A pledge by European Central Bank President Mario Draghi has put ECB bond buys back on table. Meantime, in the U.S., the House voted overwhelmingly to require an audit of the Federal Reserve.
Conversation Starter
GCF Repo Index Futures: Lucky, Good or Both?
By Douglas Ashburn
“I would rather be lucky than good.”
-Baseball Hall of Famer Lefty Gomez
Although the above quote is widely attributed to Mr. Gomez, every trader I ever met has used the phrase at least once. I can honestly say I uttered those words at least once a week during my 20 years on the trading floor. Timing is everything, but in many cases, when assessing the success of a fortuitously-timed decision, it is difficult to separate the lucky from the good.
On July 16, NYSE Liffe U.S. launched its futures on the DTCC GCF Repo Index. By all appearances, the contracts are off to a promising start, with average daily volume of over 3,000 contracts. Open interest continues to climb each day, surpassing the 10,000 mark earlier this week. The open interest number is significant, as it may demonstrate market participants’ interest in using the index as an alternative hedging mechanism for interest rate risk.
What a coincidence. As the GCF contracts began trading, a rate-rigging scandal was erupting surrounding LIBOR, arguably the most widely used interest rate benchmark on the planet. The allegations initially focused on Barclays Bank but, according to documents filed by regulators in the U.S. and U.K., other member banks participated in similar misconduct, which involved submitting rates to LIBOR’s rate-setting agency that were inconsistent with rates actually offered in the market. In the wake of the scandal, many in the industry have called for a new interest rate benchmark to replace LIBOR. The launch of the GCF Repo Index futures could not have come at a better time.
“It’s just the right product at the right time,” said Tom Callahan in a recent interview with JLN. “The clouds around LIBOR, and with the dysfunction in the Fed Funds market, a lot of people are looking for a new short-term benchmark that is objective, that is, it’s not subjective rate set by a small group.”
So, was NYSE Liffe U.S. lucky, good, or both?
Regarding LIBOR, though, I would paraphrase Mark Twain and say that rumors of its death have been greatly exaggerated. Though the rate-setting mechanism has been taken to the woodshed and given a thorough beating, the rate itself is simply too embedded in the financial world to be dismissed. The rate-setting process will evolve into something modern, transparent, and incapable of being manipulated.
Here is a parallel from my own experience. For over a decade I had the dubious honor of chairing one of the forex option pit committees at the CME. One of the primary functions of the committee was to set, monitor, and approve end-of-day settlements. For many contracts, the settlement process was a daily lobbying exercise. Traders with large positions (and brokers representing customers with even larger positions), pleaded their case for a favorable settlement price. Some would “paint the board” near the end of the day with bids, offers and/or trades favorable to their positions. Since each options contract has hundreds of associated strike prices of varying expiration dates, with daily volume spread throughout, producing a fair settlement price that placated all parties was often more art than science.
Over time, certain market participants who claimed to be too often getting the short end of the stick, complained to the exchange. The exchange stepped in and began the process of formulaic, automated settlement procedures that use state-of-the-art modelling, combined with volume-weighted average price data from exchange contracts. Of course, the migration of trading from pit to screen has helped speed up the transition. It has taken years to implement and a hybrid of the old system is still in place in some contracts. But the point is, if the industry demands a solution to a problem, and the infrastructure exists that can support a solution, the system will evolve rather than die of irrelevance. My guess is that LIBOR will soon adopt a similar automated settlement.
Does this mean that the DTCC GCF Repo Index will not be useful? Absolutely not. One of the nice things about the index is that it uses price data from actual trades to compute the index. So, from a settlement standpoint, it is ahead of LIBOR.
Besides, how often have we seen the launch of a contract that was set to displace an existing product, only to witness a volume surge in both contracts. Options on the SPX were supposedly the death knell for options on S&P 500 futures. Ditto the VIX. Many of the popular ETFs have seen concurrent volume enhancements in related futures and options contracts. NYSE Liffe U.S. appears to have a winner on its hands, regardless of what happens with LIBOR.
That’s not lucky; that is just good.
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Korea Exchange’s Jae-Joon Lim Discusses OTC Clearing and Kospi Contracts
MarketsWiki.tv
Jae-Joon Lim is director, business development at Korea Exchange, home of the most traded contract in the world, the Kospi futures and options. At the 2012 Emerging Manager Forum in London, Lim discussed the Kospi, as well as OTC clearing of Korean yun denominated interest rate swaps, due to launch this fall. Interview by John Lothian News editor-in-chief Jim Kharouf.
http://jlne.ws/M8VpI9
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CME Group: Interest Rate Market Monitor – 2nd Quarter 2012
A review of fundamental economic conditions and impact upon outright yield movements, the shape of the curve and credit considerations.
http://jlne.ws/MITA4F
**CN: A nice recap on the quarter.
Lead Stories
Draghi Pledge Puts ECB Bond Buys Back On Table
European Central Bank President Mario Draghi indicated that the institution is ready to resume purchases of Spanish and Italian government bonds in a bid to bring down borrowing costs and ensure the survival of the euro.
http://jlne.ws/PN77Y6
Assurances on Euro by Central Bank Chief
The European Central Bank appears increasingly willing to throw around its weight in bond markets to hold down borrowing costs for Spain — or at least wants traders to worry that it will.
http://jlne.ws/PMMbjZ
Untangling Europe’s Money Mess [Video]
Bloomberg TV
http://jlne.ws/Ow0xk0
House votes 327-98 to require audit of Federal Reserve
Los Angeles Times
Hoisting a once-fringe issue into the political mainstream, the House overwhelmingly approved a long-fought proposal by Rep. Ron Paul (R-Texas) to require an audit of the Federal Reserve.
http://jlne.ws/Oeq1HN
Facing Congress, Geithner Grilled on Rate Rigging
NY Times
Timothy F. Geithner was questioned sharply on Wednesday about the rate-rigging scandal that has consumed the banking industry, as lawmakers at a House hearing asked why he had failed to thwart wrongdoing during the financial crisis.
http://jlne.ws/LNIMB5
Testimony Before The U.S. House Committee On Agriculture Of CFTC Chairman Gary Gensler
http://jlne.ws/MKdcBG
Fed Sees Action if Growth Doesn’t Pick Up Soon
WSJ.com
Federal Reserve officials, impatient with the economy’s sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring. Since their June policy meeting, officials have made clear—in interviews, speeches and testimony to Congress—that they find the current state of the economy unacceptable. Many officials appear increasingly inclined to move unless they see evidence soon that activity is picking up on its own.
http://jlne.ws/MEo3iv
Low Interest Rates Are Not Enough: El-Erian
By: Mohamed El-Erian CEO, Pimco for CNBC
Welcome to what could be called “GGIRC,” the great global interest rate convergence – whereby interest rates steadily converge to zero in many countries around the world, both advanced (other than the crisis European economies) and emerging (other than the persistent financial basket cases).
http://jlne.ws/MWMg0l
Morici: Federal Reserve Has Few Arrows Left in Its Quiver
By: Peter Morici, Professor, Smith School of Business, University of Maryland for CNBC
The Federal Reserve is moving closer to announcing additional steps to stimulate the economy, but it can’t do much to curb the threat of another recession.
http://jlne.ws/QlhcOk
IMF to cut off aid to Greece
MarketWatch
The International Monetary Fund is expected to cut off further rescue aid to troubled Greece, reports said Sunday. The move is likely to lead to debt-saddled Greece’s insolvency in September. Reports say Greece will not be able to meet debt-reduction targets by 2020, meanign the country will need $60.8 billion in additional aid. But other European nations are unwilling to keep funding the nation, reports said
http://jlne.ws/P2ZGuN
Former IMF Economist Says He’s `Ashamed of Links to Fund
An International Monetary Fund economist who said he is leaving the institution wrote that he is “ashamed” of being associated with it and criticized it for what he said was a failure to send warnings about the global financial crisis and the European debt turmoil.
http://jlne.ws/Nnx2Gx
Bank of England Spotted Risks At J.P. Morgan
WSJ.com
More than a year before J.P. Morgan Chase Co. racked up billions of dollars in losses from bad trades in its London investment office, Bank of England officials raised concerns internally about potential risks arising from some of the office’s activities, but didn’t formally alert other regulators, according to people involved in the central bank’s talks.
http://jlne.ws/NTRv4x
Turner warns of Libor aftermath
FT.com
The Libor rate rigging scandal has created “a very major problem” for the City of London because it has destroyed public trust in a sector that remains a huge contributor to the economy, warns Lord Turner, head of the UK financial watchdog.
http://jlne.ws/Ma4Hnh
Former UBS chief doubts criminal intent over Libor
Reuters via Yahoo! News
The former head of Swiss bank UBS doubts whether traders at global banks acted with criminal intent to manipulate benchmark interest rates and accuses regulators of ignoring warning signs, he told Reuters in an interview.
http://jlne.ws/MKdcla
Egan-Jones cuts Italy to CCC-plus, outlook negative
Reuters
Credit ratings agency Egan-Jones on Wednesday cut Italy’s sovereign rating to CCC-plus from B-plus with a negative outlook, citing the country’s stumbling regional governments.
http://jlne.ws/On796f
Spain, Italy regulators impose short-sale bans
MarketWatch
Spanish and Italian market regulators on Monday both imposed a ban on the short selling of stocks in the wake of steep losses for equities markets in Europe. Spain’s market regulator, CNMV, said on its website that its ban would last for three months, or until the close of markets on Oct.
http://jlne.ws/MDZSTd
Spain slump deepens as bailout fears grow
Reuters
Spain’s economy sank deeper into recession in the second quarter, its central bank said on Monday, as investors spooked by a funding crisis in its regions pushed the country ever closer to a full bailout.
http://jlne.ws/QrVbMB
Spain Urges ECB to Support Euro
WSJ.com
The Spanish government, confronted by growing antiausterity protests, now sees the European Central Bank as the only institution with the ability to change the course of the country’s financial crisis.
http://jlne.ws/QrEnW9
Spain to struggle to fund 2012 debt crunch
Reuters
Regional debts, soaring borrowing costs, a higher deficit and souring market sentiment are all making it nearly impossible for Spain to find 50 billion euros in funding it needs by year end without external aid.
http://jlne.ws/MmkDyi
Spain’s debt insurance surges to record high
MarketWatch
The cost of insuring Spanish debt spiked to a record high on Monday on fears that one of the biggest euro-zone economies will have to seek a comprehensive bailout.
http://jlne.ws/OmQNZb
Milken Institute – Spain: The Next Domino
Posted by Komal Sri-Kumar
As the European debt crisis approaches its third anniversary, there is no sign of abatement. Even as Eurozone finance ministers approved an interim loan of €30 billion to recapitalize Spain’s banking sector, the eastern region of Valencia announced Friday that it would seek a bailout from the central government without which it would be unable to service its obligations. Valencia’s request for aid may be followed by other regions having similar problems
http://jlne.ws/MDrOoy
New Technology and Tougher Rules Shaking Up Fixed-Income Trading
The New York Times
Bond traders have long defined Wall Street’s swagger and, in good years, generated a large share of its profits. Now, though, an upheaval is taking place in the bond business that is wiping out billions in profits and thousands of jobs.
http://jlne.ws/N03Cb
Hussman warns recession has already begun
The Globe And Mail
It’s a down Monday for stocks, and what better time to check in with gloomy market prognosticator John Hussman. Mr. Hussman’s advice for stock buyers: look out below, because the decline is only beginning.
http://jlne.ws/M5Vgp7
As Big U.S. Bond Dealers Retreat as Middlemen, Smaller Firms Step Up
Dow Jones
As bulge-bracket dealers scale back their roles as middlemen in bond trading to conform to new regulations and corporate strategies, a host of smaller broker-dealers have been scurrying to fill the void.
http://jlne.ws/OjkXN0
Events
Bond China Congress
September 4-5, 2012, Shanghai, China
http://jlne.ws/KXsmS0
CTA Expo Chicago
September 13, 2012
http://jlne.ws/LmhfFu
Economic News
U.S. jobless claims sink 35,000 to 353,000
The number of people who filed applications for unemployment benefits fell sharply last week, marking the third straight week of big swings related to changing employment patterns in the auto industry.
http://jlne.ws/Omdxwd
Land Problem Weighs on New Home Sales
WSJ.com
There are signs that the spring selling season seems to have cooled off for new homes, as the Census reported Wednesday that as of June, builders are on pace to sell just 350,000 newly built homes in 2012, an 8.4% decline from May. New home sales are coming off a fairly deep bottom — 2011 was the worst year on record for builders, with just 306,000 homes sold — and compared to the sales pace of 304,000 in June 2011, last month’s numbers are quite strong.
http://jlne.ws/LO8gtd
U.S. manufacturing growth 2nd-worst post recession
MarketWatch
Growth in the U.S. manufacturing sector slowed in July to the second-weakest level since the country emerged from recession, according to a survey released Tuesday.
http://jlne.ws/MZeMNI
Exchanges, Clearing Houses & MTFs
BofA, UBS to Base Interest-Rate Swaps on DTCC Repo Index
Bank of America Corp. (BAC) (BAC), UBS AG and Nomura Holdings Inc. (8604) will support interest-rate swaps based on the Depository Trust & Clearing Corp.’s general collateral finance repurchase rate.
http://jlne.ws/NH2qvs
Firms & Banks
Big-Bank Pioneer Now Seeks Breakup
In a few seconds, Sanford Weill disavowed the work of a lifetime. Mr. Weill, who built Citigroup Inc. through repeated acquisitions—including the 1998 megadeal that prompted Congress to strike down a six-decade-old ban on commercial banks doing investment banking, and vice versa—on Wednesday called for the breakup of huge U.S. financial conglomerates.
http://jlne.ws/OLUBDx
JPMorgan to pay $100-million in credit card settlement
The Globe And Mail
JPMorgan Chase & Co. has agreed to pay $100-million (U.S.) to settle litigation by credit card customers who accused the largest U.S. bank of improperly boosting their minimum payments as a means to generate higher fees.
http://jlne.ws/Pes90S
J.P. Morgan Blames Lehman Brothers’ Management
J.P. Morgan & Co. (JPM) said senior management of Lehman Brothers Holdings Inc. is to blame for the investment bank’s “disastrous” high-risk strategy that resulted in a series of fraudulent transactions and led to the bank’s demise and the largest bankruptcy filing in the nation’s history.
http://jlne.ws/MSbdda
Mizuho Settles 2007 CDO Case
U.S. securities regulators filed their first enforcement action tied to rosy credit ratings bestowed on thousands of mortgage-backed investments before the financial crisis erupted, accusing Mizuho Financial Group Inc. of rigging a 2007 bond deal.
The Japanese bank allegedly used “dummy” assets to make sure it got a triple-A rating from Standard & Poor’s Ratings Services on a $1.6 billion deal called Delphinus CDO 2007-1.
http://jlne.ws/MzCVih
HSBC Reminds Us Why Anger at Bankers Is the Norm
By William Pesek – Bloomberg
You have to love the chutzpah at HSBC Holdings Plc. At the very moment its asking the courts to remove a ragged band of Occupy Wall Street protesters encamped under its Hong Kong headquarters, the largest European bank is also reminding the world why many people are so angry at bankers. While it obsesses over a few demonstrators, HSBC has been cited for helping terrorists, drug cartels and other criminals launder money, according to a U.S. Senate investigation.
http://jlne.ws/OLPJxS
Peregrine Financial New York Agency Desk Joins Gain Capital
By Allison Bennett – Bloomberg
Gain Capital Holdings Inc., a publicly-traded online foreign-exchange company, hired 10 New York-based employees from failed commodities broker Peregrine Financial Group Inc. attracted 80 percent of the Peregrine agency desk in New York, which specializes in foreign-exchange, options, metals and non-deliverable forwards, Gain Capital Chief Executive Officer Glenn Stevens said in an interview.
Former UBS risk chief joins Newedge
Financial News
Newedge, the markets largest futures broker, has bolstered its board by appointing the former head of the risk policy group at UBS as a non-executive director, as the firm moves to shore up its market position. Seasoned derivatives banker Tanya Castell joined the board of the French brokers London subsidiary last month, as chair of the firms risk committee.
http://jlne.ws/OLPJxV
Morgan Stanley Joins Citigroup in Job-Cut Push Amid Slump
Bloomberg
Morgan Stanley (MS) and Citigroup Inc. (C) are among Wall Street firms preparing to eliminate jobs as first-half revenue dropped for a third straight year.
http://jlne.ws/OLPIKA
Interactive Brokers to Pay $700,000 Penalty
Tom Steinert-Threlkeld, Securities Technology Monitor
Interactive Brokers agreed to pay civil penalties of $700,000 to settle a case involving inaccurate reporting on futures transactions involving large trading firms.
http://jlne.ws/Po7CXE
Fidelity Joins BlackRock in Weighing Libor Action Against Banks
Bloomberg
BlackRock Inc. , Fidelity Investments and Vanguard Group Inc., firms that collectively manage more than $7 trillion, are gauging how their clients have been hurt by Libor manipulation and whether to take legal action as at least a dozen banks are being investigated for rate-rigging.
http://jlne.ws/MKdd8R
Regulators
Opening Statement of Chairman Lucas at Oversight of the Swaps and Futures Markets: Recent Events and Impending Regulatory Reforms Hearing
Thank you for joining us for this important hearing. I’d first like to thank the Ranking Member and his staff for their efforts today. I’d also like to thank our witnesses for their time. It is beyond unfortunate that for a second time in less than a year, this Committee is examining the circumstances of a futures commission merchant bankruptcy where customer funds were not properly segregated.
http://jlne.ws/LROehv
Testimony of Daniel J. Roth, President and Chief Executive Officer, National Futures Association, Before the Committee on Agriculture U.S. House of Representatives
http://jlne.ws/MKd99g
CFTC Approves Regulations to Phase in Compliance with Clearing Requirements of the Dodd-Frank Act
Press Release
The Commodity Futures Trading Commission today approved final regulations that establish a schedule to phase in compliance with new clearing requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The final rule will phase in the clearing requirement based on the type of market participant entering into swaps subject to the clearing requirement. The compliance schedule does not prohibit any type of market participant from voluntarily complying with the clearing requirement sooner than the compliance deadline. Moreover, the compliance schedule will be used at the Commission’s discretion when it believes that phasing is appropriate and needed by market participants.
http://jlne.ws/MUQHZx
CFTC Proposes Clearing Determination for Certain Credit Default Swaps and Interest Rate Swaps
Press Release
The Commodity Futures Trading Commission today proposed new rules to require certain credit default swaps (CDS) and interest rate swaps to be cleared by registered derivatives clearing organizations (DCOs). The proposed rule is the first clearing determination by the Commission under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the proposed rules, market participants would be required to submit a swap that is identified in the rule for clearing by a DCO as soon as technologically practicable and no later than the end of the day of execution. The proposed rule will be open for public comment after the rule has been published in the Federal Register, and the comment period will be open for 30 days.
http://jlne.ws/Ofh2Vo
Swap ID system clears hurdle with CFTC OK of ID plan
Reuters
U.S. regulators came one step closer on Tuesday toward their goal of tracking the biggest players in the $650 trillion swaps market after they gave regulatory approval to a plan that will tag each trader with a unique identifying number.
http://jlne.ws/MKdad9
Basel III: The Role of the Auditor
By Mayra Rodriguez Valladares, MRV Associates
In a long awaited move, bank regulators voted unanimously on June 7, 2012 to adopt several Basel III rules in the United States, impacting a wider type of banks than had been previously envisioned. Importantly, a lot of focus during the 90 day comment period is on the amount and quality of capital required. However, focus should also be on the numerous parties within a bank who will have to prepare their staffs to work in
an environment of changing rules. In this second piece in a series, Mayra Rodríguez Valladares explores the implications of how Basel III will influence auditors and their role in helping banks comply with the new accord.
http://jlne.ws/MDWMgb
OTC
DTCC AND SWIFT NAMED TO PROVIDE CTFC INTERIM COMPLIANT IDENTIFIER
Press Release
The Depository Trust & Clearing Corporation (DTCC) and SWIFT announced today that they have been named by the Commodity Futures Trading Commission (CFTC) to provide the CFTC Interim Compliant Identifier (CICI) for legal entities involved in OTC derivatives trading.
http://jlne.ws/MFIa1P
SEFs Evaluated As Dodd-Frank Deadlines Loom
52 Proposed Swap Execution Facilities Analysed; 12 Strongest Players Interviewed – Consultancy Advises On Product Coverage And Trading Models
http://jlne.ws/MKdadh
Global News
China’s economy en route to soft landing, but problems remain: IMF
Want China Times
China’s economy may be undergoing a soft landing despite growing global headwinds, and the country is well-placed to respond to the possible deterioration of the external environment, the International Monetary Fund said in a report on Tuesday.
http://jlne.ws/OE7O1o
China Shifts Course, Lets Yuan Drop
WSJ.com
China’s central bank is starting to guide the yuan downward against the dollar after two years of trying to boost its value, reflecting concern in Beijing over China’s slowing economy—and risking a political fight with the U.S.
http://jlne.ws/Qjj8Hg
Spain feels debt heat, Greece way off bailout terms
Reuters
Spain paid the second highest yield on short-term debt since the birth of the euro at an auction on Tuesday, and EU officials said Greece had little hope of meeting the terms of its bailout, casting fresh doubt on its future in the euro zone.
http://jlne.ws/PVlQgg
Santander’s Profit Plunges on Property Exposure
NYTimes.com
Banco Santander reported a 93 percent drop in second-quarter profit on Thursday as the Spanish bank was forced to set aside more money to cover bad loans in its home market.
http://jlne.ws/MKdb0S
Insight: Slovenia rues bank mismanagement as bailout talk grows
Reuters via Yahoo! News
When he took control of his country’s biggest bank in 2009, Drasko Veselinovic expected a rough ride. He knew Slovenia’s state-owned Nova Ljubljanska Banka was facing difficulty as the country’s boom years began grinding to a halt. But what he did not expect was the same politicians who berated him in public to be privately asking for secret favors.
http://jlne.ws/MKdclk
BNP, Credit Agricole Seek to Escape Euro Area’s ‘Shifting Sands’
Bloomberg
France’s biggest banks are rushing to cut the more than 140 billion euros they provide their operations in Europe’s troubled economies, seeking to protect themselves against a possible breakup of the euro.
http://jlne.ws/MKddG3
Euro Exit Risk Prompts JPMorgan to Set Up Contingency Plans
Bloomberg
JPMorgan Chase & Co. has set up a contingency plan allowing it to resume trading the bonds of any nation exiting the euro area to avoid disruption to its clients.
http://jlne.ws/MKdbho
