John Lothian Newsletter: Ice blames SEC as it drops single-name CDS clearing plans; Mini Options See 'Respectable' Start; CME launches interest rate swap clearing in London

Mar 19, 2013

ICE Clear Credit tosses plans to start single-name credit-default swap clearing after an SEC policy change caused heartburn on the buyside. Yesterday’s mini-option debut produced “respectable” volume across multiple venues. CME Group turns on the lights for its London interest rate swaps clearing service.

First Read

Let the games begin
Steve Grob, Fidessa
Sitting at my desk here in chilly London, the sunshine of the FIA conference in Boca already seems a distant memory. Two themes, though, still echo from the general chatter at the conference and in the bars afterwards – how is the FCM industry going to make money in today’s uber-low interest rate environment and how are we going to deal with the convergence of OTC and exchange-traded markets? Maybe the second question answers the first. The changes in market structure that Dodd-Frank will bring feel as significant as the changes that MiFID brought (and is still bringing) to European equity markets five years ago. Nobody yet knows whether SEFs are the right model or whether futurised products on existing exchanges are the way forward. On top of this, the way global risk is transferred will change as different participants re-examine the new instruments, where they clear, the margin required and the reporting obligations.

Yes this creates confusion, but it also creates huge opportunities too. The global derivatives industry has always been highly innovative and so it should relish the challenge that Dodd-Frank and its counterparts are laying down around the world. In the US volumes of OTC cleared contracts have grown hugely this month, 3-way OTC clearing began in Europe this week and even some Asian exchanges are already making themselves Dodd-Frank friendly. So, like it or not, the starting gun has been fired on the first phase of a new era for everyone involved.


“We Can Rebuild Him”
I video chatted with John yesterday after his surgery and he’s now the proud owner of two new knees. He looked a bit worn out, as could be expected, but wanted all to know he’s doing well and ready to start the recovery process. His first request post-surgery was a Lou Malnati’s pizza, which was declined. Instead they are making him eat New York style thin crust. Also, he is now six inches taller and will begin training for a spot on the Chicago Bulls roster, or as an apple picker.

Thanks for the support.

Jim Kharouf


Opening Cross: Data Fragmentation Rears its Ugly Head Again
Max Bowie – WatersTechnology
The financial industry has long dealt with fragmented markets and data sources, consolidating market data from multiple trading venues, vendors and regions. Not only is this expensive, but it can also be a complex process to capture, map and store all relevant data.

***SG: So data is big and ugly then?


NYSE Liffe U.S. and MSCI Extend Index Licensing Agreement
NYSE Liffe U.S., the innovative U.S. futures exchange of NYSE Euronext (NYX), today announced that it has signed a license amendment with MSCI, a leading provider of investment decision support tools worldwide, to continue its success in expanding the coverage of its suite of domestic and international index futures products on MSCI equity indices through November 1, 2021.


TriOptima offers first ever Precious Metals triReduce compression cycle, eliminating $7.2 billion in notional principal outstanding
TriOptima announces that it successfully completed the first triReduce compression cycle for precious metals forwards and swaps, terminating $7.2 billion in notional principal outstandings. Working with six institutions to expand the range of compression activity, firms were able to reduce their gross positions in gold and silver unlocking regulatory capital and reducing collateral requirements.

***SG: Throwing swaps into the melting pot too.


Uhlmann Price Securities, LLC announces the opening of its new Skokie office.
Uhlmann Price Securities, a full service securities brokerage and advisory company, is excited to announce the opening of a new branch office at 5202 Old Orchard Road in Skokie, IL.


Elizabeth Cheval, EMC Capital Chairman, Dies of Aneurysm at 56
Laurence Arnold – Bloomberg
Elizabeth Cheval, the founding chairman of Illinois-based investment firm EMC Capital Management Inc. and a breakout star of a 1980s experiment in whether successful trading can be taught, has died. She was 56.


Political blowback from Cyprus
David Keohane | FT Alphaville
The Game of Cyprus is still being played and the incredibly liquid situation could change in a matter of hours. It’s fitting really, given that it kicked off in similar manner.

***SG: Looks like Cyprus is fast becoming a game of Russian Roulette.


Europe’s leaders run out of credit in Cyprus
Gideon Rachman –
European leaders must surely know that they are taking a big risk with Cyprus. The danger is obvious. Now that everybody with money in Cypriot banks is being forced to take a hit, nervous depositors elsewhere in Europe might notice that a dangerous precedent has been set. Rather than run even a small risk of an unwanted financial “haircut” in the future, the customers of Greek, Spanish, Portuguese or Italian banks might choose to get their money out now. If that starts to happen, the euro crisis will be back on again – with a vengeance.

***SG: There is a serious point here – insured deposits are supposed to sit at the top of the creditor structure. If this isn’t the case, or people in Europe don’t believe it to be, then why take your money out from under the mattress?


A Bank Levy in Cyprus, and Why Not to Worry
Never mind. The last 72 hours have been filled with breathless proclamations of impending disaster after the European Union and International Monetary Fund indicated that they planned to take money directly from depositors with bank accounts in Cyprus as part of a bailout of that country.

***JM: Aren’t you supposed to wait for the END of the tornado before blowing the “all-clear” whistle?


Benchmarks: Objective evidence offers better guarantees in a brave new world
Brooke Masters –
Until recently, few investors, bankers or regulators gave more than a passing thought to the benchma
rks and indices on which the financial world runs. To be sure, there have been complaints about the influence of “speculators” on energy and other commodity benchmarks, and the quarterly reconstitution of the many equity market indices has always been a headache for tracker funds. But, no one, least of all compliance departments, spent much time worrying about the fundamental fairness of various rates.

***SG: The real point is that nobody “owned” LIBOR in the way that other indices/benchmarks are owned by commercial concerns. Therefore there was no incentive to make sure it was not abused.


CRD IV: The story so far
Selwyn Blair-Ford – FOW
Capital Requirements Directive IV (CRD IV) and the associated Capital Requirements Regulation (CRR) promise to completely change the regulatory landscape in the European financial sector. These are the legal and regulatory instruments that will finally bring into force the Basel III accord which itself is a far reaching package of measures developed in direct response to the 2008 financial crisis. But as Arnold Bennett (1867-1931) English novelist said – any change, even for the better, is always accompanied by drawbacks and discomforts. In this instance CRDIV implementation in Europe is not without controversy.


Man Group Imposes Limits on Cash Bonuses for Executives
New York Times
The Man Group, the largest publicly traded hedge fund firm in the world, said annual cash bonuses for its top executives would be capped at no more than 250 percent of salary.


Workers Saving Too Little to Retire
Workers and employers in the U.S. are bracing for a retirement crisis, even as the stock market sits near highs and the economy shows signs of improvement. New data show that powerful financial and demographic forces are combining to squeeze individuals and companies that are trying to save for the future and make their money last.

***SG: I’ve heard there are good rates of return in Cyprus…


Its purpose limited only by one’s imagination…
Lisa Pollack | FT Alphaville
Once upon a time, there waz a big, big bank called Jay Pee Morgan. Also there waz a crysis! Everywon was wery scard. Som of the otha big banks got in trobel. Dis made Jay Pee Morgan ewen biger. So big that is Chwef Inwestment Ofwice hade $350bn dolars. Dis means it waz da sventh bigst bank in the countree if it was all on is own! Al so Jay Pee Morgan was big caus had got a big Bear and also took all the piggybanks dat Washtown Mootowel had. Meanie.

**JK – Sometimes reporters shouldn’t try to be clever.***SG: Thanks Jim for saying politely what I was thinking.


JLN Managed Futures

After a disappointing 2012, the CTA space is looking to the future of managed futures. Articles featured in this issue include two on the difficulty of trend following in markets that have not been trending, and another two articles on the squeezing of fees and performance incentives. Another category getting squeezed: middlemen – capital introducers, or “finders.” All of this is inevitable after a year in which the typical equity index fund blew away alternative investments. There are bright spots, however, in some 2013 metrics on returns and asset allocation.

By the way, readers may notice that today’s newsletter should have been delivered last Friday. We have no excuse except to say that the JLN Managed Futures team was traveling home from a fun but exhausting week at the FIA Boca 2013 conference. While in Boca, we interviewed over a dozen market participants, mostly bigwigs, for two upcoming special reports. Detail to follow.

Second Annual Managed Futures Pinnacle Awards, June 19, 2013
Join CME Group and BarclayHedge for the only awards event to recognize excellence exclusively in the managed futures space, Wednesday, June 19, 2013, preceding MFA’s Forum 2013, Chicago. For more information, including a list of the categories, and to see last year’s winners, visit the MFP Awards site below.

What is the future of trend following CTAs and futures funds?
I want to examine what has driven this asset class to deviate in 2011 and 2012 so far from such an incredible history of superior returns. It seems two atypically poor years is enough to shake the confidence of some in the industry. That’s a big mistake. Not only is the vitality of trend following far from over, I expect 2013 to be a great year for trend following CTAs. To begin with we need to examine in particular what drives such superior returns for trend following CTAs in the first place.

Executive Profile: Impassioned advocate for commodities customers
Chicago Tribune
James Koutoulas, a Chicago hedge fund manager, had about 85 percent of his clients’ money tied up in MF Global, about $55 million. Because of the shortfall in what were supposed to be safe balances, customers were frozen out of their accounts. His panicked clients were not the biggest MF Global customers, but Koutoulas became the loudest voice advocating for the speedy return of their money.

**DA: Nice piece on the newest member of the NFA board.


MarketsWiki Page of the Day
Xiao Gang

MarketsWiki Recent Updates


Xiao Gang

Companies, Organizations and Groups

MSCI Barra; Bank of China Ltd.; European Central Counterparty Limited


Mini options


36,847,599 pages viewed, 7,435 articles, 156,116 edits
MarketsWiki Statistics

Lead Stories

Ice blames SEC as it drops single-name CDS clearing plans
Matt Cameron, Peter Madigan, Joe Rennison –
Ice Clear Credit has shelved plans to clear single-name credit default swaps (CDSs) for clients of its member firms, as a result of a new Securities and Exchange Commission (SEC) policy on portfolio margining. Under the terms of that policy, circulated late on March 8 – the last working day before the start of mandatory clearing for CDX index trades in the US – clients would be able to benefit from risk offsets between cleared index and single-name contracts, but the vast majority would be charged twice the margin calculated by a central counterparty (CCP). The move sparked a furious response from some buy-side firms and has now dissuaded Ice’s CDS clearing house from offering the service at all.

***SG: So maybe the ICE Age predicted by Mr Sprecher isn’t quite here yet.

Mini Options See ‘Respectable’ Start
Dow Jones
“Mini” options made their debut Monday, allowing investors to wager on the direction of pricey stocks such as Apple Inc. for about one-tenth of the investment of a standard stock option.

***SG: Personally I’m holding out for the “Nano”.

CME launches interest rate swap clearing in London
CME Group Inc. has launched a clearing service for interest rate swaps in London, just one week after U.S. regulators began to phase in long-anticipated mandates for rate swap clearing on CME’s home turf, the exchange operator said on Monday.

***SG: Should be an interesting 3-way battle between CME, LCH and EUREX Clearing.

Cyprus Levy plan ‘bleak day for banking union’
Patrick Jenkins in London and Alex Barker in Brussels –
The weekend decision to strip E5.8bn from the savings accounts of Cypriot banking customers has blown a hole in the EU’s ambitious reforms billed as the route out of the eurozone crisis, while potentially undermining a growing reliance at banks around the world on funding their operations with customer deposits.

Why the Cyprus Bail In Is a Bigger Deal Than You Think
Yahoo! Finance: The Daily Ticker
You can be forgiven for thinking that you don’t need to give a hoot about what’s going on in Cyprus. After all, it’s just a little island somewhere in the Mediterranean. But what’s going on in Cyprus could actually matter — not just to the rest of Europe, but to the rest of the world.

The Lesson From Cyprus
The Cyprus fiasco sets a high bar for the euro zone’s new banking union. The new superregulator might not have been able to stop the blowup, or to avoid losses for insured depositors. The clear lesson from the mess is the need for a procedure to wind down failing banks.

CFTC’s O’Malia: No progress on Sef rules in past two weeks
Peter Madigan –
The Commodity Futures Trading Commission is still some way from reaching consensus on final swap execution facility (Sef) rules, commissioner Scott O’Malia has said, with no progress made at all in the past fortnight.

***SG: I guess if it was easy then these OTC contracts would be trading on futures exchanges already.

Former CalPERS officials indicted on fraud, obstruction charges
Federal prosecutors in San Francisco indicted former CalPERS Chief Executive Fred Buenrostro and former board member Alfred J.R. Villalobos on Monday afternoon as part of a years-long investigation into possible influence-peddling and corruption.

JPMorgan wins dismissal of silver price-fixing lawsuit
Reuters via Yahoo! News
JPMorgan Chase & Co has won the dismissal of a nationwide investors’ lawsuit accusing the largest U.S. bank of conspiring to drive down silver prices. U.S. District Judge Robert Patterson in Manhattan said the investors, who bought and sold COMEX silver futures and options contracts, failed to show that JPMorgan manipulated prices at their expense, including by amassing huge short positions that were not justified by market events at the time.


CFTC’s Division of Clearing and Risk Issues Limited No-Action Relief from Required Clearing for Swaps Resulting from Multilateral Compression Exercises
The Commission’s Division of Clearing and Risk (Division) today issued a no-action letter that provides relief from required clearing for a limited set of swaps that are generated as part of a multilateral portfolio compression exercise.

Remarks To The 2013 Mutual Funds and Investment Management Conference By Norm Champ, Director, Division Of Investment Management, U.S. Securities And Exchange Commission

“The New Prospectors” – Speech Of CFTC Commissioner Bart Chilton To The National Grain And Feed Association’s, 117th Annual Convention, San Francisco, California

ESMA Requires Further Improvements By CRAs

Exchanges & Trading Facilities

NYSE Euronext Launches Mini Options
NYSE Euronext today announced the launch of mini options contracts on NYSE Arca and NYSE Amex, its U.S. options exchanges, in five actively traded securities and exchange-traded funds. For the first time, NYSE Arca and NYSE Amex options customers are now able to trade mini options with 10 share deliverables as opposed to the standard 100 deliverable contracts

EEX Introduces Trayport ETS As New Natural Gas Trading System

TMX Atrium Adds LME To Its Community – Addressing The Growing Trend For Electronic Access To Non-Equity Assets

New York Stock Exchange Reviewing Continued Listing Status of Dex One Corporation

BM&FBOVESPA Announces Market Makers For Options On Stocks Of PDGR3, CSNA3 And CYRE3 – Correction

Equity Options Exercise Totals BRL 3.24 Billion On BM&FBOVESPA

Luxembourg Stock Exchange Selects SWIFT For New Fund Market Infrastructure

OneChicago Holiday Notice – Good Friday 2013

Hedge Funds & Managed Futures

Divided Views of SAC Capital Settlement
Not many Wall Street executives, let alone hedge funds, could write a $616 million check and remain solvent. But Steven A. Cohen and his fund, SAC Capital Advisors, have done exactly that, agreeing to pay that amount to settle two insider-trading lawsuits brought against it by the government.

SAC tells investors scrutiny is not over
The Wall Street Journal
SAC Capital Advisors executives told investors yesterday that its settlements with securities regulators – in which the hedge fund firm agreed to pay a record $616m penalty to end two insider trading cases – was a difficult decision that will help it to move forward.

BlackRock to axe poorer performing staff
Dan McCrum in New York –
BlackRock intends to cut around 300 jobs, or almost 3 per cent of its workforce, as the New York-based asset manager takes a more aggressive approach to culling poor performers.

Funds of funds in push on bespoke accounts
Kiel Porter – Financial News
Two of the UK’s leading funds of funds have created bespoke products for individual investors, reflecting the growing importance of managed accounts to the sector.

Avenue hedge fund names CIO as Lasry seen getting ambassadorship
Reuters via Yahoo! News
As speculation mounts that Avenue Capital hedge fund co-founder Marc Lasry will be nominated as the next U.S. ambassador to France, his $12 billion firm has told investors it is naming its first chief investment officer, according to a memo reviewed by Reuters.

CalPERS Leaders Call Federal Indictments Against Former Officials “Another Step On The Road Toward Justice”
The California Public Employees’ Retirement System (CalPERS) today applauded the indictments handed down against the pension fund’s former Chief Executive Officer (CEO) Fred Buenrostro and former member of the CalPERS Board Alfred Villalobos.

FOCUS: Mixed Activity Seen By Speculators In Latest CFTC Data For Metals
The change in speculative positioning for precious metals was mixed in the most recent reporting period for data compiled by the Commodity Futures Trading Commission, with traders adding to bullish gold and palladium positions, but cutting back on their bullish exposure to silver and platinum.”

Banks and pension funds struggle for common ground on sell-offs
Giles Turner – Financial News
It sounds like a match made in heaven. On one side are Europe’s largest banks, sitting on trillions of dollars of unwanted assets, including long-dated fixed income, infrastructure and real estate products.

Labor of love: Hedgie couple go Hollywood with Frederick’s
New York Post
Hedge-fund honcho Phil Falcone just got his fashionista wife, Lisa Maria, a hot gift — lingerie chain Frederick’s of Hollywood. A division of Falcone’s publicly traded Harbinger Group handed over $10 million to the troubled underwear retailer in exchange for the right to control the company, FOH announced. If…

Banks & Brokers

No Accounting For Auditor PwC At Levin’s Whale Hearing
You might think that when shareholders pay a firm $105.5 million in audit and audit-related fees for an opinion on whether the financial statements presented fairly, in all material respects, the financial position of JPMorgan Chase & Co. and its subsidiaries, private equity funds, commingled trust funds and special purpose vehicles at year end, that audit firm, PricewaterhouseCoopers LLP, would also be held accountable when so many things about those financial statements and management’s assertions turned out to be so terribly wrong.

Citigroup to Pay $730 Million to Settle Investor Lawsuit
Citigroup has agreed to pay $730 million to settle a class action lawsuit on behalf of investors who said they were misled by the company’s disclosures.

Is Citigroup Headed in the Right Direction?
International Business Times
Should U.S. banks be compelled to place more capital in a rainy day plan? Citigroup is one of the largest banks in the world with over 200 million customers. Operations include consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management.

Will investment banks ever reach the Promised Land?
William Wright – Financial News
As investment banks struggle to make their numbers add up, at least some of them can seek a modicum of comfort from the fact that on the other side of the wilderness there might just be a Promised Land.

Jefferies climbs lender league
Shanny Basar in New York – Financial News
US investment bank Jefferies has broken into the top 10 rankings for global loan revenues for the first time, after more than doubling earnings year-on-year.

Dougan Calls Bankers Out-Earning Investors Unsustainable
Credit Suisse Group AG Chief Executive Officer Brady W. Dougan said pay for bankers is still outpacing shareholder returns, a dynamic that will change once the bank completes an overhaul of its business model.

BofA-ML Eliminates Head of Australian Equities Role -Source
Dow Jones
Bank of America Merrill Lynch has eliminated the role of head of Australian equities, a person familiar with the situation said Tuesday.

Goldman Sachs Poaches Deutsche Bank Senior FX Sales Director-Sources
FOX Business
Goldman Sachs Group Inc. has poached Singapore-based institutional foreign exchange sales director Catherine Rich from Deutsche Bank, people familiar with the matter said Tuesday.

Supreme Court court won’t hear Goldman Sachs class action appeal
The Supreme Court on Monday declined to consider a dispute over a class action lawsuit that accused Goldman Sachs Group Inc of misleading investors about the risks associated with mortgage securities offerings.

Argentina Accuses Local HSBC Unit of Facilitating Money Laundering, Tax Evasion
Dow Jones
Argentina’s government said Monday that it has filed charges against the local subsidiary of British bank HSBC Holdings PLC, accusing the company of helping third parties to engage in tax evasion and money laundering for 616 million pesos.

U.S. Bank to buy Deutsche Bank’s U.S. municipal bond trustee business
Minneapolis-St. Paul Star Tribune
The deal with Deutsche Bank will add about $57 billion to the $3 trillion in corporate trust assets U.S. Bank administers.

Morgan Stanley Declares A Regular Quarterly Dividend on Preferred Stock

Clearing & Settlement

BNY Mellon Expands Global Derivatives Clearing Team – Regulatory And Market Changes Driving Renewed Demand For New Services

Indexes & Products

Innovation drives next generation of indices
Peter Davy – Financial News
If you always do what you’ve always done, you’ll always get what you’ve always got.” Variously attributed to Albert Einstein, Mark Twain and Henry Ford, this aphorism is increasingly being adopted by the exchange-traded fund industry. In a world where it has become increasingly difficult to generate spectacular investment returns, innovation will play an important role in the years to come, according to index providers.

ISE Signs Licensing Agreement with KSM, the Largest Israeli ETF Issuer
The International Securities Exchange (ISE), a leading U.S. options exchange, announced today a licensing agreement with KSM Sal Indices Certificates Ltd., the largest ETF issuer in Israel. The agreement licenses the ISE Water Index to KSM for its Water Fund.

Oslo Børs’ Oil Service Index Becomes Tradable
Oslo Børs is one of the world’s largest stock exchanges for the oil service sector and in 2010 the exchange launched the first European oil service index, OBOSX. On 18 March Oslo Børs introduces the opportunity to trade futures on the oil services index for investors seeking a broad exposure to the development of the companies in the oil services sector.

India Gold ETF Sales Mimic Soros as Goldman More Bearish
Indian gold funds are shrinking for the first time since June as investors in the biggest bullion- consuming nation follow billionaire George Soros in pulling money from products backed by the precious metal.

Semi-Annual Changes To The NASDAQ OMX Clean Edge Smart Grid Infrastructure Index

Semi-Annual Changes To The NASDAQ OMX CEA Smartphone Index

Moscow Exchange Indices Weekly Review: March 11 – 15, 2013


MST Capital selects SunGard’s Hedge360 for a Holistic Hosted Investment Management Suite
MST Capital, an Asian focused Global Macro hedge fund based in Australia, has chosen SunGard’s Hedge360, a hosted front-to-back office hedge fund investment management application suite.

Tbricks OnDemand – A Fully Managed Trading Service – Introducing A Managed Service Powered By QuantLINK And QuantFEED
Tbricks, the provider of next generation automated trading systems, today announced Tbricks OnDemand. Go from concept to launch with no installation, no overhead, no hardware investments. Tbricks OnDemand is powered by QuantLINK and QuantFEED from S&P Capital IQ’s Real Time solutions.


SEC Obtains Asset Freeze Against Massachusetts-Based Investment Adviser Stealing Money from Clients
The Securities and Exchange Commission today announced an asset freeze against a Massachusetts-based investment adviser charged with stealing money from clients who were given the false impression they were investing in a hedge fund.

ASIC acts to stop offshore scam netting Australian investors

[ASIC] Provisional liquidators appointed in SMSF investigation


China eases renminbi investment rules
Josh Noble in Hong Kong –
Amid all the talk of renminbi internationalisation, one question has long bugged offshore investors: what to do with the Chinese currency?

Head Of Industrial Product Department Of Dalian Commodity Exchange Provides A Detailed Explanation For The Design Concept Of Coking Coal Contract

Shanghai Stock Exchange: Communication Strengthened To Foster Awareness Of Being Shareholders – Online Voting Of The SSE’s Activity Themed With

Thai Clearing House Accepts Applications For New Settlement Banks

HKEx Publishes Online Fact Book For 2012

Frontier Markets

ACO Investment Plans $700 Million in Myanmar Private-Equity Bets
Myanmar, the Southeast Asian nation that exited 50 years of military rule in 2011, offers investors the best growth opportunity in the region, said Hari Achuthan, whose firm is betting $700 million on the country.

Delhi needs to sell the idea of the market
Gurcharan Das –
When the Indian government presented its budget last month, the people were expecting giveaways, subsidies and bribes for votes. But it turned out to be a surprisingly responsible settlement that capped the fiscal deficit at 4.8 per cent of economic output. It was a sensible budget, but it will not get India growing again.

HDFC relies on repute to ride out probe
James Crabtree in Mumbai –
News of an investigation into money laundering has forced India’s second-largest privately run bank by assets to confront an unusual problem: negative publicity.

John Lothian Newsletter

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