OCC on the hook for $4bn if member defaults; Mexico’s formula to execute annual oil hedge is ready

Jul 12, 2019

Observations & Insight

CME Group
…On June 27, 2019, a panel of the Floor Conduct Committee found that on that on June 20, 2019, Giorango engaged in a physical altercation while in the Eurodollar Options pit. The panel found that in so doing, Giorango violated CME Rules 514.A.7 and again Rule 514.A.7.

****SD: I hope the fight was worth the $20,000…


CME Options Update and Other Miscellany
Spencer Doar – JLN

CME Group’s options on futures complex has seen robust trading activity. In June, options ADV was more than 5 million contracts for the second month in a row. June’s 5.7 million ADV is the second best ever.

And there were other milestones: OI at the end of June was a record 89 million contracts. That was the (drumroll please) 54th (!) consecutive month of YoY OI growth. Overall Eurodollar options ADV was up 159 percent YoY.

As I mentioned in a previous episode of “The Spread,” I’ve heard the recent shifts in the outlook for interest rates has caused a bit of havoc in the eurodollar pit – so I’m guessing that charged atmosphere played some role in the CME disciplinary notice posted up top.

For more, see CME’s June options update here.

JJL: John Lothian News has sent a letter to the incoming Chairman of the CFTC, Heath Tarbert, welcoming him to the industry and encouraging him to select a diverse and inclusive set of division directors and senior appointees. We will publish the letter on Monday. We encourage JLN readers to send the incoming CFTC chairman a welcome letter encouraging him to select a diverse and inclusive set of division directors and senior appointees. Send the letters to secretary@cftc.gov. It is important for the new chairman to hear from the industry about this key industry initiative. I would particularly encourage our friends at the FIA and its board, WILD, and Women in Derivatives to share their views on the subject.

Last, we are reaching max capacity for the day one of MarketsWiki Education World of Opportunity event held in the Chicago offices of Trading Technologies. You can still sign up, but do so fast. The event is Tuesday. We have plenty of room at the spacious auditorium at the Stuart School of Business at Illinois Tech, so sign up for that too at www.MarketsWikiEducation.com


Kevin O. Barillas
KEVIN O. BARILLAS of J.P. Morgan’s Chicago futures & options business passed away unexpectedly last Tuesday, July 9, 2019, He was the devoted son to Amparo (nee Villeda) and Frank Barillas; loving brother of Ileana (Gill) Iruegas; dear grandson of Estela Castro; also, aunts, uncles, cousins and friends to many. Kevin was a Client Service representative of J.P. Morgan’s Futures & Options business; a former employee of Cargill’s CBOT floor operation; a graduate of the University of Illinois at Chicago; and, a graduate of Brother Rice High School. Kevin’s professional life servicing the derivatives accounts of the largest privately held corporation in the United States; Latin America’s second largest central bank; the world’s largest baking company; and many more, were secondary achievements in his life. He is remembered as an amazing friend with an incredible sense of humor and love for music who made everyone’s lives, he touched better ones. Visitation is at Zarzycki Manor Chapels Ltd., 8999 S. Archer Ave., Willow Springs, IL from 2-8 p.m. Friday, July 12. Closing Prayers start the following morning at at the funeral home located at 8999 S. Archer Ave., Willow Springs, IL. 8:30 a.m. Saturday, July 13, 2019. Final Mass will be held at Church of St. Mary Star of the Sea 6435 S Kilbourn Ave, Chicago, IL 60629 beginning at 10:00 AM, Saturday, July 13, 2019. After the Mass then Interment Resurrection Cemetery (referred to as the “Resurrection Cemetery in Justice on the internet) at 7201 Archer Rd Justice, IL 60458. For more information please contact the funeral home at (708) 839-8999 or https://www.zarzyckimanorchapels.com/ `

***** Our condolences to the family, friends and former colleagues of Kevin Barillas.


As Capital Flows Into The Logistics Industry, Trucking Freight Futures Look For Traction
Nodal Exchange, in a joint effort with DAT and FreightWaves, launched trucking freight futures in March. In this video, FreightWaves Executive Director Addison Armstrong talks about how the logistics industry has abandoned its old school ways and embraced big data, making it ripe for sophisticated hedging instruments. However, Armstrong acknowledges there will be growing pains as the industry needs more education on the benefits of this form of risk management.
Watch the video »

Lead Stories

OCC on the hook for $4bn if member defaults
Alessandro Aimone – Risk.net (SUBSCRIPTION)
The Options Clearing Corporation would have had to fork out $4.02 billion in a single day to cover payments if a single member defaulted in Q1.
The estimated peak same-day payment obligation was 32% larger than that guessed for Q4 2018. The Q1 estimate was the ninth-largest since public disclosure began in Q3 2015.

****SD: It sounded like a lot until I saw that “ninth-largest” part.

EXCLUSIVE-Mexico’s formula to execute annual oil hedge is ready – official
Anthony Esposito, Stefanie Eschenbacher, Devika Krishna Kumar – Reuters
Mexico has finished calibrating the formula used as a basis for its massive oil hedging program, a finance ministry official said on Friday, clearing a major obstacle for the hedge, the world’s largest and most secretive Wall Street oil trade.

****SD: And away we go! For other news regarding sovereign oil hedges, see the piece from the end of June – Egypt Becoming Weighty Player in Oil Derivatives.

Traders Are Dumping Hedges as Currency Volatility Goes AWOL
Anchalee Worrachate and Liz McCormick – Bloomberg (SUBSCRIPTION)
The $5 trillion-a-day market for foreign exchange is a calm place these days. Perhaps a little too calm.
In an era of almost unprecedented low volatility for currencies, there’s increasing evidence traders are taking out less protection against big moves. That risks losses if the market turns against them, and potentially a cascade effect to other asset classes if they’ve made unhedged investments.

****SD: Sounds like trouble. The smart money says all these junior traders who’ve only seen the last 5-10 years of market movement are adding to this mindset.

Option Pricing Models
Talton Capital Management
Some models are wrong in a trivial way. They clearly just don’t agree with real financial markets. For example, an option valuation model that includes the return of the underlying as a pricing input is trivially wrong. This can be deduced from put-call parity. Imagine a stock that has a positive return. Naively, this will raise the value of calls and lower the value of puts. But put-call parity means that if calls increase, so do the value of the puts. Including drift leads to a contradiction. That idea is trivially wrong.

U.S Futures Brokerage Firm R.J. O’Brien to Enter S. Korean Derivatives Market
Business Korea
R.J. O’Brien & Associates LLC, the oldest and largest independent futures brokerage firm in the United States, is pushing into the South Korean derivatives trading market.

Quants Break Records by Chasing Bonds and Ramping Up Leverage
Ksenia Galouchko and Justina Lee – Bloomberg (SUBSCRIPTION)
Fast-money quants have scaled record heights riding the bond rally this year. Now they’re in danger of falling back down to Earth.
Risk-parity funds are off to their best start since at least 2004 after ramping up exposure to government debt and levering up, while trend followers in interest rates just notched the strongest half-year in nearly three decades. Risk-parity funds are off to their best start since at least 2004 after ramping up exposure to government debt and levering up, while trend followers in interest rates just notched the strongest half-year in nearly three decades.

****SD: Risk parity funds doing well and levering up? Sounds like we have another culprit come the next sudden selloff turn in markets.

Exchanges and Clearing

BOX Exchange: Complex Qualified Contingent Cross Orders – POSTPONED
Press Release
BOX Exchange LLC (“BOX” or “the Exchange”) recently distributed IC-2019-16 which detailed the upcoming acceptance of Complex Qualified Contingent Cross Orders and modification to the execution of Complex Customer Cross Orders.

****SD: We spoke to BOX CEO Ed Boyle at OIC this year. Check that out here.

Regulation & Enforcement

Volcker Rule Revamp Coming by Fourth Quarter, Quarles Says
Jesse Hamilton – Bloomberg (SUBSCRIPTION)
Fed regulatory chief expects plan’s release ‘early in fall’; Earlier version draw sharp criticism from Wall Street banks
The Federal Reserve plans to release a fresh revamp of the Volcker Rule by this year’s fourth quarter after Wall Street assailed an earlier proposal as not going far enough to ease burdens on banks and simplify the post-crisis trading limits.

****SD: Will a Volcker revamp entail a change in name? Like how NAFTA morphed into USMCA? Reuters has a story on the rule rewrite here.

Special Report: CFTC advances two proposals amending oversight of non-U.S. clearinghouses
At an open meeting on July 11, the five members of the Commodity Futures Trading Commission voted unanimously to release a proposed rulemaking designed to create a less burdensome regulatory regime for foreign clearinghouses that clear swaps for U.S. customers. The proposal, which now will be published for public comment, would allow clearinghouses in other parts of the world to offer their swap clearing services to institutional investors and other “eligible contract participants” so long as they fall below a certain threshold of importance to the U.S. financial system. They would still be required to register with the CFTC, but the CFTC’s oversight would be limited to customer protection issues.

ESMA Publishes Responses To Its Call For Evidence On Position Limits In Commodity Derivatives
The European Securities and Markets Authority (ESMA) has published the responses received to its Call for evidence on position limits in commodity derivatives.

Giancarlo rules himself out of Bank of England job
James Thursfield – Global Investor Group (SUBSCRIPTION)
CFTC chairman Christopher Giancarlo has killed rumours linking him to the governor job at the Bank of England


Bank e-FX initiative/Best e-derivatives platform of the year: Citi
With an increasingly complex slate of solutions being marketed to clients for connecting to liquidity providers, and the landscape perceived to be diversifying away from single-dealer platforms towards aggregated, independent services, Citi took a view three years ago on how it should fulfil its obligations to clients.

****SD: From the story: “Key to the advancement of Citi’s execution suite over the last 12 months has been an emphasis placed on the reconstruction of its structured forwards offering, which has evolved in partnership with regional private bank partners. Developing the structured forwards options pricer within the options cube involved fundamental changes in both the graphical user interface for clients and internal mechanisms by which the bank generates and publishes prices.”


Turkish Stock Traders Hedge for Losses as S-400 Delivery Starts
Tugce Ozsoy – Bloomberg (SUBSCRIPTION)
As short-term risks are building for Turkish equities with the delivery of a Russian missile defense system that has drawn the threat of U.S. sanctions, option traders are bracing for losses.

The Pitfalls Of Creating Income Via An Options Strategy
Tim McGowen – ShareCafe
Melbourne-based listed investment company Mirrabooka Investments recently announced a drop in earnings “due primarily to a reduced contribution from the Trading and Options Portfolios, which was $1.7 million this year compared with $3.1 million last year.”


Panic Sales Rekindle Debate Over ETF Liquidity in Next Crisis
Rachel Evans and Emily Barrett – Bloomberg (SUBSCRIPTION)
A couple of prominent investment funds are currently living through a portfolio manager’s worst nightmare: So many customers are demanding their money back that withdrawals need to be frozen.
Amit Deshpande, a former longtime risk manager, sees it as a wake-up call. In particular, he’s watching the growing ranks of asset managers who rely on ETFs to act as cash equivalents. He wonders whether the funds can be sold off to pay fleeing clients in times of stress as seamlessly as the stewards of the $4 trillion market would like.

****SD: ETF liquidity in a crisis? That’s the third potential crisis culprit in today’s newsletter.

Long-Short Funds: Long on Complexity, Short on Returns
Conrad De Aenlle – NY Times
If Rube Goldberg had been a portfolio manager, instead of a cartoonist renowned for designing comically complicated machines for accomplishing simple tasks, he might have specialized in long-short equity funds.

Some hedge funds are paying their interns massive salaries
Sarah Butcher – eFinancialCareers
If you’re a student with an interest in finance who wants to make some serious money this summer, it seems you should have been interning at a hedge fund. So says Wall Street Oasis’s updated report on hedge fund intern pay.
While Wall Street banks pay a ‘mere’ $82k max (pro-rated) for a couple of months over the summer, some of the best known hedge funds are paying six figures, and more.

****JB: Now they tell us.

World super rich lost $2 trillion in 2018, and Trump trade war blamed
Jack Derwin and Ruqayyah Moynihan – Business Insider
You might want to spare a thought for the world’s richest people, who managed to lose a huge amount of money last year – $2 trillion to be exact.
The US-China trade war and rising global tensions played no small part in that, according to the French consultancy Capgemini, which publishes the World Wealth Report.

****SD: The Chinese super rich fared particularly poorly.

John Lothian Newsletter

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