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John Lothian Newsletter: CFTC Proposes Measure to Keep Futures and Swaps User Collateral Safer; Regulators say bitcoin poses ‘financial stability risks’; 7 major financial institutions join forces to develop blockchain infrastructure for SME post-trade

First Read

Bits & Pieces
JLN Staff

We are a day away from the big U.K. referendum to decide whether or not Britain should remain in the European Union. Have you participated in any of the numerous pre-vote polls out there? Well, here’s your chance, compliments of our friends at Trading Technologies. Click HERE to play.

In the demographic survey we conducted earlier this year, one of the questions asked participants whether they would be interested in joining a focus group to help advise us on some elements of our newsletters and sites. Later today we are asking the focus group to rate a few style changes we are considering for the John Lothian Newsletter. If you are eager to join such a group, but did not previously indicate a willingness, now is your chance. Send an email to Doug Ashburn today.

European buy-side firms begin mandatory clearing in about six months and, near as we can tell, firms are not ready. Or, at least most say they are not ready, which means either they say so in hopes of buying more time, or that they truly are not ready. Our friends at The Trade will be hosting a series of webinars aimed at buy-siders on both sides of the pond. The first one will take place on July 6 at 9 am NY time (2 pm London time). Click HERE to learn more.

The next generation needs your help! Registrations for this year’s MarketsWiki Education events in New York and Chicago are coming in, somewhere between trickling and streaming. If past years are a guide, the gusher will come in the next week or so. Seating is limited and past events have sold out.

Please help us get the word out. Do you, or does someone you know, supervise interns at your firm? Do you know of any young folks – college students, new employees, etc., who would like to know more about the industry, and be given a chance to network with some of its movers and shakers? Please send them our way. Here is the link to our information and registration portal.

Are you looking for an intern in Chicago? We just hired an Eagle Scout to help us for 10 hours a week and he is looking for more opportunity. Contact John Lothian if you have a need.

Sol Waksman had an interesting comment on Monday when reflecting on the quantitative nature of today’s markets versus the old days of technical analysis, he said “we have moved from religion to science.”

Finally, a funny moment from the Pinnacle Awards. When a rather rotund Richard Dennis took the stage and looked back to see his image projected on a floor to wall screen he said, “If I knew my picture was going to be that big I would have lost some weight.”


Strengthening Financial Market Resiliency through Technology
By Luke Moranda, OCC Senior Vice President and Chief Information Officer – OCC
Regulated counterparties (CCPs) such as OCC have an excellent track record of performing extremely well during times of market stress. This demonstrated resiliency led global policy makers to mandate that more financial transactions be centrally cleared through CCPs following the 2008 financial crisis.

***** The OCC bench continues to be proactive and outspoken.


Hedge-Fund Manager Charged in Visium Insider-Trading Case Found Dead in Apparent Suicide; Sanjay Valvani had pleaded not guilty to charges he traded on inside tips about generic drug approvals
Hedge-fund manager Sanjay Valvani, charged last week in one of the most significant insider-trading prosecutions in recent months, was found dead in his home Monday evening, an apparent suicide, authorities said.

***** An all too familiar outcome, adding more tragedy to tragedy.


Algo Trading


Tuesday’s Top Three
Is Chicago the most corrupt city in the world? That’s what this article from the Guardian asks in what was our top-clicked story yesterday. In second place was the link to the Managed Futures Pinnacle Awards page, which were held Monday evening and was the topic of yesterday’s morning commentary. In third place was a story from Bloomberg about a soon-to-close tax loophole that could cost some hedge funds a lot of money, Hedge Funds Still Can’t Figure Out a Way to Avoid a $25 Billion Tax Bill

Lead Stories

CFTC Proposes Measure to Keep Futures and Swaps User Collateral Safer
Clearinghouses could park such funds at the Chicago Fed rather than commercial banks
Farmers, ranchers and others who use futures and swaps to hedge business risks could soon see new protections for the collateral they post to back up their transactions.

Regulators say bitcoin poses ‘financial stability risks’; Financial Stability Oversight Council raises concern over uncertainties of using digital currencies
by: Barney Jopson in Washington – FT
A powerful club of US regulators has warned that the growing popularity of bitcoin and other digital currencies is posing potential financial stability risks as it revealed they are being put under closer scrutiny.

7 major financial institutions join forces to develop blockchain infrastructure for SME post-trade
BNP Paribas Securities Services, Caisse des Dépôts, Euroclear, Euronext, S2iEM and Société Générale, in collaboration with Paris EUROPLACE, today announced that they have signed a Memorandum of Understanding to explore together the development of a post-trade blockchain infrastructure for SMEs in Europe.

Euroclear looks to apply blockchain to gold market; Belgian settlement house partners with US start-up itBit
Philip Stafford – FT
Euroclear, one of the world’s largest settlement houses, is to make its first foray into emerging blockchain technology by exploring creating a new settlement system for the London gold market.

ASX ups stake in blockchain firm; ASX has increased its initial investment in blockchain firm Digital Asset from 5% to 8.5%.
By Hayley McDowell – The Trade
The Australian Stock Exchange (ASX) has announced it is to increase its initial investment in blockchain firm Digital Asset.

ICAP relinquishes stake in joint Tullett Prebon company
By Joe Parsons –
ICAP has stated it would no longer retain a 19.9% interest in the combined group of its voice-brokering business and Tullett Prebon in order to address competition rules.

New CFTC trading rule is ‘extreme overkill’
Bart Chilton –
One would not expect Coca-Cola to divulge their secret recipe for the world-renowned soft drink…nor is it required by government. The same is true for other proprietary trade secrets and intellectual property. That, however, could all change by the end of the year if some at a little-known federal agency get their way.

Markit to Acquire Prism Valuation; Expands Portfolio Valuation services and customer base
Markit (Nasdaq: MRKT), a leading global provider of financial information services, today announced that it has agreed to acquire Prism Valuation a leading provider of independent valuation and risk analysis of derivatives and structured products.

China’s “Global” Currency Goes Local
By Christopher Balding – Bloomberg
Last week’s decision by MSCI not to include Chinese shares in its primary emerging-markets stock index has been viewed — widely and rightly — as a blow to China’s hopes of internationalizing its financial sector. There’s worse news, though: Even the progress China’s made thus far is in danger of going into reverse.

A rogue trader’s view: Nick Leeson on tackling misconduct
By Lucy McNulty -eFN
The ‘original rogue trader’ tells Financial News the City needs to ‘rip up the rulebook and start again’


Fed Test Verdict Hits With Brexit Vote
Dakin Campbell – Bloomberg
Fed to post stress-test results minutes before U.K. polls shut; After stumbles, BofA seen raising payouts most if Fed approves
Few banks face as much pressure as Bank of America Corp. on Thursday, when the Federal Reserve posts initial results from annual stress tests just 30 minutes before U.K. polls close on the so-called Brexit vote

UBS warns of Brexit trading hiccups
Swiss bank points to possible increase in volatility and trading volumes before and after the UK referendum


Statement of CFTC Chairman Timothy Massad on the Financial Stability Oversight Council’s Adoption of its Annual Report
I support the adoption of the Financial Stability Oversight Council’s (FSOC) annual report and its recommendations. I want to thank the FSOC members and their staffs for the great deal of work that went into this document, and Secretary Lew for his leadership.
I would like to say a brief word about a few areas the report covers that are of particular importance to the CFTC. These are cybersecurity, changes in market structure, and central counterparties.

Remarks of Commissioner Sharon Y. Bowen before the Managed Funds Association Forum 2016
Today, I will discuss my ideas to improve governance in CFTC-regulated entities. These ideas are in addition to our prior governance proposals and I hope they become a part of the corporate governance rule re-proposal. I also hope that these ideas go beyond the CFTC and the markets we oversee.

Exchanges & Trading Facilities

IEX CEO Katsuyama stands firm on exchange’s fee-only model
By Francine McKenna – MarketWatch
IEX Group, Inc., the exchange portrayed as an investor’s hero in Michael Lewis’ book Flash Boys, won its protracted battle to become a full-fledged stock exchange. Now CEO Brad Katsuyama wants to win the war, making money his own way while bringing a level trading playing field to retail investors.

CME Group and BarclayHedge Honor Managed Futures Leaders at Fifth Annual Managed Futures Pinnacle Awards
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, and BarclayHedge, recognized managed futures industry leaders at the fifth annual Managed Futures Pinnacle Awards last night.

TMX Group Signs MOU with Shanghai Clearing House
The MOU between both groups will form a working group to help jointly evaluate multiple business opportunities.

BSE warns against unauthorised offers for its unlisted shares;The exchange is expected to file IPO papers with amrket regulator Sebi next month to mop-up Rs 800 crore
Business Standard
Ahead of its proposed initial public offering, Asia’s oldest bourse BSE today warned investors against unauthorised offers to purchase or deal in the shares of the exchange that are unlisted currently.

Osaka Exchange: Go-Live Date of Next Generation Derivatives Trading System (Next J-GATE)
OSE is pleased to announce the go-live date of Next J-GATE, which is being developed to expand market liquidity and further improve reliability and convenience for investors, trading participants, and other market users.

Nasdaq ‘assessing options’ following IEX decision; Nasdaq threatened legal action earlier this year, and is now looking into options following controversial IEX decision.
By Hayley McDowell – The Trade
Nasdaq is “assessing its options” following the Securities and Exchange Commission’s (SEC) decisio to approve the Investors Exchange’s (IEX) application to become an exchange.

Moscow Exchange completes first stage of migration to new data centre
Moscow Exchange:
Moscow Exchange has completed the first step to migrate its infrastructure to a new data centre. DataSpace1 will be used as a disaster recovery (DR) site for the Exchange’s trading and clearing platforms…


Le Pen seeks mileage from Brexit debate;National Front party leader promises ‘Frexit’ if she wins election
by: Anne-Sylvaine Chassany in Paris
Marine Le Pen has seized on the referendum on Britain’s EU membership to request a similar vote in France, as she threw her weight behind the Leave camp in the final stretch of the campaign.

Hedge Funds & Managed Futures

Hedge fund exec kills himself week after insider trading bust
By Jamie Schram, Larry Celona, Kaja Whitehouse and Sophia Rosenbaum – NY Post
A Wall Street hedge fund manager slashed his throat with a kitchen knife Monday night because he “couldn’t live with himself” after he was charged with a $32 million insider trading scheme, law enforcement sources said.

David T. Morgenthaler, Who Shaped Venture Capitalism, Dies at 96
David T. Morgenthaler, a mechanical engineer who became an early figure in the modern venture capital industry, died on Friday in Cleveland. He was 96.

Banks & Brokers

Tullett Prebon-ICAP deal could avoid in-depth probe
by: Philip Stafford – FT
Tullett Prebon and ICAP may avoid an in-depth probe of their broking merger after UK antitrust authorities said they would consider a concession from the interdealer brokers to sell ICAP’s London-based oil trading business.

ICAP offers to sell London oil desks to clear Tullett deal
British broker ICAP Plc (IAP.L) has offered to sell its London-based oil desks to address competition concerns over the merger of its global hybrid voice broking business with Tullett Prebon Plc (TLPR.L), Britain’s competition watchdog said on Tuesday.

ICAP plc – Statement Regarding Transaction with Tullett Prebon
ICAP plc (IAP.L), a leading markets operator and provider of post trade risk and information services, notes the statement from the Competition and Markets Authority (“CMA”) announcing that it will consider the proposed remedy of a sale of ICAP’s voice/hybrid EMEA oil broking business in order to address the concerns raised by CMA with respect to the disposal of ICAP’s global hybrid voice broking and information business to Tullett Prebon plc (“Tullett Prebon”) (the “Transaction”).

Deutsche Bank lapse prompts AML reassessment
Deutsche Bank pledges to update anti-money laundering (AML) processes after failings uncovered by the Financial Conduct Authority (FCA) in a move that’s pushing other banks to reassess their own operations.

Clearing & Settlement

EU swaps clearing starts: Five things you should know
Financial News
Rules imposing clearing requirements on Europe’s interest rate swaps market took effect on June 21, as the region adopts global reforms already begun in the US and Japan.

How would Brexit affect UK financial services?
The Economic Times
Pan-EU share trading platforms, such as Bats Chi-X and Turquoise, along with clearing houses including LCH.Clearnet and ICE Clear Europe, are also authorised in Britain under EU rules providing a passport to serve customers across the bloc.
Leaving the EU and not being part of the EEA could affect their cross-border business and EU-based customers might be unable to use trading platforms and clearing houses authorised by UK regulators until they are “recognised” by Brussels.

Blockchain to spell the end of financial intermediaries
Enterprise Innovation
For much of the latter part of 2015, Blockchains were the talk of the financial services community globally. The promise of a decentralized trust, greater transactional transparency, an immutable transaction record, significantly shortened settlement periods, and the freeing up of capital as we reduce settlement counterparty risks have many gravitating towards the possibility.

Indexes & Products

A two-handed look at multiple factors in emerging markets
Tom Goodwin, Sr. Research Director, FTSE Russell
In recent months there has been tremendous interest in factor indexing and multiple factor combinations in developed markets. But not as much has been said about factors and multiple factors within emerging markets, so I wanted to examine how FTSE Russell has approached the topic.
President Harry S. Truman once declared, “Give me a one-handed economist! All my economists say, ‘On the one hand, (but) on the other.'” Unfortunately for Mr. Truman, with complex issues, a two-handed approach may be necessary, and that is what we will pursue here.

Stinging MSCI Decision an Impetus for Reform
Caixin Media
China’s A-share market is undoubtedly an important investment target for global investors. Some trade A shares through the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programs, while others are in the game by virtue of various A share-related derivatives and exchange traded funds.

Stinging MSCI Decision an Impetus for Reform
China’s A-share market is undoubtedly an important investment target for global investors. Some trade A shares through the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programs, while others are in the game by virtue of various A share-related derivatives and exchange traded funds.

Pan Asia: Leveraged and Inverse ETFs Have Increased in Turnover
Indexology – S&P Global
In recent years, leveraged and inverse (L&I) ETFs have gained significant traction in Asia. Thanks to the relaxation of listing regulations, more L&I ETFs are listing in Japan, Korea, Taiwan, Australia, and recently Hong Kong. The number of L&I ETFs listed in Asia is on the rise; it was up to 87 as of June 13, 2016 (see Exhibit 1).


Grandpoint Bank offers cyber insurance against wire-transfer fraud
Grandpoint Bank on Tuesday introduced cyber insurance policies to reimburse business customers for fast-growing wire-transfer fraud schemes.

Bank of England outlines fintech plan
Banking Exchange
Just a week ahead of a major forum on fintech and regulation scheduled by the U.S. Comptroller of the Currency, the Governor of the Bank of England unveiled a multi-part approach to fintech participation and regulation in the U.K.

FSOC Finds Fintech May Pose Risks to Financial Stability
American Banker
Financial innovation, including distributed ledger technology and marketplace lending, has emerged as a new source of risk to the U.S. financial system, according to a report issued Tuesday by the Financial Stability Oversight Council.


SEC Charges Medical Device Manufacturer With FCPA Violations
The Securities and Exchange Commission today announced that Massachusetts-based medical device manufacturer Analogic Corp. and its wholly-owned Danish subsidiary have agreed to pay nearly $15 million to settle parallel civil and criminal actions involving Foreign Corrupt Practices Act (FCPA) violations.
An SEC investigation found that Analogic’s Danish subsidiary, BK Medical ApS, engaged in hundreds of sham transactions with distributors that funneled about $20 million to third parties, including individuals in Russia and apparent shell companies in Belize, the British Virgin Islands, Cyprus, and Seychelles.

Former CEO of Chicago Charter School Operator Settles Muni-Bond Fraud Charges
he Securities and Exchange Commission today announced a settlement with Juan Rangel, the former President of UNO Charter School Network Inc. and former CEO of United Neighborhood Organization of Chicago, for his role in a misleading $37.5 million bond offering to build three charter schools.

Rangel agreed to pay a $10,000 penalty and be barred from participating in any future municipal bond offerings to settle the SEC’s fraud charges. The SEC announced a settlement with UNO in 2014 for defrauding investors in the same 2011 bond offering.

SEC Halts Scheme Defrauding Pro Athletes
The Securities and Exchange Commission today announced that it has obtained a court order freezing the assets of an investment advisor it has charged with secretly siphoning millions of dollars from accounts he managed for professional athletes and investing them in a struggling online sports and entertainment ticket business on whose board he served.

Environmental & Energy

The $50 Billion Oil Bear; Driscoll believes we are in 10-year to 15-year bear market in energy and commodities
Being a bear can be lonely. That’s not Shawn Driscoll’s problem.

Elon Musk to use Tesla to buy out his SolarCity;Electric carmaker shares fall 13% on bid for related solar power company
by: Richard Waters in San Francisco – FT
Elon Musk has taken a step towards rolling up his different corporate interests, using the high-flying stock of electric car company Tesla Motors to make an all-stock offer worth nearly $3bn for solar power company SolarCity.

Investors combine to create pan-African energy group
Joseph Cotterill – FT
Infrastructure investors have launched a $3.3bn joint venture to create one of the biggest pan-African energy companies, as the private sector increasingly looks beyond individual projects to tackle the continent’s power shortages.


Hong Kong-Singapore Stars Fade With Boom-to-Gloom in Finance
Asia’s financial-hub twins, Hong Kong and Singapore, are facing increasing brakes on growth even before potential turmoil from a Brexit vote in their ex-colonial master, with China’s slowdown and the continuing shrinkage of the financial industry striking both.

Chinese depositary receipts could be tool to accelerate Shanghai-London trading link
South China Morning Post
Regulators may introduce Chinese depositary receipts (CDRs) as a tool to accelerate the proposed London-Shanghai stock connect scheme, according to analysts. Exchange officials from Britain and China have been busy since last September planning the connect scheme, which would enable investors on both sides to directly trade stocks listed on each others’ market.

Renminbi investments to be part of Singapore’s official foreign reserves: MAS
Channel NewsAsia
The central bank says that its move is in recognition of the steady and calibrated liberalisation of China’s financial markets, as well as the growing acceptance of RMB assets in the global portfolio of institutional investors.

Chinese Children Dizzied by ‘Toxic Tracks’
From awkward-fitting uniforms to being picked last for teams, students around the world have gripes about gym class. But in China, such complaints have taken on a very particular nature, with some saying that school running tracks give them headaches and bloody noses.

Frontier Markets

Frontier markets a place to dabble – or play chicken
The Globe and Mail
As China, India and other formerly hot emerging markets have matured, investors are looking elsewhere for returns. Frontier markets – Argentina and Nigeria and other countries more risky than those traditionally considered “emerging” – are one such option. Of course, they come with smatterings of caveats, not the least of which is underwhelming performance over the past two years.

Sebi calls meeting with NSE over ‘unfair access’;There have been allegations against NSE that some traders on its platform gained unfair access to market data and trading systems
Shrimi Choudhary – Business Standard
The Securities and Exchange Board of India (Sebi) has called for a meeting on Friday with the National Stock Exchange (NSE) over the ‘dark fibre’ and ‘unfair access’ controversy, said people in the know. There have been allegations against NSE that some traders on its platform gained unfair access to market data and trading systems. Also, a whistleblower has alleged the use of so-called ‘dark fibre’ connectivity by some of its members. Sources in exchange said the meeting will have new NSE chairman Ashok Chawla and Sebi chief U K Sinha, where the

Investors cheer Nigeria currency float but won’t rush back yet
By Karin Strohecker – Reuters
Nigeria’s swift one-step move to a floating currency has been welcomed by investors but most nonetheless will stay away until Africa’s biggest economy shows signs of recovering from damage inflicted by the 16-month old exchange rate peg.

BSE market making fails to smooth out illiquid stocks;First time market making introduced to infuse liquidity into stocks
Ashley Coutinho – Business Standard
Three months after it was announced, there seems to be few takers for stock exchange BSE’s market-making initiative for its XD group, which consists of illiquid stocks. This is the first time an exchange has introduced market making to infuse liquidity into stocks of listed companies. The initiative is significant as the Indian stock market is generally perceived to be shallow compared to other developed markets, and comes against the backdrop of market regulator Securities and Exchange Board of India’s insistence that both BSE and NSE (National Stock Exchange) speed up the …

EMERGING MARKETS-Emerging stocks inch to 12-day highs
By Sujata Rao – Reuters
Federal Reserve chief Janet Yellen’s circumspect tone on raising interest rates helped emerging stocks almost half a percent higher on Wednesday while the naira firmed in forward markets on its third day as a floating currency.

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About Author

Doug Ashburn is a former editor-at-large of John Lothian News. He left in late 2016 and is now the managing editor of T3 Custom.