| March 04, 2016 | | | |  | Jeff Bergstrom
Editor
John Lothian News | |
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| | | | Observations & Insight | | | Editor's Note
Don Wilson graciously guest-edited the John Lothian Newsletter this week while John is on the mend from back surgery. (By the way, happy birthday JL!) Interested in reading more of Don Wilson's commentary from the week? Click here to access this week's newsletters.
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Looking Ahead
Don Wilson, CEO, DRW Holdings, this week's guest editor
As we close the week, I'll pick back up on ideas I shared in Monday's newsletter. Regulation designed to reduce the risk of another financial crisis is being phased in. I would summarize the primary tenets as (1) reduce leverage and risk and (2) ensure that most derivatives are cleared. There is good logic to both thoughts - less leverage is less risky, and futures markets performed flawlessly through the crisis.
Of course it's never easy to go from well-intentioned concepts to practical implementation, but I will highlight a few concrete effects we have observed on the market. On the deleveraging and de-risking front, it's very clear that banks take less risk and hold smaller inventories. Because balance sheets are constrained, even near risk-free assets such as U.S. Treasuries trade differently. Off-the-runs have become far less liquid, and swap spreads are negative; in other words, U.S. taxpayers pay more to borrow, while large investors in U.S. debt pay more to transact. The effects can be seen in other markets as well. It's readily apparent that aggregate risk capital in the marketplace has been significantly reduced. Highly correlated products can have sudden and surprising breakdowns in their relationships. Expect greater dislocations, and more frequent pockets of illiquidity going forward. Is this what was intended?
As far as derivatives moving into clearing houses, we certainly have seen a lot of that. However, some of the rules will actually make it challenging for markets to continue to operate smoothly. Take options portfolios, especially commodities options. Last fall, DRW joined a group of exchanges and firms in sharing our concerns with the Basel Committee about the unintended consequences of the leverage ratio computations. The current method will lead to burdensome capital requirements for clearing members whose customers carry even risk-free portfolios of commodities options, with fewer FCMs willing to clear that business as a result. This, in turn, leads to less diversification and decreased risk capacity - all contrary to well-functioning markets. The end result? Near prohibitive costs to clear in some cases and greater systemic risk - exactly the opposite of what the rules were intended to accomplish.
However, it's not all doom and gloom. Change - whether well thought out or not - inevitably leads to opportunities for innovation. Let me highlight a few ideas that DRW has been behind, all with the same theme:
-Eris Exchange, which through its proprietary interest rate swap futures (traded on Eris and cleared on CME), provides a more efficient alternative to OTC swaps. It also offers Eris credit default swap index futures on ICE, which are starting to trade regularly.
-Digital Asset Holdings, which leverages the blockchain and distributed ledgers generally to make the settlement of traditional financial instruments more efficient, thereby enabling market participants to operate in a more capital efficient manner.
-Variance swap futures contracts on the SPX and Eurostoxx, listed to the CBOE Futures Exchange and Eurex respectively
-And most recently, an idea for a Libor solution, which we are just starting to discuss with the marketplace.
Of course many new ideas fail, but hopefully some of these - as well as ventures sponsored by others - will be viable solutions for the challenges the markets are facing.
We see how poorly conceived or implemented regulation inadvertently creates adverse consequences. Clearly, today's adversarial approach to regulation and enforcement is counterproductive. In a rapidly changing industry like ours, regulators must keep pace and engage with market participants to fully understand how the processes, technology and players are evolving and what the impact of new laws and rules will be throughout the ecosystem. Our doors are always open.
Thank you again to John and the JLN team for extending the invitation. I've really enjoyed my role as guest editor - maybe I'll be back for another round. I hope JLN readers benefitted as well; I appreciate the feedback many of you have shared about what I had to say this week. It's important that we continue to have thoughtful and candid dialogue about the issues shaping our industry.
| | | | | | Lead Stories | | | As Volatility Levels (Maybe) Stabilize, What Does VVIX Have To Say?
Frederic Ruffy - The Ticker Tape
So far, 2016 is shaping up to be another year of roller-coaster action on Wall Street. After falling sharply in the first few weeks of January and stumbling again in early February, the S&P 500 (SPX) forged a solid advance off its February 11 lows and is now (through February 25) setting two-month highs. Meanwhile, market volatility, which saw a notable spike as the SPX faltered in the first few weeks of this year, has been trending lower since February 11. In fact, more than one measure of volatility is now setting fresh 2016 lows.
jlne.ws/1LEJBvQ
Gold, silver volatility to lead to mayhem in 2016 commodities
James Cordier - MarketWatch
For commodity option sellers, the latter part of 2015 presented some solid option-writing opportunities. But with the exception of a few segments in the oil market, volatility was low across most sectors. Selling options in this environment can still produce firm results. But it involves a little more precision, and a little more timing. It's like tacking your sailboat against the wind. You can still get to your destination. It just takes a bit more effort.
jlne.ws/1LEKC7c
****SD: More in this story than just gold and silver.
ForexClear pioneer steps down amid fall-out
Farah Khalique - Euromoney Magazine
Gavin Wells, the pioneer of LCH.Clearnet's ForexClear offering, and his right-hand man Basu Choudhury have stepped down amid talk of a fall-out with the clearing house over returns, bringing into question the future direction of ForexClear. The poster boy for ForexClear, Wells was in charge of building and leading LCH.Clearnet's clearing services for foreign-exchange products, in anticipation of mandated clearing from regulators. Choudhury was hired in 2011 as a director and head of product at ForexClear, according to his LinkedIn profile.
jlne.ws/1oUFHEG
****SD: This is a wrinkle in the plan; what type or how severe of a wrinkle remains to be seen.
All Clear on Recession Risk? Not Yet
Greg Ip - WSJ
Not long ago, fear of recession was rampant. Prices of stocks, junk bonds and oil were crumbling, deflation probabilities rising, and critics were calling on the Federal Reserve to forswear higher interest rates. Nerves have calmed considerably since. Blue chip indexes are up nicely from their Feb. 11 low. Junk bond yield spreads have narrowed. Oil has stopped going down and the dollar has stopped going up, so expected inflation has risen. Especially important for everyone's blood pressure, volatility has receded. Vix, the options price-based stock market fear gauge, is back down to December levels. A model developed by Cornerstone Macro put the odds of recession, as signaled by the markets, at 64% on Feb. 11. That has since fallen to 47%.
jlne.ws/1LEKTqw
FIA Japan Newsletter March 2016 Edition Released
Press Release
Futures Industry Association of Japan has released the March 2016 edition of its bimonthly newsletter. For browse, please access the following URL.
goo.gl/0Iz1cc
| | | | | | Exchanges | | | LSE's Derivatives Market to Launch Despite Talks With Rival
John Dertrixhe - Bloomberg
London Stock Exchange Group Plc will go ahead as planned with the launch of its new derivatives market, even though the venue will compete with a market run by potential merger partner Deutsche Boerse AG. The project, called CurveGlobal Ltd., is on track to start trading later this year, according to LSEG Chief Executive Officer Xavier Rolet. The venture is a consortium with banks and the Chicago Board Options Exchange, and is explicitly designed to take on the giants of European interest-rate futures trading.
bloom.bg/1LENAIL
Ross to join LSE CurveGlobal as CEO in April
Luke Jeffs - Futures & Options World
Former Morgan Stanley managing director Andy Ross is set to become chief executive of LSE's CurveGlobal in mid-April, just weeks before the futures market is set to go live. Ross, who quit as Morgan Stanley's European head of swaps clearing a month ago after 16 years with the US bank, is set to join on April 19 the London Stock Exchange Group as the chief executive officer of CurveGlobal, according to sources. The timing is important because Curve, a new European interest rate futures platform that aims to challenge larger futures rivals the Intercontinental Exchange and Eurex, is slated go live in late May, as first reported by FOW, in line with an earlier LSE pledge to launch before the end of June.
jlne.ws/1LELOHD
BOX Price Improvement Activity in January
Press Release
In the month of January price improved contracts on BOX Options Exchange ("BOX") averaged 364,078 per day. Price improvement versus the prevailing NBBO for contracts submitted via BOX's price improvement auction, PIP, averaged $836,013 per day, while total savings to investors in January was $15.9M. With this, BOX has saved investors over $722M since its inception in 2004. Overall average daily trading volume on BOX in the month of January was 521,635 contracts.
goo.gl/vh7MCg
Nasdaq February 2016 Volumes
Press Release
Nasdaq (Nasdaq:NDAQ) today reported monthly volumes for February 2016, on its investor relations website.
goo.gl/4tk4Vb
HKEx Monthly Market Highlights
Press Release
HKEx Monthly Market Highlights - February 2016
goo.gl/0VyLYY
| | | | | | Regulation & Enforcement | | | CFTC, SEC Inch Closer to Full Strength With Nominations Moves
WSJ
Two top U.S. markets regulators, the Commodity Futures Trading Commission and the Securities and Exchange Commission, could soon be back to full strength with complete rosters for their governing boards. President Barack Obama intends to nominate an academic and a former congressional aide to serve as members of the CFTC, the top U.S. regulator of derivatives, the White House said Thursday. Mr. Obama tapped Chris Brummer, a professor at Georgetown University Law Center, and Brian Quintenz, who had worked as a senior policy aide to former Rep. Deborah Pryce (R., Ohio).
jlne.ws/1VUfEbE
MEPs draft Mifid II amendments to avoid HFT trap
James Rundle - Financial News
Lawmakers have taken advantage of the likely delay to Mifid II to table draft amendments to the overhaul of Europe's trading rulebook that aim to stave off the prospect of non-finance companies becoming caught up in rules meant to govern high-frequency traders.
goo.gl/Wp4kdT
CySEC suspends license of Pegase Capital, owner of Interactive Option
Maria Nikolova - LeapRate
After imposing a fine of EUR 300,000 on Pegase Capital Ltd in November last year, the Cyprus Securities and Exchange Commission (CySEC) today announced harsher measures against the company, which owns brands like binary options provider InteractiveOption.
jlne.ws/1LELV5X
Hong Kong's Securities And Futures Commission And DoJ Sign MoU To Strengthen Cooperation In Handling Criminal Cases
Press Release
The Securities and Futures Commission (SFC) and the Department of Justice (DoJ) today entered into a Memorandum of Understanding (MoU) to formalise and further strengthen cooperation in the handling of criminal cases under the Securities and Futures Ordinance (SFO) and other relevant legislation (Note 1).
goo.gl/mb39ds
| | | | | | Technology | | | Millennial investors turn to apps, computers
Chicago Tribune
Computers help us decide what route to take to the grocery store, who to date, and what music to listen to. Why shouldn't they also decide how we invest? Younger investors, particularly those born in the early 1980s to late 1990s known as millennials, are increasingly adopting apps and what are known as robo-advisers to make their retirement decisions for them. In the last year Betterment, Wealthfront, Acorns and others have brought in several billions of dollars in assets that used to be handled by traditional brokerages or wealth advisers.
trib.in/1LEZaDG
****SD: Millennials turning to apps/computers for advice is like Homer drinking Duff  not even a little bit surprising.
| | | | | | Strategy | | | Stock Market Hedges: Not So Obvious
ValueWalk
What are the best stock market hedges? They might not be what you would think.
With the stock market approaching the upper end of a trading range, with some calling resistance near 2,000 on the S&P 500, the question of how investors might want to hedge comes to mind. While obvious hedges such as purchasing S&P 500 put options or more sophisticated plays in the VIX volatility index come to mind, a global asset allocation piece from Bank of America Merrill Lynch takes a creative approach to hedging, identifying outperforming hedge tactics relative to the obvious choices. "If equities decline, we expect the cost of hedging in the equity derivative and credit derivative markets to rise (and vice-versa for a rise in equities)," the report said.
jlne.ws/1LEM3m4
****SD: Yet again, this reminds me of a story from earlier in the week Successful Traders "Jump Around Where It's Hot"
Big Public Money Is Buying Volatility
Mark Sebastian - TheStreet
I spent the last three days attending the CBOE Risk Management Conference. Although it sounds complex (and some of it was), it basically is a conference where allocators of capital meet traders; and asset managers meet brokers and technology service providers. It's a conference I go to every year because it does not consist of simply buy side, sell side, or banks.
goo.gl/0S5guW
****SD: Get past the RMC intro and Sebastian provides insight into the recent yield-seeking trends of asset allocators, pension funds and endowments.
| | | | | | Events | | | OIC: 5 Options Greeks for Next-Level Traders
March 15, 2016, 3:30 pm CST
What you're seeing with your options quotes is only half the story. When you understand the value of options Greeks - and the benefit they can bring investors and traders - you'll be taking the next steps towards a better understanding of how options can work for you.
goo.gl/yCc2Jb
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