Financial Times UK 30Jan2020

Thursday 30 January 2020 ★ FINANCIAL TIMES 25

M A R K E T S & I N V E ST I N G

G R E G O RY M E Y E R— N E W YO R K

Hedge funds and other speculative
traders will escape strict curbs on
commodities bets under proposed US
markets rules more than a decade in
themaking.

Federal position limits on raw materials
such as oil and grain were mandated by
the Dodd-Frank financial reform law of

2010. But the Commodity Futures
      Trading Commission’s first attempt to
      impose them was thrown out in court
      after two banking trade groups sued.
      The agency is scheduled to vote today
      on a watered-down version of the rule
      after what Heath Tarbert, CFTC chair-
      man, described as months of outreach.
      If it passes, the agency will set firm
      federal limits on the size of holdings in
      25 commodity contracts. For energy
      and metals, the CFTC will take over the
      role from futures exchange operators
      such as Chicago-basedCME Group.
      Outside of grain markets, the limits
      will apply only to speculative holdings
      of “spot month” futures on the verge of
      expiry, such as the current contract for
      March 2020 delivery of West Texas
      Intermediate crude oil. Even then, the

limits will apply to the last three days of

trading — the same window currently

regulated by exchanges, a CFTC official

said.

In the CFTC’s previous version final-

ised in 2011, federal position limits

would have applied to holdings of all

contract months listed on exchanges —

for example, crude for delivery in

March 2022.

“The goal of position limits is to pre-

vent corners or squeezes, which are

nefarious tactics to manipulate the mar-

ket,” said Mr Tarbert, a Republican who

was appointed by President Donald

Trump in 2019.

“They can also reduce the likelihood

of chaotic price swings caused by exces-

sive speculation or when prices reflect

the gamesmanship of traders,” he

added.

The proposed rules are likely to be

opposed by the two Democrats among

the CFTC’s five commissioners. One of

them, Dan Berkovitz, helped draw up

the earlier rule in a former role as CFTC

general counsel under Gary Gensler,

former Democratic chairman.

Mr Tarbert said the new proposals

would also eliminate an exemption that

Wall Street banks had claimed when

hedging their commodity derivatives

exposure on behalf of investors such as

i n d e x f u n d s. H e s a i d t h e r u l e

would “streamline” the process for com-

mercial companies seeking exemptions

from limits in energy and metals.

The CFTC already directly oversees

position limits in certain grain

contracts. The idea of widening their

application was first floated in the

aftermath of the commodity price spike

of 2008.

Commodities

Hedge funds set to escape stricter rules

as US regulator waters down proposals

K A D H I M S H U B B E R— WA S H I N GTO N

C L A I R E B U S H E Y— C H I C AG O

Navinder Singh Sarao, the British

trader implicated in the 2010 stock

market “flash crash”, avoided further

jail time on Tuesday as his sentencing

in Chicago brought a years-long legal

dramatoaclose.

The 41-year-old west London-based

trader, who has autism and lives with his

parents, was sentenced to a year of

home imprisonment after he pleaded

guilty to “spoofing” charges and

subsequently co-operated with a US

crackdown on abusive trading practices.

Wearing a black suit and blue tie, Mr

Sarao told the court ahead of his sen-

tencing on Tuesday that his life had

changed drastically after his arrest and

that he would never have engaged in

spoofing if he had known it could lead to

a possible jail sentence.

“From the moment I started trading, I

became completely engrossed in it,” he

told the court. “It was only after I was

arrested that I realised I was totally

addicted to it. I made more money than

I could have ever imagined but I did not

feel any different. I was still just me

but I felt pressured to live a different life.

“When I was at home playing video

games, that was OK when I was poor

but, now that I was rich, surely I should

be doing something more extravagant.

But whenever I thought about buying

nice things, I knew that I would just get

bored with them.”

District judge Virginia Kendall said on

Tuesday that she wanted her sentence

to reflect the severity of Mr Sarao’s

actions while mitigating the impact that

further imprisonment would have on

someone with autism.

Mr Sarao had admitted in 2016 that

he manipulated the market in E-Mini

S&P 500 futures over five years by

rapidly placing and withdrawing orders

to push prices up and down, an illegal

tactic called spoofing.

US prosecutors this month hailed his

“extraordinary co-operation” and

asked the federal judge to give him a

sentence of time served.

Judge Kendall said the prosecutors’

appeal for leniency was factored into

her decision. “It’s a rare thing in

this building for the government to

seek a time-served sentence and I

don’t take that lightly,” she said.

Roger Burlingame, the trader’s

attorney, told the court that his client

currently lived off government benefits

after he was defrauded of the majority

of the $70m in trading profits he earned

and paid back the rest.

“He spent no more as a multimillion-

aire than he now does as a public

benefits recipient,” wrote Mr Burlin-

game, noting that Mr Sarao’s only

purchase had been a £5,000 second-

hand Volkswagen that he found too

stressful to drive.

After the sentencing, Mr Burlingame

said he was grateful to the judge for her

decision. “Nav has been living under the

threat of a very long sentence for almost

five years. He is overjoyed to put this

behind him, go home and move on with

his life.”

Mr Sarao’s case drew widespread

attention. The US blamed him for caus-

ing the 2010 flash crash when New York

stock markets crashed and quickly

rebounded in a single afternoon — while

the British press dubbed him the

“Hound of Hounslow”.

The claims that Mr Sarao’s trading,

much of it automated, had triggered the

2010 crash drew widespread scepticism.

Derivatives

British trader blamed for ‘flash crash’

avoids more jail time after sentencing

The CFTC already oversees position

limits in certain grain contracts

FastFT

Our global

team gives you

market-moving

news and views,

24 hours a day

ft.com/fastft

H U D S O N LO C K E T T— H O N G KO N G
S U N Y U— B E I J I N G

Traders in Shanghai are preparing to
return to work next week, even though
the worsening coronavirus outbreak
could leave mainland China’s financial
hub severely depleted.
Local brokerages and asset managers
said they expected to field reduced
teams on Monday morning when equity
and bond markets in the world’s second-
biggest economy resume trading after
an extended lunar new year break.
That is despite orders from the Shang-
hai government that most businesses
stay shut until February 9.
The shuttering of business activity in
the city of over 20m people comes as
concerns mount over the coronavirus
epidemic, which has killed more than
130 people and infected thousands,
mostly in the central province of Hubei.
Zhang Pan, director of research at
Shanghai-basedRaman Capital, which
manages over $430m in bonds, said six
of its 27 employees will report to work.
However, they will trade wearing face
masks and with no air conditioning in a
bid to counter the spread of the virus.
“Bond trading resumes on Monday and
we need to make the market function,”
Mr Zhang said.
Staff at other Shanghai-based compa-
nies expressed surprise that the central
bank has allowed trading, clearing and
settlement to resume.
“I was a bit surprised when they said
‘open on Monday’ but I guess they want

to come back to normality,” said one

director at a Shanghai brokerage.

“You cannot do this type of job

entirely from home, you need some

people at the office,” he added, noting

that his company has told those with

symptoms of the virus to stay home.

Companies that disobey the shut-

down could face repercussions.

Shanghai-based lawyer Dong Fei

wrote on the official WeChat account of

the city’s bar association that businesses

defying the order could be fined up to

Rmb120,000 ($17,300) or have their

licences removed.

But Shanghai-based brokers pointed

out loopholes in the official orders.

Exceptions are made for “companies

important to the national economy and

peoples’ livelihoods” — without specify-

ing what those are.

Unease among market participants is

not limited to Shanghai.

Shen Xiao, a high-yield bond fund

manager atZhongji Investmentsin

Beijing, said he was not sure whether he

would be in the office next week.

“I need to have access to computers in

the office if I want to borrow funds to

make trades,” Mr Shen said. “I haven’t

made a decision because of the disease.”

Shenzhen, which is home to mainland

China’s second stock market, has said its

bourse will also resume trading on

Monday after the central bank pushed

back the reopening originally scheduled

for Friday.

But the local government has not

imposed restrictions on companies

operating in the city, even after the pro-

vincial government for Guangdong

ordered businesses not to resume work

until February 10.

Hong Kong, with which Shenzhen

shares a border, has paused rail services

with the mainland and suspended

permits for Chinese tourists visiting the

territory.

Traders may have a tough task when

the opening bell rings on Monday.

Shares in Chinese companies listed in

Hong Kong and New York have

been battered in recent days by con-

cerns over the spread of the virus and

the pressure it will put on China’s

already slowing growth.

When Hong Kong’s stock market

resumed trading last Thursday, the

benchmark Hang Seng index fell almost

3 per cent, its biggest daily drop since

August.

The Hang Seng China Enterprises

index — which contains leading

mainland Chinese companies listed in

the territory — finished the day down

3.3 per cent.

Financial and industrial stocks

tracked by the China-focused index

were among the hardest hit by the sell-

off, falling 3.6 per cent and 4.8 per cent,

respectively.

These two market segments alone

account for nearly half the weighting by

market capitalisation of Shanghai’s

benchmark composite index.

Analysts said they expect a sharp sell-

off in mainland stocks on Monday when

trading resumes, with foreign investors

using Hong Kong’s Stock Connect pro-

gramme among market participants

most likely to offload shares.

Authorities are also aware of pent-up

selling pressure among the country’s

retail investors, who have watched

share prices elsewhere in the region

drop in response to the outbreak.

This week, China’s securities regula-

tor pre-emptively instructed traders to

“actively guide investors to rationally,

objectively analyse the impact of the

outbreak” and “adhere to the concepts

of long-term and value investment”.

“The main concern is what sentiment

in the market will be on Monday,” said

the brokerage director in Shanghai. “I

don’t think there’s going to be any kind

of operational constraint there.”

Additional reporting by Christian Shepherd

in Beijing

China’s financial centre is set

to reopen even though most

local businesses remain shut

‘Bond

trading

resumes

on Monday

and we need

to make the

market

function’

The suspension

of business

activity in

Shanghai has

left public

transport

almost deserted

Aly Song/Reuters

Cross asset.Coronavirus fallout

Shanghai traders braced for

return to work after outbreak

M Y L E S M C C O R M I C K

Hedge funds includingCitadeland

Marshall Wacehave ramped up their

short positions against airlines

disrupted by the spread of a deadly

coronavirus in China as carriers cancel

flights to the country.

So-called short interest in the shares

ofAir France-KLM andLufthansahas

risen this week as speculators placed

bets that their market value would head

lower.

The airlines’ share prices have already

tumbled this month — both falling

about 13 per cent — on concerns over

their exposure to the Chinese market.

Disclosed short positions in Franco-

Dutch Air France-KLM represented

4.55 per cent of the total shares

outstanding on Monday, the highest

since mid-2018, according to data from

analytics company Breakout Point.

At Germany’s Lufthansa, they hit

3.86 per cent on Tuesday, the highest

since mid-2017.

Chinese authorities are racing to con-

trol the virus that broke out in Hubei

province and has killed more than 130

people. The prospect of people reducing

travel to and from China, either by

choice or because of travel bans, has

shaken the airline industry.

Lufthansa said yesterday that it

would suspend flights to mainland

China until February 9 following a simi-

lar move by British Airways and a deci-

sion by Hong Kong’sCathay Pacificto

halve the number of its flights to and

from the Chinese mainland.

Air France has cancelled flights to

Wuhan but said it planned to continue

operating on routes to Shanghai and

Beijing for now.

Many analysts have compared the

virus to the 2003 Sars outbreak that also

came from China and which Lufthansa’s

then-chief executive described as

aviation’s “worst-ever crisis”.

Air France-KLM and Lufthansa are

the European airlines most exposed to

the Chinese market, according to Citi-

group. Air France-KLM relies on main-

land China for 3.6 per cent of total reve-

nues, according to FactSet, while at

Lufthansa the figure is 1.9 per cent.

Citadel, the Chicago hedge fund, dis-

closed a new short position of 1.43 per

cent against Air France-KLM with Mar-

shall Wace andSandbar Asset Manage-

ment, of London, increasing their posi-

tions to 1.49 per cent and 1.04 per cent,

respectively. Marshall Wace increased

its short position in Lufthansa to

0.61 per cent while Citadel pushed its

own up to 3.25 per cent.

Citadel could not be reached for com-

ment. Marshall Wace and Sandbar

declined to comment. Air France-KLM

and Lufthansa both declined to com-

ment on the shorting of their stocks.

Equities

Speculative

bets ramped

up against

airlines hit by

China virus

Air France-KLM and

Lufthansa are the

European airlines most

exposed to China market

Coronavirus triggers slide in Chinese shares listed in Hong Kong

Indices rebased

Source: Bloomberg







 Jan  

China’s benchmark for Shanghai

and Shenzhen-listed shares

is closed until Feb 

Hang Seng China Enterprises

CSI 

JANUARY 30 2020 Section:Markets Time: 29/1/2020 - 19: 23 User: stephen.smith Page Name: MARKETS1, Part,Page,Edition: LON, 25, 1