Observations & Insight

A Basel netting issue: Pushing for less burdensome capital requirements in the options market
Spencer Doar – JLN

The unintended consequences of financial regulation have been seeping into the markets since the first rule was made in the wake of the financial crisis.

One prime example is the leverage ratio, which determines the required capital of general clearing members. The actual calculation of the capital requirement within the Basel III leverage ratio framework is a particular sticking point for the OCC. Right now, the Current Exposure Method (CEM) is used in the calculation, whereas the OCC and a wide swath of industry participants believe that the Standardised Approach for Counterparty Credit Risk (SA-CCR) would better encapsulate the nature of listed options markets.

From the OCC’s perspective, maintaining CEM as the methodology in the calculation will lead to the weakening of liquidity in the options market.

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Bits & Pieces
By John J. Lothian

Phupinder Gill loves the CME Group and its people. I know it and this will not change. In fact, he texted me on Friday to tell me that he would become the staff’s greatest fan when he retires at the end of the year. He wants the good people of the CME Group to “continue their amazing journey that I was proud to be part of and now am their greatest fan.”

He also told me that the decision to retire was his and that it had to do a lot with the life/work balance that he has been preaching to his CME employees. He also said the company is in good hands and will “continue as Terry and I had envisioned.”

When I visited Gill several weeks ago in Elmhurst in his home to ask for some advice about running my company, he shared with me a couple of books on mindfulness. It is a subject I had been exploring myself, and his referral only added gravitas to the subject.

I don’t know how all of this went down. Maybe it will come out at the bar down in Naples at the GFLC this week. But I do know that Gill denied there was a big confrontation and emphasized this was his decision.

He does want to spend some more time focusing on his son. He does want to spend more time just breathing and becoming more mindful with all the great blessings he has received.

Gill might not be the CEO after the end of the year, but I know lots of CME employees will have a friend and former colleague cheering them on and being there in a new way for them.

Lead Stories

Sailing the Chaos of a Trump Rally
Steven M. Sears – Barron’s
Despite superficial appearances, the stock and options markets are essentially a sea of chaos following Donald J. Trump’s surprise election as the next U.S. president. Stocks, and some sectors, are surging and sinking with a ferocity that suggests no one is sure what will happen when Trump takes the oath of office on Jan. 20. The sharp stock moves are making it hard to determine appropriate implied volatility levels in the options market. This creates opportunities. “The problem is the market is taking Trump at his word, and he says everything and has never governed,” a senior trader at a major market-making firm says.

Why A Trump Presidency is Fed Positive
Bob Lang – CBOE Options Hub
Many were scared of the reaction to a Donald Trump presidency, even the Federal Reserve open market committee. How do we know that? They telegraphed the uncertainty in their statement following the November 2 meeting. Well, not in so many words but they certainly telegraphed their intention to hold off in November raising rates, fearing some sort of backlash and financial calamity could ensue post election. This was a similar stance as before the Brexit vote, and while there was a decent amount of volatility then, following the vote the Fed was able to embark on their mission of data dependency and monitoring the economy and inflation.

Stock market struggles to extend last week’s postelection rally
U.S. stocks edged lower Monday as buying enthusiasm seemed to wane, following last week’s postelection sharp advance, and as investors awaited more clarity on the policy proposals of President-elect Donald Trump’s coming administration. Major indexes surged last week, with the Dow recording its biggest weekly gain since 2011 and hitting multiple records. The S&P 500 saw its largest weekly advance since 2014.

The Case For A Trump Bear Market
Seeking Alpha
This is a counterbalance to an article we wrote on November 10, 2016 called “The Case for a Trump Bull Market”. We encourage readers to look at both arguments.
It was just a couple of days ago that we wrote our case for a Trump bull market. We have been bearish on the market for the last year, and continue to believe that we will see a coming correction in the days ahead.

Brexit campaign leader Farage meets with Trump, says ‘don’t underestimate this guy’
Matthew J. Belvedere – CNBC
Brexit campaign leader Nigel Farage, a supporter of Donald Trump, told CNBC on Monday he found the U.S. president-elect to be reflective on the task ahead and concerned about how to create jobs and wealth. “Don’t underestimate this guy,” Farage said on “Squawk Box.” “He’s made a big, big success of his business career. And he intends to be a successful president, and I think he may well be.”

Trump critic Warren Buffett says stocks will continue to rise
William Watts – MarketWatch
Billionaire investor Warren Buffett was a sharp critic of Donald Trump during the presidential campaign, but said in an interview broadcast by CNN Friday that he expects the stock market to continue rising. “The stock market will be higher 10, 20 and 30 years from now and it would have been with Hillary [Clinton] and it will be with Trump,” Buffett said. Suggestions by market pundits that stocks would plunge after a Trump victory were “silly,” he said.


CME Said to Consider Dublin for Clearing Amid Brexit Fallout
John Detrixhe – Bloomberg
CME Group Inc. is examining options in Dublin to ensure its clearinghouse keeps access to European Union customers after the U.K. leaves the bloc, according to people familiar with the discussions. Managers at the Chicago-based derivatives exchange are weighing stronger ties to Ireland to ensure its London clearing operations aren’t disrupted, but no decisions have been made, said the people, who asked not to be named because the conversations were private. CME’s options in Dublin could include seeking out regulatory licensing or opening offices. A spokesman for CME declined to comment.

Regulation & Enforcement

Spoofing: What were the exchanges doing?
Neil Crammond, evoi – TABB Forum
After almost 5 years, the ‘flash crash trader’ Navinder Sarao has pleaded guilty to manipulating and abusing our markets thousands of times. But the exchanges claimed such abuses were rare.

Trump May Tap Republican Commissioner to Lead Swaps Regulator
Benjamin Bain and Robert Schmidt – Bloomberg
J. Christopher Giancarlo, a Republican member of the Commodity Futures Trading Commission who has close ties to the derivatives industry, is a leading candidate to head the regulator in the Trump administration, according to people familiar with the matter. If appointed, Giancarlo, who has been an outspoken critic of some of the commission’s regulatory efforts, would be able to set the agency’s agenda. He most recently voted against a proposal that would give the regulator easier access to high frequency traders’ secret algorithms.

Regulators Warn Investors of Binary Options Risks
FINRA via Nasdaq
Trading binary options can be an extremely risky proposition. Unlike other types of options contracts, binary options are all-or-nothing propositions. When a binary option expires, it either makes a pre-specified amount of money, or nothing at all, in which case the investor losses his or her entire investment. Trading binary options is made even riskier by fraudulent schemes, many of which originate outside the United States.

European Binary Options Association Calls for the End of Bonuses
Avi Mizrahi – Finance Magnates
Following our exclusive report that Banc De Binary is preparing to eliminate all bonus promotions, we can now say this is going to be the new standard for the industry.
The self-regulatory organization of the binary trading industry EUBOA (European Brokers Association), held its third board meeting last week and continued to develop its memberships’ code of conduct as well as agreeing to some fundamental guidelines. One of the key focuses was on the Implementation of recent ESMA (European Securities Market Association) recommendations in relation to trading benefits (bonuses) and withdrawals.


AcadiaSoft adds Quantile swaps optimisation tool
Helen Bartholomew – Reuters
Derivatives risk optimisation firm Quantile Technologies has partnered with industry margin hub AcadiaSoft to launch a counterparty risk-reduction service that aims to lower costs for participants across the US$544trn over-the-counter derivatives market.
The service aims to reduce counterparty risk between market participants – a contributer of systemic risk – by identifying trades and rebalancing strategies to optimise portfolios. The analysis is based on data that are already being inputted into the AcadiaSoft platform for new margin requirements on uncleared trades, including swaps, options and undeliverable forwards.


Volatility Update: Keeping the safety belt on
Georgio Stoev – Tradingfloor.com
Investors were betting heavily in US equities following the US elections. Sectors largely overlooked before are now bubbling as investors are rushing into buying stock in financials, healthcare, industrials in anticipation of increased new regulations and policies.

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