December 11 2013

elb2Welcome to reports on D-Day (where D implies “Disaster”) for the Volcker Rule, a poor concept, ineptly legislated and hastily processed. Now it awaits implementation where exhortations to err on the side of caution (i.e reaction) ought to apply a hefty brake to the wheels of American capitalism.

Meanwhile, readers may be pondering how well US health care reform is going as that implementation amply demonstrates the dysfunction of government… Anyway, today I won’t discuss the failings of Obama’s ‘Camelot’ (i.e. a White House remote and segregated from the real world by a moat and drawbridge) which no selfie-filled funeral appearance can rectify. Rather I will leave the word with SEC Commissioner Dan Gallagher who demurs from the misguided government position with such aplomb. His statement of dissent is an elegant elegy to government endeavours to murder freedom and free markets, to wit:

“From the very beginning, the Volcker Rule has been a solution in search of a problem, a common situation throughout the Dodd-Frank Act. To quote former Treasury Secretary Geithner, “If you look at the crisis, most of the losses that were material for the weak institutions — and the strong, relative to capital — did not come from [proprietary trading] activities. They came overwhelmingly from what I think you can describe as classic extensions of credit.” Paul Volcker himself explained, “Proprietary trading in commercial banks was there but not central” to the financial crisis…

Even in the era of never letting a serious crisis go to waste, however, the mere fact that proprietary trading makes a segment of our policy establishment nervous surely is not sufficient justification to potentially destroy the market-making system central to the liquidity and proper functioning of our capital markets. Years from now, I fear, financial historians will marvel at how the Dodd-Frank Act forced regulators to proactively disadvantage American financial institutions as well as the strength and integrity of our capital markets to address such tangential – at best – matters as conflict minerals, resource extraction, and proprietary trading, but gave a complete pass to the main cause of the financial crisis — decades worth of disastrous federal housing policy.”

“Today…the Volcker rule is being finalized in the shadow of perhaps the greatest display of governmental hubris in our lifetimes, as millions of Americans struggle to navigate the unprecedented disaster arising from governmental intrusion into our healthcare system…The nonchalant suggestion to “err on the side of” overregulation is fully in line with the staggering level of hubris reflected throughout this joint rulemaking process, which has culminated with a purely political insistence on a pre-year end vote…”

Thanks to his previous experience with the agency, Dan Gallagher is shaping up to be a voice of reason when the US government has shed so much credibility.


Elsewhere today, lots of NASDAQ news, some good, some interesting and some a bit of a wash too. All the exchange news that’s fit to print in one tidy format stretching from London to Yangon via Moscow and on to Sydney and then all the way back round the globe to the USA. All asset classes covered from Brent crude to IRS and fixed income with a great deal in between, happy scrolling:

Public Markets

Incentives Boost Growth At Nasdaq OMX’s New London Venue (subscription)
Financial Times

The new London derivatives trading venue of Nasdaq OMX has dramatically increased its trading volumes in recent weeks, helped by an incentive scheme that pays participants up to $1.5m for market share.

PLY: Open interest remains low at NLX (Phillip Stafford notes 21,000 in Euribor) although there was a remarkable volume pop of late as previously discussed. If it really is big blocks chasing incentive cash then there is clearly no great momentum yet with this ETD “me too” copycat project. Six months is not a long time and again the addition of TT customers noted here ought to further help volumes but it looks as if NLX needs more ‘paper.’

Nasdaq Plans “Dark Pool” For U.S. Treasuries

Nasdaq OMX plans to create a so-called dark pool for electronic U.S. Treasuries trading where buying and selling interest is not revealed, even on a post-trade basis.

PLY: Integrating eSpeed, clearly NASDAQ wants to maximize value. There are huge opportunities in fixed income markets the world over for block trading facilities.

Borsa Istanbul, Nasdaq OMX Group Deal Inking Postponed

PLY: Three stories in a row for NASDAQ today, with an official signing delay due to EGM issues but the deal itself is proclaimed to be safe.

Late-Night Moscow Trading Looms As Winter Time Takes Toll

PLY: Russia eliminating winter clock changes (hooray!) has slightly shifted Moscow’s time in the global trading day and thus MOEX is considering extending the market’s close by an hour to 7:40 p.m. local time to provide more overlap with the USA (Moscow is now 9 hours ahead of US EST).

On a separate note, an interesting article (in Russian) from Vedomosti discussing how spreads and trading volumes have been improving on MOEX at the expense of LSE. LSE may rue the efforts of the London financial centres body “The City UK” to improve Anglo-Russian co-operation as evidenced at the London Moscow financial centre forum the other day but overall an improvement in Moscow’s financial centre can only help grow the global market long-term.

Moscow Exchange Announces Measures To Improve Its FX Market Order Book

Moscow Exchange will introduce a minimum fee of RUB25 for FX trades of less than 50 lots on 20 January 2014. The launch of the minimum fee for small orders will help to balance interests of market participants and efforts to improve the exchange order book.

JPMorgan Files Patent On ‘Bitcoin’ System (subscription)
Financial Times

PLY: JPM appear to have copy-pasted some aspects of the Bitcoin system into a new patent proposal which is part of the increasing battle to drag the world’s Dickensian money transfer and payment systems out of the dark ages towards the 21st century.

Private Markets

Yangon SE To Open In Two Years – Deputy Minister

The Yangon SE (YSE) will open in two years based in the former headquarters of Myawaddy Bank in Yangon.

“We went there to see the location along with Japanese investors. Ground floor and first floor will be rented for the exchange,” said Deputy Finance Minister Maung Maung Thein.

The Yangon SE will be part of the capital market which will open in two years, he added. A committee has been formed to create the exchange and capital market which is expected to coincide with the opening of the ASEAN Economic Community (AEC) in 2015.

A joint venture with Japan’s Daiwa Company will be formed soon for the exchange which will have initial capital of Ks 32 billion (USD 32.6 mln).

FCMs Urged To Reform Business Workflow
The Trade

Futures commission merchants (FCMs) will need to make considerable changes to their business models in order to meet the challenges of incoming derivatives regulation, according to a white paper from technology firm Fidessa.

It said many FCMs have business models that are based on old market structure and are reliant on being able to simply intermediate between clients and liquidity, or are hoping for a return to high interest rates.

PLY: Steve Grob of Fidessa expresses a view on how the FCM model can evolve.

Barclays LX Surpasses Crossfinder As Top Dark Pool
Traders Magazine

PLY: In a new development for the dark pool model, Credit Suisse are no longer the largest because they have stopped even reporting their volume numbers… How opaque can you go?

The Future Of Bitcoin: Super Currency Or Super Fad?
USA Today

Entrepreneurs flush with newly valuable Bitcoins are creating new products designed to simplify the technology and spread Bitcoin mania into the modern American mall.

PLY: I spent a fascinating hour this morning with the good folks of Reuters Chat discussing Bitcoin with a broad forum of, mostly Asian, traders. Interesting to hear their feedback which is generally that BTC feels like a club and not really a broad consumer instrument. The usual issues about security, AML and volatility were raised as well during a very lively discussion on a vibrant forum!

Apple Blocks Bitcoin Payments On Secure Messaging App Gliph
The Guardian

Apple has forced a secure messaging app to remove the ability to send bitcoin payments reinforcing the belief that Apple has an unstated policy against allowing bitcoin apps on the store, despite allowing alternative forms of e-commerce such as apps from PayPal and Square.

Dividend News

CBOE declared a special cash dividend of $0.50 which will be paid on January 17, 2014 to stockholders of record at the close of business on January 3, 2014.

Special Section: FTI, NSEL, India at the Crossroads

PLY: Amidst the excitement of the Mumbai Fraud Squad (EOW) making so much progress in grabbing assets, at least some things remain steady – albeit in this case it is sadly the inability of NSEL to pay more than 9 crore rupees in a week on their repayment/default schedule. MCX shares are down 3% today while FTIL is flat.

The NSEL tally of shame remains:

(N.B. Anticipated weekly repayment is Rs 174.72 crore, roughly USD 28,000,000)

Week 1: Rs 92.73 crore (USD 14.37 mln) paid
Week 2: Rs 12.05 crore (USD 1.79 mln) paid
Week 3:Rs 15.37 crore (USD 2.29 mln) paid
Week 4: Rs 7.77 crore (USD 1.21 mln) paid
Week 5: Rs 8.57 crore (USD 1.35 mln) paid
Week 6: Rs 11.45 crore (USD 1.82 mln) paid
Week 7: no payout – bank accounts frozen
Week 8: Rs. 2.85 crore (USD 457.9 k) paid
Week 9: Rs. 28.34 crore (USD 4.58 mln) paid
Week 10: Rs. 30 lakh (USD 49k) paid
Week 11: Rs. 29.05 crore (USD 4.72 mln) paid
Week 12: Rs. 11 crore (USD 1.77 mln) paid
Week 13: no payout
Week 14: Rs. 6.1 crore (USD 976.7k) paid
Week 15: Rs. 9 crore (USD 1.44 mln) paid
Week 16: Rs. 9 crore (USD 1.44 mln) paid
Week 17: Rs. 9 crore (USD 1.46 mln) paid

…making a total settlement of Rs 253 crore (USD 41.22 mln) against about Rs 5,600 crore (USD 912.5 mln). The fraud squad seem to have about 500 million US so the shortfall is about 350 million USD maximum at present, although various payment schemes are in the works so FTIL probably has a shortfall to make up (or see Jignesh interned) of circa 300 million, give or take..

NSEL Defaults For 17th Time; Pays Rs 9 Crore (USD 1.46 Mln) Against Rs 174.72 Crore (USD 28.46 Mln)
The Economic Times

Crisis-ridden bourse NSEL today paid about Rs 9 crore (USD 1.46 mln) against the scheduled payment amount of Rs 174.72 crore (USD 28.46 mln), defaulting for the 17th straight time.

With today’s pay-out, NSEL has so far settled about Rs 253 crore (USD 41.22 mln) against about Rs 5,600 crore (USD 912.5 mln) due to 13,000 investors.

MCA Seeks NSEL Investigation Details From EOW
Business Standard

The Ministry of Corporate Affairs (MCA) has sought details of progress made in the investigation of the beleaguered NSEL.

“The MCA is in touch with us. They have sought details of progress made in NSEL investigation. Probably, the matter will be discussed in the Parliament” a police source said.

NSEL-Mohan India Pact Runs Into A Hurdle
The Economic Times

The first agreement between one of the largest defaulting borrowers on NSEL and the bourse seems to have run into a roadblock with commodity market regulator FMC having asked the exchange to provide it with certain clarifications on the agreement.

NSEL signed an agreement with Mohan India in October-end under which the latter agreed to pay in Rs 771 (USD 125.6 mln) crore out of the Rs 922 crore (USD 150 mln) it owed investors on the bourse over a year.

Apparently two weeks ago FMC asked NSEL about who would make good the difference of Rs 151 crore (USD 24.6 mln), what was the credibility of the agreement and whether the exchange had checked the value of the collateral put up by Mohan India for honouring its commitments.

PLY: A slight bump in the repayment road only I hope.

NSEL Brokers In Range Of Fire, BSE Brokers Forum Extend Support To Them
India Today

PLY: Brokers are in the firing line and the BSE brokers association have switched to support their NSEL brethren. I would concur that a pure broker is broadly innocent if a warehouse debacle occurs when selling a simple contract of the exchange’s making. However when self-same broker is de facto selling a loan or otherwise structured product of their own making using any form of underlying commodity, I find it harder to argue that they do not have some duty of care to ensure that they are creating a contract which has undergone reasonable due diligence?


Bursa Malaysia Goes Live With Its New Trading Engine Powered By NASDAQ OMX
Nasdaq OMX

Bursa Malaysia has gone live with their new trading engine, Bursa Trade Securities 2 (BTS2) powered by NASDAQ OMX’s X-stream INET. The project was delivered ahead of schedule on 2 December 2013, well in advance of the initial target of Q1 2014.

PLY: Another good implementation from the NASDAQ OMX tech team.

Austrian Energy Regulator E-Control Selects Cinnober For Market Surveillance

The Austrian electricity and gas-market regulator, E-Control, has selected Cinnober for the implementation of its new surveillance system.

The multi-asset solution Scila Surveillance will strengthen E-Control’s regulatory capacity to monitor the energy market for abuse and manipulation.

Cinnober press release here.

Calypso Interfaces With Tradeweb Markets SEF

Calypso is interfacing with TW SEF from Tradeweb Markets, the leading global provider of fixed income and derivatives marketplaces, to offer an out-of-the-box request-for-quote (RFQ) and order book integration solution.


ICE Futures Europe: Successful Transition Of Brent Crude Futures & Options To New Expiry Calendar

ICE Futures Europe announced the successful completion of the transition of ICE Brent futures, options and related derivatives instruments to a new, ‘month-ahead’ expiry calendar from a 15 day basis.

The expiry calendar for ICE Brent futures changed from a 15 day basis to a month ahead basis after market close on December 6, for the March 2016 contract month onwards. The transition involved 37 member firms and 1,540 open positions, representing 124,000 contracts and 124 million barrels.

PLY: For more info scroll to the grey box in this excellent Risk article which explains how the Platts benchmark got out of line with ETD over the years while the article itself deals in more detail with the execution of the running repair to the contract in mid-trade.


SGX & Thomson Reuters Launch Bond Indices For Benchmarking Investment Performance
Automated Trader

SGX and Thomson Reuters have launched a suite of Singapore dollar (SGD) bond indices, the only complete government, statutory board and corporate bond index series to provide five years of historical data. This offers market participants a barometer of fixed income returns across a multitude of segments.

STOXX Introduces Emerging Markets Exposed Index For Europe

STOXX today introduced the STOXX Europe 600 EM Exposed Index. The new index represents those companies within the STOXX Europe 600 Index that derive a substantial part of their revenues from Emerging Markets countries, thus providing exposure to these growing markets through liquid securities.

JPX And Tokyo SE: The Retroactive Index Value Of JPX-Nikkei Index

JPX, and TSE, and Nikkei will calculate “JPX-Nikkei Index 400” from January 6, 2014. The index values of JPX-Nikkei Index 400 were calculated retroactively from a base date of August 30, 2013 on an end-of-day basis.

Career Paths

JSE appointed Nonkululeko Nyembezi-Heita to replace Humphrey Borkum, who is retiring as chairman after the next AGM. Borkum, who served in the post since 2002, will step down after the meeting, the date of which will be announced on March 11.

The Italian Corporate Governance Committee appointed Mr Giordano Lombardo as Deputy Chairman, replacing Mr Domenico Siniscalco, who recently resigned.

b-next, a specialist provider of Market Abuse Surveillance, Insider Dealing and Compliance software solutions, is pleased to announce the appointment of Mike Rhoden as Product Consultant. Mike will bolster the UK operation and help to further expand b-next’s international client base.

Changes in investors/shareholders

Hellenic Exchanges S.A. Notification: Significant Change In The Number Of Voting Rights

The London And Amsterdam Trust Company Limited informed the Company in writing on 06.12.2013 that, because of a triggering transaction on 27.11.2013 it directly holds 5.01% of the share capital of HELEX (from 4.97% before the transaction).

Financial Calendar

This week

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

Dubai Financial Market PJSC will hold a Board of Directors’ Meeting on Sunday 15 December 2013, at 4:00 PM at Borse Dubai to discuss the normal business activities and any business issues as arise.

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

Analyst Notes

  • Credit Suisse Initiated Coverage On CBOE – “Underperform” Rating
  • Credit Suisse Started Coverage On NASDAQ OMX – “Neutral” Rating
  • Credit Suisse Initiated Coverage On Charles Schwab – “Neutral” Rating
  • LSEG “Overweight” Rating Restated At Barclays – GBX 1,800 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.


First Australian Equity Crowdfunding Platform To Launch In February

Australian early stage vc firm Artesian plans to launch Australia’s first online equity based crowdfunding platform in February as a government review looks at relaxing laws for startup investment.

The platform to be known as VentureCrowd is slated to start doing business in February 2014, and will offer more advanced private equity investment options than existing crowdfunding services like Kickstarter and Indiegogo because investors can buy equity stakes in the startup businesses via the websites.

The site will let pre-screened startups pitch and secure funding online from a crowd of investors in exchange for equity in the business.

PLY: I encourage Australia’s new government to help the Corporations and Markets Advisory Committee to swiftly implement crowdfunding friendly regulations.

10 Bitcoin Startups To Benefit From Crowdfunding Initiative

Simon Dixon and Max Keiser are joining forces to help launch 10 non-competing bitcoin startups on the crowdfunding platform

Other stories

Buy-side Firms Feel Powerless On Data Costs
The Trade

Buy-side firms unhappy with the cost of market data are unable to challenge the high fees because exchanges’ hold a monopoly on the data, Paul Collins, head of European equity trading at Franklin Templeton Investments says.

PLY: Suddenly data costs are all the rage, largely because lumbering giants like LSE and CME, have, from different angles, been ratcheting up data fees with some aplomb and not a lot of thought for the end customer. I have always argued that data ought to be as near free as possible to encourage business with some incremental fees for richer data experiences. However, the buy side needs to unite and show its muscle here. It is encouraging to see Paul Collins making a start. EU exchanges in particular ought to tread carefully as sooner or later I suspect the knives will be out at the Commission for any signs of excessive pricing…

US Federal Agencies Issue Final Rules Implementing The Volcker Rule

Five federal agencies on Tuesday issued final rules developed jointly to implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Volcker Rule”).

The final rules prohibit insured depository institutions and companies affiliated with insured depository institutions (“banking entities”) from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, for their own account. The final rules also impose limits on banking entities’ investments in, and other relationships with, hedge funds or private equity funds.

Like the Dodd-Frank Act, the final rules provide exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities, and organizing and offering hedge funds or private equity funds. The final rules also clarify that certain activities are not prohibited, including acting as agent, broker, or custodian.

Statement regarding the Volcker Rule – SEC Commissioner Daniel M. Gallagher – here.

PLY: As mentioned above, I am going to stay at a safe distance from my Volcker soap box as once I get there, well it might take me 950 pages to stop… Instead, please read the statement by Dan Gallagher, who sees free markets as an instrument for growth and not just a way to create litigation opportunities. This is a brilliant, hard-hitting and, sadly, damning, indictment of the vogue for regulation which suggests the state knows best and can punish anybody it perceives as questioning it. Dan Gallagher:

“We must avoid regulatory hubris and should not regulate–particularly where the changes are so novel or comprehensive–with the belief that we completely understand the consequences of the regulations we may impose.” Or, as the Commissioner surmises, the Volcker Rule is “a procedural disaster capped by a headlong rush to meet a purely political deadline.”

Volcker Rule Challenges Wall Street (subscription)
Wall Street Journal

A broad new government rule to limit risk-taking by Wall Street will force banks to rethink virtually every aspect of their trading activities, setting the stage for more tumult at the largest U.S. financial institutions.

The so-called Volcker rule, approved by five financial regulatory agencies on Tuesday, could lop as much as $10 billion total in yearly pre tax profit from the eight largest U.S. banks.

Volcker Should Be Means To End Too-Big-to-Fail (subscription)
Wall Street Journal

Whether the Volcker rule is seen as a success may depend on whether it is a first, not a last, step toward rethinking banking.

It is easy to get lost in the thicket of the Volcker rule, even though the true measure of its merit doesn’t lie in the hundreds of pages of details. Rather, its significance will rest on the rule being a milestone along the path toward ending the threat of too-big-to-fail banks, not a capstone to post-financial-crisis overhauls.

Unraveling The Lies Madoff Told (subscription)
Wall Street Journal

Even after he confessed to orchestrating the biggest Ponzi scheme in history, Bernard L. Madoff insisted on two points: He acted alone, and his separate market-making operation was “legitimate, profitable and successful in all respects.”

Those claims, from his 2009 guilty plea and other statements, have since been exposed as more lies from the con man.

PLY: Did anybody remotely believe Madoff’s ridiculous remarks? Apparently so…no wonder Ponzi schemes can work so well if people are that naive.

CFTC Meeting Scheduled For December 10, 2013, Has Been Cancelled

CFTC cancelled its scheduled Open Meeting due to the closure of all Federal government agencies because of inclement weather in the Washington Metropolitan area.

Given the hot air devoted to Volcker, let alone the energy generated by all the photocopying alone, there must surely be a way to reticulate this to clear rails, roads and runways in an energy efficient fashion and avoid this cancellation?

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