John Lothian Newsletter: CFTC Passes Collateral Rule to Backstop Treasuries in Swap Trade; CME Group says swaps clearing service was hacked in July; Federal Reserve considering a delay to Volcker rule

Nov 18, 2013

First Read

Dear Readers,

Greetings from sunny Singapore! It is my great pleasure to be guest-editing this week’s newsletter with my colleague, Michael Syn (Mike), our Head of Derivatives. I am told that this is the first time that JLN is edited in Asia! What an honour! Mike and I are excited to connect with JLN’s global audience through the exchange of ideas and opinions. Just as importantly, to share our thoughts of today’s markets as seen via Asia’s leading financial center in Singapore.

As you know, there is never a dull moment in our industry. Year 2013 has so far presented a world of volatility, risk aversion and regulatory challenges. Along with the increase in regulatory demands, the business model of the industry has also been evolving. We are all adjusting to capture new opportunities and the unanimous focus has been Asia.

As one of the world’s most international exchanges and biggest offshore market for Asian equity index derivatives, SGX is excited to be in the centre of the actions and play a part in facilitating this growth phenomenon. We provide an access point for linking global capital to Asia’s markets, and Asian investors to global opportunities. For Asia to sustain its “star” quality, stakeholders in this region will have to stay vigilant and responsive to local and global market developments.

For a start, some of us are preparing for a week of central bank-watching, especially with the Fed’s outlook. Perhaps the possible appointment of Timothy Massad as the next chairman of the Commodity Futures Trading Commission will give the market a sense of certainty, at least at the leadership front.

Once again, we’d like to extend our thanks to John for the opportunity, and look forward to the week to come.

Magnus Böcker, CEO of Singapore Exchange


CFTC Passes Collateral Rule to Backstop Treasuries in Swap Trade
Matthew Leising – Bloomberg
The U.S. Commodity Futures Trading Commission approved a rule aimed at ensuring that Treasuries pledged as collateral for swaps and futures trades can be instantly converted to cash.

***MS: I guess more CCPs will now apply to be banks. Dibsies on a platinum CME credit card.


Report casts doubt on insurance plan for futures brokers
Gregory Meyer in New York and Neil Munshi in Chicago –
Government-authorised insurance for customers of collapsed futures brokers would take half a century to become fully funded, requiring a taxpayer backstop in the interim, an industry-backed study has found. The conclusion is ominous for the creation of a futures market version of the Securities Investor Protection Corporation, which covers up to $500,000 in losses suffered by US stock investors if their broker fails.

***MS: Well as a backstop to mark-to-market we can always rely on the centuries old science of actuarial underwriting (aka deep pockets and short arms)


NYSE and Nasdaq Plan to Back Up One Another’s Data Streams
Steve Rosenbush – The CIO Report – WSJ
The committees that control consolidated data feeds for Nasdaq OMX Group and NYSE Euronext are close to an agreement on a plan to back up one another’s streams, according to people familiar with the matter. The collaboration would strengthen one of the stock market’s common points of failure.

***JM: It’s not uncommon to see two enemies band together in the face of a really scary and dangerous animal. Or, an unpleasant stream of technical failures.


David Robin

Fed Carousel: Newedge’s Robin says bond market could move in Q2 2014
Fed tapering, a government shutdown and last minute debt-ceiling deal rocked the bond market in recent weeks. John Lothian News’ editor-in-chief Jim Kharouf sat down with David Robin, managing director of Newedge to talk about what’s next for the bond market and interest rate futures volumes. In Robin’s view, we are not likely to see another Washington fiasco as we did back in October. “The significance of the debate itself and the process the marketplace and the political theater underwent, has sort of got the marketplace in a situation where know that for any extended period of time, the Fed is the only game in town,” Robin says.

Watch the video »


If you will be attending SEFCON IV Monday, read this note!
John Lothian News
This Monday, November 18, John Lothian News editor-at-large Doug Ashburn and production editor RJ Roxas will be in New York at SEFCON IV, talking with SEF participants about the status of implementation, market structure and lingering regulatory issues. Afterward, we will be putting together a short video featuring those who participated. If you will be attending the conference and have something to say, send an email to Hope to see you there.


Brazil’s Sole Stock Exchange Must Prepare for Competition
Becca Lipman – Wall Street & Technology
If everything goes according to plan Americas Trading System Brasil (ATS Brasil), a joint venture between ATG and NYSE Euronext will launch a new Brazilian exchange in 2014. It’s difficult to capture just how much things will change if they are successful.


HFTs: dividing opinions
Tim Cave
The benefits and impact of high-frequency trading are issues that are known to divide opinion. FN talks to representatives from different sectors to get their views.

***MS: Just killed a couple of mosquitos (it’s monsoon season out here). Incidentally, mosquitos buzz at about 500Hz, which isn’t too different from some of the algorithms in our markets. Except the latter often serve an important social purpose, which is sometimes overlooked in the rush to hyperbole.


NFA Announces Nominations Made by the 2013 Nominating Committee
In accordance with NFA Bylaw 406, the Office of the Secretary has received from the 2013 Nominating Committee a list of its nominees for positions on NFA’s Board of Directors and 2014 Nominating Committee. The list of nominees included with this notice shall serve as notification to NFA Members of the candidates proposed by the 2013 Nominating Committee.


Ecosystem has a natural feel for the renminbi
Josh Noble in Hong Kong –
Based purely on the numbers, no financial centre has mounted a real challenge to Hong Kong when it comes to the renminbi. The city has been at the forefront of China’s moves to make its currency a globally accepted form of payment: it has been the test bed for reform, and the only well-established currency channel in and out of China itself.

***MS: Today the Eurodollar market is the de facto international capital market. No dollars actually leave the US, but the liquidity in “offshore dollars” grew so large by the Seventies that US capital controls had to fall. (And that by the way was also the origin of SGX’s futures business, through the listing of Simex Eurodollar interest rate futures back in the 80s!). Today we find that currencies across the Asian currency bloc track CNY more closely than they do USD, which is to be expected given trade flows. There is speculation even about the eventual composition of the HKD peg. But who is the lender of last resort, you might ask? Next time somebody bumps into James Carville, remember to ask him if he wants his next incarnation to be a DimSum Bond


Liu Xingqiang: Dalian Commodity Exchange Expects Unprecedentedly Brilliant Prospect
Dalian Commodity Exchange (DCE) will continue to add new futures in the categories of agriculture, forestry and livestock products, and facilitate launch of options in the near future.

*** MS: A shout out to our dear friends at DCE. Now they’ve done egg futures, we wonder if they’d like to have a go at durian futures next.


Swiss outrage over executive pay sparks a movement in Europe
Here’s an idea for how to end corporate greed and reverse the trend of growing income inequality worldwide: impose a new rule that would limit the pay of top executives to just 12 times that of the lowest-paid employees at the same firm. In other words, prevent CEOs from earning more in one month than the lowliest shop-floor worker earns in a year.

***MS: A learned teacher once said “The rich will do anything for the poor but get off their backs”. (He also said “The production of too many useful things results in too many useless people”. Go figure.)



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Lead Stories

CME Group says swaps clearing service was hacked in July
Ann Saphir and Tom Polansek | Reuters
CME Group Inc , the world’s largest futures exchange operator, said Friday that its clearing service for energy and other swaps was “the victim of a cyber intrusion” in July, sparking a federal criminal investigation.

Federal Reserve considering a delay to Volcker rule
Gina Chon in Washington –
The Federal Reserve is considering a delay in the compliance date for the highly anticipated Volcker regulation, giving banks additional time to conform with its provisions, according to people familiar with the matter.

Treasury Arm Gets Earful From Asset Managers
Ryan Tracy –
The asset-management industry is pushing back against a powerful, yet little-known Treasury Department office that is laying the groundwork for tougher federal regulation of mutual funds and other asset managers. Large firms such as BlackRock Inc., Pacific Investment Management Co. and Fidelity Investments are blasting a report by the Office of Financial Research that found asset managers could pose risks to the broader financial system.

Swiss banks urged to come forward or risk U.S. prosecution
The head of the U.S. Justice Department’s tax division has warned that Swiss banks which do not come forward under a government-brokered program risk prosecution over tax evasion by their U.S. customers. The program closes in about six weeks.

CFTC to shake up US swaps trading market
Michael MacKenzie and Gina Chon in New York and Philip Stafford in London –
New guidance from the main US regulator of privately negotiated derivatives is set to test the business models of interdealer brokers, who have long played a crucial intermediary role between global banks.

*** MS: another step down the path of futurisation. But wait, what’s this I hear about “swapisation” coming up next summer………?

What Yellen didn’t tell Congress and why it matters
The most revealing thing about Janet Yellen’s widely praised Senate confirmation hearing performance last week might not have been what she said, but what she didn’t say – and how she didn’t say it.

Rosengren: Some Banks Need Higher Capital to Reduce Risks
Very large banks that count broker-dealer operations as an important part of their business need to hold higher levels of capital to reduce the risk these firms pose to the broader financial system, Federal Reserve Bank of Boston President Eric Rosengren said Monday.

The definitive guide to Europe’s leading HFTs
Tim Cave – Financial News
The 10 European HFT firms listed here are widely-acknowledged by market practitioners as the best of the bunch. Even though times are tough, they appear to have been able to remain highly revenue-generative and are looking for new opportunities and growing their businesses.


Pressure Builds to Finish Volcker Rule on Wall St. Oversight
The Obama administration, currently stumbling through the health care overhaul, has reached a critical stage in its other signature effort: reining in Wall Street.

Comment: Fair value lessons from ‘London whale’
Mark Hepsworth –
The US justice department’s civil and criminal charges against two traders at JPMorgan in connection with the so-called “London whale” trading losses have kept the methods employed by banks and investors for valuing complex securities in the spotlight.

Supreme Court to Review Halliburton Case
Brent Kendall –
The Supreme Court on Friday agreed to take up a significant securities-fraud case that could make it harder for investors to bring class-action lawsuits alleging they were misled.

The Fed’s Bank Regulation Challenges
Mayra Rodriguez Valladares – American Banker
In her prepared confirmation hearing remarks, Federal Reserve chairman nominee Janet Yellen mentioned that U.S. banks are in much better shape than they were during the crisis. Indeed, this has been a banner year for new regulations that are already changing U.S. banks forever.

Gary DeWaal’s Bridging the Week: November 11 to 15 and 18, 2013 (US Futures Customer Insurance? Safer US Clearing Houses? …and more)
Gary DeWaal and Associates LLC
The biggest story last week came not from a government regulator or a courtroom, but from a consortium of four self-regulators and industry organizations that released a study on the feasibility of adopting an insurance regime to protect customers trading futures through US futures commission merchants. The bottom line: only one model appears feasible on a cost/benefit basis, but even that model appears difficult to implement. Do FCMs really have the stomach to take on more fellow FCM risk – particularly where doing so might help a competitor?

CFTC’s Division of Market Oversight Issues New Guidance on the Application of Certain Commission Regulations to Swap Execution Facilities

CFTC Issues Final Rules for Derivatives Clearing Organizations to Align with International Standards

Statement Of Support Of CFTC Chairman Gary Gensler – Derivatives Clearing Organizations To Align With International Standards

[FCA] Competition in the market for services provided by a Recognised Investment Exchange: proposed amendments to REC
We are consulting on changes to our Recognised Investment Exchanges sourcebook (REC) to make it clear how we will take competition considerations into account when performing our particular functions as the supervisor of Recognised Investment Exchanges (RIEs) and Recognised Overseas Investment Exchanges (ROIEs). We want your views on our proposals.

Futures Industry Releases Insurance Study
Press Release

ESMA Risk Dashboard No.4 2013

Exchanges & Trading Facilities

Trading in new LSE future tops £1 billion
Tim Cave – Financial News
A new derivatives contract launched by the London Stock Exchange Group last month has already topped £1 billion by value traded, as the group’s partnership with FTSE bears fruit.

Nasdaq options markets briefly declare self-help against CBOE
Nasdaq OMX Group Inc said on Friday that several of its operated exchanges briefly declared “self-help” against the Chicago Board Options Exchange before revoking it about 20 minutes later.

[SIX] Regulatory changes took the spotlight at the Joint Bond Event 2013 of SIX Swiss Exchange and the Swiss Bond Commission.
Around 110 people attended the Joint Bond Event on 7 November 2013 at ConventionPoint in Zurich. The event was held by SIX Swiss Exchange in collaboration with the Swiss Bond Commission. Experts from a wide range of areas informed participants about the upcoming regulations affecting the Swiss bond market.

Zürcher Kantonalbank New Sponsor In The Sponsored Funds Trading Segment Of SIX Swiss Exchange
Zürcher Kantonalbank becomes the second sponsor to enter the trading segment for traditional investment funds of SIX Swiss Exchange and takes over market making for 32 funds.

CME Group Confirms Cyber Intrusion
Press Release

NZX Announces Q3 2013 Dividend

OneChicago Holiday Notice – Thanksgiving Trading Hours

TOM MTF Statistics Week 46, 2013 – High Volumes, New Products

Hedge Funds & Managed Futures

Geithner to Join Private Equity Firm
Timothy F. Geithner will join the private equity firm Warburg Pincus as president, the firm announced on Saturday. It would be his first prominent position since leaving office as Treasury secretary this year.

Lloyds sells SWIP to Aberdeen for 660 million pounds
Lloyds Banking Group PLC is selling its fund management arm Scottish Widows Investment Partnership to Aberdeen Asset Management for around 660 million pounds ($1.1 billion).

Ex-JP Morgan diaspora raises resources funds
Matt Turner – Financial News
A private equity fund set up by a 32-year-old ex-JP Morgan banker is closing in on securing $750 million of capital to invest in the natural resources sector, while another fund co-run by a former banker at the firm is hoping to hit $150 million in committed capital by year-end.

CTA Firm Invests in Training the New Generation of Quants
Ivy Schmerken – Wall Street & Technology
The gap between academia and quantitative trading shops is narrowing. In October, commodities trading advisor Eclipse Capital Management said it was sponsoring access to the Deltix Quantitative Research Platform for Washington University’s Olin Business School.

Ackman Had Shorted Fannie and Freddie in 2008
David Benoit – MoneyBeat – WSJ
Bill Ackman isn’t unfamiliar with the common stock of Fannie Mae and Freddie Mac: In the summer of 2008 he shorted them, though he was also proposing a plan he thought would ultimately put the companies on stronger footing.

Pimco to ramp up equities division
Joe McGrath – Financial News
Pimco has outlined the latest stage of its strategy to diversify beyond its traditional fixed-income offering.

Buyside looks to ease trade reporting burden
Anish Puaar – Financial News
European buyside traders are asking sellside brokers and banks to shoulder their responsibilities for reporting derivatives trades, amid fears that they will not be able to meet a key regulatory deadline.

What Floats Your Boat Might Not Float Your Fund
Jason Zweig – MoneyBeat – WSJ
The question isn’t whether interest rates will rise, but when. As Janet Yellen, the nominee to succeed Ben Bernanke as head of the Federal Reserve, made clear to lawmakers Thursday, the Fed won’t keep rates low forever. Some investors already are trying to protect themselves by pouring money into “bank loan” funds, or portfolios that hold short-term loans extended by banks to companies.

The winds are shifting for private equity energy investment
Simon Meads – Financial News
Private equity firms and their investors are turning away from renewable energy investments and focusing their attention on deals to extract and produce fossil fuels, as massive discoveries of shale gas in the Unites States push down energy prices and put returns from renewable energy investments under pressure.

CFTC Commitments Of Traders Reports Update

Banks & Brokers

For JPMorgan, $4.5 Billion to Settle Mortgage Claims
The checks from JPMorgan Chase just keep on coming as the nation’s largest bank works to move beyond its mortgage-related troubles. On Friday, JPMorgan reached a $4.5 billion settlement with a group of investors over claims that the bank sold them shaky mortgage-backed securities that imploded later, leading to large losses.

Custodians self-police to avoid the FCA’s magnifying glass
Sophie Baker – Financial News
Eight months ago, the Financial Conduct Authority singled out a behind-the-scenes, yet essential, part of the financial services industry, when it announced its intention to investigate whether custody banks were, in effect, ripping off their clients.

Dubai Regulator Sues Deutsche Bank Over Swiss Disclosure Refusal
Asa Fitch – MoneyBeat – WSJ
The regulator that oversees Dubai’s main financial free zone has sued Deutsche Bank, claiming that the German lender unlawfully refused to provide it with information as part of an investigation into suspected breaches of its rules.

BGC Partners Announces Launch of European Power Desk
BGC Partners, Inc., a leading global brokerage company servicing the wholesale financial and real estate markets, today announced the launch of its European Power desk.

R.B.S. Seeks Buyer for Unit
The Royal Bank of Scotland said on Monday that it was in talks to sell its structured retail investor products and equity derivatives business. The bank announced plans in June to sell the business as part of a plan to scale back its investment bank and focus on retail and commercial banking in Britain, its home market.

Indexes & Products

The future looks bright for ETF trading volumes
Leland Clemons – Financial News
Assets under management in exchange-traded funds have grown at an incredible rate (22.6% annually) over the past five years, however, the evolution of the trading landscape has not kept pace with the growth in assets.

Markit Unveils Global ETP Platform
Faye Kilburn – WatersTechnology
Data vendor Markit has developed a new platform which will enable users to navigate and analyze its universe of over 5,100 global exchange-traded products.

Leveraged exchange-traded funds see strong rise
Mike Foster – Financial News
The value of leveraged exchange-traded funds globally has risen 24% this year to the end of October, to $23.3 billion, according to leveraged ETF manager Boost.


Trade Talk: On the Air with X_TRADER in 3…2…1
On the Air with X_TRADER in 3…2…1
It is a very rewarding experience when happy customers invite me to educate their peers on the benefits of using TT products. A collective of Trading Technologies customers at BTFDtv who I’ve come to know through Twitter recently gave me that opportunity. I am thankful to @LeftHash and @2yrflipper for inviting me onto the show “Guarding the Left Hash.”

Vulpes Bows OneTick for Quant Strategies
Faye Kilburn – WatersTechnology
Singapore-based alternative investment fund Vulpes Investment Management has rolled out tick database and complex event processing system provider OneMarketData’s combined tick database and complex event processing system to support its quantitative research and mathematical model-based trading strategies.

SuperDerivatives Adds CVAs to eValueX, SDX, CorporeX
Faye Kilburn – WatersTechnology
Derivatives pricing, data and risk management software vendor SuperDerivatives has added the ability to perform credit value adjustment (CVA) calculations for OTC derivatives portfolios to its multi-asset valuation eValueX service, its CorporeX corporate risk and compliance system and its SDX structured products pricing system.

Volante Technologies Launches ‘SWIFT Funds Migration Accelerator’
Designed To Dramatically Aid Ease Of Adoption And Ensure Immediate Compliance To ISO 20022 SWIFT Funds Messages, As The Migration From 150022 Continues

Celebrating 20 Years of Award-Winning Stock Market Tools and Services, NexTrend Launches Free Crowdfunding Software
NexTrend Technologies, Inc., exclusive provider of the NexTrend crowdfunding platform, today announced the official pre-release of the NexTrend crowdfunding website


SAC Capital’s Steinberg faces insider trading trial
A trial starting this week will provide a window into what prosecutors have called a decade-long insider trading scheme at Steven A. Cohen’s once-powerful SAC Capital Advisors hedge fund.

The prosecutors with SAC Capital in their crosshairs
When U.S. Attorney Preet Bharara announced at a televised press conference on November 4 that Steven A. Cohen’s SAC Capital Advisors would plead guilty to insider trading, two prosecutors stood quietly to his right.

Environmental & Energy

REDD, CDM Likely To Find A Place In New Climate Agreement: Figueres
Ecosystem Marketplace
Despite the challenges in the Clean Development Mechanism and Reduced Emissions from Deforestation and Forest Degradation (REDD+), both mechanisms are likely to find a place in the international climate agreement expected to be reached in 2015, said UNFCCC Executive Secretary Christiana Figueres.

Developing World Pushes for Rescue of U.N. Carbon Credit Fund
Inter Press Service/Reuters Point Carbon
Negotiators from Least Developed Countries are calling for the United Nations climate body to urgently establish a rescue fund to save Kyoto Protocol’s Clean Development Mechanism from collapse.

China Faults Japan, Europe on Pollution at UN Talks
China singled out Japan and the European Union for failing to take more dramatic action against carbon pollution, signaling a rift at United Nations talks for a global treaty limiting fossil fuel emissions.


HKEx To Introduce After-hours Trading Of Mini HSI Futures And Mini HHI Futures
Hong Kong Exchanges and Clearing Limited plans to introduce Mini Hang Seng Index and Mini H-shares Index Futures to its After-Hours Futures Trading session starting on Monday, 6 January 2014.

Tokyo Stock Exchange: Weekly Single Stock Options Volume (Auction) Set A Record High
Single Stock Options reached a record high (after Tdex+ launch in 2009) in weekly volume with 31,783 contracts in auction market this week (from Nov. 11 to Nov. 15), surpassing the previous record of 22,411 contracts 2 weeks ago.

Dalian Commodity Exchange, Guangdong Ink Cooperation Agreement
Dalian Commodity Exchange (DCE) and the Guangdong Provincial Government signed a strategic cooperation agreement, in a bid to strengthen bilateral exchanges and cooperation, facilitate the construction of the multi-level capital market, and to further promote the co-development of Guangdong’s futures industry and DCE. Chen Yunxian, Vice Governor of Guangdong province, and Liu Xingqiang, DCE Chairman, and Li Zhengqiang, DCE CEO, attended the signing ceremony. Liu Wentong, Chief of the Guangdong Provincial Finance Office, and Li Zhengqiang signed the strategic cooperation agreement.

Japan’s Banks Find It Hard to Lend Easy Money
Phred Dvorak and Eleanor Warnock –
At Koeido Co., a 156-year-old sweets maker based in this city in southwest Japan, chairman Shuichi Takeda says he feels the country may finally be coming out of a 20-year funk. But with future demand unclear, and costs for imported sugar rising, Koeido still isn’t bullish enough to take out bigger loans to replace equipment or expand its business—even though banks are begging it to borrow more.

China hedge funds win seed capital
Paul J Davies in Shanghai –
China’s biggest investment bank is taking another leaf from the Goldman Sachs playbook by creating a fund to back new and established hedge fund managers in China.

Asia rise pulls in property players
Sarah Krouse – Financial News
Growth in emerging markets in Asia is bolstering the appeal of real estate assets in the region to western investors seeking to diversify their portfolios.

HKEx Welcomes FSDC Reports On Enhancing The Development Of The Hong Kong Financial Services Industry

Frontier Markets

Middle East offers distant hope
Peter Davy – Financial News
At the end of October, the UK became the first non-Muslim country to host the World Islamic Economic Forum. Not content with Middle Eastern money boosting the capital’s property market and helping build iconic buildings such as the Shard, Chancellor of the Exchequer George Osborne wants London to become “the unrivalled western centre for Islamic finance”.

Aluminium traders accused over Bahrain fraud
Caroline Binham, Legal Correspondent –
Aluminium traders from Glencore, Mitsui and Sojitz made payments to one of Bahrain’s most senior royals who is at the centre of a high-profile corruption trial, a London court heard.

DFM Achieves 100% Compliance In Quarterly Results Disclosure Of UAE Companies

The Egyptian Exchange (EGX) Monthly Statistical Report October 2013

Tehran Stock Exchange Weekly Digest – 12 November 2013


Bloomberg’s News Division to Lay Off About 50 People
William Launder –
Bloomberg LP’s news division will lay off about 50 people or about 2% of its newsroom, according to people familiar with the company’s plans, the latest financial news and data provider to make job reductions.

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Past JLN Newsletters

Market Narratives Have Pushed Aside Fundamentals

Market Narratives Have Pushed Aside Fundamentals

First Read $46,041/$300,000 (15.3%) ++++ Hits & Takes John Lothian & JLN Staff We have a new and improved version of The Spread today. We have overhauled our approach to this video series and have the whole JLN team contributing to it. Suzanne Cosgrove has...

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