Sep 1, 2019 18 min read Exchange Invest Weekly Podcast

Exchange Invest Weekly 011

Over here in the world of exchanges, it's “the Fraudulent and the Furious!” Welcome to an Exchange Invest Weekly where the world has gone GUBU!

Transcript:

PLY: This week we didn't quite manage fire famine and pestilence albeit that’s what the anti Brexit lobby appear to think in the UK. Over here in the world of exchanges, it's “the Fraudulent and the Furious!” Welcome to an Exchange Invest Weekly where the world has gone GUBU!

GUBU: Grotesque, Unbelievable, Bizarre and Unprecedented, a phrase first termed by the great Irish genius, the intellectual himself Conor Cruise O'Brien. He was discussing a particularly tiresome moment, to put it mildly, in the history of the Irish government. it's applicable for some of the stories we have this week, and let's jump straight into the frauds:

Fraud number one, the tax fraud searches at Deutsche Boerse’s Clearstream unit carried out over the course of a couple of days. This is the festering German dividends scandal. Deutsche Boerse AG, the operator of the Frankfurt Stock Exchange said the searches had been continuing. And of course, they were entirely cooperating with the authorities.

Scratch beneath the rather fiscally opaque veneer, which is an abbreviation of Cumulative Ex dividend. As a footnote, if you want to search for it, it's called the Cum-Ex scandal. Just be aware of the fact that a lot of the search results that come through the search engines for “Cum-Ex” may not be entirely safe for work or indeed family friendly! However, scratch beneath that veneer and ultimately, you find a very, very interesting, compelling and indeed what I believe is going to prove to be a mega scandal. It's been under investigation for several years. The denouement is going to bring shame and, hopefully, vast sanctions including considerable jail terms, upon its perpetrators. This is a scandal representing everything which is wrong with finance and shows much of the industry to be nothing more than a den of iniquity run by bourgeois thieves. It revolves around the process of effectively claiming multiple allowances for dividends, and therefore getting Franked for dividend tax credits.

It's an appalling situation in every possible respect, and sad. And as I expect, we're going to see a very, very large clampdown in the near future. This is not the beginning. This is not the end, but it's certainly the beginning of the end. And that might be curtains for certain European banking groups in particular.

On to Fraud 2. Reuters broke an exclusive this week about fake branded bars slipping into the world markets of gold. It would appear that some cunning folks are melting down gold, they're not doing the old tricks, which is putting rubbishy metal inside and then a little bit of gold veneer on top in order to manage to try and fool the authorities. Oh, no, the warehouses are much wiser than that. However, what has been discussed it However, what has been discovered is $50 million worth of gold over three years has been discerned to be effectively well, not what it was supposed to be. It’s gold. Therefore, it's an element. Therefore, it's the same quality. It's been melted down. It's been placed in one kilo bars, but the one kilo bars have been elegantly stamped with a refinery that actually didn't process the gold. Why would you do that? Well, let's say you're North Korea, let's say you're some sort of a salient actor in a, war-torn part of the world where you're under sanctions, then you might dig a bit of gold out of the ground. But of course, you can't sell it into the global marketplace. Herein comes the cunning scheme. You stamp it as if it came out of a reputable bullion dealing organization or bullion dealing center. In fact, one of the many many different warehousing organizations that deal with

Here's what you do. You stamp it with the mark of a reputable smelter, very cunning eh? The problem is, it seems that nobody actually keeps a fully fundamental register or indeed ledger - my goodness, it doesn't even have to be distributed - of what these all are and where all the gold bars are. So ultimately, we've ended up with this situation $50 million in one kilo bars, certainly I mean, if 1000 fake bars fell on your foot, you’d definitely know a great deal about it. But it's not a huge amount of money per se in the overall gold market. And let's face a lot of the gold market is actually traded by moving bits of paper around rather than worrying about the actual physical gold itself.

However, it's a worry.

There are clearly other gold bars in the situation in circulation that are not actually what they proved to be. In other words, illicit actors have been able to fundamentally money launder and game the system to get their assets into the warehouse system. That's got to be a big concern for people across the world.

Moving away from our fraudulent start to the day’s discussion of this week's events. The Tel Aviv Stock Exchange, they reported a second quarter profit it was down on an impairment reversal.

The Nairobi Stock Exchange: they came up with singularly the most implausible reason for a profit fall I think I've ever seen. Their profits were down - wait for it - 82%. Now part of that was due to the Kenyan economy slowing down quite dramatically but part of it also - seriously - got blamed upon Brexit. Now, hold on a second. I mean, hashtag fake news Ladies and gentlemen, what we're looking at here is the new Nairobi Stock Exchange is 2800 miles - so what’s that: 4000-Something and change kilometers from the nearest EU stock exchange, which would be Athens. It's roughly twice that distance from the London Stock Exchange or the UK. And in some way shape or form Nairobi, which has absolutely nothing whatsoever to do with the European Union is blaming Brexit.

If that is not a good example of just how crazy the world has become over what is actually a vast storm in a teacup, aka Brexit. I don't know what is.

In deals this week, a very interesting deal out of Johannesburg...

the South African exchange, the leading South African exchange - I suppose we should say - the traditional monopolist Johannesburg Stock Exchange. They've bought a share registry business. it's Link Market Services SA: they're going to buy 74.9% of it and effectively gives them total control. The remaining 25.2%, - No, those numbers don't add up for me either - are going to be held by the what they call in South Africa the Black Economic Empowerment Partner, who are going to be the minority shareholder. Iqbal Hanif will remain CEO. Very interesting deal. It's accretive. The share registers business’s clients include six top 40 companies in Johannesburg, and therefore it is going to be paying in total 224.5 million South African Rand out of Johannesburg Stock Exchange cash reserves. An accretive deal. Looks very interesting. There's a lot to happen in this settlement space: watch for further deals.

Over at the Philippine Stock Exchange, they've launched a buyback, they're creating a preference share for brokers. This is all part of the deal to buy the Philippine Dealing and Exchange Corporation, the fixed income trading market, albeit the actual PDEX deal seems to have gone away from the Philippine Stock Exchange itself. Nonetheless, they're still trying to do the paperwork, still trying to do the machinations and indeed Good grief. I think they've been buying trying to buy the Philippine stock exchange for like half the time Exchange Invest has been in existence. Certainly they've been trying for at least the course of the last three years.

One interesting funding this week. The Long Term Stock Exchange has raised $50 million in new funding. It's a Series B round led by Founder's Fund, with new investors joining existing ones such as Andreeson Horovitz, Obvious Ventures and Initialized Capital.

The long term Stock Exchange is the brainchild of Lean Startup author Eric Riess, very interesting book. And it seeks to build a stock exchange without the traditional short term pressures of the stock market per se. It's a fascinating idea. I have to say I still don't see this project as being anything other than, well, Silicon Valley vanity but we remain to see what happens. They certainly raised a great deal of money.

Elsewhere in the new exchange world, PTC India, they are leading the power exchange that's a new power exchange to take on the IEX - not the flash boys - but IEX the Indian energy exchange,

The power exchange is going to be backed by the Bombay Stock Exchange PTC, ICICI bank and ultimately they're going to be divesting a 60% promoter stake in due course.

From deals we head into the macro GUBU. Over in the UK, the truth is out there, but it's not to be found in most of the media. Celebrity luvvies, retired people who used to govern badly, journalists, Marxist agitators, some of them in Parliament, some of them not and lots of anti Democrats, some of them in Parliament, some of them not, are seeking to destroy the now almost definitively inevitable moves towards Brexit. Brexit is going to happen in some shape or form, ladies and gentlemen, on October 31. The question at the moment is merely how clean that Brexit is going to be...For those irreconcilables who resent the British vote being, well, the worst thing that they've ever seen in history, I fundamentally cannot agree with them but there you go.

Ultimately, a group of irreconcilables who resent the biggest British vote in history in favor of anything... For them, “Winter is Coming” as a certain well known catchphrase goes. For the rest of us, it will soon be “Morning in Great Britain.” And that includes anybody, whether you're in the UK, whether you're in the European Union, whether you're in the rest of the world, this is an incredible opportunity for the UK, and those who don't see it as such are ultimately going to be, well, less successful invested than the rest of us, let's say. That has an impact on the parish of exchanges, particularly because so many parishioners are still fighting the last referendum. This is not good. It's not uncommon throughout society. But unfortunately, given the prevailing mediocrity of some other exchange boards, we can't altogether be surprised that they're still following a lumpen - how might one put it - bourgeois London centric grouping of people who simply refuse to accept the democratic will of the people from the 23rd of June 2016.

So therefore, we had all sorts of weird, wacky and wonderful articles this week. No Deal Brexit. Did Brexit kill these particular deals when one particularly awful piece of analysis from some sort of service called Pitch Book news. They were blaming the idea that the “merger of equal desperation” between Deutsche Boerse and London Stock Exchange fell apart because of Brexit. The simple truth is, that deal was a dog. It was the merger of equal desperation. And despite the fact that without any apology, subsequently, the management of DB1 and LSE spent several hundred million dollars engaging all manner advisors, there was no way they were going to manage to thread this multi headed camel through the eye of any particularly small anti trust needle. At the same time, it's well this sort of journalism really reflects what's going on in the UK at the moment. And the reason I want to talk about this so much day is because I warn you please don't believe what you read in the British media or what you hear from the British media at the moment because it has simply become a London centric derangement.

A fraction of the remain vote have simply gone demented. For this week, we had an editorial in the Financial Times. You may remember the Financial Times before it became the Brussels Bugle it was actually a cheerleader for free markets. I think those times are long since gone. Nowadays, it endorses Jeremy Corbyn as prime minister, it seems: anything to try and stop or slow down Brexit. That, frankly is utterly insane. Britain's one time standard bearer of responsible financial news is now endorsing a known terrorist supporting anti Semite as Prime Minister of Great Britain, and Northern Ireland. This man also happens to be a de facto Marxist, which appears to have slipped FT’s memory too. Albeit I have to say as I said before, I have my suspicion they abandoned free markets at the FT many years ago. Utterly insane is a mild description for this sort of maneuver, which is entirely anti democratic and against the will of the people. Note that what happened in the UK this week was a simple piece of procedure, something which has hundreds and hundreds of years of precedent before it by the UK Government to extend basically a parliamentary recess by a few days net net in order to allow a new session of Parliament to begin.

Those who spend their dollars on the Financial Times must appreciate they are tacitly endorsing a newspaper, which thus supports the Venezuelan government, not to mention multiple other vile dictatorships, let alone the destruction of Israel. Frankly, bonkers isn't even the start of this delusion on the part of the FT, they truly appear to have lost their minds per things. Now, this is important within the parish of exchanges, because most bourses are still thinking remain in London. While the world is moving on. The world is moving to Brexit in line with the new British Government of Boris Johnson.

This is also important because most of the exchanges are still thinking remain while the world has moved on it has moved towards Brexit in line with the current government of Boris Johnson.

That leaves the likes of CBOE, CME and LSE exposed to name but three parish firms and indeed there are others. In fact, other than the Intercontinental exchange, I struggle to think of a single bourse group which is demonstrably Brexit proactive or grasps the opportunities of the new era about to befall the nation that houses the world's largest international financial center in London.

For those whose organization needs to see the light on Brexit, I'm available for consultation.

Soon it will be morning in Great Britain, are you prepared?

Over in technology, the Warsaw Stock Exchange are going to be launching the WSE data system in 2021. It's going to be co funded by European Union funds via the National Center for Research and Development NCBR who've awarded the grant to the Warsaw Stock Exchange. Good move for the GPW in many ways, it's an elegant example of how Polish corporate socialism works where a large government body spends money on another large government controlled body while using EU funding along the way. Works on occasion although it has to be said I've also witnessed firsthand a vast number of occasions when the money has simply been wasted. And indeed capitalism, you know, grassroots people who work their way up and build value, are swatted away by these sorts of large corporate socialist funds.

On the other hand, GBW To be fair, is probably capable of spending the money much more wisely than many other government controlled bodies. And indeed many other schemes I've witnessed around the regions of Poland. Some might say the private sector could do better, but of course, it's being ruthlessly squeezed out by the central Polish state subsidized by Brussels at all points in time. However, for the Warsaw stock exchange, it's a win win, and it will be interesting to see what they can make of their new technological subsidiary, as they ultimately work their way towards being. Well, one of a new breed of independent exchanges using independent technology rather than relying on third party vendors.

Elsewhere in technology, AWS, Amazon Web Services seem to have wreaked havoc on a few cryptocurrency exchanges. Something happened, there was a bit of a glitch to do with caching. And apparently a few people managed to pick up Bitcoin for $1 - a discount of a white wall $9,000. And where the price was at the time has to be said though, if it's a caching issue, if it's an AWS issue, isn't there something in the software that stops you from actually having these sorts of incremental falls? Certainly there is at the grown up exchanges. Perhaps this may be another example where the crypto exchanges really aren't grown up really aren't organized and have a lot to learn from their legacy brothers if only they were paying attention.

R3, some news from one of the many consortia who've been in the headlines mostly this week because of the fact that they seem to have raised a huge amount of money and not necessarily achieved a great deal. R3 struck a strategic partnership this week with the Dubai based FinTech setup, Wethaq to build next generation financial architecture for Islamic capital markets.

In regulation, winter may be coming and indeed so too is capital market reform according to the Chinese regulator. There was a large speech last weekend. Very interesting to see what the country's securities regulator is going to be up to next.

Over in India, there was a complaint on various websites, it seems that well, certain people feel that SEBI is not doing a great job in regulating the cotton market through MCX. No sign yet of it being an NSEL style fraud, but nonetheless, there are people making allegations of an inefficient Indian investigation into malpractice. Not the first time. Some might say not the last.

Perhaps the most interesting news of the week though was that even the German government, the German government, loyal supporter of the EU, has finally asked the EU to ease the MIFID II rules. Let's just remember Ladies and gentlemen, MIFID II is a mess hashtag zero shock that even the Germans are finding it difficult to implement.

In people news this week, SEBI the Indian regulator appear once again: they have exonerated three former NSE executives in the colocation case with the National Stock Exchange. Interesting to hear So Mahesh Soparkarand and Deviprasad Singh - they're both still on the naughty step. NSE is going to have to find some sort of way shape and form to discipline them in due course. Meanwhile, the three people who have been exonerated are former strategy head and group Operating Officer Subramanian Anand plus two former Chief Technology officers Umesh Jain, who was there from October 2012 to June 2015 as CTO and Ravi Apte who of course previously worked in New York for many years who was there from 2007 until September 2012. They have been completely exonerated.

In Switzerland, Urs Ruegsegger, who's the former boss of SiX, the Swiss exchange, who has a sort of “Mc job” these days, which allows him to be constitutionally intact to chair the World Federation of Exchanges, whatever they're doing these days. He's also going to be taking on a new and more substantive chairing role. He's going to become the chairman of Zugar Kantonalbank, presuming he gets through the Annual General Meeting.

Meanwhile, in Turkey, a former Borsa Istanbul boss could soon be the central bank deputy chief. Confusingly enough, last month, the government fired the central bank head Murat Çetinkaya. They elevated his deputy to replace him and now they're looking to employ as the new deputy the former Borsa Istanbul boss whose name is also Murat Çetinkaya.

In regulation news, the SEC’s Robert Jackson, one of the more left leaning SEC Commissioners we've had for many a year, says he's going to be staying around for a while. Talk about who's going to be as nominated successor is heating up.

In product news, Saudi Aramco: its back. It's bigger. Is it better? I don't know. But they're looking at a proposed two stage IPO process That looks to be likely to start by having a large offering on the Tadawul. The Tadawul, of course, being very excited having been recently upgraded to emerging market status by various parties of the great indexers of the world.

The IPO itself is going to be a two tier affair starting on Tadawul it will then be followed up by a secondary offering which looks likely at the moment to be taking place in Tokyo. That's going to be a bit of a shock and a blow to in particular London and Hong Kong. London has been wiped out because of Brexit fears. Frankly, that strikes me as being a management failure. The London Stock Exchange all along has been hugely behind the curve in trying to sell Brexit as a positive. Xavier Rolet was nothing other than a poodle of David Cameron's during the referendum campaign, and that left him badly positioned thereafter. Equally, Hong Kong is suffering. It may yet be able to come back. It depends, of course on what happens with the political situation within Hong Kong as protests carry on over the extradition law.

Elsewhere in product news, the Moscow exchange was subject to a little bit of a mini fraud this week, they've been winding up grain swaps trading after a certain amount of thefts. Over in India there was confirmation that the MCX the Multi Commodity exchange is still the dominant exchange player in Indian commodities while we also have a couple of interesting new products. Argus are going to launch a Singapore bunker fuel derivatives contract on the Chicago Mercantile Exchange. And China's Qianhai Mercantile Exchange launched copper rod trading. As you may remember, the Qianhai Mercantile Exchange is a mainland Chinese spot commodities platform owned by the massive Hong Kong exchanges group.

Elsewhere there was news Deutsche Bank has become the largest foreign bank for onshore bond Connect volumes. I don't know why but for some reason, when I read that, this alert provoked, well, immediate discomfort in my subconscious.

Over in Indonesia, the government is pushing the Indonesian tin exchange to become the global price reference. Could be interesting to see. Certainly Indonesia has long been an epicenter of the tin mining business in the 20th and 21st century.

There was a little bit of bad news over in the Turkish Lira, not so much for the Turkish Lira itself, albeit it crashed and that stunned Japanese retail investors. You may have wondered where Japanese retail investors got to recently Well, it seems they were all long with the Turkish Lira in recent weeks. Whoops.

And finally, this week in product, news that the London Stock Exchange group is looking at launching a global equity segment. Hold on a second a global equity segment. So you can trade like that American stocks. So you can go - didn’t we do this in like 1985? Wasn't that SEAQ? Didn't we do it before? Is this a new product? Sorry, am I having deja vu today?

In a more exciting degree of product news, the Bombay Stock Exchange has inked an MOU. They're going to realize trade in Steel futures at the BSE.

And equally, the Ghana Commodity Exchange is looking at including local rice on its list of traded items. Now of course, rice, is something very interesting as a commodity for trading. Subsidies remain a problem with the rice trade, they remain the biggest impediment to wider, wider trading and indeed, the introduction of wider features trading, which could be really, really, useful for a staple of so many billions of people's daily diet. But of course, also there's a lot of local trading and local regional variety to the product, which would mean that we probably need multiple products. At the same time exciting to hear that the Ghana Commodity Exchange is in the forefront of looking at fundamental trading rice.

Over in the Bahamas, the BISX. They're going to see their listings volume, or at least their listings of value of all securities, jumping to about $9 billion. That's thanks to something we discussed a couple of weeks ago, the government starting to launch government stock on the platform.

Before we go Ladies and gentlemen, one final little snippet of news from the world of cryptocurrency. Bakkt the Intercontinental Exchange supported cryptocurrency exchange which is going to revolutionize the trading of those markets come the end of September circa September the 23rd. They're going to launch their warehouse deposit starting September 6th. There is a safe place for your crypto it's called Bakkt I do believe

And that rounds up this week's exciting interesting somewhat GUBU variation on a theme of what's been going on in the world of exchanges for this week. My name is Patrick L Young, thank you very much for listening. We will be back Monday through Friday with the Exchange Invest Newsletter. Subscribe, by all means at exchange invest.com or email me Patrick at derivativesvision.com if you've got any feedback, good, bad or indifferent. The good stuff: do please leave it on any of the possible directories or places where other people might learn about this podcast. That would be very handy. Thank you very much. For now. I would like to say thank you very much for listening on behalf of the team of Exchange Invest. We'll be back next week with the podcast and from Monday to Friday You can find us in our subscriber newsletter email us for more details or drop by Exchange Invest.com

My name is Patrick L. Young thanks for listening.

Fraud 1:

Tax Fraud Searches At Deutsche Boerse's Clearstream Unit Continue
Bloomberg

FRAUD 2:

Exclusive: Fake-Branded Bars Slip Dirty Gold Into World Markets
Reuters

Results:

Tel Aviv Stock Exchange Second-Quarter Profit Down On Impairment Reversal
Reuters

Nairobi SE Profit Fall 82% On Brexit, Slow Economy
The Star, Kenya

DEALS:

JSE Buys Share-Register Business
Business Day

PSE Launches Buyback, Creates Preferred Shares For Brokers
Business Mirror

The Long-Term Stock Exchange Raises $50 Million In New Funding
Axios