Papal comments; VIX settlement w/o the complaining; Barrier reverse convertibles

May 17, 2018

Papal comments; VIX settlement w/o the complaining; Barrier reverse convertibles

May 17, 2018

Spencer Doar

Spencer Doar

Associate Editor

Observations & Insight

Pope Calls Derivatives Market a ‘Ticking Time Bomb’
Sridhar Natarajan – Bloomberg
Warren Buffett once called them “financial weapons of mass destruction.” Now Pope Francis, of all people, is taking aim at derivatives.

*****SD: I thought Warren Buffett talking to Katy Perry about bitcoin was weird… But then again, I heard the pope was reading the new Dan Brown book “Disciples and Derivatives.” (Btw, he’s talking about credit default swaps, not derivatives markets overall.)

Perhaps the oddest part from the so-called Holy See Press Office’s release, is the overuse of the qualifier “so-called.”

There are four occurrences – “…in some types of derivatives (in the [sic] particular the so-called securitizations)…”; “…negotiated on the so-called markets with less regulation (over the counter)…”; “…knowingly favored the use of the so-called creative financing…” and “…disguising the fact that the so-called offshore operation…” What are you supposed to call these things?

Lead Stories

The VIX Takes Another Ride, This Time With a Lot Less Complaining
Nick Baker, Elena Popina and Lu Wang – Bloomberg
Cboe pleased with how auction went following overhaul of rules; Speculation something fishy is going on got louder in April
It won’t quiet every critical voice. But even as the VIX took another swing just as futures tracking it expired Wednesday, steps taken by overseers to squelch anomalies from past settlements showed signs of working.
The result, at least for a day, was a muzzling in the familiar refrain of outcry over possible manipulation.

****SD: If you missed it yesterday, there was a great piece with a recap of the ongoing suits against MMs and Cboe regarding VIX issues.

Investment Banks Sell a Controversial Way to Hedge Volatility
Yakob Peterseil – Bloomberg
As the shadow of volatility looms, it’s out with simplicity, in with complexity.
A little-watched corner of the investment-product industry is offering money managers some refuge from jittery markets by combining bonds with exotic options. The security offers juicy yields and the prospect of better returns than vanilla equity investments if prices swing moderately.

****SD: Not the same instruments, but this reminded me of the issues in China with real estate bond puts.

Dollar Index Replaces VIX as New Market Gauge of Fear
Eric Lam – Bloomberg
Investors who have long used the VIX volatility index for signs of a market downturn can now add the dollar to their list of fear indicators. This is especially apparent in the case of emerging-market stocks, which have seen a rally reversed in recent weeks as the dollar’s surge makes the riskier assets less attractive. “Forget the VIX,” the greenback’s spot gauge “is the new fear index if we consider the number of market cracks the dollar has exposed,” Stephen Innes, head of trading for Asia-Pacific with Oanda Corp., said in a note to clients.

Exclusive: Barclays activist Bramson eyes trading shutdown at under-fire investment bank
Activist investor Edward Bramson is pushing to shutter the majority of trading activities undertaken by Barclays’ investment banking unit, in a radical plan to cut costs and boost returns at the British lender, three sources told Reuters.

****SD: Unclear what the full potential impact would be on Barclays’ derivatives activity.

Virtu CEO comes out swinging against critics
Samuel Agini – Financial News
Douglas Cifu, the chief executive and co-founder of the $6.1bn electronic trading firm Virtu Financial, does not seem to mind if people think he is ruthless. Asked about slashing the staff levels of KCG Holdings, which Virtu acquired last year, he said: “I don’t run offices that don’t make money.”

****SD: They’re haymakers, too. No jabs from Cifu.

Exchanges and Clearing

Eurodollar Term Mid-Curve Options – Launching June 11
CME Group
In response to strong customer demand, CME Group will list 3-month, 6-month and 9-month Eurodollar Mid-Curve options for first trade date Monday, June 11, 2018.

London Metal Exchange takes aim at booming electric car market with new contracts for battery metals
Enoch Yiu – South China Morning Post
The exchange to offer contracts in lithium, graphite and manganese among others, its head says

****SD: Also in the works are gold and silver options. (And this is old news for those of you who follow our video content.)

Deutsche Boerse to Cut as Many as 50 Management Positions
Nicholas Comfort and Geoffrey Smith – Bloomberg
Theodor Weimer’s pruning of Deutsche Boerse AG has only just begun.


Post-Trade DLT Network Readies Launch
Shanny Basar – MarketsMedia
Adrian Patten, co-founder and chairman of Cobalt, said the testing period for the foreign exchange post-trade processing network which uses distributed ledger technology is reaching its conclusion for banks that will be going live at launch this year.

****SD: FX options coming in a later phase.

3 Reasons Fund Managers Should Embrace Quants
Jared Broad – TABB Forum
Instead of fearing quants, hedge funds should be embracing and collaborating with them. While quants build complex algorithmic strategies that can lead to alpha generation, it’s often the traders and investment managers who have the experience and understanding to know when to deploy these strategies. Here are the top three reasons why fund managers should embrace quants.


Here’s another reason to believe stock-market volatility is here to stay in 2018
Anora M. Gaudiano – MarketWatch
Declining volatility, at least as measured by one popular index, since the start of April has given stock-market investors a bit more confidence, but don’t get used to the calm just yet, says Jessica Rabe, co-founder of DataTrek Research.
Both implied, or expected, volatility and realized, or actual, volatility in U.S. equity market has fallen in the second quarter after a February spike that sent ripples through financial markets. But history suggests that once volatility spikes, it has a staying power.

Strong Earnings? Don’t Expect the Market to Rally
Mike Bird – WSJ
U.S. companies have posted great earnings, but investors shouldn’t count on that giving their stocks a particular boost.


Sanctions stresses still bubbling in aluminium market
Andy Home – Reuters
The initial sanctions shockwaves may have passed but the aluminium market is still structurally stressed by the U.S. Treasury’s action against Oleg Deripaska and his Rusal aluminium empire.

Myron Scholes: Inflation shock could come from anywhere
Vesna Poljak – Australian Financial Review
The world’s largest economy could experience an inflationary shock that would force the US Federal Reserve to raise interest rates faster than anticipated, and without the rise in wages that it is counting on, warns the financial economist Myron Scholes.

Cboe Conducts May Settlement of Cboe Bitcoin Futures
Cboe Global Markets, Inc., one of the world’s largest exchange holding companies, today announced the settlement of the May expiry Cboe bitcoin (XBT) futures, the fifth contract settlement conducted since the contract was introduced last December.

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