September 05 2013

elb2 Greetings from sunny Stockholm where President Obama reached Arlanda just before me yesterday. Today I am spending the day with the good folks of Cinnober giving their staff some insights into my world view of markets, infrastructure and naturally IT.

IT is appropriate as away from Cinnober, Glitches and Twitches are the new “merger mania” as the media looks for little else. SEF applicant 11 emerges and there are multiple other stories, including more on FTT, receivables and shadow banking, including even a column from yours truly from the 500 million readers a month RT.com (Op-Edge) site.

Public Markets

Nasdaq Suffers Another Glitch (subscription)
The Wall Street Journal

Glitch Hits Nasdaq System At Center Of Trading Outage
Reuters

Nasdaq OMX press release here and here.

The system at the center of NASDAQ’s three-hour trading halt on August 22 had a six-minute outage on Wednesday for a small number of stock symbols, but the issue had been resolved and trading was not affected.

While Nasdaq said trading was not affected, exchange operator Direct Edge said it temporarily halted trading in Nasdaq-listed securities ranging from PBCP through ZZZZ between 11:43 a.m. and 11:48 a.m.

The latest outage was due “to hardware memory failure in a back-end server,” but a backup system successfully kicked in and the issue was resolved, Nasdaq said.

Securities Information Processor Issues Statement On UTP SIP Committee Meeting
Nasdaq OMX

The Unlisted Trading Privileges Securities Information Processor met today with the UTP SIP committee to review the events of August 22, to better understand the causes of the regulatory halt and to consider a series of steps to strengthen the resiliency of the SIP.

NASDAQ OMX is one of 15 members of the UTP SIP Committee and is responsible for operating the SIP, which provides equities pricing data information to market participants.

BGC Partners Files Swap Execution Facility Application With The CFTC

BGC Partners has filed an application with the CFTC to become a SEF.

FO: According to our files, BGC is the 11th public SEF filing.

CME Europe Seeks End September Launch (subscription)
Futures and Options Intelligence

CME is understood to be working towards a launch date of September 29 for its new European exchange, dependent upon regulatory approval.

The new launch date represents a delay from the planned target date of September 9 and a significant delay from the original plan to launch in Q2 this year.

Moscow Opens Direct Access To Foreign Players (subscription)
The Wall Street Journal

Thanks to the implementation of T+2, Moscow Exchange, will open equity DMA to foreign investors through global banks Citigroup, Credit Suisse, Merrill Lynch, and Morgan Stanley this month with rubles, U.S. dollars, euros and securities serving as collateral for transactions.

Philippine – PSE-PDEx Merger Threatened
Business World Online

THE BANKERS Association of the Philippines (BAP) is reviewing a planned merger between the Philippine Stock Exchange (PSE) and Philippine Dealing & Exchange Corp. (PDEx) following the filing of an antimonopoly lawsuit against the latter.

“We are putting the discussion on hold until we sort out the case. We need to discuss if we will continue with the due diligence while the case is pending before the high court,” BAP President Lorenzo V. Tan said in a text message.

The BAP has a 25% stake in Philippine Dealing Systems Holdings Corp. (PDS Group), which is the holding company of PDEx. The PSE is another major shareholder of the PDS Group along with the Singapore Stock Exchange, each owning a 20% stake.

Brazil Begins Push To Widen Bovespa’s Appeal (subscription)
Financial Times

PLY: An interesting feature with a dash of fiscal pronography discussing Brazil’s high helicopter ownership etc but with interesting serious points as the likes of Algebris seek to open funds onshore in Brazil and the BM&F clearly hopes to see more deal flow at the expense of PE.

CME Prices $750 Million Aggregate Principal Amount Of Senior Unsecured Notes

CME has priced an underwritten public offering of $750 million aggregate principal amount of 5.300% notes due 2043. The offering is being made under CME’s existing shelf registration statement and is expected to close on September 9, 2013, subject to customary closing conditions.

CME intends to use the net proceeds from the offering, together with cash on hand, to retire at maturity its outstanding 5.75% notes due February 2014. Although CME Group does not currently anticipate doing so, it may use some or all of the net proceeds from the offering for other, general corporate purposes.

BME:REGIS-TR And TriOptima Cooperate To Provide Portfolio Reconciliation Of Trade Repository Data

REGIS-TR and TriOptima announce that they will provide portfolio reconciliation of REGIS-TR’s trade repository data with data in TriOptima’s triResolve reconciliation service for OTC derivatives as requested by their clients.

By September 15th, financial and non-financial firms will have to start reconciling their OTC derivatives portfolios; and trade reporting will begin January 1st, 2014 under ESMA’s rules.

REGIS-TR has seen its client base double in a three-month period with over 400 pilot customers testing transaction reporting. TriOptima’s triResolve portfolio reconciliation platform is used by over 425 institutions and reconciles 8 million transactions, most daily.

PLY: Repeating once again: TRs are one of the biggest opportunities in markets almost nobody is talking about…

Polish CSD KDPW To Assign LEI

On 19 August 2013, KDPW has been assigned a prefix (2594) necessary to assign identifiers – future LEI – to legal entities. According to the provisions of regulations delegated under EMIR, a relevant identifier is necessary in order to report derivative trades to a trade repository.

PLY: See comment in the previous story. …Also bear in mind KDPW is perhaps the sexiest investment opportunity in financial markets infrastructure currently owned by government and slated for privatization. That said it may be simply sold into GPW to create a Warsaw silo…

Private Markets

UK Government begins investment in SMEs via MarketInvoice.com

MARKETINVOICE, the online funding platform for SMEs seeking access to working capital, is delighted to announce the commencement of the UK Government’s investment through its service.

As part of the Government’s Business Finance Partnership, the Department for Business Innovation and Skills (‘BIS’) is committing £5m as an Investor Member on MarketInvoice, with expected yearly returns of approximately 10-12%. With funds on MarketInvoice recycled every 45 days, this £5m commitment will equate to approximately £40m in investment to SMEs over the next year.

MarketInvoice enables SMEs to sell their long-dated invoices to a pool of investors, who in return for advancing most of the funds upfront, take a small discount fee in return.

PLY: …and now a de facto exchange nobody has heard of: similar to TRX in the USA and a very powerful means of empowering commercial activity, Market Invoice is a very interesting business for investors and issuers alike and it is good to see the UK government supporting it.

LCH Lays Out Asset Protection Plans (subscription)
Financial News

LCH.Clearnet has unveiled plans to protect buyside assets under new swaps rules, reigniting criticism among market participants over a lack of harmonisation on how clearing houses will safeguard collateral.

Bahamas – BISX Developing New Gov’t Debt Security
tribune242.com

The Bahamas International Securities Exchange (BISX) yesterday revealed that it is developing a new debt security for the Government, which will “fill the gap” by offering investors medium-term maturities.

Keith Davies, BISX’s chief executive, told Tribune Business that the proposed paper security would have a maturity of between one-two years and five years, sitting between Treasury Bills and Bahamas Government Registered Stock (BGRS).

PLY: An interesting move from BISX as they continue to develop a healthy portfolio of markets.

The Slow Decline Of Bitcoin’s Biggest Exchange, In One Chart
The Washington Post

Mt. Gox is the world’s largest Bitcoin exchange, at least as measured by transaction volume. Millions of dollars worth of bitcoins change hands every day on the site.

Yet recently, something peculiar has been happening. Ordinarily, the price of a commodity is roughly the same everywhere it’s traded. But lately that rule hasn’t applied to Bitcoin. The price of Bitcoin on Mt. Gox is $145. Yet on other Bitcoin exchanges, like Bitstamp, Bitcoin only sells for about $130.

PLY: I didn’t have time to counter yesterday’s thought provoking article and now it has been done very succinctly! If you cannot withdraw your money on Mt Gox, then why trade at the same price as the fully functioning exchanges? That is as economically rational as they come…

Special Section: FTI, NSEL, India at the Crossroads

It’s sort of stasis as the noose tightens on the culpable (and that means a lot more folk than just Jignesh Shah or NSEL) although FTI shares are up 5% while MCX is again limit up +5% too…

Income- Tax Department Notices To 24 NSEL Borrowers
The Economic Times

The income-tax department will issue notices to two dozen borrowers on NSEL as their probe so far has revealed that most of the trades undertaken by them were not backed by underlying commodities.

“We will be summoning the borrowers shortly as an examination of their books and other records shows more than 90% of the transactions they entered into were not backed by commodities,” a senior I-T official told ET after having examined the books of the two-dozen borrowers who cumulatively raised about Rs 5,500 crore (USD 821.38 mln) against commodities lying ostensibly in NSEL-accredited warehouses in different parts of the country. The tax department’s investigation revealed the warehouse receipts issued and kept with exchange were bogus — not backed by commodities.

Did NSEL Investors’ Money Never Reach Borrowers?
Business Standard

Contrary to NSEL’s claims that a default by 24 borrowers and their clients had resulted in the Rs 5,600-crore (USD 836.32 mln) payment crisis, more and more borrowers are claiming the money invested by about 13,000 investors never reached them. And, in what supports this argument, some of the ledgers provided by the exchange do not contain any details of the trades settled on the T+2 cycle. In fact, some borrowers claim the exchange has to pay back the margin money they had remitted for T+25 trades.

PLY: Ugly.

NSEL Brokers With The Highest Exposures
moneylife

Customers of some of the biggest names in the Indian broking fraternity who aggressively sold NSEL’s borrowing-lending racket are staring at large outstanding in NSEL. Clients of Anand Rathi Commodities stand exposed to over Rs 600 crores (USD 89.6 mln) while those of Indian Infoline stand to lose over Rs 300 crore (USD 44.8 mln).

NSEL is taking an ugly turn for retail investors and HNIs who had ‘invested’ through member-brokers into the borrowing-lending racket being run by the Exchange. As is now known, NSEL was an operation to channel money from investors through member-brokers, to a small group of 24-odd NSEL members-borrowers. For this “assured return” scheme, the brokers were collecting a juicy 5%-6% as brokerage, fees and commission. Neither the brokers, nor the investors, had done enough due diligence and have ended up as unsecured lenders, not investors in an assured return scheme that their brokers aggressively sold them.

Apart from channelling money from “investors” these member-brokers had also put in some of their own money into the scheme. The borrowers now owe as much as Rs5,380.53 crores (USD 803.54 mln) in unsettled dues. But which member-brokers were on the other side of the racket, that is, which of the brokers were most aggressive in channelling the money? The biggest was Indian Bullion Markets Association Ltd (IBMA), a group company of Financial Technologies (India) Ltd, the promoter and 99.5% shareholder of NSEL. It is not yet clear, who the “clients” of IBMA were. Who were the other brokers?

NK Proteins: The biggest Defaulter In NSEL’s Books
Business Standard

NK Proteins’ (NKPL) unsettled position of Rs 969 crore (USD 144.71 mln) at NSEL vis-à-vis a net worth of Rs 108 crore (USD 16.12 mln) has already taken a toll on its rating.

Icra recently downgraded its long-term rating to B- from BB+. NKPL is the biggest defaulter in the list of 24 members which collectively contributed to a default of Rs 5,600 crore (USD 836.32 mln) at NSEL. The company says this has been grossly overstated. “We do not owe the amount as specified by NSEL.

Insignificant Exposure To NSEL, Says Axis Bank
The Economic Times

Axis Bank today said its exposure to NSEL is insignificant and it has sufficient collateral.

MCX Shares Up 80% In Two Weeks, Bad Run On For FTIL
mydigitalfc.com

MCX has seen one way rise by over 80 per cent or Rs 190 in just over a fortnight after its sharp fall triggered by the payment crisis at NSEL, promoted by FTI.

The stock had initially touched an all time low of Rs 238.30 (USD 3.77) on August 19. Since then, the stock has risen by 5 per cent in each trading session, hitting the exchange set upper circuit every day.

DGCX ‘Not Affected By FTIL Problems’
tradearabia.com

Dubai Gold and Commodities Exchange, the region’s first derivatives exchange, has affirmed that it has not been affected by the ongoing developments at India-based FTI, a minority shareholder which nominates 2 directors from 5 nominated seats.

The DGCX clarification comes in the wake of reports in Indian press that NSEL, promoted by FTIL, is facing the problem of settling Rs5,600 crore ($839 million) in dues to 148 members after it suspended trade on July 31 as per government direction.

DGCX press release here.

MCX-SX Cash Turnover Rises 4.25% In August Despite NSEL Crisis
The Economic Times

As crisis continues to engulf NSEL, the stock trading turnover at MCX-SX, promoted by the same group, rose by 4.25 per cent to Rs 1,085.7 crore (USD 162.03 mln).

However, its equity derivative segment turnover declined by 29.3 per cent to Rs 23,105 crore (USD 3.45 bln) in August.

The licence of MCX-SX is coming up for renewal before Sebi later this month.

FT: N Balasubramanian Was A Director For Just Five Days!
moneylife

Jignesh Shah-led FTI appointed N Balasubramanian as additional director on 22 August 2013. However, within five days, the former chairman and managing director (CMD) of Small Industries Development Bank of India (SIDBI) resigned from the Board. Neither FT nor Balasubramanian have given any reason for this sudden exit.

On The Spot Scam
frontline.in

In October 2008, India’s experiments with economic and financial deregulation led to the creation of one more new market: a commodity exchange called NSEL.

The promoters of the NSEL had declared their mission as follows: “To develop a pan-India, institutionalised, electronic, transparent Common Indian Market offering compulsory delivery-based spot contracts in various agricultural and non-agricultural commodities with a reduced cost of intermediation by improving marketing efficiency and, thereby, improving producers’ price realisation coupled with reduction in consumer paid price.” Taken at face value, that was indeed a laudable objective.

Early in August 2013 this description turned out to be a myth, with the NSEL appearing as an institutionalised but opaque and secretive den of speculation and possibly fraud…

PLY: Perhaps the greatest tragedy of NSEL is that spot exchanges have yet to really achieve the aim of providing a widespread market for small farmers to interact easily with commodities markets.

Technology

Three Top Talents Kick Off Cinnober’s New Trainee Program

Cinnober’s first-ever group of trainees has just begun a one-year program in Umeå, Sweden. The newly created cinCube program, specializing in financial IT, has attracted enormous interest and many highly qualified applicants.

PLY: I sincerely hope these brilliant individuals won’t give me too hard a time today when it is my honour to be lecturing them and the staff of CInnober on matters of moment in the financial infrastructure space!

Products

No ETF Left Behind Begins At NYSE
Barron’s

That’s my term, not NYX’s, for a plan the exchange hopes can breathe some life into dormant ETFs, which make up a surprisingly large proportion of the industry.

The one-year pilot NYSE Arca ETP Incentive Program lets fund companies pay anywhere from $10,000 to $40,000 per fund, per year, to NYSE market-making firms as incentives for creating tight bid-ask spreads and strong liquidity in those trading-starved ETFs.

Indexes

Brazilian Exchange Shake-Up To Boost IPOs (subscription)
Financial Times

Brazil is set to change the formula behind its benchmark stock index for the first time in 45 years as part of a series of measures to counter one of the worst market slumps since the onset of the financial crisis.

Career Paths

Aquis Exchange, a new pan-European equities trading platform that has piqued the interest of investors such as former Barclays chief executive Bob Diamond, has hired Jon Knight – head of market surveillance for Europe, the Middle East and Africa at the European arm of trading firm Liquidnet – ahead of its planned October launch.

In addition to their slate of hires outlined yesterday in EI, note that Moscow Exchange also hired Marc Millington-Buck a while back as International Business Development Consultant: International Sales, DMA, Electronic Trading & Risk Management Specialist.

PLY: Excellent hires one and all. In particular I wish Jon Knight every success at Aquis as it has been a pleasure to work with him through my non-executive directorship of Liquidnet Europe.

Analyst Notes

Charles Schwab “Neutral” rating reaffirmed by Zacks- $22.00 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.

Financial Calendar

Today:

Betfair AGM

Tomorrow:

BGC Partners $0.12 Q2 dividend payment

Record date ASX for AUD 82.3 cents full-year final dividend for the year ended 30 June 2013

IntercontinentalExchange, will announce Q3 2013 financial results on Tuesday, November 5, 2013. An earnings press release will be issued prior to the earnings conference call, which will begin at 8:30 a.m. ET.

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

Crowdfunding

The Changing Role Of Crowdfunding Platforms In The Hardware Ecosystem
Forbes

Going by numbers alone, hardware projects should be a win-win proposition for both entrepreneurs and crowdfunding platforms. Seven of the top ten most-funded projects on Indiegogo, a popular crowdfunding platform, are hardware projects.

However, delays in delivery (and outright failures, in some cases) are sullying that dream. According to research conducted last year, approximately 85 percent of hardware projects funded through Kickstarter failed to deliver finished products. In other words, only 15 percent of total hardware projects are successful.

Other stories

EU Commission’s Roadmap For Tackling The Risks Inherent In Shadow Banking

The Commission has today adopted a communication on shadow banking and proposed new rules for money market funds (MMFs).

The communication is a follow-up to last year’s Green Paper on Shadow Banking (IP/12/253). It summarises the work undertaken so far by the Commission and sets out possible further actions in this important area.

PLY: “Shadow Banking” and “dark pools” connote bad things in the minds of the politicians when in fact shadow banking is increasingly the way forward. Deeply worrying are the ways in which politicians may be (inadvertently) supporting the banking system to maintain their fetid monopoly over money process which has passed its sell-by date.

Why Good Banking Is In The Shadows Ahead Of G20
rt.com/op-edge

“In their apparent haste to make financial markets safer, politicians are actually helping to hold back the inevitable decline of banker power.”

PLY: I don’t usually mention my RT Op-Edge columns as they concern broader topics but my latest, one of two G20 preview articles this week, discusses shadow banking, FTT et al…

India – SEBI’s New Circuit Filters To Be Calculated On Daily Basis
moneylife

In an attempt to curb volatility, SEBI has modified the limits of the circuitfilter of indices, which will now be calculated on a daily basis instead of on a quarterly basis

Earlier, the circuit filter levels were decided on a quarterly basis, while the percentage levels remains the same at 10%, 15% and 20% of the market-wide index variation. When the circuit filter is activated, the market comes to a halt depending on which band is activated (i.e. 10%, 15% or 20%), but this time the duration of the halt has been reduced by 15 minutes for each of the respective percentage levels. After that, there will be a pre-open call auction session in the cash segment of the exchanges.

Poland Tells Private Funds To Hand Over Bonds
The Wall Street Journal

The Polish government said Wednesday that it would reduce the role private funds play in the country’s pension system by getting them to transfer sovereign bond holdings worth around $37 billion to the state.

The move—intended to reduce Poland’s debt burden as it breaks out of a self-imposed structure of limits—stopped short of a previously announced option of nationalizing the funds’ holdings in listed companies.

PLY: I will ponder this further but this solution is not quite any of the three earlier proposed. At first glance it appears a half-way house – not good but at the same time it may help the Polish government with their limited approach to governing while allowing private funds to eventually flourish. Developing…I will be in Warsaw Friday and discern more over the weekend. On first glance it could have been worse but the government continues to look to be in office but incapable of governing or reforming and in the long-term the pensions burden on government funds has just exploded…

Georgia, LSE Discuss Market Development
en.trend.az

Georgian Minister of Economy and Sustainable Development Giorgi Kvirikashvili received on Wednesday the head of the Infrastructure Department of the Global Development Market of the LSE.

PLY: LSE meet everybody all of the time, this does not necessarily denote anything, apart from the brilliance of the LSE in making all exchanges, large or small feel special as LSE seeks new business.

NSE Informs Trading Members About Possible Sun Outage Impact
Business Standard

Leading bourse NSE today informed trading members that they may face connectivity problems at various times due to ‘sun outage’ between September 24 and October 8.

Sun outage periods, with a duration of 15 days, generally occur twice every year when there is interruption in geostationary satellite signals caused by interference from solar radiation.

The exchange has been informed by the Indian Space Research Organisation (ISRO) that there would be ‘sun outage’ from September 24, 2013 till October 8, 2013 between 1335 hrs to 1410 hrs.

It also asked the intermediaries to use alternative mode of connectivity instead of VSAT during this period.

VSATs (Very Small Aperture Terminals) are two-way satellite ground stations and access satellites in to relay data from small remote earth stations to other terminals or master earth station hubs.

PLY: Hmmm, can they hedge via Sat-X which I think is operating from Toulouse nowadays?

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