March 13 2014

elb2Today in Exchange Invest:

Oops! It seems Virtu concentrated their mathematically literate resources on trading and not accounting (or so we clearly must hope). Bob Greifeld reminds us he is a cash market dinosaur at heart while Gil defends the progressive doctrine of competition and innovation. EU may be sabotaging EMIR through narrow national interests while contracts will walk out of Europe to avoid MIFID II CCP prescriptions. Thomson Reuters figures in decline (plus ca change, many may sigh). SEC seeks comment on 400 page clearinghouse proposals and our pool side scoops in Premium remains undiscovered by the fourth estate in situ at the resort… In a spirit of generosity, we’ll even share one tomorrow just to give you an idea what you’re missing by not paying $120 to join our inner circle. However, if you want to be ahead of the rest, our latest post will be of interest: Boca Pool Side: A New Derivatives Dauphin For London?

Indeed, the latest 5 Premium Posts are:

Boca Pool Side: A New Derivatives Dauphin For London?

Boca Pool Side: The Fresh Prince Of Asia?

Barnier Suffers A Set-Back

Satoshi Unmasked

A Bond Market Dilemma

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Meanwhile happy scrolling, here is today’s bumper issue leading today’s Exchange agenda:

Public Markets

Thomson Reuters – Annual Report 2013
Thomson Reuters

Revenues from ongoing businesses – $12,543 mln in 2013, increased 1% compared to $12,443 mln in 2012
Adjusted EBITDA – $3,070 mln in 2013, decreased 7% compared to $3,310 mln in 2012
Underlying operating profit – $1,881 mln in 2013, decreased 15% compared to $2,205 mln in 2012
Adjusted EPS – $1.54 in 2013, decreased 19% compared to $1.89 in 2012

PLY: TMR continues to struggle. It’s always proven impossible to kill but it could do so much more as a business…

National Interests Threaten EMIR Progress (subscription)
Anish Puaar – Financial News

Fears are growing that national interests could be obstructing the approval of the first European clearing houses trying to comply with new swaps rules.

The worries relate to reforms to OTC derivatives trading enacted under EMIR, and specifically the power that groups of national regulators have to approve clearinghouses from other countries under the new rules.

They come after Germany’s Eurex Clearing, the DB-owned clearing house, said in a member circular yesterday that its approval would be delayed after failing to receive the required sign-offs from other national regulators.

According to three people familiar with the matter, there are concerns that some national regulators might be trying to delay approvals so that clearing houses in other countries do not move ahead and have more time to prepare for the introduction of swap clearing earlier than others.

PLY: Once again the EU fails in its core purpose. Disappointing but not surprising. Elsewhere George Soros is launching a new book noting how the Euro will probably lead to the EU’s eventual death but it may take a 25 year stagnation akin to Japan before it happens.

SEC Proposes Rules For Systemically Important Clearinghouses
Dave Michaels – Businessweek
SEC Proposes Rules For Systemically Important & Security-Based Swap Clearing Agencies

Clearinghouses guaranteeing trades in part of the $693 trillion swaps market would have to meet new standards to guard against defaults and failure under rules proposed by SEC.

The SEC’s five commissioners voted unanimously today to seek comment on the measures aimed at clearinghouses whose importance was boosted by the 2010 Dodd-Frank Act, which required most swaps to be guaranteed at clearinghouses, traded on exchanges or other platforms, and reported to the government.

PLY: A 400 page document suggests we now have a new problem in search of a Shad Johnson/CFMA solution: namely parallel approaches to clearing houses in the US depending on whether they are in equity or other products. That could prove to be another wall of regulation and concomitant costs which may make US markets/CCPs less competitive in the long term. I am not sure how that helps make markets safer.

US Energy Futures May Be Forced Out Of UK CCPs (subscription)
Tom Osborn – Risk

ICE Clear Europe and LCH.Clearnet may not be able to offer clearing of US futures contracts in the UK after European clearing rules take effect, lobbyists are warning. The incoming regime requires a choice of segregation models that contradicts US rules.

PLY: The mass clearance of European listed product as it bifurcates to the US and Asia will be huge if the EU’s short-sighted anti-European rules are actually permitted as part of their unilateral clearing suicide pact element of MIFID II.

Monopoly Talk Riles Futures Market CEOs Amid Nasdaq’s Critique
Matthew Leising – Bloomberg

PLY: Here is a debate which demonstrates that cash guy Bob Greifeld is clearly out of his depth in the three dimensional waters of derivatives. (There might also be grounds for accusing him of hypocrisy, as after all NASDAQ OMX was so early into the CCP for OTC business that they have already unbundled that venture). Meanwhile the idea of a six month exclusivity for new products demonstrates not merely Mr Greifeld’s profound ignorance of how to run a derivatives market but also the fact that the arguments currently being bandied around by the bank captive bourses are hyper-juvenile. This misguided mantra of competition is actually protectionism for the industry which screws everybody, and is of course now dominant in the FIA. So presumably Bob was playing to FIA with his remarks. Oh and as a customer, I love my vertical silos and I want to see the best product innovation the exchange industry can muster and not be ripped off by banks. Cushty? If Mr Greifeld feels so strongly about vertical silos then why not try selling his Scandinavian monopoly OMX Clearing business as a sign of his devotion to competition?

ICE Strategy Driven By Global Regulation – Sprecher (subscription)
Luke Jeffs – FOW Intelligence

The CEO of ICE has said his plan to expand geographically is driven by the problem of regulatory variations across the world’s many trading centres.

Co-operation With SHFE Is LME’s Goal – Jones (subscription)
Metal Bulletin

Co-operation, not competition, is the goal in LME’s interactions with its industry peer the Shanghai Futures Exchange (SHFE), according to the LME CEO.

PLY: I am just not clear that SHFE have got the memo which suggests this applies to both parties.

Open Outcry Trading Crucial For LME – Jones (subscription)
Metal Bulletin

The open outcry trading floor is central to the validation of LME as the forum for benchmark non-ferrous metals prices.

PLY: The world’s only viable floor at roughly 4000 sq foot it is reused for each fixing and hence not a big burden on the exchange given that it does provide an open benchmark which is global.

SGX — A Year Of Investment Preparing For Years Of Growth

For SGX, 2013 was the year of infrastructure, said SGX CEO Magnus Böcker at Boca Raton…

PLY: I have a lot of time for Magnus but must admit was surprised to discover some company he kept while in New York. Even I am learning from our Boca correspondent whose poolside gossip continues this afternoon on our Premium service… Our previous exclusive missives were:

Boca Pool Side: A New Derivatives Dauphin For London?

Boca Pool Side: The Fresh Prince Of Asia?

ASX Wants To Keep Trading Systems Local
Michael Smith – Sydney Morning Herald

ASX will use the government’s financial services inquiry to push for five-year time horizons on policies affecting market structures and ensure that key infrastructure for trading equities and derivatives was not outsourced overseas, said CEO Elmer Funke Kupper at a Citi conference in London.

PLY: ASX strikes me as akin to the Titanic crew in manic deckchair arrangement mode while trying to deny that the iceberg is dead ahead… I wrote more on the topic of Antipodean Monopoly Woes here, amongst other sizzling premium posts this week.

SGX Issues First Trading Cautions On Penny Stocks

SGX on Wednesday issued its first ever “trade with caution” warnings, flagging two listed firms which have seen their share prices surge over the past two days after a penny stock scandal hit turnover last year. The bourse told investors that they should be careful when dealing in the shares of Ziwo Holdings Ltd and Giken Sakata Ltd.

SGX is to introduce new trading rules, as reported on February 10th.

Alibaba’s Tsai Says Will ‘Never’ Change Partnership Structure For Hong Kong IPO
Paul Carsten & Anne Marie Roantree – Reuters

Alibaba will not change its partnership structure in order to list on HKEx, Executive Vice Chairman Joe Tsai told Reuters in an exclusive interview in Hong Kong on Wednesday.

PLY: That is just fine, then stay private! I retain massive misgivings about companies where a minuscule number of shareholders control the business. It’s not capitalism, and the sooner the tawdry practice of minority control is ended, the better it will be for all investors.

Private Markets

Virtu Admits Weakness On Expense Accounting (subscription)
Arash Massoudi – Financial Times ‎

Virtu Financial, the trading firm that this week revealed plans for a US public listing, has suffered from material weaknesses in how it accounts for and reports its expenses. The revelation came to light after Virtu filed for an IPO in which it made an unusual reference to the recent discovery of problems with its ability “to prepare accurate financial statements”. The weaknesses resulted from “a lack of reconciliations, a lack of detailed review and insufficient resources and level of technical accounting expertise within the accounting function”, according to Virtu’s prospectus.

PLY: None of the above exactly provides a lot of comfort given that this is the sort of prop trading business which although it has apparently made money every day bar one in 1238, could lose 1238 days trading profits in 125 seconds if things go wrong. Confidence is a fragile thing and if they can’t actually get state of the art accounting, does that mean the money all went on the geeks…or, well maybe the second bit doesn’t bear thinking about.

FMC Asks NMCE To Check Price Manipulation
Business Standard

FMC has directed National Multi-Commodity Exchange (NMCE), the country’s third largest commex, to closely monitor transactions on its platform to check price manipulation.

Zimbabwe Govt Moving To Set Up Commodities Exchange

As reported earlier this year, Zimbabwe government will soon set up a special market for agricultural products as it moves to address the marketing and pricing of crops, says Agriculture, Mechanization and Irrigation Development Minister Dr Joseph Made.

Bitcoin Needs To Grow Out Of Its Obsessive Adolescence (subscription)
John Gapper – Financial Times

PLY: The users of Bitcoin are a bit, well “Tea Party” in their fervent conversational demeanour I agree but then again messenger shooting doesn’t discredit the message per se. BTC is young and growing but at the same time, it makes mistakes and learns from them. This is nonetheless sagely advice from one of the relatively few wise voices still left at the pink paper.

Tokyo Lawsuit Raised Red Flags On Mt. Gox Funding, Compliance

Two months before Mt. Gox filed for bankruptcy it was sued by a customer seeking the return of funds in a case that highlights some of the red flags raised in the run-up to the collapse of what was once the world’s biggest bitcoin exchange. New York resident Marko Simovic filed a civil action at the Tokyo District Court on December 24, seeking to recover $105,000 (63,203.52 pounds) on deposit at Mt. Gox and about $14,000 in interest, court filings show.

Bitcoin Derivatives Platform BTC.SX Resumes Trading After Mt Gox-Induced Freeze
Danny Bradbury – CoinDesk

Derivatives trading site BTC.SX has resumed trading after a few weeks of downtime induced by the Mt. Gox collapse. The company has signed BitStamp as its new exchange partner, said BTC.SX CEO Joseph Lee. BTC.SX suspended its operations until further notice in February, after Mt. Gox imploded.

Goldman Sachs Sees Bitcoin Future In Payments Over Money
Carter Dougherty – Bloomberg

Goldman Sachs analysts see Bitcoin as an innovative payments technology while doubting that it will evolve into a true alternative currency, according to a research report released today titled “All About Bitcoin.”

Special Section: FTI, NSEL, India at the Crossroads

PLY: Both MCX and FTIL are down 3-4% on an otherwise fairly flat day in Indian stocks. The clampdown continues and it strikes me as only a matter of time before this affair ends with Jignesh Shah being bought out of FTIL despite his apparent desire to retain a 19% stake.

CBI Conducts Search At NSEL Office In Connection With Payment Crisis
Khushboo Narayan & Aman Malik – Livemint

The Central Bureau of Investigation (CBI) is searching the office of NSEL in connection with the payment crisis at the commodities exchange. CBI has been conducting an enquiry in the NSEL case as the commodity spot exchange owes money to two state-owned companies — MMTC Ltd and PEC Ltd.

CBI Lodges FIR Against NSEL, PEC Officials
Business Standard

Central Bureau of Investigation has lodged an FIR against the officials of NSEL and Project and Equipment Corporation (PEC) today for criminal conspiracy and cheating. The agency in the FIR has alleged that PEC was floating “fraudulent paired contracts for trading of agro commodity on the platform of NSEL without undertaking any genuine trade and causing a loss of Rs 120 crore (USD 19.6 mln) to the government.” The agency is presently conducting raids across 15 locations in connection with the NSEL scam. The CBI team is searching four locations in Mumbai, two in Karnal and nine in Delhi. These include residences and offices of PEC and NSEL officials.

PLY: “FIR” stands for “First Information Report” a preliminary analysis which sets in train the process for a broader criminal investigation.

FTIL, MCX Shares Spurt On Shah Stake Sale Rumour
Business Standard

FTIL rose 3.2 per cent and MCX by four per cent. L&T Infotech, Infosys and Cognizant, in addition to Reliance Industries and Thomson Reuters, were the names which did the rounds as being interested in buying the stake of Jignesh Shah, the promoter of FTIL. The company later denied the news.

Earlier, according to sources, Tech Mahindra had shown interest in buying a part of Shah’s stake in FTIL. However, these talks did not result in a deal, leading the company to seek fresh partners for a stake sale. Shah currently has 45.63 per cent stake in FTIL and is looking at offloading 26 per cent, say sources.

PLY: I still believe that any deal involves Shah leaving – which large corporate business such as any of those named above will want to risk having him still on board?

PwC Preparing Second Audit Report On MCX
The Hindu Business Line

PwC, which was mandated to do the forensic audit on MCX, is expected to submit its second report soon.

The first report, which was submitted last month, went into the financial details of the exchange since its inception in 2003 and highlighted major discrepancies.

The second report may broadly cover the aspect of risk management followed by the exchange and financial transactions between MCX and the Indian Bullion Market Association.


TT Introduces Next-Generation Trading Platform & Unveils New Brand

TT, unveiled its new SaaS trading platform, “Nextrader,” along with a new brand identity.

PLY: The vision is clearly ascribed to new CEO Rick Lane. It will be interesting to see how it rolls out amongst clients. No mention in the press release of how many patents are pending.

Markit Expands European Pricing Data Service (subscription)
Michael Shashoua – waters technology

Markit has expanded its pricing data for European asset-backed securities to cover more than 9,000 European RMBS, CMBS, consumer ABS and CLO securities, from a previous offering of 4,000 ABS.

Object Trading Selects MarketPrizm To Offer Managed Direct Market Access

DMA provider Object Trading, has selected MarketPrizm, to offer Object Trading’s managed FrontRunner DMA on MarketPrizm’s integrated, data enabled platform for buy-side and sell-side firms.

Broadridge And Lombard Risk Form Strategic Alliance In The Collateral Management Sector

Broadridge Financial Solutions, together with Lombard Risk Management, have formed a global alliance to address changing industry needs in the collateral management sector.

Mock Trading Session – BM&FBOVESPA PUMA Trading System

On Saturday, March 22, 2014, a mock trading session will be held to test BM&FBOVESPA PUMA Trading System due to the updating of systems and infrastructure at the Exchange (External Communication 004/2014-DI).


Shanghai To Open Up Trading Of Commodities Futures (subscription)
Kwong Man-ki – South China Morning Post

Shanghai Futures Exchange (SHFE) plans to open up trading of its long-awaited crude oil futures and a number of other commodities futures to foreign investors.

“China is a big importer of crude, and we rely 60 per cent on crude imports. However, our influence in the global pricing of crude oil has been low, and it doesn’t match with our big consumption,” exchange chairman Yang Maijun said in Beijing yesterday.

PLY: Those who wonder about what open access rules by the EU may mean, should note that the crude market is likely moving east and that is just for starters…

Taiwan To Launch ETF Platform For Mainland China Stocks This Year

Taiwan’s will launch an exchange-traded fund platform for investors to trade in mainland China stocks this year, the chairman of Taiwan’s Financial Supervisory Commission said in a statement to lawmakers Wednesday.


CBOE Plans Nearly Non-Stop VIX Futures Trading This Year – CEO

CBOE will implement nearly non-stop trading for futures on the its Volatility Index by the end of the year to capture more Asian trading, its CEO said on Wednesday.

Career Paths

Congratulations to Bobby Brantley Jr. on his appointment as CEO at Trop-X (Seychelles) Ltd., the national securities exchange of Seychelles which is a multi-currency, multi-asset international exchange covering equities, derivatives, ETFs and more.

MondoVisione reports that OCC announced the appointment of new Board Officers and Board committee chairs for 2014

Felix Davidson, President, TD Ameritrade Clearing, Inc., was appointed Member Vice Chair and Chair of OCC’s Performance Committee
Craig Donohue was reappointed OCC Executive Chairman
Michael Cahill was reappointed OCC President and CEO
Richard Lindsey was reappointed as Chair of OCC’s Risk Committee
Pat White was reappointed as Chair of OCC’s Audit Committee
Matthew Gelber was appointed as Chair of OCC’s Governance Committee

OCC’s Nominating Committee also nominated the following candidates for election to the Board of Directors for the term ending in 2017, with such election to be held at OCC’s Annual Meeting of Stockholders on April 22, 2014:

Mark Dehnert, Goldman Sachs Execution & Clearing, L.P.
Craig Messinger, The Bank of New York Mellon
John Ruth, ABN AMRO Clearing Chicago LLC

OCC’s Board also approved the recommendations of OCC’s Nominating Committee to appoint the following individuals to fill vacancies on the board, with each such appointment to be effective as of OCC’s Annual Meeting of Stockholders to be held on April 22, 2014:

Christine Show, Newedge USA, LLC, for the term ending in 2015
Judith Kula, Wolverine Execution Services, LLC, for the term ending in 2016

Additionally, NYSE appointed the following individuals as their representatives on the OCC Board:

Thomas Farley, COO, NYSE
David Goone, SVP and Chief Strategic Officer, ICE

Financial Calendar

BGC Partners $0.12 quarterly dividend payment

Interactive Brokers $0.10 quarterly dividend payment
Record date GFI $0.05 quarterly dividend
Record date NASDAQ OMX quarterly dividend of $0.13

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

Share Notes

ITG Director James Selway III sold 1,560 shares Friday, March 7th at an average price of $18.02 (bargain $28,111.20). He now owns 85,419 shares.

Analyst Notes

ICE: Bet On The Dealer (subscription)
Dana Blankenhorn – Seeking Alpha

As great a business as it is to be a bookie, or rather an insurance company, and a loan shark, or rather a banker, there’s a better business out there for a financial investor: You can be the dealer.

Today, the master dealer is ICE.

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.


7 Alternative Funding Platforms Join Forces To Launch Small Business Finance Portal
Lucy Smith – startups

Seven of the UK’s leading alternative finance providers have joined forces to launch signposting finance portal

Collectively the businesses involved – regulated equity crowdfunding sites Crowdcube and Seedrs, invoice finance marketplaces Platform Black and Market Invoice, P2P lenders Funding Circle and Zopa, and pension platform – account for over 85% of the current alternative funding market and have been responsible for providing more than £580m to small businesses.

Announced before the Alternative Finance Summit in London yesterday, the move is designed to redirect a reported 45% of rejected bank loan applicants to other potential sources of finance.

PLY: Can’t do any harm methinks given that banks have abandoned lending…clearly the open access need is more fundamental to finance than merely CCPs…

Other stories

Why Commexes Should Offer Incentives To Encourage Growth
The Hindu Business Line

Commodity exchanges collect transaction charges from its members according to the average daily turnover in a slab-based system.

The recent decision of FMC to give freedom to commodity exchanges to fix different transaction charges is a landmark one.

Enhancing The Stability And Safety Of Clearing Agencies – SEC Commissioner Luis A. Aguilar, SEC Open Meeting, Washington, D.C

Statement On The Proposal Of Rules Related To Registered Clearing Agencies, SEC Commissioner Kara M.Stein, Washington, D.C.

Statement At SEC Open Meeting – Commissioner Daniel M. Gallagher, Washington, D.C.

PLY: Dan Gallagher remains a key Commissioner to watch with his astute judgement on SEC policy and actions. His pithy comments as ever cut through the attempts by the regulators to drive through regulatory strictures without considered economic analysis, as he notes:

“I’m pleased to be able to support its publication for public comment. Lastly, I want to stress that, while I think we are generally moving in the right direction with this proposal, I am not convinced that we got it exactly right, so I look forward to receiving meaningful comment on these critically important issues.

In particular, I urge commenters to pay special attention to the questions in the release. By presenting controversial ideas in question format, the Commission avoids having to subject them to the rigorous cost-benefit review mandated by our economic analysis guidance for all rulemakings, whether proposed or final. This continues a disturbing trend towards substantive questions that amount to shadow proposals in question format, – best illustrated by the Volcker Rule – and I question the viability of this process under the Administrative Procedure Act.”

Statement At Open Meeting Regarding Standards For Covered Clearing Agencies, SEC Commissioner Michael S. Piwowar, Open Meeting, Washington, D.C.

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