January 16 2014

elb2MIFID II agreement stirs considerable debate. Dodd Frank carpet bumps raised, NASDAQ exits SIPs – NYSE seeks monopoly, Warsaw releases 2020 strategy (or was that a suicide note?), SGX launching steel, Tadawul opening? TeraExchange sign up IDBs, Trade Reporting rush ahead of Feb 12 ongoing, NEPSE goes block trading, LMAX expands offering…and much more.

Happy scrolling, lots to consider today (and I am around for follow ups on MIFID, lots to discuss here!):

Public Markets

EU Securities Reform May Shine Light On Market’s Dark Corners
Reuters
EU Agrees On Deal To Overhaul Financial Market Rules (subscription)
Wall Street Journal

A new deal to overhaul the EU’s rules for financial markets left questions on Wednesday about whether loopholes could still allow big financial companies to evade regulatory scrutiny of their trading tactics.

PLY: I am pretty much in the utterly cynical camp about MIFID II overall despite some useful components. The end result is a populist political fudge instead of a meaningful roadmap for markets.

Useful things like consolidated tapes and creation of OTFs etc are vastly outweighed by huge clunking regulations in commodities, Institutional Liquidity Pools (ultimately the politicians could only see ‘dark’ inferring bad – not as the means by which pension funds invest with least impact) and other issues which are not remotely good for markets have been inserted by a neophyte political class. As for the HFT regulations, given that regulators don’t analyse (apart I believe from the Dutch) pre-trade data in any coherent way…I fear MIFID II has found a shortcut to market madness!

This will be a very costly piece of regulation for the regulators themselves and the EU is deluding itself in thinking markets will be overall better as a result. Very sad to see what could have been a useful incremental process turn into an anti-investment pogrom.

ICE Drops Most Since 2011 After Europe Revamps Trading Rules
Businessweek

Shares of ICE declined the most in two years after the EU agreed to increase competition among derivatives exchanges.

PLY: There is a lot here and rules still need to be written but the idea that Europe will have open access and America retains its silos is perhaps the stupidest thing ever to emerge from the mouths of EU policymakers. At a stroke American hegemony in exchanges is assured and Europe will become a backwater. Time for DB to do that HQ pivot I long believed was feasible.

CME Group Sued By Long-Time Members Over Exchange Changes
Businessweek

CME was sued by shareholders who started with the exchange in the 1970s and claim operational changes to their trading rights have diluted the value of their memberships.

“This is a breach of contract action seeking hundreds of millions of dollars in damages,” they alleged in a complaint filed today in Illinois state court in Chicago against CME and its CBOT unit.

Sheldon Langer and Ronald Yermack, who say they’ve been CME members since the 1970s, and Lance Goldberg, who claims he’s been a CBOT member since 2003, allege that they and their fellow old-line Class B members have lost free access and close proximity they formerly had to the CME’s Globex Electronic Trading platform, according to the complaint.

PLY: In many ways this action has parallels with the Montreal Exchange case some years back where I was the expert witness.

CFTC Eyes Warehousing After LME Foreign Board Of Trade Application (subscription)
Metal Bulletin

LME has applied to be a foreign board of trade in the US, a move that has led to increased scrutiny by the US regulator of its warehousing system.

Vincent McGonagle, director in the market oversight division of CFTC, said that the LME’s application had led the regulator to evaluate whether the long queues to access metal in LME-approved warehouses were the cause of high premiums for physical delivery.

Outsourced Trade Reporting Services Ramp Up Ahead Of Key Deadline (subscription)
Financial News

Regarding the reporting start date, Stewart Macbeth, chief product development officer at DTCC Deriv/SERV, said: “It’s definitely pressured. Right now it’s about getting to the compliance date. Not all things will be finished or perfect.”

PLY: More on the rush to make the February 12th reporting deadline as discussed also last week.

Warsaw SE Strategy 2014 – 2020
WSE

Summary of the development strategy for WSE for 2014-2020, adopted by WSE Management Board and approved by the Supervisory Board on December 18th, 2013.

If you prefer pretty pictures to reading, here is the Presentation

PLY: Not a huge amount of depth in the presentations but the key factor seems to be more what is behind the pretty pictures: presumably the government has won the battle and is keen to engage in a divisive, shareholder destructive takeover of Vienna’s CEESEG while then seeking to sell the plumped up GPW/WSE to a major exchange by 2020. – I am told this was stated by CEO Adam Maciejewski in his remarks (thanks to our man on the call!). Apparently a deal could be done to catch the dysfunctional falling Viennese knife by the end of the year.

In essence after 2 decades of success, the GPW has allowed pure unvarnished vanity to eat into its core business plan. On the other hand, the opportunity in the New Europe opens up enormously: if GPW plays politics integrating the Austro-Hungarian empire they will create massive opportunities on top of those already existing in the region while GPW has its hands tied. In its hubris Warsaw probably will not recognise what a sad day this is for markets. Misguided (minority shareholder) political ambition is riding roughshod over a coherent customer-centric shareholder value strategy. Make no mistake, if GPW buys Vienna it has all the makings of the single worst deal in exchange history.

Private Markets

FSC To Let KRX Use ‘Shutdown Switch’ For Erroneous Derivatives Trades (subscription)
Yonhap

KRX will be allowed from later this year to directly cancel erroneous derivatives tradings after a local broker came on the brink of bankruptcy due to a trade blunder, the financial regulator said Wednesday.

Canada Is Ground Zero For More Market Structure Changes
Traders Magazine

More change is coming to the equity trading markets of the Great White North.

Last year the Canadian equity markets saw several developments that changed the way that traders did business. These changes include new rules around electronic trading; additional venues formed by existing equity ATSs; the arrival of taker/maker pricing scheme; the Aequitas proposal; and the regulators proposed review of the existing order protection rules (OPR).

If that were not enough, one industry observer in Canada says that the nation’s markets should brace for more change.

Nepse Soon To Launch BTF
eKantipur

Nepal SE will shortly be providing block trading facility (BTF) for transactions of 10,000 or more units of shares. Under the mechanism, promoter’s as well as public shares could be traded which is expected to facilitate the bulk trading of shares.

PLY: Could Nepal become the new centre of Institutional Liquidity Platforms with simple block rules like this? Given the way the EU is going, it may seem far fetched but then again who would have thought the EU wanted to wage war on pension savings?

Nigeria SE’s Investor Protection Fund Takes Off In 2014
Premium Times

The newly established Investor Protection Fund, IPF, is billed to commence operation in 2014, the CEO of NSE, Oscar Onyema, said on Wednesday

TeraExchange And European Brokers Reach Landmark SEF Trading Agreement
Reuters

TeraExchange, a multi-asset SEF, has executed agreements with multiple IDBs to provide fully-compliant execution and reporting services for swap trades. This allows over 100 banks and international bank affiliates to confidently conduct their swap executions while adhering to US regulations requiring SEF trading and reporting.

PLY: An interesting strategy to sign up the smaller IDBs and the likes of RP Martin could provide some chunky business here.

Will The Saudi Market Finally Open To The West?
MarketWatch

The Saudi bourse, the Tadawul, has a market capitalization of $417 billion — between Mexico’s $508 billion and Thailand’s $399 billion — making it by some measures, the world’s last major market not opened to international capital. However, that may be changing.

PLY: Many Gulf markets have suffered from a lack of access (even for domestic retail traders) and the liquid Tadawul ($1.3 billion exchanging hands daily, 80% of the total Gulf Cooperation Council volumes) is a key market which remains off limits to foreigners.

Sky Is The Limit For Pakistan Mercantile Exchange
Khaleej Times

Pakistan Mercantile Exchange (PMEX), plans to increase its product portfolio by adding more commodities at the exchange. Ejaz Ali Shah, MD of PMEX, said the exchange is in discussion with the apex regulator to add copper and leading foreign currencies i.e. dollar, yen, pound sterling and euro.

Bitcoin Operators Resume Business In India Despite RBI Warnings
First Post

After suspending their operations for a few weeks amid growing regulatory glare, many bitcoin operators have cautiously resumed courting business from their clients and some new players have also come to fore in India.

The Reserve Bank last month had issued a warning against dealing in bitcoin and other virtual currencies due to various risks, including those related to money-laundering and cyber security, as such digital currencies are not backed by any assets or monetary authorities.

Special Section: FTI, NSEL, India at the Crossroads

PLY: MCX is off 2% flirting around the 500 rp level while FTIL is off 1%. Half a million dollars was paid in this week’s default.

The NSEL repayment 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
Week 18: Rs. 11.5 crore (USD 1.85 mln) paid
Week 19: Rs 12.64 crore (USD 2.04 mln) paid
Week 20: Rs 21 crore (USD 3.37 mln) paid
Week 21: Rs 2.45 crore (USD 394k) paid
Week 22: Rs 3.24 crore ( USD 526k) paid

On January 15th, NSEL defaults 22nd time – pays Rs 3.24 crore ( USD 526k).

NSEL Inducts Five New Directors
Business Standard

NSEL has inducted five independent directors into its board. The new members have brought with them experience in various fields. The company has appointed Uttam Prakash Agarwal, Amarendra Sahoo, Niraj Gupta, Subramanya Kusnur and Varghese Jacob as independent directors and Ashok Nag as non-executive director to its board.

High Court Tells FTIL To File Asset Details By January 27
Business Standard

The high court has ordered FTIL to file its response with details of lock-in assets by January 27 in the NSEL affair, a subsidiary, in a class action-type suit filed by Modern India and three other “aggrieved” companies.

PLY: Plaintiffs Modern India, Shree Rani Sati Investment Finance, Modern Derivatives and Commodities and F Padumjee Investments seek to broaden the complaint with ex-NSEL CEO Anjani Sinha and a host of broking firms such as Motilal Oswal, Anand Rathi, Emkay Commotrade and India Infoline to be made parties.

EOW Threatens To Freeze NSEL Brokers’ Properties
Business Standard

After interrogating borrowers of the crisis-ridden NSEL and attaching properties valued at about Rs 4,300 crore (USD 698.5 mln), the economic offenses wing (EOW) of the Mumbai police has threatened to freeze the properties of the exchange’s brokers.

PLY: Clearly a somewhat nuclear option if it stops brokers trading or impacts client funds but at the same time, there need to be repayments in the NSEL scandal and the fraud squad, if it is pragmatic, can help make repayments happen.

Police Grill Anand Rathi Director, Summon IIFL
The Free Press Journal

The Economic Offences Wing of Mumbai Police interrogated Jugal, Mantri, director at brokerage Anand Rathi Securities in the NSEL case, as it stepped up probe into the role of brokers in the 56-bln-rupee default by the commodity exchange.

Technology

Nasdaq Cancels Contract To Operate Key Market System
Fox Business

Nasdaq OMX has terminated its contract to run SIP, as rumoured yesterday.

The contract stipulates that the termination process take 24 months, so Nasdaq will still operate SIP for the time being.

PLY: as per my remarks yesterday when this was first mooted, NASDAQ are wise to walk away from a project where they get pilloried when the industry is reluctant to invest in a solution, now the issue is being forced and regulators need to realise how precarious their expansionary moves in recent years are…

NYSE Says It Would Take Over Nasdaq Stock Quote System
Reuters

NYSE Euronext offered on Wednesday to take over the data processor at the center of the massive Nasdaq trading outage last August after Nasdaq OMX indicated it would stop running it, as reported on January 15th.

NYSE Euronext “would be happy to” run the Nasdaq securities information processor (SIP) that provides investors with stock quotes and last sale prices, Duncan Niederauer, CEO of NYSE Euronext, told CNBC on Wednesday.

ICE unit operates its own SIP.

PLY: Interesting. What makes NYSE so confident they can run this unit profitably when NASDAQ has been palpably frustrated with industry reluctance to invest? Or is it just a classic “New York minute” discussion where NYSE want to make NASDAQ look less capable? Does ICE as a group want the concentration of risk on the politicized SIP issue?

NASDAQ OMX Commodities Updates
Nasdaq OMX

NASDAQ OMX Commodities announces the launch of new instruments and features in Genium INET during Q1 2014. On 10 February 2014, Genium INET will be upgraded to support the EMIR requirement of Unique Trade Identifier (UTI) in Clearing Reports. Thereafter, Genium INET will be upgraded to version 4.0201 during the weekend 15 to 16 March 2014.

Consumerisation Of Technology For Capital Markets: Innovating In The New Normal
Wall Street & Technology

PLY: An interesting read, pondering closed market systems versus the innovations of mainstream IT (when it comes to market data in particular).

Indexes

CBOE To Expand Offerings With Treasury, Short-Term VIX Futures (subscription)
Wall Street Journal

CBOE plans to further expand the number of ways investors can trade market volatility, both with its well-known Volatility Index franchise, and in new markets such as Treasury bonds.

Products

SGX To Stop Trading, Clearing LME Minis
Bloomberg

SGX plans to stop trading and clearing futures on three industrial metals after the contracts attracted little interest from customers.

SGX, which started trading the copper, zinc and aluminum futures in a joint venture with LME in February 2011, will make the products “dormant” pending approval from the the Monetary Authority of Singapore, according to an e-mailed statement from SGX in response to queries from Bloomberg News.

PLY: Given the ownership of HKEx, this is hardly surprising, as SGX has other plans:

SGX Set For February Move Into Asia Steel
Futures and Options Intelligence

SGX will enter the steel derivatives market on February 17 with the launch of Hot-Rolled Coil Steel futures.

NCDEX Launches Gold Contract For Hedgers
The Hindu Business Line

In a bid to attract bullion hedgers, NCDEX has launched gold-hedge contract which will mimic the international prices without considering other charges such as customs duty, local taxes and premiums. The contract will be available for trading from Thursday.

LMAX Exchange Adds RUB And CNH Currency Pairs
Automated Trader

LMAX Exchange, the first FCA regulated MTF for FX trading, has added ruble (RUB) and offshore renminbi (CNH) currency pairs to its existing list of over 70 traded instruments.

Career Paths

Three new members of the BoD of the Bulgarian SE were elected by the GMS. The election of Gergana Beremska – Karadjova, Ivan Kutlov and Dimo Spassov must be approved by the deputy chairman of the Financial Supervision Commission.

Dimo Spassov was appointed as Chairman, while Gergana Beremska – Karadjova as the vice-chair of the new BoD.

Simultaneously, GMS terminated the contract of and dismissed former BoD members Assen Yagodin, Vasil Golemanski and George Bulgarski.

Ivan Takev remains the CEO of BSE. He and Lubomir Boyadziev retain their seats on the BoD of the exchange.

PLY: Good to see Ivan Takev staying on board as CEO in Sofia. Now the new BSE board must address a way forward to privatisation. There is a clear path it just does not involve big name western exchanges.

Tokyo Commodity Exchange announced the resignation of Mr. Mikio Kawamura as a director as of January 15, 2014

Fidessa has today announced two new key sales appointments for its sell-side business. Emily Thomas will become Global Head of New Business Sales based in New York, and Phill Jeffrey will join the company as Asia Pacific Regional Sales Director based in Hong Kong.

FCA Board appointed three new members to the Regulatory Decisions Committee

Dame Elizabeth Neville, former chief constable of Wiltshire Police, Pauline Wallace, a former senior partner at PwC and Peter Craddock who up to December 2013 was Group Operations Director at Perspective Financial Group Limited, a £23m turnover national finance advisory group.

Financial Calendar

Tomorrow
CBOE $0.50 special cash dividend payment

Next week
Interactive Brokers Q4 financial results
SGX Q2 Results

This month
ITG Q4 2013 financial results on Thursday, January 30, 2014

Next month – new announcement
Thomson Reuters Q4 2013 results – February 12, 2014

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

Share Notes

Interactive Brokers Group SVP Milan Galik sold 2,000 shares Monday, January 13th at an average price of $22.88 (bargain $45,760.00). He now owns 837,517 shares. Mr Galik’s regular sales are chronicled on this specific page.

Analyst Notes

LSE “Outperform” Rating Reaffirmed At RBC Capital
Charles Schwab Downgraded At Credit Agricole To “Underperform”

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.

Crowdfunding

Crowdcube, Start Up Loans Partner To Help More UK Entrepreneurs Crowdfund
Crowdfund Insider

Crowdcube has teamed with Start Up Loans, an organization that focuses on lending-based funding initiatives and training for UK entrepreneurs.

Other stories

FESE European Equity Market Report – December 2013 Figures
MondoVisione

PLY: Another month, another excellent statistical digest from the FESE team who did well keeping OTFs out of equities amongst other issues in MIFID.

SIFMA Issues 2013 Year In Review
MondoVisione

The report explores the role of the financial industry in fueling economic growth and job creation; reviews progress that has been made in the financial regulatory reform process to date; and highlights opportunities for members to be involved with the association.

NYSE’s Niederauer Preaches Humility To Wall Street Execs
American Banker

Wall Street executives aren’t exactly known for their humility, but Duncan Niederauer is trying to change that. The CEO of NYSE Euronext picked up an award on Tuesday night from the Museum of American Finance. Then he used his speech as a sort of public reflection on his current and future personal clout, while telling the bankers and financial executives in the audience to “be humble.”

PLY: Clearly any payout for selling ICE to NYSE has made Mr Niederauer a better man. Humility is good. Niederauer’s remarks are sensible, although as he was receiving an award from a former Goldmans boss and is a former GS alumni, I am left pondering a conflict of interest issue, alas.

CFTC Announces Agenda For The Public Meeting Of The Technology Advisory Committee
MondoVisione

CFTC announced that on Tuesday, January 21, 2014, the CFTC’s Technology Advisory Committee (TAC) will hold a public meeting at the CFTC’s headquarters in Washington, DC from 10:00 a.m. to 5:00 p.m. For more information regarding the meeting, see CFTC News Release 6820-14. You can view the agenda under related links.

SIFMA President & CEO Kenneth E. Bentsen, Jr. Testifies On The Impact Of The Volcker Rule
MondoVisione

SIFMA President & CEO Kenneth E. Bentsen, Jr. testified before the House Financial Services Committee on the impact and unintended consequences of the Volcker Rule. A link to Bentsen’s full written statement is available here.

PLY: Any rule has unintended consequences and when the rule runs to thousands of pages that problem only multiplies exponentially.

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