OCC Fined by SEC/CFTC; CME’s Bitcoin Options(?!)

Sep 5, 2019

Observations & Insight

SEC and CFTC Charge Options Clearing Corp. with Failing to Establish and Maintain Adequate Risk Management Policies
CFTC
The Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission today announced that the Options Clearing Corporation (OCC) will undertake remedial efforts and pay $20 million in penalties to settle charges that it failed to implement policies to manage certain risks as required by U.S. laws and SEC and CFTC rules.
/jlne.ws/2zTj23E

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OCC Statement on SEC and CFTC Settlement
OCC
OCC, the world’s largest equity derivatives clearing organization, released the below statement in response to a settlement reached with the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) regarding allegations that OCC failed to comply with certain SEC and CFTC regulations.
The SEC and CFTC both considered OCC’s cooperation and remediation efforts in reaching their settlement with the company. The SEC noted that OCC developed remediation plans that have been provided to the Commission staff and has already obtained SEC approval to enhance the company’s margin policy, incorporate stress testing and liquidation costs into its clearing fund and margin methodologies, respectively, among other approvals. The CFTC specifically noted that “OCC developed remediation plans to bring OCC into compliance with [clearing agency] Core Principles and Regulations.”
/jlne.ws/2zUZ8F6

****SD: I’ll just quote John Lothian on this one: “JLN has a unique perspective on the OCC as we interview their executives often, and they are among our sponsors. I want to defend them regarding this fine, pointing out there has been dynamic change from the country-club style of management to the Craig Donohue led complete transformation. This is not your father’s OCC. And John Davidson has taken the OCC to a higher level as CEO, with his long previous experience leading a clearinghouse. However, the results of this transformational change versus the standard regulators are applying will only be established when there is a major market event or cyber attack on the system or the entire financial infrastructure. Then we will know. Is all the change enough? Not just to meet the potentially arbitrary regulatory requirements, but to meet the true risk management challenges. Here is the OCC’s transformation in the OCC’s own words to show how it is meeting the challenge. The OCC is a SIFMU, a strategically important financial market utility. It is also the only equity options clearinghouse, a potential single point of failure. I am hesitant to criticize the SEC and CFTC on this, as I am holding my CFTC criticism back for their terrible decision to make a bigger martyr out of Jitesh Thakkar.” Other sources regarding the fine: WSJ and Financial Times

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Ah, September! Litigation is in the air
Thom Thompson – John Lothian News

This year, early September is back-to-federal-court time in Chicago. Three of our favorite cases have seen some recent action in the Dirksen Building.

CFTC v Kraft and Mondelez. Last week, the CFTC asked to move the date of the evidentiary hearing in the parties’ latest spat in U.S. federal court from September 12 to October 2. Its motion was granted. (Btw, it is pronounced “mon-del-ease.”)

The upcoming hearing arises from the now-soured settlement agreement in the CFTC’s wheat futures manipulation case that dates back to 2011. Having agreed to pay $16 million in fines to the CFTC on August 15, Kraft/Mondelez hauled the plaintiff back into court on August 19 after the CFTC published a press release and other statements on its website. It appeared to Kraft/Mondelez that the documents were one part defamatory and two parts indicative of extreme bad faith in settling the case. While brief, the August 19 hearing was tense.

To read the rest of this commentary, click here.

Lead Stories

CME Group is sharing details on bitcoin options that could signal an ‘imminent’ product launch
Frank Chaparro – The Block (SUBSCRIPTION)
According to documents obtained by The Block, the exchange is sharing contract specifications for a bitcoin option
/jlne.ws/2zS3CwA

Volatile sterling lives up to ‘Great British Peso’ moniker
Eva Szalay – Financial Times (SUBSCRIPTION)
Sterling’s nickname — the Great British Peso — is supposed to be a joke, a nod to its unusually violent moves in the wake of the Brexit referendum.
But, in recent days, markets have started showing signs of greater uncertainty over the path of the pound than of its Mexican cousin.
/jlne.ws/2MSAcXv

****SD: Also see Reuters’ Pound posts biggest two-day surge in 10 months as no-deal Brexit fears fade and Bloomberg’s Investors Pull $1.5 Billion From U.K. Equities as Brexit Bites.

Wolverine Trading’s Book: Hiding in Plain Sight
Paul Rowady – Alphacution
With this one, we’re just going to let the visuals speak for themselves, for now – and see how that goes…
/jlne.ws/2ZKUnN2

Jump Trading Confirms Our Congregational Feedback Loop
Paul Rowady – Alphacution
The clues can be very subtle, but they are there – if you choose to pay close enough attention. We stumbled over one such clue recently. Or, did that clue somehow announce itself to us? You be the judge…
Here’s the setup: In January 2019, Alphacution published a post entitled, “Jump (Experiments In) Trading, LLC” wherein we note, among other highlights, that there may have been a mistake in one of their 13F filings; specifically, a report for Q4 2014. In the exhibit below, Alphacution presents a 31-quarter sample of total 13F positions for Jump Trading – the Chicago-based proprietary powerhouse known more for its high-speed futures trading strategies than those in the 13F securities universe – beginning Q1 2011 and ending Q3 2018. The position spike in Q4 2014 – from a status quo of about 1,000 (13F long) positions to over 8,000 positions – represented a technical error due to disaggregated reporting of option positions.
/jlne.ws/2ZKTKTG

VIX Underpricing Volatility Risk by Almost 40%, Macro Risk Says
Gregory Calderone – Bloomberg via Yahoo Finance
The Cboe Volatility Index, trading about a point above its one-year average after a tumultuous month for equities, is sending a false signal of calm for the market, a Macro Risk Advisors analysis shows.
/jlne.ws/2zTK0bj

Inside Volatility Trading: September 4, 2019
Cboe Blog
The trade war between the leaders of the two largest economies in the world continues to percolate; so too has volatility. Based on historical data, volatility as measured by intraday S&P 500 ranges tends to come in bunches.
/jlne.ws/2PMNiYC

Exchanges and Clearing

HKEX halts derivatives trading on ‘connectivity’ issues; stocks slip
Reuters
Bourse operator Hong Kong Exchanges and Clearing (HKEX) said on Thursday it has suspended trading in its derivatives market for the afternoon and after-hours sessions.
/jlne.ws/2zVOw97

****SD: Also see the Financial Times and Bloomberg.

Cboe Global Markets Reports August 2019 Trading Volume
PRNewswire
– Futures ADV up 42% over August 2018 and up 53% over July 2019
– Options ADV up 24% over August 2018 and up 26% over July 2019
– U.S. Equities ADV up 17% over both August 2018 and July 2019
– August ADV in SPX options, RUT options and VIX futures highest of 2019
/jlne.ws/2zTSvmF

Miami International Holdings Reports August 2019 Trading Results And New Records for MIAX Exchange Group
MIAX
Miami International Holdings, Inc. (MIH) today reported the August 2019 trading activity for its three fully electronic options exchanges – MIAX, MIAX PEARL and MIAX Emerald (together, the MIAX Exchange Group). The MIAX Exchange Group collectively executed over 43.1 million equity option contracts in August for a combined average daily volume (ADV) of 1,961,849 contracts, representing a total U.S. equity options market share of 10.31%.
/jlne.ws/2lTUUKe

Intercontinental Exchange Reports August Statistics
ICE
Intercontinental Exchange, Inc. (NYSE:ICE), a leading operator of global exchanges and clearing houses and provider of data and listings services, today reported August trading volume and related revenue statistics.
/jlne.ws/2zQVQD5

NOM and BX Options Adopt Rules Pertaining to Authorization to Give Up
Nasdaq Options Regulatory Alert #2019
Effective September 9, 2019, Nasdaq Options Market (NOM) and Nasdaq BX Options (BX Options) will implement the Authorized Give Up process.
/jlne.ws/2zWFGIo

How NSE versus SGX ended up in Gujarat
Jayshree P. Upadhyay, Anirudh Laskar – LiveMint
GIFT City facilitated the rapprochement between NSE,?SGX. Now,?it has to get investors interested in trading there
GIFT has a design error.
/jlne.ws/30TMS3I

CME Group Has Been The Stock That Keeps On Giving
Andrew Hecht – Seeking Alpha
In December 2002, shares of the CME Group Inc (CME) traded to a low at $7.78. The Chicago Mercantile Exchange began operations in 1898 in Chicago, Illinois. For many years, the company was owned by members who purchased seats that came with ownership and trading privileges. Technological advances in the 1990s and early 2000s, changed the ownership structure as the business became more capital intensive. Electronic trading, regulations, and expanding volumes made it possible for seat holding members of the exchange to cash in their investments via an initial public offering of shares.
/jlne.ws/2zVX7sE

CME Group Foundation Awards Nearly $1 Million in Grants to Reduce Computer Science Deserts
PRNewswire
CME Group Foundation will award more than $900,000 in new grants to Chicago Public Schools (CPS) and local nonprofits to support in-school and after-school computer science programs with the goal of reducing “computer science deserts” in Chicago.
/jlne.ws/2zWF5X6

Moves

Virtu expands executive team with senior hires from Morgan Stanley and Interactive Brokers
Hayley McDowell – The Trade
High speed trading firm Virtu Financial has made several senior appointments to its executive team, including two new hires from Morgan Stanley and Interactive Brokers.
/jlne.ws/2zTGzl1

UBS plots revamp of investment bank after performance falters
Stephen Morris – Financial Times (SUBSCRIPTION)
UBS is preparing an overhaul of its investment bank as the Swiss lender seeks to galvanise earnings and cut costs after a drop off in performance over the past few quarters. As part of the revamp, due to be announced at a townhall on Thursday, executives are discussing hundreds of job cuts at the investment bank, especially within the higher ranks, as duplicate roles are cut after sweeping divisional mergers, according to people familiar with the matter.
/jlne.ws/2zTK6j1

Regulation & Enforcement

An old fight over margin protections rears its head
Robert Mackenzie Smith – Risk.net (SUBSCRIPTION)
Not all things consigned to the history books remain there.
More than five years ago, a group of US derivatives exchanges and regulatory bodies tried to clamp down on margin protections relied on by asset managers running separate accounts for institutional clients. That effort went nowhere and the issue faded into the background.
/jlne.ws/2zSQ9Er

Strategy

JPMorgan to SocGen Tout Hedges as U.S. Stocks Mask Big Risks
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
An awful lot of strategists are recommending hedges on U.S. equities right now.
JPMorgan Chase & Co. suggests bearish options on the SPDR S&P 500 ETF Trust, citing concern the market may be underpricing risks that a deterioration in corporate America’s health could hurt jobs. Bank of America Merrill Lynch is touting puts because its model suggests increasing risk for the S&P 500. And Societe Generale SA and Credit Suisse Group AG see some options tied to the index that are too cheap to pass up.
/jlne.ws/2MX6b8R

Bond Investors Are Bracing for a Bubble And Being Smart About It
John Ainger and Charlotte Ryan – Bloomberg via Yahoo
The fear of a global bond bubble bursting has the market on edge, but it takes a brave investor to bet against a rally that smashed so many records.
/jlne.ws/2ZGSYHo

Getting Paid to Collect Yield
Steven Sears – Barron’s
Despite the political turmoil of the past few months, which sometimes made it seem that the post – World War II order of the world is at risk, the S&P 500 index and the Cboe Volatility Index, or VIX, remain at reasonable levels – and stocks are on pace to finish the week up 2%. But it’s hard to dismiss the growing number of respected investors who are expressing caution about the long-running bull market.
/jlne.ws/2zTCRHM

****SD: “This column has recommended buying gold and exchange stocks, selling stock and replacing the positions with upside calls, and hedging portfolios. Recently, we have often cited one of our favorite strategies: selling puts on blue-chip stocks that pay dividends to enhance returns on idle cash.”

Mystery trader bets Lululemon could jump 10% on earnings
CNBC
Lululemon is about to jump. That’s at least according to the options market, which is implying a 10% move in either direction for shares of the athletic apparel retailer following its upcoming earnings report.
/jlne.ws/2zVCSv0

****SD: “One trade that caught Khouw’s eye was a purchase of the $180 calls expiring on Friday. A mystery trader paid about $7 for just over 400 of those calls, financing that trade by selling $3 worth of $200 calls expiring at the end of the month.”

Miscellaneous

Brexit Has Ruined One of the Most Reliable Trades in Energy
Mathew Carr – Bloomberg (SUBSCRIPTION)
Carbon volumes last month jumped to highest ever for August; Prices could double by end of next year, says Bank of America
/jlne.ws/2zTDJwn

Emerging Markets Smile Widest as Stocks Rebound
Robert Burgess – Bloomberg (SUBSCRIPTION)
Investors were feeling pretty good on Wednesday, and rightfully so. The risk of the U.K. crashing out of the European Union next month without an exit deal diminished after some surprise developments in British politics. There may be a peaceful end to months of protests in the Asian financial hub Hong Kong. China’s cabinet signaled that a plan to release cash into the nation’s slowing economy is coming.
/jlne.ws/2zWKa1q

China Approves First Commodity-Linked Exchange-Traded Funds
Alfred Cang – Bloomberg (SUBSCRIPTION)
Chinese authorities have given the go-ahead for the first exchange-traded funds that track domestic energy, metal and agricultural futures as the country seeks to boost the liquidity of its capital markets.
/jlne.ws/2zSNISo

Greenspan: Volatile stock markets may frustrate central bank efforts to fight downturn
Greg Robb – MarketWatch
Former Federal Reserve Chairman Alan Greenspan said Wednesday that global central bank efforts to combat the slowing global economy may be hamstrung by volatile stock markets.
“I think they [global central banks] are going to have difficulties largely because equity prices are going to adjust more than they have over the past,” Greenspan said, in an interview on CNBC.
/jlne.ws/2MUbhTy

Old Post Office closes in on leases with PepsiCo and WeWork
Ryan Ori – Chicago Tribune
Another 320,000 square feet of office space is being gobbled up at The Old Post Office redevelopment, continuing a run of big leases in the long-vacant structure that will become one of Chicago’s largest office properties when it opens in October.
/jlne.ws/2zSQjvx

****SD: Another update on what will be the Cboe’s new home.

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