Observations & Insight
Boris Johnson quits to add to pressure on May over Brexit
Boris Johnson has resigned as Foreign Secretary amid a growing political crisis over the UK’s Brexit strategy.
He is the second senior cabinet minister to quit within hours following Brexit Secretary David Davis’s exit.
****SD: Wow. Just wow.
Another Option (Literally) for Trading with TT: Introducing Options on TT
Bernie Schwartz – TT
Last month, buried far beneath headlines on widely covered legislative battles, a relatively minor bill quietly made its way out of the U.S. House Financial Services Committee and onto the House floor. The Options Markets Stability Act, if passed, will allow financial institutions to use more sophisticated methods of risk calculation when assessing exposure on positions in derivatives, and particularly in options. While that’s certainly not the most thrilling introduction, the effect of measures like this will be to essentially allow for greater liquidity and more market making across options markets. Now that could be exciting.
****SD: Unfortunately, Bernie is right – the Options Market Stability Act did slip under the general radar. There will be more to come from JLN regarding capital requirement calculations of bank-affiliated clearers of options liquidity providers.
Buffett Starts to Say Goodbye to a Pile of Equity-Index Options
Katherine Chiglinsky – Bloomberg (SUBSCRIPTION)
The puts began expiring last month, will dwindle until 2026; They lifted Berkshire profit by $2.4 billion from 2008 to 2017
Warren Buffett is beginning to say farewell to his equity derivatives.
****SD: It’s been known he uses “weapons of mass destruction.” But these are some real profitable WMDs.
32 Years of Performance History for 10 Benchmark Indexes That Use S&P 500 Options – Lower Volatility and Enhanced Risk-Adjusted Returns
Matt Moran – Cboe
In 2001 some portfolio managers who engaged in strategies that used S&P 500 (SPX) options told me that pension fund sponsors suggested that the options industry should develop indexes that could serve as benchmarks for options-based performance. In 2002 Cboe worked with Professor Robert Whaley to introduce the first major benchmark index that uses listed options: the Cboe S&P 500 BuyWrite Index (BXM). In this blog I am pleased to provide an update regarding the performance of ten SPX-options-based strategy benchmark indexes that have 32 years of price history.
Sea of red in Treasury market may signal bond boom is over
Kate Duguid – Reuters
The 10-year U.S. Treasury note that debuted in August 2016 9128282A7=RRPS when the bond market was near its peak has had a rough ride, its price falling ever since and no reprieve in sight.
What Trump’s Trade War Is Really About
Christopher Balding – Bloomberg
As the trade war between the U.S. and China escalates, with President Donald Trump imposing tariffs on $34 billion of Chinese imports, both sides are trying to portray themselves as victims of an unconstrained unilateralist rival. They’re both wrong: This dispute is about something much bigger.
ECB head Draghi: Trade protectionism is main risk to economy
European Central Bank head Mario Draghi says that new trade barriers are the main risk to Europe’s economy and that it’s up to the EU to “lead by example” by supporting economic openness and reforming its institutions.
Draghi told the European parliament Monday that the bank had decided to phase out its 2.4 trillion-euro ($2.8 trillion), three-year stimulus program at year-end because inflation is finally trending in line with the ECB’s goal of just under 2 per cent. Along with that, economic growth has created 8.4 million jobs since mid-2013.
Exchanges and Clearing
New month-end options support the buy side
As of 9 July, Eurex offers EURO STOXX 50 options with month-end expirations. The new product is another part of our buy-side initiative as it meets the needs of insurers and other market participants that offer pension schemes linked to the performance of the EURO STOXX 50 index.
R.J. O’Brien Appoints Joseph Raia Managing Director, Global Commodity Futures in New York
Chicago-based R.J. O’Brien & Associates (RJO), the oldest and largest independent futures brokerage and clearing firm in the United States, announced today that Joseph B. Raia has joined its New York office as Managing Director, Global Commodity Futures. Raia has a decades-long track record in futures and over-the-counter (OTC) markets as well as hedging/risk management and business development – with a specialty in global commodities and energy products – including in Managing Director roles at Goldman Sachs and Co., CME Group and the New York Mercantile Exchange (NYMEX).
Gemini Exchange steals another NYSE executive
Erik Gibbs – Coingeek.com
Confidence in cryptocurrency trading is on the rise, with more people turning from traditional financial investments to crypto. As investors move toward crypto, so do more and more financial executives who have been part of shaping the financial environment of Wall Street for years. The latest to make the switch is Robert Cornish, who has been chosen to be the chief technology officer for the Gemini Exchange.
Regulation & Enforcement
CBOE Global Markets Applies for New Bitcoin ETF License
Celeste Skinner – Finance Magnates
United States regulator, the Securities Exchange and Commission (SEC), has received an application for a Bitcoin exchange-traded fund (ETF) license from Chicago Board Options Exchange (CBOE) Global Markets. While other applications have been turned down by the watchdog, a Bitcoin ETF looks like it will have a better chance of success.
Traders find a receptive ear among regulators for relaxing rules
Joe Rennison in New York and Philip Stafford – Financial Times
One new standard, called the leverage ratio, increases the capital banks must retain against their customers’ positions, so that any failure does not spread through the wider market.
These customers have an outsized influence. Cboe Global Markets estimates four-fifths of the market makers — who help buyers and sellers transact — in S&P 500 options are independent companies such as Citadel Securities and Chicago Trading Company.
The CFTC Intervenes to Prevent Moral Hazard in the CDS Market – But Why the CFTC?
Craig Pirrong – Streetwise Professor
The WSJ reports that the CFTC engaged in extraordinary efforts to prevent manipulation of the CDS market by Blackstone Group. Blackstone had bought about $333 million in protection on homebuilder Hovnanian, and then extended a low-interest loan to the company to induce it to make a technical default on debt the company itself owned (having bought it back). The CFTC caught wind of this, and put on the full court press and eventually, uhm, persuaded (by intimating that it considered such behavior manipulative) Blackstone to negotiate an exit from the CDS with its counterparties.
Here are 3 ways you can use market volatility to generate income
Andrew Osterland – CNBC
For investors worried about the risk of a concentrated stock position, options can reduce their exposure in a tax-efficient way.
Three common option strategies can generate income and/or limit losses from an investment portfolio: covered calls and collars, straddles and strangles and writing puts.
Option-writing strategies range from conservative (covered calls and collars) to extremely risky (naked puts).
Risk-Adjusted SPIVA Scorecard: The Evaluation of Active Managers’ Performance Through a Risk Lens
Aye Soe – S&P Dow Jones Indices
Evaluating active managers’ performance through a risk lens is rooted in modern portfolio theory (MPT), which states that the expectation of returns must be accompanied by risk—the variation (or volatility) around the expected return. MPT assumes that higher risk should be compensated, on average, by higher returns.
Institutional investors tend to be interested in risk-adjusted returns. In addition to the performance of managers hired to manage their assets, institutional investors also look at the risks managers take to achieve those returns.
Scholar Robert Meister on a new model: Using the financial markets to fuel historical justice
Patrick Lawrence – Salon
Revolutionary thinker and author of “After Evil” on how the financial markets could be leveraged toward justice
****SD: What does options theory, revolution and consumer debt have in common? This article, apparently. It is certainly a different perspective (if you can get past the academ-ese language). Reading parts of this transported me back to some eye-wateringly boring college lectures though…