The CFTC leads the news with a couple of rule decisions, one of which is controversial beginning with its vote. The IMF says that European banks may have to sell trillions of dollars in assets through next year if their financial firewalls prove inadequate. The hedge fund industry, coming off a fairly lousy 2011, sees enthusiasm for new startups wane as far fewer investors are willing to fund new ventures. In the top box, lots of attention paid to the CFTC, which is a great showcase for how well MarketsReformWiki catalogs regulatory information; and Sarah Rudolph’s JLN Options Newsletter has a comparison of incoming mini option offerings from NYSE Arca and ISE.

The CFTC says that JPMorgan Chase allowed Lehman Brothers to consider customer funds as its own, so that LB could borrow more prior to its 2008 collapse.  The Richmond Fed’s Jeffrey Lacker says that the Volcker Rule may not be possible to put into practical practice. Deutsche Börse announces details about the closure of its First Quotation Board, scheduled for the end of 2012.  In today’s Top Box, there’s no shortage of stories on a pre-holiday issue:  NYSE Arca announces mini-option contracts; JLN Options’ Sarah Rudolph has an interview with Thomas McKeon of Clothier Springs Capital Management; and the most interesting man in the world makes headlines in Fontana.

BATS exchange issues its IPO today. Recent CFTC rules prevent dealers and clients from using a standardized clearing model proposed by the FIA and ISDA. Paul Volcker, in a speech yesterday, reiterated calls to reform financial and governmental systems. It was a sleepy news day, but the top box today is bursting with fresh content: commentary by Sarah Rudolph of JLN Options exploring the value of CBOE’s new VIX of VIX; a MarketsWiki.TV interview with Tom Callahan of NYSE Liffe US; an interview from HFT Review with Leo Melamed; and a sharp analysis of Dodd-Frank by Merton-Sholes via OpenMarkets.

By Sarah Rudolph

Last week at the FIA conference in Boca Raton, the Chicago Board Options Exchange announced a new CBOE VIX of VIX Index (VVIX) that measures the volatility of the CBOE Volatility Index (the VIX index). The VIX index itself is a measure of the market’s expectation of future volatility implied by the prices of options on the S&P 500 stock index.

Who are the likely users of the index? Anyone who trades volatility products or watches the VIX index, according to Catherine Shalen, director, research and product development, for CBOE. “It is a natural offshoot of the VIX; it uses the same methodology but applies it to a new asset class.”

Currently, there are no futures or options traded on or planned for the VVIX index, according to Shalen. It can be used as an indicator, in particular to capture volatility risk premium for those who trade a portfolio of VIX options. VVIX measures the price of a portfolio of VIX options, just as the VIX measures the price of a portfolio of S&P 500 options, she said. The CBOE has noticed that, historically, if you sell the portfolio on a consistent basis, you can expect, on average, to earn a volatility risk premium.

Mark Wolfinger, a former CBOE market maker and author of The Rookie’s Guide to Options, said he thinks the new index will be a success for the CBOE because of the volatility of the VIX index, but said he expects the VVIX to be used mostly for speculation rather than hedging, and he prefers to think of options as a hedging tool.

Read the rest of the report here.

Considering the MF Global collapse and how it damaged customer funds, various participants in the futures industry bring forth proposals on how to protect customer collateral. Exchange operators in the US agree to let regulators have another three months to figure out what to do about flash crash rules, though they didn’t agree to stay seated while waiting. The ISDA determines that the Greek bailout doesn’t constitute a default event, so insurance doesn’t activate. ICE reports success at keeping most “stupid algo” orders out of its market. And in today’s top box, a JLN Options Sarah Rudolph interview with Russ Chrusciel of SunGard’s Valdi Options Solutions.

The SEC increases its consideration and attention on the role of technology and automation in trading, after giving the industry a decade’s head start on the issue. BGC Partners increases its stake in the ELX Futures Exchange. Now it’s not just Britain; at least four European nations are getting a stiff neck over the EU’s intent to regulate the bank capital of individual states.  The MF Global investigation shifts to wire transfers made by the company, but the investigative song remains relatively unchanged. In the top box, Sarah Rudolph reports on John Damgard’s recent speech, his last as FIA president.

by Sarah Rudolph 

In what he said was his last speech as president of the Futures Industry Association, John Damgard was optimistic that Republicans would dominate both the Senate and the House in the next election, but not that they would be able to undo any of the provisions of the Dodd-Frank legislation to which they object.

Damgard told the Union League Club of Chicago that he expects the House to remain Republican and even gain a few more seats, and that the Senate will likely pick up four to six Republican seats. 

“The recent redistricting has guaranteed Republicans control of the House for the next 10 years,” he said. Odds are stacked against the Democrats, as super PACs are focused on supporting Republican House members, and the Republicans have stymied the Democrats with the Supercommittee, he added.

BATS Global Markets hopes to launch its IPO sometime next month.  As Greece hurries to put debt-related laws into place, creditors of that nation worry about far-reaching consequences of that legislative effort.  The CFTC will next week consider ideas to safeguard customer funds in futures accounts better than telling MF Global, “Remember, it’s bad to use that money for yourselves.”  In the top box, Sarah Rudolph provides deep details about CFE’s new Radar Logic real estate index, and you’ll also find a list of the top topics currently being discussed on FuturesCrowd.com; add your own thoughts, if you haven’t already!

NYSE Liffe in London suggests that imposition of futures contract position limits, similar to what is currently done in the USA, would be a good idea.  UBS, in the glare of the LIBOR interrogation light bulb, suspends traders; UBS is also said to have asked Canadian regulators for immunity in that probe. NYSE Euronext, making good on its determination to go in new directions, buys a stake in Fixnetix, which provides high-speed trading tech. In today’s top box, Jim Ginsburg provides yet a third perspective on the wisdom (or lack thereof) of CME Group’s plan to dump the CBOT Building; and JLN’s Sarah Rudolph interviews Henry Schwartz of Trade Alert.

Henry Schwartz is the President and Founder of Trade Alert, a real-time option flow analytics firm that serves Wall Street sell-side derivative desks, floor brokers, market makers, hedge funds, and proprietary trading firms. He previously worked at Banc of America Securities, where he was responsible for electronic market making on the start-up ISE. Trade Alert was founded in 2005. Schwartz spoke with JLN Options editor Sarah Rudolph about the OptionAlert analytics system, technology challenges for clients and firms, and fragmentation in the options markets.