Lead Stories

Mexico Said to Take First Steps in Annual Oil Hedging Program
Nacha Cattan and Javier Blas – Bloomberg
Mexico said to ask banks for options quotes to fix 2018 prices; Mexico annual sovereign hedge is Wall Street largest oil deal
Mexico has taken the first step in its annual oil hedging program, asking Wall Street banks for price quotes on the put options it buys to lock in prices for the following year, according to people familiar with the matter. Mexico usually buys put options from a small group of investment banks, starting as early as May but sometimes as late as July, in what’s considered Wall Street’s largest — and most secretive — annual oil deal.

****SD: I was hoping for some fun options news after that annoying bummer of a day yesterday. Boom. Here it is. Bloomberg had an April longform on the practice – Uncovering the Secret History of Wall Street’s Largest Oil Trade. Last year Mexico bought $1 billion of puts. Then there’s $130ish million of puts bought by Pemex. And related to all of this is the news from the end of May that Iraq might start its own oil hedging program.

Treasuries-Bund Trade Is About to Get Interesting; Option prices show downside risk to German bonds.
Myron Scholes And Ash Alankar
The tide is turning. In recent years, many investors have been burned by their conviction that the price of German bonds would fall relative to U.S. Treasuries of the same maturity, as the yield on the 10-year bund dipped for the first time into negative territory. But with the return of consistent growth and a reduction in near-term political risk in the euro zone, options prices indicate that interest rates are more likely to increase than decrease in Europe’s largest economy. This is a significant departure from a number of months ago, when options market prices were neutral as to the direction of rates in Germany.

****SD: Wow. This is like the third or fourth Myron Scholes/Ash Alankar article I’ve seen in the last few months. Nice.

No fear: Wall Street’s volatility gauge drops to 23-year low
Evelyn Cheng – CNBC
The low volatility plaguing the market looks here to stay, after traders hoping for a spike this week got the opposite.
The CBOE Volatility Index (.VIX), considered the best gauge of fear in the market, dropped Friday to 9.37, its lowest since Dec. 27, 1993.

****SD: Ugh. See below story as well.

Markets Can’t Shake Low Volatility Grip, Despite Risk-Rich Week
It was supposed to be the triple whammy — a trio of catalytic news events that could potentially break financial markets from the gravitational grip of low volatility.
But despite the European Central Bank shifting its language on interest rates, an ex-FBI chief characterizing the U.S. president as having lied and British voters serving up another surprise result, the following charts show markets have kept the proverbial stiff upper lip.

****SD: Also from Bloomberg The Daily Prophet: That Turned Out to Be a Whole Lot of Nothing

Won’t take much movement for flat-lining VIX to come to life
Reuters via Times of India
VIX still moribund, but with S&P 500 nearing major long-term channel resistance, it won’t take much rise in the implied vol measure for it to threaten its own key levels.

****SD: Here’s one of those fun, random (due to the ‘monthly close’ aspect) figures I don’t know what to make of: “In wake of two previous VIX monthly closes at 10.63 or lower (1994 and 2007), VIX doubled or tripled within 2-3 months.”

Exchanges and Clearing

Eurex Exchange’s Equity Index Highlights – June Edition
Following a significant volume drop last year caused by legal uncertainty, the “New Rules for Equity Trading over Dividend Record Date”, helped Single Stock Futures to rally in the last few months and reach 2015 levels with an open interest of 10 million contracts. Although the absolute April and May figures in the EURO STOXX 50 Index Options remained below the strong March figures, the overall open interest peaked at 40 million, it is the highest level since May 2012 – reflecting the overall anxiety to the possibility of an adverse French election result.

Fixed Income Highlights – June Edition
Volatility across the board has been softer and investors have reduced their risk. Having said this, markets have moved their focus away from the French elections to focus on Italy, with German versus Italian government bond spreads widening to around 195bps. In volatility terms, the market has been comfortable selling volatility, with single digit levels seen across many asset classes. One of the reasons for this is a low supply of economic and political surprises, which has allowed the volatility in the underlying rates market to remain relatively benign. volatility has remained under pressure.

MIAX Options: New Equity Rights Program For 2017
MIAX Options (the “Exchange”) filed for immediate effectiveness to implement an equity rights program pursuant to which units representing the right to acquire equity in the Exchange’s parent holding company, Miami International Holdings (“MIH”) would be issued to a participating Member in exchange for payment of an initial purchase price or the prepayment of certain transaction fees and the achievement of certain volume thresholds on the Exchange over a 42 month period.

LSE eyes more index deals after agreeing to buy Citi’s Yield Book
John McCrank – Reuters
The London Stock Exchange Group PLC (LSE.L), which last week agreed to buy Citigroup Inc’s (C.N) Yield Book fixed-income analytics and indexing business for $685 million, is looking for similar deals, LSE’s chief financial officer said on Thursday.

****SD: I’m just doing some trend following here.

Regulation & Enforcement

European Commission proposes new powers for ESMA to develop CMU
The European Commission wants to beef up the powers of ESMA to carry through CMU.
Paul Walsh – The Trade
The European Commission (EC) will look to strengthen the powers of the European Securities and Markets Authority (ESMA) as part of the Capital Markets Union (CMU) project. Following a mid-term review launched earlier this year, the EC has vowed to increase ESMA’s authority in order to “promote the effectiveness of consistent supervision across the EU and beyond.” Such a move would, according to the EC, ensure that a single set of rules is implemented in a uniform way across the single market.

House Passes Financial Choice Act, Rollback Of Dodd-Frank
Geoff Bennett – NPR
House Republicans voted Thursday to deliver on their promise to repeal Dodd-Frank ó the massive set of Wall Street regulations President Barack Obama signed into law after the 2008 financial crisis.
In a near party-line vote, the House approved a bill, dubbed the Financial Choice Act, which scales back or eliminates many of the post-crisis banking rules.

New SEC enforcement chiefs see cybercrime as biggest market threat
Sarah N. Lynch – Reuters
Hackers are increasingly breaking into brokerage accounts to steal assets or make illegal trades, prompting U.S. securities regulators to start tracking cyber crimes more closely, two newly appointed enforcement officials said in an interview on Thursday.
On Thursday, the U.S. Securities and Exchange Commission named Stephanie Avakian and Steven Peikin as new co-directors of enforcement.

****SD: It is odd how folks will lock their house and car but leave themselves totally exposed electronically. Seems like there is still much progress to be made in making people realize there is more to security than the physical realm now. I’m as guilty as the rest sometimes.

Supreme Court Ruling Set to Shake Up SEC Enforcement Landscape
B. Colby Hamilton – New York Law Journal
Both regulators and financial litigators can expect to see cases moving rapidly through the courts in the wake of the U.S. Supreme Court’s decision in Kokesh v. Securities and Exchange Commission, observers say.
“It’s going to change the way the SEC approaches complicated, long-running investigations,” said Kara Novaco Brockmeyer, a partner at Debevoise & Plimpton and a former SEC attorney.

Ajay Tyagi, and the job of a Sebi overhaul
Anirudh Laskar and Jayshree P. Upadhyay – Livemint
Since Ajay Tyagi took the helm from U.K. Sinha, Sebi has focused on clearing the mountain of pending cases, but that’s just the tip of the iceberg. Mint examines the challenges at hand for the new Sebi chairman


Bond Market’s Fast Money Bets on the Fed Hiking in June and December b
Alex Harris and Edward Bolingbroke
Traders look past September after miss on May labor data; Bets are in eurodollars, CME’s most actively traded futures
The traders with the most at stake from the Federal Reserve’s policy decisions see a rate hike next week as practically a lock, and they’ve started to put their money on a followup boost in December.

****SD: CME’s Fed Watcher indicates a 95 percent chance of a rate hike next week.


Hedge-Fund Growth and Tax Arbitrage
Matt Levine – Bloomberg
Everyone knows the stereotypical way that hedge funds work: You start a little hedge fund, raise a little money, and go invest it in your best ideas. Those ideas do well and you have good returns. You then market your fund based on those returns, and raise a lot more money. Now you have a big hedge fund, and you invest it in your best ideas, but also your second- and third-best ideas, because there is no room in the best ideas for all the money. Then you have mediocre returns. This is fine for you, because you are getting paid management fees on all the money in your hedge fund, and getting paid 2 percent on billions of dollars is a perfectly fine way to make a living.

Are Speculators ‘Crushing’ Our Coffee Growers?
Seeking Alpha
“Physical coffee market fundamentals are counting less and less for futures markets, now leaded by algorithmic hedge funds and their short-term interests. We need to develop politics to protect coffee growers’ interests against those of short-term speculators”, said Brazilian coffee broker EscritÛrio Carvalhaes, recently.
Commonly, I can feel the pain of my friends and partners whom do their best at seeding, growing and benefiting their beans with the highest quality standards to produce an excellent cup of coffee, when they see the price of their product slumping on-exchange, often with no clear reasons.

JPMorgan’s Jamie Dimon proves the ultimate ‘survivor’
Ben McLannahan – Financial Times
A Fortune cover dated September 2008 features Jamie Dimon in a leather chair, surrounded by a handful of his senior executives. The strapline ó “The Survivors” ó leads into a discussion of how the chairman and chief executive of JPMorgan Chase, supported by his crew, had “weathered a perfect storm.”

****SD: New York Times on the move that provided a time stamp for the above article – Matt Zames to Leave JPMorgan Chase, Seeking to Run His Own Business

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