TLT Becomes Lightning Rod for Bond-Tantrum Trades; Feds kill big banks’ hopes of escaping Volcker rule

Jul 10, 2019

Observations & Insight

Equivalence and Other Brexit Concerns
In April, the deadline for Brexit was extended to October 31, 2019. Unfortunately, there is still a lack of clarity on a number of key regulatory fronts. In this video, ION Markets Senior Regulatory Adviser Christian Voigt lays out the key concerns for financial markets.
Watch the video »

****SD: Speaking of Brexit, see Reuters’ Bad news everywhere: Sterling held near 2-yr lows.


Fed Chair Powell Signals Openness to Rate Cut and Stock Market Rallies
NY Times
Federal Reserve Chair Jerome H. Powell signaled that an interest-rate cut may come soon, sending stocks to a new high as the benchmark S&P 500 stock index traded above 3,000 for the first time.

****SD: Where are the people on the floor with the “3,000” hats? Or is that only a Dow thing?

Lead Stories

A $14 Billion ETF Becomes Lightning Rod for Bond-Tantrum Trades
Yakob Peterseil – Bloomberg (SUBSCRIPTION)
BlackRock Inc.’s $14 billion Treasury ETF is fast becoming a weapon of choice for traders placing boom-to-doom bets on the fate of the world’s largest bond market.
Outstanding options riding the iShares 20+ Year Treasury Bond fund, the world’s most heavily traded government debt product, are near the highest level this year. Bank of America Corp. and Macro Risk Advisors reckon bearish contracts on the long-dated ETF, or TLT, can buffer multi-asset investors from a bond tantrum as Wall Street frets the one-sided bull market.

Federal agencies kill big banks’ hopes of escaping Volcker rule
Brian Cheung – Yahoo Finance
Five regulatory agencies have tightened the standards for exemption from a key post-crisis regulation known as the Volcker rule, ending larger banks’ hopes that they may have been able to escape compliance originally meant for “community” banks.
Despite comments from trade groups and lawmakers that large banks should get a break from the regulation, the agencies said Tuesday that they were “not persuaded” by the argument that double negatives in the law extended to banks as large as U.S. Bancorp (USB) and PNC Financial Services (PNC).

Derivatives assets surge at eurozone hedge funds
Louie Woodall – (SUBSCRIPTION)
Eurozone hedge funds saw derivatives asset holdings spike by almost 28% to EUR91.9 billion ($103 billion) over the three months to end-March. It’s the largest amount they have reported since August 2016, when derivatives asset values hit EUR95.6 billion.

CEO CHAT: David Hait, OptionMetrics
John D’Antona Jr. – Traders Magazine Online News
While very true and in practice in the equity markets, data is also helping options traders make sense of the derivative market. So much so, that OptionsMetrics Chief Executive Officer David Hait is willing to stake his reputation on it. Hait took some time out to chat with Traders Magazine’s editor John D’Antona Jr. on the 20th anniversary of his firm and discuss his sojourn from consultant to analyst to founder.

Suspect share trades preceded one in 10 UK takeovers last year; Activity that can indicate insider trading falls to lowest level since at least 2006
Caroline Binham – Financial Times (SUBSCRIPTION)
Suspicious trades that can indicate insider trading occurred before 10 percent of takeover announcements in the UK in 2018, the financial regulator has revealed.

****SD: In 2017 suspicious trading preceded 22 percent of takeover announcements!

Traders Are Certain Fed Will Cut in July, But Unsure What’s Next
Liz McCormick – Bloomberg (SUBSCRIPTION)
Lurking beyond traders’ apparently unwavering confidence that the Federal Reserve will cut interest rates this month is a more nebulous outlook about what the central bank will do after that.

Fed dovish pivot may threaten Asian life insurers swimming ‘naked’ in U.S. corporate bond markets
Sunny Oh – MarketWatch
Warren Buffett said “only when the tide goes out do you discover who’s been swimming naked”.
If the Federal Reserve’s recent move to possibly lower interest rates results in weakness in the U.S. dollar, yield-hungry life insurance companies in Japan and Taiwan that bought dollar-denominated bonds without hedging for currency volatility might want to keep that investing maxim in mind.

****SD: Also from MarketWatch – Fed’s Powell tells Congress he’d refuse to leave if Trump tries to fire him.

Exchanges and Clearing

CCP margin buffers too big, research suggests
Alexander Campbell – (SUBSCRIPTION)
Regulatory minimums that underpin the way clearing houses set initial margin requirements – designed to prevent the sudden ramping up of margins when prices collapse, making a crisis worse – may be needlessly conservative, constraining liquidity by tying up collateral and potentially discouraging market participants from clearing, two senior CCP risk experts have argued.

****SD: Here’s a link to the paper’s fairly extensive abstract and recap. If you have an SSRN account (it’s free to sign up) you can read the full paper here.

LBMA, CME See Unprecedented Record Trading Volume In Gold Market In June
Neils Christensen – Kitco News
…the LBMA isn’t the only organization that is reporting record trade data. Last week the CME said that the daily volume for June gold options increased to 105,000 contracts, up 134% compared to 2018. The exchange’s weekly gold options also saw record daily average volume of 9,500 contracts, up 450% from last year.

****SD: Not all metal trading was created equal though – see Reuters’ Trade war fatigue saps global base metals activity.


Millward joins Galinov’s new startup, 24 Exchange
Julia Bahr – FXWeek (SUBSCRIPTION)
Earlier, he was head of FX product strategy at Bats Global Markets for more than a year. Millward’s career began in FX sales at Fenics in 2003. A year later, he joined GFI Group and spent almost 12 years working there.

Morgan Stanley parts ways with European electronic trading co-head; There have been a number of senior changes within investment banks’ electronic trading businesses over the last 18 months
Samuel Agini – Financial News (SUBSCRIPTION)
One of the co-heads of Morgan Stanley’s European electronic trading arm has left, following a number of cuts within its London equities business earlier this year. Rupert Fennelly has left the bank, according to people familiar with the matter. He had been co-head of Morgan Stanley Electronic Trading (MSET) alongside Kevin Twitchen since 2014. MSET spans cash equities, options and futures, and offers services including algorithmic trading.

Regulation & Enforcement

Transitioning to alternative rates – The countdown is on
The industry has just over two years to begin trading a range of financial products – including loans, floating-rate notes and derivatives products – benchmarked to alternative risk-free rates following the transition away from Libor. Eurex explores how, by being proactive at the earliest opportunity, banks can best manage the burden of preparation ahead of the impending 2021 deadline

****SD: From the article: “The market is focused on getting an ecosystem which is set up and able to handle the vanilla parts of the business, which underpin the banking system,” says [Lee Bartholomew, head of fixed income derivatives product research and development at Eurex]. “That includes funding, lending, deposits, and so forth, and then the focus will shift as you build liquidity in those markets, and you have issuance, and you have loans based on the back of them, and then you can then look at the derivatives contracts, and then the more non-linear products, like caps, floors and swaptions.” For more on the demise of Libor, see the Financial Times’ Why investors must face up to Libor’s demise and Bloomberg’s The Short Road From Libor’s Death to ‘Armageddon.’


Itiviti Continues To Deliver On Commitment To Strengthen Support And Experience For Migrating SSEOMS Clients
Itiviti, a leading technology, and service provider to financial institutions worldwide, today announced the appointment of Greg Cooper as AVP, Sales Manager, EMEA. Greg will be based in the Itiviti London office and will be responsible for new business sales within EMEA as well as ensuring the smooth transition of migrating SSEOMS clients.


New ETF Offers Options Collar Strategy
Heather Bell –
Aptus Capital Advisors launched its fourth ETF today, an actively managed options-based strategy designed to provide income and downside protection. The Aptus Collared Income Opportunity ETF (ACIO) uses a collar strategy for each of its equity holdings as its primary strategy.

****SD: Recap of a different fund via Seeking Alpha – EXG: When A Covered Call Strategy Isn’t Working.

The Pinnacle
RCM Alternatives Blog
The annual Pinnacle awards show put on by the CME and BarclayHedge (now Backstop solutions) does as good a job as any in promoting the industry and awarding those who have stood out in the recent past for their good performance. Which is why we have been proud to sponsor the event for many years.

****SD: This piece contains a chart of the prior year’s managed futures performance, the annual honoree, and the comedian – I don’t see much of a correlation.

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