November 18 2013

Patrick-l-young-mergermaniaWith arguably propitious timing, I have just arrived in Brussels and today’s EI seems to be burgeoning with regulatory headlines. In the paper scissors stones game of Dodd Frank it seems clear that SEFs wrap, cut and simultaneously blunt, IDBs, making the CFTC’s interpretation of the game somewhat one-sided.

Manila reports declining profits, CME was hacked, China IPO rules ease, HKEx wrestles with their, LME under the spotlight from Whiting Report to present, Reuters issue notes, Tanzania liberalizes, futures insurance expensive, one stop shop commodity exchanges for India? All this and lots more in today’s EI, happy scrolling:

Public Markets

Philippine Bourse Operator Sees Profit Fall In Q3

Philippine SE booked a net income of P137.23 mln (USD 3.14 mln) last quarter, down 14.61% from P160.71 mln (USD 3.9 mln) in the same three months last year.

Despite Q3 performance, net income still rose 16.75% to P566.18 mln (USD 12.98 mln) as of September from P484.95 mln (USD 11.77 mln) in the same nine months a year ago.

PLY: Disappointing numbers from the PSE which is also trying to complete the takeover of the national Bond exchange.

CME Discloses FBI Probing July Hacking Attack (subscription)
Financial Times

CME disclosed on Friday that a system used to process big futures trades had been hacked in July.

The CME said “certain customer information relating to the CME ClearPort platform was compromised”.

Press release here.

PLY: Those with long memories may recall that prediction markets such as Intrade were targeted by cybercriminals a decade ago.

EU Set For Battle Over Rules For Securities Markets

PLY: MIFID hits the uber-stress zone this week with Christmas looming and then the long downhill run to the end of the European Parliament. Hence negotiations are a touch fraught and with a keen eye on his legacy Commissioner Barnier is uber-keen to get things sorted; apparently so he can lead the French UMP list (nominally centre right, realistically corporatist-socialist) at the European elections and presumably trounce the Socialists…although the National Front currently leads in their polls!

Therefore in France where economic debate has just about reached 1960 (1960 in Moscow that is) levels, Barnier is keen to trim London, curb finance and well, remember those stats?

Currently Europe is: 7% world population, 25% of world economy and 50% of world welfare spending.


I applaud the Czechs, Dutch, Irish and Slovaks who have already offered a joint response to M. Barnier’s willful vandalism towards EU financial markets:

“We do not support inappropriate restrictions on waivers as a means of protecting price formation, especially so where there is no impact assessment to support any such restrictions.”

European Commission Gets Tough On Dark Pools (subscription)
Financial News

PLY: The story so far: if government hasn’t already stolen your pension (q.v. Hungary, Poland, others to follow) due to ill-conceived EU ‘pillar’ rules, then in future “Institutional Liquidity Pools” could be hamstrung to such a degree that your life savings will be ravaged by slippage, if they can even deal at all…

CFTC To Shake Up US Swaps Trading Market (subscription)
Financial Times

For interdealer brokers, the latest CFTC guidance means they must open up their trading platforms beyond the small club of powerful dealers who dominate the interdealer market.

PLY: The crunch. After decades in the shadows, the CFTC is going to push IDBs out into the open. The CFTC Democrats generally mistrust IDBs seeing them as men in dodgy braces under exposed light bulbs in poorly ventilated New Jersey offices. A harsh perception and one which was not even shared by outgoing Commissioner Bart Chilton. However, this latest edict may also be the lifeline the IDBs need. Long in the ultimate Stockholm syndrome cum ‘Predator Partnership’ embrace with the banks, IDBs may not find themselves forced to adapt and hence cannibalize their business model while expanding into a brave new world of speaking to people who are – gosh – not actually, banks! This could be a very exciting journey and has always been clearly on the cards since ever Messrs Dodd and Frank first caught each other’s eyes over a heated Senate debate. It will scramble the IDB pack further but an innovative approach could deliver both a new customer proposition and shareholder value hand in hand.

CFTC Issues Final Rules For Derivatives Clearing Organizations To Align With International Standards

CFTC finalized rules to establish additional standards for systemically important derivatives clearing organizations (SIDCOs). The rules were passed unanimously via Seriatim vote by the Commission.

CFTC Passes Collateral Rule To Backstop Treasuries In Swap Trade

CFTC approved a rule aimed at ensuring that Treasuries pledged as collateral for swaps and futures trades can be instantly converted to cash.

With today’s vote, the nation’s main derivatives regulator toughened safeguards according to a copy of the rule on its website.

Borsa Istanbul Plots Next Phase Of Growth
Turkey’s Stock Exchange Head Boasts Of Achievements

Speaking at FTSE Global Markets’ Accessing Turkey conference in London, BIST’s CEO Dr Ibrahim M. Turhan revealed plans to embark on a series of IPOs, along with the production of new corporate debt instruments and the launch of energy and commodity derivatives.

PLY: Difficult to tell whether these stories being long on hype and short of facts is due to journalistic failings or just a flowery speech from Ibrahim Turhan. I wasn’t able to attend the FTSE event but would presume he must have provided some details.

The difficult for BIST is that of course the innovative ends of the market were mostly run by the likes of TurkDex in Izmir which was somewhat shotgun married into the Istanbul Exchange last year and it is not yet clear that either Ibrahim, for all his good intentions, nor his team, are truly going to be innovative. That is the challenge they are now addressing of course.

China Plans To Ease Grip On IPOs (subscription)
The Wall Street Journal

China’s leaders vowed to revamp the country’s IPO system, transforming it from one where the government decides which companies can list and into a Western-style system where companies can go public on their merits.

PLY: Another welcome drip of progress.

Fixing The World’s Metals Warehousing: Why So Long?

In the mid-1990s LME was embroiled in a criminal investigation after the discovery that a trader – nicknamed Mr. 5 Percent for the share of the world’s copper he reputedly controlled – had spent years manipulating its systems to hoard copper and boost the price.

Sumitomo Corp’s head trader Yasuo Hamanaka racked up $2.6 billion in unauthorized losses trying to corner the copper market, plunged the LME into crisis and led to an investigation by the British government.

No criminal charges were ever brought in the UK, but a 1997 probe by former Treasury official Alan Whiting triggered an overhaul of the LME rule book and introduced limits on traders’ positions.

While lessons were learned, a review of the Whiting study and other LME reports spanning 17 years suggests opportunities may have been missed to prevent a more recent controversy.

PLY: Today’s “Must Read” article is a gem of perspective, insight and all the many qualities which make Reuters such a great news agency. Here is team work by Susan Thomas, Veronica Brown and Josephine Mason threading together insights from Alan Whiting’s 1997 report to create a fascinating insight into how the LME may have missed a chance to reform warehouses much earlier.

Before anybody goes to flog LME as a knee jerk I might add that given the linearity of the exchange business, it is always a challenge to move resources to lateral pursuits such as reform. Nonetheless this article raises questions about LME’s approach to warehouses which may not point to a smoking gun but could make stakeholders squirm. Other exchanges ought to be minded to pursue lateral reviews of just what they may have got smoking gently in the background: however they need to have lateral thinkers to approach the problem and address it!

Nasdaq Options Markets Briefly Declare Self-Help Against CBOE

Nasdaq OMX said on Friday that several of its exchanges briefly declared “self-help” against CBOE before revoking it about 20 minutes later.

Self-help, which occurs when an exchange is dealing with internal problems processing trades and need to send orders through alternate venues, was declared by Nasdaq OMX PHLX, Nasdaq OMX BX Options and Nasdaq Options market systems around 11:28 a.m. ET. Each of the Nasdaq operated exchanges later revoked the self-help declaration by around 11:49 a.m. ET.

NYSE CEO – Financial Education Key To Closing Wealth Gap
Global Atlanta

He may have had more pressing reasons for being in Atlanta, but NYSE Euronext CEO Duncan Niederauer said he wouldn’t have missed a financial literacy summit where he was asked to speak Thursday.

“Even if the deal closed today instead of yesterday, I was going to be here,” Mr. Niederauer said at the Operation HOPE Global Financial Dignity Summit.

PLY: Financial education is one of the biggest issues our industry must address. The insecurity of intermediaries need to be assuaged so we can have better educated investors and a greater opportunity to have more active investors for all our futures (on, or off, balance sheet).

Governance: Businesses Balk At Listing Under Tough New Regulatory Regime (subscription)
Financial Times

Hong Kong has a dilemma. The city has brushed up its corporate governance standards following some scandals at listed companies, with regulators taking a strong stance on investor protection.

But critics say this is turning some companies away and making the listing process too lengthy or costly for others.

And while stock market operator HKEx obtains just 17 per cent of its revenues from listing fees, companies going public bring important banking and professional services business to the economy.

PLY: A huge dilemma. Chinese IPOs have been a bit like early Chinese takeaways in western cities, an MSG-laden high produced in vague accordance with traditional practice. Nowadays sophisticated oriental food is a popular alternative throughout the west but there are all sorts of post sugar rush lows being felt by those who bought some (at best) MSG laden Chinese IPOs. HKEx knows it avoided a few ugly bullets which New York swallowed on the Sino-IPO front and is keen to avoid any further damage but at the same time, the financial centres service providers are understandably concerned about lucrative accounting / audit / consulting / legal business drift elsewhere.

Problem is there is no easy answer. More regulation is counterproductive but no regulation could give HKEx and Hong Kong huge headaches. Proportionality will be difficult to achieve and of course now China is easing its listing rules…

Energy IPOs Add Lustre To Romania Bourse, Reform Needed

Romania’s IPOs of state-controlled energy majors Romgaz and Nuclearelectrica will boost liquidity on the country’s stock exchange that is in dire need of reform to lure investors, its chief executive said. Bucharest SE (BvB) is one of the least developed emerging European markets – with just over 80 listed firms and a capitalisation of roughly 27 billion euros.

Foreign investment on the bourse has long been stifled by scarcity of offerings and tight regulations that are “almost prohibitive,” CEO Ludwik Sobolewski told Reuters in an interview. “We need investors, better corporate governance, a better trading mechanism, better risk management…”

PLY: Put simply there is no cohesive capital market infrastructure in Romania, not even in the current exchanges as such. Total revolution is required and Ludwik Sobolewski is quite correct in his criticisms.

Moscow Exchange: Resolutions Adopted At EGM

Key decisions included:

Shareholders voted to decrease the exchange’s share capital by purchasing and retiring 99,852,660 floating book entry registered ords (4.2% of the share capital). The purchase price was RUB 55 (USD 1.68) per share, which was the price at IPO and exceeds the six month weighted average price to 19 September, when the decision to hold the EGM was made. Shareholders may tender their shares for buyback from 15 November through 30 December. 99% of shareholders voted in favour of the buyback.

It was also decided to reduce the number of Supervisory Board members from 19 to 15, increasing efficiency. The members will be elected at next year’s AGM. 99% of shareholders voted in favor of the reduction.

BGC Partners Announces Launch Of European Power Desk

BGC Partners announced the launch of a European Power desk, based in London, with a brokerage focus on power products in the French, German and Polish markets.

Regulator Sets Final Penalties For Everbright Error

The China Securities Regulatory Commission on Friday announced formal penalties for an insider trading case involving China Everbright Securities Co Ltd, levying a fine of 523 million yuan ($85.7 million) and banning four managers from the nation’s financial markets for life.

PLY: ” Pour encourager les autres.” Swingeing penalties but I believe Chinese in-house risk management has been stepped up considerably – and that can only improve market efficiency and reduce strains placed on the rest of the marketplace by the errors of other counterparties.

Thomson Reuters Announces Pricing Of C$500 Million Note Offering

Thomson Reuters announced the pricing of its offering of C$500 million (approximately US$478 million) principal amount of 3.369% notes due 2019.

The offering is expected to close on November 22, 2013, subject to customary closing conditions. Thomson Reuters plans to use the net proceeds of this offering for general corporate purposes including, without limitation, to finance share repurchases.

Private Markets

Tanzania To Open Up Capital Markets To East African Investors

Joseph Massawe, director of economic research and policy at the bank of Tanzania: “We plan to liberalise the capital account by removing restrictions to free flow of capital within east Africa by December this year…By 2015, we expect to remove almost all restrictions on the capital account for investors even from beyond east Africa. We are now making amendments to our financial regulations to ease those restrictions.”

Massawe said the move was part of Tanzania’s commitment under the East African Community (EAC) trade bloc, which plans to introduce a common market with free movement of capital. Currently, only Tanzanian investors are allowed to invest in Treasury bills and bonds and trade shares on the Dar es Salaam Stock Exchange.

Savers Boosting Bitcoin Demand In China

Linke Yang, a co-founder of China’s biggest Bitcoin exchange BTC China:

“The main reason why Bitcoin has become big in China is because Chinese people are savers, and more people are seeing Bitcoin as a way to store and invest their money…There are boundless opportunities for BTC China and Bitcoin in the next five years, you never know with the way the Internet develops.”

Dividend News

NZX Board has declared a fully imputed dividend of 1.5 cents per share in respect of Q3 2013.

The record date is 2 December 2013 and the payment date is 13 December 2013.

Special Section: FTI, NSEL, India at the Crossroads

PLY: Shares in FTIL and MCX are bounding upwards today, including MCX which was previously locked in a +/-5% band. Excitement seems to revolve around what ought to be a fascinating audit discussion where the MCX directors can cross examine the findings of the audit report which forms the basis of the show cause fit and proper notice outstanding to Jignesh Shah and others:

FMC Allows MCX Directors To Cross-Examine Grant Thornton
The Hindu Business Line

FMC has allowed the three former directors of MCX and FTIL to cross-examine Grant Thornton, which conducted the forensic audit on the trouble-ridden NSEL, on November 25.

Based on the audit report, the Commission had issued a show cause notice in the fit-and-proper case to FTIL promoter Jignesh Shah, former MCX director Joseph Massey, former MCX MD Shreekant Javalgekar and FTIL, the promoter of NSEL.

FMC Shortlists Haribhakti & Co And Chokshi & Chokshi Chartered Accountants For E-Series Audit
The Economic Times

FMC has shortlisted two Mumbai-based chartered accountancy firms — Haribhakti & Co and Chokshi & Chokshi Chartered Accountants — to conduct a forensic audit of gold and silver backing the so called e-series bullion contracts on crisis-hit NSEL, which suspended their trading on August 6 based on a government diktat.

FMC Wants Close Scrutiny Of Jignesh Shah’s Firms

India’s commodities markets regulator is strengthening its scrutiny of some group companies of Jignesh Shah-led FTIL, following the payment crisis at NSEL.

FMC is setting up a cell to monitor the escrow account of the spot exchange that is being used to settle the dues of small investors affected by the payment crisis.

It has also directed that the special auditor of MCX, a FTIL company, should “exhaustively” probe all trades done by the National Bulk Handling Corp. Ltd and the Indian Bullion Market Association (IBMA) on MCX.

NSEL scam: Arun Sharma gets judicial custody till Nov 25
The Hindu

Rejecting the application of Mumbai police’s EOW, seeking further custody of Lotus Refineries’ CMD, Arun Sharma, in connection with the ongoing payment crisis at the crippled NSEL, a sessions court on Saturday remanded him in judicial custody till November 25.

Arun Sharma, who is also a film financier, was arrested by the Economic Offences Wing (EOW) on November 11, becoming the fifth person to land behind bars in the payment crisis at NSEL.

EOW Probing NSEL Borrowers’ Books, Attaching Properties
Business Standard

After the Income Tax Department and the Enforcement Directorate, now, the Economic Offenses Wing (EOW) of the Mumbai police, too, has started looking at the books of accounts of NSEL borrowers.

Now, the police is attaching properties of NSEL borrowers-— the attached properties can be sold and the money distributed to investors.

PLY: It has been interesting to note how the shrill sounds of brokers and dealers complaining about the exchange have been silenced once it became apparent that they were not exactly bereft of involvement in curious financing around NSEL and their own actions may have been slightly remiss in at least a moral dimension, if not others too. A broad crackdown by the police on all defaulters is welcome and if other corporate misdemeanours come to light, in many respects the entities really have only themselves to blame for their predicament.


NYSE And Nasdaq Plan To Back Up One Another’s Data Streams (subscription)
The Wall Street Journal

The committees that control consolidated data feeds for Nasdaq OMX and NYSE Euronext are close to an agreement on a plan to back up one another’s streams.

PLY: Sensible.

Merger MegaDeals Lead Exchanges To Mull Tech/Data Integrations (subscription)
waters technology

PLY: Looks like a promising article, although the links seem to be faulty and/or a paywall clobbers us so it is not clear if it’s all about data feeds or broader tech, where clearly the NYSE Technologies behemoth is exposed especially since the latest Captain has jumped ship.


Abu Dhabi To List Govt Bonds On Own Exchange

Abu Dhabi’s government said it would list its bonds on its own Securities Exchange as well as in London, in a sign of growing competition among financial centres for the region’s business.

Many Gulf governments and companies have traditionally listed their bonds in London, because of its deep market and respected legal framework. Abu Dhabi government bonds currently outstanding have been quoted on LSE since 2009.

But the emirate’s Department of Finance (DOF) said on Thursday that it would now obtain dual listings for the bonds in Abu Dhabi, and expected the procedures to be completed soon.

“The dual listing will reinforce Abu Dhabi’s position as an international financial centre that attracts investment and provides investors with diverse options in the stock and bond markets,” DOF chairman Hamad Al Hurr Al Suwaidi said in a statement.

Future For Egg Derivatives Is Fragile In China (subscription)
The Wall Street Journal

If we were to dream up the perfect commodity to trade as a futures contract, it would probably be durable, non-perishable and subject to regular swings in supply and demand. Being notoriously fragile and perishable, eggs clearly don’t fit the bill on the first two counts, and investors may need some convincing on the third.

PLY: China is in love with developing commodity futures right now and it is not clear what will, or will not, work. True CME, originally an egg-centric market (the “Chicago Butter & Egg Board”) has not listed futures for years but China may be better suited to a market than the heavily corporate USA. Who knows, but in this case clearly you can’t expect to make a market without at first breaking a few eggs…

Career Paths

HKEx – Mary Xuezheng Ma has resigned from the Main Board and GEM Listing Committees with effect from 14 November 2013 following her appointment as a Non-Executive Director of the Securities and Futures Commission.

Financial Calendar


Moscow Exchange 9M2013 IFRS Results

This week

MarketAxess Q3 $0.13 dividend payment
Record date Thomson Reuters for $0.325 Q3 dividend
Record date MCX Rs. 7 interim dividend
Record date TMX $0.40 dividend

Betfair results for the six months to the end of October on 3 December.

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

Share Notes

NASDAQ OMX EVP Edward Knight sold 11,391 shares Thursday, November 14th at an average price of $36.77 (bargain $418,847.07). He now owns 130,503 shares.

Analyst Notes

Charles Schwab “Sell” Rating Restated At Keefe, Bruyette & Woods – $20.00 Price Objective

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.


Latest Crowdfunding Platform Launches First Projects

Crowdrooster, a rewards-based crowdfunding platform focused on consumer goods launched its first six projects, aiming to encourage conspicuous consumers to invest in “the products of the future.”

Other stories

Insurance Against Failed Futures Brokers Would Be Costly: Study

An insurance program to protect U.S. futures traders from financial losses when a brokerage collapses would come at a high cost, according to a study released on Friday, which was quickly criticized by a top U.S. regulator.

Bart Chilton, a member of CFTC, cast doubt on the findings because the study was funded by futures-industry groups supported by firms that have opposed insurance programs.

The National Futures Association (NFA), Futures Industry Association, exchange-operator CME and the Institute for Financial Markets commissioned the study last year. It analyzed the potential costs and benefits of four insurance models, but did not make a recommendation on whether any option should be pursued.

The most feasible privately run option studied seemed to be a proposal from eight insurance companies to create a captive insurance company that would offer coverage to futures customers on a voluntary basis, said Christopher Culp, who led the study for the consulting firm Compass Lexecon.

That proposal would initially cover up to $300 million in claims by customers of participating brokers. The total cost of the program was estimated at $18 million to $27 million a year.

PLY: Conflicts of interest there may be but then again in the increasingly partisan world of regulation, it is difficult to find too many independent views being permitted as the big corporate gorillas of banks (including their various lobby groups) and regulators slug it out without really considering the market as a whole, alas.

India – Single Platform Likely For Spot, Futures Trading: FMC
The Hindu Business Line

FMC is considering a proposal to allow trading in commodity futures and spot on a single platform.

Speaking at the Federation of Indian Chamber of Commerce and Industries (FICCI) event ‘The Changing Regulatory Paradigm and the Road Ahead’, FMC Chairman Ramesh Abhishek, said that some exchanges have submitted a proposal to offer an integrated trading platform for both spot and futures market and it is under active consideration.

“The new proposal would be in line with the capital market which trades both cash and derivatives on a single platform. We are also encouraging existing futures exchanges to come out with short-term contracts to widen participation and align futures market more with spot,” he said.

PLY: It would be wise to permit the opportunity to have spot and futures on the same platforms. Now what is required is an ability to deliver the advantages of exchange trading back to the farmers who need it and away from the bias which has emerged towards leveraged speculation above risk transfer as a key participant group.

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