Risk Management
October 19, 2025 – Weekly Comment
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I have to start this one with a disclaimer: What follows are ONLY my personal views. Nothing below should be attributed to RJ O’Brien or StoneX in any way.
“When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, it’s the reputation of the business that remains intact.” -Warren Buffet
In 1983, when they filmed Trading Places, the CME floor was supposed to be the venue. However, the exchange was concerned the movie would besmirch its reputation and denied access. Ultimately it was filmed in NY.
On the trading floor, members wore badges with identifying acronyms (like VAL for Billy Ray Valentine). In the old bond room was a tom-boyish girl, who had an Ivy League education but was a bit ditzy, sandy blond hair, plain clothes, Converse gym shoes. Her badge was AFS. Her nickname: Awfully F-cking Stupid.
In 1993, I had been at a CME members meeting, before the exchange went public, and the Chairman at the time, Jack Sandner, a trim, fiery former amateur boxer was making a speech, “The CME is not in the TRADING business” he shouted. “It’s in the RISK MANAGEMENT business.” That line always stuck with me. We’re not a bunch of gamblers. We’re a critical block in the financial architecture that allows prudent risk transfer from hedgers to speculators.
It’s now obvious to everyone that lines have blurred. But I hadn’t even realized this: The CME partnered with FanDuel to provide a platform for betting markets. For the last couple of days, I have struggled with whether I should say this or not. That’s AFS.
Here’s the CME press release from August:
https://www.cmegroup.com/media-room/press-releases/2025/8/20/cme_group_and_fanduelpartnertodevelopinnovativeeventcontractspla.html
CME Group, the world’s leading derivatives marketplace, and FanDuel, America’s premier online gaming company, part of Flutter Entertainment, today announced a groundbreaking alliance that will launch new products and expand access to financial markets for millions of FanDuel customers in the United States.
This innovative partnership will build on CME Group’s long track record of developing regulated, transparent markets, and FanDuel’s vast customer reach. Together, the companies will develop new fully funded, event-based contracts with defined risk. Customers will be able to express their views multiple times a day on a wide range of markets with simple “yes” or “no” positions for as little as $1. [CME will create a new non-clearing FCM]
Things change. Quickly. Few will likely recall “socks and stocks”. That’s when Sears Roebuck (oh, you don’t remember that?) bought Dean Witter and put kiosks in department stores to sell financial services. From a 1984 article in ‘The Oklahoman’ “Some in the financial industry joke about customers buying stocks and socks and real estate from the same store where they buy underwear and tools.” But the results of a recent survey reveal what may be their true feelings. According to a survey from March in the American Banker, CEOs of big banks said they think Sears will be their major competitor in 1990.”
https://www.oklahoman.com/story/news/1984/05/26/socks-and-stocks-sears-financial-services-catch-on/62802189007/
This is from a BBG story about Robinhood
https://blinks.bloomberg.com/news/stories/T4A708GPQQLX
Like a lot of things Robinhood has done, this latest move [into gambling markets] has been widely derided for what seems like pretty obvious reasons. “The key is to help people understand the difference between gambling, trading and investing—some companies try to blur the lines,” says Andy Reed, head of investing behavior research at Vanguard. “We’re not trying to present investing as something that’s fun or gives you instant gratification. It’s not about dopamine, it’s about serotonin.”
Tenev sees it differently: There’s no reason for the brokerage app—like a grocery store that sells both carrots and Ding Dongs, ground beef and Impossible burgers—not to offer memecoins alongside individual retirement accounts, or to promote both sports bets and financial planning services.
Speaking of risk management, Zion’s and Western Alliance Bank apparently made loans where they thought they would be paid off first from borrower MOM CA Investco, LLC (a CA real estate firm). They weren’t. They discovered they were much lower down in the jenga credit tower (made famous in The Big Short). Is the whole thing about to collapse? I have no idea, but probably not, after all these institutions are overseen by the Fed, with its sophisticated risk management tools. Which, after running the numbers through the model, always ends up with “Hey Jamie, you’re going to have to buy another bank.” The worry isn’t banks. From the IMF, “…nonbanks now hold around half of the world’s financial assets. In the United States and the euro area, many banks now have nonbank exposures that exceed their Tier 1 capital—a crucial cushion that allows a bank to absorb losses and remain stable in times of crisis.”
Staff at the Fed and Treasury are obviously well aware of risks. They are already working on what to do if there IS a collapse. Me? I’m trying to figure out if I should bet a couple of dollars on the Bears game. Not that it’s going to make me rich. It’s not as if I’m the Governor of IL JB Pritzker, who reported $10 million in income of which $1.4m was gambling winnings. Hey JB, ever see that Twilight Zone episode where the low level mobster dies and finds himself in a beautifully appointed casino surrounded by beautiful women, where he can gamble all day? He NEVER loses. Finally he is getting so bored that he says to his jovial and attentive guide, this is awful, I never lose, no matter what. This isn’t heaven!
“Heaven? Whatever gave you the idea you were in Heaven, Mr. Valentine? This is the other place!“
It’s almost like Hillary’s ‘no-lose’ cattle trading in 1978/79. Um, did it ever occur to you that they were letting you win? No, of course not, you studied cattle statistics.
By the time she closed her trading account ten months later, she had racked up $99,541 in profits, a spectacular 10,000 per cent return on her initial investment of $1,000. [She actually opened the account with $25k]
https://www.nationalreview.com/2016/06/hillary-clinton-cattle-futures-windfall/
Look, I might be all wrong about this whole thing. Maybe AFS really was smart.
OTHER THOUGHTS/ TRADES
Powell had previously said the Fed should move from a regime of ‘abundant’ reserves to ‘ample’. Last week he suggested the Fed would stop balance sheet run-off in a couple of months. The spread between one-month Fed Fund contracts and one-month SOFR is an indication of liquidity tightening at the margin, the risk is that reserves fall below ‘ample’. FFV5 settled 9591.25, SERV5 9583.25, spread of -8. FFX5 9615.0, SERX5 9607.5, spread of -7.5. (spread in lower panel)
On Thursday, the ten year yield fell below 4% to end at 3.975 vs TYZ5 113-24. However, rates popped back up slightly on Friday to 4.007 vs TYZ5 113-15. 4% has been the lower yield bound this year, but I think we’re going to see 3.79 to 3.80 this week. In 2024 the low was 3.62. Current DV01 on TY contract is $67.90, so a move to 3.79 would imply ~114-30 to 115-00 given a parallel shift.
In ten year options, long call strikes TYZ5 113, 113.5 and 114 have been rolled to higher strikes, TYZ5 115 and 115.5 and on Friday, partially into Feb (TYG) 116c. From Friday, +30k TYG6 116c 28, vs -17250 TYZ5 115c at 16 and -1300 TYZ 113-17. TYH6 settled 113-12 and TYG 116c 27 (22d). TYG options expire on 23-Jan. The FOMC is 28-Jan; I would note that TY pushed to a new high just prior to the Sept FOMC.
CPI is released on Friday, expected 0.4% with Core 0.3. YOY 3.1 from 2.9 with Core 3.1 from 3.1. Crude oil is near the low of the year with CLZ5 57.15 settle. The 10y breakeven, treasury minus tip, is at a new recent low 227.6, having been as high as 244 in August. Excluding Liberation Day turmoil, where the low was 205 bps, the range since 2023 has been 215 to 248. The market is not concerned about inflation even though the consumer is. Perhaps Friday’s data will change that.
| 10/10/2025 | 10/17/2025 | chg | ||
| UST 2Y | 351.8 | 346.2 | -5.6 | |
| UST 5Y | 364.2 | 359.2 | -5.0 | |
| UST 10Y | 404.8 | 400.7 | -4.1 | |
| UST 30Y | 463.0 | 460.2 | -2.8 | |
| GERM 2Y | 195.7 | 190.6 | -5.1 | |
| GERM 10Y | 264.3 | 258.0 | -6.3 | |
| JPN 20Y | 270.8 | 262.9 | -7.9 | |
| CHINA 10Y | 184.7 | 182.3 | -2.4 | |
| SOFR Z5/Z6 | -64.0 | -68.0 | -4.0 | |
| SOFR Z6/Z7 | 11.0 | 12.0 | 1.0 | |
| SOFR Z7/Z8 | 18.5 | 20.0 | 1.5 | |
| EUR | 116.06 | 116.63 | 0.57 | |
| CRUDE (CLZ5) | 58.48 | 57.15 | -1.33 | |
| SPX | 6552.51 | 6664.01 | 111.50 | 1.7% |
| VIX | 21.66 | 20.78 | -0.88 | |
| MOVE | 81.65 | 78.62 | -3.03 |
