TheChek News Flow

One year ago today, on August 24, 2015, severe volatility drove S&P 500 futures to

be halted in pre-market trading, listed SPX option markets to go black, and other

equity market dislocations to arise. That moment was one of the most severe

shifts in SPX volatility, switching from a relatively low volatility period to extremely

high volatility (11% selloff in a week) almost instantaneously. Vol control funds,

multi-asset investment portfolios with a dynamic asset allocation determined by

market volatility, were important contributors to the severity of that selloff. In

this piece, we provide background on vol control funds and guidance on how

investors can monitor them going forward.

Vol control products sell equities when volatility is rising and buy equities when

volatility is falling, creating a market feedback loop. Product growth has slowed -

but rebalancing impact has grown in illiquid, risk-averse markets. This has been,

and continues to be a driver, of the repeated pattern of sharp selloffs followed by

consistent rebounds seen in the last 2Y, and contributes to high skew and vol-ofvol

in derivative markets. Several fund features - most importantly lags in trading

following a volatility spike - keep the products from becoming a systemic risk.

The most important trading implication of a large vol control market is the funds'

impact on sharp selloffs. We have had almost as many transitions from very low

vol to much higher vol in the last 6Y as we have had in the prior two decades.

Through fund-by-fund research of $200bln of vol control funds, we have

categorized the funds into four categories, and created a DB Vol Control

Composite model based on systematic strategies that we believe captures the

essence of these products' equity allocation patterns. We estimate that a sudden

4% global equity selloff today would drive $20bln of selling by vol control funds -

less than earlier this year - as realized vol is now below many funds' thresholds.

We estimate that in the aftermath of the Aug-15 selloff, vol control funds sold

around $50bln of global equities, and in the aftermath of the Brexit vote sold

around $25bln. These numbers are large in absolute terms - and stand out

when they're coming from an investment type that does minimal asset allocation

rebalancing on a typical day-to-day basis.

Mainfirst

*VW-To start settlement talks with US States by 1st Nov-HB........+0.5%

*DEUT POST-May sell E-Transporter to third parties says FAZ.......-0.5%

*FLUGHAFEN ZURICH-Rev 480.7m(482.83),Ebitda 265.9m(261),o/l ok....-0.5%

*AIRBUS-Qantas would love to excercise 787 options,not A380's.....U/C

*VIVENDI-Fininvest to claim €570m,Universal bans excl m/stream....-0.5%

*SCA-Plans to split group into 2 listed companies in 2017.........+0.5%

*SAP-Alibaba to offer 3 SAP Cloud-Based solutions in China........+0.5%

*ASTRA-To sell Antibiotics business to Pfizer,will clse Q4 '16....+1%

CS

AstraZeneca M/P To sell small molecule antibiotics ops to Pfizer

BAE Systems -0.5% Pentagon Tester Warns of ‘Significant’ F-35 Problems to Fix

Brenntag +1% CS upgrade to NEUTRAL (Valuation)

Carillion -1% No's inline, no changes to FY expectations

Charles Vog M/P Numbers inline, EBIT guidance slightly better

Flug Zuerich M/P H1 revs inline, EBITDA 2% ahead, guidance slightly light

Glencore +1-2% 1H adj EBITDA $4.0bn est $3.9bn, $670m divestment

Hikma M/P Numbers inline with warning back on 4th August

Lenzing UNCH H1 revenues inline with consensus, EBIT slightly ahead

Lundbeck +3-5% Q2 revs DKK3.75b vs cons 3.67b, guidance raised

Miners -0.5% Copper UNCH, Brent -0.70%, Iron Ore -1.00%, China -0.09%

Oils -1% US API Crude Inventories +4.46M barrels last week

OneSavings +3% PBT 8% ahead, revenues 4% beat, guidance inline

Paddy Power +1% 1H underlying EBITDA 3% ahead, guidance inline

Schoeller -2-3% H1 weaker and outlook remains cautious

Unicredit M/P PZU Wants to Buy 33% Stake in Pekao in Tranches

WH Smith +1% Travel Business strong, new store openings on track

WPP +1% H1 Rev GBP 6.54b vs GBP 5.84b, LFL net sales better

Macro :

- S&P 500 Near Record Shows Complacency, Cantor Fitzgerald Says

- Deutsche Bank’s Cryan Calls for ECB Policy Shift: Handelsblatt

Keep an eye on :

- CWI AV : Conwert Immobili 1H Rev. Gains 26% Y/y; Raises Year FFO I View, Has Record 1H Results

- DENERG DC : Dong Energy, Paysafe Enter Stoxx 600; Thomas Cook, Unipol Exit

- DPW GY : Deutsche Post May Sell its E-Cars to Third Parties, FAZ Reports

- FHZN SW : Flughafen Zuerich 1H Passengers Rise; Sees Lower FY Profit Y/y

- HLNG NO : Hoegh LNG Signed Pacts for FSRU Conversion Project

- HSBA LN : HSBC Bought Back 2.16m Shares at Avg 541.63 Pence Each Aug. 23

- LNZ AV : Lenzing 1H Rev. +8.3%; Sees Substantial FY Earnings Improvement

- LIN GY : Praxair-Linde Deal May Get Go-Ahead With Asset Sales: UFP

- LUN DC : Lundbeck 2Q Rev., Ebit Beat Estimates, Raises 2016 Forecast

- SAN SM : Santander Consumer Delays 10-Q Past Aug. 15 Deadline

- SAP GY : SAP, Alibaba to Offer 3 SAP Cloud-Based Solutions in China

- UBSG VX : UBS, Banks Team Up to Develop Digital Cash for Blockchain: FT

- LANS NA : Van Lanschot Says 1H Net Profit EU31.5m vs EU37.7m

- VIV FP : Spotify Said to Be in Talks Over Music Rights Before IPO: WSJ

- VIV FP : Universal Said to Ban Exclusive Music-Streaming Deals: NYP

- VOW3 GY : VW Conflict Shows Consequences of ‘Extreme’ Work Allocation:Weil

- VOW3 GY : VW to Start Settlement Talks With U.S. States by Nov. 1: HB

*BRENNTAG RAISED TO NEUTRAL VS UNDERPERFORM AT CREDIT SUISSE

*CAPE RAISED TO NEUTRAL VS UNDERPERFORM AT MACQUARIE

Streaming service is in talks with record labels to negotiate new contracts

As Spotify AB gears up for a potential initial public offering next year, the music-streaming service is missing one key component in its pitch to investors: rights to play the music in years to come, according to people familiar with the matter.

Spotify is now operating on short-term extensions of its old contracts with all three major record companies, having been on a month-to-month basis with at least one of the labels for nearly a year. It is negotiating new deals that would make its finances more attractive to investors.

Spotify, which saw its net loss increase to roughly $200 million last year even as revenue doubled to more than $2 billion, wants to pay a smaller share than the nearly 55% of its revenue that it currently pays to record labels and artists, according to people familiar with the matter.

It pays roughly an additional 15% to music publishers and songwriters.

But some major label executives want Spotify to pay them as much as 58% of revenue from both its free and paid tiers. That is what Apple Inc. pays for Apple Music subscribers who aren’t on free trials, people familiar with the matter said. Apple has more than 5 million users on free trials, they said.

Some executives think Spotify should pay more than it did when it was getting off the ground in the U.S. in 2011.

Other label executives said they may let Spotify pay lower rates, but only if the streaming service grants them other rights, such as the ability to make some music available only to the service’s 30 million-plus paying subscribers and not to its more than 70 million free users.

Some also want Spotify to limit free usage, a move they hope would drive more paid subscription.

Spotify is under mounting pressure to go public thanks to the terms of its most recent round of financing: $1 billion in convertible debt issued by a group that includes private-equity firm TPG, hedge fund Dragoneer Investment Group and Goldman Sachs. The debt carries an interest rate that increases the longer Spotify delays an IPO, while the investors are also entitled to a 20% discount on shares if they convert their debt into equity—a discount that also balloons the longer Spotify takes to go public.

The licensing disagreement highlights the tricky relationship between Spotify and the major record labels, which all took minority stakes in the Swedish outfit as part of their initial licensing deals. As investors, the labels have a direct interest in seeing Spotify succeed, while they are also counting on subscription streaming in general to make up for a long decline in record sales. Paid services yield far more per user than ad-supported ones, and Spotify is the world’s biggest subscription service, with double the 15 million paying subscribers that one-year-old Apple Music has.

Illumination Entertainment and DreamWorks to remain separate animation studios

Comcast Corp.’s NBCUniversal announced a leadership structure at its newly acquired DreamWorks Animation SKG Inc. on Tuesday that keeps the “Shrek” studio separate from the other animation company under its roof, Illumination Entertainment.

When NBCUniversal’s acquisition of DreamWorks was reported earlier this year, an open question was if and how the company would integrate with Illumination, which has provided a steady stream of hits for Universal Pictures like “Minions” and “The Secret Life of Pets.”

NBCUniversal’s outline of the new leadership structure, announced a day after the $3.8 billion acquisition closed, didn’t include Illumination Chief Executive Chris Meledandri. But the studio left the door open for his involvement down the road.

“Now that the deal has closed, we will be working with Chris to determine the most effective path forward for Illumination and DreamWorks Animation,” a Universal spokesman said.

The studio has some time in figuring out a final arrangement: Universal Pictures won’t not begin distributing DreamWorks movies until 2018, when an existing agreement with Twentieth Century Fox expires. DreamWorks has three releases planned before then, and movies in development at the company for release after 2018 are being evaluated by Universal.

The heads of DreamWorks’ biggest divisions will stay in place.

Bonnie Arnold and Mireille Soria, two veteran producers elevated to co-presidents of feature animation in 2015, will continue running the feature animation group and report to Universal Pictures Chairman Donna Langley.

DreamWorks’ head of animated television, Margie Cohn, will lead an integrated DreamWorks and Universal television animation business and report to Universal Filmed Entertainment Group Chairman Jeff Shell. DreamWorks’ growing television business was among the top draws of the company to Universal.

DreamWorks’ games, digital and consumer-products divisions will be absorbed into similar departments at NBCUniversal. Marketing and distribution operations will also be combined.

As previously announced, DreamWorks Chief Executive Jeffrey Katzenberg will become chairman of DreamWorks New Media, which will oversee NBCUniversal stakes in online-video producer AwesomenessTV and the NOVA technology company. Ann Daly, a longtime deputy of Mr. Katzenburg’s who served as President at DreamWorks, will step down from the company.

Universal Music — the world’s largest music company, with a 33.5 percent market share — reached a “strategic commitment” to keep from offering exclusives to a single music streamer, one source said.

The decision came “after months of experimentation and dialogue,” the source said. Others labels are expected to follow Universal’s lead.

The label, headed by Lucian Grainge, believes the move is best for its artists and their fans over the long term, the source said.

“They no longer want their artists seduced by short-term money,” the source said.

Compensation for exclusives has been offered by Tidal owner Jay Z, whose service further benefits his wife, Beyoncé, Kanye West and others through ownership stakes.

Apple Music is also exclusive-driven, having paid Drake a hefty amount for a seven-day monopoly on his “Views” album and cutting deals with Pharrell Williams before its launch in June 2015.

The biggest criticism of exclusives-as-marketing-ploys is their alienating fans who don’t subscribe to the chosen platform.

This risk is greatest in Japan and Germany — two of music’s Top 5 markets — where streaming is not yet the dominant platform.

Only last year did digital consumption of music surpass physical to become the industry’s primary revenue stream. Global sales increased 3.2 percent, to $15 billion, marking the first significant growth since 1998.

Universal’s take on limiting an album to a single platform on its release left “too much money on the table,” the source said.

The ban on exclusives will affect most — but not all — Universal artists.

Some on joint-venture labels will be free to continue the practice, as will mega-stars with the clout and the inclination to cut deals with individual platforms.