Volatility Goes AWOL; Corporate Currency Hedging; Good Year for Wall St. Traders
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.)
****In case you missed the super important options news out of Powell’s testimony that got pushed under the rug.
Volatility Goes AWOL From Global Markets Besieged by Risk
Sid Verma and Luke Kawa – Bloomberg (SUBSCRIPTION)
Implied swings at levels not seen since before February rout; U.S. resilience helps keep lid on volatility premiums
Whisper it quietly, but there’s a distinct air of complacency creeping into financial markets just now.
****SD: There are people out there who would like to throw the VIX in the brig.
US Treasuries market volatility gauge falls to new low
Joe Rennison – Financial Times (SUBSCRIPTION)
A widely-watched measure of volatility in Treasury markets has fallen to a new low for the year, despite broader consternation over trade disputes and warning signals in the bond market that the US may be headed toward recession.
The Merrill Option Volatility Estimate, or Move, aims to track the implied volatility of US Treasuries over the coming month, based on prices in derivatives markets. It is the bond market equivalent of the Cboe’s Vix volatility index, considered the stock market’s fear gauge.
Firmer U.S. dollar boosts corporate interest in currency hedging
Saqib Iqbal Ahmed, Jessica DiNapoli, Caroline Valetkevitch – Reuters
U.S. multinational companies are starting to reevaluate their currency hedging strategies after a surge in the dollar in recent months, as the impact of the stronger greenback starts to show up in second-quarter corporate earnings.
****SD: When you need it, you don’t have it and when you have it, you don’t need it. That’s life, right?
Wall Street traders set for best year since aftermath of crisis
Matt Scuffham, Rishika Dugyala – Reuters
Wall Street trading desks may have reached a post-crisis turning point, with revenue on track for the best year since 2011, second-quarter earnings reports from big U.S. banks showed.
Trump’s Trade Tweets Now Matter for Only One Asset Class
Luke Kawa – Bloomberg (SUBSCRIPTION)
Donald Trump’s tweets once rattled markets more than a North Korean nuclear test, with attacks on individual companies sparking stock selloffs.
Now, the U.S. president’s tweets about upending cross-border commerce occasionally sow discontent among world leaders — but for traders, they only matter if you’re speculating on soybeans.
****SD: More from Yahoo Finance – Chart: Markets don’t care about Trump’s trade tweets
Exchanges and Clearing
NOM and BX Intra-day Electronic Quoting Requirements
Nasdaq Options Regulatory Alert
Below is a reminder of the intra-day quoting obligations for NOM and BX Market Makers, respectively.
****SD: I can’t help but wonder who screwed up to merit Nasdaq putting out “a reminder.”
SGX Proposes To Enhance Default Management Capabilities Of Derivatives And Securities Clearing Houses
Singapore Exchange (“SGX”) is seeking public feedback on proposed amendments to the clearing rules of Singapore Exchange Derivatives Clearing Limited (“SGX-DC”) and the Central Depository (Pte) Limited (“CDP”) (the “SGX-DC Clearing Rules” and the “CDP Clearing Rules” respectively) to enhance both clearing houses’ default management capabilities.
Regulation & Enforcement
NSE to levy 10 times higher STT on physically-settled derivatives
Business Standard News
Derivative investors, already reeling under the pressure due to regulatory tightening, have received a fresh jolt. The National Stock Exchange (NSE) has decided to levy 0.1 per cent securities transaction tax (STT) on derivative contracts of stocks that are physically-settled. This is 10 times higher than the 0.01 per cent STT levied for stocks that are cash-settled.
EU financial market regulation – Balancing financial stability and competitiveness is decisive for sustainable growth
Dr. Torsten Schaper and Dafina Gasi – Eurex Group
In order to stabilise the financial markets, in the past years the EU has been very dedicated in implementing the G20 objectives. It has placed regulated trading venues, clearing houses / Central Counter Parties (CCPs) and transaction registers at the core of its regulations. Essential milestones are the reporting obligation through trade repositories (EMIR, since 2013), the securitisation and the clearing of OTC trades (EMIR and CRD IV, since 2016) by CCPs as well as the trading obligation for liquid derivatives (MiFIR, since 2018). The EU has consistently implemented global standards within its financial policy.1)
More than half of hedge funds now using AI technology
Hayley McDowell – The Trade
Over half of hedge funds are currently using artificial intelligence (AI) or machine learning technology to inform investment decisions and generate trading ideas, according to a survey.
****SD: From MarketBrains – Another record quarter for AI funding in US at $2.3bn, deals flat
China’s Yuan Tumbles as PBOC Weakens Fixing, Easing Bets Mount
Tian Chen and Emma Dai – Bloomberg (SUBSCRIPTION)
Central bank shows little inclination to halt the decline; Rising bets on monetary easing adding to pressure on the yuan
China’s yuan slumped to a one-year low as the central bank showed little sign of intervening to slow the currency’s descent and bets for monetary policy easing mounted.
****SD: From Reuters – China to use ‘counter-cyclical’ measures to curb FX volatility
Something Changed on Wednesday
Helene Meisler – TheStreet
Something changed on Wednesday. It wasn’t the breadth of the market, because that continues to lag. Breadth hasn’t made a higher high in over a week. It wasn’t the McClellan Summation Index because that is still trying to roll over and requires a net breadth day of +500, something it hasn’t seen in a week.
Options Trading Around Earnings is Not a Zero-Sum Game
David Borun – Nasdaq
Options trading is often considered a “zero-sum” game in the sense that whatever profit a trader makes, another trader must have lost. Technically this is true because each option purchased has to have been written (sold) by a counter party. If both traders hold the position until expiration without making any other trades, they will exchange shares of stock and/or cash and one of them will make exactly as much profit as the other lost.
In reality, this is rarely the case. Usually, one or both parties engage in additional transactions over the life of the contract that significantly affect the profitability of the trade.
Eye of the Emerging-Market Storm May Have Passed the Rand
Colleen Goko – Bloomberg (SUBSCRIPTION)
Traders cut bearish bets on the South African currency; Foreign selling of bonds turns to buying as credit risk falls