September 26 2013

elb2 Welcome to Today’s Exchange Agenda set in one simple ‘scrollalong’ environment:

US exchange collaboration to dissipate IT risks may be afoot, regulators waste years on unproductive investigation, all sorts of SEF updates, pre-close from LSE & ICAP while the world’s largest IDB cops perhaps the highest service charge for curries in history. The week’s big event is a bit of an anti-climax as Jignesh sounds more like he is at a party political conference while the UK starts suing the EU’s courts to apply the broadly just cause which appears remarkably oxymoronic in the breach: human rights for bankers.

Today’s unanswered question: if NASDAQ is incubating, does that make Bob Greifeld pregnant? If so, he can probably get some maternity wear on Alibaba whose IPO conundrum has been understandably haunting Charles Li’s dreams…

Public Markets

NYSE Said To Join Nasdaq Weighing Plan To Collaborate On Backups

NYSE and Nasdaq are considering improvements that include acting as each other’s backups on data feeds that disseminate prices.

Options under consideration include safeguarding each other’s securities information processors, or SIP, the feeds that both New York-based companies oversee to distribute trading information to investors. Another possibility is asking DTCC to run the backup systems…

PLY: Encouraging evidence that the single point of fail methodology is being abandoned in order to provide genuine redundancy and separate systems to back each other up from the two primary listings venues.

ICE To Launch ICE Swap Trade For OTC Energy Markets

ICE will provide trade execution services for its financially settled, bilateral OTC energy markets through its SEF, ICE Swap Trade, ICE’s which is expected to launch on October 2, 2013.

ICE transitioned its cleared OTC energy contracts to futures contracts in October 2012. Certain contracts that continued to trade on ICE OTC commodity markets will begin trading on ICE Swap Trade to satisfy new regulatory requirements. These contracts include all uncleared swaps markets.

CFTC Issues Notices Of Temporary Registration As A SEF To tpSEF Inc. And TraditionSEF,Inc.

PLY: Which we reckon makes 15 approved from 18 applicants – you can keep up with SEF application/approval developments on our new SEF page.

MarketAxess SEF & Traiana Complete Live Trade With Pre-Trade Credit Checks

Traiana and MarketAxess SEF Corporation have completed their first live CDS index trade using Traiana’s CreditLink service as the credit hub to verify pre-trade credit limits. JP Morgan acted as the clearing member for the major buy-side participant on the trade.

CFTC SEF rules require a clearing member to undertake pre-trade credit checks on trades prior to execution. CreditLink acts as a centralized hub and provides trading platforms, clearers/prime brokers, executing banks and buy-side firms the ability to monitor and manage pre- and post-trade credit in real-time across multiple trading venues in a consolidated view.

PLY: With pre-trade credit now mandatory for transitioning OTC to SEF markets will we see the same process uniformly applied to futures and options where a bare couple of exchanges (notably SIBEX and SGX) have implemented such a methodology for all derivatives transactions?

LSEG Pre-Close Period Update

PLY: LSE in upbeat mode ahead of the close period.

ICAP plc Trading Statement

PLY: ICAP aren’t quite as ebullient as LSE but then again yesterday was a tricky day…

ICAP Is Fined $87 Million In Libor Scandal (subscription)
The Wall Street Journal

Bribes of curries and a broker nicknamed “Lord Libor” lent a distinctly British flavor to an $87 million settlement by ICAP PLC of rate-rigging allegations with U.S. and U.K. regulators – the fourth major firm to do so.

Hmmm, given that the favours ranged from asking for Ferraris sometimes apparently being settled with a curry and copious Cobra beers suggests LIBOR fixing may have been the most volatile market in history.

Brookfield Snaps Up NYMEX Building For $200M
NY Post

The NYMEX Building at One North End Ave. on the Hudson River in the World Financial Center is being acquired by neighboring owner, Brookfield Office Properties.

Brookfield apparently signed a contract earlier this week to pay $200 million for the 16-story office building, which like all the Battery Park City buildings is on a long-term lease from the Battery Park City Authority until June 2069.

The deal works out to roughly $385 a square foot, and seller — CME — is expected to lease it for two years and then restack its energy market trading operation into the lower 220,000 square feet for 13 years at a rent expected to be in the $50s per square foot.

This would give Brookfield about 300,000 square feet on the upper floors to lease to other companies, and perhaps fill in a double height trading floor to add an additional 30,000 feet.

Nasdaq OMX Steps Up Efforts To Support SMEs (subscription)
Financial News

Nasdaq OMX is boosting efforts to support capital raisings for European small and medium-sized enterprises, becoming the latest exchange to improve its junior listings services in Sweden.

Following a consultation with market participants, Nasdaq’s Swedish exchange has published a White Paper laying out steps needed to improve the initial public offering climate in the Nordic country.

New rules will also impact listing requirements and trading rules. The current 25% free float requirement will remain intact, but companies will no longer need to have 500 shareholders who must each own shares worth €1,000 in order to list.

Nasdaq Plans To Incubate Young Tech Companies
NY Post

Nasdaq CEO Bob Greifeld isn’t sweating Twitter’s stock listing.

As early as next week, Nasdaq OMX is expected to win approval from FINRA to operate a private listing venture, Nasdaq Private Market, through a partnership with SharesPost Inc.

Nasdaq is hoping the private market will serve as a D-league, allowing it to aggressively recruit Silicon Valley startups before they enter the big leagues.

PLY: Private shares is an interesting idea but currently rather heavily populated – NYSE bought into the territory just the other week – and the business itself seems to be highly seasonal, usually enjoying volume pops ahead of major IPOs such as LinkedIn or Facebook. A useful tool for the legacy department stores to have in their armoury but hardly a major engine of growth on current evidence.

Alibaba U.S. Listing Would Be New Battle For Exchanges (subscription)
The Wall Street Journal

While the listings themselves would bring little in terms of revenue—with annual fees per company of less than $250,000—they can build the reputation and brand of the exchanges, which can help bring additional business from companies.

If Nasdaq and its chief executive, Robert Greifeld, were to snag one or both of these deals, it could go a long way toward healing the wounds of a difficult two years. For NYSE, winning the listings would be a signal that the iconic Big Board will survive a takeover from ICE, the upstart electronic futures exchange based in Atlanta, with its cachet intact.

PLY: I still believe Greifeld needs to win at least one listing to realistically maintain office. Without a follow-on sell through of NYSE cash markets, I still believe Duncan Niederauer will be leaving by end Q1 next year as ICE begins managing the Big Board in earnest.

HKEx To Alibaba: Thanks, But No Thanks (subscription)
The Wall Street Journal
HKEx CEO Charles Li Live And Direct

Waving goodbye to the prospect of a multi-billion dollar IPO from Alibaba couldn’t have been an easy move for the Hong Kong SE.

Alibaba had made as a condition of its listing in Hong Kong the ability to retain control over the composition of the board. HKEx wanted to hold on to its oft-stated principle that all shareholders should be treated fairly. Alibaba proposed a nomination system whereby its partners, including founder Jack Ma and other senior executives, would nominate the majority of its board directors and put that up for a shareholder vote.

As potentially the biggest tech IPO globally since Facebook, an Alibaba listing would have given a huge shot in the arm for Hong Kong’s IPO market, which currently ranks sixth in the world by IPO volume year-to-date, according to Dealogic. It was in first place two years ago.

Listing fees accounted for 11% of HKEx’s total revenue for the first half of 2013.

But Alibaba was running out of time for a Hong Kong listing this year, as from Oct. 1, IPO candidates must appoint sponsor banks at least two months before submitting listing applications, and it has yet to do so.

True the HKEx may not even need Alibaba for the rest of 2013 to finish on a high note. There’s still about $14 billion worth of IPOs in the pipeline.

PLY: Clearly Charles Li has suffered understandable angst here. I am percolating his ponderings – at least he is getting some sleep which is encouraging – although I am minded to believe HKEx did the right thing in sticking to its principles and making the HKEx a transparent bastion within the greater Chinese markets where trust is often somewhat lacking especially amongst foreign investors. Instead Alibaba have opted for New York which has been a bit of a hotbed of dodgy Chinese IPOs in recent times – if anything goes wrong with Alibaba in due course, HKEx will clearly look a lot better in the long-term than the US markets. A difficult choice all round which doubtless will be debated in my inbox for the next few days…

Rusal Urges LME To Delay Rule Changes On Metal Withdrawals

United Co. Rusal, the world’s biggest aluminum producer, urged LME to postpone suggested rule changes aimed at speeding up withdrawals of warehoused metals as the current proposal risks distorting the aluminum market further, reducing transparency and make the LME less relevant for industrial users.

UC Rusal press release here.

Investors Urge EU To Be Firm On More Competition In Share Trading

A broad coalition of investors, asset managers and brokers appealed to the EU Wednesday not to dilute proposed rule changes that would open securities trading to more competition.

The bloc’s member states and the European Parliament are in final talks on revising trading rules, known as the Markets in Financial Instruments Directive (MiFID), to reflect rapid advances in technology and apply lessons from the financial crisis.

PLY: If I could surmise this in one sentence it would be an achievement so let me just note I am in Brussels next week…

Private Markets

India: NSE Gets 50% Of Retail Clients From Smaller Cities
The Hindu Business Line

Indicating broader participation of investors in the capital market, entities from smaller cities now make up for half of the total retail clients trading on NSE.

As per latest data compiled by NSE for fiscal 2012-13, 50 per cent of the total number of retail clients trading on the exchange’s cash market platform comes from the cities other than the Tier I and II categories.

Besides, 43.7 per cent of the total turnover of trades carried out by retail investors in the cash segment during the fiscal came from cities other than the Tier I and II categories, the data showed.

Tier 1 includes major metro cities like Bangalore, Chennai, Delhi, Hyderabad, Mumbai and Kolkata, while Tier 2 cities include Ahmedabad, Jaipur, Kanpur, Lucknow, Nagpur, Pune and Surat.

PLY: A broad Indian investor culture is growing, despite what FTIL memorably refers to as “purported crisis” in the NSEL commodity market, speaking of which:

Special Section: FTI, NSEL, India at the Crossroads

PLY: MCX is flat while FTIL has a bit of a bounce, up 5% following the largely inconclusive AGM yesterday.

FT Shareholders Find AGM A Disappointment
Business Standard

The 25th AGM of Financial Technologies Ltd, saw a fair amount of turmoil inside and outside the venue, though it finally didn’t amount to anything substantial.

Chairman Jignesh Shah managed to get into the heavily guarded venue without anyone noticing.

Some shareholders left while the meet was still on, complaining of anodyne management answers and not being able to ask all their queries.

Shah, speaking on the sidelines of the AGM, told reporters he’d come to the city to give confidence to the shareholders.

Some said they questioned him on operations and alleged irregularities but did not get convincing answers.

Shah, it appears, told the meeting that taking recourse to the courts was unlikely to solve their problem of getting their money back. ‘He said it can be solved through continued persuasion and by taking the investors’ forum into confidence, said one.

Talking Tough, Jignesh Shah Says Will Come Down Hard On NSEL Defaulters
The Hindu Business Line

Beleaguered NSEL on Wednesday said that it will get tough with defaulters to recover its dues and sought the Government’s support to overcome the payments crisis.

“We need to collectively go behind the 23 planters (defaulters) who took away money,” said Jignesh Shah, Chairman of Financial Technologies, promoter company of NSEL, after the company’s 25th AGM in Chennai.


Shah said: “We should honour investors’ commitment, and any support from the government is desirable. But I fully understand the Government’s stand that the exchange was unregulated. We are a victim too, and the fraud has happened at the management level.”

Reacting to concerns raised by NSEL investors, Shah said: “I have an equal responsibility towards minority shareholders and understand the pain of investors. I had a dialogue with the investor forum and told them that we are also a victim.”


There was chaos at the venue of FT AGM with some NSEL investors protesting outside the meeting hall. Police were called in and the company engaged private security forces to keep NSEL investors at bay.

Protesting investors sought refund of their money from the company and a timeframe for the settlement. Shah said he did not have an answer at present, but would get back with a solution soon. “We need to collectively fight this problem,” he told the investors.

PLY: Jignesh Shah put in a measured performance by all accounts. He didn’t say anything dreadfully wrong but at the same time he didn’t manage to actually answer anything specifically. Perhaps a bit of an anti-climax but ultimately Shah claims he is trying to sort the problems out while expressing a remarkably candid innocence, claiming even he as a director of NSEL was clearly duped by previous management which frankly is difficult to believe.

MCX Outcome Of Board Meeting

MCX has informed BSE that pending reconstitution of the Board as per FMC Guidelines for constitution of the Board etc. dated August 12,2013 and September 13, 2013, the Board at its meeting held on September 24, 2013, inter alia, decided on the following:

1. Appointment of Mr. R. M. Premkumar, IAS Retd. and FMC nominated Independent Director as Chairman of the Board till the reconstitution of the Board in accordance with the aforesaid FMC Guidelines.

2. Appointment of Mr. Ravi Kamal Bhargava, IAS Retd. and FMC nominated Independent Director as Chairman of the Audit Committee till the reconstitution of the Board in accordance with the aforesaid FMC Guidelines.

3. The Board also took note that Mr. Joseph Massey, retiring director, who had earlier offered himself for re-appointment, has withdrawn his consent for re-appointment as a Director at the ensuing AGM and has expressly conveyed vacating his office as a director w.e.f. close of business hours on September 30, 2013 and approved the Addendum II to the Notice of AGM being sent to the shareholders.

SEBI To Probe Financial Technologies, Study Other Regulators’ Findings
The Financial Express

Even as the government investigates the payments crisis on NSEL and FMC assesses whether the exchange’s promoters should be stripped of the “fit and proper” tag, the Jignesh Shah-promoted FTIL will now be probed by SEBI.

Income Tax Dept probing NSEL Payment To Financial Technologies

The Income Tax department is investigating whether NSEL violated tax rules while transferring funds to promoter company FTIL.

Financial Tech To Recast Accounts
The Hindu

At the AGM, it was decided to restate the accounts for 2012-13 with the existing auditors Deloitte, Haskins & Sells. Though no timeframe was fixed, he said there would be another meeting of shareholders to ratify the accounts. Quizzed on the impact of NSEL crisis on the profits of FT, Mr. Shah said it would be known only after the audit was recast. Asked whether the dividend already announced would be cut, Mr. Shah said that FT, with a base of 55,000 shareholders, was paying dividends continuously for 36 quarters. “It is my wish to continue paying dividend. But it all depends on the decision of board of directors,” he said.
Mr. Shah also categorically denied diluting stake in Financial Technologies.

Believe FTIL Auditor Reports At Your Own Peril?

Equity investors were rudely shocked on Tuesday to hear that audit firm Deloitte Haskins and Sells had said FTIL financial results for fiscal year 2012-13 should no longer be relied upon. The firm’s audited results had been released to stock exchanges on 30 May, and its annual report had already been dispatched to shareholders.

Investment blog said, “The message to investors in Indian equities is clear: Believe audited accounts at your own peril.” But accounting professionals say the situation is somewhat more nuanced.

David Jones, assurance practice leader, Grant Thornton Advisory Pvt. Ltd, says: “This is perhaps the first case that’s got so much public attention, post Satyam. But nearly all accounting firms have had to deal with similar situations, where subsequent events lead to a change in the initial opinion of the auditor and/or the financial statements. In most such cases, a superseding report is issued and the original one is withdrawn.”

‘NSEL Client Money Used For Defaulters’
Business Standard

NSEL has used clients margins money to fulfill obligations of defaulters.

This was revealed by Grant Thornton, the forensic auditor of the NSEL, which submitted its report to the exchange on September, forwarded to FMC on Wednesday, the regulator overseeing Rs 5,600 crore (USD 900 mln) payment crisis of the Financial Technologies group spot exchange.

According to the source, the NSEL was aware of borrowers continuously getting defaulted about 18 months ahead of the actual default of the exchange.

PLY: Some form of defaulting was rolling on for 2 and a half years it seems. This does not inspire much confidence in NSEL’s audits either.

10 Facts About FTIL Audit Report That Deloitte Did Not Withdraw
Business Standard

On September 24, a day before its AGM, Financial Technologies (FTIL) told the exchanges that key resolutions are deferred. One of the reasons given was that Deloitte Haskins & Sells, had some reservations about the audit report it had earlier given following the crisis in NSEL, a key FTIL subsidiary. Business Standard tells you what it is and what it is not.

PLY: A useful primer on what presumably Deloitte still agree with. Frankly the audit profession can try to group together to protect itself but this looks dismal from the outside.

I-T Dept Wants NSEL Deal Details From Investors, Brokers May Have Diverted Funds
The Economic Times

Was the total amount put in by thousands of investors different from Rs 5,500 crore (USD 883.67 mln) that the troubled NSEL owes them? A letter sent out by the income tax department on Wednesday asking several investors to spell out transaction details, sparked suspicion of fund diversion by some of the intermediaries.

The tax office has not made any enquiries on the source of funds of these investors. Instead, the department has asked them to disclose all transactions routed through the spot exchange in the past three years.

Confirming that many clients have received such letters from IT office on Wednesday, a senior official of a brokerage said that investors were clueless as to why the tax office was looking for data it already has.

According to a senior chartered accountant familiar with the development, the IT department will compare contract notes generated by brokers on NSEL investors with the actual trades routed through the exchange.

SEBI May Act On Fit & Proper Criteria Of MCX-SX

The securities market regulator will act on fit and proper criteria in case of Jignesh Shah-promoted MCX-SX if other regulator confirms it, a top official from SEBI said on Wednesday.

The government has empowered FMC to take a call on the ‘fit and proper’ status of NSEL’s under the existing promoters Financial Technologies India (FTIL).

PLY: To repeat, it will be intriguing to see the reasons provided whatever the decision taken by FMC on Mr Shah’s “fit and proper|” status.


Tadawul Bolsters Trading Technology, Extends Contract With NASDAQ OMX
Nasdaq OMX

NASDAQ OMX and the Saudi SE (Tadawul) have today entered into an agreement to upgrade Tadawul’s current trading platform. As part of the agreement Tadawul will also continue to leverage the existing suite of market surveillance and CSD technologies that have been supported by NASDAQ OMX since 2006.

As part of its long-term strategic plan, Tadawul will replace its existing NASDAQ OMX platform (SAXESS) with one powered by the industry leading X-Stream INET technology. Migration to the new platform is expected to commence in January 2014.


NASDAQ OMX Introduces Trading In Actively-Managed Funds
Nasdaq OMX

NASDAQ OMX today introduces trading in Actively-Managed ETFs in Sweden and Finland. Actively-Managed ETF is a new type of product in the Nordic countries and aims for greater return on investment through active management.

Career Paths

LSE Wednesday said its majority owned subsidiary, LCH.Clearnet, named non-executive Chairman Jacques Aigrain as interim Executive Chairman until it finds a new CEO.

Aigrain will also continue as a non-executive director of LSEG.

Meanwhile, LCH.Clearnet Limited, the group’s UK arm, appointed Michael Davie, currently chief executive of SwapClear, as its CEO. Davie will take on the role in addition to his SwapClear responsibilities.

Financial Calendar


NASDAQ OMX $0.13 Q2 dividend payment
Record date Hellenic Exchanges for EUR 0.03 special dividend (share capital return)

Launch ICE Swap Trade LLC – October 2

CBOE Q3 financial results to be announced pre-market Friday, November 1, 2013 – conference call – 7:30 a.m. Central Time.

LSEG Interim Half Year results November 13.

ICAP Half Year Results November 13.

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

Share Notes

Following his sale of 12,500 shares Wednesday, September 4th at an average price of $17.02 (bargain $212,750.00) reported on September 9th and the sale of 17,500 shares Thursday, September 5th at an average price of $17.28 (bargain $302,400.00) reported on September 11th Investment Technology Group CEO Robert Gasser sold another 10,000 shares Friday, September 20th at an average price of $16.04 (bargain $160,400.00). He now owns 223,366 shares.

Analyst Notes

CME upgraded at Keefe, Bruyette & Woods from a “Market Perform” to “Outperform” rating – $89.00 target price (from $81.00)
LSE “Buy” rating reaffirmed at Espirito Santo Investment Bank Research – GBX 1,718 price target

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 Steps Into Mainstream After Green Energy Venture Makes Investments Available Through IFA Portal

Those that pay for financial advice now have the choice to add crowdfunding investments to their portfolio after renewable energy platform Abundance Generation announced it is to launch an IFA portal to allow advisers to handle investments on behalf of clients.

Other stories

CFTC Closes Investigation Concerning The Silver Markets
5 Yrs And 7,000 Staff Hours Later CFTC Closes Silver Manipulation Investigation Without Pressing Any Charges

CFTC Division of Enforcement has closed the investigation that was publicly confirmed in September 2008 concerning silver markets. The Division of Enforcement is not recommending charges to the Commission in that investigation.

…Think about that . . . FIVE YEARS and SEVEN THOUSAND man hours! And, the result, no evidence of wrongdoing, no charges, typical government waste of resources. Perhaps this is why Angry Gensler is always pounding his fist and stamping his foot demanding more money.

Why, I bet that if the CFTC had invested these 7,000 hours into regulatory reform they might just have completed the DFA rulemaking process by now. Or, maybe, just maybe, they’d have had enough resources to buy computer systems to let them understand all the new data they are collecting. Better yet, perhaps the failed silver investigation will make clear that price volatility or deviation is not necessarily a function of market manipulation.

PLY: A righteously angry ninja who points to an ongoing flaw in US regulation – if you find a violation you sue asap. If you don’t, just keep digging. Don’t worry about tying up the time of the innocent because yours is a government job and the aim alas often appears more to be ensuring you have not missed anything than providing a cost-effective regulatory oversight. This is a foible of regulators in the US and elsewhere.

…I would add 7000 hours would have provided a lot of regulatory review of SEFs in place of the current “cursory” checks.

US Lawmakers Pressure CFTC Over New Rules (subscription)
Financial Times

Regulator criticised for overstepping its authority.

India Urged To Liberalise Bond Markets (subscription)
Financial Times

Calls to reduce barriers to access for foreign investors.

Legal Challenge Launched Into New Rules On Bankers’ Pay

The government has lodged a legal challenge with the European Court of Justice (ECJ) on new EU rules on pay in the banking sector, which Britain fears will undermine responsibility in the banking system rather than promote it.

PLY: Pierre Trudeau once noted the government has no business in the bedrooms of the nation. It’s the same on pay and a heap of other regulatory issues. Bank bonuses may be controversial but that is a matter between shareholders and management, not over-arching undemocratic supranational bodies like the EU.

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