March 13 2015


Its that time of the week when I almost feel I ought to be in Boca but that’s just because the Amelia Island concours is on at the weekend which is like a catwalk for exquisite automotive history. Meanwhile in the conference, it’s variations on a theme of new reg digestion as everybody tries to work out just how / when the post OTC market becomes a lively throbbing pulse of liquidity once more (and indeed what damage will be wrought by the eventual demise of the Bond market and rise in US interest rates – oops, I just stepped on a remarkably broad industry patch of denial there).

Quote of the Day:

“That the American stock market had become a mystery struck me as interesting. How does that happen? And who benefits?”
Michael Lewis

Happy birthday to the book “Flash Boys” while Singapore underlines support for clearing vision. EU sees imminent mandatory swap clearing, London to host a ‘war game’ on CMU. Soc Gen buys stake in Eris, BATS Europe considering bond TR expansion…

FXCM appear sadly rooted in denial but they clearly expect the broad marketplace to sympathise with their blamestorming, as opposed to presumably repricing the management on the basis of inadequacy/leveraged hubris and incapacity to (still) appreciate their own flaws?

Indian stock holding shuffles as the enforcement dudes start encumbering assets again and lots more, welcome to your Boca-pertinent but froth free Exchange Invest daily…

Meanwhile, Recent “must read” Premium Posts include:

Did Duncan Do Due Diligence?
Duncan Niederauer Fund Manager – An Essential Due Diligence Resource
LCH.Clearnet: A Paradismal Shift? (to be read alongside the classic: Homer Simpson maxim of CCP)

Premium Briefs keeping you abreast of various industry issues are updated daily when news arises. All topics covered can be found on our dedicated Briefs page via Exchange Invest Premium. The latest include:

NSEL Scandal Brief – Part 1Part 2Part 3, Part 4
Rise of Africa – Part 1Part 2Part 3Part 4Part 5
The Bond Platforms Rush – Part 1Part 2
ICE – NYSE Euronext Deal – Part 1Part 2Part 3

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Public Markets

FXCM 2014 Financial Results

Q4 2014 Highlights

U.S. GAAP revenues of $134.7 million, up 19% versus the same period in 2013 and up 16% from Q3 2014
U.S. GAAP net income attributable to FXCM Inc. of $15.8 million or $0.35 per fully diluted share versus $0.08 per fully diluted share for the same period in 2013 and $0.05 per fully diluted share in Q3 2014

PLY: Of course this is all academic because as we know only too well, FXCM suffered a subsequent balance sheet implosion:

Subsequent to Year-End:

On January 15th, 2015, FXCM customers generated negative equity balances owed to us of approximately $276 million due to volatility in the Swiss Franc. On January 16th, 2015, we entered into a $300 million financing transaction with Leucadia National Corporation. FXCM has since repaid $12 million of the facility and is in the process of disposing of non-core assets to further repay a portion of the debt.

PLY: Read the next bit and let’s get on with the pith about FXCM’s 50x sour grapes:

FXCM To Swiss National Bank: You Managed The Swiss Franc Like A Developing Nation (subscription)
Seeking Alpha

FXCM issued a press release and video presentation describing the details of what it calls the EUR/CHF Flash Crash caused by the currency mismanagement of the Swiss National Bank.

FXCM press release here.

PLY: The one thing about leveraged fx folks (even compared with the worst of exchange egos), is outstanding hubris – well like much of retail forex land I suppose they leverage it 50 times or more. FXCM here is behaving with the juvenile petulance of the sort of clients the retail forex business all too often grooms – losers who blamestorm away their own inexperience and trading inadequacy. To paraphrase, ‘the SNB ought to have gradually moved the peg’ – er, sorry, does anybody who has ever traded a single cent of anything, believe that would have made an orderly market?

The massed data look good but serve to demonstrate the failing of management to actually pre-consider the untenable nature of the Swiss Franc’s long-term pricing (as other brokers did!) and apply holistic risk management. As I recall the SNB didn’t promote guaranteed execution. I think there is adequate evidence that FXCM was not sufficiently evaluating risks – QV the widespread losses / repricing amidst supposedly coherent industry players (yip, banks too). The argument that the reprice caused chaos is self-evident – but no exchange / CCP would retain an ounce of credibility if it said “oops it was a crash, we couldn’t cope because a dastardly central bank did something which was always on the risk event horizon.”

The SNB was in a bind and concomitant events under stress are often a dislocation of logic – that is part and parcel of markets: live with it or take up fishing/social work/professional navel gazing or whatever. The fundamental flaw is that FXCM are, at best, indulging their denial in fallacious arguments and hoping to find a wave of sympathy for their inadequate pricing of risk which rightly cost them.

Hopefully regulators will reassess symptoms of broker denial in the light of the overall fiasco which is a poorly overseen facsimile for off track betting using currency instead of nags and not a valid economic market sector.

Caveat emptor.

QV our Premium brief: FX – CHF Crisis – Brief.

(Oh and on the topic of horses: it’s Tony McCoy’s last Cheltenham Gold Cup today – if this man was in a different sport they would have sanctified him by now…I wonder if Betfair fear material losses from his end of season retirement?).

FMC-SEBI Merger May Help MCX Hold Up To 15% Stake In MCX-SX
Suresh P Iyengar – The Hindu Business Line

MCX will become an indirect beneficiary of the Government proposal to merge the commodity market regulator FMC with capital market watchdog SEBI. MCX, which has been knocking on the doors of SEBI unsuccessfully for the last few months (as reported here), may get to hold up to 15% in its erstwhile subsidiary MCX-SX (mSXI) against the now prescribed limit of 5% once the Finance Bill is passed in Parliament.

The Finance Bill that paves the way for merger of FMC with SEBI provides deemed stock exchange status to all the four national commodity exchanges — MCX, NCDEX, NMCE and Ace Derivatives and Commodity Exchange — under the Securities Contracts (Regulation) Act, 1956. The market regulator will provide adequate time for the deemed exchanges to comply with the Securities Contracts Act, said the Finance Bill.

While commodity exchanges are allowed to hold only 5% in other recognised exchanges under the Forward Contract Regulation Act, stock exchanges can invest up to 15% in other exchanges.

Marquee Names May Hold Over 50% In MCX-SX
The Economic Times

MCX-SX, the stock exchange which was battling survival few months ago, is the only company — and certainly the only unlisted firm in India — in which a string of marquee individual investors have stakes.

They include Rakesh Jhunjhunwala, Viral A Parikh, Nemish S Shah, Kalpraj Dharamshi, Dhanesh Sumatilal Shah, Uday Shah, Madhuri Kela, Renuka Shah and Madhu Vadera Jayakumar, among others. They have made it clear they are not parties acting in concert. Their combined holding is around 45% and with further allotment of warrants (which is expected soon), the combined stake would touch or may even exceed 50%.

Read our Premium brief: FTIL Stakes Sales Brief

EU Watchdog Sees Mandatory Rate Swaps Clearing Later In 2015
Carolyn Cohn & Huw Jones – Reuters

Steven Maijoor, Chairman of ESMA, told a pensions conference that the watchdog had completed an analysis of the IRS market and had recommended that the European Commission endorses mandatory clearing from later this year.

London To Host “War Game” To Test EU Capital Markets Plan
Huw Jones – Reuters

EU plans to lift flagging growth by raising more funds on markets will be tested in a “war game” next week to identify pitfalls and help keep Britain on board the EU train.

Brussels has outlined steps for a “capital markets union” (CMU) to tap stock, bond and other markets more effectively for plugging funding gaps left by retrenching banks.

Up to 40 officials from finance ministries, ECB, BoE, the European Parliament, big investors and lenders will simulate how the CMU plans could work at the March 19 event and which political potholes to avoid.

The aim is to break new ground in EU policymaking.

PLY: Great idea although my concern with this “wargame” is the emphasis on the incumbent blob: hence modelling allied to the status quo which is liable to be broadly linear in outlook – a few lateral minds would be useful to make it a more worthwhile effort but at least it is a start to consider the process.

Previous comments on the CMU topic here, here, and here.

Singapore Fostering Commodity Trade as Clearing Units Expand
Eduard Gismatullin & Sharon Chen – Bloomberg

Singapore’s financial regulator will work with commodity exchanges, investors and producers to support the development of the city-state as a trading center, including the expansion of clearing houses in Asia. The entry of new clearing houses can boost liquidity and encourage the development of products.

PLY: Correct vision (“vision” being an operative word: Singapore Inc excels on the macro) for the great city state and a good quotation in here from the seasoned exchange C-suiter Tom McMahon: “Asia generically doesn’t have robust commodity-clearing houses.”

One of those ironies of life is that once upon a time there was ICCH and with the sort of prescience which caused many cities to rip out their trams only to regret it within a generation, so too the clearing infrastructure in the vintage age of derivatives was all there but sadly disassembled in a sort of (very) post Imperial shuffle…

LSEG’s UnaVista Applies To Become A Registered Reporting Mechanism For Remit

UnaVista, LSEG’s global regulatory reporting platform, has applied to be a Registered Reporting Mechanism (RRM) ahead of the introduction of REMIT in October 2015.

REMIT will require any firm who trades wholesale energy contracts to report details of these trades to a RRM. The trades will then be sent on to the Agency for Cooperation of Energy Regulators (ACER) for monitoring purposes and market abuse controls.

UnaVista’s REMIT solution will be built using the same technology as its EMIR Trade Repository and MiFID Approved Reporting Mechanism (ARM), giving clients the unique opportunity to see all of their reportable transactions through a single provider and one interface.

Michael Lewis Reflects On His Book Flash Boys, A Year After It Shook Wall Street To Its Core
Michael Lewis – Vanity Fair

“When I sat down to write Flash Boys, in 2013, I didn’t intend to see just how angry I could make the richest people on Wall Street. I was far more interested in the characters and the situation in which they found themselves.

PLY: I know the HFT folks think they have rebuffed Michael Lewis’ core thesis but actually they have barely buffed a few edges. Then again it has to be said the HFT lobby is of highly variable coherence when it comes to making their own arguments (NB Remco Lenterman was splendid on my panel at GomberFest in Frankfurt last month).

Quote of the day from that pith-meister Michael Lewis:

“That the American stock market had become a mystery struck me as interesting. How does that happen? And who benefits?”

Private Markets

Societe Generale Takes An Equity Stake In Eris Exchange
Eris Exchange

Eris Exchange announced that Societe Generale Prime Services – formerly Newedge – has completed an equity investment in Eris. As part of the arrangement, Societe Generale will join Eris’ BoD.

FAO note: Last month Societe Generale acquired a minority stake in GMEX, becoming the second minority investor in the group after DB1 which bought a stake in the UK start-up exchange in October 2013.

Amongst other projects, Societe Generale SA, together with other 11 banks, is involved in bond platform project Neptune – as mentioned in Exchange Invest last year.

Read our Premium brief: Exchange Deals Brief.

BATS Eyes Bond Market Expansion
John Geddie – Reuters

BATS is looking at opportunities to expand into fixed income, as regulators push for more transparency in this largely OTC market. Mark Hemsley, COO of BATS Chi-X Europe, told Reuters on Thursday that the firm was looking specifically at ways in which its trade reporting capabilities might be developed.

“Ever since we started this, we have had requests from various banks and brokers about extending this service to fixed income.”

“As we get closer to Mifid II and it becomes a requirement to report OTC transactions in fixed income, that is where there is an interest in using that service,” he said, adding that there were no firm plans as yet.

PLY: Bond trade reporting sounds sensible – presumably Cinnober’s BOAT are looking at the situation too. There may be a better opportunity here at lower risk for the TR business to boom as opposed to joining the vast horde of humanity whose platforms all have ‘unique’ features which convinces them of their upcoming success despite the fact that the future of the Bond market involves an outcome akin to the inevitable result when a cartoon frame shows Elmer Fudd, an anvil and a rocky cliff top.

QV our Premium briefs: The Bond Platforms Rush – Part 1, Part 2

Saudi Arabia – Cautious Curtain-Raising
James Gavin – Zawya

Will the expected opening of the Saudi SE (Tadawul) to foreign investors this year represent a seismic shift in domestic and regional capital markets?

PLY: Good question, and I suspect like all initiatives, more transparency will make better markets…

West African Integration Initiatives Drive Rapid Changes In Capital Markets
Elliott Holley – Banking Technology

West Africa’s capital markets are changing fast as regional integration and local stock exchange initiatives combine to transform its infrastructure. Increasing adoption of FIX and a promising demographic profile help too.

Read our Premium briefs: Rise of Africa – Part 1Part 2Part 3Part 4Part 5

Bitcoin Exchange BTER Reopens, Announces Plan To Pay Back Losses

China-based cryptocurrency exchange BTER announced that trading is reopened and that there is a plan in place to pay back bitcoins owed to account holders. Later in the day, BTER announced that a total of 1,000 BTC had been distributed among its users as a first installment of paying back what is owed to its customers.

BTER had been shut down since Feb. 15 (reported here), when 7,170 BTC was stolen from its offline storage bitcoin wallets, an amount that could have been sold for about $1.75 million at the time, and about $2.1 million at current market prices.

Special Section: FTI, NSEL, India at the Crossroads

PLY: MCX and FTIL moving again almost in lockstep, off pretty much 3% each as a new wave of attachment frenzy grips the authorities – no auctions of the assets yet on the horizon though…

NSEL: ED Attaches Rs. 278 Crore (USD 44.35 Mln) Oil Factory In Gujarat
The Hindu

The Enforcement Directorate (ED) on Thursday attached a Gujarat-based castor oil extraction plant worth over Rs. 278 crore (USD 44.35 mln) of an accused firm in the multi-crore rupee NSEL scam under anti-money laundering laws. The factory is based in Kadi area of Mehsana district and has been identified by the agency to belong to a defaulting firm in the scam — N K Proteins.

This is one of the biggest single asset attachment made by the central agency in this case so far and the accused firm is allegedly one of the largest defaulters in the scam pegged at Rs. 5,600 crore (USD 900 mln). The firms’ liabilities stand to the tune of an estimated over Rs. 900 crore (USD 143.5 mln).

Read our Premium briefs: NSEL Scandal Brief – Part 1Part 2Part 3Part 4


KRX Proposes New Specifications For Baku SE Trading System

KRX is actively working over improvement of the trading system of Baku SE and has offered new specifications for its trading system working within the framework of the Capital Market Modernization Project (CMMP) in Azerbaijan.


RPT-Sterling-Based Cocoa Contract Seen Enduring Euro Denominated Upstarts
Nigel Hunt & Sarah McFarlane – Reuters

ICE’s sterling-denominated cocoa futures contract faces a challenge from two euro-based contenders this month, but the odds look stacked in favour of the established market. Launching new commodity contracts has proved difficult in markets where they do not already exist, let alone in spaces where there are already firmly entrenched products, such as cocoa where futures and options have been traded since 1928.

CME and ICE are both launching euro denominated cocoa contracts on March 30.

Dealers said cocoa is too small a market to support two or three European contracts and historically it has been difficult for new commodity products to gain traction.

PLY: Not sure I buy the linear approach given that the tale of ‘most every other commodity in recent years has been how electronic dealing has helped fragment the stranglehold of the dollar with multiple granularity emerging. For instance, thanks to the foresight of SAFEX (now JSE) South African farmers have endorsed Rand contracts. So too across the world similar initiatives have not overly harmed the US contracts but have enabled a more diversified localised currency approach to commodity risk. Maybe Cocoa is the exception but I am not convinced on an initial glance at the fundamentals.

The Mechanics Of The Chinese Gold Market
Koos Jansen – BullionStar

Chinese gold market essentials.

EI reported earlier this month that China is planning the launch of a yuan-denominated gold fix this year.

MOEX To Start Ruble-Yuan Futures Trading Next Week

Moscow trading in ruble-yuan futures will begin on March 17 with the pair of currencies expected to become the third most popular by volume.

Tokyo Financial Exchange: Extension Of Three-month Euroyen Futures Discount Program

TFX has determined to extend Three-month Euroyen Futures Discount Program for a further six months from 1 April 2015 to 30 September 2015.

Career Paths

Slovenia’s government nominated jurist Miloš Čas for the new director of the Securities Market Agency (ATVP). He is to take assume office on 4 May after he has been endorsed by Parliament.

Meet The New CEO Of Uganda Securities Exchange
Tom Minney – African Capital Markets News

Paul Bwiso, the former GM of stockbroker Dyer and Blair Investment Bank of Uganda, has big plans as new CEO of the Uganda Securities Exchange. His challenges include a challenger exchange, plans to win more listings, more automation, hopes to demutualize the exchange.

Yesterday we reported that ALTX Uganda, a new alternative multi-asset exchange in the country, has announced its eight-member board to steer it when it officially starts trading on May 1. Recently, Gmex Group acquired 25% in ALT X.

Read our Premium briefs: Rise of Africa – Part 1Part 2Part 3Part 4Part 5

Financial Calendar


FIA Boca 2015


Record date Nasdaq $0.15 quarterly dividend
Record date NZX 6 cents fy 2014 dividend
Interactive Brokers $0.10 quarterly dividend payment

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

Other stories

U.S. CFTC Enforcement Chief To Revive Use Of In-House Courts

The U.S. derivatives regulator’s enforcement director said that his division planned to revive the use of in-house administrative courts, after more than a decade of bringing contested cases only to federal courts.

PLY: A very interesting position which may raise some interesting legal standpoints…

ESMA Chair Steven Maijoor’s Speech At The NAPF Investment Conference In Edinburgh

Steven Maijoor, ESMA Chairman, delivered a speech to the NAPF Investment Conference in Edinburgh focused on how to increase capital availability and support economic growth in the EU.

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