John Lothian Newsletter: CFTC Misreporting Size of Swaps Market, Agency Says; NYSE Surpassed as Biggest U.S. Market Owner; EU agrees overhaul to settlement rules

Dec 19, 2013

First Read

CFTC Misreporting Size of Swaps Market, Agency Says
Andrew Ackerman – WSJ.com
U.S. commodity regulators are stumbling at one of their primary goals: bringing transparency to the multitrillion-dollar swaps market. The Commodity Futures Trading Commission said Wednesday that technical errors at two so-called swaps data repositories, which collect and supply regulators with transaction data, have led the CFTC to misreport the overall size of the swaps market by undercounting its size.
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***** Now if they were an FCM, they would probably be fined like $1.5 million for this infraction.

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Court Approves Distribution to Peregrine Customers
WSJ.com
With the stroke of a bankruptcy judge’s pen Wednesday, customers of defunct brokerage Peregrine Financial Group Inc. can expect to receive up to $41 million by the year’s end.
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***** Not exactly a Merry Christmas gift, but better than nothing. There is some hope of more from a successful result in the case against U.S. Bank.

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IntercontinentalExchange Announces 2013 Achievements; NYSE Leads in Capital Raised, Total IPOs and Technology IPOs
IntercontinentalExchange Group, the leading global network of exchanges and clearing houses, today announced 2013 accomplishments, including the third consecutive year for NYSE’s leadership in global initial public offerings and capital raised.
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***JM: “Also, we bought an exchange; don’t know if anybody heard that…”

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Trading Technologies Goes Live On NASDAQ OMX NLX
Trading Technologies International, Inc. today announced the release of its connection to NASDAQ OMX NLX, the new London-based derivatives trading market.
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***** I can remember when this was made to be a very big deal. It is still a big deal, but it lacks a certain Eurex US panache.

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Holiday Edition of Orc Quarterly Newsletter
Happy holidays! It has been a great year here at Orc and we are excited about what is around the corner in 2014. Leading up to the new year, we have enhanced our products and services to help you maintain focus on your core business.
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***** Here is to wishing Orc a great 2014. And everyone else too.

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A progress report: the early days of Sefs
William Mitting – FOW
It was an inauspicious start for the new regime designed to shine light on the OTC markets. The new era of Swap Execution Facilities began on October 2 with a string of no-action letters from the Commodity Futures Trading Commission.
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***** If Dodd Frank has put execution and repositories together, we could have had SERFs, Swap Execution & Repository Facilities. Or, it could have been SMERFs, Swap Market Execution & Repository Facilities. A missed opportunity. SEFCON could have been SERFCON or SMERFCON.

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NYSE Libor executive Stuart Sloan departs
Michelle Price – Financial News
A senior London-based executive at NYSE Euronext, who helped engineer the exchange’s successful bid to run Libor, has left the company, Financial News has learned.
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***** There is a very active exit door at NYSE.

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Thoughts on the Volcker Rule
Philip McBride Johnson – FOW
Consuming nearly 1,000 pages of regulations and explanatory materials, the Volcker Rule is now the law. Its purpose is to curb speculative investments using their own money by depository banks that enjoy Federal Deposit Insurance Corporation backing in the event of insolvency. Fine, but it has its critics, not only among affected banks but by people who think it does not go far enough.
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***** I knew it should have been 1001 pages!

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ConvergEx Settles Fraud Charges for $151 Million
Jean Eaglesham and Bradley Hope – WSJ.com
A brokerage firm agreed to pay more than $151 million to settle criminal and civil charges that it inflated fees when trading for clients, bilking charities and other big investors in what prosecutors called an “astonishingly brazen” scheme.
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***** This will make Eric Noll’s job that much harder, but it makes more sense as to why they brought him in. He will help restore trust and confidence in ConvergEx.

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CBOE claims victory in legal battle with rival ISE
Reuters
CBOE Holdings Inc, which runs the largest U.S. options exchange, said on Wednesday a judge had dismissed a challenge by rival International Securities Exchange against CBOE’s exclusive license to list options on certain key U.S. indexes.
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****** Is Gary Katz still breathing? Then the victory is but temporary. The war continues.

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MarketsWiki

MarketsWiki Page of the Day
Gavin Wells
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MarketsWiki Recent Updates

People

John J. Conheeney; James M. Falvey; Harris Brumfield; Gavin Wells

Companies, Organizations and Groups

Constellation Energy; CME Group, Inc.; Tokyo Grain Exchange; National Futures Association Executive Committee; RTS Realtime Systems Group; Phillip Futures Inc.; Archer Daniels Midland; Trading Technologies International

Products

X TRADER

Statistics

45,963,697 pages viewed, 7,721 articles, 169,704 edits
MarketsWiki Statistics

Lead Stories

NYSE Surpassed as Biggest U.S. Market Owner by Merging Upstarts
Sam Mamudi – Bloomberg
IntercontinentalExchange Group Inc.’s U.S. stock markets were pushed out of first place today by Bats Global Markets Inc. and Direct Edge Holdings Inc., two exchange operators in the process of merging.
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EU agrees overhaul to settlement rules
Philip Stafford – FT.com
EU policy makers have agreed new regulations aimed at preventing a breakdown of the market infrastructure that conducts trade settlements in the 28-strong member bloc.
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Fed cuts bond buying in first step away from historic stimulus
Reuters
The Federal Reserve on Wednesday embarked on the risky task of winding down the era of easy money, saying the U.S. economy was finally strong enough for it to start scaling down its massive bond-buying stimulus.
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Derivative trading rules will not reduce risk
Philip Stafford – FT.com
The theory behind the post-crisis regulatory overhaul of derivatives trading is about to become practice, and concerns are growing that systemic risk will simply be transferred rather than backstopped.
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Stumbling Toward the Next Crash
GORDON BROWN – NYTimes.com
In early October 2008, three weeks after the Lehman Brothers collapse, I met in Paris with leaders of the countries in the euro zone. Oblivious to the global dimension of the financial crisis, they took the view that if there was fallout for Europe, America would be to blame — so it would be for America to fix. I was unable to convince them that half of the bundled subprime-mortgage securities that were about to blow up had landed in Europe and that euro-area banks were, in fact, more highly leveraged than America’s.
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Why ADM chose Chicago for its headquarters
Meribah Knight – Crain’s Chicago Business
While shopping for a new city to call home for its world headquarters and technology center, it turns out Archer Daniels Midland Co. had a plan B the whole time: to slice and dice its offering if it wasn’t getting what it wanted.
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Why HFT Regulation Could Create More Volatility
Megan Morgan – TabbFORUM
Removing high-frequency trading firms from the market could actually create the very situation market regulators are trying to mitigate: increased volatility, increased transaction costs and distortion in market prices.
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Regulatory

U.S. regulators address small banks’ Volcker concerns
Reuters
A U.S. senator on Wednesday urged banking regulators to address some concerns from small and medium-sized banks about the Volcker rule after it was finalized last week.
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U.S. SEC unveils plan to spur more public stock offerings
Sarah N. Lynch – Reuters
Start-up companies will be able to raise much more capital through certain public stock deals without facing costly regulatory burdens under a proposal announced by U.S. securities regulators on Wednesday.
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European Officials Agree on Plan for Failed Banks
DAVID JOLLY – NYTimes.com
European Union finance officials agreed late Wednesday on a system for winding down failed banks, an important step toward introducing a banking union.
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CFTC guidance means FIA-Isda contract ‘no longer needed’
Joe Rennison, Fiona Maxwell – Risk.net
Thousands of contracts drawn up as the over-the-counter derivatives market prepared for the shift to central clearing will need to be torn up or amended, lawyers and dealers say, following guidance from the Commodity Futures Trading Commission (CFTC).
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Systemic operational risk since the financial crisis
Marcelo Cruz – Risk.net
A year of huge fines and settlements has thrown new light on the importance of controls and conduct risk
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Toward a uniform functional model of the financial infrastructure
Ron J. Berndsen – Risk.net
The aim of this paper is to provide one uniform representation of functional concepts for the whole field of financial infrastructures. This encompasses the part of the infrastructure with inherent systemic risk such as financial market infrastructures but also retail payments including new instruments such as mobile payments and new phenomena like Bitcoin.
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Statement At Open Meeting Regarding Regulation A+ – Commissioner Michael S. Piwowar, U.S. Securities And Exchange Commission, Washington, D.C., Dec. 18, 2013
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Notice to Members I-13-41: Reporting Requirements for Christmas Day
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AMF publishes for comment clearing house, central securities depository and settlement system requirements
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IOSCO Requests Public Comment On Implementation Of PRA Principles
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CPSS And IOSCO Issue A Consultative Document On The Assessment Methodology For The Oversight Expectations Applicable To Critical Service Providers
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Exchanges & Trading Facilities

HKEx Sets Several New Records in 2013
Hong Kong Exchanges and Clearing Limited (HKEx) set several new records in its securities and derivatives markets this year according to year-end market statistics for 2013 (to 13 December) published today (Thursday) in response to media requests.
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BM&F Bovespa Increases Investment Plans for 2014
WSJ.com
Brazilian financial exchange BM&F Bovespa SA has raised the amount it expects to invest next year as it improves its customer services ahead of expected competition in the hosting of securities trading.
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Vienna-Warsaw bourse tie-up could take time-paper
Reuters
Talks on a tie-up between the Vienna and Warsaw stock exchanges are not set for a quick conclusion, the co-CEO of the Vienna Stock Exchange told the Wirtschaftsblatt paper.
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8 reasons to simplify exchange connectivity, Part one
Steve Woodyatt – FOW
Clearing and prime brokerages know that consolidating the number of exchange connectivity gateways they utilise is beneficial in terms of gaining faster, more cost-efficient access to the marketplace. But there are additional, perhaps lesser known upsides associated with normalising market access technology and reducing the number of pathways used to access the markets.
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Are the Exchanges Running the SIPs on Outdated Technology?
Ivy Schmerken – Wall Street & Technology
A report in the Wall Street Journal, which disclosed that a securities information processor operated by Nasdaq runs on Windows 2003, has sparked debate on the failure of exchanges to upgrade critical market infrastructure.
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***JM: Aw, but Windows 2003 is a great operating system for those newfangled “Pentium” chips I keep hearing about…

MIAX Options Exchange: MIAX Options Christmas And New Year’s Holiday Schedule
jlne.ws/1cCsvai

CBOE Holdings Announces Date Of Fourth-Quarter 2013 Earnings Release And Conference Call
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Market Cap Segment Review At Nasdaq OMX Nordic Exchanges
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ASX Board Renewal
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TSX Markets Top 20 Largest Consolidated Short Position Report – November 30, 2013
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Amendment Of WSE Dividend Policy
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Hedge Funds & Managed Futures

Fidelity Plants Flag in Hedge-Fund Turf
Joe Light – WSJ.com
Fidelity Investments launched two “event-driven” mutual funds, the latest foray by the firm into a sector traditionally dominated by hedge funds.
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More Employees Depart SAC Capital as Firm Shifts Focus
MATTHEW GOLDSTEIN – NYTimes.com
The slow exodus of traders and analysts continues from SAC Capital Advisors, the hedge fund founded by Steven A. Cohen.
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Michael Platt’s BlueCrest Capital Poised for Rough Close to 2013
WSJ.com
A tough 2013 is casting a shadow over BlueCrest Capital Management LLP, one of the most successful hedge-fund firms of the post financial-crisis era.
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Virtu Financial Takes Steps Toward IPO
WSJ.com
Electronic trading firm Virtu Financial Inc. is gearing up for a possible initial public offering next year, and is likely to submit its first confidential regulatory filing within the next couple of months, people familiar with the matter said.
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Hedge funds rise but trail equities
Harriet Agnew – Financial News
Hedge funds are coming to the end of a fifth consecutive year of underperforming the S&P 500 index. The Federal Reserve’s stimulus programme pushed the index up 29.1% this year through November, leaving the average hedge fund, which is up 8.31% this year, trailing. In an environment of rising equity markets, shorting stocks proved difficult and short-biased hedge funds dropped 15.87% in the first 11 months of this year, according to data provider HFR.
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The Buffett difference, derivatives edition
Dan McCrum | FT Alphaville
Actual new information about the great man and his methods is rare indeed. Warren Buffett is the investment equivalent of Churchill, endlessly dissected but forever in the context of a history he wrote himself — the annual letters to the shareholders of Berkshire Hathaway.
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Credit Portfolio Management in a Turning Rates Environment
Arthur M. Berd, Elena Ranguelova, Antonio Baldaque da Silva – Cornell University Library
We give a detailed account of correlations between credit sector/quality and treasury curve factors, using the robust framework of the Barclays POINT Global Risk Model. Consistent with earlier studies, we find a strong negative correlation between sector spreads and rate shifts. However, we also observe that the correlations between spreads and Treasury twists reversed recently, which is likely attributable to the Fed’s ongoing quantitative easing. We also find that short-term effective durations in the banking industry are now significantly lower than historical patterns would indicate.
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CFTC Commitments Of Traders Reports Update
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Federal Reserve Issues FOMC Statement
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Federal Reserve Board And Federal Open Market Committee Release Economic Projections From The December 17-18 FOMC Meeting
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Banks & Brokers

JPMorgan’s Bold Billion Dollar Suit Against The FDIC: Foolish Or Smart Move?
Halah Touryalai – Forbes
Can you beat the federal government? JPMorgan Chase is willing to find out. The FDIC owes JPM at least $1 billion associated with its purchase of Washington Mutual, according to a lawsuit filed by the bank today.
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Citigroup’s Orszag on Volcker, Bitcoin
Julie Steinberg – MoneyBeat – WSJ
The Volcker rule may be causing some bank executives some sleepless nights, but it doesn’t appear as though Peter Orszag is one of them. Mr. Orszag, vice chairman of corporate and investment banking at Citigroup Inc.C +2.51%, said in a discussion Wednesday sponsored by The Atlantic in New York that he is focused less on regulations like the Volcker rule than on what he deems the best way to improve the banking sector: through higher capital ratios.
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BGC Partners Updates Its Outlook for the Fourth Quarter of 2013
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UBS to sell employee equity services business
Reuters
UBS said on Thursday it would sell its administrative services arm for employee equity plans to Montagu Private Equity as part of the Swiss bank’s drive to simplify its operations.
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Former Irish bank executives charged with fraud
Reuters
Three former Irish bank executives, including the ex-chief executive of one of the country’s largest lenders, have been charged with conspiracy to defraud in the run-up to the country’s banking crisis, a court heard on Wednesday.
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JPMorgan shoots the instant messenger
Tom Braithwaite in New York – FT.com
JPMorgan Chase’s investment banking co-heads banned their staff from using multi-bank instant messaging services on Wednesday, the latest sign of banks clamping down on a tool blemished by its use in market manipulation.
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Clearing & Settlement

Deutsche Boerse AG : BayernLB joins EurexOTC Clear
Bayerische Landesbank (BayernLB) has been clearing member of EurexOTC Clear for Interest Rate Swaps (IRS) since 18 December 2013. By connecting to Eurex Clearing’s central counterparty (CCP) for OTC derivatives, the bank is preparing itself ahead of time for the clearing obligation for OTC derivatives in Europe expected in 2014.
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Clearstream Extends The ICSD Settlement Day And Improves US Market Coverage
Clearstream, the post-trade services provider of Deutsche Börse Group, is extending the settlement day of its international central securities depository (ICSD). This results in improved cash and securities deadlines for internal settlement activity as well as for domestic settlement with local counterparties in the US, Canada and Latin American markets such as Argentina, Brazil, Mexico, Uruguay and Peru. The step will also facilitate the free flow of collateral within the extended deadlines.
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Technology

Interactive Data Adds Weight to Thin-Client FutureSource
Faye Kilburn – WatersTechnology
Interactive Data has made a number of enhancements to the thin-client web application version of its FutureSource data workstation to bring the content and functionality in line with the vendor’s desktop-based version, in addition to the recent addition of new commodities content from interdealer brokers GFI and Icap, and commodities data vendor Informa Agra and pricing and news vendor Oil Price Information Service (IMD, Dec. 16).
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Enforcement

Federal Court in Florida Orders More than $8 Million in Sanctions against Defendants Philip Leon and Paul Rangel for Commodity Pool Fraud and Misappropriation
The U.S. Commodity Futures Trading Commission (CFTC) obtained federal court Orders requiring Defendants Philip Leon, of Altamonte Springs, Florida, to pay a $4 million civil monetary penalty and $1,598,343 in disgorgement and Paul Rangel, of Apopka, Florida, to pay a $1.7 million civil monetary penalty and $819,781 in disgorgement to settle CFTC charges related to a fraudulent commodity pool scheme.
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NFA permanently bars Cincinnati commodity pool operator QFC LLC
December 18, Chicago – National Futures Association (NFA) has permanently barred QFC LLC (QFC), a commodity pool operator Member of NFA located in Cincinnati, Ohio from NFA membership. The Decision, issued by NFA’s Business Conduct Committee, is based on a Complaint filed against QFC on September 13, 2013.
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Ex-SAC Trader Is Convicted of Insider Trading
NYTimes.com
Prosecutors lacked the incriminating wiretaps that underpinned past insider trading cases. The emails pointed to no smoking gun. And the government’s star witness, a felon who testified to avoid prison time, fumbled his way through five days of cross-examination. And yet a federal jury in Manhattan on Wednesday still convicted Michael S. Steinberg, the highest-ranking employee at SAC Capital Advisors to stand trial for insider trading.
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Preet Bharara Remains Undefeated for Insider Trading Trials
MoneyBeat – WSJ
It’s yet another win for Wall Street’s top prosecutor. Following a jury’s conviction of SAC Capital’s Michael Steinberg Wednesday, Preet Bharara remains undefeated in prosecuting insider trading.
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SEC Charges ConvergEx Subsidiaries With Fraud for Deceiving Customers About Commissions
The Securities and Exchange Commission today announced fraud charges against three brokerage subsidiaries and two former employees of a global trading services provider that caused many institutional clients to pay substantially higher amounts than disclosed for the execution of trading orders.
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UK watchdog fines EY over audit of Christmas club
Reuters
Britain’s accounting watchdog has fined EY 750,000 pounds for failing to meet required standards in its auditing of Christmas savings club Farepak Food and Gifts.
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Firm fined £1.8million for “unacceptable” approach to bribery & corruption risks from overseas payments
The FCA has fined JLT Specialty Limited (JLTSL) over £1.8million for failing to have in place appropriate checks and controls to guard against the risk of bribery or corruption when making payments to overseas third parties.
jlne.ws/1cCsvXK

No prison for former JPMorgan exec in muni bond bid-rigging case
Reuters
A former JPMorgan Chase & Co vice president received no prison time on Wednesday after pleading guilty and cooperating with authorities investigating bid rigging and fraud schemes related to investment contracts for municipal bond proceeds.
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Securities regulator issues notice of hearing against B.C. company and three B.C. residents alleging illegal distribution
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Environmental & Energy

Expected to be China’s biggest, Guangdong carbon mkt begins briskly
Reuters
The first day’s trading in what will be by far the largest carbon market in China kicked off briskly on Thursday with pricing in line with expectations, as Beijing continues its drive to slow its rapid growth of heat-trapping emissions.
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First Chinese forest project seeks local carbon cash
Reuters
A Chinese forestry firm has applied to receive offset credits under the nation’s nascent carbon market, the first to target domestic emissions trading schemes to fund reforestation projects.
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EU Emission Slump Tests Broker Survival Skills: Carbon & Climate
Bloomberg
As Europe’s recession recedes, trading via brokers in the $74 billion carbon emissions market is plunging amid a record glut in the commodity Richard Sandor once predicted to reach the highest volume in the world.
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Asia-Pacific

In Asia, Cheering for Low Interest Rates
Fiona Law and Prudence Ho – MoneyBeat – WSJ
Bankers in Asia–particularly in Hong Kong, home to big China deals–are sighing with relief.
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Fragments of Asia
Euromoney magazine
The structural development of Asia’s capital markets is failing to keep pace with economic growth. Until that gap closes, it is unlikely the region’s markets or its financial institutions will fully realise their potential to compete more effectively with the west.
jlne.ws/1cCsy5W

Central bank acts to ease China cash crunch fears
Simon Rabinovitch in Shanghai – FT.com
The Chinese central bank has made an emergency money injection after a surge in interbank rates, trying to prevent a repeat of the cash crunch that rattled global markets earlier this year.
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3rd time lucky for TSE night trading?
The Japan News
After two failed attempts to offer stock trading at night, the Tokyo Stock Exchange is hoping for a case of third time lucky.
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SGX welcomes Linc Energy to Mainboard
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Thai Bourse Organizes Tax Incentive Funds Fair
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Osaka Securities Exchange: Partial Revisions To Articles Of Incorporations, etc. In Connection With The Integration Of Derivatives Markets With Tokyo Stock Exchange, etc.
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Frontier Markets

South Africa and Nigeria lag as internet set to add $300 billion to Africa’s GDP
Kanika Saigal – Euromoney magazine
Internet connectivity in Africa has the potential to transform the continent, contributing up to $300 billion to GDP by 2025, according to a McKinsey report. However, some of the country’s most advanced economies, such as South Africa and Nigeria, are lagging behind other innovative peers, says Paul Cook of Silvertree Capital.
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India’s Forward Markets Commission Deems Financial Technologies (India), Jignesh Shah, Joseph Massey And Shreekant Javalgekar To Be Not A ‘Fit And Proper Person’
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