John Lothian Newsletter: FDIC Chief Martin Gruenberg: Big Bank Failure Won’t Imperil System; Castleton joins oil trade titans with Morgan Stanley deal; Small investors focus of trading shake-up

May 12, 2015

First Read

Options Industry Perspectives: Exchange Leaders Trade Viewpoints at OIC 2015
Sarah Rudolph – John Lothian News

At the Options Industry Conference this year, the exchange leaders panel directly followed a presentation by Andy Nybo, head of derivatives at The Tabb Group, that offered a rather bleak look at the options industry. Total volume year-to-date was down 8.7 percent compared to a year earlier, bid-ask spreads have been getting wider, and options exchanges are finding it difficult to compete in a field of 12-going on-14 players.

Given that “dark cloud” the industry appears to be under, moderator John Lothian asked the panel what the industry could do to turn it around.

Exchange leaders agreed that the lack of liquidity was a big problem and that, as the ISE’s Boris Ilyevsky said, a major cause was that the current market structure does not incentivize active, liquid quoting.

Read the rest of the article on


CEO McClain on market regulation and structural change at the OCC
FTSE Global Markets
At this week’s World Federation of Exchanges and IOMA meeting, US options education was repeatedly mentioned as one way to strengthen non-US derivatives markets. Michael McClain, president and chief operating officer of the Options Clearing Corporation (OCC) is an advocate of education programs and the development of thought leadership in the derivatives industry. In a speech to the OIC Industry Conference, last Thursday, McClain, developed a number of themes, not least the need to educate regulators on the impact of regulation on market infrastructure and the economics of day to day derivatives trading (not all of it beneficial) and the impact of regulation and market change on the structure and strategy of the OCC.

***DA: In case you missed it, you can hear more on these topics from Mr. McClain in our interview HERE


Bourbon Feels the Burn of a Barrel Shortage; Surge in popularity coincided with downturn in white oak logging
In 50 years of making bourbon barrels, no one had ever offered Leroy McGinnis more than what he charged for them. But over the past six months, multiple distillers have offered to pay him $250 a barrel—a 70% premium above the $150 list price.

**** White Oak futures anyone?


FT Partners’ Research: Innovations in Capital Markets
Financial Technology Partners LP
This 83-page intelligence report focuses on open source communication networks, unstructured data analytics and intelligent search. It includes a look at industry trends, innovator landscape, selected transactions, and a deeper dive into a number of firms on the cutting edge.

***DA: FTP shared this with JLN readers at the urging of our friends at Green Key Technologies, one of the featured firms. You will recognize other firms as well, such as CME Direct Messenger



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Lead Stories

FDIC Chief Martin Gruenberg: Big Bank Failure Won’t Imperil System; If major financial firm runs into trouble, it will be allowed to fail
Nearly seven years after the financial crisis, Federal Deposit Insurance Corp. Chairman Martin Gruenberg said U.S. regulators can safely guide a major financial firm to failure without taxpayer bailouts or catastrophic consequences for the financial system.

Castleton joins oil trade titans with Morgan Stanley deal
Castleton Commodities International will buy Morgan Stanley’s physical oil business, the largest and oldest on Wall Street, vaulting the Connecticut-based merchant into the big leagues of global crude and fuel traders.

Small investors focus of trading shake-up
Philip Stafford in London and Nicole Bullock in New York, FT
Five years of adverse headlines about dark pools, flash crashes and high-frequency trading has hardly encouraged retail investors jumping on board the long-running US equity bull market.

US Federal Reserve faces heightened scrutiny from Congress
Barney Jopson in Washington, FT
The US Federal Reserve would be forced to explain its monetary policy decisions to Congress in unprecedented detail under a draft Republican bill that is the most serious attempt at financial reform since the Dodd-Frank act.

Shed no tears for slow demise of the joint CEO-chair role
Andrew Hill, FT
Sometimes a species reaches the end of its natural existence. As its numbers dwindle, disappearance becomes inevitable and the last survivors of the doomed herd become objects of curiosity and pity. This is happening to chief executives who are also chairmen — but with none of the pity.

Volatile Oil Market May Hurt Global Economy; New report by prominent climate
economist warns oil price swings threaten investment and jobs
The dramatic fall in oil prices since last summer has been a boon for global consumers taking advantage of cheaper fuel and lower utility bills. But the price rout has increased the volatility of the crude market, which could end up hurting the global economy, a new report warns.

Big banks flag dangers of financial bubble in oil and commodities; Barclays warns that the latest commodity boomlet has charged ahead of economic reality across the world: ‘Watch out: this rally may not last’
By Ambrose Evans-Pritchard, The Telegraph
The big global banks have begun to warn clients that the blistering rally in oil and industrial commodities in recent weeks has run far ahead of economic reality, raising the risk of a fresh slump in prices over the summer.

Picasso painting sells for $179.4 million, smashing art auction record
A Picasso oil painting from 1955 smashed the record for the most expensive artwork ever sold at auction when it soared to $179.4 million at Christie’s on Monday. The auction house had estimated “Les femmes d’Alger (Version ‘O’)” would sell for about $140 million, but several bidders competing via telephone drove the winning bid to $160 million, for a final price of $179,365,000 including Christie’s commission of just over 12 percent.

Insurers step up lobbying to battle U.S. regulators
Douwe Miedema, Reuters
Insurance firms, already among Washington’s biggest donors, are securing powerful allies in Congress as the Federal Reserve draws up nationwide capital rules for the $1 trillion industry after years of delay. Two members of the House of Representatives who received large industry donations for their election campaigns and one senator last month started the Financial Protection and Life Insurance Caucus, grouping lawmakers pledged to vie for the industry’s interests on Capitol Hill.

U.S. companies aren’t doing enough to battle the buck; Many companies aren’t doing enough to protect against the strong dollar,
Lately, the buck has been the biggest bugaboo of U.S. corporations.
Many U.S. companies have blamed the strong dollar for eating into earnings — so consistently, in fact, that some have likened CEO’s griping about exchange rates to the ubiquitous laments about “bad weather” heard during last year’s first-quarter earnings season.

BP Trader Said to Be Put on Leave Amid ‘Cartel’ Currency Probe
by Liam Vaughan, Bloomberg
A senior currency trader at BP Plc has been placed on leave after conversations emerged linking employees at the oil giant to an online chat room used by the world’s biggest banks to rig the foreign-exchange market.

Tullett Prebon launches online platform to match up traders
Harriet Agnew and Philip Stafford in London, FT launching an online platform designed to match up sellers of alternative investment positions with potential buyers, as new regulation and advances in technology pushes the industry of interdealer brokers to explore new markets.

Rare US bank launch targets ‘It’s a Wonderful Life’ values
Ben McLannahan, FT
It was when Bill Greiner was denied a $2m loan to buy a building that he knew big banking was broken. This was May 2008, not long before the Lehman crisis, so it was understandable that his bank manager might have demurred a little.


No answer yet to cross-border concerns
derivatiViews – OTC derivatives comments from ISDA officers
US and European regulators continue in their efforts to reach agreement on their clearing house rules. The long-running negotiations over a possible European Union equivalence decision for US central counterparties (CCPs) have recently centred on divergences in the margin methodologies for futures. It is hoped a data-collection exercise on required margin under both methods will help resolve the deadlock. But, following a recent meeting between the European Commission and Commodity Futures Trading Commission, it now seems an agreement is unlikely before the third quarter at the earliest.

Malaysia and Quebec Join International Information Exchange Agreement, Membership Grows to 50 Signatories – Agreement strengthens international supervisory cooperation, promotes enhanced consumer protection
AMF Canada
Felix Hufeld, Chair of the Executive Committee of the International Association of Insurance Supervisors (IAIS), today announced that the insurance supervisors of Malaysia and Quebec have joined an international supervisory cooperation and information exchange agreement. Since the first jurisdiction was admitted in June 2009, membership in the IAIS Multilateral Memorandum of Understanding (MMoU) has grown significantly to now include 50 signatories representing more than 63% of worldwide premium volume.

Service of request for freeze order extension
AMF Canada
The publication of this press release constitutes the method of service authorized by the Bureau de décision et de révision (the ?Bureau?) of a request for a freeze order extension related to the matter of Warren English, Mega International Business and Alain André Desarzens in respect of AlertPay inc.

Alexandre Lamfalussy, central banker, 1929-2015
Claire Jones, FT
Alexandre Lamfalussy, one of the most important architects in laying the foundations for Europe’s monetary union, has died aged 86.

Self-Regulatory Organization (SRO) Rulemaking and National Market System (NMS) Plans

  • CBOE: Notice of Proposed Rule to Introduce Asian style Settlement and Cliquet Style Settlement for FLexible Exchange Broad-Based Index Options (Release No. 34-74914; File No. SR-CBOE-2015-044; May 8, 2015); see also Exhibit 5


  • ICC: Order Approving Proposed Rule Change Relating to Physical Settlement of CDS Contracts (Release No. 34-74917; File No. SR-ICC-2015-004; May 8, 2015)


  • MIAX: Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to the Nullification and Adjustment of Options Transactions Including Obvious Errors (Release No. 34-74918; File No. SR-MIAX-2015-35; May 8, 2015); see also Exhibit 5


  • NASDAQ: Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend Chapter V, Section 6 (Release No. 34-74915; File No. SR-NASDAQ-2015-054; May 8, 2015); see also Exhibit 5


  • NASDAQ OMX BX: Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend Chapter V, Section 6 (Release No. 34-74916; File No. SR-BX-2015-028; May 8, 2015); see also Exhibit 5


  • NMS: Notice of Filing of Amendment No. 35 to the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privileges Basis Submitted by the BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, Nasdaq Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. (Release No. 34-74910; File No. S7-24-89; May 8, 2015)


  • NMS: Notice of Filing of the Twenty Second Substantive Amendment to the Second Restatement of the CTA Plan and Sixteenth Substantive Amendment to the Restated CQ Plan (Release No. 34-74909; File No. SR-CTA/CQ-2015-01; May 8, 2015)


  • NYSE Arca: Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule 6.87 – Obvious Errors and Catastrophic Errors in Order to Harmonize Substantial Portions of the Rule with Recently Adopted, and Proposed Rules of Other Options Exchanges (Release No. 34-74921; File No. SR-NYSEArca-2015-41; May 8, 2015); see also Exhibit 5


  • NYSEMKT: Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule 975NY – Obvious Errors and Catastrophic Errors in Order to Harmonize Substantial Portions of the Rule with Recently Adopted, and Proposed Rules of Other Options Exchanges (Release No. 34-74920; File No. SR-NYSEMKT-2015-39; May 8, 2015); see also Exhibit 5


  • Phlx: Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend Rule 1092 (Release No. 34-74919; File No. SR-Phlx-2015-43; May 8, 2015); see also Exhibit 5

Exchanges & Trading Facilities

Trading at Settlement (TAS) Transactions
CME Group
Effective on Sunday, June 7, 2015, for trade date Monday, June 8, 2015, CME and CBOT will adopt new Rule 524 (“Trading at Settlement (“TAS”) Transactions”).

Nasdaq adopts bitcoin backbone for stocks
Richard Waters in San Francisco, FT
Nasdaq is to start using the technology behind the virtual currency bitcoin to handle transactions on its market, making it what is thought to be the first major financial market to adopt the idea.

Product Delisting: Distillers Dried Grains Futures
CME Group

Invitation to Tender for Designated Market Maker Status in STIR & LTIR Futures and TED Spreads

Hedge Funds & Managed Futures

Main Street Portfolios Are Investing in Unicorns
Andrew Ross Sorkin, NY Times
With Uber now reportedly valued at $50 billion, there are justifiable worries that some private start-up technology companies worth $1 billion or more — known as unicorns — are in bubble territory.

Bill Gross: The Amount of Money I’ll Give Away ‘Is Staggering, Even to Me’
by Mary Childs, Bloomberg
Count Bill Gross among the world’s biggest philanthropists.
The bond investor has already given away as much as $700 million and eventually will donate his remaining $2 billion fortune, a figure that’s “staggering, even to me,” Gross said in an interview on Bloomberg Television.

Billionaire Paulson Said to Score Hedge Fund Wins in April
by Kelly Bit, Bloomberg
Billionaire John Paulson’s hedge funds gained in April after successful wagers on energy, mergers and Greek banks.

What Drives the Stock Market
By Barry Ritholtz, Bloomberg
Good to be back in the saddle after of a week of traveling in Silicon Valley, Napa and San Francisco. And I thought New York real estate prices were crazy.

Banks & Brokers

Morgan Stanley oil business sold for $1bn
Gregory Meyer in New York and Neil Hume and David Sheppard in London, FT
Castleton Commodities International, the energy trader backed by hedge fund luminaries, has sealed a $1bn-plus purchase of Morgan Stanley’s giant physical oil merchant business, in a transaction aimed at elevating the company to the upper ranks of global oil dealers.

Big Banks Stocks Are Struggling in 2015
It’s been a tough year for investors betting on the big bank stocks. Overall, U.S. banks and thrift stocks have trailed the broader stock indexes during the first four months of 2015, falling 0.5%, according to SNL Financial. The S&P 500 and Dow Jones Industrial Average were up 1.3% and 0.1% respectively during the same time period.

JPMorgan Hires Banker for Private Financing
By MICHAEL J. de la MERCED, NY Times
JPMorgan Chase has hired a senior banker to lead the firm’s effort to provide private financing for companies like hot Silicon Valley start-ups, the bank announced in an internal memorandum on Monday.

Missing Morgan Stanley Trader Found Dead in Toronto
by Doug Alexander, Bloomberg
Toronto police identified a body found in the water near the city’s Beaches neighborhood as that of missing Morgan Stanley sales trader Murray Abbott.

Lloyds CEO May Face Shareholder Opposition Over ‘Excessive Pay’
by Richard Partington, Bloomberg
Lloyds Banking Group Plc’s shareholders should oppose Chief Executive Officer Antonio Horta-Osorio’s compensation at Thursday’s annual general meeting, said Pensions & Investment Research Consultants Ltd.

Clearing & Settlement

Nomura to exit OTC client swaps clearing
Financial News
Nomura has confirmed plans to pull out of clearing over-the-counter derivatives in the US and Europe, joining a swathe of other financial institutions beating a retreat from the area in the face of regulatory delays and higher capital costs.

Mooted clearing of options on credit indices raises concern
Intercontinental Exchange is aiming to expand its role in safeguarding derivative products, a key objective of post-crisis regulation. ICE, a major credit clearing house, is looking to be the first clearer to bring options on credit default swap indices into its remit with this move.

Indexes & Products

Hard to find U.S. small-cap bargains after years of strong gains
The Globe and Mail
At a time when every asset class seems expensive, the U.S. small-cap space is attracting special warnings. “Since 2009, it’s been a really good run for small-cap performance,” said Steven DeSanctis, head of small-cap strategy at BofA Merrill Lynch Global Research. “Just about every stock has been picked over, and so there are just not a lot of bargains out there.

ETFs Tracking MSCI Indexes see Assets Swell to $418 Billion
ETF Trends
MSCI (NYSE: MSCI) continues bolstering its status as one of the premier providers of indexes for use by exchange traded providers as combined assets under management for ETFs benchmarking to MSCI indexes jumped 12% to a record $418 billion in the first quarter.


Bitcoin May Never Make It to Wall Street, But Its Tech Will
James Angel compares bitcoin to MySpace, the social network that paved the way for far more influential services like Facebook and Twitter. Today’s bitcoin digital currency, says Angel, a professor of finance at Georgetown University, is too flawed to replace existing currencies. But the basic ideas underpinning the technology, he believes, can significantly change how the financial world operates. This is already starting to happen.

Report from Cinnober’s Annual General Meeting 2015
Cinnober Financial Technology held its annual general meeting on Monday, May 11 under the chairmanship of Thomas Nygren, the company’s legal adviser for over a decade. The meeting took the following decisions, among others.

Fintech Incubators Around The World Look For Great Startups
Tom Groenfeldt, Forbes
Accenture and a group of 10 Asia-based financial institutions have opened the application period for the second class of the FinTech Innovation Lab Asia-Pacific, kicking off a competitive search for the top financial technology innovators interested in the region. Last year one participant was from Canada and another was based at least partly in New York.

Moore’s Law Reaches 50 as Chip Industry Faces New Challenges; Will it ever be proven wrong?
by Ian King, Bloomberg
Even for its author, Moore’s Law — the predictor of progress in the electronics industry — has been around a lot longer than expected.

Scorching FinTech Market Keeps Attracting New Players As NerdWallet Raises $64 Million
NerdWallet, the six-year-old company launched with $800 by company co-founder and chief executive, Tim Chen, has raised $64 million in its first round of outside financing. Sources with knowledge of the company’s plans had put the round at $60 million. NerdWallet also raised an additional $36 million through a revolving loan facility with Silicon Valley Bank.


SEC Sues Retirement Planners for Making False Claims to Investors
The Securities and Exchange Commission today charged a self-described retirement planning firm and its principals with falsely telling customers that interests in life settlements they offered and sold were “guaranteed,” “safe as CDs,” and “federally insured.” The SEC also alleges that they used a bogus “net worth calculator” that improperly qualified some prospective investors for purchases by including income that investors hadn’t received, such as future pension and Social Security benefits.

CFTC Orders Libero Commodities SA to Pay $480,000 for Call Cotton Reporting Violations
The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against Libero Commodities SA (Libero), an agricultural trading company, for failing to comply with its legal obligation as a reportable trader to submit weekly CFTC Form 304 Reports that show its call cotton purchases and sales, in violation of CFTC Regulation 19.02. Libero’s principal office is in Geneva, Switzerland, and it maintains another office in Mato Grasso, Brazil.

Goldman Sachs ordered to pay $80 million plus interest in 2006 case
Goldman Sachs Inc has been ordered to pay $80 million, plus interest, to the National Australia Bank for breaches associated with the sale of mortgage-linked securities, according to a court filing.

Big banks finalise $6bn-plus settlements on foreign exchange
FT Reporters
Five of the world’s biggest banks are finalising agreements to collectively pay more than $6bn for allegedly manipulating foreign exchange markets, with an announcement expected as soon as Wednesday.

Prosecutors Probe Korea’s KNOC, Bank of America; Investigation related to Korea National Oil Corp.’s takeover of Canada’s Harvest Energy Trust
By RICK CAREW in Hong Kong and JONATHAN CHENG in Seoul, WSj
South Korean prosecutors are investigating Korea National Oil Corp. and its adviser Bank of AmericaMerrill Lynch in relation to the state-run oil company’s takeover of Canada’s Harvest Energy Trust in 2009, according to people familiar with the situation.

Finra arbitration panel awards $500,000 to former Morgan Stanley rep; Broker and wirehouse embroiled in a three-year dispute over a promissory note
By Darla Mercado
A Finra arbitration panel last Thursday decided in favor of a former Morgan Stanley rep following a dispute between the broker and firm over an alleged breach of a promissory note.

ASIC cancels FX company’s licence
Following an investigation, ASIC has cancelled the Australian financial services (AFS) licence of FX provider Rainbow Legend Group Pty Ltd (Rainbow Legend) for failing to comply with its obligations, including making false and misleading statements.

Environmental & Energy

How your smartphone needs 13 tonnes of water
By Jessica Shankleman – BusinessGreen
Nearly 13 tonnes of water and 18 square meters of land are required to produce just one smartphone according to a new report that aims to help businesses calculate their demand for natural resources.

A Climate-Modeling Strategy That Won’t Hurt the Climate
By John Markoff – The New York Times
It is perhaps the most daunting challenge facing experts in both the fields of climate and computer science — creating a supercomputer that can accurately model the future of the planet in a set of equations and how the forces of climate change will affect it.

Midwest coalition asks EPA to help it develop voluntary carbon market
By Robert Walton – Utility Dive
A coalition of Midwest power stakeholders has asked the federal government to assist in creating a voluntary carbon market they believe would be the most cost-effective way to meet pollution mandates included in the Clean Power Plan (CPP).

Forget Desert Solar Farms: We Can Get More Than Enough Solar Energy From Cities
Fast Company
Solar plants keep getting bigger: The new Topaz Solar Farm, in a remote part of southern California, sprawls over an area about a third of the size of Manhattan.


BJS goes live with Fidessa platform
The Trade
Brokerage Guotai Junan Securities (Hong Kong) has today gone live with Fidessa’s equities trading platform to trade shares on the Hong Kong Stock Exchange.

Osaka Exchange: Revision To Contract Specifications For 20-year Japanese Government Bond Futures
OSE is pleased to announce revisions to the specifications for 20-year Japanese government bond (JGB) futures contracts aimed at invigorating trading by enhancing convenience for market participants.

Nomura exits OTC derivatives client clearing
The Trade
Nomura has joined the growing list of brokers to pull out of providing OTC clearing services due to continued regulatory uncertainty.

China’s Stock-Market Boom Won’t Erase Bad Debts; The wrong companies are taking advantage of China’s frothy markets to sell new shares
A booming stock market has the potential to lighten China’s groaning debt load. So far, though, the wrong types of companies are taking advantage.

Frontier Markets

Frontier Markets: Pakistan in Focus
I was interested to read an article on Bloomberg written by Eric Balchunus titled, “Now you can easily invest in Pakistan. But should you?” with the sub heading, “The nation is known for military coups and a famous, now departed resident named Osama bin Laden.” My issues with this fund are the same as the author’s: liquidity and political instability. Don’t forget that it wasn’t very long ago that Pakistan was ruled by a military dictator. Even more importantly, during the financial crisis, investors were unable to liquidate their positions because the authorities froze their assets.

Senegal ‘Must Accelerate Reforms’ in Order to Achieve Emerging Status – Frontier Markets News – Emerging & Growth Markets
Senegal is making progress on its ambitious economic reform agenda but much work remains to be done, says the International Monetary Fund. Following a visit to Senegal the International Monetary Fund signaled support for the country’s development plan, the Plan Sénégal Emergent (PSE), which aims to remove bottlenecks to growth and help Senegal achieve emerging-country status by 2035.

Mobius: emerging markets should still emerge
Emerging and frontier market countries contain some of the most vibrant and fastest growing economies in the world, and despite a comparative slowdown in growth recently, there remains good value to be found in the sector, according to sector specialist Mark Mobius. Speaking at the Morningstar Investment conference in London today, Dr Mobius, executive chairman at Franklin Templeton Emerging Markets Group, said he believes both global and domestic factors present an attractive opportunity for investors in emerging markets.

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