17 min read

044 Exchange Invest Weekly Podcast

The Bank of China meanwhile is mulling payout to investors who lost through those exchange traded products on the WTI bets.


In oil, Brent created a tale of two settlements. ICE reminded us what management looks like, with excellent results and another magnificent quarterly call. The FSB threatens a big CCP shake up. Are we moving towards a better system? Or just another example of the blob bending over backwards towards the banks? And Charles Li has set his CEO departure date as Hong Kong Exchanges miss their first quarter estimates. My name is Patrick L. Young Welcome to the bourse business weekly digest: it's the Exchange Invest Weekly Podcast

ICE reported results with a reminder of how a professional management team deport themselves. There was education aplenty, with a delightfully elegant explanation of how oil settlement processes work (something which was desperately needed after the confusion following the Cushing crisis).

It has become almost commonplace to expect a masterclass from the ICE but this quarter’s call not only rammed home the material difference between the somewhat rambling, amateur performance we had a day earlier but also reminded us of the depth of the ICE team. It’s management ranks may be appreciably thinner than others but each member brings a depth of ability. Ben Jackson was truly enlightening while Scott Hill shone once again. Jeff Sprecher was naturally peerless.

One quarter on and I suspect there is a hint of realisation amongst the investor/analyst community that they hastily leapt to an erroneous conclusion over eBay. Certainly there can be no doubt that the difference between the well managed entities in the parish such as ICE and Nasdaq is exacerbated by a chasm to those other large entities who still appear blithely unaware that they are on the cusp of crisis.

Speaking of which, the CME Group has secured $7 billion as a credit facility to protect against clearing member default, a very sensible caution. Albeit what happens if a GCM fails because of a flaw in CME contract design?

Elsewhere, the Delhi High Court have refused to stay a user complaint about the WTI April settlement in India. A full hearing will take place on June the 24th.

That tale of two settlements, Brent and WTI demonstrated an amazing chasm in the ability to create an orderly market and an orderly settlement process. Ultimately the media just passed by when there wasn't a meltdown...and missed a much more newsworthy event.  Brent Crude Oil Futures settled last Friday at $25 29. That was May the first. Please note this was positive $25 29 not negative

Moreover that settlement was achieved through hard work, concentration and absolutely NO DRAMA whatsoever. Moreover oil traders had such confidence in the ICE Brent crude settlement process they held  Open Interest equivalent to 74 million barrels of crude, which is pretty much the entire working capacity of Cushing on a good day. By comparison, they held 74 million barrels I repeat: through to expiry. Traders and commercial interests had the confidence to hold to expiry and were rewarded with a perfectly coherent settlement process. I don't want to overly load the excellent staff of ICE here as they did the job they are expected to do and indeed regulated by government authorities to provide: a coherent settlement,  as expected of modern futures markets. Sadly, the world's media didn't see fit to cover this smooth event because it lacked the crisis, they demand of modern news. Yet it does open up a whole new series of questions about practice and accountability in other areas.

Behind closed doors there are folks across the exchange industry who are now considering the WTI contract where there clearly seems to be a problem with the design being outmoded and unfit for modern purpose. Hopefully too that discussion extends to CME as they are the people behind the specification which has been around since 1983. Certainly given the zero drama Brent settlement compared to Cushing crisis with a plummet to minus $37 amid some rather incredible trading, it would seem only fair to suggest a lot of introversion is needed to work out how WTI can be cured of this foible going forward. If it cannot be cured, the question must arise: can the contract viably sustain the interest of commercial players

The smooth settlement of Brent certainly contrasts enormously with the CME’s WTI only days earlier. One wonders whether the many lawyers apparently corralling lawsuits will be considering an exchange’s obligation to avoid disorderly markets? Certainly there is a chasm between these two settlements, not merely in price, but in the entire orderly process of one, versus the enormous drama of the other. While the legacy media has no interest in understanding the problem beyond crude economics and scaremongering, it strikes me somewhere in the parish, many restive voices are concerned about recent events. Whether that results in regulatory action or further lawsuits remains to be seen. Certainly every corporate risk committee and board of directors the world over which has any reason to use oil  futures will peruse the enormous contract spread rollover risk and presumably be voting with their balance sheets to use alternatives like Brent for hedging, as opposed to WTO which runs the risk - if not suitably updated - for the modern extraction to storage market structure of oil, of ending up as kind of a punting tool for speculators somewhat removed from being perceived as a coherent risk management tool.

The latter may ultimately burn the futures business where we need the link between risk transfer to be maintained as a priority. Speculation is always welcome, but it is the physical product link through the fiber technology, which gives the parish of exchanges and derivatives exchanges in particular, their strength in making a better market and thus a better world for producers, miners, and everybody else in the value chain of energy impacted commerce. Brent crude clearly retains that link Cushing WTI is broken.

We saw more on that during the course of the week with various Chinese stories. The top Chinese financial regulatory body is urging institutions to strengthen risk controls on investment products linked to international commodities. The Bank of China meanwhile is mulling payout to investors who lost through those exchange traded products on the WTI bets.

That of course is going to prove to be very very interesting indeed, who will end up holding the baby on the Bank of China payments? With such a dramatic loss of reputation, is legal action against CME inevitable given the ongoing discovery exercise by Bank of China's Council in correspondence with the exchange?

In CCP the FSB, the Financial Stability Board, consulted on guidance on assessing the adequacy of financial resources for CCP resolution.

With the banking system, weak in many places, there is a bank driven desperation to avoid responsibility for their actions that's commingled with an inability to pay for it anyway, in the event of a major crisis. To that end, FSB appears to be warming to the bank sponsored approach to make everybody else pay...apart from how poorly that served the world after 2008. And given the failure of banks to reform their egregious attitudes to business, there is a major concern here that CCPs will be forced to bolster their own safety resources. However, the key issue is that it's perhaps time to find a new model for GCMs where banks are increasingly unable to offer the service due to their own shrinkage. There are a lot of issues here bubbling to the surface while this consultation is focused on what looks like a covert attempt by banks to ensure everybody else pays for their OTC marketplace a decade on from the G 20. reforms.

Over in results, Hong Kong exchanges were the biggest reporting Miss of the week with, of course, the Intercontinental Exchange being the biggest success. Sadly, profits were minus 13% at the Hong Kong exchanges, a rather disappointing tally compared to global peers. Admittedly, the underlying trading data was very, very encouraging: the profits were skewed by investment portfolio valuation issues, nonetheless a pity as indeed CBOE the exchange operator also beat their profit estimates alongside Intercontinental Exchange during the course of the last week. And there were also very encouraging results from BGC partners, notably missing were results from Thomson Reuters. They have actually cut their sales outlook. Where Thomson Reuters leads will Refinitiv follow?

In deals this week IHS Markit acquired Catena Technologies, a Singapore trade reporting firm. Terms were not disclosed and Catena will be integrated with the IHS MarkitServ reporting platform. Over in new markets news this week, ICE issued a statement due to the ongoing situation with COVID-19.

“Due to the ongoing situation with COVID-19, we no longer expect to launch ICE Futures Abu Dhabi (IFAD), our new exchange established to launch the world’s first Murban crude oil futures contract, in the first half of this year. We continue to make progress including obtaining relevant regulatory approvals and working with our members and trading participants to prepare for launch. We will communicate further on launch timing as we continue through the process.”

With a world in lockdown and indeed no commercial flights in the Emirates for quite some weeks, it's hardly surprising that ICE Futures Abu Dhabi will be slightly delayed. At the same time major IFAD partner ADNOC -  the Abu Dhabi National Oil Corporation  - have just unveiled their magnificent panorama digital command center, which enabled an agile response during COVID-19. And indeed, for the ongoing management of their oil and gas resources going forward.

It’s not directly related but a clear sign of the cohesion of ADNOC moving towards the digital cutting edge. Similarly, given oil market settlement instability  in CME WTI as well as a lot of volatility in energy generally, it is hardly surprising that this venture will take a few extra months to reach fruition.

In the new markets this week, Zimbabwe: they're opening a stock exchange at Victoria Falls. It's intended to be an offshore financial center structure with the acceptance of foreign currencies at all. Interesting to see but difficult to believe that in the short term, the crisis rocked Zimbabwean economy will attract a huge amount of foreign direct investment. Equally Sudan have set up a bourse for gold as they're opening up their market.

If you're looking for some reading during lockdown if you're seeking inspiration in these hyper volatile times, for markets where career paths are often looking decidedly imprecise, I have a recommendation. If you're trying to get a handle on how technology is affecting life and markets, there's a new book to help you 20 years old from the excitement of the original FinTech, best seller “Capital Market Revolution!” it's time to look at some of those loose strands hanging around which need a spot of perspective, whether you're an exchange parishioner, a FinTech professional, or anybody just trying to stay abreast of where technology is driving investments and finance,

“Victory Or Death, Blockchain Cryptocurrency And The Fintech World” Is an easy read explaining the differing and diverging role of banks and exchanges, explaining the winning business models of the New World Order and placing in perspective just what Bitcoin blockchain and cryptocurrency mean for markets. It's 70,000 words of pure play PLY pith, passively discussing matters of moment. And revisiting the original trailblazing first FinTech best seller “Capital Market Revolution!” which was published in 1999. proved even if I say so myself, rather prescient.

It's a binary world your career will sustain or collapse in the next stage of the digital world, hence the title “Victory or Death” lest you need reminding of the exciting times for finance in which we are living.

“Victory or Death is published by DV Books and is distributed by Ingram worldwide: in stores now.

Meanwhile, while you're waiting for your copy of Victory or Death to arrive, after the podcast, try our pugcast: step over to YouTube and search for IPO-VID in Patrick's opinion comes to the small screen with a series of investor videos with my guest star Toby the pug

In crypto land this week worrying news from the Swiss blockchain Federation, but not altogether surprising. The Crypto Valley may shrink by 90%  - shrinkage  - and become a Death Valley warns Lorenz Furrer the vice president of the Public Private Association. Having polled the country's 800 blockchain firms about the impact of the COVID-19 crisis and subsequent recession on their businesses. 200 responded. Four out of five said they are looking at bankruptcy in the next six months, while 88% said they wouldn't survive without state aid.

Elsewhere. We had a new exchange this week, quite a bizarre one too. Mt Gox has returned!

A short history. No you can't make this up. But just in case you've been asleep for the course of the last 10 Bitcoin years:

Magic the Gathering online exchange traded playing cards for the sort of hyper involved Fantasy games, where if you understand the prevarications of reg NMS, and the minutiae of the SIP rules, you can probably follow the appropriate path to dox, your giants and float your fairies or something. Magic the Gathering then became a crypto exchange Mt Gox. The pivot was initially successful as Mt Gox was the largest Bitcoin exchange for some time. And if you made any cynical remarks about it, as I did, indeed, at Poland's first major cryptocurrency conference many years ago, you received at best ridicule, and at worst outright hostility. However, the Japanese based marketplace fell apart soon afterwards through a long running fraud. Now apparently mount Gox shareholder Albert Jehy has decided to restart the Mt . Gox exchange.

In terms of “a new era for crypto exchanges,” as was the headline in VN Reporter, will that amount to even broader ridicule from the legacy regulated world?

People news this week dominated by two stories. First of all, the biggest executive movement directly in the parish of exchanges. The Hong Kong Exchange’s chief executive Charles Li is going to leave in October next year. He will depart October 2021 at the end of his current contract, it will be therefore a long goodbye from Charles, all the best to him. Certainly Hong Kong exchanges will be a materially different firm to the one he joined in 2009. Whether he leaves in October 2021, or indeed possibly sooner in the event of a more rapid CEO replacement process coming to fruition.

Elsewhere, Dan Gallagher, an SEC Commissioner from 2011 to 2015, where it often seemed Dan was frequently the sole voice of free markets in the actual agency itself. He's moving over to become the chief legal officer of Robin Hood, leaving Wilmer Hale to go executive having been previously on the board of the Robin Hood organization. He's replacing Anne Hoge who is leaving due to issues with family illness, we wish her and her family all the best. Moreover, I wish Dan every success, albeit I continue to worry that Robin Hood risks a legal action when the extent of ‘free execution’ exercises some of the ambulance chasing legal fraternity in a bear market downturn.

Products this week, the London Stock Exchange have announced the launch of an MTS Depo program. It's going to be a platform: an electronic multilateral exchange system for European unsecured money market trading denominated in Euros.

The CME meanwhile they're enhancing the yield curve just a little bit more. They've got an enhanced three year US Treasury note feature coming out. Agha Mirza the CME Group Global Head of interest rate products noted.

"The changes we are announcing today will offer our clients greater precision and seamless spread trading, which they are seeking amid increased fixed income volatility."

Good news. Of course no amendments to WTO because that contract is clearly perfect. One contract which is clearly imperfect at the moment seems to be the world of libor alternatives. The American banker with a worrying headline “Libor alternative isn't a one size fits all benchmark.” Equally. They also said “Libor goes from dying to being in demand with the Fed pushing fast loans”  as once we have the COVID money crisis How was the fan reading Monday but of course via live or as the Fed Embraces Libor Again And Risks Undermining Push To Kill It Yahoo finance noted and that leads us into ICE benchmark administration who published their fourth upgrade regarding the US Dollar ICE Bank Yield Index. Now #HanSolonomics101 gives me “a bad feeling about this”  not about ICE -  far from it. The worry is the blob and its stubborn persistence on new benchmarks which don't appear to be thought through, or indeed consistent with either banking or the digital age. The US dollar ICE Bank yield index aims to replace the US dollar LIBOR, which is of course the largest LIBOR by far for the cash market. Retail banks have been writing to the Fed supporting a broad view that the new benchmark needs to be credit sensitive, because Sofr does not reflect bank funding costs. Therefore “the bad feeling about this” clearly emerged as the Fed splashed money around recently like a Miami rapper in a Benjamin laden 1990s MTV Video as the COVID-19 spread

That left SOFR at zero Yep, a big fat zero, which unsurprisingly, zero is some way below what the banks could actually fund out. A whole new era of backwardation banking clearly could prove exciting but generally doesn’t pass muster with economics 101 (a theory alas QE may feel itself superior to, as the Central banks defy fiscal gravity with hubristic post Newtownian money math). As LIBOR avoided backwardation, bankers not unreasonably noted it might be a better benchmark as things stand for the crisis. There’s also the issue that Revolving Credit Facilities are all still LIBOR-based lines but clearly may be endangered by SOFR-world.

Amidst this potentially chaotic discrepancy, ICE Benchmark Administration (IBA) came up with the Bank Yield Index which they have been testing since December 2017 and introduced in Jan 2019.

In fact, iterative tweaking continues as the IBA team seeks the best possible solution, all the while sharing the test data with the general public. Thus the update this week of test results until the end of April, with 14 panel banks on board out of the 16 panel banks who calculate US dollar Libor. IBA aims to launch the index in the latter part of this year COVID dependent as ever, Or as Latin, jokesters might say, “COVIDus Paribas”, of course.

Of course Ameribor from the perma fertile mind of Dr. Richard Sander also incorporates credit sensitivity and providing a fascinating benchmark for the vast seam of smaller American banks, which also shows just why libor wasn't so bad and indeed why one size fits all seems horribly analogue in a multi dimensional digital world, particularly as a “cut and shut” emergency solution to the perceived labor problem.

The conclusions clearly remain: considerable concern that the blob wants one size fits all, the lack of credit sensitivity in SOFR and the fact that what was always going to be ‘a process akin to changing all four jumbo jet engines in mid air’  is now equivalent - thanks to COVID-19 - to changing said engines in mid air while circling in a holding pattern above an active ash-spewing volcano, those who want to compare that with, say the infamous 1982 BA flight  BA009, which coined  the Galunggung Gliding Club for those who survived... It may be a useful point of reference for bearing in mind just how dangerous it is to tinker with things that work in financial markets, even if they might be somewhat imperfect. So, Libor lives on will Sofr take over? It's difficult to tell actually at this juncture in the COVID crisis, the blob says yes, the markets may yet say no.

In regulation, Bloomberg are going to pay $5 million to settle an SEC investigation of their brokerage practices. Not so long ago. Indeed, the company's founder spent that sort of money from Bloomberg before breakfast on SMS messages for his presidential run.

However, the big regulation news this week was all about SEC statements to modernize the governance structure of the national market system plans for equity market data. Or as the Wall Street Journal put it in headlines: exchanges told to give brokers more say in how stock data are distributed. The one thing I think I have in perspective as an investor is my place in the food chain. Pick the first bug that is not conducive to meeting windshields at any speed, and you're in line with my portfolio's relevance to humankind. Therefore, I wish my daughter were cheaper in places but I actually can follow that if I want the extra cream on top of loads of extra data points. Or if I want that data delivered in decently quickly, then I would expect to pay more. I happen to think some basic cheap data can help drive volume to exchanges but if people want those pricey optional extras, well, they can pay for them, and good luck to them.

Curiously, lots of financial institutions retain a belief that all data ought to be quasi-free essentially regardless of the time and effort put into creating, storing or delivering it. This is indeed curious as last time I looked those folks when in New York didn't seem to lunch in McDonald's, but preferred the likes of the late lamented Four Seasons. Whether that amounts to idiocy or hypocrisy. I'll leave it to you to judge. However, the most worrying point is that regulators appear eager to bend over backwards to destroy data distribution by making it a communist style centrally planned one size fits all exercise. As a windshield avoiding micro bug with some insights into capitalism, I see that as a spectacularly dumb idea. However, given the regulator concerned here is the behemoth, which came up with the imbecility of reg NMS and much more. Let's just say we have our ongoing differences.

So ladies and gentlemen, only one piece of big world this week while much has been happening: Pop over to medium and have a read of my post. “There's no such thing as bailout money, only taxpayers money,” I'm proud to say that we are not going to be taking a penny from the Government during the course of this crisis, I believe as a small entrepreneur that self reliance is vitally important. Moreover, given the fact we were 127 months into an American expansion alone, by the time this crisis hit, it was indeed feasible that you could have stored something for a rainy day. Let those who deserve, need, and really ultimately need that money, tick the government grants, we will not be taking a cent. And indeed, I was delighted to notice that even Gwyneth Paltrow decided to follow in his footsteps this week by refusing to take government bailout cash. And on that bombshell, ladies and gentlemen, I wish you a great week in markets. But moreover, remember the way to get this sort of daily pith in your inbox every day - And trust me, there was a lot lot more in the world of exchanges that happened this week that we can't cram into this podcast, - then please subscribe to exchange invest the Daily Bourse Business Digest. My name is Patrick L Young. I wish you a great week in markets. Thank you very much for joining this the exchange invest weekly podcast


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the Galunggung Gliding Club

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There's No Such Thing As Bailout Money, Only Taxpayers Money. (Shorter version on LinkedIn: There's No Such Thing As Bailout Money, Only Taxpayers Money).

PPE Exchange
PPE Exchange