OCC default fund drops $5bn; OptionMetrics Research Conference Takeaways

Dec 18, 2018

OCC default fund drops $5bn; OptionMetrics Research Conference Takeaways

Dec 18, 2018

Lead Stories

OCC default fund drops $5bn under new approach
Alessandro Aimone – Risk.net (SUBSCRIPTION)
The Options Clearing Corporation (OCC) lopped 36% off its clearing fund requirement in the third quarter, following the introduction of a new methodology for sizing its default resources. Clearing members’ mandatory contributions to the default fund stood at $9.5 billion at end-September, down from $14.8 billion at end-June, and are now at their lowest level since the third quarter of 2017.

****SD: The new approach to the OCC’s clearing fund involved two key changes: moving from sizing the fund based on a Cover 1 to a Cover 2 scenario (along with different approaches to stress tests) and altering the methodology for calculating members’ proportional clearing fund allocations. The latter involved switching allocations to a model based on 70 percent margin risk, 15 percent open interest, and 15 percent volume (70/15/15) rather than 35 percent margin risk, 50 open interest and 15 percent volume (35/50/15). That new, more margin risk-focused allocation model was phased in over a period of three months, with the margin risk percentage increasing to 45/40/15 in October, then 55/30/15 in November and finally up to 70/15/15 this month. The margin models themselves are determined differently, too, as of October. For full documentation, see OCC notice #43267 (for margin model changes), #43212 (on the overall clearing fund methodology changes) and #43908 (for phased in pro rata allocation changes) via the OCC’s memo page (be sure to expand the calendar search range).

Insights Gleaned from Options Conference – Research on Options & Lottery Stocks, RNS Factors, New Modelling Techniques, More
Tabb Forum
Findings from the 7th Annual OptionMetrics Research Conference (ORC2018) at Fordham University in New York City
OptionMetrics hosted the 7th Annual OptionMetrics Research Conference (ORC2018) on Monday, October 15, 2018 at Fordham University in New York City.The event drew together researchers from across the globe to present ideas and research in the expanding options field. OptionMetrics Founder and President David Hait welcomed guests and officiated the conference.

****SD: The degenerate gambler effect: “the lottery features of OTM options are likely unrelated to the underlying securities, as we observe systematic violations of arbitrage conditions.”

Market Maven: Marko Kolanovic Of Quants, Quantum Physics And Stocks
Steve Sears – OCCAM
Every month, usually when the Federal Reserve is about to meet, or the options market is nearing a major expiration cycle, Marko Kolanovic sends a short, muscular report about the stock market to J.P. Morgan’s clients. His notes are distributed around the world, often prompting investors to change their market views, and even their positions.

****SD: Missed this at the beginning of the month!

Credit Suisse Loses Bid To Send Ala. Inverse VIX Suit To NY
Dean Seal – Law360 (SUBSCRIPTION)
An Alabama federal judge said Saturday he will not transfer a locally filed lawsuit, which accuses Credit Suisse of misrepresenting the value of certain short-term notes…

Commons to vote on May’s Brexit plan in week of 14 January; Prime minister tells MPs once more that only alternative is no deal or not leaving EU
Peter Walker – The Guardian
The Commons will vote on Theresa May’s Brexit plan in the week starting 14 January, the prime minister said, as she once again urged MPs to back her proposals, saying the alternative was no deal or no departure from the EU.

Eurekahedge Hedge Fund Index declines -2.36% as of November 2018 year-to-date
The Eurekahedge Hedge Fund Index declined 2.36% as of November 2018 year-to-date, in contrast to the 8.45% gain made in 2017, which turned out to be the best year for hedge funds and equity markets since 2013.

****SD: Also see WisdomTree’s Managed Futures: ‘Tis the Season for Losses

China Inc. to Suffer More Defaults in 2019 as Profits Stall
China’s stimulus policies may not be enough to jump-start profit growth at the nation’s corporations, raising the prospects of more debt defaults next year, analysts say.

****SD: Puttable bonds!

Exchanges and Clearing

Nasdaq significantly improves acquisition offer for Cinnober amid CMA probe
John Brazier – The Trade
Nasdaq Technologies has confirmed that it has made a revised acquisition offer for Swedish technology provider Cinnober after its original bid failed to secure the required level of shareholder approval.

****SD: Also see the press release and the FT

NSE Gets SEBI’s Nod To Launch Weekly Options On Nifty 50
PTI via BloombergQuint
The National Stock Exchange on Tuesday said it had received the Securities and Exchange Board of India’s approval to launch weekly options on Nifty 50 index. This move will provide a hedging tool to market participants to manage their portfolio risk more effectively.


A New Way to Spot the Next Financial Crisis; The tech revolution means better models of the financial system. This will help identify risks, but is no panacea
A more realistic way to model financial risk is emerging. It could help big banks and regulators spot potholes, even if it can’t stop people falling into them.

JPMorgan tries to streamline spending in tech arms race; New digital division set up to better manage bank’s $10.8bn technology budget
Laura Noonan – Financial Times (SUBSCRIPTION)
JPMorgan Chase says it is raising the bar for investment bankers and traders looking for a slice of the firm’s $10.8bn technology budget, and will be knocking back more pitches for projects that are “not scalable” or strategic.


Most Crowded Trade on Wall Street Is No Longer Going Long FAANGs
Arie Shapira – BloombergQuint
For the first time in almost a year, a strategy of going long the biggest U.S. and China tech stocks isn’t the most crowded trade cited in a Bank of America survey.
“Long FAANG+BAT” — or buying shares of Facebook, Amazon, Apple, Netflix, Alphabet, Baidu, Alibaba, and Tencent — was cited by 20 percent of participants as the most crowded trade. It has been replaced by a long U.S. dollar trade, which was noted by a quarter of the fund managers.

Exercising Your Stock Options: How to Develop a Timing Strategy
Scott Shuryn – The Ticker Tape
Stock options offer special potential benefits as compensation. Unlike salary, which is taxed when you receive it, stock options defer taxes until you choose to exercise the options and receive income. In the meantime, their value may increase—perhaps significantly. If not, you don’t have to exercise them at all.

Where Are Analysts Most Optimistic on Ratings for S&P 500 Companies For 2019?
John Butters – FactSet
With the end of the year approaching, where are analysts most optimistic and pessimistic in terms of their ratings on stocks in the S&P 500? How have their views changed over the past few months?
Overall, there are 11,136 ratings on stocks in the S&P 500. Of these 11,136 ratings, 53.9% are Buy ratings, 40.8% are Hold ratings, and 5.3% are Sell ratings.

****SD: The company with the highest percentage of sell ratings? Public Storage (ticker: PSA). The company with the highest percent of buy ratings is a three way tie between Marathon (ticker: MPC), Keysight (ticker: KEYS) and Jefferies (ticker: JEF).

Global investors make record shift into bonds; Fund managers also cutting stock overweight and moving towards ‘defensive’ sectors
Adam Samson – Financial Times (SUBSCRIPTION)
Investors have made the largest-ever shift into bonds this month, according to a widely-watched survey that also showed bets on global equities falling to the lowest in two years as concern over the economic outlook increases.


Market Volatility: Headwinds, from Trade War to Rates, in 2019?
Blu Putnam – CME Group
Markets could face headwinds in 2019 from the lag effects of major events that took place in 2018, from the trade war to rate hikes and corporate tax cuts.

Smaller Fed Moves Have Bigger Market Impacts
Nick Timiraos in Washington and Rachel Louise Ensign – WSJ (SUBSCRIPTION)
In a world of low inflation and slow recuperation from the financial crisis, even small interest-rate changes can have outsize effects on markets and the economy.
That is a key lesson that Federal Reserve officials have learned as they prepare another short-term rate increase at their policy meeting this week. With markets unsettled and the economy slowing, the officials are wondering whether they should slow the already-anemic pace of action.

****SD: In other “causes of market moves” news, Treasury Secretary Mnuchin reportedly cited high frequency trading and the Volcker Rule today as causes of increasing volatility.

Not Even Hindsight Could Have Helped You Make Money This Year
John Authers – BloombergQuint
Every December, I visit the managers at Hindsight Capital LLC, an imaginary hedge fund that always invests with the best possible strategy for beating the market—in hindsight. These managers live in a world perpetually 12 months in the future; the only limit to their trading ability is that they must explain why their trades could have been foreseen 12 months in the past.

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