February 27 2014


And so to Issue 201. Many thanks for all your kind words yesterday and the IOIs on the subscription product. Thanks too to Robert Barnes who blazed a trail for Turquoise well ahead of the competition by becoming our first premium product subscriber (we were actually testing the payment gateway and when Robert spotted it one evening he promptly signed up!) Thank you for your ultra low latency gesture of support Robert!

As to the subscriber product, it’s simple really – a venue for more in-depth analysis and comment than the 1-5 lines of pith I can usually fit into the daily newsletter. Therefore with circa 5 posts likely per week, the value add ought to be significant on top of the newsletter and at 120 dollars per user/year it provides good value for money while I will continue (incredibly!) to give you the daily newsletter for free – with grateful thanks to our supportive sponsors!

Back to today’s edition, not quite as massive as yesterday but burgeoning nonetheless: Craig Donohue discusses the challenges at OCC, HKEx: is it D-word or G-word as they grapple with a bigger business, concomitant threats from RusAl et al. Indian warehouse shake-up as PE firm buys FTIL unit, multiple competitive wranglings, all sorts of EMIR and regulatory fallout, especially in commodities while FCA pushes forward with compliance. Meanwhile, tech deals and a new tech fund alongside a swingeing (deserved) fine for FXCM and all manner of news in the field of swaps, OTC, CCP…in fact you name it, there is something here today…

Scroll forth and multiply your knowledge:

Public Markets

HKEx Joins The D Club (subscription)
Michelle Price – Financial News

Diversification, the de rigeur term for the likes of Nasdaq OMX, LSE and DB, echoed round the HKEx’s auditorium as CEO Charles Li explained to journalists and analysts why the HKEx’s financial results for full year 2013 are more complex than in previous years.

PLY: The worry about ‘diversification’ is how exchanges can end up dangerously deluding themselves about what they really can sell. QV this article discusses technology being 4% of HKEx sales…which it will increase by selling more tech, especially its new clearing system. Er, how so? There are already multiple vendors on all fronts and just because you have great tech doesn’t make others desperate to buy it (or earn you a profit) as the likes of DB and NYSE Tech have shown in different ways. The “D” word as La Price refers to it often masks that very dangerous “G” word in the exchange C-suite: Groupthink.

HKEx Maps Out Plans For 2014
Simon Osborne – The Trade

HKEx has laid out its intentions for upcoming market microstructure improvements. The plans were set out in tandem with the exchange’s 2013 results announcement.

HKEx Expects LME Trading Fees To Rise In 2015

PLY: Which ought to excite CME that they have more chance to compete in the marketplace…

Craig Donohue Tackles Options Market Risk In New Clearinghouse Role
Nandini Sukumar – Businessweek

Craig Donohue, the new chairman of OCC, says he’s focused on improving the organization’s operations after regulators criticized how it managed risk in the $1.2 trillion U.S. equity options market.

“My focus and part of my role and responsibility is to make sure we have a highly compliant organization,”

PLY: Good to see the sharp legal mind of Craig Donohue back in the saddle at OCC and I am sure he will be using knowledge accumulated as CME CEO about potential weak spots in OCC to improve the system. The OCC has a massive opportunity and now has a rejuvenated management team to achieve that.

Private Equity Firm IVFA Buys Out FTIL’s Warehousing Arm For Rs 300 Crore (USD 48.4 Mln)
The Economic Times

Private equity firm India Value Fund Advisors (IVFA) has purchased National Bulk Handling Corporation, the warehousing arm of FTIL, for Rs300 crore (USD 48.4 mln).

PLY: Two key points here. First this is a significant move in the break-up of FTIL group which I suspect will end up a pure fintech play (perhaps under the ownership of Mahindra). Second, this story notes that negotiations on a settlement between FTIL and NSEL creditors have broken down, collapsing a circa 200 million dollar deal and generating a raft of lawsuits pending directly against FTIL. That is ugly.

UK Investors, Banks At Odds Over Who Covers Clearing House Risks
Huw Jones – Reuters

Britain’s race to shield taxpayers from a potentially new breed of “too big to fail” financial firms is pitting investors against banks over who pays the bill if one of the clearinghouses handling the trillions of dollars of trades made each year in financial markets runs into trouble.

PLY: A very high stakes situation where my initial sympathies lie with investors. It strikes me that if Walmart goes bust when I am in the store, I shouldn’t have to open my wallet to pay for the company’s liabilities. There needs to be a lot more thinking to work out how to ensure clearinghouse probity/safety now they have been pushed to become vast repositories of essentially every counterparty’s risk. At the same time, banks are scared about being upended, having traditionally paid nothing in margin for bilateral OTC trade. This is a tricky issue and still needs calm reflection to create a genuinely safe system going forward (besides if a crash is so great as to endanger a CCP will the banks actually have any money to pay?). Linear thinking just won’t crack this one.

Rusal Calls LME Warehouse Rules ‘Damaging’ In U.K. Court Case
Kit Chellel & Agnieszka Troszkiewicz – Businessweek

Rusal told a court it may lose “tens of millions of pounds” under new warehousing rules from LME that the company said were illegal, irrational and breached its human rights. LME “should have investigated the alternatives properly,” Rusal’s lawyer, Monica Carss-Frisk, said at a court hearing yesterday.

Rusal v LME: Warehousing Proposals Came From Charles Li, Consultation Was Unfair, Court Told (subscription)
Metal Bulletin

LME’s recently implemented policies on warehouse load-in and load-out rates originated with Charles Li, CEO of HKEx, and may have been connected with a desire to be seen not to be “doing nothing”, the UK High Court was told on Wednesday February 26.

During the first of two days of hearings it also emerged that the then-CEO of the LME, Martin Abbott, wrote a letter in December 2012 stating the LME had already gone as far as it could to address long aluminium queues.

PLY: Charles Li is in the hot seat while presumably Martin Abbott must be viewing the situation with some calm from afar!

EI reported yesterday that Rusal and LME gearing up for court.

EU Derivatives Rules Sow Confusion In Metals Markets
Alexander Winning – Reuters

PLY: Brokerage boss Malcolm Freeman puts it simply: “EMIR is a rule book without totally defined rules. Is it going to protect anybody? No. Will it stop rogue traders? No. So what’s it for?”

– The legacy of the current European Commission / Parliament looks increasingly like a travesty of nitpicking politicised centralisation by incompetents as opposed to anything approaching judicious regulation for future market growth.

Barclays Pulls Down Shutters On European, U.S. Power Trading Desks
Jeanine Prezioso – Reuters

Barclays has closed its power trading desks in London and New York, joining a string of global investment banks that are paring down their commodity market activities as increased regulations bite.

U.K. FCA: Commodities Houses Pose Oversight Challenges (subscription)
Sarah Kent – Wall Street Journal

Commodities-trading houses are posing a challenge to market oversight, the U.K.’s FCA warned Thursday.

As tighter regulatory requirements have reduced banks’ activities in the sector, their places have been taken by specialist companies, many of which are closely held and have substantial operations outside direct oversight of market regulators.

The best known, such as Cargill, Vitol Group SA and Trafigura Beheer B.V., are genuinely global operations that control huge volumes of essential goods—ranging from grains, cocoa and coffee beans to industrial metals and oil.

PLY: Commodities regulation has been driven so far by a knee-jerk leftist fallacy that food prices are driven up by capitalism when the plain truth is food prices have fallen for the past century, thanks to free markets. This politicised regulatory process has been so ill-considered as to make the current financial regulations look logical. That’s damning. And no, I don’t want to bang on about it again but the government-regulatory nexus cannot afford to enforce the new rules properly anyway.

FCA Firms Up Its EMIR Deadlines (subscription)
Tim Cave – Financial News

FCA has given firms just two months to demonstrate their compliance with key elements of incoming EU regulations designed to reduce risk in the region’s derivatives markets.

PLY: Doubtless compliance officers everywhere rejoice at this news, especially against the background of definitions which are lacking in core aspects of some EU regulations.

ATS Brasil Hopes To Break Stock Market Monopoly
Mimi Whitefield – Miami Herald

Although Brazil is the sixth largest economy in the world, BM&F Bovespa has only 361 stocks listed, which would rank it between exchanges in Mongolia and Vietnam. ATS CEO Alan Gandelman noted, 10 very large companies — Petrobras and Vale among them — account for about 50 percent of trading volume.

“There’s not a lot of trade quite frankly,’’ said Gandelman. “Bovespa doesn’t represent the Brazilian economy at all.”

EI reported on February 13th about ATS Brasil preparing to challenge BM&F Boverspa and on February 5th about ATG filing for a clearing house licence in March.

MCX Cuts Transaction Charges To Push Up Volumes

MCX, India`s biggest exchange in terms of volumes, has cut transaction charges on futures contracts of all commodities effective Wednesday, in a bid to push up battered volumes.

MCX, NCDEX Try To Grab Each Other’s Market Shares
Business Standard

After FMC allowed comexes to fix different transaction charges in intra-commodities and contracts early this month, MCX and NCDEX have started targeting each other’s strongholds. The two comexes account for about 95 per cent of the commodity futures trading business in India.

BSE Pips MCX SX, Dents NSE Share In Currency Derivatives Play
Palak Shah – The Economic Times

The entry of BSE in the currency segment has sparked off a turf war among domestic stock exchanges with all of them trying to fiercely protect their volumes. While MCX SX has lost its second spot to the BSE, the NSE, leader in equity derivatives, too has seen nearly 15% erosion in its market share since November last, when BSE entered the business.

Measures Needed To Curb HFT
Richard Curran – Irish Independent

90 to 95pc of all bid offer spreads on American stock exchanges are automatically generated by computers. When it comes to the actual volume of shares sold, more than 50pc of them fall into the computerised HFT category. In Europe, the figure is around 40pc.

Private Markets

Markit’s Float At Risk From EU’s Collusion Probe
Tim Wallace – CITY A.M.

Investors in Markit fear the European Commission’s probe hanging over the market data firm could derail or delay its planned stock market flotation.

Perseus Buys TLV For Low-Latency CME-ICE Microwave Data (subscription)
Max Bowie – waters technology

Perseus Telecom has acquired Broadview, Illinois-based TLV Networks, which operates a low-latency microwave network connecting Chicago-based futures exchange matching engines, from wireless network infrastructure design and management provider CCSI for an undisclosed cash sum.

BSE To Launch Equity Cash Segment On New Platform In April
The Economic Times

PLY: BSE will launch equity cash segment for trading on its newly launched ‘Bolt Plus’ platform on April 7, having previously transferred currency etd in November 2013, interest rate futures in January and equity derivatives February 7.

Ex-JP Morgan Custody Chief Readies Fintech Accelerator (subscription)
Tim Cave – Financial News

Dinkar Jetley, formerly chief executive of JPM’s giant custody business, is readying the launch of a new investment firm that will back fintech companies specialising in alternative credit and wealth management.

PLY: I wish Mr Jetley and his co-founders Akbar Poonawala (ex-Deutsche Bank), and Larry Klane (ex-Cerberus Capital Management) every success with their new fund in this interesting niche.

Where Did the Bitcoins Go? The Mt. Gox Shutdown, Explained
Joshua Brustein – Businessweek

How did the once-largest Bitcoin exchange lose hundreds of millions of dollars’ worth of the digital currency?

Two words: transaction malleability.

Bitcoin Foundation Aided Prosecutor’s Probe Of Mt. Gox
Carter Dougherty & Patricia Hurtado – Bloomberg

The Bitcoin Foundation, an advocacy group for the nascent digital currency, provided information to federal prosecutors this week that aided a probe into Mt. Gox, a shuttered exchange in Tokyo.

Troubled MtGox Bitcoin Boss Emerges After Shut Down
BBC News

The head of troubled Bitcoin exchange MtGox has made his first statement since the service went offline.

Mark Karpeles said he was “working very hard with the support of different parties” to address issues with the service, which went offline on Tuesday.

An estimated 744,000 bitcoins – about $350m (£210m) – are believed to have been stolen thanks to a loophole in Tokyo-based MtGox’s security – representing about 6% of total BTC circulation.

Japanese authorities are investigating the company.

Bitcoin Derivatives Market Trading BTC.SX Temporarily Suspended

“Unfortunately, due to the current closure of our main exchange partner, we regret we will be unable to take any further orders and our site will be suspended until further notice. All customer balances are secure and we will honour any withdrawal requests. For open positions, these will be liquidated and deposits will be refunded in full.”

Mt. Gox Shutdown Prompts Bitcoin Damage Control Efforts
Carter Dougherty – Bloomberg

With the shutdown of Mt. Gox, other companies in the Bitcoin universe worked to defend the nascent industry’s reputation.

Beyond Mt. Gox, Bitcoin Believers Keep The Faith, See More Robust System
Jeremy Wagstaff – Reuters

The apparent collapse of Tokyo-based bitcoin exchange Mt. Gox isn’t bothering Anthony Hope and others who have ditched steady careers in government and finance to build bitcoin companies – and who stand to lose money they have in Mt. Gox. Hope, a former British Treasury official, now head of compliance at Hong Kong-based MatrixVision, says that while Mt. Gox’s fate is unclear, its troubles form part of a wider shift as more professional players move into the bitcoin mainstream.

PLY: The wild west is going to give way to a more credible ecosystem whether regulators catch up or not.

U.S. Firms Bank On Bitcoin Bounce Back (subscription)
Michael J. Casey & Robin Sidel – Wall Street Journal

U.S. firms are pushing ahead with plans to open bitcoin exchanges catering to professional traders. Perseus Telecom, a provider of high-speed telecommunications lines for securities exchanges and trading firms, is joining forces with bitcoin-trading platform Atlas ATS and Strevus Inc., which produces compliance-management tools.

Special Section: FTI, NSEL, India at the Crossroads

PLY: MCX is pretty flat, FTIL up about 1%. The problems fester while FTIL seems to be breaking up (qv the warehouse sale story above).

Ministry Of Corporate Affairs Seeks Law Min Advice To Act Against FTIL
The Economic Times

The Ministry of Corporate Affairs (MCA) has sought the law ministry’s opinion on the course of action to be taken against FTIL after an inspection found the company of violating regulations.


SIP To Get Tech Upgrades, While Consultant Hired To Conduct RFPs
Ivy Schmerken – Wall Street & Technology

The UTP SIP committee unanimously approved technology enhancements for a key market data feed, and also hired Jordan & Jordan to conduct two RFPs to replace Nasdaq when its contract officially runs out.

Steadying Data Flows (subscription)
Michael Shashoua – waters technology

Data management professionals will need to achieve smooth input and output to make investment books of record into useful systems for their firms while EMIR rules implementation is raising concerns.

An Interesting Year For The IBOR Debate
Becca Lipman – Wall Street & Technology

Delivering the ideal IBOR solution may be more of a journey with value on the way rather than something you can just put in place.

BSE To Cut Down Trading Speed; Challenge Rivals
The Economic Times

Who says elephants can’t dance? The 150-year old BSE has lagged behind younger rival the National SE (NSE) for some time. Now chief Ashish Chauhan believes it can dance. After cutting down trading speed from 10 milliseconds to 200 microseconds, the BSE on Wednesday announced it will cut the trading speed to 20 microseconds in three years.

FIX Trading Community Announces Industry’s Adoption Of FIX Protocol For TESI

FIX Trading Community, has begun implementation of the guidelines set down by the FIX Trading Community to reduce operational risk and enable more efficient set up of clients on OTC electronic trading platforms.

SEC’s Newest Enforcement Weapon: Powerful Software
Emily Flitter & Sarah N. Lynch – Reuters

SEC is beefing up its capacity to detect insider trading and other illegal activity by engaging with Palantir Technologies, a software company originally set up to help foil terrorists.

The SEC has embarked on a multi-year deal, worth more than $13 million, to use Palantir’s technology to help the agency crunch massive amounts of data.


CME Clearing Europe Expands Its OTC IRS Suite

CME Clearing Europe has received Bank of England approval to add Overnight Index swaps (OIS), zero coupon swaps, Forward Rate Agreements (FRAs), basis swaps, variable notional swaps and SEK, DKK and NOK currencies for clearing beginning 3 March to its existing IRS offering.

The expansion of products in Europe adds to the global offering of CME, which has cleared more than $20 trillion in notional value with more than $11 trillion currently in open interest since launching 19 October, 2010.

PLY: I remain impressed by how CME have grasped the mettle of the OTC morph so far.

DGCX & China’s Dalian Commodity Exchange Launch Plastics Futures Simultaneously

DGCX and Dalian Commodity Exchange (DCE) announced the simultaneous launch of their respective polypropylene futures contracts.

TOCOM Starts Offering SCO On Inter-Commodity Spreads On March 24

TOCOM announced that official launch date for implementing Standard Combination Orders (SCO) on Inter-Commodity Spreads in the Oil and Chukyo-Oil Markets is March 24, 2014. The Exchange made its preliminary announcement on November 12, 2013.

Career Paths

Andrew Ackerman (WSJ) reports that the Senate Agriculture Committee will question three of President Barack Obama’s nominees for CFTC at a hearing next week, including Timothy Massad, a senior Treasury Department official tapped to head the agency.

The panel will meet March 6 to hear from Mr. Massad as well as Sharon Bowen, a partner at law firm Latham & Watkins LLP, and brokerage executive J. Christopher Giancarlo. Mr. Massad was tapped in November to succeed Gary Gensler, who left the agency in early January.

Ms. Bowen, who was nominated in December, would replace Bart Chilton, a Democrat who plans to soon depart the CFTC, while Mr. Giancarlo would fill an open Republican seat at the commission. He was nominated last summer.

Brokerage firm Marex Spectron has hired former Icap head of freight research Georgi Slavov as head of basic resources and freight research, the company said on Tuesday February 25.

Financial Calendar

MarketAxess $0.16 quarterly dividend payment
Record date BGC Partners $0.12 quarterly dividend

Record date CBOE $0.18 quarterly dividend
Record date Interactive Brokers $0.10 quarterly dividend

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

Analyst Notes

TMX: The Ultimate Bull Market Stock
Deon Vernooy – The Motley Fool

At the time of the merger, the company indicated that considerable business synergies and cost savings would be derived from the merger. The latest indication given by the firm is that an annualised $28 million (c 8%) of expenses would be saved during 2014, arising from the combination of trading platforms and the realisation of efficiencies of overlapping functions.

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.


New Zealand’s Financial Markets Authority: Crowd Funding Gets Green Light

Commerce Minister Craig Foss today announced Cabinet has approved regulations for crowd funding and P2P lending as part of the Government’s financial market overhaul. Mr Foss has announced that there will be no investor caps for equity crowd-funding, other than the previously announced $2 million cap that a company can raise through crowd funding each year.

PLY: New Zealand demonstrates a deft touch to encourage crowdfunding.

Other stories

FXCM UK Fined 4 Mln Stg For Witholding Client Profits

Britain’s financial watchdog said on Wednesday it had fined foreign exchange trading firm FXCM’s UK subsidiaries 4 million pounds ($6.7 million) for withholding profits from clients between 2006 and 2010.

FCA said that FXCM kept around 6 million pounds in profits made on favourable market movements between the time customers placed orders with FXCM UK and the moment they were executed by another part of the group. By contrast, any losses were passed to clients in full.

PLY: A very ugly situation which heaps shame on this business.

Hong Kong’s Securities & Futures Commission Issues Q3 Report

Securities and Futures Commission (SFC) summarises key regulatory work in the reporting period from October to December 2013.

CSDs: Council Of The EU Confirms Agreement With European Parliament

The Permanent Representatives Committee today approved, on behalf of the Council, an agreement reached with the European Parliament on new rules aimed at improving safety in the securities settlement system and at opening the market for central securities depositories (CSD) services (6828/14).

Click here for full details.

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