John Lothian Newsletter: Libor Oversight Chief Was Forced Out; Nasdaq NFX passes key trading milestone; FCM client clearing numbers in steep decline

Dec 18, 2015

First Read

WSJ overhauls Money & Investing team
Talking Biz News
There are a lot of changes underway at the Money & Investing team and I wanted to share them with you. The moves are intended to make our coverage more analytical, impactful, and timely, while giving our staff opportunity to adapt and grow.

***** Aaron Lucchetti, Telis Demos and Serena Ng are among the reporters given new roles. Lucchetti, a favorite of mine, will become the lead financial technology editor. It tells you the tectonic shifts going on in the financial sector as FinTech becomes the game. I wonder if the potential for Blockchain has anything to do with this? Hmmm.


Sweet 16: The Tops For 2016 – Regulation

Regulation is always front and center and it will be once again next year. In our John Lothian News Sweet 16 Series, we spoke with Timothy Massad, Gary DeWaal, Dan Roth and Marisol Collazo about everything from the CFTC’s regulatory framework to the impact on innovation to harmonizing data. Here’s what they had to say.

The Sweet 16 Series features the top 16 ideas about exchanges, regulation, economics and technology, drawn from 38 interviews conducted at the FIA Expo Conference in November 2015.
Watch the video »
Sponsored by Cinnober

The Economist
The latest chapter in the “Star Wars” saga, “The Force Awakens”, was due to open in cinemas worldwide on December 16th, after The Economist went to press. Most fans will queue up to watch nail-biting lightsaber duels and catch up on the lives of beloved characters. Economists, who can render the most exciting of material dull, will be more interested in the state of the galactic economy. Did the destruction of the Death Star at the end of the sixth film in the series trigger a massive financial crisis, as a recent paper* by Zachary Feinstein, a professor of financial engineering at Washington University in St Louis, speculates? What sort of structural reforms might the new galactic government adopt?

***** My son Robby went to the show last night and said it was great, if you were ok with having your soul stolen. He liked it a lot. He is still looking for his soul.


A Marginal Victory – for the Time Being
Doug Ashburn – JLN
On Wednesday, a U.S. Government entity took a giant step that will have far-reaching effects on the global financial ecosystem. Oh, yeah, and the Fed raised interest rates for the first time in 10 years. While most eyes in the financial world were glued to the talking heads blathering about the rate hike, I was watching the CFTC as it approved two rulemakings – a proposed rule that would require exchanges, clearing houses, swap execution facilities and data repositories to conduct specific cybersecurity tests, and a final rule requiring swap dealers to exchange initial and variation margin with financial institutions.
****** Doug Ashburn’s column is brilliant, even if I say so behind his back.

***DA: As John is keen to say, “if you can’t dazzle them with brilliance…”


The worst kind of co-worker, according to Harvard study
Chicago Tribune
Every workplace has them. The colleague who bad-mouths you behind your back at the water cooler. The boss who takes credit for everyone else’s ideas. The sexist jerk people actively avoid by taking circuitous routes to the printer and lying about their happy hour plans.

***** Or the co-worker with the bad back who takes a lot of time off.


Discovering the destructive force of excess capital
For examples of the strange spot the financial world is in, let us examine the desks of investment banks which help companies raise money.

***** The force awakens!


The Year in Review: Ten Trends in SEC Enforcement Actions
Jon Eisenberg – K&L Gates LLP via JD Supra
As 2015 winds down, we offer the following observations about 10 important trends in SEC enforcement actions.

***** Get ready for the year end stories.


Lead Stories

Libor Oversight Chief Was Forced Out
Joanna Perkins disagreed with Ice Benchmark Administration over how much independence the committee should have
The chairwoman of a committee overseeing an interest-rate benchmark at the center of a global scandal was forced out of her post after a disagreement over greater independence from the company that runs the process, according to people familiar with the matter.

Nasdaq NFX passes key trading milestone
Futures & Options World
Nasdaq has said its new energy exchange passed a key milestone on Monday by trading more than three million contracts, less than five months after the launch. The number of contracts traded on Nasdaq Futures (NFX) passed the three million mark on Monday, with open interest on the platform also increasingly steadily, buoyed by strong activity in natural gas options, chief executive of NFX Magnus Haglind told FOW.

FCM client clearing numbers in steep decline
Jonathan Watkins – The Trade
The number of futures commission merchants (FCMs) clearing for customers in the US is set to drop to just 54, a huge decline from pre-crisis levels.
Recent data from the Commodities Futures Trading Commission (CFTC) shows 55 active customer clearing brokers in the US, though one more name now needs to be struck off the list.

BATS to expand FX offerings on Hotspot, mulls new fees
John McCrank, Reuters
BATS Global Markets is considering adding market data products and connectivity fees to its Hotspot FX foreign exchange trading platform to boost revenues, according to a regulatory filing.

From December’s Trading Places: Battle Of The Bund II At A Cinema Near You Soon – Huw Jones
Academics have long pontificated why LIFFE lost out to Deutsche Boerse, pointing to Frankfurt’s electronic trading with European reach to grab participants who funnelled orders through brokers wearing colourful jackets in a trading pit. The first half of 2016 should see at least two attempts at pulling off a similar coup.

TMX Readying for Showdown With Nasdaq for Canadian Unicorns
Bloomberg Business
The owner of Canada’s largest stock exchange is trying to make the company more enticing to technology startups amid new competition from Nasdaq Inc., the global heavyweight in tech listings.

The Junk Bond Rout That Wasn’t
Common Sense
After seven years of rock-bottom interest rates, it should come as no surprise to see excessive risk taking on Wall Street. Investors have long been trying to identify the next bubble, and last Friday Carl Icahn, the billionaire activist investor, weighed in.

Fed enters new era in managing rates
Joe Rennison and Michael Mackenzie,
A new era in the daily management of US interest rate policy began on Thursday as the Federal Reserve drained $105bn of cash from the financial system.

Morgan Stanley plans to trim stock-trading staff in annual cuts
Financial News
The cuts will affect about 100 people globally and are based solely on performance, the people said. They are not related to the Wall Street firm’s recent decision to slash about 25% of its debt traders and salespeople. Morgan Stanley’s executives expect to end 2016 with roughly the same number of equities employees the firm will have at the start of the year, the people said. Morgan Stanley is not alone in pruning its workforce annually, in both good and slower years, with rival Goldman Sachs expected to shed some 5% of its employees in early 2016 as well.

“Perverse, Unpredictable Effects” of Negative Interest Rates: Mortgage Rates Soar in Switzerland
Wolf Street
In Europe, after they became established as the latest method of flogging savers until their mood improves, all kinds of absurdities saw the light of the day. For example, bailed-out national governments can now fund their deficits at negative rates, extracting money from their bondholders, rather than paying them. Perhaps the coolest notion was that banks would be “paying your mortgage.”
That may have been an illusion – at least in Switzerland


Forex investors ready to bid farewell to ‘last look’ abuses –
Investors who use the foreign exchange markets are putting pressure on banks and market makers to justify one of its most common — and potentially abusive — practices. The $150m fine levied on Barclays by the New York Department of Financial Services last month for abusing so-called “last look” in forex trading has added to doubts over the way the market polices itself.

IOSCO lays out OTC derivative harmonisation plans
Charles Gubert – The Trade
Proposals to create a harmonised Unique Product Identifier (UPI), an alphanumeric code designed to help identify over-the-counter (OTC) derivative products, have been laid out by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO).

CFTC’s Massad seeks new data from CME, ICE for position limits plan
Anjelica Tan and Neil Roland, MLex
The head of the US Commodity Futures Trading Commission is trying to update decades-old derivatives data to support a long-pending rule to establish speculative position limits. CFTC Chairman Timothy Massad’s staff has held at least six meetings with the leading futures exchange, CME Group, and four meetings with the No. 2 market, Intercontinental Exchange, since October, agency records show.

FCA acknowledges costs of MiFID II will be ‘significant’
Paul Walsh – The Trade
Costs of implementing MiFID II are likely to be substantial according to UK regulator’s most recent consultation paper, something which firms should bear in mind as they plan their regulatory projects for the year ahead, according to Aite Group.

CFTC Staff Issues Advisory Reminding Swap Dealers and Major Swap Participants of their Reporting Obligations as Required by Commission Regulations
These regulations require swap dealers and major swap participants to report all information and data in the time and manner specified in Parts 43 and 45 of the Commission’s regulations. The staff advisory also discusses common examples of issues and failures DSIO has observed with respect to swap data reporting, and provides guidance to assist in addressing these issues and failures.

Why Chemical Firms Are Seeking More U.S. Regulation
Chemicals used to make baby bottles, paint strippers and furniture have become lightning rods for consumer activism, state regulation and restrictions by big chain stores. And that has prompted manufacturers to ask for more federal regulation of their products.

Libor panel chief was forced out
Financial News
The chairwoman of a committee overseeing an interest-rate benchmark at the centre of a global scandal was forced out of her post after a disagreement over greater independence from the company that runs the process, according to people familiar with the matter.

Sebi to chalk out exit route for commodity exchanges
The Economic Times
The Securities and Exchange Board of India (Sebi) will soon spell out exit route for commodity exchanges. The move will pave the way for closure of defunct ones to apply for voluntary exits. At present, there are 12 commodities exchanges, of which six are nationalised,while the rest is regional.

Exchanges & Trading Facilities

London Stock Exchange Sees “Good Performance” In Eleven Months
Press Release
London Stock Exchange Group PLC said Thursday it has seen a good performance across each of its businesses in the eleven months to end-November.
In the Information Services segment, the LSE cited good momentum in the integration of FTSE Russell and delivery of synergies, whilst in the Post Trade Services segment, the LCH.Clearnet business delivered a good performance, it said.

BATS IPO on the way: Hotspot FX parent company tries (again) to go public
BATS has filed for an IPO planning to raise about $100 million in early 2016. In its filing BATS reported Revenues of $1.34 billion for the first nine months of 2015, with Net Profit coming in at $57 million.
Will BATS list its shares on the NYSE or NASDAQ? Neither, actually. BATS intends to list its common stock on its own BATS Exchange under the symbol BATS.

Intercontinental Exchange, Inc. announces placement of shares in secondary offering
Intercontinental Exchange
The shares offered in the secondary offering were originally issued to the selling stockholders in connection with the acquisition of Interactive Data Holdings Corporation. ICE did not sell any shares and will not receive any proceeds from this offering.

Market Volatility Drives Record High Yield Trading on MarketAxess
MarketAxess Holdings Inc. (Nasdaq:MKTX), 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 a new daily volume record in high-yield (HY) trading of approximately $1 billion on Friday, December 11, 2015. Recent market volatility has also driven an increase in estimated market share for MarketAxess, with over 10% share of TRACE HY volumes on December 11th, compared to an estimated 5.9% share during the third quarter.

Dutch court sides with Euronext in row with govt over equity
A court has sided with Euronext in a dispute with the Dutch government over capital requirements, a court spokesman said on Thursday. “The court ruled in favour of the appeal filed by Euronext,” Pelle Biesmeijer of the Rotterdam District Court told Reuters. “The government’s decision was thrown out.” Euronext was protesting requirements that it hold 250 million euros ($271.5 million) in equity and maintain positive tangible equity through 2017.

New bourse CEO eyes more listings
The Budapest Business Journal
The Budapest Stock Exchange is in need of more listings, however, the problem is on the supply and not the demand side, BSE CEO Richárd Végh, elected yesterday, said in an interview in daily Magyar Idok, published today.

Hedge Funds & Managed Futures

“Perverse, Unpredictable Effects” of Negative Interest Rates: Mortgage Rates Soar in Switzerland
by Wolf Richter – Business Insider
The unintended consequences of NIRP.
Negative interest rates – called “punishment interest” in Germany – have morphed from sheer impossibility to solid reality in Europe. Having seen how they work, the Bank of Canada has invoked them now, and Fed Chair Janet Yellen, has put them “on the table” before a House of Representatives committee.

Fed Move Adds to Pressure on Commodities
As global financial markets from equities to bonds rallied on the back of the U.S. decision to raise interest rates, most commodities bucked the trend after the Federal Reserve compounded their long-term woes.

Third Avenue says fund seized up before collapse amid redemption flood
Third Avenue’s Focused Credit Fund built up a $200 million cash position in the days before its collapse, but that was not enough to meet redemptions as the fund could not sell even its most liquid assets at rational prices.

Northern Rock Bonds That Lost Over 90% in Value to Repay in Full
Bloomberg Business
Investors in mortgage bonds from failed U.K. lender Northern Rock Plc will be paid back in full on debt that once traded at less than 10 percent of its sale price. About 7 billion pounds ($10 billion) worth of residential mortgage-backed securities will be redeemed from Thursday, with the bulk of the notes to be paid back on Dec. 21, according to data compiled by Bloomberg. The securitizations, which are known as Granite, are being unwound after Cerberus Capital Management bought the underlying debt from the U.K. government.

Hedge funds cut fees to stem client exodus
Many hedge funds are cutting fees and negotiating with investors to trim some of their hefty costs and avert withdrawals after another mediocre year for returns.

Banks & Brokers

Wells Fargo to Nudge Brokers to Get Bigger Clients; Change is bank’s latest push to compete for clients who have millions of dollars in assets
Wells Fargo & Co. will push its brokers to work with bigger clients as part of a broader strategy to attract wealthier investors.

State Street: We Overcharged Some Asset-Servicing Clients For Nearly Two Decades – Focus on Funds
State Street (STT) told its asset-servicing clients that it’s overcharged them by hundreds of millions of dollars over nearly two decades. The Boston-based trust bank said in a statement early on Thursday that, over 18 years, some $200 million or more of expenses may have been “incorrectly invoiced.”

Battle for young customers heats up in HSBC’s Asia stronghold; HK banks target aggressively prospective customers aged 18-24; Digital offering key to young clients when they open an account; Rivals introduce apps, mobile platforms to erode HSBC dominance; Hong Kong is key driver for global growth for HSBC
By Lawrence White and Daria Hsu – Reuters
Banks in Hong Kong are intensifying the battle for young customers key to their future retail profit, offering online perks and mobile banking products in a bid to erode the dominance of HSBC in its Asian stronghold.

A former New York Jets wide receiver just made a big Wall Street move
Yahoo Finance
Former New York Jets wide receiver turned financial adviser Wayne Chrebet will be joining Stifel Financial Corp. from Barclays Wealth Management. He is part of a six-person wealth-management team with $2 billion in assets that is joining Stifel as part of the firm’s acquisition of Barclays Wealth and Investment Management, Americas, which closed on December 4.

Clearing & Settlement

Swaps CCPs hope to slash capital via margin change
Change could translate into big capital savings for bank members of central counterparties. Treating margin as settlement could cut leverage – CME, Eurex, Ice, LCH.Clearnet all seeking approval Four derivatives clearing houses are seeking legal opinions regarding whether the daily payment of variation margin can be treated as the settlement of a cleared swap contract, a step that could translate into big capital savings for bank members of central counterparties (CCPs).

OCC Declares Clearing Member Refund and Dividend for 2015 and Reduction of Fees under Approved Capital Plan
Business Wire
OCC, the world’s largest equity derivatives clearing organization, today announced the declaration of a refund, dividend, and fee reduction under its approved capital plan. The refund of approximately $39 million to clearing members and the dividend of approximately $17 million to Stockholder Exchanges will be paid in Q1 2016 following issuance of OCC’s financial statements. The new fee schedule, included below, will commence on March 1, 2016, and will result in a reduction in the average clearing fee of approximately 19% from current levels.

LCH hires equities director from JP Morgan
Joe McGrath – The Trade
Clearing group LCH.Clearnet has appointed a former JP Morgan director as its new equities director and head of cash markets development. The appointment of Willem Mooijer comes as the larger clearing houses seek to bolster their talent pools ahead of 2016 as they look to increasingly offer direct access to buy-siders.

The birth of US real time payments
UK based international payment systems provider, VocaLink, has agreed to work with The Clearing House (TCH) in order to develop US real time payments immediately, in a similar way to how the Faster Payments initiative was introduced in the UK.

Indexes & Products

We Can’t Even With This Millennial ETF
Eric Balchunas – Bloomberg
Millennials are about to be able to invest in one of their favorite things: themselves.
As companies from every industry trip over each other to appeal to a generation of 18-to-33-year-olds, we can all look forward to an exchange-traded fund focused on this very demographic as ETF provider Global X just filed for the first millennial generation ETF, according to

Japan Exchange Group: Launch Of S&P/JPX Risk Control Index (5%, 10% And 15%)
It is the second index to be launched as part of the S&P/JPX Smart Beta Index Series via a strategic index agreement announced by S&P DJI, JPX and TSE in October of this year.

Strong Market, Weak Returns—Why?
By Romain Hatchuel – WSJ
As the end of the year approaches, many investors are likely to confront an all too familiar outcome: mediocre returns relative to overall market performance. This pattern, which emerged in recent years, hasn’t received the attention it deserves.


UK firms join Linux Foundation in blockchain technology collaboration
Tech City News
Two UK companies have joined the Linux Foundation in a new collaborative effort to advance developments in blockchain technology. London Stock Exchange Group and Isle of Man-based Credits join ANZ Bank, Cisco, CLS, Digital Asset Holdings, Fujitsu, IC3, IBM, Intel, Mitsubishi UFJ Financial Group, State Street, SWIFT, VMware and Wells Fargo in the initiative.


Justice Department Announces Three Banks Reach Resolutions Under Swiss Bank Program
The Department of Justice announced today that BNP Paribas (Suisse) SA (BNPP), KBL (Switzerland) Ltd. (KBL Switzerland) and Bank CIC have reached resolutions under the department’s Swiss Bank Program. These banks will collectively pay penalties totaling more than $81 million and continue to cooperate with the department.

ASIC bans investor Nick Bolton
The Australian
According to a statement by his investment vehicle Keybridge Capital Mr Bolton has been banned from acting as a corporate director or being a company manager for three years.

MCX to ban members not registered with SEB
The Hindu Business Line
MCX will ban members who are not SEBI registration compliant from December 22. The last day for registration was set by the regulator at December 28. However, the Exchange has advanced the deadline as it needs time to verify members documents before uploading it on SEBI website.

Environmental & Energy

Proposed Extension of Tax Credits for Renewable Energy Would Have Uneven Effect
After months of taking a beating in the markets, renewable energy companies suddenly seemed to be on firmer footing this week, as lawmakers proposed extending important tax credits in exchange for lifting the decades-old ban on exporting American crude oil.

Britain Pushes to Revive Fracking, Possibly Under National Parks
The British government is once again trying to revive its flagging effort to extract the country’s natural gas and oil from shale rock.


Fixing China’s Stock Market
The ups and downs of the Chinese A-share market have been one of the big stories of 2015. This volatility has been blamed on the immaturity of the Chinese stock market, yet Saturday will mark 25 years since the Shanghai Stock Exchange first began trading.

Case of Missing Broker Shows China Risks Coming to Hong Kong
Bloomberg Business
One month after the head of a Hong Kong brokerage vanished, his whereabouts remain a mystery. Those who suspect Yim Fung, the missing chairman and chief executive officer of Guotai Junan International Holdings Ltd., was pulled in to assist authorities with an investigation in mainland China include Christopher Cheung, a Hong Kong lawmaker who represents the finance industry — and who’d been due to attend a dinner with Yim on the day he was reported missing. But no one knows for sure.

Seven funds approved in HK-China mutual fund recognition scheme
The Hong Kong and Chinese securities regulators said on Friday they had approved the first batch of funds under a Hong Kong-China mutual fund recognition scheme, in a landmark development that further opens up China’s capital markets. The scheme, which regulators first started discussing in 2012, will allow global asset managers to secure a bigger slice of money available for investment in China while also giving Chinese managers an opportunity to expand overseas.

Many many happy returns as China stock market marks 25
Dunya News
A quarter of a century after it opened for business, the Shanghai exchange as a whole has more than 1,000 listed firms, nearly 100 million investors — more than the membership of the Communist party — and a total market capitalisation of $4.5 trillion. It has given companies a key funding source outside the state-dominated banking system and created new wealth for investors.

Shanghai seeks to rival London, New York, as one of the world’s best cities
Financial Review
The hostile grey city that once shunned outsiders is now pitching itself against the established heavyweights as one of the world’s foremost international addresses.

China’s economy is ‘a story of pervasive weakness’: Report
Channel NewsAsia
China’s economic conditions weakened in the final quarter of 2015, revealing “a story of pervasive weakness”, the latest China Beige Book (CBB) report said.

Frontier Markets

Global stock markets cheer Federal Reserve rate hike, but deeper questions loom for consumers and countries
The Washington Post
The Federal Reserve’s landmark decision to raise its benchmark interest rate is already beginning to ripple through the global economy, boosting international stock markets Thursday, but raising deeper questions about whether troubled countries will be able to withstand higher rate and forcing ordinary households to rethink their investments.

Emerging markets hold key for future growth
Saudi Gazette
Malaysia is an ideal backdrop for discussions on convergence within the industry due to its leading role in the development of Islamic finance as well as its pioneering initiatives to encourage crossovers between Islamic finance and responsible finance, including establishing a regulatory framework to support sustainable, responsible and impact (SRI) sukuk.

BlackRock Frontiers Investment Trust Plans Tender Offer (ALLISS)
London South East
“The company currently invests in companies listed or operating in frontier markets (defined as any country which is not in either the MSCI Emerging Markets Index or the MSCI Developed Markets Index). The board is proposing an amendment to the company’s current investment objective and policy so as to define frontier markets as any country that is not a constituent of the MSCI Emerging Markets Index or the MSCI Developed Markets Index as at December 1, 2015,” the company said

Kingdom unfazed by Fed rate hike
Phnom Penh Post
A day after the US Federal Reserve increased interest rates, which can potentially impact incoming investments and make debt more costly, experts say the Kingdom’s strong underlying growth will help maintain investments flows and leave the country largely unaffected.

Thailand Futures Exchange Announces TFEX Best Awards 2015
Thailand Futures Exchange PCL (TFEX), announced the winners of the six categories of “TFEX Best Awards 2015,” with KGI Securities (Thailand) pcl showing outstanding performance by sweeping three categories, namely the “Most Active House 2015” for having the highest derivatives trading volume; the “Most Active Agent 2015” for having the highest transactions from investors; and the “Most Active Prop-Trader 2015” for making the most proprietary trading transactions.

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