October 07 2013

elb2NASDAQ-LSE rumours, LME adapting as metals week begins and Indonesia tries exchange protectionism for tin. Chicago’s new NullArbor Plain (yip, Pat fled), NSEL Jiggered. Jignesh not quite jiggered. Yet. Gary Gensler discusses swap progress as SEC sticks its oar in. AIM grows, BME goes cash CCP…

Video: The Future Of Markets

PLY: Amongst an ongoing flurry of off-sites and conferences this autumn, I enjoyed a marvellous day in Stockholm recently interacting with the good folks of leading independent exchange technology vendor Cinnober all about the history of markets and their bounteous future.

Having argued for years that this is a world of opportunity, alas there seem to be remarkably few who share my views in many bourses right now. The link above leads to a brief video I recorded with Fredrik Backlund and team discussing the prospects for exchanges in five years and beyond which has been released today…

Public Markets

Gensler Assesses U.S. Swap Rules’ Debut By Phone Amid Shutdown

Gary Gensler spent much of the past month fending off Wall Street’s campaign to slow the move to electronic swaps trading. So when the platforms went live last week, the top U.S. derivatives regulator wasn’t going to let a government shutdown stop him from monitoring its progress.

With most of the staff at the Commodity Futures Trading Commission’s Washington headquarters on furlough, Gensler, in his final months on the job, had to pick up the phone and call around to make sure the system was working. He pronounced himself satisfied.

PLY: With the chaos before hand a big bang was never on the cards while the SEC / CFTC turf issues only further cloudy a troubling picture of a period when US regulators failed to really carry through what was a wildly ambitious plan for the government’s budgets.

Nasdaq And LSE Speculation Lingers (subscription)
Financial Times

PLY: Rumours continue to swirl that there could be an LSE-NASDAQ deal although detail is fuzzy.

LME Heeds Calls For More Transparency (subscription)
Financial Times

LME is set to start publishing information about the futures positions of hedge funds and other traders in response to calls for greater transparency.

PLY: It’s LME week hence a slew of stories on metals. A “Committment of Traders” style report would be a first in Europe and it will be interesting to see if such a report in and of itself can stimulate volumes, albeit that for LME the non-contiguous nature of their futures contracts means they are for adult speculators only…

LME May Delay Decision On Warehouse Rules (subscription)
The Wall Street Journal
Metals Logjam Could Remain Even After Rule Change (subscription)
The Wall Street Journal

LME may not decide on new rules for its global warehouse system at its October board meeting.

…LME’s proposed overhaul of its warehouse system may not go far enough to significantly loosen the grip of traders and banks on the supply of commodities such as aluminum.

The market “doesn’t have a semblance of normality,” said Evangelos Mytilineos, chairman of Mytilineos Holdings SA, which owns Aluminum SA, Southeastern Europe’s largest producer. “I’m not sure if the LME will be able to fix it.”

PLY: Hmmm, at the risk of sounding glib, I always thought the point of the LME was to bring a dash of homogeneity but surely never a semblance of normality or other such banal commoditization?

BME On Track To Launch Equities Clearing House In 2015 (subscription)
Financial News

Bolsas y Mercados Españoles is on track to establish its first equities clearing house by 2015, which is likely to reduce clearing costs and could help the Spanish stock exchange group claw back market share from Europe’s alternative venues.

PLY: Having a clearing house is good. However, in and of itself, I can’t see the arrival of clearing suddenly pushing market share back to BME unless it can find huge cost cuts and begin to compete head on. BME’s failed denial of MIFID strategy has left it badly positioned once it was forced to comply with (not so) recent EU regulations.

NYSE To End Subsidies For Nasdaq-Owned Market Services (subscription)
The Wall Street Journal

NYSE Euronext will stop paying for NYSE-listed companies to receive stock-market services provided by a former unit of Thomson Reuters Corp. that is now owned by rival Nasdaq OMX.

PLY: Unsurprising development as the department store silos jockey for position with their issuer offerings.

London’s Junior Market Grows For First Time Since 2007

London’s junior stock market grew for the first time in six years in the third quarter, according to research on Monday, as more companies joined than left (26 versus 18).

PLY: Encouraging to see AIM growing, presumably aided by a policy change where government allowed AIM stock to be included in tax-free savings accounts (ISA).

Nasdaq OMX Axes CO2 Market Maker Programme Over Poor Results (subscription)

Exchange operator Nasdaq OMX has terminated its lucrative European carbon market maker programme, after its share of trade all but disappeared.

Indonesia Challenges LME In Bid to Set Global Tin Benchmark

Indonesia, the world’s largest tin exporter, wants to displace the LME as the venue for setting the global benchmark by requiring that the metal be traded on a local exchange before export. Prices rose.

“The purpose of trading physical tin through the bourse for export is to make Indonesia the place for international tin-price discovery, not to refer to the LME anymore,”

Sutriono Edi, head of the Commodity Futures Trading Regulatory Agency, said by e-mail in response to Bloomberg questions. The government was studying other commodities to which the local-trade policy may be applied, he said, listing coffee, cocoa, rubber and coal.

PLY: Even if a second local exchange is authorised, at first sight this is a curious piece of back door protectionism.

Romania’s Bucharest Stock Exchange Eyes Expansion

After building a new market from scratch on the Warsaw Stock Exchange, Ludwik Sobolewski, the new CEO of the Romania’s Bucharest Stock Exchange (BVB), is aiming to make the local exchange a challenger to Budapest and Prague in the next two years.

PLY: I am worried that Ludwik may yet suffer “I” strain as he stresses all the things he did at GPW.

Private Markets

Delhi Bourse Mulls Closure
Business Standard

The Delhi SE (DSE), a regional bourse which has been around since the time of India’s independence and whose shareholders include FTIL, is set to take a call this month on exiting the exchange business.

PLY: I make it Delhi could be the fifth exchange to exit the business this year following Hyderabad SE in January as well as Coimbatore SE and Saurashtra Kutch SE which exited in early April and Bangalore which resolved to exit last month.

Special Section: FTI, NSEL, India at the Crossroads

MCX is down -1% while FTIL is up almost 2% today as the noose tightens (Business Standard’s words, not mine, for once!) around Jignesh Shah… The “fit and proper” question has been asked. Jignesh is expected to use every lawyer at his disposal to defend his position. Given that warehouse scams appear to have abounded and that almost half the amount owed to NSEL is by bogus companies, bogging down the process in law is Shah’s likeliest survival strategy now, as the evidence appears to be mounting that there have been chronic failures all around NSEL.

FMC Issues Show-Cause Notice To MCX Promoter FTIL
The Economic Times

FMC has issued a notice to FTIL, Jignesh Shah, Joseph Massey, MD & CEO of MCX Stock Exchange, and Shreekant Javalgekar, MD & CEO of MCX, asking them to show cause why they should not be declared not ‘fit and proper’ to be shareholders and directors on MCX.

PLY: Devastating double negative: i.e. onus of proof now on Shah, Massey and Javalgekar to prove they deserve the regulator’s imprimatur. That will be difficult to prove and hence gives the regulators’ some advantage as now the MCX three must do all the running to prove their fitness to continue.

How The Noose Around Jignesh Shah Was Tightened
Business Standard

The “show cause notice” by FMC to promoters of NSEL on Friday, including Jignesh Shah, is the culmination of a series of steps by the authorities to tighten the noose around Shah.

PLY: Two weeks to respond and as expected given his pedigree, Jignesh Shah is expected to go down fighting.

Jignesh Shah, FMC Tussle: Financial Technologies To Explore All Legal Options
The Economic Times

The tussle between Jignesh Shah-led FTIL Group and regulators could turn into a long-drawn court battle. Industry circles and sources close to Shah believe that FT will explore all legal options to preserve its stake and retain control over the exchanges it has promoted.

PLY: Shah hopes to win as he did in 2010 but this time around the burden of proof has been handed to the government case. NSEL was a fiasco, Shah was on the board and yet knew nothing of a billion dollar bubble. Shoehorning that into a positive sentence alongside “fit and proper” is tricky but presumably about to become a niche parlour game for exchange geeks.

Twist In NSEL Scam: 9 Defaulting Cos Bogus

An entirely new murky facet of the Rs. 5,500 crore (USD 895.3 mln) NSEL scam has emerged, with the Economic Offences Wing of Mumbai police discovering that 9 of the 27 companies that defaulted in making payments to the exchange never existed.

These nine companies account for half of the scam amount of Rs. 5,500 crore (USD 895.3 mln).

PLY: So haircuts start at 50% then.

NSEL Raw Wool Stock Inferior, Worth A Fraction
Business Standard

While the Swiss firm SGS, which audited the goods stored in NSEL, found a huge shortfall in quantity, the quality too now appears to have been inferior.

The raw wool stock, if sold at the best prices at the auction, would fetch a paltry Rs 5.17 crore (USD 841.6k) against the outstanding of Rs 730 crore (USD 11.8 mln).

PLY: A clear example of how “fit & proper” is a stretch to prove, when stock worth nearly 12 million dollars is actually worth barely 850,000 US…

MCA Inspection Report On NSEL Books Likely In Couple Of Weeks
The Economic Times

Corporate Affairs Ministry expects to complete inspection of account books of the crisis-hit NSEL, its promoter group FTIL and others, within a couple of weeks.

Some NSEL Brokers May Face Criminal Charges
The Economic Times

The arm of the Mumbai police that is investigating the NSEL fraud maintain the option of bringing criminal charges against brokers open after ascertaining whether they have connived with entities which have defaulted in settling investor dues worth Rs 5,500 crore (USD 895.3 mln).

How NSEL Shunned Corporate Governance
Business Standard

The NSEL case presents an example of bad strategy and poor corporate governance.

It is a bad idea to search for regulatory grey areas with the expectation that the firm will flourish faster in the absence of regulatory constraints. When a firm operates in a twilight zone, it exposes itself to enormous risk of regulatory overdrive when the incentive to the regulator fails to motivate it to turn a blind eye on the operation of the firm.

PLY: “Good Derivatives” require good regulation as Richard Sandor’s fascinating tome of the same name discusses.

MCX-SX’s Cash Segment, Equity Derivative Turnover Dip

Equity derivative turnover at MCX-SX plunged 69 % in September and its cash segment volume dropped 8.8%, amid a deepening payment crisis at its group entity NSEL.

PLY: A simple and damning indictment of lack of faith in the current shareholder structure. With clarity, MCX-SX can prosper.

I Was Thinking How Many Regulators The Country Has, And I Couldn’t Count: UK Sinha
The Financial Express

PLY: Interesting interview with SEBI Chairman UK Sinha.


Nasdaq Platform Speeds Up Nigeria Bourse

The Nigeria SE’s adoption this week of the Nasdaq X-Stream trading platform has improved the speed of transactions, dealers said on Friday.


Malaysia To Tap ‘Latent Demand’ With Gold Futures Offering

The Gold Futures Contract (FGLD), Malaysia’s first precious metals futures contract, will begin trading on the Malaysian stock market’s derivatives exchange this Monday and is aimed particularly at retail investors.

Career Paths

SEC Friday announced the appointment of Karen L. Martinez as director of the Salt Lake Regional Office. Ms. Martinez joined the SEC staff in 2002 as trial counsel in the Salt Lake office.

Kyungsoo Choi has been appointed as the new chairman and CEO of the Korea Exchange (KRX).

Before taking this position at KRX, Choi was president and CEO of Hyundai Securities. Earlier in his career, he worked in the Ministry of Finance and served in a number of government roles, including a spell as president of the National Tax Tribunal.

PLY: KRX is at a fascinating crossroads in the history of both the exchange and the dynamic South Korean state, we wish Mr Choi every success.

Analyst Notes

ICE “Neutral” Rating Reiterated By Zacks – $193.00 Target Price

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

Ex-CBOT Chief Says He’s In Europe After Warrant Issued
Ex-CBOT Chief Accused Of Fleeing Country To Keep Millions From Ex-Wife
Chicago Sun Times

Former CBOT Chairman Patrick Arbor said on Saturday that he was in Europe, following a newspaper report alleging he had fled the US to avoid paying millions of dollars to his ex-wife.

…Given the lengths to which Arbor has gone to leave Chicago behind, allegedly fleeing to Europe to shield tens of millions of dollars in assets from his wife in their divorce, it is reasonable to conclude he does not intend to return.

PLY: Pat Arbor has apparently rebranded himself as an Italian citizen… Perhaps not unsurprising that this historic lothario would seek to become Mediterranean macho for his move to Europe, although we await information as to whether Interpol has issued a “lock up your daughters” advisory on Mr Arbor. Meanwhile, the USA has a new septuagenarian fugitive to follow replacing Whitey Bulger. Daughters aside, at least he isn’t dangerous.

India – SEBI Allows Put & Call Options In Shareholder Deals
The Economic Times

SEBI has provided companies the flexibility of buying and selling of shares to private equity investors and strategic partners by changing rules on forward contracts.

SEBI on Thursday removed restrictions that were more than a decade old and has allowed companies to include put and call options in shareholders’ agreements.

EFCC Signs MoU With Nigerian SE To Guard Against Infractions By Stockbrokers

The Economic and Financial Crimes Commission (EFCC) on Friday signed a Memorandum of Understanding with the Nigerian SE in a bid to guard against infractions on extant rules by players on the exchange.

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