This week in the parish of bourses and market structure:
Checkmate for CHESS
As FTX becomes a fraud which is Fundamentally Tarnished Exchange.
My name is Patrick L. Young.
Welcome to the bourse business weekly digest.
It’s the Exchange Invest Weekly Podcast Episode 171.
Good day ladies and gentlemen, this is a very brief reduction of highlights amongst the key headlines from the week in market structure. All the analysis of the many events and happenings of the past seven days can be found in Exchange Invest’s daily subscriber newsletter, the unique guide to the bourse business sent daily to your inbox.
More details at ExchangeInvest.com.
Of course, we’re going to start with the bitcarnage, the demise of FTX and more. Last week we were quoting Jacques Mallet du Pan, the famous French writer of the Revolutionary period “A l’exemple de Saturne, la révolution dévore ses enfants”. Taking Saturne as an example the revolution eats its children and ultimately that’s how it seems to be ending up while Binance FTX has sucked up all the crypto media oxygen of late the reality is the bad news in crypto recently has been the success of the SEC’s ‘sue it and see’ precedent chasing strategy, which has hit paydirt – LBRY failed the Howey Test, now potentially just about every token can be deemed a security most significantly Ethereum.
Now we can presume that the likes of Elizabeth Warren and others are going to be gunning for crypto, and both GG and Rostin Behnam as the head of the SEC and CFTC respectively, look exposed through inactivity (at best), and hence they will need to redouble their efforts to sort things out. As we all know precipitate regulatory action under political duress has essentially never resulted in a better, more flexible working environment for free or better functioning markets.
And what now for Sam, the man who was previously the legendary SBF? Well, if he hadn’t given so much money to DC candidates, I would have been more convinced an orange jumpsuit looms for him for a considerable period of time. It ought to, as he was commingling and stealing client funds to give to Alameda (a subsidiary in his empire, which many have alleged, received preferential treatment on FTX exchanges). Thus, we would indeed like to throw down the gauntlet to Elizabeth Warren, will you seek the unvarnished truth about SBF (after his bipartisan history of donating vast sums to the Democratic Party? And indeed, it has to be said on a bipartisan basis, he also gave a wodge of cash to the GOP Chairman of the Agriculture Committee, who just happened to oversee the CFTC which SBF was trying to influence with a whole new set of regulations – zero prizes for guessing on the latter rationale why he was being so bipartisan).
Regulation is coming to crypto and the phrase ‘hasty overly prescriptive screw up’ may yet be appended to that but a crackdown there will be…and that will likely leave the incumbents badly damaged, if not outright deceased.
In the latest filings about FTX itself, the truth emerged that an Ivy League education may give you wokeability but when it comes to workability, you’re essentially unemployable through cluelessness when it comes to running a business…unless of course, you have few billion behind you and backing in which case you’re viewed as a demigod until the wheels fall off…
In other news, Elizabeth Holmes was sentenced to 11 years in prison this week.
Speaking of how demigod’s fall and the failure of the education system, we have an epic filing in US government history, not quite as outright funny as the recent Onion’s Supreme Court filing but nonetheless every bit as wacky:
In the United States Bankruptcy Court for the District of Delaware
In Re: FTX Trading Limited et al., 1 Debtors. Chapter 11 Case Number 22-11068-JTD Doc 24 Filed on 17th of November
Liquidator John J. Ray III notes:
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”
That’s only really foreplay once you get into the report, it gets even more damning still.
“The FTX group did not maintain centralised control of its cash. Cash management procedural failures including the absence of an accurate list of bank accounts and account signatories, as well as insufficient attention to the creditworthiness of banking partners around the world.”
Meanwhile, for those who are concerned about “work from home” having got out of hand, FTX may yet prove the high watermark, Mr. Ray goes on:
“The FTX Group’s approach to human resources combined employees are various entities and outside contractors, with unclear records and lines of responsibility. At this time, the Debtors have been unable to prepare a complete list of who worked for the FTX Group as of the Petition Date, or the terms of their employment. Repeated attempts to locate certain presumed employees to confirm their status have been unsuccessful to date.”
I mean, elsewhere Sam Bankman-Fried has claimed that he forgot about $8 billion, meanwhile, some people have clearly forgotten they even have a job with FTX. That frankly, Trump’s even the Maltese government payroll at election time.
Ultimately, this whole farago prompted a multitude of health warnings in Exchange Invest when it was leading with this coverage. Most notably, the damage to screens across multiple different kinds of devices has been significant in recent weeks as coffee has been spotted, left right, and center in reply to, well, take this example, Mr. Ray once again:
“The Debtors did not have the type of disbursement controls that I believe are appropriate for a business enterprise. For example, employees of the FTX Group submitted payment requests through an online ‘chat’ platform where a disparate group of supervisors approved disbursements by responding with personalized emojis.”
I know I know you’re thinking “at least it wasn’t a GIF” but in so many ways emojis just feel very last decade best practice for internal communications, don’t they?
Meanwhile, Mr. Ray continued:
“In the Bahamas, I understand that corporate funds of the FTX Group were used to purchase homes and other personal items for employees and advisors. I understand that there does not appear to be documentation for certain of these transactions as loans, and that certain real estate was recorded in the personal name of these employees and advisors on the records of the Bahamas.”
Well, the latest on this, ladies and gentlemen, is that thanks to a Reuter scoop, we’re talking a $122 million property portfolio purchased by FTX, SBF himself, the greater Bankman-Fried family, and other FTX insiders…
This would appear to have been funded at least in part by the FTX funding round itself. Apparently, when they raised $420 million dollars in hard cash from investors SBF promptly treasured $300 million of it.
At least those assets are on a good old-fashioned property register, Mr. Ray continues in the realm of “Digital Asset Custody” and it gets more damning still.
“The FTX Group did not keep appropriate records or security controls, with respect to its digital assets. Mr. Bankman-Fried and Mr. Wang controlled access to digital assets of the main business in the FTX group (with the exception of LedgerX, regulated by the CFTC and certain other regulated and/or licensed subsidiaries). Unacceptable management practices included the use of an unsecured group email account as the root user to access confidential private keys and critically sensitive data for the FTX Group companies around the world, the absence of daily reconciliation of positions on the blockchain, the use of software to conceal the misuse of customer funds, and the secret exemption of Alameda from certain aspects of FTX.com’s auto-liquidation protocol. In other words, ladies and gentlemen proof that Alameda was actually playing within a bent Casino, and the absence of independent governance between Alameda (owned 90% by Mr. Bankman-Fried and 10%, Mr. Wang,) and Dotcom Silo (in which third parties had invested).”
In other words, it all looks rather like John Belushi does Corporate Governance.
So ultimately the CFTC was dancing with the devil – the exchange was called as you prefer a casino, a rocket, a fraud, but it was NOT a level playing field exchange, at least certainly not beyond LedgerX but nonetheless, FTX overall was dealing considerably with the CFTC, as indeed, it looks incredible now with the benefit of 2020 hindsight that Sam Bankman-Fried made any progress whatsoever with his utterly ludicrous plan to rejuvenate, remodel, and ultimately, I think disassemble when everything had would have managed to hit the fan, the whole concept of central counterparty clearing.
I could go on all the details in Exchange Invest daily this week, to which all subscribers have been duly elucidated on the day of publication. All it remains for me to say is to note that Mr. Ray “I declared upon penalty of perjury that the foregoing was true and correct” in his report. Well, given that it’s far from a pro forma chapter 11 filing as I think it’s feasible to ever get, unless the Supreme Court commissions Elon Musk and Johnny Depp to reinterpret the bankruptcy code. This has surely got to be as wacky as it gets, at least for this cryptocurrency bubble.
Meanwhile, the litigation is ongoing. I’ve mentioned in Exchange Invest many moons ago we’re going to see A2A litigation (the “S2E” model, as I call it) where you suit everybody.
And indeed, we’ve now started to see a litany of class action suits coming through, most notably a large number of celebrity endorsers including Tom Brady Gisele Bündchen, the Golden State Warriors, Shaquille O’Neal, and Kevin O’Leary have all been subpoenaed and made responsible for the many billions of dollars in damages according to Plaintiff’s actions.
As I said many days ago in Exchange Invest: “Don’t be surprised if FTX becomes the Christmas class action suit, carnival of 2022.”
Of course, if you’re reading Exchange Invest, clearly you weren’t, as we told you that days, weeks, actually in advance of the lawsuits arriving.
Let’s leave the topic of bigcarnage for this week by referring to the FTX Wreckoning in an article in Politico, quoting Jeffrey Sprecher (the chief executive and chairman of ICE) pointed out:
“I’ve always found it odd that the regulators haven’t used the existing rules a little more aggressively. They certainly aren’t shy with us.”
That mot juste goes beautifully alongside another quotation from Politico in the article Washington Watchdogs Outgunned In Crypto’s Wild West.
Former SEC enforcer John Reed Stark’s comments of the regulators and the regulators seeking to blame the practitioners:
“Blame them? That’s like Oswald blaming the Secret Service because he killed Kennedy.”
In the mainstream of exchanges this week, EEX (European Energy Exchange) sees the EU plans for gas prices cap as a threat to supply security, which is a pleasant euphemism for beyond stupid even for the high bar of idiocy set by the EU over several decades.
Meanwhile, Xavier Rolet has been talking to the financial news.
“The litmus test of London’s appeal as a global financial centre will be whether it retains its dominance in the one quadrillion notional interest rate swap clearing market once European clearing equivalency expires.”
It was a busy week for results in the parish. Let’s look at two highlights.
NSE (National Stock Exchange) India the consolidated net profits soared +62% in the September 22 quarter, while GPW (the Warsaw Stock Exchange) have reported their nine-month results sagging a little bit along with the stock market their net profit -10.6% year on year.
Deal news this week, one really, really exciting piece of information in Abu Dhabi, Mubadala (the sovereign wealth fund of the emirate) have acquired a stake in aircarbon exchange, which is of course nowadays basing a significant amount of its operations out of Abu Dhabi itself.
Don’t forget ladies and gentlemen, if you’d like more pith from Patrick and you want to read it at some point in time, catch a copy of my most recent book “Victory or Death?” Blockchain, Cryptocurrency and the FinTech World, published by DV Books and distributed by Ingram worldwide.
While you’re waiting for your copy of that book to turn up, instead of pondering “Victory or Death?” ponder IPO-Vid. You can find it on Facebook, YouTube, and LinkedIn search IPO-Vid. Our most recent show was an epic Brendan Bradley the doyen of product development the world over and futures markets in recent years. He was discussing Evolving Markets, Evolving Careers, and in our next show coming Tuesday at 7PM European time, that’s 1 o’clock Eastern, we’re going to have our guest, Professor Balaji Prabhakar, he’s going to be discussing Accelerating The Cloud.
Product news this week, ICE’s Long Gilt Futures have their 40th anniversary.
The Shorts and the Mediums may never really have caught on – due to lots of issues with the cheapest to deliver oscillating faster than recent British governments. However, the Long Gilt Future represents the finest of Britain’s long-dated government bonds and was celebrating last week its anniversary. What a remarkable 40 years of history that has been.
940 traded contracts since this market first emerged at the Royal Exchange all those years ago, and perhaps most significantly of all, while a pint of beer may have gone to 4 pounds, amongst other many inflationary actions over that time. The spectacular number from the Long Gilt pit to the electronic Long Gilt market on ICE today is the execution and carrying fee 28 pence, the same as it was, the day it was launched – 40 years ago.
Remember that message, that was at a point in time when we were in the early years of Pope John Paul’s II papacy, Mrs. Thatcher was in her first term as PM and it didn’t look as if she was necessarily going to get a second term, while Ronald Reagan was smarting as a poor economy allowed the Democrats to even take a house seat in West Virginia during the midterms a week earlier. Mind how times change, but 28 pence remains the fee for the Long Gilt Future.
Technology news this week and what an epic announcement it was – finally ASX have bit the bullet in the month where we learned FTX was all a crypto chimaera. We have similarly learned that the CHESS update process was also a chimaera.
It’s a total embarrassment but not before time for the frankly flawed Digital Asset software, and utter shame on the house of ASX who have stubbornly pursued windmills with a vigour that could surely have had even Don Quixote rethinking whether continued tilting made sense?
Umpteen years later, millions of man-hours and $170 million down the drain. and yet, and yet ASX Chairman Damian Roche offered a subtle non-pology, which demonstrates more the ignorance prevailing at ASX HQ in these heady days when, they have, after all been self-proclaiming themselves as a technology company. The non-pology says:
“We began this project with the latest information available at that time however, after further review, including consideration of the findings of the independent review…there are significant technology, governance and delivery challenges that must be addressed.”
I.e. nothing worked, nothing worked at any point in time, nothing was compatible with what went on and obody could actually make the system work. Those are suddenly, yes, I suppose one could call them significant technology governance and delivery challenges. Egg on the face of the entire Australians Securities Exchange Group.
Meanwhile, ‘Carcrash’ Kengeter has unfortunately another slightly festering disaster on his hands albeit he didn’t start this one but he did buy into Digital Asset Holdings when it was already clear to many in the parish that the CHESS replacement was a disaster.
Regulation news this week of a statement of the month ‘we’re missing the bigger picture’, say industry experts in London while crying (if not screaming) for urgent regulatory reform, despite the fact that the Bank of England seems determined to manage to keep Britain as if it were still within the EU without noticing any change of the course of the last 10 years.
Career paths this week, we begin with sad news Nigel Babbage , a champion of New Zealand capital markets tragically died suddenly just days before his final board meeting as announced executive director of the NZX (New Zealand Exchange).
As James Miller, the outgoing Chairman noted:
“He was a man of immense passion and integrity, something he demonstrated through his 35-year career as a currency trader, businessman, conservationist and director”.
RIP, a great parishioner, Nigel Babbage.
Scott Bradley is the latest senior departure in the LSEG restructuring. The LSEG is undergoing a considerable headcount reduction. Alas, the Group management cannot bring Refinitiv under control, that means removing senior people with vast experience like Dr. Robert Barnes, and now Scott Bradley. Once again, LSEG has its eye on the bottom line with the wrong kind of squint and no appreciation of the future, just the next quarter or two.
And that, ladies and gentlemen, lead us to the big surprise of the week in markets, the Saudi Stock Exchange closed on Wednesday, after an epic and momentous moment in football. Besides the football team beating Argentina multi world champions in the opening match they were playing of the World Cup.
I have to say, I applaud the Tadawul decision for such an epic football victory even as a non-football fan, although some might argue the hand of God was in this historic victory or perhaps the fact the hand of God wasn’t in this historic victory helped them to actually defeat Argentina.
The whole fact of it, of course, must rub salt in the wounds of Qatari soccer fans. Not only did they see their team defeated in their opening match, but of course, some might argue that soccer here was only an afterthought in the regional geo-political relationship throughout the Middle East.
And on that mysterious and magnificent note, ladies and gentlemen, I wish you all a great week in blockchain, life, and markets.
Washington Watchdogs Outgunned In Crypto’s Wild West
EEX Sees EU Plans For Gas Price Cap As Threat To Supply Security
Xavier Rolet: Clearing Is The ‘Litmus Test’ For London’s Global Crown
NSE India Consolidated Net Profit Rises 62.04% In The September 2022 Quarter
Mubadala Acquires Stake In AirCarbon Exchange Based In Abu Dhabi
ICE’s Long Gilt Futures: 40 Years As A Benchmark For U.K. Sovereign Bond Markets
ASX Will Reassess CHESS Replacement Project And Derecognise Capitalised Software Of $245-255 Million Pre-Tax In 1H23
‘We’re Missing The Bigger Picture’: Industry Experts Call For Urgent Regulatory Reform
Nigel Babbage – Champion of NZ Capital Markets
Scott Bradley Latest Senior Departure In LSEG Re-Structure
Saudi Stock Exchange To Close On Wednesday After World Cup Win Against Argentina