Friday, November 28th. It’s the day after Thanksgiving in the US – possibly the lightest trading session of the year. And here, buried under the turkey leftovers, we find two statements (click to read) …
That’s the CME handing out disciplinary action against Mr Igor Oystacher, one of the biggest individual fish in the deep Chicago derivatives pond. He’s been landed with a $150,000 fine and a one month trading ban. Happy Holidays Igor! Read more
Gold experienced a sizable wobble on Wednesday, so no surprise people are still trying to make sense of it.
The best comment we’ve seen come from Commerzbank and UBS on Thursday who suggest a fat finger or rogue computer algorithm could be to blame for the disturbance… Read more
By now everyone is well aware of the flaws associated with the Libor-setting process. As yet, however, no alternative has been deemed full-proof enough to replace it.
The search for a better system, however, is on. Read more
From John Kemp at Reuters on Monday (our emphasis):
Hedge funds and other money managers reduced their long position in U.S. crude by the equivalent of nearly 54 million barrels of oil, the largest one-week decline since at least June 2006, according to data released by the U.S. Commodity Futures Trading Commission (CFTC) on Friday. The long liquidation was three times greater than in the “flash crash”, almost exactly a year ago on May 5, 2011, when speculative longs were cut by a little under 19 million barrels.—– Read more
Back in early 2011, a very intriguing thing happened in the oil markets.
As if by magic — (well, over the period of about a couple of months) — the market collectively and spontaneously moved from using WTI as its primary benchmark for pricing product spreads over to the Brent contract. The era of the “Brent crack” was born. Read more
US banks are pushing for their activities around exchange-traded funds to be exempt under the so-called Volcker rule, the FT says, highlighting the importance of the funds as a tool for the big financial institutions that create and sell them. According to some interpretations, ETFs are not included in the special Volcker carve-out that allows banks to “make markets” on behalf of their clients. “Market makers in exchange-traded funds enter into a number of transactions, such as creating and redeeming ETF shares,” the Securities Industry and Financial Markets Association, which represents big banks and investors, said in its submission to US regulators on the Volcker rule. Meanwhile the CME Group has warned that the proposed Volcker rule could impede the primary dealer system used by the US Treasury to sell government debt, reports the FT separately. In a comment letter filed this week, Craig Donohue, chief executive of CME, the US’s largest futures market, wrote that the Volcker rule’s exemption for US Treasury debt did not go far enough by failing to extend to the use of Treasury derivatives such as futures and options contracts. And the WSJ reports Goldman Sachs submitted two letters pushing to rein in the proposed regulation that aims to restrict bank risk-taking. Goldman asked that regulators take years rather than months to introduce the rule, arguing that it overstepped their bounds and went beyond Congress’s intentions in passing Dodd-Frank.
This looks like a sign of the post-MF Global shift in the futures market…
MF Global’s bankruptcy trustee has asserted client privilege in declining to hand over documents about the failed broker to regulators, the WSJ says. Louis Freeh’s office said it was prepared to waive the privilege if the CFTC, which is probing the loss of customer funds from MF Global, discussed the issue with them. However, the dispute threatens to slow down the customer funds investigation, which is already in its third month, Reuters adds. The CFTC is also investigating the role of the CME in verifying the safety of the funds held at MF Global, NYT Dealbook reports.
The Commodity Futures Trading Commission is looking at the actions of CME Group as part of the regulator’s inquiries into the collapse of MF Global, says NYT Dealbook, citing people briefed on the matter. CME operates the main exchange used by MF Global, and also served as the commodities brokerage’s primary regulator. It has come under criticism after $1.2bn in customer money disappeared from MF Global. The CFTC is reviewing whether CME’s efforts to verify the safety of customer funds were sufficient, the report says, while CME has said that MF Global may have intentionally produced inaccurate documents. CME has not been accused of any wrongdoing, and the review of its actions may not produce any findings, it says.
In case you missed it, last night Jon Corzine was artfully thrown under what looked like a bomb-strapped bus being driven by the Chicago Mercantile Exchange, with no Keanu Reeves in sight.
Terry Duffy, chief executive of CME group, told the Senate hearing on MF Global that the former New Jersey governor “was aware” that money had gone missing from customer accounts. Read more
Jon Corzine, the former chief executive of MF Global, “was aware” that the broker-dealer made use of customer funds during its desperate fight for survival, a US Senate hearing was told on Tuesday. The FT reports Terry Duffy, chief executive of CME Group, the futures exchange operator that supervised MF Global’s handling of customer money, said a CME auditor heard an MF Global employee say during a conference call involving senior MF Global employees that “Mr Corzine was aware of the loans being made from segregated accounts”. A spokesman for Mr Corzine declined to comment. The hearing was thrown into confusion by Mr Duffy’s comments, says NYT DealBook, as the claim was not included in Mr Duffy’s prepared remarks for the hearing, catching Senators off guard. Meanwhile investigators, including the SEC, the Justice Department, the CFTC, and the bankruptcy trustee are reviewing MF Global’s accounts to find out whether the brokerage intentionally used customer funds to cover margin payments on European sovereign trades, says Bloomberg, citing people with knowledge of the probe.
Agencies who investigated MF Global before its collapse will give different accounts of when they first became concerned about its trades, when they appear before a Congressional hearing later on Thursday, the FT reports. Terry Duffy, chief executive of CME Group, said that MF Global seemed to be in “full compliance” with segregating its customers’ funds until the day before its collapse, only for CME and CFTC auditors to be told on 2am on the day the broker filed for bankruptcy that some funds had been transferred. The CBOE said it was receiving data from the broker in August, while Finra said it had been watching MF Global’s trades in euro sovereign debt since May. A”turf war” may meanwhile be opening between Chicago and New York prosecutors on bringing criminal charges over the collapse, Reuters says.
CME Group, the world’s largest futures exchange, will allow international investors to use the Chinese currency as collateral for trading in all its futures products from January 2012, the FT reports. The move, announced on Monday, means investors holding renminbi deposits in Hong Kong or other financial centres outside mainland China can use the cash to bet on markets including metals, grains and energy. “It has symbolic significance that the best-known futures exchange in the west has put a stamp of legitimacy on the Chinese currency by accepting it as collateral,” said Dariusz Kowalczyk, Hong Kong-based strategist at Crédit Agricole. However he added that CME’s move was unlikely to have any immediate market impact. The exchange said it would cap the amount of renminbi it accepts at $100m, a relatively small figure that reflects the fact that the offshore renminbi is only a few years old and is less liquid than most major currencies.
All US futures trading firms will be audited in the wake of the search for $600m of missing customer funds from MF Global. The CFTC, which is searching for the missing money, will audit many of the nation’s largest futures commission merchants, NYT DealBook says, citing a person briefed on the decision. Exchanges like the CME Group will examine smaller firms to ensure they are keeping customer money separate from company money. The WSJ takes a look at the hunt for the funds. Meanwhile ICE has joined the chorus of commodity traders calling for MF Global’s bankruptcy court to release billions of dollars in cash frozen in their accounts, reports Reuters, by writing to Manhattan bankruptcy Judge Martin Glenn, to warn of the “systemic implications” and “moral hazard” of rewarding customers who had held onto their positions — and are now trading with new brokers — while penalising those “who acted quickly and responsibly to reduce their exposure”. The trustee overseeing the liquidation of MF’s brokerage moved to deflect mounting pressure to give back more of that collateral while the search continues for some $600m of missing customer funds, saying he could not yet legally release individuals’ funds. However Trustee James Giddens’ spokesman said a legal team would seek court approval on an expedited claim submission process for customers.
MF Global broke rules on keeping customer money separate from its own trading accounts, according to the CME Group, which acted as self-regulatory body to the collapsed broker-dealer as well as hosting its trades, the FT reports. According to people familiar with the situation on Tuesday, the Commodity Futures Trading Commission was investigating MF Global’s accounting – after regulators discovered an alleged shortfall in client funds of several hundred million dollars – and the Federal Bureau of Investigation was looking into the matter. MF Global declined to comment. But a lawyer for MF Global told a New York court on Tuesday that “to the best knowledge of management, there is no shortfall”. Kenneth Ziman told the bankruptcy court that most of MF Global’s US assets were held at its brokerage unit. Regulators have not ruled out the possibility that all the clients’ funds will ultimately be accounted for as the firm’s positions are unwound but believe MF Global has, at the least, broken rules on segregating funds. For more on the off-balance sheet trades which prompted MF Global’s sudden need for cash see FT Alphaville.
There’s to be no last-minute deal to salvage MF Global: the futures brokerage and sometime European debt specialists filed for bankruptcy on Monday in New York. Click through to access the filing (H/T John Carney):
Talks are taking place that could see the Dow Jones Industrial Average come under the same umbrella as the S&P 500 index, the FT reports, citing three people familiar with the discussions. Spokespeople for McGraw-Hill, owner of Standard & Poor’s, and CME, the Chicago derivatives exchange owner which bought 90 per cent of Dow Jones Indexes in 2010, declined to comment. Dow Jones, the News Corp subsidiary that owns 10 per cent of Dow Jones Indexes, and Dow Jones Indexes itself also declined to comment. The discussions were first reported by News Corp’s WSJ, also citing unnamed sources familiar with the situation. The FT’s sources cautioned that the talks had been going on for about a year and could change or fall apart. However, they added that the plan under discussion would see McGraw-Hill own almost 75 per cent of the joint venture, which would be housed in McGraw-Hill Markets, the financial services company that is to be formed when the media conglomerate spins off its education business next year. CME would have almost 25 per cent of the joint venture, with Dow Jones retaining a small stake.
The head of the largest US futures exchange has labelled derivatives that track the price of traditional commodity futures “parasitic”, stoking tension over proposed US curbs on speculators, the FT reports. Craig Donohue, chief executive of Chicago-based CME Group, said that pending US rules limiting commodity speculation would prompt banks and hedge funds to abandon futures that require physical delivery and pour money into contracts that settle in cash. The reason for this, he said, was that the US commodity regulator had proposed allowing traders to hold five times more cash-settled contracts than traditional futures contracts. “What you’re doing is you’re encouraging people to leave the physical delivery, price discovery contract and move to what I would call a parasitic, second-order derivative,” Mr Donohue told the Financial Times. CME’s exchanges list leading physical commodity futures, including West Texas Intermediate crude oil, natural gas, corn and soyabeans.
Gold suffered its largest two-day absolute fall in more than three decades, dropping $160 per ounce between Tuesday and Wednesday, the FT reports. Investors risked further sharp moves as the leading US metals exchange announced it will demand larger good-faith deposits to own gold futures starting after Thursday’s close. Spot gold prices fell to a session low of $1,750.55 per troy ounce, down $160.91 from the all-time high of $1,911.46 a troy ounce set in late trading on Monday. However bullion for immediate delivery increased as much as 0.4 per cent to $1,766.85 an ounce in Thursday morning trade in Singapore, says Bloomberg. Late on Wednesday, CME Group, the operator of New York’s Comex exchange, said it will increase gold margin requirements by 27 per cent. This followed a 22 per cent increase two weeks ago.
Trading in equities and derivatives has hit record levels this week, the FT reports, as investors traded frantically in response to a tumult of factors such as the US Federal Reserve’s decision to stick with near-zero interest rates until 2013, fears over the US’s credit rating and the eurozone debt crisis. Trading in currencies and gold, seen by many investors as a “safe haven” alternative to dollars, have spiked as central banks in the US, Europe and Japan have intervened to attempt to pump liquidity into currency, equity and sovereign debt markets. CME Group, the world’s largest futures market, reported an all-time volume record on Tuesday, beating the last peak of activity hit during the “flash crash” last year in the US, when markets gyrated wildly. On the CME, there were 25.7m contracts traded across all asset classes, with individual market records being hit in gold and Australian dollars.
Leaving aside the volatility and growth fears, who is really compelled to sell Treasuries as a result of the S&P downgrade?
The answer, when it has all played out, might go some way to explaining just how powerful the ratings agencies are right now. Or, how powerful they should be. The last few days have seen some passionate debate on that subject. Read more
CME Group has increased the haircuts it applies to Treasury, agency and foreign sovereign bonds, it said in a statement, reflecting growing volatility in the Treasuries market as fears over a debt ceiling default continue. T-bill collateral haircuts will rise from 0 to 0.5 per cent, and those for off-the-run Treasuries from 0.5 to 1.5 per cent. CME earlier increased margin requirements for Treasury futures, also in response to volatility, according to Reuters. The margin cost of trading 10-year Treasury futures is now $1,300, but still some way below the $2,200 charged in the depths of the financial crisis in October 2008, the FT reports.
Here’s some genuinely sad news out of Chicago on Friday.
Courtesy of Reuters: Read more
An employee at CME Group has been accused of planning to steal proprietary software and pass it to a Chinese start-up. Chunlai Yang, a 49-year-old naturalised American, has been formally charged with stealing proprietary source code, the FT reports. If convicted, he faces up to 10 years in prison and a $250,000 fine. Mr Yang appeared in a Chicago court on Wednesday morning for a detention hearing, at which no ruling was made. He remains in custody pending another court date on Friday. The case will raise new concerns about cybersecurity after several recent incidents. Google, Sony and Citigroup have been the targets of cyberattacks in recent months.
An employee at CME Group, the US’s largest futures exchange operator, planned to steal proprietary software and pass it to a Chinese start-up, according to federal investigators, writes the FT. Chunlai Yang, a 49-year-old naturalised American, has been formally charged with stealing proprietary source code. If convicted, he faces up to 10 years in prison and a $250,000 fine.
We speak of the market for sovereign yield spread futures (Sovys) — a product designed by CME Group and aimed squarely at the heart of cash bonds and credit default swaps, as a new way to trade sovereigns.
First trades were made on Thursday of last week. Read more
The natgas mystery continues!
Let’s start first with the following flashes from the CME via Reuters on Friday: Read more
Our colleagues on the paper-side drew attention last week to the fact that silver trading in Asian hours experienced a clear pickup into the lead up to the commodity rout.
Jack Farchy wrote, citing Edel Tully, analyst at UBS: Read more
Silver prices rose by over 60 per cent between the start of the year and April 25.
They’ve now fallen by over 30 per cent — unwinding some 80 per cent of the upward move in the space of two weeks, according to Société Générale figures. Such violent swings have lead to margin call hikes on the precious metal (along with other commodities) at the Chicago Mercantile Exchange, and have also unleashed a wave of debate about just how much margin moves may have attributed to price falls. Read more
Breaking pre-market news on Tuesday,
- Microsoft close to deal to buy Skype — report. Read more