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Photo of Pantera Capital CEO Dan Morehead

Dan Morehead,
Pantera Capital

I might have been hasty in my last post regarding being bearish on institutional investments in bitcoins. After interviewing Pantera Capital CEO Dan Morehead for Trader Magazine’s current cover story, I refined my views a bit.

Buy-and-hold asset managers will still find investing in the digital currency directly difficult. The bitcoin market remains relatively small, highly fragmented, and illiquid from an institutional investor’s perspective.

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Federal Reserve Vice Chairman Stanley Fischer

Speaking before German Finance Ministry and Bundesbank officials earlier today, Federal Reserve Vice Chairman Stanley Fischer warned his audience that non-bank are less vulnerable than they were during the global financial crisis, but now is not the time to relax.

“Regulation is a ‘cat and mouse’ game,” said Fischer. “Regulators need to respond to existing regulatory gaps and to keep pace with further changes. We hope we will succeed in doing so. But we know that we will never be able to identify in advance all of the threats to stability that are out there.”

The dearth of non-bank data hampers regulators from monitoring the stability of financial institutions and the financial system effectively, he added. “Outside of the banking system, we have only limited information on leverage and maturity transformation rather than precise estimates for all types of non-bank entities.”

However, Fischer has seen an increase in the volume of data that the Fed receives, but the central bank still needs to know the scope and size of hedge-fund and other non-bank activities.

“We need to be alert to changes and trends in the financial system that may pose risks to financial stability, particularly those stemming from areas of the non-bank sector that are not subject to prudential supervision,” he explained.

Fischer cited mutual funds that track the return on leveraged loans, credit default swaps, and other less liquid assets as an example. “These funds offer daily or even intraday liquidity to investors while holding assets that are hard to sell immediately, thus making the funds vulnerable to liquidity risk.”

This maturity transformation remains a key vulnerability as many non-bank financial firms rely on the secured short-term funding markets to finance their activities, according to Fischer.

“Many of the firms that rely on this maturity transformation are highly leveraged and thus more vulnerable to threats to their solvency. The proposed international framework being developed by the Financial Stability Board for margins on securities financing transactions may be an important tool for limiting the pro-cyclicality and sharp deleveraging that can occur in these markets.”

This may be a poorly timed post since the Tabb Forum’s annual fixed-income conference is tomorrow, I’m pretty bearish on meaningful changes in corporate-bond market these days.

There’s been a lot of activity in the electronic-trading space for fixed income over the past year as agency brokerage ITG and Tradeweb launch their respective trading platforms for corporate bonds to compete against MarketAxess’s all-to-all trading model.

Even this week, we saw Lime Brokerage co-founder and former-CEO Alistair Brown announce the February launch of the first phase of OpenBondX, a new electronic fixed-income trading venue.

All of this activity and innovation is reminiscent of all the ECNs that sprung up after the US Securities and Exchange Commission (SEC) changed the order-handling rules in the 1990s and swap-execution -facility(SEF) explosion when the SEC and US Commodity Future Trading Commission (CFTC) began writing the new rules for over-the-counter (OTC) swaps trading mandated by Dodd-Frank.

BlackRock only added gasoline to this fire when it published its white paper calling for a reform of the corporate-bond market’s market structure in September 2014 asking for new and innovative trading models for the market.

However, maybe the buy side should start looking for change internally and not externally.


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The industry might have rung out 2014 discussing the “grand compromise” on the US equity market structure led by the Intercontinental Exchange that would lower access fees in exchange for a trade-at rule, but BATS Global Trading wasted no time in the new to offers its market-structure alternative.

In an open letter to the industry, exchange CEO Joe Ratterman and president Chris Concannon argue against the compromise as a bad deal for investors despite it being a win-win for exchange operators and broker-dealers.

“[I]nvestors will likely pay more both in the form of potentially wider spreads as well as fewer and inferior execution choices resulting from restrictions on competition,” they wrote.

The pair suggests that exchanges should determine their access fees, and associated rebates, using a tiered price model based on an issue’s liquidity. For example, the most liquid stocks could have a five cent per 100 share, or $0.0005 per share, and more illiquid a stock is, greater its access fee.

They also recommend that alternative trading system (ATS) operators be required to disclose the operation rules of their platforms, descriptions of available order types, transparent eligibility guidelines, participant pricing tiers, order routing logic, and eligible routing destinations as well as expanding Rule 605 and 606 reports to include execution quality on a dealer-by-dealer basis.

None of these ideas are a real departure from the industry’s ongoing market-transparency and market-structure conversations.

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The era of good feelings definitely is over for the over-the-counter (OTC) derivatives market judging by the tone of the conversations at yesterday’s SEFCON V.

“It’s to be expected,” said  a beaming Chris Ferreri, chairman of the Wholesale Brokers’ Association Americas (WBAA) and who hosted the event. “Last year, we all were trying to accomplish the same thing. But with ‘made available to trade’ in place, we are all competitors now. Isn’t great?”

The zingers flew wild and free during the conference’s first panel on what the industry has learned over the first year of swap execution facility (SEF) trading.

Representatives from Bloomberg, Credit Suisse, the DTCC’s Data Repository, Thomson Reuters,  tpSEF and UBS shared some rather candid thoughts and information during the verbal free for all.

Although the UBS offers a SEF aggregation service, it currently does not connect to Bloomberg SEF or tpSEF.

And when it comes to differentiating the SEFs that have sizable liquidity, it is all about the bells and whistles that they offer, according to Bloomberg’s Nathan Jenner and Thomson Reuters’ Jodi Burns.

However, the SEF operators might want to cool their technology pitch to swap dealers and institutional investors, suggested PIMCO’s Ric Okun, who spoke on a later SEF-technology panel.

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