August 13 2013

elb2 Financial News has a story behind the paywall today about EUREX and collateral for clearing. True, being able to offset may be a huge gain for CCPs and users in the future whether or not offsetting futures and the derivatives formerly known as OTC. (There is also a slight issue of whether this may increase risk in one area – qv the arguments of IBKR/Timber Hill founder Thomas Peterffy a few years back). EUREX have been making a big play to master collateralisation and with EUREX Clearing and Clearstream they have quite a pool to play with.

However, what I wonder about the issue of bankruptcy?

German insolvency, like most such processes on the anti-enterprise proto-socialist island of western Europe, are essentially a bit like the end of a good Mozart opera with the central character dragged into a flaming pit of hell from which he may emerge heavily singed to redemption but the odds are not good. Britain, almost uniquely in the EU, adopts a much more philosophical approach. Moreover the UK has opt outs from insolvency law for clearing houses making collateral a lot more secure in the event of some form of corporate collapse. It strikes me that the biggest single problem for EUREX’s many splendid innovations is that banks, other than, say German captive ones, may not feel so comfortable with clearing through a brilliantly conceived and engineered German solution where they are at the mercy of a bureaucratic state.

Yes, CCP can be a god-send in matching every buyer to every seller but when it comes to using your LEIs and untangling where the asset owners really lie, I don’t feel inclined to argue with the German state when I could clear my assets snugly in London or somewhere where the law aligns with the clearing houses’ best interests.

Perhaps somebody with greater knowledge of German law will be kind enough to disabuse me of my concern.

…Elsewhere in EI today, CFTC takes the lead in metals actions, India’s crisis continues, corporate actions in the cloud and an IOSCO report on clearing where a teaser from Bloomberg suggests a potentially cataclysmic reform…

Public Markets

Angry Alloy Users Should Sure the Fed As Well
CFTC Subpoenas Metals Warehousing Firm As Inquiry Heats Up
Reuters UK

“There’s a whiff of ambulance-chasing to the lawsuits. Warehouse waits have caused grumblings for three years, but plaintiffs’ lawyers only sprang into action after congressional hearings brought the problem to the attention of the bank-hating public.”

CFTC has subpoenaed at least 2 metals warehousing firms, including Glencore, seeking documents and communications as an inquiry into complaints about inflated metals prices gathers steam. A letter from the regulator last month ordered warehouse firms to preserve 3 years of emails, documents and instant messages.

PLY: The gloves are off and I suspect some at HKEx will be uneasy about the way this is playing out. Likewise UK regulators already seem to be entirely sidelined as the USA takes control, just as they have with the pending actions in the “London whale” case. There is a fair bit of extraterritoriality here which leads me to wonder why there was not so much zeal from the US regulator’s when there were so many problems with banks circa 2007/2008…

CME Tries To Take Aluminum Price Risk Off Table
agmetalminer.com

The CME Group is trying to persuade buyers to make use of their US Midwest aluminum premium futures contract, in light of the LME warehousing scheme affecting small buyers all the way up to processors such as Novelis.

EuroCCP Offers Netting Of Settlement Fees for UK, Irish Stocks
Bloomberg

EuroCCP, the DTCC European unit are offering a service to cut settlement fees, through a netting process, charged to clients buying or selling U.K. or Irish stocks over several different alternative trading venues.

The clearinghouse will allow so-called netting of transactions across the different trading systems it services from today which could save each client as much as 2 million euros ($2.7 million) a year.

PLY: Another clean, neat innovation in equity clearing and settlement. Good for end users, just like transaction taxes aren’t.

Derivatives Margin Losses Could Help Save CCPs
Bloomberg

Derivatives traders should be prepared to lose the initial margin they post at clearinghouses if it’s needed to prevent a financial crisis according to a joint IOSCO/CPS report.

PLY: I didn’t get a chance to read the IOSCO report yesterday but will endeavour to do so today. However, I do feel I am in the midst of a bout of wrong movie syndrome when I read that initial margin could be used to bail out failing institutions. That strikes me as undermining the whole notion of why we feel safe deposited our hard earned investment funds with CCPs in the first place. Presumably there is some context missing because this suggestion on its own strikes me as daft, particularly as swallowing initial margin would provoke the mother of all contagions to the point where we’ll end up in the Catskills, Cotswolds or Tatras knitting our own sweaters and trading tins of beans.

Bucharest SE Q2 Results

Hot off the presses is the 6 months report from Bucharest SE (BVB) profit fell by 70% in Q2 y/y, generating a small profit of RON 1.09 mln (USD 0.32 mln) profit.

Private Markets

SEFs Are Only One Part Of The Swaps Equation
waters technology

When it comes to untangling the emergence of swap execution facilities (SEFs), it’s sometimes easy to feel like Theseus navigating the labyrinth. Whether the regulators play the parts of Daedalus and Icarus, or the Minotaur, of course, depends on your place in the market. The central point of the entire process – moving derivatives onto exchange-like platforms – is simple enough. But there are a huge number of processes and concerns beyond it that spring up to support electronic trading.

PLY: Indeed, many IDB staffers have been discussing little else apart from the splendid metaphor of Theseus navigating the labyrinth. One thing which jumps out of this discussion is Trade Repositaries. Frankly not many understand them and nobody is really watching them but it is a huge area in the development of OTC to CCP, platform trading and beyond…

Nairobi SE, Shanghai Pact To Boost Asian Investments
capitalfm.co.ke

Nairobi SE has signed an MOU with the Shanghai SE to attract more investment funds from Asia.

PLY: Am I alone in being bemused that a core Obama legacy as first African-American President will be letting China become the major economic actor in the continent as he pranced around not achieving anything of consequence?

Dark Pool Trading At Record Levels In Europe (subscription)
Wall Street Journal

European share trading taking place in anonymous, off-exchange venues known as “dark pools” reached its highest-ever level in July, amid lower volatility and a growing proliferation of high-frequency trading on the platforms.

PLY: Personally I must admit that I do not see why HFT ought to benefit from dark markets unless they are trading HFT blocks (which I do not believe anybody does). Again this data calls for some form of break between the simply opaque that could easily trade on exchanges and those block trades which require Institutional Liquidity Platforms to execute on without making the massive execution impact they will have on normal ‘soup to nuts’ bourses.

Withdrawals From Mt. Gox: Growing Pains Or Banking Bottleneck?
CoinDesk

Bitcoin investors let out a collective sigh of relief July 4 when Mt. Gox finally resumed USD withdrawals. The reason for the hiatus on withdrawals was so Mt. Gox could test out its new transaction system in the face of increased volume. Yet there was a level of exasperation for those looking to cash out of BTC because of the fact that bitcoin at the time was experiencing a low not seen since April.

PLY: Cryptocurrency is heating up. At one level the Feds are investigating and in max subpoena mode, elsewhere a judge deemed it legal the other week. MtGox is worrying in terms of its ongoing delays – not good for the infrastructure of the marketplace…and that infrastructure is incidentally fascinating, as some of our recent research has been discovering!

Special Section: FTI, NSEL, India at the Crossroads

PLY: More useful analysis from the front in India. Gradually many facts coming out in the wash including details of creditors and possible conflicts and likely lawsuits. As of press time, FTI was down slightly, MCX with down its worryingly habitual (now 5%) limit… Thanks for all the feedback on this issue from India and around the world. Still not encountered anybody who sympathises with Jignesh Shah incidentally…

Investors Want FIR Against NSEL;
IGF Wants FMC & Ministry Officials Too Named In FIR
The Economic Times

The Investors Grievance Forum (IGF) has filed a complaint with the Economic Offences Wing of the Mumbai police against NSEL alleging “cheating, fraud and forgery” affecting “17,000 small farmers and investors”.

The forum’s president and BJP leader Kirit Somaiya has urged the police to file an FIR against the promoters of NSEL officials of NSEL, commodity futures market regulator FMC, officials in the ministry of consumer affairs and brokers and warehouse keepers, who have allegedly issued false documents and information.

The FIR, he stated in his complaint, should be filed under the Indian Penal Code and the Maharashtra Protection of Interest of Depositors Act.

PLY: This is a deadly concern for NSEL and India that ultimately the small farmers may be adversely affected when it was them who were in many ways the agricultural foot soldiers benefitting from the MCX/NSEL revolution…

Govt Probes NK Proteins-NSEL Conflict Of Interest
Business Standard

The ministry of consumer affairs is looking into the alleged conflict of interest issues in NK Proteins, a key debtor of beleaguered NSEL, and claims by the company that it holds huge castor seed and cottonseed oil stocks.

NK Proteins, run by relatives of NSEL chairman Shankarlal Guru, owes the exchange around Rs 930 crore (USD 151.14 mln). According to the latest stock position filed by the exchange on August 6, the company had 7,553 tonnes of castor oil, 96,581 tonnes of castor seed and 84,766 tonnes of cotton wash oil.

Will The 24 Companies Pay USD 910 mln They Owe NSEL?
The Economic Times

Mohan India is essentially a shell company. In 2011-12, the last date for which its financials were available, the company earned a net profit of Rs 2,044 (USD 33.21), and had revenues of Rs 72,400 (USD 1176.6).

Yet Mohan India, along with a sister concern Tavishi Enterprises (which was incorporated this year and whose financials are not yet available) together owe NSEL Rs 952 crore (USD 154.7 mln).

CPAI, ANMI And BBF Members Concerned Over NSEL Payment Crisis
ndtv.com

The Commodity Participants Association of India along with the Association of National Exchanges Members of India and BSE Brokers Forum today said some clients have expressed concern on quantity and quality of commodities lying in warehouses controlled by NSEL. The organisations have formed a joint forum.

The associations have suggested to FMC and the government that all buyers / processors / millers (who are supposed to make payments) should be asked to give their firm commitment towards fulfilment of their obligations, adequately supported by collateral.

Financial Technologies Clarifies On News Item
Moneycontrol

With reference to news item appearing in leading financial dailies titled “NSEL settlement is FTIL’s responsibility” and “Govt puts onus on promoter for NSEL settlement”, Financial Technologies (India) Ltd has clarified to BSE as under :

1. As a policy of the Company, the Company do not wish to comment on rumors which are speculative in nature; hence the Company refrain from commenting on the said news articles.

2. The Company has not received any communication as referred to in the Articles.

3. NSEL’s response is already covered in the said press note mentioning the formation of “Oversight Committee” and other steps taken by NSEL. Board and the Company do not have any further comment on the same.

Technology

SunGard Expands XSP Business Into Singapore
Finextra

SunGard has expanded its XSP business to build a presence in Singapore. SunGard’s XSP platform and XSPrisa Software-as-a-Service (SaaS) solutions help broker-dealers, asset managers and financial services firms to eliminate traditional manual processing associated with corporate actions.

PLY: Once upon a time people fretted when their share certificates were dematerialised. Lovers of IT history will recall a whole cultish group of consultants and scaremongers who trumpeted Y2K as a future disaster. As befits all too many consultants, they were of course dead wrong, after companies held hostage had paid consultancy ransom. Now we’re headed swiftly to corporate actions in the cloud and barely anybody is even blinking an eye…

Products

CME Announces New Crop Option
hpj.com

CME will launch short-dated new crop options on KC Hard Red Winter Wheat futures.

PLY: Not very mainstream but worth noting as these are additions to the KCBOT rule book following the CME’s acquisition of the Kansas Exchange a few months back.

Career Paths

Congratulations to Dr Tina Hasenpusch on her appointment as Chief Operating Officer, Managing Director CME Clearing Europe Ltd.

Uganda SE named Gordon Mwebesa, the head of finance and administration, as acting CEO after Joseph Kitamirike’s three-year contract ended. More from Bloomberg on this story here.

Financial Calendar

JSE Limited – will release Q2 financial results today

Share Notes

ICE Director Judith Sprieser sold 1,500 shares on Thursday, August 8th at an average price of $186.15 (bargain: $279,225.00). Sprieser now directly owns 5,753 shares.

Following his sale of 2,000 shares Tuesday, August 6th at an average price of $16.64, (bargain $33,280.00) reported yesterday, Interactive Brokers SVP Milan Galik sold another 2,000 shares Thursday, August at an average price of $16.78 (bargain: $33,560.00). The SVP now directly owns 822,604 shares.

Other Stories

How Many Options Exchanges Can Be Profitable?
dancollinsreport.com

For more than a decade I had been going to the Futures Industry Association conference in Boca Raton and to its Futures and Options Expo in Chicago. As part of each conference the FIA would always include a panel of options exchange leaders. These panels would include the usual griping regarding Securities and Exchange Commission’s (SEC) regulatory structure, which was much more hands on than what the exchanges in the futures world experienced with the Commodity Futures Trading Commission (CFTC).

Every year at each event the panel would conclude with the moderator asking the exchange leaders for a prediction on what the market would look like in the future and there was always a consensus, which was that there would be consolidation in the option exchange space. Five options exchange were definitely too much, then six option exchanges were too much.

PLY: Useful thinking from Dan Collins where he neatly points out the lack of lateral thinking available to process-driven exchange executives where defending the status quo in the options market was always the role of the legacy providers and when ISE first arrived they shook up the model, revolutionised options trading by bringing institutional trading back to the market in size and thus creating a massive opportunity for options exchanges. Note too that the US options market beautifully underlines the idiocy of the ‘ever smaller number of exchanges’ dogma which having finally entered the minds of the linear camp is proving hard to deinstall despite clear evidence the exchange world is growing in every direction, including number of players and will do for some time to come…

China – Plan May Open Govt Bond Futures To Lenders
Global Times

Chinese financial authorities have submitted a plan which may allow the country’s commercial banks to participate in the trading of government bond futures either directly or through futures brokerages.

PLY: The China Financial Futures Exchange (CFFEX) team relaunching government bond futures appear to be gaining considerable traction…

ASIC Makes Rules On Dark Liquidity, High-Frequency Trading

ASIC (Australia) has released its market integrity rules on dark liquidity and high-frequency trading.

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