John Lothian Newsletter: Bats President Leaves Exchange; European Hedge Funds Scramble to Pass First Test Under EU Regulations; Global Watchdogs Seek End to Tainted Benchmark Guessing-Game

Jul 23, 2014

First Read

Oil and a ‘little’ fire
Jeremie Bacon – Orc Group
The oil and gas industry is amazing to me. So much so that I’ve actually read all 900 some-odd pages of Daniel Yergin’s seminal classic, The Prize, twice! From the men and women in pursuit of black gold via exploration efforts, to those trading natural gas and brent crude futures contracts all over the globe, I find every link in the chain fascinating.

I owe this next memory to my father, who, in his first career worked in oil and gas. As a geologist, his job was to study and interpret topographic features, surface rock, and soil types in an attempt to find the best places to look for oil traps. He was good at it and his job took us to Texas, Oklahoma, and eventually, Colorado. My father almost got to do more than just look for oil by investing directly in a small production oil well in rural Oklahoma in the early 1980s, though as I’ll explain below, that wouldn’t necessarily have been a good thing.

Dad wanted to give my siblings and I a chance to experience life in the sticks so in the late 1970’s, we moved to a farmette in Chandler, Oklahoma, a small town between Tulsa and Oklahoma City. In that environment we had all kinds of fun exploring the countryside, taking care of farm animals, and getting into good-natured mischief. Our property bordered a piece of land with a single working pump jack and a massive raw oil storage tank where we loved to explore and play. The two properties were separated by a couple acres of scrub oak and prairie grass; grass that, on one particularly hot, dry, and windy Saturday afternoon, my dad decided we should burn and clear to make room to plant an enormous garden.

The garden plot sat a few hundred yards from our home, which happened to be the only place on our land with running water. My older brother was stationed at the faucet there and was responsible for turning the water on and off when my dad signaled him. He was 7. I was strategically positioned at the point where the trail from the house opened up into the plot we’d be clearing. My job was to ensure the almost endless chain of garden hoses we’d strung together didn’t become entangled and cut off the flow of water. I was 5. That left the hard work of managing the fire with a single hose and solitary shovel to my dad.

Did I mention it was a hot, dry, windy day on the Oklahoma prairie?

You can probably guess what happened about 14 seconds after dad dropped a single match in the dry grass at his feet. The prairie grass, the hose, the shovel, the surrounding scrub oak and everything else anywhere close by went up in a fire the likes of which I haven’t seen since. And then came the wind, driving the fire due west in the direction of the oil well next door! No amount of water coughing in fits and spurts out of the flaming coil of hose was going to help us. Seeing the futility of the fight, my father and I set off at full sprint toward the house to call 911.

Thankfully, seemingly every firefighter in the county showed up and after a couple hours of battling the flames, were able to put the fire out before it managed to overtake the well (and our house). Had that well gone up in flames, I have to believe my dad (and probably every one of us kids), would still be ‘investing’ in barrel after barrel of crude oil to this day.


O’Malia switches allegiances and becomes ISDA chief
Jon Watkins – The Trade
Scott O’Malia has been named chief executive officer of the International Swaps and Derivatives Association (ISDA) just 24 hours after leaving the US swaps and futures market’s top regulator.

***JB – If you can’t join ’em, beat ’em (with a lawsuit).


World Of Opportunity Chicago 2014: Tony McCormick (Promo)
Our MarketsWiki World of Opportunity Summer Intern Education Series in Chicago is quickly approaching. Tony McCormick, CEO of BOX, will be discussing the importance of internships. McCormick looks back on his years as an intern and how they helped shape his professional life. For more information on the event and how to register, click here.

Watch the video »


“Gimme Some Money”: Money Market Gets Another Regulatory Look
Doug Ashburn, JLN
Today, traders, fund managers and other big buy-siders will be tuning in to an announcement from a Federal agency that may have far-reaching effects on how money is allocated in the U.S.

This time it is not the FOMC that has their attention, but rather the Securities and Exchange Commission, which will be voting on money market reform. At issue is whether the commission will require institutional money market funds to adopt a floating net asset value and/or institute liquidity fees or so-called “redemption gates” during times of extreme market stress.

At the height the financial crisis of 2008, a large money market fund, the Reserve Primary fund, “broke the buck,” meaning the value of its investment income failed to cover expenses, usually due to a loss or default on investments in the fund’s portfolio. In the case of Reserve Primary, the fund’s exposure to securities held by Lehman Brothers, the investment bank that filed for bankruptcy in September 2008, caused the fund’s NAV to fall to 94 cents (generally, money market funds hold the NAV constant at $1.00).

Since money market funds were large purchasers of the commercial paper corporate America uses to finance its operations, that market ground to a halt as well, creating serious problems for the real economy. It took an emergency action by the Federal Reserve – an unlimited guarantee on deposits – to avoid a catastrophe.

Read the entire commentary =>


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McDonnell gets top sales job as TT eyes key launch
William Mitting – Futures & Options World
Trading Technologies has promoted Robbie McDonnell to run its global sales team as the tech vendor gears up to launch its next generation trading system. McDonnell, who is currently TT’s managing director of Asia Pacific and based in Sydney, will relocate to Chicago and report directly to chief executive Rick Lane.

**JK – First order of business: All TT sales reps will be trained to speak with Robbie’s Toledo, OH accent.


Gmex set for October bow and hails study findings
William Mitting – Futures & Options World
The Global Markets Exchange Group is targeting an October launch and has hailed the results of a study conducted by University College London as proof of the benefits of its new product. Gmex, the new European exchange group, is planning to launch a constant maturity future (CMF), a futures contract designed to replicate the economics of a plain vanilla interest rate swap, on its new trading venue later this year.


Libor Needs More Competition
Darrell Duffie & Jeremy Stein – Bloomberg
Two years after news broke that traders at the world’s largest banks had been manipulating interest-rate indicators used to value hundreds of trillions of dollars in securities and derivatives, a crucial question remains: How can we restore confidence in benchmarks on which the financial system depends the way the rest of us depend on tap water?

**JB – The report issued by the Financial Stability Board with recommended solutions is worth a read, but at 758 pages you’ll need as many months to get through it as it will take someone else to propose a different solution…


Lead Stories

Bats President Who Rebuked Michael Lewis Leaves Exchange
Sam Mamudi – Bloomberg
Bill O’Brien, the former Goldman Sachs Group Inc. executive who built Direct Edge Holdings LLC into one of the biggest U.S. stock exchanges, is leaving the firm after merging it with Bats Global Markets Inc.

***JB – Another victim of HFT fallout? Hope not.

***JK – Rumor has it, Bill will be joining Rick Santelli to deliver weekly rants on CNBC.

European Hedge Funds Scramble to Pass First Test Under EU Regulations
Laurence Fletcher – WSJ
European hedge funds have scrambled to pass their first test under complex new European Union regulations amid confusion over the timing and introduction of the rules. Tuesday at 5 p.m. marked the official deadline by which managers in the U.K.—where the bulk of Europe’s $530 billion hedge fund industry is based—had to submit applications to the…

**JB – Another ‘sounds great in theory’ regulation destined to fail? How in the world are the 72 people working on AIFMD authorizations and general operations going to make any sense of the info set to come their way via required reports from more than 1,000 managers?

Global Watchdogs Seek End to Tainted Benchmark Guessing-Game
Jim Brunsden and Ben Moshinsky – Bloomberg
Global regulators set out plans to overhaul the way key financial benchmarks are calculated as they try to re-establish confidence in key market rates tarnished by manipulation scandals.

Dodd-Frank has made banks safer but slowed economy, data show
Gina Chon in Washington – Financial Times
Four years after the Dodd-Frank financial reform bill was signed, US banks are more stable and better capitalised. But this has come at the cost of a sluggish economy caused by reduced access to, or more expensive, mortgages, business loans and other forms of credit, the banks say.

Facing up to the Financial Transaction Tax
Elliott Holley – Banking Technology
A European financial transaction tax on equities and derivatives trades could be damaging for European liquidity levels and the City of London, but it also looks set to impose serious operational challenges for banks, brokers and their buy-side clients following the failure of a UK appeal to the European Court of Justice earlier this year.

Watch what markets don’t do as world politics turns nasty
Like so much in the investment world of late, it’s what financial markets are not doing right now that is most intriguing.

5 Red Hot Summer Market Predictions
Dr. John Bates – Wall Street & Technology
As scandals continue to dog capital markets — from FX and Libor fixing to dishonest dark pools — I predict that we will see even more newsworthy crises before the end of 2014.

Debt deal is impossible, says Argentina
Benedict Mander in Buenos Aires and Vivianne Rodrigues in New York – Financial Times
A settlement between Argentina and holders of its defaulted debt by the end of the month was not possible, lawyers for the South American nation said on Tuesday.

U.S. grain farmers resort to giant storage bags to avoid cheap sales
As U.S. farmers turn in record grain crops this autumn, many will have a powerful new tool – giant sausage-shaped storage bags – to help them avoid the lowest prices in years and gain more control over trade with giants such as Cargill Inc.


Departing O’Malia stresses SEF data challenge
Catherine Snowdon – Euromoney Magazine
Scott O’Malia, who will leave his position as a commissioner at the Commodity Futures Trading Commission (CFTC) in August after almost five tumultuous years at the regulator, pulled few punches in one of his final interviews when it came to discussing problems with the implementation of new swap execution facility (SEF) rules.

U.S. SEC poised to adopt reforms for money market funds
Sarah N. Lynch – Reuters
U.S. regulators are expected to adopt rules on Wednesday that force “prime” money market funds used by large institutions to float their share price.

Hedge Fund Chief Testifies at Senate Tax-Avoidance Hearing
Complex financial instruments that the government has said helped the hedge fund Renaissance Technologies claim billions of dollars in tax savings were “extremely important,” its co-chief executive said at a Senate hearing on Tuesday.

SEC Eyes Cyber-Security Planning
Ivy Schmerken – Wall Street & Technology
With the relentless threat of cyber criminals and hackers attacking financial services firms, the US Securities and Exchange Commission is intensifying its focus on information systems security at broker-dealers and investment advisers.

**JB – This is a good idea but the bigger threat is probably always going to be disgruntled employees.

Bank rules would be stricter if UK left EU, says Bowles
Tom Osborn –
Sharon Bowles, former chair of the European Parliament’s economic and monetary affairs committee (Econ), has fired a parting shot at critics who argue UK banks and other financial firms have been hamstrung by EU regulation, claiming instead that post-crisis reforms would have been tougher if the UK had been left to its own devices.

FSB says swaps users to be pushed away from Libor
Joe Rennison –
Derivatives market participants may have to be pushed into a new, multi-benchmark world, says FSB in Libor reform recommendations

Late AIFMD applications ‘may face less scrutiny’ by FCA
Jessica Meek –
With a considerable backlog of applications, the FCA may be less strict when it comes to authorising fund managers under AIFMD in order to meet today’s deadline, one expert says

Speech By Tracey McDermott, Director Of Enforcement And Financial Crime, The UK Financial Conduct Authority, At The Thompson Reuters Compliance & Risk Summit, London

Exchanges & Trading Facilities

CFTC highlights process changes at ICE Futures US
Joe Parsons – Futures & Options World
The US Commodity Futures Trading Commission (CFTC) has recommended several changes to the internal market surveillance procedures carried out by ICE Futures US. The CFTC’s division of market oversight released on Tuesday its report into ICE Futures US’ compliance with two core principles of the Dodd-Frank Act concerning the prevention of market disruption and position limits.

CFTC Releases Rule Enforcement Review Of ICE Futures U.S.
Press Release

MarketAxess Reports Second Quarter 2014 Record Revenues of $65.0 Million, Pre-Tax Income of $29.1 Million and Diluted EPS of $0.48
MarketAxess Holdings Inc., the operator of a leading electronic trading platform for fixed-income securities, and the provider of market data and post-trade services for the global fixed-income markets, today announced results for the second quarter ended June 30, 2014.

LME stands up for rules of decorum
Joe Parsons – Futures & Options World
Nine LME traders have been fined almost £14,000 for breaching last Friday one of the LME’s many rules of decorum. Their crime? Standing up when trading.

The emergence of new listed products and instruments
Renaud Huck, Deutsche Börse Group-Eurex Exchange –
With the move to exchange clearing, European firms will join US buy- and sell-side firms in creating a new trading environment. However, many questions remain unanswered and challenges confront the industry during this transition. Renaud Huck, head of buy-side, Deutsche Börse Group-Eurex Exchange, discusses the firm’s plans for products and approaches to meet the challenges of the new environment.

Six questions with NASDAQ OMX’s Deirdre Dastous
Tim Human – IR Magazine
Global head of advisory services discusses her new role and IR industry trends

Direct Edge Trading Notice #14-28: A Message From BATS Global Markets CEO Joe Ratterman

BATS Global Markets Announces Departure of William O’Brien; Joe Ratterman, CEO, Reassumes Additional Role of President
Press Release

London Stock Exchange Group: UnaVista Partners With Omgeo To Boost Matching Of Synthetic Equity Swaps
Press Release
London Stock Exchange Group’s UnaVista and Omgeo, the post-trade solutions provider, today announced a partnership to support tri-party matching of synthetic equity swaps between executing brokers, prime brokers and investment managers.

Hedge Funds & Managed Futures

Funds of hedge funds profit from new improved look
Beverly Chandler – Financial News
Bright-eyed and bushy-tailed from the Nineties into the Noughties, the fund of hedge funds industry emerged from the financial crisis in a bedraggled state. After six years in the doghouse, it is gradually regaining some lustre, but only because it has evolved into a rather different breed.

Banks & Brokers

RBS ‘wilfully obtuse’ in turnaround unit evidence: UK lawmaker
Royal Bank of Scotland was “wilfully obtuse” when giving evidence to lawmakers examining whether its corporate turnaround division had been used to make money out of small businesses, the chairman of a British parliamentary committee said.

UBS Poaches Power Bankers from Morgan Stanley
Gillian Tan – MoneyBeat – WSJ
UBS AG has poached two managing directors from Morgan Stanley, according to an internal memo obtained by The Wall Street Journal.

Excerpts from New York Fed’s Letter to Deutsche Bank
MoneyBeat – WSJ
Late last year, the Federal Reserve Bank of New York wrote a letter to Deutsche Bank’s U.S. executives outlining their concerns about the financial data, governance, auditing and technology systems in the bank’s U.S. units.

5 Reasons the New York Fed Isn’t Happy With Deutsche Bank
The Federal Reserve Bank of New York has given Deutsche Bank a talking-to – which went unreported until today – over a range of problems the regulator says compromise the bank’s ability to meet toughening reporting standards.

Deutsche expands U.S. exchange-traded products team
Deutsche Bank AG has hired three new regional vice presidents to join its U.S. distribution team focused on exchange-traded products, the company said on Tuesday.

JP Morgan steps into a brave new FICC world
Matt Turner – Financial News
The fixed income markets are changing, forcing investment banks to play a game of stick or twist. JP Morgan has decided to twist.

Middle age catches up with StanChart
Martin Arnold and Patrick Jenkins – Financial Times
Fivefold growth over a decade is a rate that would hardly look out of place in Silicon Valley. But that kind of expansion can also be found in a less likely location: the balance sheet of one of Britain’s biggest banks.

Full capital structure securitization makes tentative return to Europe
David Wigan – Euromoney Magazine
As the European securitization market slowly recovers, banks are printing full capital structure deals amid growing regulatory pressure and improving deal economics. However, some investors are not yet ready to buy.

Morgan Stanley chief marketing officer leaves after 9 months
Susan Smith Ellis has left Morgan Stanley nine months after becoming the chief marketing officer of the Wall Street bank, a spokeswoman confirmed on Tuesday.

TD Ameritrade Q3 profit rises 3 pct despite sharp trading drop
TD Ameritrade Holding Corp, the biggest online stockbroker as measured by client trading, said quarterly net income rose 3 percent from a year earlier despite higher expenses, continuing low interest rates and a drop in client trades and commissions.

Clearing & Settlement

CCPs eager for first forex clearing mandate
Fiona Maxwell –
Market participants claim a clearing mandate for non-deliverable forwards is written, but has been languishing while the Commodity Futures Trading Commission puts new leadership in place. With that now done, some say the rules could be issued within weeks.

Deutsche Bank strikes collateral deal with Clearstream
Jon Watkins – The Trade
Clearstream has agreed to develop a customised triparty collateral management solution for Deutsche Bank and its customers, the latest bank to sign up to the central securities depository (CSD).

CME Group Delivery Dates for August 2014

Indexes & Products

NASDAQ OMX Lists First Trust Dorsey Wright International Focus 5 ETF – International ETF Tracks Index Based On Systematic Momentum Strategy


Abacus Group Hires ConvergEx Exec As Chief Financial Officer
Abacus Group LLC, a leading provider of hosted IT solutions for hedge funds and private equity funds, today announced that it has hired Jonathan Bohrer as Chief Financial Officer, effective June 30th 2014. Jonathan will be based in New York and will report to Chris Grandi, Chief Executive Officer of Abacus Group.

Corvil Launches Streaming Analytics Platform to Mitigate IT Risk in Electronic Trading
Ivy Schmerken – Wall Street & Technology
To detect risks in electronic trading, Corvil is moving beyond latency management to help banks and exchanges run real-time analytics on petabytes of data that can be migrated to big-data systems.

Algo-Logic Systems Launches Ultra-Low-Latency Highly Scalable Key/Value Search (KVS) Solution For Datacenters
Altera And Algo-Logic Systems Successfully Collaborate To Deliver Industry Leading Algorithmic KVS Solutions Enabling 150 MSPS At 100 Gbps Line Rate


SEC Charges Investor Relations Executive With Insider Trading While Preparing Clients’ Press Releases
The Securities and Exchange Commission today charged a partner at a New York-based investor relations firm with insider trading on confidential information he learned about two clients while he helped prepare their press releases.

CFTC Releases Rule Enforcement Review of ICE Futures U.S.
The U.S. Commodity Futures Trading Commission (Commission) notified ICE Futures U.S. (Exchange) today of the results of a rule enforcement review completed by the Commission’s Division of Market Oversight (Division). The Division assessed the Exchange’s compliance with elements of Core Principles 4 and 5, relating to the Exchange’s market surveillance program.

FCA imposes recruitment ban on the Financial Group for failing to control its Appointed Representatives
The Financial Conduct Authority (FCA) has used its suspension power for the first time, banning two of the Financial Group’s (the Group) subsidiaries, Financial Limited and Investments Limited, from recruiting new Appointed Representatives (ARs) and individual advisers for a period of four and a half months.

FCA commences criminal prosecution against Phillip Boakes in relation to an unauthorised investment scheme

Environmental & Energy

PEGAS: Half-Year Volumes More Than Double Year-On-Year


Hong Kong-Shanghai equities ‘through-train’ on track
Jennifer Hughes in Hong Kong – Financial Times
Hong Kong has never been short of conspiracy theorists wary of what Beijing is thinking – and the financial community is not immune. Take the speculation that a much-heralded scheme to allow fund managers to sell products across the border has been delayed because the mainland government does not want to reward Hong Kong while its debate over democracy remains heated.

KRX to co-operate with Bank of China
Simon Osborne – The Trade
The Korea Exchange (KRX) says it has executed a comprehensive memorandum of understanding with the Bank of China.

JP Morgan rolls out new Aqua in Asia
Simon Osborne – The Trade
The new version of Aqua, JP Morgan’s flagship liquidity-seeking algorithm product will be live and available by 1 September across all of Asia (with the exception of Indonesia).

Tick size changes for TOPIX100 Stocks
Simon Osborne – The Trade
From 22 July, 2014, sub-yen tick sizes are being introduced for TOPIX100 stocks. Furthermore, TOPIX100 stock prices will now contain decimals.

Osaka Exchange: Latest Update Of Deliverable Bonds And Conversion Factors Of JGB Futures

Frontier Markets

Macro Horizons: Emerging Markets Are in, but Not All Signs Are Good
MoneyBeat – WSJ
The latest fad in global investing has been to plough money into emerging-market currencies and the assets denominated in those, as well as those of countries such as Australia whose exporters’ fortunes are tied to emerging markets. In a world of low volatility, abundant central bank liquidity and record-low bond yields, developing world markets battered during last year’s “taper tantrum” are seen as one the few promising sources of higher returns.

DIFC Posts Consultation Papers For Public Comment On DIFC Netting Law

Dubai Financial Market Market Closure – Eid Al Fitr

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