December 10 2013

elb2IOSCO worried as extraterritoriality threatens market cohesion, Volcker rule raises blood pressure of all concerned, CME under continued fire for erratic data approaches, SEF developments, Tomas Carruthers new CEO of Social Stock Exchange…

Incidentally, before tomorrow’s EI goes live, Reuters users can catch me on the Global Markets Forum Asia discussing one of my favourite topics, Bitcoin, cryptocurrency and its future at 0630 GMT, 0730 CET 1200 IST, 1430 SGT. Last week their guest was Jim Rogers and next week it’s Mark Mobius, once again I am honoured to be the man in the middle in this schedule!

Public Markets

US Regulator Acts To Reform Futures Trading (subscription)
Financial Times

The US derivatives regulator has drawn up plans to bring more transparency to futures trading, a move that could tilt the competitive balance between exchanges.

The block trading rule would set out three broad categories for futures, requiring at least 95 per cent of trading in the most active contracts to take place on central exchanges and not between two parties.

CFTC was set for a public vote on block trading on Tuesday, but has delayed the proposal as commissioners focus on the Volcker rule for banks’ proprietary trading.

The measure is important to the competition between futures exchanges including CME and ICE, as well as start-up derivatives platforms called SEFs. The outcome of the rule could influence where traders want to do business.

Watchdog Warns Of Chaos In Competing Derivatives Rules

Failure to thrash out a common supervision of the $640 trillion global financial derivatives industry will split markets and bump up costs for end users, as David Wright, Secretary General of IOSCO warned it was a “recipe for chaos” that could get messy and anti-competitive.

Banks who trade interest rate swaps, credit default swaps and other derivatives are looking to the US and the EU to harmonize their approach to new rules aimed at making markets more transparent.

Banks worry that rule clashes and overlaps will create legal uncertainties and extra compliance costs.

PLY: David Wright is the best endorsement for the EU’s bureaucracy ever. A clear and perceptive thinker who is not unwilling to express his opinions. Now the EU’s loss is absolutely IOSCO’s gain and his insights are precise in this instance with the US and EU lumbering elephants trying to placate domestic concerns on a world stage rather than cooperating to help build a better global framework.

UK Lawmakers Urge Britain To Shape EU Transaction Tax Debate

Britain should cultivate allies and use its clout to stop a tax on financial transactions in 11 EU countries from harming the City of London, a committee from the House of Lords has said in a report adding that the planned tax on derivative, bond and share trades was flawed and would undermine the EU single market.

“The government should be more closely involved in defending the single market. They don’t find allies and there is a real and present danger to the City of London, Europe’s most important financial centre,” the committee’s chairman, Lyndon Harrison, told Reuters.

PLY: Absolutely. Britain must lead as other nations see the UK’s being at the forefront of anti-FTT measures as imperative to help them slot in behind… Note Committee Chairman Lord Harrison is a former Labour Party MEP.

HKEx To Waive Some Fees To Help Brokers

HKEx will waive some fees to help small brokerages cut costs, after 14 securities firms in the city closed down this year.

Fees for real-time securities market data for the first 10 terminals used by each brokerage will be scrapped from next year, costing the exchange about HK$10 million ($1.3 million) annually.

Intensifying competition from banks and lower brokerage commission may see 25 percent of local firms close in the next five years, the Hong Kong Securities & Futures Professionals Association said in July.

Canceling the HK$200 monthly terminal fee would help reduce the average related costs by about 20 percent. The city has about 502 brokerages.

PLY: Hong Kong, a bastion of the free market in so many senses, long held onto the bizarre notion of fixed commissions which helped a multitude of brokerages remain in business. I am all for customer choice but 500 brokerages strikes me as a touch on the high side?

Data Fees Kick CTAs And IBs When They’re Down

PLY: The CME has a big fat festering disaster on its hands. When you bring in the Powerpoint addicted crypto-consulting classes to middle management and ask them to figure out a way to raise revenue, they often have ideas. However, good, well-rounded ideas trade at a premium and alas here CME seems to have careered off down a road directly to hell where the customers appear to be volubly questioning whether there is even a faint vestige of good intention paving the aggressive price rises.

CME has palpably failed to communicate their approach here and it looks very bad – a blatant gouging of loyal existing customers appears to be taking place. True, there have long been odd practices in data distribution which exchanges accepted in the rush to go electronic. To reverse the situation on a dime is a PR disaster and potentially damaging to loyal customers of CME, especially those who have spent time selling the services of the business through connectivity et al.

Les Rosenthal, a man of considered opinion who is rightly an elder statesman of the exchange traded derivatives community in Chicago and world-wide, has written a most eloquent letter which appositely bristles at the ham-fisted implementation of a new charging mechanism without remotely coherently explaining what the aim is, barring a monopoly rent for the CME Group.

CME has so much going for it but in a competitive marketplace, it cannot afford to Balkanize customer relations as it has with this rather totalitarian implementation of a plan which may have merits in the long term – but they have been buried in consultant-speak gobbledygook.

LME GC: Ringing The Changes
The Lawyer

PLY: Interview with LME General Counsel Tom Hine who “has guided the institution through a Hong Kong buyout and out onto the stormier seas of Eurocracy.”

New Fees Of The Moscow Exchange’s Equity Market To Come Into Effect
Moscow Exchange: Grace Period For Trades In Foreign Securities

From 16 December ETFs will be considered a specific category of securities with ETF fees similar to those charged for trades in mutual funds.

A unified total fee of 0.01% of trade size will be applied to all dark pool trades regardless of the fee schedule selected by a trading member. A cap of RUB1,500 for the total fee charged for dark pool trades will be abolished due to the end of the grace period.

Meanwhile, there will be a 50% discount for trades in shares of foreign issuers and depositary receipts running from 16 December to 30 June 2014.

Sri Lanka Looks To Partner With SGX To Develop New Products

Sri Lanka is looking to enter into a partnership with the SGX particularly in relation to product development.

PLY: SGX seems to be on a roll with product development partners this month alone: from Hong Kong to Sri Lanka and the Philippine Exchange too.

Private Markets

Will BSE List?

PLY: SEBI supports the listing of exchanges although the arcanery of regulation would appear to suggest otherwise. At least partly there is a clash with the overly prescriptive and highly reactionary Jalan committee report which SEBI mostly enacted pushing Indian market infrastructure practice backwards.

CFTC Seeks Public Comment On Certification From Bloomberg SEF LLC To Implement Available-To-Trade Determinations For Certain IRS/CDS

CFTC is requesting public comment on a certification from Bloomberg SEF LLC to implement available-to-trade determinations for certain interest rate and credit default swap contracts.

Bloomberg submitted its available-to-trade determinations to the Commission on a self-certified basis pursuant to Commission regulations 37.10 and 40.6.

Comments may be submitted electronically through the CFTC’s Comments Online process. All comments will be posted on the CFTC’s website.

Recovering Stolen Bitcoin: A Digital Wild Goose Chase
The Guardian

PLY: A curious tale of how to lose BTC in what is really a fairly conventional fraud/bankruptcy juxtaposition but with added blockchain… It seems somebody may have made off with a cool hundred million – Willie Sutton would clearly be impressed.

Special Section: FTI, NSEL, India at the Crossroads

PLY: MCX is down 3% and FTIL down 2% today as it becomes clearer that the Mumbai fraud squad may have nearly completed a miracle, recovering enough assets to ensure the near total repayment of NSEL creditors…which apparently could be a 100% payout if Jignesh Shah values his liberty. A remarkable turnaround in a story which, if only it had had more female characters, could make a great Bollywood film.

Finmin Reviews Actions Taken Against NSEL
The New Indian Express

“We had a review meeting on NSEL. Concerned regulators are taking action,” Economic Affairs Secretary Arvind Mayaram told reporters.

EOW Attaches Assets Worth Rs.4,041 Crore (USD 660 Mln) In NSEL Case

PLY: Update: the total attached by the fraud squad (EOW) in Mumbai is apparently 4,041 crore (USD 660 mln) out of a total Rs.5,575.34 crore (USD 910 mln) debt pile (although different media continue to report different numbers!).

“We have roughly recovered 80% of the money. Last week Jignesh Shah and Joseph Massey discussed with us plans to make up for the shortfall,” said Rajvardhan Sinha, additional commissioner of police, EOW.

PLY: If this all comes to pass it will be not merely great news for investors but a triumph for the often criticised Indian state – thanks to the dogged work of the Mumbai fraud squad. A few weeks ago I was anticipating a haircut of well over 50%. Having collected a bare few percent of total money owed so far directly, NSEL was in deep trouble. Rather, if FTIL come up with the amount they suggested yesterday, the shortfall would be about 100 million dollars. Doubtless under duress FTIL will make up the total, as indeed the police have clearly inferred:

EoW Tells Jignesh Shah To Get Rs.2000 Crore (USD 326.7 Mln) Or Get Arrested
India Today

Soon after the attachment of movable and immovable properties of Jignesh Shah, worth Rs.200 crore (USD 32.67 mln), it was expected that Jignesh and several other directors would be arrested…

Exclusively, a top senior police officer told, “Jignesh Shah has requested us not to arrest him so that he could make an arrangement of Rs.2000 crore (USD 326.7 mln) which could be returned to NSEL investors.”

This Rs.2000 crore (USD 326.7 mln) is separate from Rs.3000 crore (USD 490 mln) assets which has been attached by EOW to date. “Jignesh has assured us to give him some time to arrange Rs.2000 crore (USD 326.7 mln), and we are considering it,” said the officer.

PLY: Jignesh may yet save his skin from debtor’s prison but now he has a simple binary problem – find the money or face jail (well, apart from fleeing the country presumably). In terms of raising the cash, while there are issues about the SMX money (see below), coupled with some potential revenue from, say, MCX-SX shares etc it ought to be feasible to raise the money in reasonably short order…presumably FTIL has some cash on its balance sheet too. Jignesh may be damaged goods but he is not finished yet.

FTIL Seeks To Shield SMX Sale Proceeds

In MMTC’s recovery suit against NSEL, with MMTC attempting to raise the corporate veil for targeting the promoters, FTIL is trying hard to shield the sale proceeds from SMX.

In the suit, MMTC has sought ad-interim relief in the form of securing the SMX sale proceeds.

FTIL is planning to use the sale proceeds to repay ECB dues. MMTC is seeking the USD 150 million dollars as security against its investment of Rs 220 crore (USD 35.9 mln) in the trouble ridden spot exchange.

EOW Turns Heat On NSEL Brokers
Business Standard

After the arrests of some officials of the beleaguered NSEL and its leading borrowers, the Mumbai police EOW has initiated investigations against the 150-odd brokers through which investors had dealt with NSEL contracts.

The EOW has told NSEL to give it, by Tuesday, details of the past five years, of investors through the exchange-appointed broking firms, along with facts on the margin money taken by them from clients.

PLY: The Mumbai fraud squad have been the catalyst to settlement so far in all aspects of NSEL, it will be interesting to see what charges will emerge…


INET Nordic – NASDAQ OMX To Implement Source IP Validation On OUCH
Nasdaq OMX

To further improve security on INET Nordic, NASDAQ OMX will implement source IP validation for OUCH order entry ports in addition to the password protection already in place.

EEX Exchange Council Welcomes Introduction Of New “T7” Trading System

In the first week of December 2013, EEX successfully switched its Derivatives Market trading system to “T7” technology, a new derivatives market trading system developed by Deutsche Börse AG replacing the current EUREX system.

NCDEX Launches Day Spread Order Functionality
The Economic Times

Agri commodity exchange NCDEX has launched a new a trading facility for market participants enabling spread trading using day-limit orders for contracts in the same commodity, with different expiry months, NCDEX.


Prague Energy Bourse Launches Gas Futures Trading

Prague’s Power Exchange Central Europe (PXE) launched gas futures trading on Monday as part of its push to be at the centre of a regional energy trading hub.

PXE’s partner in the physical delivery futures is Vienna-based Central European Gas Hub, the trading platform provider for Austria’s natural gas hub at Baumgarten, the first entry point for imports to Western Europe from Russia.

PLY: On the topic of Russian gas, I have been musing on the politics of the South Stream pipeline in my latest RT Op-Edge column…

CME To Launch Edmonton Sweet As Producers Seek To Dodge Price Discounts
The Province

CME is preparing to launch a new futures contract for Alberta’s light oil, spurred by demand from small producers eager to avoid price discounts created by pipeline constraints. CME will launch the Edmonton Sweet contract Dec. 15, allowing oil companies to lock-in prices for future production as soaring output from Alberta’s oil sands and North Dakota’s Bakken play contribute to chronic pipeline jams.

Career Paths

The Board of Directors of HKEx Monday approved appointment of Michael Lee as an additional member to its Audit Committee with immediate effect. Mr Lee’s term on the Audit Committee shall be coterminous with his directorship with HKEx.

Powerstorm Capital Corporation CEO Mike J. Freni, today announced the appointment of Andy Booth as the company’s first member of a newly-formed Board of Advisers. Booth is CTO of NYSE LIFFE US.

Thomson Reuters Corp is replacing the senior executives overseeing three of its main businesses – legal, growth markets and intellectual property – as part of a wider reorganization aimed at boosting growth and trimming costs.

The news and information company said in a statement on Monday that Susan Taylor Martin will take over the Legal division, which represents more than a quarter of total revenue at Thomson Reuters.

Taylor Martin is currently managing director of Thomson Reuters Legal in the U.K. and Ireland, and has previously been head of corporate strategy at Reuters and president of the media business. She will succeed Mike Suchsland, who is leaving the company.

Gonzalo Lissarrague has been appointed president of Global Growth & Operations, an area that includes certain emerging markets, replacing Shanker Ramamurthy. Basil Moftah has been named president of the company’s Intellectual Property & Science division, taking over from Chris Kibarian. Ramamurthy and Kibarian are also leaving the company.

All three appointments are effective Jan. 1, 2014.

SEC has named Sebastian Gomez Abero as Chief of the Office of Small Business Policy. The appointment is effective immediately.

The Social Stock Exchange has appointed Tomas Carruthers as its new CEO.

The Social Stock Exchange, which was launched by David Cameron in June 2013, has today announced Carruthers’ appointment, and the succession of Pradeep Jethi, a co-founder of the stock exchange. Jethi will become full time chairman of the Social Stock Exchange’s independent Admissions Panel.

PLY: Interesting to see serial entrepreneur Tomas Carruthers taking charge as he also has a background in the exchange business via AngelBourse which was a UK SME market some years back. Tomas ought to move the project forward as the difficulty with so many social investment initiatives is that they are often created by NGO-types and therefore reliant on endless studies before any decisions can be made…

Financial Calendar


Record date CME Q4 $0.45 dividend

This week

Interactive Brokers $0.10 Q3 dividend payment
NZX 1.5 cents Q3 dividend payment
Record Date Nasdaq OMX Q3 $0.13 dividend

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

Analyst Notes

LSE “Neutral” Rating Reiterated At HSBC – GBX 1,710 target price

The Changing Face Of Nasdaq OMX

In the evolving world of financial exchanges, Nasdaq OMX is zigging and zagging to remain vibrant. And while significant challenges remain, in an improved operating environment and with proper execution, we think Nasdaq could be worth up to 21% above our current fair value estimate.

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.


Lending Club Hits $3 Billion Milestone

Lending Club’s move further into the financial mainstream was evident this month when the San Francisco company said it originated more than $3 billion in loans, just six months after crossing the $2 billion mark.
The company expects to make $2 billion in loans this year alone.

In November, Lending Club received a $57 million investment from Yuri Milner’s DST Global and Coatue Management, placing the company’s valuation at $2.3 billion.

Lending Club has issued 225,000 in loans to residents of 44 states as it brings together borrowers wishing to refinance other debts at lower rates with investors seeking higher returns than can be found elsewhere. The lending platform has attracted more than 70,000 investors, including several institutional players.

Lending Club’s success signals good times for across the peer-to-peer lending business.

PLY: Debt crowdfunding / P2P lending is now reaching critical mass with some gusto, great to see and yet so many opportunities still exist as this business is barely scratching the surface at present…

Indiegogo Launches Crowdfunding Playbook
Fort Mill Times

The crowdfunding industry is exploding, with new platforms, innovations and experts emerging daily. Indiegogo, the world’s first and largest crowdfunding platform, solidifies its position as the global leader with the introduction of the ‘Indiegogo Playbook,’ a comprehensive online educational resource designed to equip future and current campaigners, partners and contributors with the tools, best practices, strategies and advice on how to be better campaigners and crowdfunding participants.

Other stories

Volcker Rule Sets New Hurdles (subscription)
Wall Street Journal

The Volcker rule will put in place new hurdles for banks that buy and sell securities on behalf of clients and will restrict compensation that provides incentives for risky trading, according to a draft.

If We’re Lucky Volcker Rule Will Make Banks Less Transparent

Pre-publication of the rule, here are DealBook and Bloomberg News articles that are best read as companion pieces: Bank lobbyists think that the Volcker rule is too strict and will sue to weaken it, while anti-bank lobbyists think that it’s too lenient and will lobby to strengthen it. No one knows what it says. Opinions, and lawsuits, on whether it’s too strict or not strict enough do not turn on what it actually says.

As Tyler Cowen puts it: “Many people, even seasoned commentators, approach the Volcker rule with mood affiliation, starting with how much we should resent our banks or our regulators or how we should join virtually any fight against either ‘big banks’ or regulators.”

PLY: The Volcker rule may be published in its bloated entirety but it will remain a huge bone of contention and I still suspect may be hugely watered down in due course.

The Case Against Edgy Information

PLY: another excellent piece of research from Integrity noting the, er, information asymmetry in foggy US regulatory comments which do not clarify the precise areas where information is deemed legal or illegal. This is a huge problem, especially as new SEC Chairman Mary Jo White is more a determined litigator than a holistic regulator it seems.

Amdocs To Transfer Stock Exchange Listing To The NASDAQ Stock Market

PLY: Chalk a late season win up to NASDAQ as Amdocs (NYSE: DOX), the leading provider of customer experience systems and services, has decided to transfer its share listing The NASDAQ Global Select Market (‘NASDAQ’) from NYSE.

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