September 18 2013

elb2 Greetings from Google Campus London where I have popped in to witness the future of fintech being crowdsourced as I complete today’s Exchange Invest.

There are mentions of cost benefit analysis from NYX and a couple of demutualisations as well as news of CME expanding in Asia. Intriguingly, SiX are preparing their attack on the derivatives clearing space, building out on their highly successful equity CCP model.

Needless to say NSEL has had a fifth consecutive default. The ex-CEO is singing like a bird it seems and at least one former staffer may have absconded.

Public Markets

NYSE COO Says Market Tech Must Pass ‘Cost Benefit Analysis’ (subscription)
The Wall Street Journal

The head of operations at NYSE Euronext, which manages the data feed that brought down the options market for a brief period of time on Monday, says that market participants can and should do a better job of managing technological change. The public should not, however, expect market technology to function perfectly—a goal that would be too expensive to implement even if it were technically feasible.

“When you go through a lot of change, there is a higher probability of error. That is just what happens, and that means we need to do a better job of managing change,” NYSE Euronext COO Lawrence Leibowitz told CIO Journal during a phone interview on Tuesday, several hours after the company issued a statement that attributed options trading problems on Monday to a software update.

PLY: Wise words from Mr Leibovitz in many respects although it raises the intriguing question of how ICE will apply “cost benefit analysis” to the Big Board’s expansive technology subsidiary?

Six Challenges Eurex With Clearing Push (subscription)
Financial News

Six Group, could find itself pitted against its former joint venture Eurex, as it pushes ahead with plans to provide clearing services for new listed derivatives trading venues in Europe.

PLY: Ignore the erroneous 50% shareholding moniker on EUREX (a long story), this is a fascinating development as SIX could shake up clearing especially given the way London seems to be dragging its heels over enabling the CME Europe clearing venture. Not sure how Swiss bankruptcy laws work with regard to derivatives trading but Zurich’s banking infrastructure is clearly highly efficient and scalable for the processing of many derivatives trades via a SiX CCP.

LSE Signs Up 1,000 New Users In First Month As Pre-LOU

Approximately 1000 new users have signed up to the LSE’s Pre-LOU platform UnaVista, to access the consolidated view of all global LEI data. LEI codes have been allocated for companies based in 3 continents Europe, North America and Asia Pacific.

CME To Increase Asia Staff (subscription)
Business Times

CME, the world’s largest futures exchange, plans to boost its headcount in Asia from 55 to between 60 and 70 people.

Talan Hits Goldman, LME With Another Antitrust Suit
American Metal Market

Goldman Sachs and LME have been slapped with another antitrust lawsuit alleging that they conspired to restrain aluminium supplies, inflate aluminium prices and manipulate Midwest premiums.

Private Markets

Irish SE: Born In 1793 – Slowly Dying In 2013

The Irish SE, which was founded in 1793, suffered the latest blow to its credibility on Monday when Grafton Group, the building materials business and owner of Woodies DIY outlets in Ireland, announced it was quitting the exchange and moving its main listing to London.

PLY: A narrowly focussed argument is presented here which has been deployed for about 40 years or more and is still not valid. Yes, a big company with many sales outside Ireland has decamped but actually the success of the Dublin market has been in remodelling itself against all odds (i.e. having London on its doorstep). The listing of all manner of vehicles has been successful elsewhere and the Irish SE remains a franchise with a great future. ISE will need to keep innovating but the “slowly dying” tag is quite wrong – reflecting a stream of defeatism in some quarters currently driven by a grinding recession. The Irish SE must keep moving. CEO Deirdre Somers’ team boasts some excellent talent to take the market forward. Outside of Ireland their European Wholesale j.v. with Malta is a good example of the forward thinking within ISE and is entirely ignored in this article, alas.

Kalimirchi Vyapari Association Withdraws Case Against NCDEX
Business Standard

Kalimirchi Vyapari Association has withdrawn the writ petition filed against NCDEX in the High Court of Madhya Pradesh, Indore, seeking direction for delivery of pepper as per contract specification.

NSX Blasts FINRA’s ADF Proposal
Traders Magazine

The National SE (NSX), in a letter to the SEC last week, petitioned the regulator to disapprove a proposal by FINRA to dun ECNs for the upgrade of the Alternative Display Facility, or ADF.

FINRA has asked its ECN members to pony up $250,000 or $500,000 to help pay for the cost of rehabilitating its 11-year old ADF. The ECNs want an operational ADF—it is currently not functioning—so they can quote there. Today, they quote on the NSX.

Under the proposal, if the ECNs invest in the upgrade of the ADF, and also commit to quoting on it, FINRA will reimburse them with the market data revenues it receives.

The NSX calls the charges unreasonable and the whole scheme a burden on competition—specifically the NSX.

Bangladesh – Bourses To Become Public Limited Companies Soon
The Daily Star

Dhaka and Chittagong stock exchanges will turn into public limited companies with a huge paid-up capital once they get a regulatory approval for their demutualisation schemes within this month.

The paid-up capital of Dhaka Stock Exchange will be Tk 1,803.77 crore (USD 232.5 mln), consisting 180.37 crore ordinary shares of Tk 10 (USD 0.12) each.

The Chittagong bourse will have Tk 634.52 crore (USD 81.78 mln) as its paid-up capital, which will be divided into 63.45 crore primary shares of Tk 10 (USD 0.12) each.

The authorised capital of Dhaka bourse will be Tk 2,500 crore (USD 322.24 mln), while the port city bourse will have Tk 1,000 crore (USD 128.89 mln), according to the demutualisation schemes submitted to the Bangladesh Securities and Exchange Commission on July 29.

Baltic Exchange Establishes Office In Shanghai

The London-based Baltic Exchange, a major world maritime market information provider, opened an office in Shanghai on Tuesday.

The opening of the Shanghai office will boost the connections between Chinese bulk carriers and the world, providing easier ways for Chinese shipowners, shipbrokers and charters to tap into the global maritime market, said Jeremy Penn, CEO of the Baltic Exchange.

PLY: Interesting and encouraging to see Baltic Exchange expanding their footprint physically into Chinese offices. Meanwhile, their futures platform sale negotiations appear to have gone quiet for the time being…

Sri Lanka Studies HKEx’s Demutualisation Process

Sri Lankan officials have held discussions with the officials of HKEx to study the Demutualisation process of ‘HKEx’.

Sri Lanka is looking to demutualise its Colombo SE by next year.

Special Section: FTI, NSEL, India at the Crossroads

PLY: At the current average run rate, NSEL is barely on target to repay 125 million USD (which is probably high given the average skew with the first week payout). That suggests a hole of 800 million dollars or so. Of course there may be some miraculous uptick in payments ahead.

The run rate has been as follows, with each week circa 27 million USD scheduled to be paid:

Week One: Rs 92.73 crore (USD 14.37 mln) paid
Week Two: Rs 12.05 crore (USD 1.79 mln) paid
Week Three:Rs 15.37 crore (USD 2.29 mln) paid
Week Four: Rs 7.77 crore (USD 1.21 mln) paid
Week Five: Rs 8.57 crore (USD 1.35 mln) paid

Apparently MCX shares are down 7.5% which is curious as I thought limit was 5% while FTI has rallied 5.5% so far today…

NSEL Defaults For Fifth Time; Pays Only Rs 8.57 Cr (USD 1.35 Mln) To Investors
The Economic Times

NSEL made the fifth straight payment default yesterday, as it could pay only Rs 8.57 crore (USD 1.35 mln) to investors out of the scheduled amount of Rs 174.72 crore (USD 27.65 mln).

Crisis-ridden NSEL had defaulted in payments on four previous occasions as well. With today’s pay-out, NSEL has been able to settle just about Rs 137 crore (USD 21.6 mln) out of Rs 5,500 crore (USD 870.66) outstanding to the 13,000 investors.

According to the NSEL data, four members out of 24 have paid in Rs 8.57 (USD 1.35 mln) crore to the bourse, against the the pay-out requirement of Rs 174.72 crore (USD 27.65 mln).

The four members include Metkore Alloys & Industries (Rs 4.5 crore – USD 712 k), N K Proteins (Rs 2.1 crore – USD 332.4 k), Sankhya Investments (Rs 1.4 crore – USD 221.6 k) and Yathuri Associates ( Rs 58 lakh – USD 91.8 k).

NSEL Investors To Move Economic Offences Wing
The Economic Times

After 45 days of waiting, investors of crisis-ridden NSEL are preparing to fire their first salvo — around 150-200 complaints would be lodged with the Economic Offences Wing of Mumbai Police within a day or two, claimed Sharad Saraf, convenor, NSEL Investors Forum.

NSEL Appoints Saji Cherian As New MD & CEO

NSEL appointed Saji Cherian as the MD and CEO of the company with effect from September 16, 2013.

‘NSEL Used NBHC Stocks To Mislead Investors’
Business Standard

The officials of NSEL used stocks lying under the management of National Bulk Handling Corp (NBHC) to build positions on the exchange against money brought in by gullible investors in the paired trades… it now emerges that many of its warehouses and stocks could have been misused by NSEL.

NSEL Ex-CEO Affidavit Confirms That The Body Was A Platform To Borrow And Lend Money
India Today

A single affidavit of NSEL ex-CEO Anjani Sinha has made investigative officials life a bit easier now. Thanks to Sinha (who is now saving his own skin and spreading entire blame game on others including top management), skeletons have started tumbling out from NSEL cupboard.

On September 11, Headlines Today/Aajtak had published an exclusive findings of Mumbai income tax department that, “NSEL was nothing but a trading platform used by management, brokers and defaulting companies to borrow and lend finance.”

Our reports highlighted, how buying members were using NSEL platform for running their business, diverted funds in real estate and if ED sources are believed that there is also a high possibility that investors money might have been transacted to companies based outside the country – a clear case of money laundering.

Findings with IT department had also said – that top brokers like Motialal Oswal, Anand Rathi, IIFL and few others had information about illegal activities taking place within NSEL, however, later MOSL denied this allegation.

On the same day (Sept 11), Anjani Sinha had filed an affidavit which was handed over to FMC, the Economic Offence Wing (EOW) of Mumbai police and other investigative agencies – taking entire blame on himself and also spreading it across the board naming some specific names and sharing some specific details on how NSEL has cheated its investors.

The affidavit exposed the underbelly of NSEL’s dealings over the past few years, how its business model changed from a delivery-based trading platform to more of a financing model and how the platform was extensive misused by its members in collusion with NSEL management to raise funds without trades being backed by adequate stocks at the spot bourse’s warehouses.

Sinha’s affidavit says, “Besides, some of the buyers have used such funds for some other activities such as extension of their plants, investment into real estate and may be for other activities too.”

PLY: A clear collapse of the house of cards as the defence of various executives is now crumbling. Expect character attacks on Anjani Sinha to follow from those implicated.

NSEL Fudged Records For Two Years To Prevent Defaults, Says Ex-CEO
The Financial Express

Anjani Sinha, former MD,NSEL, may have tried his best to absolve the exchange’s the board from any wrongdoing but a closer look at his affidavit reveals that even senior management members were pawns in the hands of the borrowers.

Fears of a widespread default as early as 2011-12 forced the NSEL management to concede buyers’ every demand, including designing contracts to suit their needs and rollover of positions fully aware there were no stocks and that any rollover would increase exposure by at least 20% every year.

According to Sinha, Mohan India wanted to use the NSEL “platform for T+2/T+25 contracts and also for the purpose of developing Delhi-based sugar contracts based on delivery”.

In May 2013, according to Sinha, NSEL realised that the “entire story is a farce” and that Mohan India “availed of funds through (NSEL) platform and invested in land.”

PLY: Maintaining that “fit and proper” designation is going to be increasingly tricky for directors of NSEL – in particular one Jignesh Shah – as despite his best efforts to be the original fall guy, the former CEO has now clearly indicated a longstanding pattern of dubious activity and it is tricky to see how the board could not notice something was afoot…

NSEL Investors To Also Target Borrowers
Business Standard

Worried over the delay in recovery of their dues, investors of NSEL say they’re keeping the settlement option open while now targeting the borrowers who have to actually make payment to the exchange.

When asked if the forum was ready to settle the case with a haircut (acceptance of a writedown in payments as part of a settlement), Arun Dalima, its secretary, said: “Show us the money first and then talk about haircut or settlement.”

PLY: Clearly it is almost certain there will be a haircut in this sad affair as the losses are so significant and the repayment process merely drops in the ocean of debt.

NSEL Owes Rs. 254 Crore To Motilal Oswal Group

Domestic brokerage Motilal Oswal on Tuesday said the group has a total exposure of Rs. 253.92 crore (USD 40.19 mln) in crisis-ridden NSEL.

NSEL owes Rs. 195.24 (USD 30.9 mln) with respect to positions taken by its clients through the broking platform offered by Motilal Oswal Group. NSEL also owed Rs. 57.28 crore (USD 9.06 mln) with respect to the proprietary positions undertaken by the group, the filing added.

Premature To Write-Off Exposure To NSEL: India Glycols

India Glycols shares lost almost 13 percent in afternoon trade Tuesday on concerns that the company through its subsidiary IGL Finance has significant exposure to NSEL.

NSEL Staffer Missing As Ex-CEO Shifts Blame
The Financial Express

The Haryana-based Maneesh Chandra Pandey, among the seven employees sacked by NSEL in the wake of the settlement crisis, is absconding. Sources say Pandey, who was manager (business development), did not come to Mumbai when outstation executives were called by NSEL and that he is incommunicado.

Interestingly, according to the statement filed by Anjani Sinha, former CEO, NSEL, who was sacked along with Pandey on August 20 — Pandey played a key role in bringing on board members like PD Agro Processors, ARK Imports, Namdhari Food International, Namdhari Rice & General Mills, Lotus Refineries, White Water Food and Yathuri Associates which collectively owe NSEL nearly R2,200 crore (USD 348.26 mln).

PLY: Looks like the first man to run has fled NSEL, likely increasing investor demands for pre-emptive incarceration of many figures. As I hypothesised the other day, could Jignesh Shah flee too?

DEA To Submit Report On NSEL Fiasco On Wednesday

Department of Economic Affairs secretary Arvind Mayaram led panel will submit its report on the NSEL crisis on Wednesday and present an action plan.

SEBI Doesn’t Want FMC Under Its Purview
Business Standard

With FMC being moved to the finance ministry, sources say the commodity market regulator would remain a separate division; it wouldn’t be merged with Sebi, as was widely believed.

“Sebi has conveyed to the finance ministry it doesn’t want FMC to come under its purview.”

For FMC, irrespective of whether it is merged with Sebi or remains a division under the finance ministry, it would have to be strengthened further. Bringing FMC under SEBI would create several regulatory discrepancies—the capital and commodities markets function differently. For equities, a price rise is good for all, but for commodities, consumers and producers have divergent interests. Also, in case of agriculture commodities, the prices determine inflation and cropping patterns.

Earlier, FMC was a division under the department of consumer affairs.

To make FMC a powerful statutory regulator, the Forward Contract Regulation Act would have to be amended. A Bill for the amendment is pending with Parliament.

Rajnikant Patel: The NSEL Effect – A Case For ‘Indocom’
Business Standard

Although everybody is busy trying to unravel the crisis on the NSEL, another core issue may be waiting in the wings. India has six commodity futures exchanges (comexes). MCX is the dominant player with a nearly 85 per cent market share, followed by NCDEX with approximately 10 per cent. The remaining 5 per cent market share is divided among four others: National Multi Commodity Exchange, Indian Commodity Exchange, Ace and Universal Commodity Exchange.

Having two dominant players commanding 95 per cent of the market is tough for any newcomer in any field. More so in a market that is regulated, so introducing product innovations and differentiation is difficult, and the first-mover advantage is probably non-existent. Getting liquidity from other exchanges is also tough. Hence, the continued financial viability of such small exchanges becomes a major concern.

PLY: Given that India is the same population as the US plus the EU and then some on top, I am not so convinced of these arguments. True, restrictive capital requirements for exchanges could drive them out of business but small, capably managed, nimble exchanges ought to be able to survive on even a modest proportion of India’s enormous agri-market…

FMC Sets Up Panel To Look Into Tech-Based Trading Issues
The Hindu Business Line

FMC has constituted an ‘Advisory Committee’ to look into issues arising out of technology enabled trading facilities like algorithmic offered on the national commodity bourses.

Currently, there are 21 commodity bourses in the country, of which six are national level commodity bourses — MCX, NCDEX, NMCE, ICEX, ACE and UCX.

“To keep pace with the technological development and to take appropriate regulatory measures, the commission has decided to constitute an Advisory Committee on Technology,” commodity markets regulator FMC said in an order.

National commodity exchanges have online trading system, risk management system and clearing and settlement system for various futures contracts.


NYSE Technologies Obtains License To Distribute Market Data In China
The Options Insider

NYSE Technologies, has obtained Chinese State Council Information Office (SCIO) approval to distribute market data in China.

With the SCIO license, NYSE Technologies will now disseminate financial information including NYSE Euronext’s real-time and historical market data, as well as SuperFeed services to mainland China market participants.

Deutsche Börse To Enhance Its International Network In Europe
Deutsche Börse

DB offers a new Access Point in Interxion’s Vienna data centre campus. Interxion Holding N.V. is a major European provider of cloud- and carrier-neutral co-location data centre services.

Iberclear Chooses SWIFT To Connect To T2S

Iberclear, intends to go live on T2S connecting via the SWIFT VAN in February 2017.


Osaka SE Licenses CNX Nifty With IISL

OSE has licensed CNX Nifty, the benchmark index of India’s NSE to introduce a Yen-denominated index futures contract with the targeted launch timing of March 2014.

Career Paths

On 17 September 2013, the Polish Financial Supervision Authority approved changes to the Exchange Management Board whereby Dariusz Kułakowski was appointed Management Board Member and CIO.

The long-serving CEO of the Channel Island Stock Exchange has resigned. Tamara Menteshvili had headed the exchange since its launch in 1998.

The Stock Exchange of Thailand’s (SET) Board of Governors agreed to elect Sathit Limpongpan the exchange’s 15th chairman, with immediate effect succeeding Sompol Kiatphaibool, whose term has ended. Sathit’s term will run to September 5, 2015.

The exchange also welcomes Suthichai Chitvanich as a new governor. Suthichai was appointed by the Thai SEC to replace Subhak Siwaraksa, whose term had ended.

Share Notes

Following his sales of:

2,000 shares Tuesday, August 6th at an average price of $16.64, (bargain $33,280.00) reported on August 12th
2,000 shares at an average price of $16.78 (bargain: $33,560.00) reported on August 13th
2,000 shares Monday, August 12th at an average price of $17.02, (bargain $34,040.00) reported on August 16th
2,000 shares Friday, August 16th at an average price of $17.16 (bargain $34,320.00) reported on August 21

2,000 shares Tuesday, August 20th at an average price of $17.15 (bargain $34,300.00) reported on August 23
2,000 shares Thursday, August 22nd at an average price of $17.10, (bargain $34,200.00) reported on August 27
2,000 shares Monday, August 26th at an average price of $17.26 (bargain $34,520.00) reported on August 29

Interactive Brokers SVP Milan Galik sold another 2,000 shares Friday, September 13th at an average price of $17.57 (bargain $35,140.00). He now owns 797,604 shares.

(PLY: Welcome back Mr Galik, I was missing you).

NASDAQ OMX Group EVP Bruce Aust unloaded 7,500 shares Friday, September 13th at an average price of $31.23 (bargain $234,225.00). He now owns 114,751 shares.

CME Group CAO James Pieper sold 3,785 shares Monday, September 16th at an average price of $72.47 (bargain $274,298.95). He now owns 4,793 shares.

GFI Group EVP J Christopher Giancarlo sold 49,700 shares Monday, September 16th at an average price of $4.06 (bargain $201,782.00). He now owns 13,995 shares.

Analyst Notes

Nasdaq OMX Group Ranks As A Top Pick

A study of analyst recommendations at the major brokerages shows that Nasdaq OMX Group is the #22 broker analyst pick among those stocks screened by The Online Investor for strong stock buyback activity.

To make that list, a stock must have repurchased at least 5% of its outstanding shares over the trailing twelve month period.

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.


Crowdfunding Events Platform Fully Funded On Seedrs
Crowdfund Insider

Exeter based CrowdCanDo – a crowdfunding platform for events of all types – has raised its target of £22,000 for 10% equity for the crowdfunding platform with the platform anticipating launch in 2014.

The pitch was approved for the Seedrs platform this past June and crowdfunding commenced in early July.

Other stories

Former NYSE CEO Thain Says Dark Pools Should Be Closed

CIT Group Inc. CEO John Thain, the former head of NYSE, said there’s too much fragmentation and insufficient transparency in the stock market and called for the closure of “dark pools.”

PLY: The closure of what I call the “Institutional Liquidity Pool” end of the dark market threatens block trading, would be a disaster for buy side investors and cost pensioners a fortune. This is an odd remark for Mr Thain to make without thinking through the consequences of such a blunt action when the exchanges do not have a solution under their own auspices for effective wholesale market block trading.

China Expands Margin Trading And Short Selling Scheme For Larger Investor Base

China has given the greenlight to expand margin trading and short selling in the equity markets in a bid to ramp up investor activity in the sector.

Following the announcement, the China Securities Finance Corporation (CSF) nearly tripled the number of brokerages and stocks participating in the pilot programme.

The CSF is an incorporated financial institution, authorised by market regulator China Securities Regulatory Commission (CSRC), which aims to facilitate the margin transactions of brokerages by providing them loans. It now has a registered capital of 12bn yuan (€1.5bn, $2bn, £1.2bn), with shareholders as Shanghai SE, Shenzhen SE, China Securities Depository and Clearing Corporation, Shanghai Futures Exchange, China Financial Futures Exchange, Dalian Commodity Exchange, and Zhengzhou Commodity Exchange.

PLY: I am not averse to adding leverage for those who wish it but at the same time the more leverage available, the greater likelihood the market may bubble.

Fidelity, Schwab, Other Big Firms Call For Money Fund Reform Rethink
Investment News

Major financial firms are calling on the SEC to narrow its money market fund reform plan, asking the agency to exclude tax-exempt money funds and revise the definition of “retail investor,” among other changes.

CFTC Seeks Public Comment On Request From CME To Amend Rule 538 (Exchange For Related Positions)

The Exchanges are seeking approval to eliminate the use of transitory Exchange for Related Positions transactions (EFRP) wherein the execution of an EFRP is contingent upon the execution of another EFRP or related position transaction between the parties and where the transactions result in the offset of the related positions without the incurrence of market risk in the context of the related position transactions.

The Exchanges also are seeking approval to amend and/or clarify certain recordkeeping and other compliance obligations relating to non-transitory EFRPs, and to incorporate aspects of the Exchanges’ existing guidance on EFRPs set forth in CME Group Market Regulation Advisory Notice RA1006-5 from June 11, 2010, into the text of Rule 538.

Comments regarding the Exchanges’ request should be submitted on or before October 18, 2013.

Comments may be submitted electronically through the CFTC’s Comments Online process. All comments will be posted on the CFTC’s website.

PLY: EFP/EFRP rule changes require some thought, I will ponder this and revert to those who are interested!

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