John Lothian Newsletter: LSE set to buy US firm Frank Russell, plans rights issue; Top NY securities regulator sues Barclays over ‘dark pool’; Banks May Lose $4.5 Billion a Year on Swaps Shift, McKinsey Says

Jun 26, 2014

First Read

Sport’s Last Gasp
Rick Lane – Trading Technologies
With today’s World Cup match between USA and Germany, I’m reminded not just of America’s sine-wave-esque love affair with soccer (whose four-year frequency will either come to an end today or be extended for another few days of spontaneous fandom) but of the strangely good sporting events we’re experiencing in a time traditionally known for a lack thereof.

Granted, it’s not March Madness. Nor is it October, with its confluence of professional baseball, basketball, football, and hockey. But it nevertheless has been a fun few weeks to be a sports fan in the US. In addition to our national soccer team surpassing all expectations on the world’s biggest stage, we’re still riding the fumes of a great NBA Finals (great to me at least, because Miami didn’t win).

Speaking of Miami not winning, LeBron James surprises no one and opts out of his contract with the Heat, perhaps in an attempt to make right on his “decision” — at least depending on the outcome of today’s NBA draft.

Major League Baseball sees two no-hitters within a week of each other, including one yesterday by a pitcher called the Freak (and even stranger, the Freak no-hit the same team for the second time… in less than a year). And love him or hate him, today marks the return of the surgically enhanced repaired Tiger Woods; time will tell how much rust he has, but you can’t deny he’s good for the game of golf (and selling Buicks).

So during your extended lunch break (which might have five minutes of stoppage time – you should add that to your calendar), take some time to enjoy what could be sport’s last hurrah until the fall (unless you’re an Andy Murray fan), when (the real) football returns and all becomes right in the sports world once again.

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LSE: a bigger cheese
Jonathan Guthrie – Financial Times
As a Frenchman, lunch has symbolic importance for Xavier Rolet. No one is going to eat the meal rightfully belonging to the London Stock Exchange Group, of which he is chief executive, if he can stop it. He wants the exchange to be a consolidator rather than a takeover target. The $2.7bn acquisition of the Frank Russell Company underlines that.
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***RL: TT recently rang the opening bell at LSE, and let me tell you, they do breakfast pretty well too.

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Slick Transition: ICE Clear Europe’s Paul Swann Talks NYSE Integration
JohnLothianNews.com
ICE Clear Europe is at the center of the Intercontinental Exchange’s effort to expand across Europe, as well as integrate NYSE Liffe products into its market. The clearing house has been busy trying to adjust to new regulations and structural changes in the industry, not to mention merge business lines with the former NYSE family of exchanges.

Paul Swann, president and managing director of ICE Clear Europe, said the clearing strategy for ICE has expanded greatly from just clearing energies in 2008 to now clearing credit swaps and a new host of NYSE Liffe contracts.

Watch the video »

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High-Frequency Firm Tradebot Swam in Barclays Pool, N.Y. Says
Sam Mamudi – Bloomberg
New York Attorney General Eric Schneiderman’s complaint against Barclays Plc names just one outside high-frequency trader, Tradebot Systems Inc., as operating in its dark pool. In keeping with the document’s tone, the firm is referred to more than once as “toxic.”
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***RL: Apparently they were tipped off by an unusually warm area in the kiddie section.

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Morgan Stanley Gets 90,000 Summer-Program Applications
Michael J. Moore – Bloomberg
Morgan Stanley (MS), owner of the world’s largest brokerage, received about 90,000 applications for its summer program for analysts and associates.
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***RL: And the Summer Intern Series couldn’t siphon a few dozen of these?! (Too soon?)

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Lessons From the World Cup
Mohamed A. El-Erian – Bloomberg
Every football fan I meet has been pleasantly surprised by the World Cup’s high level of competition and quality. Exemplified by Costa Rica’s remarkable start, quite a few nontraditional teams that global football brand names once viewed as mere pushovers, even irritations, have done surprisingly well.
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***RL: Every football fan I’ve met has been pleasantly surprised by the World Cup’s low level of flopping.

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Lead Stories

LSE set to buy U.S. firm Frank Russell, plans rights issue
Reuters
The London Stock Exchange Group said it planned to acquire U.S.-based asset manager and stock exchange provider Frank Russell for $2.7 billion, with the help of a $1.6 billion rights issue, as it ramps up its U.S. presence.
jlne.ws/1sHcMnM

Top New York securities regulator sues Barclays over ‘dark pool’
Kara Scannell and Nicole Bullock in New York – Financial Times
Shares in Barclays fell on Thursday on news that New York’s top securities regulator has sued the UK bank for allegedly favouring high-speed traders using its “dark pool” trading venue while misleading institutional investors.
jlne.ws/1qy2QZQ

***RL: Failure to have arm-floaties in the deep end.

The 40th Anniversary of Jaws, Barclays Edition: Did the LX Dark Pool Keep Out the Sharks or Invite Them In?
Streetwise Professor
Today’s big news is the suit filed by NY Attorney General Eric Schneiderman alleging that Barclays defrauded the customers of its LX dark pool. In the current hothouse environment of US equity market structure, this will inevitably unleash a torrent of criticism of dark pools. When evaluating the ensuing rhetoric, it is important to distinguish between criticism of dark pools generally, and this one dark pool in particular. That is, there are two distinct questions that are likely to be all tangled up. Are dark pools bad? Or, are dark pools good (or at least not bad), but did Barclays not do what dark pools are supposed to do while claiming that it did?
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***RL: I think we’re going to need a bigger boat.

Five questions on the Barclays dark pool lawsuit
Sarah Krouse and Anish Puaar – Financial News
“This is a case about fraud and deceit by one of the world’s largest banks.”
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***RL: Have all the dark pool puns been made?

Banks May Lose $4.5 Billion a Year on Swaps Shift, McKinsey Says
Matthew Leising Jun 25, 2014 2:00 PM GMT+0200 – Bloomberg
Banks stand to lose as much as $4.5 billion in annual revenue as regulations aimed at improving financial stability alter how interest-rate swaps are bought and sold, according to a report from McKinsey & Co.
jlne.ws/1qy31UZ

Hedge Fund Industry Surpasses $3 Trillion for First Time
Steven Russolillo – MoneyBeat – WSJ
The hedge-fund industry exceeded the $3 trillion barrier in May for the first time ever, according to one research firm, as new allocations and performance gains pushed total assets to a new record.
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Chart of the Day: Here’s How Quiet it Really Is on Wall Street
Steven Russolillo – MoneyBeat – WSJ
Ah, summer. Stocks are slightly higher Wednesday in another low volatility, low volume type of trading session. A round of discouraging economic data didn’t cause much of a stir in financial markets, as the major stock indexes haven’t budged much from recent levels.
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***RL: Today’s mid-day mini-vacation the country will be taking certainly won’t help.

Regulatory

SEC limits overseas swaps for US banks
Gina Chon in Washington – Financial Times
The US Securities and Exchange Commission on Wednesday restricted some of the overseas swaps activities of US banks, but some commissioners complained that the measures left loopholes.
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Senior U.S. Prosecutor to Step Down
BEN PROTESS – Dealbook – NY Times
After five years of tussling with Goldman Sachs, JPMorgan Chase and the giant hedge fund SAC Capital Advisors, Lorin L. Reisner is ready for a change.
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The SEC & Cybersecurity: Expectations & Exam Prep for Investment Firms
Steve Schoener – Wall Street & Technology
The current SEC questionnaire asks firms for details about their technology infrastructure, operational policies, and procedures as they relate to cybersecurity.
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SEC Announces Order for Tick Size Pilot Plan
The Securities and Exchange Commission today announced that it has ordered the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) to act jointly to develop and file with the Commission a national market system plan to implement a targeted 12 month pilot program that will widen minimum quoting and trading increments (tick sizes) for certain small capitalization stocks.
jlne.ws/1sHdcdP

SEC Adopts Cross-Border Security-Based Swap Rules
The Securities and Exchange Commission today adopted the first of a series of rules and guidance on cross-border security-based swap activities for market participants. The new rules will be key to finalizing the remaining proposals.
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SEC cracks down on US banks foreign branches
Joe Parsons – FOW
US banks are set to face new limits on security-based swaps transactions conducted by their foreign branches following a plan approved by the US Securities Exchange Commission (SEC) on Wednesday.
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SEC fears US banks still tied to non-guaranteed units
Peter Madigan – Risk.net
US banks that trade from non-guaranteed units in order to avoid Dodd-Frank Act rules could still choose to save their stricken affiliates, commissioners at the Securities and Exchange Commission (SEC) warned today. Despite that obvious gap, chairman Mary Jo White said the SEC is limited in the steps it can take to close it.
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CFTC Staff Issues an Extension of Time-Limited No-Action Relief to LCH and Nodal
The U.S. Commodity Futures Trading Commission’s (CFTC) Division of Clearing and Risk (DCR) and Division of Market Oversight (DMO) today issued a further extension of time-limited no-action relief to LCH.Clearnet Limited (LCH), a derivatives clearing organization (DCO) registered under Section 5b of the Commodity Exchange Act (CEA), and Nodal Exchange LLC (Nodal), a designated contract market (DCM) under Section 5 of the CEA.
jlne.ws/1sHdlxS

CFTC Staff Issues an Extension of Time-Limited No-Action Relief to LCH
The U.S. Commodity Futures Trading Commission’s (CFTC) Division of Clearing and Risk (DCR) today issued a further extension of time-limited no-action relief to LCH.Clearnet Limited (LCH), a derivatives clearing organization (DCO) registered under Section 5b of the Commodity Exchange Act.
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***RL: “No Action Relief” sounds like a Tums slogan

SEC Chair’s Opening Statement On The Adoption Of Cross-Border Securities-Based Swap Rules Under Title VII Of The Dodd-Frank Act
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Exchanges & Trading Facilities

Eris Exchange June News: Eris Sets Another Open Interest Record: $121,714,000,000
58% increase in Eris open interest since January 1, 2014
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***RL: Eris is good with stats.

Gilbert Dupont Selects SunGard to Help Enhance Smart Pan-European Trading Platform
Société de Bourse Gilbert Dupont, a wholly owned subsidiary of the Groupe Crédit du Nord, part of the French and international financial group Société Générale, has selected SunGard to access Turquoise, the multilateral trading facility operated by the London Stock Exchange Group.
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Memorandum Of Understanding With The Mozambique Stock Exchange
The Warsaw Stock Exchange and the Mozambique stock exchange (Bolsa de Valores de Mocambique) have signed a memorandum of understanding on 26 June 2014. The purpose of the memorandum of understanding is to initiate co-operation between the two stock exchanges.
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***RL: Memo’s of Understanding were all the rage in the futures industry in the early ‘00s.

CBOE, C2 And CFE Trading Schedule For Independence Day Holiday
jlne.ws/1pP9VFH

Euronext Brussels Welcomes Ontex To Its European Market
jlne.ws/1mvIUWT

Hedge Funds & Managed Futures

Gross’s Pimco Fund Tops Rivals in Quarter
WSJ
The Pimco Total Return Fund has outpaced two-thirds of rival funds in the second quarter, a win for manager Bill Gross following a year of poor performance and investor outflows. The $229 billion fund has posted a total return of 1.96% this quarter through Tuesday, reflecting price gains and interest payments.
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Lifestyled, passive and liquid – the future of pension investments
Mark Cobley – Financial News
A new global model is emerging for pensions: investing in passive funds and shifting towards lower-risk assets as savers age. That was the clear picture that emerged from the global pensions conference run by asset management trade association ICI Global in Geneva last week.
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What Happens When the Vulture Funds Start Circling
Daniel Huang – MoneyBeat – WSJ
The standoff between Argentina and some hedge funds playing out in New York federal court this month isn’t the first time Wall Street has faced off with a sovereign debtor.
jlne.ws/1lRvqUS

US debt investor opens London office
Jennifer Bollen – Financial News
A US private equity firm, whose deals include debt and equity financings, has arrived in London as it anticipates a greater volume of bargain bank sell-offs.
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Banks & Brokers

After Crisis, Risk Officers Gain More Clout at Banks
James Sterngold – WSJ
At Wells Fargo & Co., some executives pushed last year to relaunch a program letting homeowners get a line of credit secured by the equity in their house—and pay only the interest due on the loan. Such credit lines have been scarce since the financial crisis, but the executives saw them as a way to boost revenue as housing prices climb. The bank’s chief risk officer, Michael Loughlin, said no.
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Goldman Sachs Brings in New Blood for Bond Trading
Nick Kostov – MoneyBeat – WSJ
Goldman Sachs has hired two senior traders to lead its European government bond trading business, at a time when falling revenues have led to widespread job cuts in the fixed income market.
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***RL: MS gets 90,000 and GS gets… two? Spread the wealth, guys!

Dealers face revenue hit in swaps shake-up
Michael Mackenzie in New York – Financial Times
Large dealers are facing losses of $2.5bn-$4.5bn from the $13bn in revenues generated last year from large global interest rates markets as new reforms transform the US swaps market, according to McKinsey.
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Macquarie Poaches Morgan Stanley’s Perry Offutt – MoneyBeat
Gillian Tan – MoneyBeat – WSJ
Macquarie Group Ltd. has poached Morgan Stanley’s head of infrastructure investment banking in the Americas, Perry Offutt, according to people familiar with the matter.
jlne.ws/1lRuVtQ

Deutsche Bank back on top in European DCM
Vivek Ahuja – Financial News
Deutsche Bank is poised to reclaim top spot in the European debt capital markets bookrunner rankings for the first six months of the year, having been pushed into second spot in the latter half of last year by BNP Paribas.
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Clearing & Settlement

Japan kicks-off electronic swap clearing regime
Futures & Options World
Japan has cleared its first electronic yen swap more than a year before the rules that mandate clearing take effect, bringing the Japanese market into line with the US which has already taken this step.
jlne.ws/1qy5kap

***RL: After that World Cup performance, it’s the only thing they’ll be kicking for a while. Badum Ching!

DTCC Tests Corporate Actions Service
Michael Shashoua – WatersTechnology
DTCC has begun testing of Corporate Actions Web, with plans to move all its users to the service by October. DTCC also is promoting greater migration to the ISO 20022 standard for corporate actions
jlne.ws/1lRvOCD

CME Group Clearing: CME Group Delivery Dates for July 2014
www.cmegroup.com/tools-information/lookups/advisories/clearing/files/Chadv14-261.pdf

CME Group Clearing: Name change for Dow Jones-UBS Commodity Index futures & swaps
www.cmegroup.com/tools-information/lookups/advisories/clearing/Chadv14-260.html

Indexes & Products

CBOE SKEW Index Rose to 143.26, Its Highest Level Since 1998
Matt Moran – www.cboeoptionshub.com
The median of the daily closing values of the CBOE Volatility Index so far this year has been 13.7, which is below the long-term median value of 18.3 for the VIX since 1990. The fact that the VIX lately has been below its long-term median has led some people to ask whether there now is too much complacency in the markets. However, in the charts below, the SKEW Index and the SPX volatility skew could suggest that some investors are not complacent at all, and there is demand for out-of-the-money (OTM) protective puts on the S&P 500 Index.
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The Spanish Stock Exchange Trades The First ETF On The IBEX Medium CAP – It Is The First Exchange-Traded Fund On A Spanish MidCap Total Return Index
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Technology

Optimal Execution with a Price Limiter
Sebastian Jaimungal, Damir Kinzebulatov – papers.ssrn.com
Agents often wish to limit the price they pay for an asset. If they are acquiring a large number of shares, they must balance the risk of trading slowly (to limit price impact) with the risk of future uncertainty in prices. Here, we address the optimal acquisition problem for an agent who is unwilling to pay more than a specified price for an asset while they are subject to market impact and price uncertainty.
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Enforcement

SEC Announces Fraud Charges Against Three Former Regions Bank Executives in Accounting Scheme
The Securities and Exchange Commission today announced fraud charges against three former senior managers of Regions Bank for intentionally misclassifying loans that should have been recorded as impaired for accounting purposes. As a result, the bank’s publicly-traded holding company overstated its income and earnings per share in its financial reporting.
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SEC Charges Former Brokers with Trading Ahead of IBM-SPSS Acquisition
The Securities and Exchange Commission today announced it has charged two additional brokers with trading on inside information ahead of the $1.2 billion acquisition of SPSS Inc. in 2009 by IBM Corporation.
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S.E.C. Stops Harvey, Ill., From Selling Municipal Bonds
MARY WILLIAMS WALSH – Dealbook – NY Times
Federal regulators went to court on Wednesday to keep a city in Illinois from bringing its bonds to market, an unprecedented step they called necessary to halt a widening securities fraud.
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***RL So is it SEC or S.E.C.? And why don’t we hear more about what the N.F.A. aka NFA is doing?

Ex-Schroders Trader Charged as FCA Cracks Whip on Insider Dealing
Vivek Ahuja – MoneyBeat – WSJ
A former equities trader at Schroders Wednesday was charged with nine counts of insider dealing and will appear in court next week, in the latest example of the Financial Conduct Authority’s strategy of using criminal penalties to crack down on wrongdoing in the U.K..
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FINRA Hearing Panel Expels Success Trade Securities and Bars CEO Fuad Ahmed for Fraudulent Scheme
The Financial Industry Regulatory Authority (FINRA) announced today that a FINRA hearing panel has expelled Washington, D.C.-based Success Trade Securities, Inc. from membership and barred its CEO and President, Fuad Ahmed, for the fraudulent sale of promissory notes and for creating a Ponzi scheme. In addition, the firm and Ahmed are jointly and severally ordered to pay approximately $13.7 million in restitution to 59 investors, the majority of whom were current and former NFL and NBA players.
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Rajaratnam’s ex-driver sues, claims secret payments to prisoners
Reuters
A former driver for Raj Rajaratnam has sued the one-time billionaire, claiming he was fired for complaining about secret wire transfers the founder of the Galleon Group hedge fund made to fellow prisoners following his conviction for insider trading.
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Executive accused in Madoff scam pleads guilty
LARRY NEUMEISTER – AP
A senior partner at a New York accounting firm pleaded guilty to criminal charges Tuesday in a cooperation deal with the government, saying he unwittingly played a role in financier Bernard Madoff’s “horrific and evil Ponzi scheme.”
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Environmental & Energy

Koch to Start EU Power Trading as It Plans LNG Expansion
Anna Shiryaevskaya, Bloomberg
Koch Supply & Trading, a unit of Koch Industries Inc., will start buying and selling European electricity and expand its liquefied natural gas business to take advantage of a globalizing market for the fuel.
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***LB: Also in this story “The company will expand into Turkey and the Caspian region in 2015 and open an office in Tokyo for its LNG business this year”

Japan bets big on making fuel-cell cars a near-future reality
Yoko Kubota and Maki Shiraki, Reuters
Japan’s government and top carmakers, including Toyota Motor Corp, are joining forces to bet big that they can speed up the arrival of the fuel cell era: a still costly and complex technology that uses hydrogen as fuel and could virtually end the problem of automotive pollution.
jlne.ws/1loNQgb

Merkel to push back against EU if green energy support questioned
Reuters
Chancellor Angela Merkel said on Wednesday she would push back decisively against the European Commission if it raises further objections to Germany’s system of green power subsidies.
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Asia-Pacific

Thailand Futures Exchange Plans To Terminate Silver Futures
Thailand Futures Exchange PCL (TFEX), under the Stock Exchange of Thailand group, is planning to remove silver futures from its trading board due to an absence of the London Silver Fixing benchmark which will terminate its business in August. The removal plan is seeking an approval from The Securities and Exchange Commission (SEC)
jlne.ws/1mvRHbv

Minimum variance indexes may struggle in China retail market
Xiao Wang – Risk.net
The Chinese market’s retail focus may mean a limited investor appetite for the minimum variance indexes that are being launched by two leading providers, according to a senior figure from a Chinese asset manager.
jlne.ws/1lRw58N

***RL: Color me shocked that “Minimum Variance Indexes” and “Retail” don’t mix

China finds $15 billion of loans tied to falsified gold deals
Reuters
Chinese gold processing firms have since 2012 used falsified gold transactions to borrow 94.4 billion yuan ($15.2 billion) from banks, the country’s chief auditor said.
jlne.ws/1sHcQnu

SGX moves into precious metals with gold contract
Joe Parsons – FOW
The Singapore Exchange (SGX) plans to launch its first gold contract in the hope of competing with other Asian exchanges to offer an alternative to the Western gold benchmark.
jlne.ws/1qy5heL

SGX Welcomes Emperor Futures As New Member
jlne.ws/1mvGRlP

HKFE Announces Revised Margins For Futures Contracts
jlne.ws/1mvGOWZ

Dalian Commodity Exchange Holds Night Trading Emergency Drill
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Frontier Markets

UK sukuk bond sale attracts £2bn in orders
Elaine Moore and Thomas Hale – Financial Times
Britain has become the first western country to issue an Islamic bond, attracting orders of more than £2bn from global investors for its sale of sharia-compliant debt.
jlne.ws/1qy0Pg7

Saudi bourse falls 37% in 2013 in debut disclosure
GulfBase
Saudi Stock Exchange (Tadawul), the Middle East’s largest bourse that is planning to go public, reported a 37 percent drop in 2013 net profit, its first ever financial disclosure showed on Tuesday. The exchange made a net profit of SR152 million ($40.5 million) last year. It attributed the decline in earnings to lower revenues from reduced average daily trading volumes.
jlne.ws/1qy3ztS

Miscellaneous

Crowdfeeding: the burrito option
Dan McCrum – Financial Times
One day we will cease to be amazed by the wonderful new world of crowdfunding, but that day has not yet arrived. In the FT on Wednesday is a story about crowdfunding debt finance for, among others, a restaurant chain. More on that in a second, but let’s enjoy the quote from James Tomlins, a high-yield bond portfolio manager at M&G
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***RL: Risking £10,000 for a free burrito every week? I’m in.

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