August 15 2013

elb2 With typhoon Utor passing through, the HKEx announces good numbers while Romania’s SIBEX didn’t provide much fanfare ahead of the Romanian holiday today for their simply ghastly losses.

Most of Europe is on holiday today but even while India celebrates its Independence Day, there is a huge quantity of speculation on the NSEL affair which makes fascinating reading…

BATS has shareholders news and there are some career paths of interest too.

Happy whatever day it is wherever you are but have a skim and keep up with the cutting edge of exchange markets:

Public markets

HKEx Q2 Profit Climbs 9% On Improved Volumes, IPOs

HKEX posted a 9.3 percent increase in Q2 net profit, driven by higher volumes and more IPOs.

Net profit rose to HK$1.17 billion (USD 151 mln) in April-June from HK$1.07 billion (USD 137 mln) a year earlier, roughly matching analysts’ expectations for HK$1.2 billion (USD 155 million), according to Thomson Reuters SmartEstimates.

PLY: Two large IPOs (from Sinopec Engineering and China Galaxy Securities) helped the results which are very encouraging for HKEx.

Full report here.

Derivatives To Drive Nasdaq OMX Europe Expansion

Nasdaq OMX, the second-largest U.S. equity market operator, is making a push on derivatives, which accounted for 17% of Q2 $451 million net revenue, including debt and energy instruments.

PLY: For approximately the millionth time in 15 years or more, permit me to add: “it’s a derivatives world.”

SIBEX Losses Mount As Volumes Tumble

Romania’s Sibex reported a loss of Lei 798 826 (USD 239 169), 5 times larger than the same period of 2012. Turnover decreased 50% compared to last year.

PLY: A tragic example of an exchange has little prospect of progress until management demonstrate any clear capability to develop the exchange. SIBEX is currently an 8 million Euro market cap or less with the prospect of being a 100 million business if management can tap even a small part of its significant potential.

On a separate piece of Romanian news, thanks to Florin for all his hard work producing today’s newsletter when it’s a public holiday…

Private Markets

BATS Stake Sold by Lehman Estate
Wall Street Journal

Spectrum Equity, a leading growth equity firm focused on the information economy, and TA Associates, a leading global growth private equity firm, have each acquired a minority stake in BATS Global Markets, Inc. (“BATS”), a leading operator of securities markets in the U.S. and Europe, from Lehman Brothers Holdings Inc.

BATS, founded in 2005, regularly ranks as the world’s third-largest equities exchange company, operating two stock markets in the U.S., as well as BATS Chi-X Europe, that region’s largest exchange. The firm also operates the BATS Options market in the U.S. and offers a primary listings business for exchange-traded products.

Press announcement here.

PLY: Roughly 12% of BATS went to TA Associated and Spectrum Equity.BATS have no current plans for an IPO following last year’s still-born offering.

Aequitas Begins Journey To Transform Canadian Capital Markets

Aequitas Innovations Inc. (“Aequitas”) is pleased to be commencing its next implementation stage with the Ontario Securities Commission (“OSC”) publication of a Staff Notice relating to the Aequitas Proposal to build a new stock exchange in Canada. The OSC Staff Notice sets out OSC Staff views on current market structure in Canada and requests comments in connection with the Aequitas Proposal.

The Aequitas team will be conducting extensive industry outreach efforts over the next 45 days to build awareness on the proposal and discuss solutions.

The OSC Staff Notice and Request for Comments, including the Aequitas description of its proposed market structure, can be found here.

PLY: True it’s summer and slow but admiration for Jos Schmidt’s gaining of the perceived agenda can only be matched by disappointment at TMX’s inaction…

Bitcoin Besieged By Hackers And Regulators

Just as Bitcoin warns its users that Android-based bitcoin wallets are vulnerable to theft, so the New York Department of Financial Services subpoenas 22 digital currency companies and investors, and investigates the regulatory guidelines that should be put in place.

PLY: The sheer depth/volume of attacks/enquiries/subpoenas is a sign of BTC’s strength. Bitcoin has flaws and issues. So too did the Model T Ford. That didn’t stop it popularising the automobile to unprecedented levels. Meanwhile the current levels of cynicism in many parts are oh so reminiscent of the flat earth candidates who couldn’t see the capital market revolution coming in 1995-1999.

SEC Designates Malta Offshore Securities Market

The (US) SEC have confirmed the Malta SE as a ‘designated offshore securities market’ (DOSM) within the meaning of Rule 902(b) of Regulation S under the Securities Act of 1933.

Dividend News

HKEx has declared an interim dividend of HK$1.82 (USD 0.23) per share (2012: HK$1.85 – USD 0.23 – per share), amounting to a total of about $2.1 billion (USD 270 mn) (2012: $2.0 billion – USD 257 mln ) for the year ending 31 December 2013 which includes dividends of about $4 million (USD 515k) (2012: $4 million – USD 515k) for shares held in trust under the Share Award Scheme.

The interim dividend will be payable in cash with a scrip dividend alternative to Shareholders whose names appear on the ROM on Friday, 30 August 2013.

Special Section: FTI, NSEL, India at the Crossroads

PLY: So, NSEL announced a 30 week payment schedule and the brokers moaned. Then again, from one week to another the payment schedule goalposts seem to have moved somewhat. The brokers have some good points but would they really be better in charge? Meanwhile many apparently fervent capitalists demand government intervention. There is no good news for India Inc here and the relatively closed, protectionist local investor market clearly needs improvement.

Jignesh Shah is still clinging to survival but his grip is weak.

NSEL Says It Will Clear Dues In 30 Weeks
Business Standard

NSEL, will settle the entire dues of Rs 5574.31 crore (USD 909 mln) in 30 weeks beginning August 20. While the pay-in will begin every Friday from August 16, pay-out will happen every Tuesday thereafter.

However, the detailed settlement plan failed to convince brokers.

PLY: Besides demands for government intervention, one comment stands out here: Priti Gupta, executive director of Anand Rathi: “Just a settlement calendar does not guarantee smooth payment.”

Need More Clarity Not Promises In Settlement: Brokers

Reacting to brokers’ skepticism, Anjani Sinha, MD, NSEL says that the plan was formulated based on the feedback from the buyers. “The entire mechanism involves recovering money from 24 buyers and distribution of funds to the receivable brokers. In the last 15 days, we have merged all the settlements, notified our buyers and based on that commitment from them, we have issued this schedule.”

As per the settlement calendar upto September 13, NSEL is to pay around Rs 830 crore (USD 135.4 mln).

NSEL settlement schedule here.

FMC Tells NSEL Not To Settle Bullion Body Members’ Dues
The Hindu Business Line

The Forward Markets Commission (NSEL regulator) has instructed NSEL not to make any settlement to members of the Indian Bullion Market Association.

Ramesh Abhishek, Chairman, Forward Markets Commission, said the members of the Indian Bullion Market Association hold substantial equity stake in the exchange.

Besides, FMC has also called for details on the members and traders associated with the Association.

NSEL Investors Nearing A Dead End As Promoter Tries To Wash Hands Of Fiasco
The Economic Times

The worst fears are coming true. Investors of crisis-hit NSEL won’t get back their money soon, if at all they can recover any. Jignesh Shah, founder of the group that promoted NSEL, is trying to distance himself from the default that has hurt thousands of investors. And the chaos at the spot exchange is threatening to impact MCX, the country’s only listed commodity futures exchange, with member brokers demanding an independent audit of the exchange’s books and a scrutiny of the MCX settlement guarantee fund.

According to sources, a committee of government officials under the direction of the Prime Minister’s Office (PMO), and comprising officials of the finance ministry and central agencies, will investigate the matter.

Irked by a staggered repayment schedule that is yet to be approved by commodity market regulator FMC, some wealthy investors owed money via NSEL are planning legal action against Financial Technologies.

PLY: Jignesh Shah hangs by a thread while the battle for MCX’s future is clearly on:

Members Of MCX Want Promoters To Pay Them By Pledging Personal Shareholdings
The Economic Times

Top executives of the Jignesh Shah-promoted MCX met members of the exchange in Delhi to reassure them about its future prospects in the wake of the trouble facing NSEL, but the gathering turned stormy as many members were worried about the security of their money in the exchange.

MCX members, who are also active in NSEL, want Shah and other promoters to pledge personal shareholdings and assets to make their payments. MCX members, who have deposited 50 lakh each, want the exchange to return their trade guarantee money by Saturday. Also, in view of the controversy surrounding NSEL, they want to appoint an independent auditor to look into the books of MCX to ensure that everything is in order.

PLY: The independent audit is an absolute must for confidence in MCX. At the same time, I doubt personal guarantees will emerge but clearly Jignesh Shah & his associates need to change this narrative with some creative solutions to add confidence and appear in charge of, as opposed to mere passengers. The process looks not so much managed as an ongoing car crash.

I still like evaluating MCX as an investment but as I keep noting, due diligence will be the key here. Meanwhile, NYSE look to be stuck with their shareholding until the air clears…

4 Options For NSEL Brokers
Business Standard

Confidence remains shaky over whether NSEL will be able to meet its obligation of around Rs.5500-5600 crore (USD 910 mln). Should brokers remain unsatisfied over payment proceedings, the following are said to be some of the options before them:

1) Consider Criminal Proceedings

2) File A Civil Complaint

3) Opt For A Class action suit

4) Brokers Pay out of their own pockets

PLY: I suspect item 4 is less plausible on a broad scale but I think 1-3 are highly probable, if not already under way…

NSEL Brokers Have No Legal, Monetary Liability
Business Standard

Sharad Saraf, convenor NSEL Investors’ Forum: “We entered into a contract which was facilitated by the broker but whose counterparty was the exchange. The liability is that of the exchange, not of the broker.”

Market players said what prompted the brokers to blame the exchange for the NSEL crisis on Tuesday was rising insecurity about repayments. The brokers are under pressure from clients to ensure repayment.

Should NSEL Brokers Get Away With Saying They Acted In Good Faith?

The NSEL Investors’ Forum is partly right: the government should take over the settlement process (not the liabilities) of NSEL. The exchange has hardly inspired trust with its inconsistent statements on the settlement guarantee fund and the repayment schedule. On Wednesday, NSEL announced a settlement calendar which turned out to be quite different from what was indicated last week.

News reports say some of the warehouses in which the underlying stock is supposedly stored are controlled by the very entities who owe the exchange large amounts. It’s foolhardy to leave the stock, if any, in the control of those who have already defaulted on their obligations to the exchange.

But just because the broking community has come up with a solution to deal with the NSEL crisis doesn’t mean that they should be absolved of their failures.

PLY: Amidst many excellent analyses, this piece by Mobis Philipose stands out. Explaining the incompetence of NSEL and puncturing the hypocrisy of some aspects of the brokers’ stance. A must read.

NSEL Crisis: What Is Sebi Doing With Its New Powers?
Business Standard

The $1-billion NSEL scandal can be approached in two ways. First, it was an exchange and was allowing clients to sell commodities they did not own or short-sell, which is illegal. Second, it was a financing scheme, which allowed a small group of people to pool money from a large number of investors, assuring them returns.

These two views need not be mutually exclusive and in this case, they certainly are not. The NSEL paired trades investment scheme was both. In fact, last December, Consumer Affairs Minister K V Thomas went on record that a complaint had been received saying NSEL was an illegal financing operation, clothed in exchange-wear. He said they were investigating this.

Let’s look at the facts. There were 24 people who made use of Rs 5,600 crore (close to $1 billion) collected from 13,000 investors. At a point, this sum was as high as Rs 21,000 crore(USD 3.4 bln), the minister was quoted as saying recently. The people who collected money assured a return of 15-18 per cent. These people, who are companies with little or no actual business, can’t even dream of such sums in the regular channel, say banks or other financiers. Two intermediaries helped this: the exchange and the brokers. They both earned huge fees and commissions, in crores of rupees.

PLY: Another excellent analysis by N Sundaresha Subramanian which clinically exposes the weakness of regulators despite their active role in Indian markets

NSEL Fallout: Sebi Looks To Tweak Settlement Guarantee Fund Norms
Financial Express

Sebi is looking at redefining the manner in which stock exchanges manage their settlement guarantee fund (SGF).

According to persons privy to the development, the last couple of meetings of the committee did not make much headway as all three bourses — NSE, BSE and MCX-SX — were opposed to Sebi’s earlier idea of transferring 25% of their annual profits every year to SGF. The main issue remains the manner in which bourses would contribute to the fund.

PMO Plans To Set Up Special Team To Look Into NSEL
The Economic Times

The Prime Minister’s Office is planning to set up a special team headed by the Economic Affairs Secretary to look into NSEL.

Lessons From NSEL Fiasco
Business Standard

NSEL fiasco is another lesson for retail investors – don’t invest in products that offer exceptional returns. According to industry sources, there are 8,000 – 15,000 retail customers (with exposure of Rs 10 lakh or less) whose investments are stuck with the exchange.

While these retail investors and the high networth individuals (HNIs) can claim that brokers offered them good returns, in excess of 15 per cent. Lesson: don’t be greedy and get carried away with returns.

Then, the exchange was not regulated by anyone in particular which meant that they were following some guidelines of FMC and department of consumer affairs. In fact, even the exchange had complained that there was no particular entity regulating these and it was leading to confusion. Lesson: If you are investing through an unregulated entity, there is no clarity about the redressal system.

PLY: India is a truly incredible, pulsating nation with sensational potential. Against a cloudy background for NSEL and MCX which we hope will be resolved satisfactorily asap, we wish all our avid Indian readers a very Happy National Day.


Battling The Bottleneck: An Analysis Of The New Eurex Platform

Eurex introduced a new trading platform that represents a radical departure from its previous platform based on OpenVMS (Eurex Version 14.0, the final release on this technology stack).

Finally, the first real benchmark products have arrived on T7. As of 8 May 2013, we have some meaningful production statistics for some highly liquid futures such as the DAX EURO STOXX 50 futures.

PLY: A fascinating analysis of the performance of the EUREX system…


PEGAS: EEX To Launch Quality-Specific Natural Gas Products For Germany

PEGAS: EEX to launch quality-specific Natural Gas products for Germany 2013/08/14

Career Paths

Pinar Emirdag, head of professional business development at LSE, has left the company after three years. Read more here.

A useful profile of serial innovator Jos Schmitt now building Canada’s Aequitas Exchange can be read here.

Tullet Prebon rehired Shane Burton to oversee its carbon options business after Jerry Vlam left the firm last month. Read more here.

Financial Calendar

ASX will release its 2013 full-year results on Thursday, 22 August 2013.

All forthcoming exchange / investment related events are now listed in our Events page.

Analyst Notes

CME was upgraded by Zacks from a “Neutral” to an “Outperform” rating – $89.00 price objective

A full table of current analysis can be found on our Analyst Ratings page which is updated daily.

All Analysts, Banks and Brokers are welcome to contribute to this section.


A New Crowdfunding Platform For Hardware Entrepreneurs

In the absence of investment capital from venture capitalists, hardware entrepreneurs have flocked to popular crowdfunding platforms, such as Kickstarter and Indiegogo, to finance their projects.

Come September, Boston-based manufacturing services firm Dragon Innovation will launch their platform exclusively for hardware entrepreneurs last week. Currently in a beta test, the platform is invitation only. However, the firm plans to open it to a broader community of entrepreneurs in September.

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