OCC Enhances Resilience with Regulatory Approval of Recovery and Wind Down and Associated Recovery Tools
John Davidson, President and COO, OCC
On August 23, OCC, the world’s largest equity derivatives clearing organization, received approval from the U.S. Securities and Exchange Commission of the company’s proposed recovery tools and proposed recovery and orderly wind-down (RWD) plan. These are critical risk management tools designed to enable OCC to enhance its resiliency as a Systemically Important Financial Market Utility (SIFMU) and successfully manage extreme market disruptions in future financial crises
One-Way Volatility Bets Seen as ‘Fool’s Errand’ by 6,000% Winner
Dani Burger and Yakob Peterseil – Bloomberg (SUBSCRIPTION)
Volmageddon blew up short vol strategy, stock calm sinks longs; Goldman bets on aimlessness, neither high- nor low-vol regime
Heads you lose, tails you lose. This year for the first time, trading strategies betting on a jump in equity market volatility and those wagering for calm are both losing. The reason? February’s “volmageddon” blow out, which did enough to sink short-volatility strategies but not enough to protect long-vol trades from the tranquility that came before and after.
****SD: The article mentions that relative value volatility is the “only volatility strategy in Eurekahedge indexes that’s up this year, though barely.” I find two other things notable when looking at Eurekahedge’s index strategy returns map (the image is neart the bottom of the linked page). First, there are no big winners. This year’s return leader, distressed debt (+5.88%), doesn’t look like much when the previous seven years’ return leaders all sported “teenage” percentages. Second, for the first time since 2011, when it was the leader, tail risk is not the worst performer. To the article’s point, the two worst strategies are short vol (-5.17%) AND long vol (-6.13%). But hey, everybody’s favorite former Target manager turned short vol poster boy, Seth Golden, claims to be up big this year (as of the beginning of August). The Globe and Mail republished this story (w/o paywall) here as did Investor’s Business Daily.
Melt-Up on the Mind as U.S. Stock Gains Near Euphoric Levels
Luke Kawa – Bloomberg (SUBSCRIPTION)
Global risks abound but options, positioning point to gains; Rest of world catch-up suggests wider risk appetite growing
U.S. stocks took the stairs during the six-month slog back from February’s market correction. Signs are mounting that investors expect them to ride the elevator even higher.
Bullish hedge fund managers continue to pull oil positions
John Kemp – Reuters
Hedge fund managers continued to liquidate their bullish positions in crude and fuels, amid negative sentiment towards petroleum, before prices rallied sharply in the second half of last week.
Hedge funds and other money managers cut their combined net long position in the six most important petroleum futures and options contracts by another 49 million barrels in the week to Aug. 20.
Italy Bond Hedges Get Dusted Off as Populists Prepare Budget
James Hirai and Todd White – Bloomberg (SUBSCRIPTION)
From selling BTPs to CDS, investors have options to hedge risk; Populist coalition is due to reveal budget plans in September
Three months after the political imbroglio around forming a populist government roiled Italian assets, bond investors are contemplating a fresh hurdle: its first budget, due next month.
The big risk is that the euroskeptic Five Star Movement-League coalition breaks the 3 percent deficit limit set under European Union rules, putting the country on a collision course with the bloc. That’s got traders hunting a variety of strategies, from selling bond futures to buying Euribor options, to guard against the kind of market meltdown seen at the end of May.
Short Bets Against FAANG Stocks Have Surged to $37 Billion
Eric Lam and Matt Turner – Bloomberg (SUBSCRIPTION)
Short positions against the so-called FAANG group of the largest U.S. technology stocks have surged by more than 40 percent in the past year as investors bet against some of the biggest drivers of the global bull market.
Bearish investors have shorted about $37 billion worth of stocks in the group, which comprises Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc., up 42 percent from a year ago. Amazon leads the way with almost $10 billion in short interest, according to data compiled by Bloomberg as of Aug. 28 from financial analytics firm S3 Partners LLC.
Capital and RWA for Tier 1 US Banks – 2Q 2018
Maheen Khan – Clarus FT
Last year we wrote about Capital Ratios and Risk Weighted Assets for Tier 1 US Banks and that blog remains popular to this day. Today I will provide an update using the latest quarterly figures, to see if the trend we observed with US Banks increasing capital and reducing RWA has continued into 2018.
****SD: Credit risk across the big banks covered handily dwarfs market and operational risk combined.
Exchanges and Clearing
MIAX Options – Secondary (B Side) Retransmission Services For ToM, cToM, MOR And AIS Feeds For Clouds 22
Please be advised the MIAX Options Exchange Secondary (B Side) Retransmission Services of the ToM, cToM, MOR and AIS Feeds for clouds 22 through 24 will be unavailable for use today.
Regulation & Enforcement
Senate Confirms CFTC Nominees, Filling All Agency Seats
Dave Michaels – WSJ (SUBSCRIPTION)
The Senate on Tuesday confirmed two nominees to join the Commodity Futures Trading Commission, bringing the main U.S. derivatives regulator to full strength for the first time since 2014.
The Senate voted to add Dawn Stump as a Republican member and Dan M. Berkovitz to take a Democratic seat on the commission. Ms. Stump is a former Senate aide who has recently worked as a lobbyist for the Futures Industry Association. Mr. Berkovitz, a partner at law firm Wilmer Cutler Pickering Hale and Dorr LLP, was the CFTC’s general counsel during the Obama administration.
****SD: Bloomberg here.
Fed plan too weak to get banks to clear more derivatives, asset managers say
MLex Market Insight (SUBSCRIPTION)
Asset management groups, echoing the derivatives industry, contend that a US Federal Reserve proposal to reduce banks’ capital requirements for loans won’t do enough to encourage banks to clear more derivatives.
Volatility harvesting – the great diversifier
Todd Hawthorne – Pensions & Investments
Institutional investors generally cite three overriding objectives for fixed-income allocations: stability, yield and diversification. However, the “ballast” value of bonds can begin to deteriorate in certain economic environments, a circumstance that can also dull the diversifying impact of fixed-income allocations as normally inverse correlations begin to align.
Why a trend divergence in the S&P 500 and the VIX may spell trouble for stocks
Sue Chang – MarketWatch
The S&P 500 and the Cboe volatility index — the so-called fear index — tend to trend in opposite directions since investors have less to worry about when the stock market rallies, and vice versa. However, in recent days, this well-choreographed relationship has been thrown off balance, with the VIX hovering significantly above its 52-week lows even as the large-cap index continues to carve out new records.
U.K. and EU Said to Drop October Deadline for Brexit Deal
Tim Ross, Ian Wishart and Birgit Jennen – Bloomberg (SUBSCRIPTION)
Both sides see mid-November as new end date for divorce talks; Theresa May’s spokesman says pace of negotiations accelerating
As Trump Slams China on Yuan, FX Market Trades Record Amounts
Katherine Greifeld and Tian Chen – Bloomberg (SUBSCRIPTION)
Average daily volume through CBOE quadruples to $1.7 billion; PBOC’s latest move ‘creates more tradeable market’ – Bechtel
Turnover in the offshore yuan has reached unprecedented levels, spurred by U.S. President Donald Trump’s broadsides against Chinese currency practices and the protracted trade dispute between the world’s two biggest economies.
In Elon Musk’s World, Brakes Are for Cars, Not C.E.O.s
David Gelles – NY Times
Elon Musk was up early on Saturday. He departed Los Angeles, where he runs SpaceX, his private rocket venture, and flew north in his white Gulfstream jet. Stopping in Silicon Valley, he picked up two engineers from Tesla, his electric-car company. They flew on to Reno, Nev., where they spent the day at Tesla’s battery plant, the Gigafactory.
It might have been just another workday for Mr. Musk – a multistate jaunt to personally fix a drive-unit production line. But this was no ordinary morning. He was a brief night’s sleep removed from one of his most consequential decisions: scrapping his plan to take Tesla private.