January 13 2015

elb2US banks overplay their hand with a petulant display of rank CCP hypocrisy. BATS suffers colossal Direct Edge fine for not knowing their own order types as the SEC’s fining accelerometer reaches new high. (As the world flirts with deflation, is Chairman White waging a one woman campaign to keep prices going higher through regulatory impot?). LSE signs BIST co-operation as Romania changes exchange ownership limits and SEC looks at more equivalence in the MTF light touch versus full exchange regulations. Chinese consultations from Gary De Waal and various new products too.

I have had a really pithy time below this morning, despite my clear self-interest in your reading, believe me, you cannot afford not to scroll on:

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BSE’s Christmas Wishes – Is Indian Exchange Shareholding Reform Looming?
On Bonds & SEFs
The Bond Bubble
Vale: Ronald Li
NEW: Postscript: Ronald Li Dealing Until The End

(Q.V. Our new series of briefs threading together the history of burning issues (e.g. NLX, The bidding war for GFI, PSE – PDEx Merger brief, FTIL Stakes Sales, LSE – Frank Russell Deal Brief, LME – Rusal Trial Brief has overnight been joined by: ICE – NYSE Technology Sales Brief) to help you rapidly review these developing situations from one source).

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Public Markets

LSEG Signs Partnership Agreement With BIST

LSEG announces that it has signed a partnership agreement with Borsa İstanbul (BIST), covering derivatives and index products.

Under the terms of the partnership agreement London Stock Exchange Derivatives Market (LSEDM) will offer trading in futures and options on the BIST 30 Index and leading Turkish stocks. In addition, LCH.Clearnet will provide CCP services to LSEDM and its clearing members.

The flagship BIST 30 Index futures currently trades, on average, more than 170,000 contracts per day on BIST. Subject to regulatory approval and customer readiness, London trading in the products is expected to be available in H2 2015.

In addition, FTSE and BIST plan to launch, by the end of 2015, an index partnership involving all BIST-owned and other relevant indices referencing Turkish securities.

PLY: To place this in context, understand that BIST isn’t so much a crusading company as a corporate blob with ambition surrounded by a very exciting economy. Therefore it is perhaps unsurprising they opted to partner with FTSE (which is really the core of this deal) as opposed to building their own index infrastructure further. The index deal clearly has potential (although I am always concerned about how hungry FTSE actually is to sell things but its kinetic energy will pull it through methinks). Cross listing BIST products will add some potentially tasty morsels to the LSE’s ongoing struggle to find derivatives heft beyond Milan. An incremental deal which reminds us of the enormous potential of BIST albeit at the expense of the lack of ambition within exchange management. If unleashed as a full blooded business, BIST could be truly awesome.

Ironies Behind Kotak Mahindra Bank’s Run-In With FMC
Mobis Philipose – Livemint

Kotak Mahindra Bank Ltd’s attempt to have a seat on the board of MCX has come to nought, at least for the time being. FMC had concerns about a conflict of interest, and late last week the company withdrew its nomination for the seat. Kotak’s run-in with the regulator is full of ironies. For instance, its 15% stake in the exchange makes it the largest shareholder, but some investors with much lower ownership have a board seat. The most interesting part about the dispute, however, is the bank’s founder, Uday Kotak, may have had a role to play in the drafting of the very rules that FMC is using to argue its case. FMC’s main concern relates to the association between the company and Kotak Commodity Services Ltd, a firm that trades actively on MCX. Its rules state: “No trading member or clearing member or their associates and agents shall be on the board (of an exchange).”

Q.V. our Premium post – BSE’s Christmas Wishes – Is Indian Exchange Shareholding Reform Looming?

PLY: This rule is singularly daft. I can see what FMC were getting at but it is disproportional. As always Mobis Philipose writes crisp, elucidating copy, eliminating my scope for pith. I am delighted to be disintermediated in these circumstances.

US Banks Call For Action On Clearing Houses (subscription)
Tom Braithwaite & Philip Stafford – Financial Times

US banks have urged Jack Lew, the US Treasury secretary, to take action to shore up clearing houses, arguing that the likes of CME and LCH.Clearnet could cause the next financial crisis instead of preventing it.

PLY: Having been supportive of US bank ‘concerns’ about seeing CCP security shored up, the banks have now seriously overplayed their hand with what amounts to a cheap shot seeking to undo the good bits of Dodd Frank (killing nebulous and expensive bank cartels in OTC derivatives) which, whatever the colour of the house, must not be allowed to succeed. I am all for incremental improvement of the CCP system. I fully favour seeing what might be added to the top of the waterfall but for banks who have guzzled at the taxpayer trough without the slightest hint of shame or apology for their flagrant incompetence to attack the CCPs demonstrates more an act of desperation as banking is increasingly disintermediated, as opposed to a principled stand to make markets better. The clear weak link at present is that banks won’t be able to cough up the cash they have pledged in the event of another credit crunch. Therefore the answer is simple and the banks have left themselves open to it with this petulant letter: The Treasury Secretary ought to respond by ensuring CCPs change waterfall provisions to demand full capitalisation including all possible contingent payments as soon as possible. Thus we won’t have to worry about banks avoiding their obligations when they next hit trouble and hopefully the government can let more of them go bust. Pour encourager les autres.

Romania – Changes To The Capital Market Law

Bucharest SE’s (BVB) Articles of Association has been aligned to the GEO 90/2014 regarding the increase of the threshold and the flexibility requirements of quorum and decision-making in EGSM of the market operator.

PLY: Biggest news: an increase in shareholding in BvB from 5% to a 20% ceiling per shareholder. That could shake up the ownership of BvB (and presumably SIBEX – which retains optionality but is in dire need of a rescue plan).

Stricter Dark Pool Rules Said To Be Under Consideration At SEC
Dave Michaels & Nick Baker – Bloomberg

Even as they’ve captured a bigger slice of U.S. stock trading, dark pools have faced less regulation than the better-known public exchanges. Regulators are taking steps to change that.

PLY: Doubtless the SEC is polishing the ceremonial bludgeon so they can add a few more layers of bureaucracy on top of the silt of NMS which already clogs the pores of the US equity market. However that is not to say the concept is wrong- level playing fields are good but situations where upstart platforms can systematically internalise while adopting a rather ‘light touch’ approach which strains the concept of ‘best execution’ is not on. The actual real live end customers (not the self-interested investment banks) remain hopping mad that Wall Street is ripping them off. What they want is reform, not the SEC fining ever more dizzying amounts. Speaking of which:

Private Markets

Bats Pays $14 Million Settling Claims Markets Obscured Rules
Sam Mamudi & Annabelle Ju – Bloomberg

Bats Global Markets Inc. is paying a record fine to settle allegations that two stock exchanges it bought last year obfuscated a central part of how their trading system worked.

Bats agreed to a $14 million SEC penalty to resolve the case, which contended that the Direct Edge markets didn’t accurately portray procedures known as order types, which are instructions on how to handle orders to buy and sell stocks.

SEC announcement – here.

BATS Global Markets Statement Regarding SEC Announcement – here.

PLY: Rumours are growing that deep in the bowels of their Washington HQ, the SEC apparently have a calculating machine which is part- accelerometer / part- wheel of fortune, which they spin every time they fine somebody…albeit increasing the number of noughts on the punishment scale for each new fining ceremony. Or so it seems as the dramatic number series has gone Pipeline 1 million, Liquidnet 2 million,…NASDAQ 10 million and now a spectacular 14 million against BATS for a violation at Direct Edge which seems to prove my own contention that even venues struggle to grasp just what their cornucopia of order types actually mean.

Sebi Attempts To Strengthen Market-Wide Circuit Breaker Systems
Anirudh Laskar – Livemint

Sebi on Monday moved to strengthen the market-wide circuit breaker mechanism. In a circular, Sebi directed National SE (NSE) and BSE to compute their market-wide index (Nifty and Sensex respectively) after every trade in the index constituent stocks and to check for breach of market-wide circuit breaker limits after every such computation of the market-wide index. Stock exchanges are required to halt trading on a 10%, 15% and 20% movement, in either direction, on the BSE’s Sensex or NSE’s Nifty.

Coinsetter Launches Margin Trading For Business Customers & Market Makers
Ron Finberg – Forex Magnates

New York-based Bitcoin exchange, Coinsetter, announced that they have begun to offer margin trading for select business customers and market makers. The offering is based on the integration of post-trade settlement of trades to instantly measure balances and allow for margin trading.

Bitstamp Reopens Doors After $5m Hack
Charlie Osborne – ZDNet

Bitstamp suspended services last week following a security breach which relieved the company of over $5 million in digital currency.

PLY: I will post something about Bitcoin on Premium later today. Interesting times at the cryptocurrency crossroads.

Special Section: FTI, NSEL, India at the Crossroads

PLY: MCX and FTIL are flat.


MOEX – Derivatives Market Trading Suspended, Resumed

A technical error occurred during the daily interim clearing session at the Derivatives Market on 12 January. Once the accuracy of clearing data was verified, the trading system was restarted for normal operation. Orders could be cancelled from 2:22 pm, and trading resumed at 2:50 pm.

MOEX’s other markets were unaffected.

MOEX: Derivatives Market Intraday Clearing Session To End Later Than Usual Today

Due to the need to conduct additional verification of the intraday clearing session results on MOEX’s Derivatives Market, the session will end seven minutes later today, at 2:10 pm MSK.

Goldman Sachs Dark Pool Has Trading Outage Amid Euronext Failure
John Detrixhe – Bloomberg

Goldman Sachs’ European dark pool had no trading at the open Monday as its technology provider Euronext NV (ENX) suffered from a connectivity problem.

The bank’s Sigma X dark MTF and Euronext’s Smartpool failed to open for at least the first 75 minutes of European trading. Sigma X, opened at 9:15 a.m. London time, while Smartpool resumed trading at 9:45 a.m., Amsterdam-based Euronext said the connection between traders and the platform had failed.


ICE Gasoil Future Rolling To Lower Sulphur Contract

ICE gasoil futures, the most actively traded diesel and distillate benchmark contract, switches to a lower sulphur specification on Monday when the January contract expires. The move will see the gasoil contract on ICE move to a 10 parts-per-million (ppm) sulphur specification from February onwards, down from 1,000 ppm previously.

Euronext Launches ETF Options In Amsterdam

Launch Of Currency Contracts Crucial For MCX-SX: MD

Currency options trading at MCX-SX has come to a halt as the market regulator Sebi is yet to give a green signal. MCX-SX MD and CEO Saurabh Sarkar says the launch of currency contracts are crucial for the exchange as it looks to raise funds of nearly Rs 300 crore (USD 48 mln) in the next few months.

CSRC Proposes Interim Measures To Accommodate Access To Approved China Derivatives Markets
Gary DeWaal (Katten Muchin Rosenman LLP) – Lexology

China Securities Regulatory Commission is soliciting public comment on proposed rules that, if adopted, will permit certain foreign nationals and brokerage firms to trade particularly designated futures contracts listed on China’s futures exchanges.

Under CSRC’s proposal, overseas customers would be permitted to access approved futures either through Chinese or overseas brokers, or trade directly through exchange facilities, subject to exchange approval. Only local brokers could directly clear approved products for foreign nationals, or qualified overseas brokers that establish or control entities in pilot free trade zones in China (one is located in Shanghai).

DGCX To Launch Spot Gold Contract (subscription)
Alice Attwood – FOW


NYSE & MYRA Capital Launch NYSE Dynamic Allocation Indices Family
Business Wire

NYSE and MYRA Capital announced the launch of the new NYSE Dynamic Allocation Indices family to fulfill the increasing demand for innovative index solutions combined with an intelligent risk management and dynamic beta-management.

Career Paths

R.J. O’Brien & Associates announced the appointment of Kevin J. Danca, 45, and Michael G. Connolly, 42, as Directors, FX and Precious Metals, based in the New York office. The two bullion market veterans have joined RJO’s global FX division to spearhead precious metals sales and trading, building out the firm’s expertise in the area as part of its growing institutional offering.

Tullett Prebon hired 40 bond brokers from Murphy & Durieu LP to expand in the U.S.

Financial Calendar


ESMA open hearing on the ongoing consultations concerning the CSD Regulation
CME $2 annual variable dividend payment

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

Share Notes

ICE insider Paul Swann sold 3,322 shares Friday, January 9th at an average price of $221.94 (bargain $737,284.68). He now owns 3,762 shares.

Analyst Notes

Keefe, Bruyette & Woods Raised Their Target Price On CBOE From $59.00 To $62.00 – “Market Perform” Rating

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.

Other stories

ESMA Announces Open Hearing On MiFID II/MiFIR

ESMA will hold an open hearing February 19th in Paris on the issues set out in its Consultation Paper on MiFID II/MiFIR published in December 2014.

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