St Etienne), EZ Trader (Monaco) and now Option Web with PSG”.

****SD: When I was a youngster, I thought the sponsor on the chest of a club’s jersey was the team’s name. “Oh, Vodafone is playing Fly Emirates? That’s nice.”

RLAM government bond duo plot derivatives moves
Dave Baxter – FT Adviser
Royal London Asset Management’s (RLAM) Absolute Return Government Bond fund managers are looking at increasing their derivative positions in anticipation of greater fixed income volatility in 2016.
Paul Rayner and Darren Bustin, managers of the GBP195m vehicle, said tools such as interest rate swaps or options may grow in importance this year, particularly as central banks part ways on monetary policy.

Tumbling oil trades below $30 a barrel for first time in 12 years
Catherine Ngai – Reuters
Oil fell briefly below the widely watched $30-per-barrel level on Tuesday, extending a selloff that has sliced almost 20 percent off prices this year amid deepening concerns about fragile Chinese demand and the absence of output restraint.

BNP hires James Rowe as European head of e-sales
Luke Jeffs – Futures & Options World
BNP hired in October Edmund Shing as global head of equity derivatives strategy
BNP Paribas has hired electronic broking expert James Rowe as its European head of electronic sales for listed derivatives just three months after he left commodities broker RJ O’Brien.
The French banking giant hired Rowe to run electronic broking sales for Europe, Middle East and Africa from London on December 23, according to the FSA register.
He reports to Declan Crosbie, the bank’s head of listed derivatives execution for Europe, the Middle East and Africa, and has been hired to help BNP grow its listed derivatives execution and clearing franchise.
A spokesman for BNP Paribas confirmed the appointment but declined to comment further.

BlackRock to radically restructure business
The Trade
BlackRock has rolled out a wide-ranging restructure of its leadership, boosting its multi-asset staff and overhauling its equity, fixed income, and real assets teams.
In a note to staff, seen by CIO, BlackRock CEO Larry Fink and President Rob Kapito detailed how the world’s biggest asset manager was to create a single, “globalized” fixed income business and combine its “scientific” and “fundamental” equity teams into one department.


Nodal eyes third quarter for options launch
Alice Attwood – Futures & Options World
US-based energy market the Nodal Exchange plans to launch its first power and natural gas options contracts in the third quarter of this year, chief executive Paul Cusenza told FOW.
“We have already begun development work on the new contracts – which has been driven in part by client demand – as well as a desire of the business to meet broader member requirements. By adding options we can expand the attractiveness of Nodal as an exchange and clearing offering to a broader set of traders in the pool of potential participants,” said Cusenza.
The firm also plans to add further locations on some of its futures contracts, as well as expanding its systems and operations team, said the CEO.

BSE to begin price reasonability check in equity derivatives
Economic Times
To strengthen its pre-trade risk management framework, top bourse BSE has decided to introduce price reasonability check (PRC) for equity derivative segment as well as currency options from January 18.
The mechanism is on the lines of globally prevalent risk management measures and helps to reduce potential instances of market abuse and fat-finger errors while also facilitating true price discovery and investor protection.

Regulation & Enforcement

Isda boosts board to tackle 2016 challenges
Cian Burke – Futures & Options World
Trade association said the new board members will be named in the first quarter
Trade body the International Swaps and Derivatives Association (Isda) said on Tuesday it had voted to increase the size of its board to 30 members from 26 to reflect the changing diversity of the firms it represents.
The trade body, which represents some of the world’s largest banks, said the move would broaden the perspective and scope of the board by electing members that represent the growing diversity of the market.

CFTC to discuss blockchain potential
Asset Servicing news
The US Commodity Futures Trading Commission (CFTC) Technology Advisory Committee (TAC) will hold a public meeting addressing blockchain and the potential applications of distributed ledger technology in the derivatives market.
On 26 January the committee will also discuss the CFTC’s proposed regulation on automated trading and standardisation and harmonisation of swap data.
The meeting comes after the CFTC ruled in September that bitcoin and other virtual currencies are commodities, and as such are covered by the Commodity Exchange Act. It then ordered a bitcoin options trading platform operator to stop offering bitcoin options.

Japan’s FSA warns against binary options broker GBinarys
Japan’s Financial Services Agency (FSA) has earlier today updated its lists of unauthorized investment businesses targeting Japanese investors.
Amid the new additions is GBinarys, a binary options brand of Binext Global Ltd, operating from https://gbinarys.com.


Roboforex Strengthens Asset Suite With Twenty New Options Instruments
Jeff Patterson – Finance Magnates
Roboforex has launched a total of twenty new assets for clients, which encompass a pantheon of features and instruments ranging from binary options, stock pairs, and ladder options, according to a Roboforex statement.


Trader bets $6.5M against this hot sector
Amanda Diaz – CNBC
When it comes to the market trends so far in 2016, what was once hot is suddenly not.
The consumer discretionary sector, which was the best-performing sector in 2015 thanks to the outperformance from high fliers like Amazon, Nike, McDonald’s and Starbucks, has fallen 4 percent in the last six trading sessions. According to one trader, the volatility will continue in the space throughout the year.

Volatility Here Is Peaking
John Thomas – Seeking Alpha
It is often said that the stock market has discounted 12 out of the last four recessions.
While the market is discounting another recession now, I believe it is one of the many previously forecast that will never happen, a lot like the 18% swoon in the futures markets we saw last summer.
If anything, the reported hard data are showing that the economy is strengthening now, not weakening. The December nonfarm payroll hit a one-year high at 292,000. Christmas sales were off the charts for online merchants.


Where’s the Panic When We Need It?
Adam Warner – Schaeffer’s Research
What if the market threw a sell-off and nobody cared? Or at least cared enough to panic about volatility?
I noted on Friday that the CBOE Volatility Index (VIX) had hit historically high levels vs. its 10-day simple moving average. Well, that was so Friday. The market has fluctuated a bit, but nudged higher over the past couple days and volatility has actually drifted.

The Blame Game
Kevin Davitt – CBOE Options Hub
Plenty of ink has been spilled about the selloff in global equity markets including SPX and RUT. We have been witness to an escalating VIX and RVX, albeit with significantly lower highs (to this point) when compared to the late August selloff.
Psychologically, we like to be able to attribute market pullbacks to something specific. People want a narrative. They prefer to have something to point to and affix blame.

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