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JLN Options
May 26, 2023  
 
Jeff Bergstrom
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Observations & Insight
 
EDITOR'S NOTE: There will not be a JLN Options Newsletter on Monday, May 29, in observance of the Memorial Day holiday. We will be back on May 30. Have a great weekend!
 
 
Lead Stories
 
US life insurer index options market hits $1trn mark
Samuel Karasek - Risk.net (Subscription)
The aggregate of the equity index options market for life insurers exceeded $1 trillion in notional in the fourth quarter of last year as Lincoln Financial grew its book by nearly 70% to emerge as the heaviest user of the instrument in the space.
The life insurance arm of the Pennsylvania-based conglomerate added $43.1 billion to its holdings to increase its total to $105.6 billion notional. Lincoln opened a $33.8 billion written puts position and grew its purchased puts to $25 billion in
/jlne.ws/3WDjyfp

Hedge funds raise bets against US stocks as debt deadline nears
Chris Flood and Laurence Fletcher - Financial Times
Hedge funds and asset managers have raised their bets against the US stock market to their highest level since 2011, driven by fears about a possible US debt default and a recession.
Net short positions — bets on price falls — held in derivative contracts linked to the S&P 500 have increased sharply in recent weeks, according to a Société Générale analysis of a combination of futures positions from the US Commodity Futures Trading Commission.
/jlne.ws/3Wz18g3

US default fears spark clearing house collateral scrutiny
John Mccrank, Laura Matthews and Michelle Price - Reuters
Clearing houses and their members are working out how to treat certain U.S. Treasury bills and bonds commonly used as collateral, as the United States nears a deadline that could see it default on its debt, according to four industry sources.
U.S. President Joe Biden and top Republican lawmaker Kevin McCarthy on Thursday edged closer to an agreement to raise the U.S. debt ceiling, Reuters reported. The Treasury Department has warned the government could run short of funds to cover all of its expenses as soon as June 1, meaning it could potentially miss payments on Treasury bills and other obligations.
/jlne.ws/3qeTsDD

Bitcoin's (BTC) Volatility Drops to Lowest Since 2020 As AI Tokens Rally
Vildana Hajric and Lu Wang - Bloomberg
The typically hyper-volatile Bitcoin hasn't been so choppy of late at all.
The largest digital asset hasn't posted a daily move of 6% for 70 sessions, the longest streak of calm since October 2020, data compiled by Bloomberg show. And the coin is on pace for a slight loss in May after gaining each of the first four months of the year.
/jlne.ws/3oyJrR7

Inflation Is Sticking Around. It's More Ammo for Another Interest-Rate Hike.
Megan Leonhardt - Barron's
The Federal Reserve's favored measure of inflation showed that high and rising pricing haven't been banished. That increases the likelihood that the U.S. central bank will opt for another interest-rate increase in June.
The government's personal-consumption expenditures price index, released Friday morning, showed that prices rose 0.4% in April on a month-over-month basis, slightly more than anticipated by the consensus forecasts of economists surveyed by FactSet. The annual headline inflation rate rose to 4.4% from the 4.2% rate recorded in March, the Bureau of Economic Analysis reported.
/jlne.ws/45BiTiX

What would happen to a Treasury bill after default? Six key questions
Karen Brettell - Reuters
The U.S. Treasury Department is at risk of defaulting on its debt if Congress doesn't act to lift the debt ceiling before it is reached, which could happen as soon as June 1. For holders of Treasury bills, notes and bonds, that raises uncertainty over whether the issues they hold will be affected, and what happens if the debt is not repaid or an interest payment is skipped.
/jlne.ws/3ONjFn3

 
 
Exchanges
 
ICE Reports Record Trading in SONIA as the Market Manages New Expectations for U.K. Interest Rates
Intercontinental Exchange
Intercontinental Exchange, Inc. (NYSE: ICE), a leading global provider of data, technology, and market infrastructure, today announced that a record 1.37 million SONIA futures and options contracts traded on May 24, 2023, as the market manages new expectations for U.K. interest rates. On May 24, 2023, over 1 million SONIA futures traded, with high levels of activity in the June, September and December 2023 SONIA contract months. "As the market digests the latest U.K. inflation data and reviews expectations for interest rate changes, investors are using SONIA futures and options to manage and adjust their exposure for the potential of higher interest rates to continue for longer in the U.K.," said Caterina Caramaschi, Vice President, Financial Derivatives at ICE.
/jlne.ws/43xayLj

Dividend derivatives buoyed by fundamentals in 2023
Eurex
With the European market halfway through its dividend payment season, Eurex caught up with Lorenzo Longo, Head of EMEA Equity Forwards Trading at Goldman Sachs to get his views on the route ahead and prospects for the dividend derivatives market for the rest of this year. We also took the opportunity to look back on a survey conducted earlier this year and measure how the expectations of respondents have played out since then, both for the asset class and the broader economic conditions that underlie it.
/jlne.ws/3MXisrH

Euronext appoints Roberto Pecora as CEO of Euronext Clearing
Euronext
Euronext today announced that Roberto Pecora has been appointed by the Board of Director of Euronext Clearing as CEO and General Manager, starting from 3 rd July 2023. Roberto will focus on the day-to-day management of the CCP, including engagement with regulators and with clearing members. As a member of Euronext's Post Trade Leadership Team headed by Anthony Attia, he will be in the forefront of the Euronext Clearing European expansion plan. The expansion of Euronext Clearing to all Euronext markets, starting with equities from Q4 2023, will strengthen and enlarge the single, resilient, and multi-assets clearinghouse for all Euronext markets, while creating important efficiencies for clients.
/jlne.ws/424Kczb

Cboe Launches 1-Day Volatility Measure
Press Release via Traders Magazine
Market participants have long sought ways to continue to better understand and manage volatility in the financial markets. While various tools and indicators exist, many are lagging indicators that provide information about volatility after the fact. In response to this need, Cboe Labs, Cboe Global Markets' innovation hub, has introduced the VIX1D Index. This groundbreaking volatility measure allows traders to estimate the current day's volatility, providing real-time insights into market dynamics.
/jlne.ws/3WArGxc

 
 
Regulation & Enforcement
 
Debt-Ceiling Battle Brings Popular Hedge Fund Trade Fresh Scrutiny
Sonali Basak, Liz McCormick, Lydia Beyoud and Hema Parmar - Bloomberg
A highly leveraged bond trade that's become popular with hedge funds is drawing fresh scrutiny three years after it blew up spectacularly.
Officials at the Securities and Exchange Commission and the Federal Reserve have questioned prime brokers about leveraged trading in government bonds by their fast-money clients, according to people familiar with the matter, who asked not to be named citing the confidential nature of discussions. The dangers have been heightened as political brinkmanship around the debt ceiling has threatened to sink the US into default and unleash chaos in financial markets.
/jlne.ws/42em0dw

CFTC Orders a California Commodity Trading Advisor to Pay More Than $4 Million for Fraud and Registration Violations
Commodity Futures Trading Commission
The Commodity Futures Trading Commission today issued an order filing and simultaneously settling charges against Sharief Deona McDowell, of Loma Linda, California, for fraud in connection with options on commodity futures contracts by a commodity trading advisor (CTA) and for failing to register as a CTA. The order requires McDowell to pay $2,376,509.96 in restitution and a $2,376,509.96 civil monetary penalty.
/jlne.ws/3q94FFE

 
 
Strategy
 
ETF investors are following Warren Buffett and betting big on Japan. But here are key risks to consider.
Isabel Wang - MarketWatch
Hello! This is markets reporter Isabel Wang bringing you this week's ETF Wrap. In this week's edition, we take a look at Japan ETFs, which saw significant inflows in the past month after the legendary billionaire investor Warren Buffett said that Berkshire Hathaway owns more stocks in Japan than in any other country outside of the U.S.
/jlne.ws/42aY3nm

Traders No Longer Expect Interest-Rate Cuts This Year
Eric Wallerstein - WSJ
Traders have been clinging to the idea that the Federal Reserve would cut interest rates several times this year. But they've finally conceded that's unlikely, based on futures bets.
/jlne.ws/3ozCH5u

Study: Risk-Managed ETFs Didn't Meet 2022 Challenges
Dan Mika - ETF Trends
According to a recent study, more than half of the risk-managed strategies that underlie ETFs designed to manage losses during market turbulence failed to fare better than equities in 2022, including several strategies marketed as hedges against black swan-type events. The study by consulting firm Global Finesse sampled a group of ETFs deemed to have "downside mitigation" strategies meant to limit losses in a market downturn in exchange for fewer gains when the equity market is positive. These risk-managed ETFs often use a combination of equity options, Treasurys, VIX futures contracts, and cash to protect against potential losses from stock market downturns.
/jlne.ws/3MZfnr9

 
 
Events
 
Our good friends at FTSE Russell are getting ready for one of the most widely anticipated market events, Reconstitution or "Recon day," which ensures that the indexes continue to accurately reflect the current state of the US equity markets and their market capitalization segments, industry breakdowns and style segment. The role of derivatives is explained by market experts from CME Group, Cboe Global Markets and FTSE Russell on June 1, 2023 at 10:30am CDT in a webinar titled "Russell US Reconstitution: mitigating risk with derivatives." The speakers are Rick Rosenthal (Cboe Global Markets), Paul Woolman (CME Group) and Catherine Yoshimoto and Indrani De (FTSE Russell). ~JJL
 
 
 
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John Lothian News (JLN) is the news division of John J. Lothian & Company, Inc. (JJLCO). The online media and financial services firm is staffed by derivatives industry, journalism and technology professionals.
 
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