Traders Ramp Up Bets on a Hawkish Fed Surprise at Jackson Hole; Fed Stability Report Comes as Close as It Can to Saying ‘Bubble’

May 7, 2021

$40,951/$300,000 (13.7%)
Brian Duff

Lead Stories

Traders Ramp Up Bets on a Hawkish Fed Surprise at Jackson Hole
Stephen Spratt and Edward Bolingbroke – Bloomberg
A large option bet on quicker rate-hikes by the Federal Reserve got bigger this week, even as officials pushed back against hawkish expectations. The wager — carrying a notional value of $40 billion — is focused on a possible surprise at the annual August symposium in Jackson Hole, which has been used in the past by central bankers to signal changes in monetary policy. The positions are now the third-biggest of any Eurodollar options. As it stands, Eurodollar futures — which are priced off three-month Libor — imply a bit less than five 25 basis point rate increases by September 2024. This option play, focused on contracts expiring the month after Jackson Hole, is looking for traders to add another two Fed hikes to those expectations.

Fed Stability Report Comes as Close as It Can to Saying ‘Bubble’
Brian Chappatta – Bloomberg
The Federal Reserve can’t say “bubble.”
But if it could, it quite possibly would have done so in its semiannual financial stability report released Thursday afternoon, which, in what I can only assume is a first, used the phrase “meme stocks” not once, not twice but three times. The central bank said that it views valuations for some assets as “elevated relative to historical norms even when using measures that account for Treasury yields. In this setting, asset prices may be vulnerable to significant declines should risk appetite fall.”

Investors Prepare Taper Tantrum Plan as Fed Demurs On Timing
Emily Barrett – Bloomberg
As the pullback in Federal Reserve monetary support draws inexorably closer, investors are striving to taper-proof their portfolios with 2013’s volatility still fresh in their minds.
Eight years ago this month, global yields jumped and risky assets fell on a hint from then-Fed Chairman Ben Bernanke that the central bank might start trimming its crisis-era bond program. Wary of a repeat volatility spike some fund managers are turning to lower-duration high-yield debt for shelter, while others see a tantrum-less taper and are betting on emerging market assets to prevail.

Fed Warns of Peril for Asset Prices as Investors Gorge on Risk
Craig Torres and Rich Miller – Bloomberg
A rising appetite for risk across a variety of asset markets is stretching valuations and creating vulnerabilities in the U.S. financial system, the Federal Reserve said in its semi-annual financial stability report.
“Vulnerabilities associated with elevated risk appetite are rising,” Fed Governor Lael Brainard, the head of the Board’s financial stability committee, said in a statement accompanying the report released Thursday. “The combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event.”

Talent War: Volatility Traders Hired From Wall Street Investment Banks
Alex Morrell – Business Insider
Equity derivatives traders have become one of Wall Street’s hottest commodities.
Following record trading hauls in 2020 — thanks in part to market shocks from the pandemic that amped up volatility throughout the year — derivatives traders at top investment banks have seen their market value soar, and many have seized the moment to chase new opportunities.

Big Airlines Pull Back From Oil Hedging After Losing Billions
Alex Longley and Siddharth Vikram Philip – Bloomberg
Some of the world’s biggest airlines are shrinking their mammoth fuel-hedging programs after losing billions of dollars in derivatives markets last year.
British Airways parent IAG SA said it will cut its year-ahead fuel hedging to about 60% of its requirements. The company was about 90% hedged for the comparable period when the pandemic began. Similarly, Deutsche Lutfthansa AG will cut its hedging volumes by about 20 percentage points.

Exchanges and Clearing

April 2021 monthly figures at Eurex
Building on an already very strong start to the year in clearing, average daily cleared volumes (ADV) at Eurex grew 78 percent, from 94 billion in April 2020 to 167 billion EUR in April 2021. Looking just at Interest Rate Swaps, ADV grew from 16 billion EUR last year to 25 billion this April, a gain of 54 percent. Overall notional outstanding volumes at Eurex rose year-on-year by nearly a third in April – up from 17,943 billion to 23,034 billion EUR. Derivatives trading volumes showed a mixed picture in April, with the overall number of traded contracts little changed compared to April 2020 – a drop of 1 percent from 121.4 million to 119.7 million. However, there were strong rises in volumes across several areas. The number of traded European interest rate derivatives contracts grew from 29.6 million in April 2020 to 40.7 million in April this year – a rise of 37 percent. For European equity derivatives, traded contracts grew by 31 percent from 21.2 million to 27.8 million.

The Case for Stability in Euro Clearing
Over the past year, the coronavirus pandemic and Brexit have presented derivatives markets with their greatest test since the financial crisis. While the market has proved its resilience, the prospect of a forced relocation of derivatives clearing from the UK to the EU poses a further threat of disruption and fragmentation…

Regulation & Enforcement

SEC chief warns of growing monopoly power among market makers, retail brokers at GameStop hearing
Chris Matthews – MarketWatch
Securities and Exchange Commission Chairman Gary Gensler on Thursday warned lawmakers that growing concentration in the securities wholesaling and brokerage industries could lead to market “fragility,” and increased costs for retail and institutional investors.
“At the heart of well-functioning markets and the mission of the SEC of fair, orderly and efficient markets is promoting competition in markets,” Gensler said during a hearing before the House Financial Services Committee. “It can be done through transparency, but it’s also looking at our rule set to make sure that our rule set inspires more competition rather than concentration.”

SEC to Explore Rules for Apps That ‘Gamify’ Trading, New Chairman Says
Dave Michaels and Alexander Osipovich – WSJ
The new Securities and Exchange Commission chairman told lawmakers Thursday that regulators were scrutinizing the marriage of social media and online trading that caused gyrations in shares of GameStop Corp. this year.
SEC Chairman Gary Gensler said Wall Street’s top regulator was studying whether to impose new restrictions on brokerage apps that use technology to nudge people to trade more stocks and other securities.


SGX RegCo leverages RegTech for oversight of listed issuers
Singapore Exchange Regulation (SGX RegCo) is introducing the use of artificial intelligence and other RegTech solutions to enhance its oversight of listed issuers. The solutions will help automate the extraction of data that can then be used to compute certain indicators of financial risks. The indicators are based on SGX RegCo’s observations of indicative signs of possible financial distress or irregularities in listed companies. These include, among others, the existence of long outstanding trade receivables; significant asset write-offs; low cash coverage ratio and negative working capital.


Rising Star Shows Me the Risks and Rewards of the Broken Wing Butterfly | Rolling Trades Series
Vonetta Logan – tastytrade
I once saw a bumper sticker that read, “Bad decisions make great stories.” It’s true! Life’s too short to sit behind a desk. So a fun fact about me…I love risk. By risk I mean heart pounding, holy crap I barely escaped the jaws of death, and I probably need a new pair of shorts risk. Skydiving? Done it twice. White water rafting? The bigger class rapids the better. Snowboarding? Black diamonds only, son.


All About Options (With) Expert Sheldon Natenberg
Join the Cboe Options Institute on Wednesday, May 12, to learn from one of the industry’s most renowned option trading educators. This webinar will interest traders of all ages and experience levels, but if you are new to options trading you really won’t want to miss it.
Wednesday, May 12, 2021
12:00 p.m. ET

Fundamentals of Futures & Options (also applicable to Series 3 Exam)
For more than 30 years, IFM has consistently provided learners with a solid foundation and understanding of futures and options markets and trading including terminology, risk management, pricing, and basic trade strategies. This instructor-led virtual course includes lectures from an engaging instructor with real-world expertise and supported by class discussion, practice exercises and educational materials. The course fee includes two must-read industry books, “Futures and Options” and the “Guide to U.S. Futures Regulation.”
Dates: May 10, 2021 through May 14, 2021, 12:00 p.m. to 2:00 p.m. ET.
Location: Virtual Live. 2-hour sessions over 5 days.
Early-bird $495
Fee $595
Instructor: Marti Tirinnanzi
Class size registration is limited to approximately 20 participants to promote student participation and interaction.

The Covered Call Options Strategy
Date: Wednesday, May 12, 2021
Time: 3:30 p.m. CT
Duration: 1 hour
Mark Benzaquen – Principal, Investor Education – OCC
For options investors, the covered call is one of the core strategies for income generation, but there are many details to consider before opening a position. On May 12, join The Options Industry Council’s Mark Benzaquen, a former pit broker who now focuses on options education, for a detailed overview of the covered call.


Anti-money laundering considerations for security and commodity derivatives
Part of the L&C webinar series
May 13, 2021 • 10:00 a.m. – 11:00 a.m. ET
In 2018, the CFTC Division of Enforcement established a Bank Secrecy Act task force dedicated to investigating and enforcing AML regulations. In October 2019, the CFTC, the SEC and FINCEN issued a joint statement highlighting the importance of AML compliance in matters involving securities, commodities, derivatives and digital assets. Since then the CFTC, SEC, FINCEN and DOJ have initiated numerous investigations of alleged AML deficiencies, and pursued civil and criminal actions enforcing AML compliance. In this webinar, we will discuss recent AML enforcement investigations and actions, cooperation among the various U.S. and foreign agencies, best practices and compliance considerations for security- and commodity-based instruments and digital assets, and risk mitigation measures.

Clearing 101: Exchanges, Clearinghouses and CCPs
Dates: Sep. 15, 2021 12:00 p.m. – Sep. 16, 2021 1:30 p.m. ET.
Location Virtual Live. Two 90-sessions over 2 days.
Early-bird $199
Fee $225
Instructor: Marti Tirinnanzi
Registration is limited to approximately 20 participants to promote student participation and interaction.
Join us for a short program (90 minutes each day for 2 days) that explains the multilateral systems that provide the infrastructure for transferring, clearing and settling payments, derivatives and other financial transactions among financial institutions and end users. Following Dodd Frank, clearinghouses became designated as Systemically Important Financial Market Utilities, vital to the operations of the financial markets and subject to heightened regulatory scrutiny. Buyers and sellers in exchange transactions rely on clearinghouses to intermediate transactions and to manage credit risks between trading parties. As such, clearinghouses promote transparency, efficiency, and stability by providing market-based pricing, daily settlement, and ensuring adequate capitalization for markets to function.


Goldman Offers New Bitcoin Derivatives to Wall Street Investors
Matthew Leising – Bloomberg
Goldman Sachs Group Inc. is wading deeper into the $1 trillion Bitcoin market, offering Wall Street investors a way to place big bets.
The investment bank has opened up trading with non-deliverable forwards, a derivative tied to Bitcoin’s price that pays out in cash. The firm then protects itself from the digital currency’s famous volatility by buying and selling Bitcoin futures in block trades on CME Group Inc., using Cumberland DRW as its trading partner. Goldman, which still isn’t active in the Bitcoin spot market, introduced the wagers to clients last month without an announcement.

A $25 billion dogecoin whale lurks, but Robinhood CEO says ‘we don’t have significant positions in any of the coins we keep’
Mark DeCambre – MarketWatch
That’s Vlad Tenev, CEO of Robinhood Markets, speaking at a “fireside chat” on Thursday hosted by the popular brokerage platform, attempting to dispel any lingering speculation that Robinhood may be a so-called dogecoin whale, maintaining a massive stockpile of the cryptocurrency for its own benefit.

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