Hultgren Questions Powell On Options Market; Pound Volatility; VIX Futures Settlement

Jul 18, 2018

Hultgren Questions Powell On Options Market; Pound Volatility; VIX Futures Settlement

Jul 18, 2018

Spencer Doar

Spencer Doar

Associate Editor

Observations & Insight

Timely Capital Relief Comments from Fed Chair Powell or: The Options Market Stability Act Was On TV!
Spencer Doar – JLN

During Federal Reserve Chairman Jerome Powell’s testimony on Capitol Hill, Rep. Randy Hultgren asked Chairman Powell about targeted capital relief for bank-affiliated clearers of options liquidity providers.

Recall that Rep. Hultgren authored legislation – the Options Market Stability Act – that just passed the House. That legislation seeks to provide relief for clearers by directing banking regulators “to consider a number of items including the availability of liquidity, the economic value of delta weighting and netting of positions, safety and soundness of financial institutions and overall financial stability. The legislation also requires the Federal Reserve to submit a report to Congress assessing the impact of their final rule.” (Emphasis added.)

Action from the Fed could take the form of adopting SA-CCR, which accounts for offsetting positions, as a replacement for the Current Exposure Methodology (CEM), which is currently used to determine capital requirements of clearers. But it could take some other form, too.

In response to the question from Rep. Hultgren about capital relief, Chairman Powell said, “We think SA-CCR is good policy. We’re working on a rule on it now. I hope it can get out before 8 or 12 months. I’ll go back to the office and check in. It’s a priority – I know there’s actual drafting going on and negotiation between agencies. So, it’ll happen.”

This is important because it is uncertain whether Rep. Hultgren’s legislation would make it through the Senate despite its widespread bipartisan support in the House (see our top Lead story today). But legislation is not required for the Fed to alter these rules – it simply forces the Fed to act.

Chairman Powell’s comments today show that the Fed will act to revamp the bad math of CEM regardless of the legislation, removing reliance on the legislature to prompt necessary changes to the current burdensome capital regime.


Also, VIX Term Structure
Spencer Doar – JLN

VIX futures settled at their lowest level in six months – 12.12

That might seem like a return to the abnormalcy of 2017, but the curve looks more normal than it did in the recent past.

Below is a chart of the VIX curve at the time of this writing (in black) plotted against the curve on June 27 (in blue).

(Click for larger image)

Lead Stories

After Senate reg relief bill, House package would be cherry on top
Neil Haggerty – National Mortgage News
Following enactment of the Senate’s regulatory relief bill in May, Congress is attempting to sprinkle in a handful more provisions to ease the industry’s burden.

****SD: It’s not too often we get to include a piece from National Mortgage News, but one part of the aforementioned “cherry” is options market participants’ favorite piece of legislation, the Options Market Stability Act. Fingers crossed.

Subdued pound volatility contrasts with febrile Brexit politics
Roger Blitz – Financial Times (SUBSCRIPTION)
Link between pound’s value and protection against swings has weakened since Brexit
The febrile atmosphere in Westminster over Brexit has yet to be felt by investors.
Sterling volatility has been kept surprisingly in check as the UK government stumbles in its attempt to leave the EU, and Leavers and Remainers in parliament manoeuvre to frustrate progress.

VIX Futures Close at Lowest Level in Six Months as Fear Vanishes
Luke Kawa – Bloomberg
After a storm comes the calm…eventually.
Front-month VIX futures closed at 12.12 on Tuesday, their lowest finish since before the record explosion in volatility in February, which roiled markets and wiped out several exchange-traded products that let investors bet on market tranquility.

****SD: Coverage of the last few months from Benzinga – An Overlooked Loser In The Trade War: The VIX

Markets wary of trade war risks, but complacent too
Jamie McGeever – Reuters
A global trade war would hit financial markets hard, potentially wiping trillions of dollars off the value of stocks and other assets. So it’s a wonder investors appear relaxed at the prospect which, ominously, is growing more likely by the day.
There’s a surprising correlation developing between the newsflow and markets: the more tariffs and counter-measures are threatened and applied, the higher major stock markets go, and the lower volatility goes.

****SD: Warnings from all sides. From Reuters: Citadel’s Griffin warns on dangers of prolonged trade war and from Bloomberg: Bernanke, Geithner, Paulson Voice Some Concern About Next Crisis. Obviously the VIX futures story below points to the complacency angle of the above column.

A Hidden FANG Trade Is Rising Thanks to These Exotic Bonds
Yakob Peterseil and Luke Kawa – Bloomberg (SUBSCRIPTION)
Banks have sold $59.3 million of complex notes this year; Products hedge declines, investors need to understand ‘risks’
For those fretting the end of days for tech stocks on the heels of Netflix Inc.’s recent plunge, Wall Street might have just the product for you.
Meet FANG, in structured-note form.

****SD: This is one of those less-than-typical options stories.

Exchanges and Clearing

Indonesia Exchange Plots Ways to Lure Investors to Combat China
Fathiya Dahrul, Viriya Singgih and Harry Suhartono – Bloomberg (SUBSCRIPTION)
Bourse is looking at ETFs, derivatives to keep equities appeal Chinese stocks were recently added to MSCI’s global benchmarks
The Indonesia Stock Exchange plans to increase its offerings as it tries to keep its equities market relevant for global investors in the wake of China’s addition to a key global benchmark.

****JB: Among other things they want to introduce single stock options.

Round-up: our Equity Index segment in June
Eurex Exchange
In June, Eurex finalized its work on EURO STOXX 50 options with month-end expirations.
We launched the new products on 9 July. They are another part of our buy-side initiative as they meet the needs of insurers and other market participants that offer pension schemes tracking an index with monthly calculation dates.
EURO STOXX 50 month-end expiry index options have been listed in response to requests from the market to allow the transition from OTC into an exchange cleared environment.

Intercontinental Exchange Finalizes Acquisition of Chicago Stock Exchange
Intercontinental Exchange

****SD: Curious to see what ICE will do with the CHX medallion…


SIP Operating Committees Welcome Three New Advisory Committee Members
The Securities Information Processors’ (SIPs’) Operating Committees today announced the addition of three new members to the Advisory Committee. They are: Chris Nielsen, Managing Director, Charles Schwab & Co., Inc.; W. Todd Watkins, Director, E*TRADE Financial Corporation; Matt Billings, Managing Director, TD Ameritrade

****SD: Dash’s Peter Maragos is one I can recall saying that increased investment in the SIP is long overdue.

Regulation & Enforcement

Physical Settlement of F&O Trades Not Covered By Existing Laws – NSE Stock Brokers
The Association of National Exchanges Members of India (ANMI) has opposed move by National Stock Exchange (following a decision by market regulator in April) to commence physical delivery in a few scrips in the futures & options (F&O) segment and levy of securities transaction tax (STT) without absolute clarity from the government. ANMI is a pan India body comprising trading members of NSE, BSE and other Exchanges with national presence.


FX Traders Pivot to Tactical Bets as Old-School Strategies Flop
Lananh Nguyen – Bloomberg (SUBSCRIPTION)
OppenheimerFunds cuts holding times for some currency wagers; Questions on growth, trade undermine momentum, carry bets
Currency traders are switching up their playbooks as some of the most time-tested strategies are fizzling in the $5.1-trillion-a-day market.

Yield Curve Anxiety
David Blitzer – S&P Dow Jones Indices
The slope of the yield curve is a good recession predictor. When the curve is inverted – when the yield on three month T-bills is greater than the yield on the ten year T-Note – a recession is imminent. Similar signals can be seen if the T-bill is replaced by a two- or three-year T-Note or the Fed funds rate. The same result is found if one uses 20- or 30-year treasuries instead of the ten-year, although there is less data available for the longer maturities.


Goldman Takes More Risk in Commodities as Earnings Recover
Jack Farchy – Bloomberg (SUBSCRIPTION)
Commodities have been emblematic of bank’s trading struggle; Business recovering from worst performance since IPO in 1999
Goldman Sachs Group Inc. reported slightly higher risk-taking in commodities and signaled a recovery for the business that last year suffered its worst performance since the bank went public in 1999.

Low Stock Trading Volumes Lull Markets
U.S. stock-trading volumes have tumbled this month, despite escalating trade tensions with China, a cooling global growth outlook and fears about the impact of rising interest rates.

Russian warship ‘carrying GBP100 billion in gold’ discovered off South Korea
Julian Ryall – The Telegraph
A South Korean salvage team has discovered the wreck of a Russian warship that was sunk in a naval battle 113 years ago and is believed to still contain a trove of gold bullion and coins worth 150 trillion won, or GBP100 billion.

****SD: Clickbait of the day. Btw, I think this was the plot to a Clive Cussler book?

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