Breaking News

BoE told to firm up oversight of clearing and other support; Biggest banks each set to be hit with $200m trading rule costs; Smaller companies fear threat from new financial regulation

First Read

New CEO, Updated Offices
By John J. Lothian, Executive Chairman

Today is the first day in the reign of Jim Kharouf as king….err… CEO of John J. Lothian & Company, Inc. He takes command in our newly updated offices in the CBOT Building, which are not quite done yet.

Friday we learned we had an unresolved heating and air conditioning situation that needed to be resolved. We will begin to move in the office this afternoon and hope the work is done by tomorrow.

In the new game of thrones, Jim will now sit on the iron hot seat of JJLCO. I move to executive chairman, which is kind of like flying in first class, lots of champagne and legroom to move around.

I am headed to the Commodity Markets Council State of the Industry 2017 event in Miami at the end of the month. I have the pleasure of being on a panel with a number of former CFTC commissioners.

We are working on rescheduling our Frankfurt and Stockholm events for the MarketsWiki Education World of Opportunity series. We hope to have some news soon.

We encourage all our readers to be paid subscribers in 2017. If your firm is not an enterprise subscriber, please contact us for an invoice. You can pay online with a credit card, or send us a check. Enterprise subscribers should be receiving invoices this week.

Thank you all for your support of John Lothian News.

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London Tube Strike Hits Monday Morning Commute for Millions
Sharon R Smyth and Christopher Jasper – Bloomberg
Rail unions reject last-minute offer to increase staffing; Stations to shut, service ‘severely reduced,’ TFL warns
Millions of U.K. commuters struggled to reach work Monday as staff on the London Underground subway system staged a 24-hour strike over station closures and job cuts.
/goo.gl/yNKBDF

***** The word of the day is UBER.

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Bitcoin, PayPal Used to Finance Terrorism, Indonesian Agency Says
Resty Woro Yuniar – WSJ
Islamic militants based in the Middle East used bitcoin and online-payment services such as PayPal to fund terrorist activities in Indonesia, the world’s largest Muslim-majority nation, an official with the country’s financial-transactions agency said Monday.
/goo.gl/C27SNK

***** When are they going to start calling it “Blood Bitcoin?”

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How Market Crashes Happen
Ben Carlson – A Wealth of Common Sense
Charlie Munger has long championed the benefits of acquiring worldly wisdom through the development of mental models which utilize a number of different subjects — physics, biology, sociology, psychology, finance, philosophy, literature, etc. — to understand the world and make better decisions.
/goo.gl/vbrVsw

***** Remember, you can still crash and walk away from it.

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How to Destroy the Business Model of Breitbart and Fake News
Pagan Kennedy – NY Times
One day in late November, an earth and environmental science professor named Nathan Phillips visited Breitbart News for the first time. Mr. Phillips had heard about the hateful headlines on the site — like “Birth Control Makes Women Unattractive and Crazy” — and wondered what kind of companies would support such messages with their ad dollars. When he clicked on the site, he was shocked to discover ads for universities, including one for the graduate school where he’d received his own degree — Duke University’s Nicholas School of the Environment. “That was a punch in the stomach,” he said.
/goo.gl/PL9RoZ

***** The ad model is flawed. Reputational risk is not to be discounted.

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Bridging the Week by Gary DeWaal: December 19, 2016 to January 6, and January 9, 2017 (Jon Corzine; Infiltrating E-Mails; ATS Gone Bad; Whistleblower Infractions)
Gary DeWaal
More than five years after the collapse of MF Global Inc. delayed the repayment to its customers of 100 percent of their funds for approximately two and one-half years, Jon Corzine, the firm’s former chief executive officer, settled an enforcement action brought by the Commodity Futures Trading Commission for his role in the firm’s demise. He did this by agreeing to pay a US $5 million fine and to be subject to a CFTC-registration prohibition.
/goo.gl/YZ9wVg

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Friday’s Top Three
Last Friday’s most read stories were led by Bloomberg’s Corzine Agrees to Futures Industry Ban in CFTC Settlement. Second was Bloomberg’s piece on Ev Williams’ firm Medium, titled Why Medium Failed to Disrupt the Media. And because it was Friday, and a glass of fine wine was not far away, third went to Bloomberg’s How Emirates Airline Serves the Best Wine List in the Sky. Have a good week everyone.

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MarketsWiki Stats
92,097,715 pages viewed; 22,297 pages; 203,091 edits
MarketsWiki Statistics

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Lead Stories

BoE told to firm up oversight of clearing and other support; Watchdog says demands on financial markets supervision likely to increase
Caroline Binham and Philip Stafford in London – FT
The Bank of England has been warned by its internal watchdog that it needs to strengthen its supervision of the vital plumbing behind the financial system such as clearing houses, payment services and exchanges.
/goo.gl/wLuMEs

Biggest banks each set to be hit with $200m trading rule costs; New Basel regulations due to take effect in 2019 will create need for 2,000 staff
Laura Noonan, Investment Banking Correspondent – FT
Some of the world’s biggest banks are set to spend more than $200m each — much higher than their original estimate — to implement new regulations that will dramatically increase capital demands for some parts of their trading businesses.
/goo.gl/2L0U2X

Smaller companies fear threat from new financial regulation; Mifid II rules next year will force brokers to charge for sellside research
Chloe Cornish – FT
City broking houses have warned that new European financial regulations risk damaging small British businesses by throttling coverage of them in research provided to investors.
/goo.gl/hthXzV

China Considers Relaxing Curbs on Stock-Index Futures; Once-popular financial product was blamed for exacerbating stock-market crash two years ago
Shen Hong- WSJ
China is considering relaxing curbs on trading in stock-index futures, a once-popular financial product blamed by authorities for exacerbating the country’s unprecedented summer stock-market crash two years ago, people familiar with the matter told The Wall Street Journal on Monday.
/goo.gl/cqKHxX

As Trump eyes Dodd-Frank, Chicago’s trading interests gear up for a battle
Lynne Marek – Crain’s Chicago Business
For all the Trump team talk about gutting President Barack Obama’s landmark financial law, Chicago’s trading community is wagering that at least part of it will stick: swaps reform.
/goo.gl/Z9VRhg

Inside weather-derivatives trading: This is what Randall from ‘This Is Us’ does for a living
Catey Hill – MarketWatch
It took a 60-foot grave — and 26 hours — for Holly Capron and her husband, who were then raising turkeys in Kansas, to bury the 4,600 birds that died in the 2011 July heat wave. Roughly, 1,000 miles to the east in North Carolina, the losses were worse: 50,000 chickens died in under an hour as temperatures jettisoned above 100F.
/goo.gl/mvuIzH

Vanguard is best-selling fund manager of 2016; Pennsylvania-based asset manager draws in more money than its 10 nearest rivals
Madison Marriage and Cat Rutter Pooley – FT
Vanguard has topped a table of the bestselling fund managers globally for 2016 after drawing nearly $200bn from investors, eclipsing the total amount of new money raised by its 10 nearest competitors.
/goo.gl/1dRcm

DTCC eyes derivatives system on blockchain
Julie Aelbrecht – FOW
US clearing giant said it plans to deliver the new post-trade system in 2018
The Depository Trust and Clearing Corporation (DTCC) plans to develop a blockchain-based post-trade framework for derivatives with tech firms R3, IBM and Axoni starting this month. The US-based clearing giant aims to replace the technology underpinning its Trade Information Warehouse database with a distributed ledger. The database currently automates the record keeping, lifecycle events, and payment management for more than $11 trillion of cleared and bilateral credit derivatives.
/goo.gl/2oTsYKU

Bitcoin Extends Loss After China’s Central Bank Warns Investors
Justina Lee and Emma Dai – Bloomberg
PBOC officials tell bitcoin platform to rectify issues; Bitcoin surged 120% in 2016 as yuan depreciation quickened
Bitcoin extended Friday’s tumble amid concern China will tighten rules on the digital currency to curb capital outflows.
/goo.gl/5Cfb0p

Brexit

Britain facing ‘catastrophic’ Brexit because Government is dismissing trade experts
Ben Kentish – The Independent
Britain is likely to suffer a “catastrophic” Brexit because the Government is “ignoring” the advice of its own trade experts, a senior Canadian diplomat has said.
Jason Langrish, who was closely involved in the 10 years of negotiations that eventually led to a EU-Canada trade deal, said a British agreement with Europe was likely to take a decade to negotiate and, in the meantime, Britain could see its economy shrink by 4 per cent.
/goo.gl/KDMNTt

Exchanges, OTC and Clearing

SGX reports market statistics for December 2016
SGX
Securities – Total Securities market turnover value was at S$20.9 billion, down 29% month-on-month and up 23% year-on-year, over 21 trading days. There were 22 trading days in November 2016 and in December 2015.
Derivatives – Total Derivatives volume was 13.3 million, down 20% month-on-month and down 8% year-on-year.
/goo.gl/gnMVUY

Deutsche Börse cooperates with Fudan University; Partners develop joint financial science offerings
Deutsche Börse
Deutsche Börse AG and the School of Management of Fudan University (FDSM) have signed a joint declaration of intent to expand their relationship and to cooperate in the field of financial science education. The aim is to deepen the mutual understanding of the Chinese and European capital markets.
/goo.gl/drPQuw

HKEX publishes 2016 Market Statistics
HKEX
Hong Kong Exchanges and Clearing Limited (HKEX) published a set of market statistics for the full year of 2016 on its website today (Monday). The year saw an outstanding performance in Hong Kong’s derivatives market with a number of new records set.
/goo.gl/WYUfqT

Börse Frankfurt is expanding its market share in the 2016 certificate trade
Deutsche Börse
More than 2.1 million customer orders executed / proportion of international participants doubled
In the trading of structured products via the Frankfurt Exchange trading center, EUR 14.8 billion was implemented in 2016 with more than 2.1 million customer accounts executed. The activity remained at a comparatively high level, but fell by ten per cent compared to the previous year. Trading in the approximately 1.3 million investment and leverage products is the responsibility of Börse Frankfurt Zertifikate AG, since mid-2013 a wholly-owned subsidiary of Deutsche Börse AG.
/goo.gl/OVof6e

Politics

Trump team considering another Goldman exec for key Treasury post
MarketWatch
Goldman’s Jim Donovan being considered for undersecretary for domestic finance
/goo.gl/FOwM3L

Meet the Mercers: A Quiet Tycoon and His Daughter Become Power Brokers in Trump’s Washington
By GREGORY ZUCKERMAN, KEACH HAGEY, SCOTT PATTERSON and REBECCA BALLHAUS – WSJ
In February 2014, a group of conservative political donors gathered at New York’s Pierre Hotel to strategize about the coming presidential contest. Robert Mercer, a computer programmer and hedge-fund manager who distrusted the political establishment and loathed Bill and Hillary Clinton, issued a warning: Data he had seen indicated mainstream Republicans such as Jeb Bush and Marco Rubio would have difficulty winning the White House in 2016, according to one of the attendees. He said only a true outsider with a sense of voters’ frustrations could win.
/goo.gl/eT4Lgz

Mnuchin’s Loans to Failed Movie Studio Face Scrutiny
by Zachary Mider and Saleha Mohsin – Bloomberg
Mnuchin served on Relativity Media board while running OneWest; His bank previously loaned millions to Kavanaugh’s company
When a movie studio couldn’t repay an almost $80 million loan, it put Steven Mnuchin in an awkward position. He ran the lead lender, OneWest Bank. He was also co-chairman of the borrower.
/goo.gl/JTIm1x

Investing and Trading

Introducing The 4x ETF
Themis Trading Blog
The amount of money pouring into ETF’s continues at a staggering pace. According to ETF.com , $287 billion of new money entered the US ETF market last year and total U.S.-listed ETF assets grew to $2.56 trillion. While ETF’s serve a very useful purpose by allowing investors to diversify at a low cost, it’s important to remember that not all ETF’s are the same. Some of the larger ETF’s like SPY and QQQ are backed by the actual securities in the index but there are a number of other leveraged ETF’s which contain derivatives in their holdings which could cause tracking and risk issues.
/goo.gl/8ojz4j

How Index Funds Democratize Investing
Barbara Novick – WSJ
In 1952 Harry Markowitz, as a University of Chicago student working on his Ph.D. dissertation, codified one of the enduring beliefs of investing: the value of diversification. Since then, the benefits of diversification have become widely recognized by regulators, financial advisers and individual investors—as well as the Nobel committee, which awarded its economics prize to Mr. Markowitz in 1990. The ability to mitigate risk by spreading assets across sectors, industries and companies is a foundational component of good, smart…
/goo.gl/MDzmVZ

Dow Jones Industrial Average 2016 Year in Review
Jamie Farmer – S&P Indexology Blog
The Dow Jones Industrial Average ended 2016 at 19,762.60 – up 2.337.57 points for a 13.42% annual return, the best year since 2013 when the market surged over 26%.
/goo.gl/L6SfGL

ETFs hit record high for third year in a row; BlackRock gathered the most exchange traded fund assets, of $140bn, for a second year
by: Chris Flood – FT
Exchange traded funds pulled in record inflows for a third year in a row in 2016, intensifying competitive pressure on investment managers that try to beat the market.
/goo.gl/aKKnEy

Don’t Worry Bond Investors, Baby Boomers Have Got Your Back
by Natasha Doff – Bloomberg
HSBC report sees aging population supporting demand for bonds; Debt already accounts for more than half of pension holdings
Investors mourning the end of a 30-year bull market in U.S. Treasuries can take solace from demographics: thanks to the aging population there’s a limit to how high yields can go.
/goo.gl/etZ5PC

Odey staff sacked after market calls go wrong
Harry Wilson, James Hurley – The Times
Crispin Odey has begun to shed staff after the billionaire hedge fund manager’s investments suffered the worst year in his firm’s history, losing nearly half their value as bets on a market collapse failed to come good.
/goo.gl/Ws4esF

Institutions

Can Janus make it in the ETF market?
Lewis Braham – MarketWatch
In Roman mythology, Janus is depicted as a two-faced god, meant to symbolize his control over transitional moments when one’s fate could go in either direction. Never has that symbolism seemed more apt for the fund company that bears his name.
/goo.gl/4QOQLe

How Merrill Tamed Its Herd, Pushing Brokers to Pitch Bank Products
Michael Wursthorn – WSJ
For Geoffrey Soper, the shift from stock hawker to advice dispenser has been a long time coming. When he first joined Merrill Lynch at age 21 in 1985 as a stockbroker, Mr. Soper spent his time cold-calling would-be investors and pitching stocks to nab sales commissions. But in the three decades since, Merrill and many other big brokerages have pushed their brokers instead to serve as overall financial advisers, providing long-term financial planning and pitching checking accounts, credit cards and other banking products, rather than single stocks.
/goo.gl/cPHNdG

‘The weak players are leaving the poker table,’ and it’s killing mutual funds
Tina Wadhwa – Business Insider
Warren Buffett famously said that if you’ve been in a poker game for half an hour and “you don’t know who the patsy is, you’re the patsy.'” When it comes to the stock market, the patsy is leaving the table. That’s according to a big note from Credit Suisse strategists led by Michael J. Mauboussin. The investment world has seen an accelerating shift from active fund managers to passive management, and this trend is shaping the way the industry operates.
/goo.gl/uXALVC

Bad behaviour from the big banks? Try their competitors
Rob Carrick – The Globe and Mail
Make it a goal in 2017 to try one new financial product from a company not associated with one of the big banks. Try an alternative bank offering comparatively high interest rates on savings, or a credit union. Try a robo-adviser, where your investment portfolio is managed for you online at low cost. Try an independent financial-advice firm, or one of the non-bank online brokerage firms that scored well in my recent broker ranking.
/goo.gl/4DETLP

Hedge fund launches heading for eight-year low
Lindsay Fortado – Financial Times
New hedge fund launches last year look set to be the lowest since 2008 if the rate at which new funds were launched in the first three quarters held steady to the end of 2016. Fund closures are also set be the highest in eight years.
/goo.gl/NSdOZ6

Taxpayer no longer the biggest shareholder in Lloyds Bank as Government sells down stake
Sam Dean – Telegraph
The British Government is no longer the biggest shareholder in Lloyds Banking Group after selling down its stake to less than 6pc.
/goo.gl/lZeSul

Banks rush to bond market ahead of rates rise
Eric Platt in New York – Financial Times
Banks have flooded the market with debt in the first days of the new year, propelling a record pace of bond sales as companies seek to lock in borrowing costs before interest rates rise further.
/goo.gl/a3PVs2

SNB Expects Bumper 2016 Profit After Record Loss a Year Earlier
by Catherine Bosley – Bloomberg
Federal government, cantons to get at least 1 billion francs; Central bank made 19 billion francs on currency holdings
The Swiss National Bank expects a 2016 full-year profit of 24 billion francs ($23.6 billion), enabling it to shell out money to the federal government and municipalities.
/goo.gl/2qMFY6

RJO parts ways with two more brokers in London
Luke Jeffs – FOW
Hopkins and Steptoe left RJ O’Brien’s London-based unit on December 21
RJ O’Brien has parted ways with two more senior brokers in London, marking the latest personnel changes at the US broker’s European arm. RJO parted ways on December 21 with Jeremy Hopkins and John Steptoe, according to the Financial Services Register, two senior brokers who joined RJ O’Brien together from inter-dealer broker Icap in early 2015.
/goo.gl/XWWnx8

Fintech

2017: A Common Operating Layer for Capital Markets
Mazy Dar, OpenFin – TabbForum
The ability to ‘fail fast’ and then correct course has been the major driver of innovation on the web and on mobile. This is in a large part due to common operating layers – the browser for websites and iOS and Android for mobile – that drive the costs of deployment and delivery to zero. But when it comes to desktop apps in capital markets, that’s not how we do things.
/goo.gl/muLq4U

Data Could Be the Next Tech Hot Button for Regulators
Steve Lohr – NY Times
Wealth and influence in the technology business have always been about gaining the upper hand in software or the machines that software ran on.
/goo.gl/zRFSBY

Commercial blockchain pilots to arrive in 2017; The financial services sector is likely to release commercial pilots of blockchain services in the coming year, according to Veredictum.io.
FinTech News
Noting that 2016 saw many financial services firms develop and test prototype blockchain technologies, Veredictum.io founder Tim Lea said the new year would see clients begin to access them.
/goo.gl/pdqtjS

Regulation

MiFID II’s algo plans come under fire
Sarfraz Thind – The Trade
The regulatory focus on algorithmic trading has never been greater. It is likely to get much more intense with the advent of MiFID II in 2018, which brings with it a raft of obligations for trading firms—in particular for high frequency traders (HFT)—who use algorithms as part of their operations. It is a change not welcomed by the industry.
/goo.gl/oiXxPf

Congressman introducing bill delaying DOL fiduciary rule
InvestmentWeek
Rep. Joe Wilson, R-S.C., introduced a bill Friday that would delay the implementation date of the Department of Labor’s fiduciary rule by two years from enactment of the legislation.
/goo.gl/U7MzXj

Regions

Brokers turn poetic as plummeting turnover slashes pay
Laura He – South China Morning Post
China’s stockbrokers have inventive ways to ask for a bonuses from their bosses as they feel the pinch after the A-share market turnover shrank 50 per cent last year, one of the worst declines across the globe. Average daily turnover for Shanghai and Shenzhen markets shrank sharply to 519 billion yuan last year from 1.04 trillion yuan in 2015, according to Wind data.
/goo.gl/wxCWCt

Indonesia plans regulation to ensure bond dealers produce ‘factual’ research
Hidayat Setiaji and Gayatri Suroyo – Reuters
Indonesia is planning regulation to ensure primary bond dealers produce only “factual” research, senior government officials said, in a move that is likely to add to bankers’ concerns about a growing backlash over negative investment commentary.
/goo.gl/KTS6mM

No Free Ride for Bitcoin in China
Christopher Langner – Bloomberg Gadfly
Anyone wondering how serious China is about stemming the outflows that brought its currency reserves to their lowest since February 2011 need only to look at bitcoin.
/goo.gl/iVwMXZ

China Reserves Slumped $320 Billion Last Year as Yuan Tumbled
Bloomberg News
Holdings decreased $41.1 billion to $3.01 trillion in December; Policy makers take steps to curb outflows as currency slides
China’s foreign currency holdings fell for a sixth month in December, bringing last year’s drop to $320 billion as the yuan posted its steepest annual slide in more than two decades.
/goo.gl/ZPS1lK

Miscellaneous

Farmers Get Creative in Reaping Profits; As commodity prices drop, some growers are converting grain into booze and flour to wring money from crops
Jesse Newman – WSJ
Instead of selling all of this fall’s record corn harvest to ethanol plants or foreign livestock farmers, Jim and Jamie Walter are turning a portion into a more lucrative product: whiskey.
/goo.gl/mvHw3U

Summers Warns of Financial-Crisis Risk From Trump Economic Plans
Christopher Condon – Bloomberg
Former U.S. Treasury Secretary Lawrence Summers attacked the policy proposals of Donald Trump on several fronts, saying the president-elect’s plans for deregulation were setting the stage for the next financial crisis.
/goo.gl/VzfKPb

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Graduate of University of Minnesota School of Journalism and Mass Communication