John Lothian Newsletter: Banks face new probe over mortgage bond trades post 2008; Derivatives competition unlikely despite Mifid II push; JPMorgan Joins Chi-X Global Ownership Consortium

Jan 8, 2014

First Read

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Newsletter Subscriptions Due
This is the time of year when we ask readers to pay for their John Lothian Newsletter and JLN E/E subscriptions. Many, but not all, firms pay an Enterprise Rate for their readers. If you are not sure if yours does, please ask me. If you would like an invoice for your subscription, just email me and I will send you one. The invoice will include an option to pay online via Intuit’s Online system. Additionally, there are links on the website which include Paypal links, also allowing you to pay online. We will be much more aggressive this year in requesting payment, so please pay early and beat the rush. New subscription policy for new readers in 2014:


Matt Shelley
Sadly, I must report the passing of my former Price Group colleague Matthew Shelley. Matt passed away Sunday in Chicago. Matt was a long-time futures broker, part of a storied family in the futures business; his father Jack was an iconic figure in the wheat pit back in the 60’s, 70’s and 80’s. Condolences to his family and friends.


Gensler a “scourge”? Really?
JLN Staff
We confess to being puzzled at the Reuters story “Swaps regulator Gensler: banker turned Wall Street scourge” in yesterday’s JLN Financials Newsletter talking about Gary Gensler’s legacy at the CFTC. It is noted in the article that bankers really did not like the guy, thus leading to the question, what will Gensler’s legacy be?
***DA: I would use the term “polarizing.” Scourge is too strong of a word, even for Mr. Gensler.

Dark Pool Trading Is Climbing – Here’s Why
Keith Ross – Traders Magazine
The dark markets have become so efficient that the costs of execution and market impact are lower than at the display markets where the take fees are the highest and market impact is the most significant.
***** Can you climb out of a dark pool?

J.P. Morgan banker joked that Madoff’s accounting firm might be a car wash
The Tell – MarketWatch
The government paints a damning picture of J.P. Morgan Chase & Co. in its dealings with Bernie Madoff. The $1.7 billion settlement revealed Tuesday portrays bank employees who were alternately too incompetent to notice, or too calculating to bother reporting, that Madoff was running a gigantic Ponzi scheme.
***** This is insulting to car washes everywhere.

First Witness in Martoma Trial Took Detour to Waffle Business
When Timothy W. Jandovitz left SAC Capital Advisors after five years of grinding out financial numbers and analyzing companies, he decided to try his hand at pork belly and burrata-filled Belgian waffles.
***** I have never had pork filled Belgian waffles and now it seems like I will never have the chance. Now, strawberries and whip cream on a Belgian waffle? Love that.

Is Keeping It Simple for Banks Stupid?
Darrell Duffie – Bloomberg
Regulators rightly want to remedy a serious flaw in the financial system: The complexity of bank capital requirements has made them vulnerable to manipulation. In the rush to embrace simplicity, however, policy makers could inadvertently make safe investments unattractive for banks.

***** Is this the counterpoint to Jon Matte’s end of the year message?

***JM: Simplicity doesn’t guarantee wisdom; but complexity often precludes it.


Not enough trade for Volcker
Euromoney magazine
Will Paul Volcker, author of the rule that has banned banks from proprietary trading, now stand up, perhaps beside Gary Gensler, recently departed head of the Commodity Futures Trading Commission, and lambast banks for not trading enough?

***** There is not enough trade for everyone.


CFTC Announces Public Meeting Of The Technology Advisory Committee
The U.S. Commodity Futures Trading Commission (CFTC or Commission) announced today that the Commission’s Technology Advisory Committee (TAC) will hold a public meeting on Tuesday, January 21, 2014 from 10 a.m. to 5 p.m. at the CFTC headquarters in Washington, D.C.

***** I will be participating in this meeting via teleconference from Chicago at the CFTC’s offices.


Dan Hubsher

Flex Time: Object Trading’s Dan Hubscher on Shedding Operational Complexity
From a flurry of new regulations and rapid changes in market structure to constant updates from exchanges, simple, flexible infrastructure has never been more important in the trading world. John Lothian News spoke with Dan Hubscher of Object Trading on the topic of shedding operational complexity and what they found from their most recent research.

Watch the video »



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Lead Stories

Banks face new probe over mortgage bond trades post 2008: WSJ
Federal regulators are probing whether several big banks deliberately mispriced mortgage bonds in the years following the financial crisis, the Wall Street Journal reported, citing people close to the inquiry.

Derivatives competition unlikely despite Mifid II push, says BAML
Anish Puaar – Financial News
Competition among derivatives trading venues and clearing houses in Europe may never materialise, even if ongoing regulatory efforts to open up the market are successful, according to new research from Bank of America Merrill Lynch.

J.P. Morgan Joins Chi-X Global Ownership Consortium
Chi-X Global Holdings LLC today announced that J.P. Morgan has acquired an equity stake in the firm.
J.P. Morgan becomes the eighth member of Chi-X Global’s ownership consortium. It joins owners BofA Merrill Lynch, Goldman Sachs, KCG Holdings Inc., Morgan Stanley, Quantlab Group L.P. and UBS AG.

J.P. Morgan to Pay $2.6 Billion in Madoff Fraud Settlements
Dan Fitzpatrick –
J.P. Morgan Chase & Co. will pay a high price for Bernard Madoff’s crimes. After years of denying culpability in the Ponzi scheme, the bank agreed to $2.6 billion in payments to resolve charges it failed to police Mr. Madoff’s activities and entered into a rare pact with prosecutors intended to head off a criminal case.

J.P. Morgan’s Madoff Settlement Leaves Many Mysteries
James Sterngold and Michael Rothfeld – MoneyBeat – WSJ
The government’s settlement of criminal and civil charges against J.P. Morgan Chase & Co. for failing to alert authorities to suspicions about Bernard Madoff’s massive Ponzi scheme resolves some key issues but, as is the case with many aspects of this extraordinary fraud, it also left several mysteries.

Steep Penalties Taken in Stride by JPMorgan Chase
To settle a barrage of government legal actions over the last year, JPMorgan Chase has agreed to penalties that now total $20 billion, a sum that could cover the annual education budget of New York City or finance the Yankees’ payroll for 10 years.

Deutsche Bank Said Set to Punish Staff Including Cloete on Libor
Deutsche Bank AG (DBK), Europe’s biggest investment bank by revenue, will review whether to punish senior employees including Alan Cloete for their roles in the interest-rate rigging scandal, according to a person with knowledge of the matter.

Bundesbank warns over ‘highly speculative’ Bitcoin
Alice Ross in Frankfurt –
The Bundesbank has become the latest big central bank to warn about the risks of Bitcoin, amid rising concerns from regulatory authorities around the world as the virtual currency grows in popularity.

Bitcoin faces fresh hurdle as Alibaba bans its use
Simon Rabinovitch in Shanghai –
Chinese ecommerce group Alibaba is banning Bitcoin from its shopping websites, a move that further consigns the virtual currency to the margins of the world’s second-biggest economy.


Wanted: SEC Chief Economist
Andrew Ackerman – MoneyBeat – WSJ
The Securities and Exchange Commission is searching for a new chief economist to succeed Craig Lewis, who plans to leave the agency this spring.

FCA would ‘prefer’ tough new rules for non-banks too
Mark Cobley – Financial News
The Financial Conduct Authority would prefer the new, stricter approval process that is being brought in for senior bankers to cover not only banks but firms across the finance sector, according to Clive Adamson, the regulator’s director of supervision.

Resist the rise of the risk management machines
Vincent Kaminski –
Overreliance on modern risk management systems, and metrics such as value-at-risk, can blind firms to tectonic structural market shifts. To help alleviate this problem, the use of human judgement and intervention is required,

Exchanges & Trading Facilities

NYSE Euronext Announces Trading Volumes for December 2013
NYSE Euronext today announced trading volumes for its global derivatives and cash equities exchanges for December 20131. Global derivatives average daily volume of 5.9 million contracts, excluding Bclear in December 2013 decreased 7.6% compared to December 2012 and decreased 10.8% from November 2013. U.S. equity options volumes in December 2013 decreased 13.2% compared to December 2012 and decreased 9.9% sequentially. ADV in U.S. cash equities declined 8.7% year-over-year but increased 0.9% month-over-month. European cash equities ADV in December 2013 increased 13.6% compared to December 2012, but decreased 9.3% from November 2013 levels.

CNSX Markets Becomes Canadian Securities Exchange
CNSX Markets Inc. announced that, effective yesterday, the exchange will carry on business under the name “Canadian Securities Exchange”, abbreviated for convenience to the “CSE”. All of the CSE’s web services are now available at

BM&FBOVESPA Announces 2013 Market Performance

TMX Group Equity Financing Statistics – December 2013: Toronto Stock Exchange, TSX Venture Exchange

The Trading Volume On Mercado Alternativo Bursátil (MAB) In 2013 Increases By A Multiple Of 5 To 279 Million Euros

The Year 2013 On Warsaw Stock Exchange

Irish Stock Exchange Statistics December 2013

Ljubljana Stock Exchange: Annual Statistical Report Year 2013

LME Approves GF Financial Markets As category 1 Member – Lee Kee Group And Vitol S.A As Category 5 Members

NASDAQ OMX Holds Fourth Quarter 2013 Investor Conference Call

Hedge Funds & Managed Futures

Paul Singer’s Elliott International Hedge Fund Up 11.8% in 2013
MoneyBeat – WSJ
Hedge-fund manager Paul Singer turned in another steady year of performance in 2013, according to a monthly investor update.

Carmignac hires European team from SAC Capital
Mike Foster – Financial News
French asset manager Carmignac Gestion has hired a four-person team that previously worked for SAC Capital, the US hedge fund group that is closing its London office and retrenching following a record insider-trading settlement.

Investment trusts trounce the competition
John Authers –
This is the season for judging fund managers. Rightly or wrongly, most of us still frame investment performance using calendar years, and put the strongest frame around the most recent, one-year performance.

Equity capital markets set for another year of plenty
Richard Partington – Financial News
After a very busy year for equity capital markets in 2013, industry participants say there are few signs the revival will be blown off course this year.

Blackstone builds Indian real estate empire
Henny Sender in New York-
The public debut of Hilton Hotels in December capped one of private equity’s most lucrative deals for Blackstone, which bought the chain in a highly leveraged $27bn takeover in 2007, turning its $6bn of equity into about $14bn.

Hedge Funds Trail Stocks for Fifth Year With 7.4% Return
Kelly Bit – Bloomberg
Hedge funds trailed the Standard & Poor’s 500 Index (SPX) for the fifth straight year as U.S. markets rallied to record levels.

Banks & Brokers

Citi Considers Selling Private-Equity Stake to Comply With Volcker Rule
Shayndi Raice – MoneyBeat – WSJ
Citigroup Inc. is considering selling its $1 billion stake in a private-equity fund to comply with new federal rules, said a person familiar with the matter.

Goldman Reshuffles an Investment Banking Group
Goldman Sachs is shaking up its technology, media and telecommunications investment banking group, according to internal memos.

Challenging year ahead for transaction banking industry
Rebecca Brace – Euromoney magazine
Although the implementation of the Single Euro Payments Area (Sepa) presents the biggest and most pressing challenge to the European transaction banking industry at the outset of 2014, there are reasons for banks and their corporate clients to be optimistic about the year ahead.

JPMorgan Chase names Kristin Lemkau chief marketing officer
JPMorgan Chase & Co, the biggest U.S. bank by assets, on Tuesday named Kristin Lemkau chief marketing officer for the entire company.

The year of the great FICC exodus (maybe)
Tim Cave – Financial News
Once regarded as the engine room of investment banking revenues, units trading fixed income, currency and commodities are slowly running out of steam.

Morgan Stanley top interest-rate trader leaves bank
The Wall Street Journal
Glenn Hadden, Morgan Stanley’s top interest-rate trader, has left the bank amid a challenging turnaround effort in its bond-trading business, according to a memo sent to the securities firm’s staff Monday.

Wells Fargo Creates Swat Team to Keep Loans Inhouse: Mortgages
Dakin Campbell and John Gittelsohn – Bloomberg
Wells Fargo & Co. (WFC), the largest U.S. home lender, has assigned about 400 underwriters to originate mortgages for the bank to hold, with as many as 40 percent of the loans likely to fall outside government guidelines taking effect this week.

Clearing & Settlement

HMRC excludes client clearing from UK bank levy
Joe Rennison –
UK tax authorities exclude client collateral received as a result of clearing activities from bank levy, after complaints it would act as a disincentive to clearing

Promoting standardisation in Sef reporting
Jodi Burns – FOW
The launch of Swap Execution Facilities (Sefs) has represented a milestone for the derivatives market. Buy- and sell-side firms are focusing on transitioning to a new market structure, with new forms of connectivity and workflows aimed at bringing transparency, standardisation and automation to the market.

Indexes & Products

Capita Asset Services And Clearstream Make Cross-Border Transactions More Secure And Efficient For Exchange Traded Funds
Capita Asset Services and Clearstream – the post-trade services provider of Deutsche Börse Group – have joined forces to establish a more streamlined, efficient and more secure issuance process for Exchange Traded Funds (ETFs) on the German market.

Tokyo Stock Exchange To List 2 JPX-Nikkei Index 400 ETFs On Jan. 28, 2014 (Tue.)

Semi-Annual Review Of The OMX Helsinki 25 Index

BM&FBOVESPA Announces The New Theoretical Portfolios For The Ibovespa And The Other Indices


Aizawa Securities Selects Fidessa For Proprietary And Wholesale Agency Trading
Fidessa group plc has today announced that Aizawa Securities, an independent securities company headquartered in Tokyo, has selected Fidessa as its new proprietary and wholesale agency trading system.

MarketAxess Announces Monthly Volume Statistics for December 2013
Press Release
MarketAxess Holdings Inc. announced total monthly trading volume for December 2013 of $55.3 billion, consisting of $33.8 billion in U.S. high-grade volume, $14.7 billion in other credit volume, and $6.9 billion in liquid products volume. This data can be accessed on MarketAxess’ website at

Exchange Connectivity Technology: To Build or To Buy?
Gerry Turner – Wall Street & Technology
When it comes to obtaining exchange connectivity, most sell-sides subscribe to a policy of “buy to standardize, build to differentiate.” This is a good philosophy to consider when looking at market access. Some firms believe that developing their connectivity systems internally helps set their firms apart. However, while this approach may seem reasonable at the surface, the reality is that it quickly becomes overly complex and expensive to maintain over time.

Interactive Data Bows Web Data Usage Analytics Toolkit
Giulia Lasagni – WatersTechnology
Interactive Data is launching a new suite of web analytics tools designed to help financial and media organizations roll out tailor-made investment products and tools by tracking and analyzing how users navigate their websites, and leverage “crowd data” from usage statistics to offer better data tools to clients.

CME Group Clearing: Expanded Use of FIXML Regulatory Trade ID Block Coming February 10, 2014

TMX Atrium Expands Moscow Connectivity To IXcellerate


Ex-Goldman VP Tourre denied a new trial in SEC case
Fabrice Tourre, the former Goldman Sachs Group Inc vice president who was found liable for defrauding investors over a failed mortgage transaction, has failed to persuade a federal judge to dismiss the case or give him a new trial.

RBS Securities Japan Ltd Sentenced For Manipulation Of Yen Libor
RBS Securities Japan Limited, a wholly owned subsidiary of The Royal Bank of Scotland plc (RBS) that engages in investment banking operations with its principal place of business in Tokyo, Japan, was sentenced yesterday for its role in manipulating the Japanese Yen London Interbank Offered Rate (LIBOR), a leading benchmark used in financial products and transactions around the world.

ASIC Accepts Enforceable Undertaking From National Australia Bank

Environmental & Energy

EU Carbon-Fix Plan’s Scrutiny Said Possible to Be Accelerated
The European Union’s emergency plan to help boost carbon prices may get all necessary regulatory approvals as soon as next month and start around April, according to two people with knowledge of the matter.

Court to re-consider New Jersey’s exit from U.S. carbon market
An appellate court will hear arguments on Wednesday on whether Governor Chris Christie illegally withdrew New Jersey from a regional trading scheme aimed at cutting carbon emissions, raising hopes among environmental groups that the state might be forced to rejoin.

Brussels says energy-intensive industry is coping well despite US price gap
Industrial energy consumers in the European Union have dealt well with a large energy price differential to peers in the United States but should remain concerned about high prices, the EU executive said in a draft policy paper seen by Reuters. Europe’s industrial energy users have been paying more than twice the electricity price and four times as much for gas as their US peers who have benefited from a boom in shale gas.


Moody’s Places Negative Outlooks on Three Mongolian Banks, Citing Rising Bad Loans, Slower Economic Growth
Enda Curran – MoneyBeat – WSJ
Moody’s Investors Service has placed negative outlooks on three Mongolian banks, citing risks from rising bad loans, slower economic growth and a deteriorating operating environment.

JCCH: Japanese Commodity Markets Summary for December 2013

JCCH: Japanese Commodity Markets Summary for FY 2013

Shanghai Stock Exchange: Notice On Doing Good Job In Listed Companies’ Annual Reports of 2013

Frontier Markets

Miners Less Optimistic on Prices This Year
Arpan Mukherjee – MoneyBeat – WSJ
Mining companies expect commodity prices to rise over the next 12 months but they are less optimistic than a year ago when they wrongly predicted price movements for 2013, a recent survey by PricewaterhouseCoopers shows.

Indonesia drums up solid US demand for $4bn bond
Josh Noble in Hong Kong –
Indonesia has sold the largest US dollar bond in Asia since 1998, moving to bolster its foreign currency holdings as the Federal Reserve begins to pare back its asset purchases.

Do not bet on a broad emerging market recovery
Mohamed El-Erian –
One striking aspect of last year’s markets is the extent to which emerging market assets underperformed those in advanced economies. As investors search for returns this year among some frothy asset markets, such unusual underperformance attracts even greater attention.

DCM: A good time for African Eurobonds
Euromoney magazine
Fed tapering will prompt rises in yields for African hard-currency debt, but this doesn’t mean that countries with strong economic fundamentals should hold off issuing.

Bursa Malaysia Closes For Maulidur Rasul (Prophet Muhammad’s Birthday) And Thaipusam

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