Breaking News

Innovation Is the Only Cure for Fragmentation; Deutsche Börse Reveals Three ‘Pillars’ of Its Pervasive Blockchain Integration; Index Funds Still Beat ‘Active’ Portfolio Management

First Read

Cold as ICE: Sprecher asks UK, How much do you love me? In the battle for financial markets in Europe, exchanges would like some more communication about why they should stay in the UK.
By Jim Kharouf

To hear one exchange leader tell it, UK markets could use a little more love.

At the 10th annual FIA IDX conference on Tuesday, ICE Chairman and CEO Jeff Sprecher said UK regulators have not communicated with ICE much about how they could work together and keep ICE Europe’s operations more firmly in London. In the wake of Brexit and the upcoming MiFID II rules in January, not to mention the ongoing questions about equivalent financial regulations after the UK and EU split, Sprecher said the UK authorities haven’t shown much interest in the financial markets lately. And that’s not a good thing in his mind.

“The US is interested in our business. I know the French, Dutch and Germans are interested in our business,” Sprecher said. “I don’t know if the UK is interested in our business.”

The CFTC is in the process of a major cultural shift under the guidance of acting chairman Chris Giancarlo. His rousing speech from FIA Boca in March still echoes the message of more cooperative and smarter regulation and more technological partnering. It was reaffirmed here in London with an IDX appearance from Andrew Busch, the new CFTC’s chief market intelligence officer, who reinforced the idea that regulators want to help the industry.

Sprecher said there are reasons for UK based firms to worry about a nonchalant UK government. The industry is facing a massive regulatory push with new rules and Basel III capital requirements. There are also threats to legacy institutions by financial technology upstarts. To Sprecher, the UK’s approach “seems a little daft and redundant.”

The warning carries some weight coming from Sprecher. ICE has a UK clearinghouse and another in Amsterdam, giving the exchange some flexibility in terms of where clients might want to, or must, clear. With the mobility of capital in the markets, he said, “we thought we’d better be pretty flexible.”

Will ICE pick up and move from London? It’s not something Sprecher would like to do.

“We’re here in London because the world comes here,” he said.

But it would be nice, he said, if they showed they want to continue to keep and defend that title as the global financial center.

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More Bits & Pieces from IDX
By Jim Kharouf

  • The 2 minutes of silence during the afternoon at the conference and across London for the victims of the terrorist attack last Saturday was moving. Silence can say a lot.
  •  CME President Bryan Durkin said the decision to close CME Europe and CME Clearing Europe this year was driven by customers who wanted a simpler trading and clearing model – all in the US. The good news, he said, was that the investment in Europe helped increase its European customer volume with a dedicated sales force.
  • Ed Tilly, CEO of the CBOE, said new product launches have been hampered by capital constraints, clearing issues and regulatory uncertainty.
  • Jeremy Grant has left the Financial Times. His last day at the news organization was last Friday. No word on what is next for the intrepid journalist.

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Time Ticking on Next Margin Deadlines
ISDA
Time has a habit of marching relentlessly on, and revised compliance dates for counterparties to make changes to their collateral documents as part of new variation margin requirements are nearly upon us in some cases. Substantial progress has been made over the past few months because the industry isn’t being complacent – yet there’s still more to do, and little time to do it in.
/goo.gl/D6bfIs

****SD: Think the opposite of the Stones song – time is not on your side.

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JPMorgan’s Moonshot Man
Hugh Son – Bloomberg
Meet David Hudson, tasked with building innovation inside the bank to protect it from outside threats. His title might as well be chief disruption officer.
/goo.gl/kTg7eF

****SD: No. No one’s title should ever be chief disruption officer. Even in theory.

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Kids allowed to sell lemonade on Ottawa bike days, if they sign 3-page contract
Global News
The National Capital Commission is allowing children to open a lemonade stand on Sunday Bikedays in Ottawa this summer, provided that the kids and their parents get a permit and agree to 15 separate conditions.
jlne.ws/2rLnVXB

****JB: Now the kids know there are regulators out there besides mom and dad.

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Tuesday’s Top Three
Our top story yesterday took a more fundamental look at volatility, JPMorgan Has a Surprisingly Simple Theory for Low Volatility. Our second most read story, How China’s Biggest Bank Became Wall Street’s Go-To Shadow Lender, dealt with the Industrial and Commercial Bank of China. And third was Barry Ritholtz’ piece on William Sharpe’s efforts to tackle retirement planning, Tackling the ‘Nastiest, Hardest Problem in Finance.’

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MarketsWiki Stats
102,094,982 pages viewed; 22,537 pages; 206,392 edits
MarketsWiki Statistics

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You’re Invited to FOW-John Lothian News Trading Chicago on June 28th!

Register here

This one-day event at the Swissotel on June 28th is aimed largely at the end-users of the markets: commodity trading advisors, asset managers, hedge funds and proprietary traders.

The conference will cover the issues that impact those firms directly – regulation, technology and market structure, with an underlying thread of trading in an age of uncertainty. All of this will be delivered in a variety of formats, from an Oxford-style debate on the Dodd-Frank Act’s repeal to TED-style talks to panel discussions.

The event is free to attend for CTAs, asset managers, props and hedge funds. For full conference information, click HERE.

Watch the preview »

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Lead Stories

Innovation Is the Only Cure for Fragmentation
Don Ross – TABB Forum
The liquidity crisis is real. The average institutional order is more than 180,000 shares, while the average trade size is closer to 180 shares. But there is no regulatory magic wand that can fix the institutional liquidity crisis. This is a challenge that only innovation can solve.
jlne.ws/2rL9FOs

Deutsche Börse Reveals Three ‘Pillars’ of Its Pervasive Blockchain Integration
Michael del Castillo – CoinDesk
One of the largest institutional trading networks in the world has revealed details to CoinDesk about its plan to move the vast majority of its post-trade services to a blockchain.
To maximize the current technological ability of using a shared, distributed ledger, or blockchain, the Frankfurt, Germany-based Deutsche Börse Group decided to focus its efforts solely on post-trade settlement. Following a lengthy analysis of its own internal ecosystem of products that include the Eurex exchange, the Xetra exchange and the Clearstream central securities depository, the conglomerate developed a three-prong plan of attack.
jlne.ws/2rLjyf9

Index Funds Still Beat ‘Active’ Portfolio Management
Burton G. Malkiel – WSJ
A recent report from Standard & Poor’s adds impressive support to the large body of evidence suggesting the superiority of simple index investment strategies over traditional stock picking. At the start of every year, “active” portfolio managers declare that the current year will be the “year of the stock picker.” But the results consistently fail to support that view.
jlne.ws/2rLhdR6

Ethereum Could Change Russian Banking and Government
Leonid Bershidsky – Bloomberg
Russian President Vladimir Putin and his economic team have long been under the impression that, to wean the country off its oil dependence, they needed a major leap in some specific area of technology that wasn’t yet dominated by Western, Chinese or Japanese tech giants. Their latest hopes are being pegged to the Ethereum blockchain platform.
jlne.ws/2rL927E

Some Inconvenient Facts for the Fed
Justin Lahart – The Wall Street Journal
The central bank is poised to raise rates but a weaker economy might put more action on hold
The facts have changed. Will the Federal Reserve change its mind?
There is no such thing as a sure thing, but a Fed rate increase next week is close. Officials at the central bank have made it clear they plan to lift their target range on overnight rates, and futures markets are putting the odds at better than 90% that a move will be made at the meeting that concludes June 14.
/goo.gl/hJWJTU

No more MiFID II delays says ESMA chief
Paul Walsh – The Trade
The chair of the European Securities and Markets Authority (ESMA) has pledged there will be no further delay on the implementation of MiFID II.
/goo.gl/sv9JJR

Mark Cuban tweets, and bitcoin drops
Shawn Langlois – MarketWatch
When Mark Cuban tweets, people listen.
At least that appeared to be the case on Tuesday when the outspoken billionaire offered this bitcoin warning to his 7.1 million Twitter followers.
jlne.ws/2rLaYwU

A $1.2 Billion Equity Quant Fund Run by QIM Is Up 55% This Year
Fund posted 13% gain in May compared with 1.2% rise in S&P 500; QIM’s managed futures vehicle is up 5.2% year to date
Quantitative Investment Management, the $3.5 billion money management shop run by Jaffray Woodriff, saw its tactical hedge fund return 55 percent in the first five months of the year, according to an investor document seen by Bloomberg News.
/goo.gl/yEjIPw

Wall Street firms are betting that the technology behind bitcoin could help them cut jobs
Frank Chaparro – Business Insider
Wall Street is convinced that blockchain is set to radically transform the world of finance. But exactly how and when that transformation will transpire is uncertain.
Blockchain, which gained notoriety as the technology behind the cryptocurrency bitcoin, is thought to have the potential to improve numerous businesses including banking, payments, and the capital markets.
jlne.ws/2rKZSYU

HSBC’s Bond Bull Major Moves Closer to Peers by Just a `Tweak’
Natasha Doff – Bloomberg
The Treasury market’s biggest contrarian is edging closer to consensus.
Steven Major, the HSBC Holdings Plc head of research who has consistently kept his year-end outlook for U.S. Treasury bond yields far below peers, raised his forecast to 1.9 percent from 1.6 percent in a note published on Wednesday. The outlook is still the lowest in a Bloomberg survey of 59 economists and would be a 25 basis-point drop from current levels to the lowest yield since November.
jlne.ws/2rLt6GS

Global growth headed for six-year high: OECD
Leigh Thomas – Reuters
The global economy is on course this year for its fastest growth in six years as a rebound in trade helps offset a weaker outlook in the United States, the OECD forecast on Wednesday.
The global economy is set to grow 3.5 percent this year before nudging up to 3.6 percent in 2018, the Paris-based Organisation for Economic Cooperation and Development said, updating its forecasts in its latest Economic Outlook.
/goo.gl/czByJy

Exchanges, OTC and Clearing

Australia’s Biggest Stock Exchange Announces First-Ever Bitcoin Investment
Samburaj Das – Cryptocoins News
In a first, Melbourne-based Blockchain Global Limited (BGL) has used bitcoin in an AUD$4.35 million investment to acquire a 40% stake in ASX-listed blockchain payments fintech DigitalX.
/goo.gl/724dYh

EU power grab on UK’s EUR930bn clearing business would be ‘severely detrimental to Europe’
The Independent
A global financial trade body has said it has “grave concerns” over EU plans to force the relocation of the EUR930bn (£810bn) per day clearing business from London to the EU after Brexit.
The Futures Industry Association, warned on Tuesday that it “strongly believes” that moving the clearing of transactions denominated in euros would be “severely detrimental to the economic interests of the EU”.
jlne.ws/2rLf0W4

ICE boss: does the UK even want us in London?
Samuel Agini – Financial News
The chief executive of the Intercontinental Exchange has said the UK needs to demonstrate it does not take the derivatives giant’s presence in London for granted ahead of Brexit.
ICE runs one of Europe’s main clearing houses – ICE Clear Europe – from offices in the City of London. But the European Union is considering whether to force clearers of euro-denominated derivatives – which sit in between trades to guarantee their completion – into the bloc after Brexit. Such a move could potentially see jobs and business leave London.
jlne.ws/2rLhkMR

Euronext Announces Volumes For May 2017
Euronext
Euronext, the leading pan-European exchange in the Eurozone, today announced trading volumes for May 2017.
The May 2017 average daily transaction value on the Euronext cash order book stood at EUR8,471 million, up +42.8% compared to May 2016 and stable (+0.2%) from the previous month. The average daily transaction value on ETFs was EUR548 million, up +22.5% compared to May 2016 and steady from the previous month. Our ETF offering remained stable this month with 809 listings at the end of May compared to 790 end of 2016.
/goo.gl/fZ60el

India’s National Stock Exchange aims to settle unfair access probe with regulator
Abhirup Roy – Reuters
India’s National Stock Exchange is talking with the market regulator to settle any issues and accept a penalty tied to the disclosure that some brokers may have been given unfair access to NSE servers, two sources familiar with the matter said.
jlne.ws/2rLkQqv

Fintech

Desmarais Empire Seeks Fintech Transformation From Outside In
Sandrine Rastello and Gerrit De Vynck – Bloomberg
Canada’s billionaire Desmarais family has come up with a novel approach to fend off the technology startups that threaten its financial services empire: Bring the enemies in and invite them to attack.
jlne.ws/2rL0hdJ

INTERVIEW: U.S. derivatives regulator engages ‘fintech’ world seeking better oversight, compliance
Henry Engler – Reuters
The U.S. Commodity Futures Trading Commission has taken a lead among fellow American regulators in its “LabCFTC” initiative to engage emerging fintech and regtech companies. The effort seeks to enhance the agency’s oversight of commodity and derivatives markets, but also to make compliance and regulatory reporting more effective for the industry participants.
jlne.ws/2rL6CpG

FinTech50 list: Here are the 50 hottest fintech firms in Europe right now
Neil Ainger – CNBC
The annual FinTech50 list of European financial technology (fintech) firms was unveiled Tuesday with the U.K. dominating the rundown.
The 50 names selected for the 2017 list include U.K. challenger banks Atom and Monzo; German competitor N26; and technology providers such as Iwoca (U.K.); NetGuardians (Switzerland); Fenergo (Ireland); and Traxpay (Germany).
jlne.ws/2rLuf1c

Hong Kong’s Central Bank Inks FinTech Pact with Shenzhen in China
Samburaj Das – CryptoCoin News
The Hong Kong Monetary Authority (HKMA), the defacto central bank, is co-operating with the neighboring city of Shenzhen in China over developments in financial technologies or FinTech.
Hong Kong is looking to gain expertise from the world’s largest FinTech market in China, a country which sees some 500 million people, over 40% of its population, adopt FinTech payment methods.
jlne.ws/2rLwHF4

RSRCHXchange and Substantive Research expand integration to include payment for research
Leaprate
RSRCHXchange, the MiFID II research aggregator and marketplace for institutional research, today announces the expansion of their partnership with Substantive Research, curator of macroeconomic investment research. This latest integration phase means that Substantive ResearchMatch Curations are now integrated into the RSRCHX platform, enabling clients to seamlessly move from research curation to purchasing subscriptions and reports.
/goo.gl/fmuZ9z

Politics

Christie Deputy, Ex-Goldman Sachs Executive Win Primaries
Bloomberg
A wealthy former Goldman Sachs executive and Republican Gov. Chris Christie’s top deputy immediately took aim at each other after winning primaries Tuesday in the race to replace the unpopular governor, continuing campaign attacks that have marked the first statewide primary election since President Donald Trump took office.
jlne.ws/2rLzxJZ

Regulation

Chicago trader gets 1 year in prison for stealing ex-employer’s computer code
Becky Yerak – Chicago Tribune
A former longtime worker at WH Trading has been sentenced to a year and a day in federal prison for stealing secrets from the Chicago-based firm. Over five months in late 2013 and early 2014, David J. Newman stole all of the securities trading firm’s computer code and trading software, downloading more than 400,000 electronic files to multiple thumb drives.
/goo.gl/6sbFZS

Dodd-Frank: House lawmakers to debate bill weakening the financial legislation
Roger Yu – USA Today
President Trump’s agenda to deregulate the financial industry could take a big leap forward this week.
The House of Representatives plans to begin debating on Thursday an ambitious Republican bill that aims to scale back much of the landmark Dodd-Frank Act, which was enacted in 2010 in the wake of the financial crisis and regulates banks and financial service companies.
jlne.ws/2rLfETz

Tax dodging crackdown to hit wealth managers
Laura Noonan – Financial Times
A global clampdown on tax dodging will lead to clients to pull an additional $1.1tn out of wealth managers over the next few years, a new report predicts, which would add new costs to an activity that many banks rushed into after the financial crisis.
jlne.ws/2rLFtms

London Judge calls off RBS trial, leaves door open to further hearings
Reuters
A London High Court judge on Wednesday called off a trial due to begin on Wednesday in a drawn-out investor lawsuit against Royal Bank of Scotland (RBS.L) over its 2008 rights issue that would have called disgraced former CEO Fred Goodwin to testify.
/goo.gl/aAwnSl

HSBC faces fresh suit alleging forex manipulation
Martin Arnold, Banking Editor – Financial Times
HSBC is facing a fresh legal battle over allegations that its traders manipulated foreign exchange markets for their own profit at the expense of their clients, with the allegations centring on trades from more than a decade ago. ECU Group, a UK-based currency investment firm, has filed an application to London’s commercial court asking for HSBC to be required to hand over records relating to three large foreign exchange orders it executed in 2006.
/goo.gl/y6Qkc6

Spotlighting ‘Best Ex’
Terry Flanagan – MarketsMedia
Regulators are leaning on market participants to prove trade execution was in fact best execution, raising the bar for sell-side brokers and their buy-side clients alike.
/goo.gl/CYSWdi

The Untested $181 Billion Bank Safety Net
Lisa Abramowicz – Bloomberg
European regulators dreamed up a new type of bond after the 2008 financial crisis to prevent another financial meltdown: contingent convertible debt, which would get wiped out before a big bank became insolvent.
Banks have sold hundreds of billions of dollars of this debt in recent years to bolster their capital, and regulators have declared the financial system safer.
jlne.ws/2rLh6oE

Ex-State Street executive to plead guilty in U.S. to fraud scheme
Nate Raymond – Reuters
A former State Street Corp executive has agreed to plead guilty in connection with a scheme to defraud six clients through secret commissions on billions of dollars of trades, according to court papers filed on Tuesday.
jlne.ws/2rLE92Y

Is a Certificate in Financial Services Compliance the Next Step for You?
Law Street
Millennials were teenagers or young adults when the worst financial crisis since the Great Depression hit, and our lives since have been marked by it. The crisis has been blamed, whether correctly or incorrectly, for everything from our growing student loan debt to our refusal or inability to buy houses. As a result, there’s long been a sense of “never again.” Millennials in particular have expressed a desire for corporate responsibility and to work for ethical companies.
jlne.ws/2rLxwgT

Investing and Trading

Expectations for pound volatility muted ahead of UK election
Adam Samson – FT
Smooth sailing ahead? Investor expectations for volatility in the UK pound and other British assets remained muted ahead of Thursday’s election in stark contrast to the palpable worry before the Brexit vote.
/goo.gl/61zs2G

Spring Rally in Stocks, Bonds, Gold and Bitcoin Unnerves Investors
Min Zeng and Ben Eisen – WSJ
Stocks, bonds, gold and bitcoin—assets that rarely move in unison—have all been surging this spring, an everything rally that leaves investors confounded about how to play the plodding U.S. expansion and vulnerable to sharp reversals in fortune.
/goo.gl/yMmzVN

10-Year Treasury Yield Sinks As Futures Price In A Rate Hike
The Capital Spectator
Fed funds futures are pricing in a near certainty of a rate hike at next week’s FOMC meeting, although you wouldn’t know it by looking at the 10-year Treasury yield, which has been sinking like a stone in recent weeks.
/goo.gl/49qvrv

Institutions

Goldman Sachs boost rates for savers in bid to attract deposits
Olivia Oran – Reuters
U.S. savers who routinely scour personal finance sites for the best deposit rates are soon going to see an unusual bank at the top of the list: Goldman Sachs Group Inc. The Wall Street bank’s consumer arm, Goldman Sachs Bank USA, plans on Wednesday to raise the rate it offers customers on deposits to 1.2 percent, slightly higher than rivals Synchrony Bank, CIT Bank and New York Community Bank’s My Banking Direct.
/goo.gl/Tv4k7W

Interactive Investor Completes Acquisition of TD Direct Investing
www.finanznachrichten.de
Interactive Investor Limited (“Interactive Investor”) is pleased to announce the completion of its acquisition of TD Bank Group’s European direct investing business (“TDDI”), following receipt of the necessary regulatory approvals. Accordingly, TDDI is now operating under the ownership of Interactive Investor.
The completion of the acquisition, which was first announced in October 2016, creates the UK’s second largest investment platform with assets under administration (AUA) of £21 billion and more than 300,000 customer relationships.
jlne.ws/2rLnLzf

How Wells Fargo’s Cutthroat Corporate Culture Allegedly Drove Bankers To Fraud
Vanity Fair
Most Americans have assumed their bank accounts are sacrosanct. But with the major scandal unfolding at Wells Fargo, angry former employees illuminate the alarming pressure that allegedly led local bankers to defraud perhaps more than a million customers.
/goo.gl/kS7U91

Regions

How Spain’s Zombie Bank Rescue Snares Bondholders: QuickTake Q&A
Tom Beardsworth – Bloomberg
Banco Popular Espanol SA’s decade-old crisis is finally coming to an end. It’s being swallowed by Banco Santander SA, Spain’s biggest bank, in an agreement that rescues the lender’s customers and senior creditors at the expense of shareholders and junior bondholders. It’s the first real test of Europe’s post-crisis bank resolution rules.
jlne.ws/2rLvy0e

Spain’s Santander rescues Banco Popular from collapse
Jesús Aguado and Francesco Canepa – Reuters
Spain’s biggest bank Santander is to buy struggling rival Banco Popular for a nominal one euro after European authorities determined the lender was on the verge of insolvency. Santander will ask investors for around 7 billion euros ($7.9 billion) of fresh capital to cover the cost of bolstering Popular, which has been weighed down by billions of euros of risky property loans.
/goo.gl/fYGhEF

China’s Global Ambitions Playing Out in Remote Bond Markets
Annie Lee and Narae Kim – Bloomberg
Chinese diplomacy is spurring a shake-up in the world of frontier-bond underwriting. When the tiny island nation of the Maldives prepared to make its dollar-debt debut last week, it looked beyond more veteran international arrangers to Bocom International Holdings Co., the securities arm of China’s fifth-biggest bank. The firm was sole lead on the $200 million, five-year bond, the latest in a slew of frontier-market dollar offerings this year.
/goo.gl/O1poIj

China should reform forex system to promote yuan flexibility: central bank adviser
Reuters
China should urgently reform its foreign exchange rate system or risk impeding the economy and plans for the yuan to play a larger role on the global stage, a central bank adviser said on Wednesday.
/goo.gl/prMY98

May volume for the Japanese commodity markets, Courtesy of Japan Commodity Clearing House Co., Ltd.(JCCH)
/goo.gl/uVMTZq

GMEX Group places Mauritius IFC at heart of global expansion plan
Mondovisione
Providing global support and services for expanding group of partner organisations
London, Mauritius 7th June 2017. GMEX Group, a global provider of multi-asset exchange trading, post trade business solutions and technology today announced the opening of its regional headquarters in the Mauritius International Financial Centre (IFC).
/goo.gl/Kpv0uL

Brexit

Exchanges Warn on Brexit
MarketsMedia
Jeff Sprecher, chairman and chief executive of Intercontinental Exchange, said that the closure of CME Europe could be a sign of things to come, as the UK leaves the European Union.
In April CME Group announced that it intends to close its London-based derivatives exchange and clearing house, CME Europe and CME Clearing Europe, by the end of this year.
/goo.gl/7ft0gO

Miscellaneous

This Tycoon Lost $14 Billion in Just Two Years
Ari Altstedter – Bloomberg
Dilip Shanghvi’s shrinking fortune has become one of the most visible casualties of the troubles hitting India’s generic drug industry. Once India’s richest person, he recently slipped to No. 6 with his fortune dropping $14.1 billion from its peak of about two years ago.
jlne.ws/2rLuutg

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About Author

Bergstrom is chief information officer of John J. Lothian & Co. He edits MarketsWiki and JLN Options.