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’American swap regulation: a class apart
Take a moment to imagine what it must be like to be an American regulator. There are plenty to imagine being: the OCC, the Fed, the CFTC, SEC, FDIC, and that thrift one, until it subsumed into the OCC. Got one?
So there you are,
When a derivatives counterparty leaves the euro…
Law firm Clifford Chance must be tired of fielding questions about what would happen to derivatives contracts should one’s eurozone counterparty exit the single-currency. So much so that they’ve put a document together covering 20 of what we imagine have been the most frequently asked questions.
How badly do you want EFSF first-loss protection?
The EFSF has opened the kimono a little on how it would work as a sovereign bond insurer. Answers from an updated investor Q&A — especially interesting ones have been bolded by us:
E11 – What will be the scope of the protection under option 1 [credit enhancement]?
The partial protection certificate will cover a portion of the principal value of the bond.
How much is this plain vanilla derivative in the window?
Just to be totally clear we’re talking plain vanilla derivatives like, say, interest rate swaps a bank might arrange on behalf of a company. But it seems they’ve taken on a more exotic flavour, of late.
Rococo risk hedging, a sovereign-bank tale
What price sovereign risk within a bank bond? BIS answer here:
That’s a chart from a fresh paper on sovereign effects on bank funding, released by the Bank for International Settlements on Monday.
Goldman’s on top of the Dodd-Frank talks
A list of financial entities most panicked about upcoming Dodd-Frank rules.
Whoops! We mean a list of financial entities who are most concerned about educating regulators.
Goldman Sachs tops the list,
Bernanke has other ways of acting
All this debate about whether or not we will see another round of quantitative easing in the US, and yet, in his latest comments, Ben Bernanke has hinted more strongly than ever that if the Fed does act it might do so in a very different manner.
Somewhere in the Argentine (CDS) Andean foothills…
Greece one-year credit spreads in June 2011, meet Argentine one-year credit spreads in July 2001 (chart from an old IMF paper):
You have a lot in common — around 2,500bps actually:
That’s a chart of Greece’s CDS curve at Thursday’s close,
What to do with all that cash?
Use it as collateral of course.
We refer, of course, to the massive cash reserves built up by banks due to quantitative easing. Reserves which, as most deflationistas point out, have been stuck firmly on banks’ balance sheets rather than making their way through to the real economy — thus supposedly having little inflationary impact.
Eurostat isn’t happy with Greece and its Goldman swap
Greece’s currency swaps with Goldman Sachs may have slipped your memory.
Luckily Eurostat, in a just-published review of its methodological visits to Greece in 2010, has a quick reminder. More importantly,
The ongoing mess in Allied Irish’s capital structure
So bad a mess even the hedging looks bust.
Quite apart from threatening to overturn the foundation-stone financial hierarchy of debt over equity…
There’s another way Allied Irish’s subordinated liabilities order might kill a market,
The market for Sovys [updated]
Oops. Acronym alert. Sovys = Sovereign Yield Spread Futures, interest-rate products unveiled by CME Group last Thursday.
It’s a fascinating little challenge to all sorts of sovereign trading traditions,
Who’s afraid of Comex gold delivery?
The answer is the University of Texas Investment Management company.
Via bullion brokers Goldcore’s daily note on Monday:
$1 Billion of Gold Bars Taken Delivery of by Pension Fund Due to Risk of COMEX Default and Shortages
Although the dispatch is actually based on the following story from Bloomberg:
Do banks see ETFs as inexpensive funding for illiquid securities? – Part II
(continued)
Here’s our favourite part from the FSB report.
It refers to the practice of collateral sweating — loading your ETFs with the cheapest collateral out there and swapping it to guarantee the performance of a specific index (our emphasis):
Do banks see ETFs as inexpensive funding for illiquid securities? – Part I
Recent trends in Exchange Traded Funds (ETFs) could create “potential financial stability issues” says the Financial Stability Board.
We say: about time someone stated the obvious.
We know other regulators have cast their eye on ETFs,
Florence and the derivatives machine [updated]
The sad, bonkers story of the derivatives battle between investment banks and Italian municipalities received another footnote on Friday:
Milan, March 25, 2011 — Moody’s Investors Service has today downgraded the City of Florence’s debt rating by one-notch to Aa3 from Aa2.
Pointing out Japan’s (Pfandbrief) effects
Pfandbrief, ultra-boring — yet they never cease to surprise in a crisis.
Did you know, for instance, that the bond structures beloved by German banks have some exposure to Japan? Granted, it’s not much — but we think it’s surprising.
The derivatives hour for the Japanese yen
Variance swaps strike again!
Did anyone notice that the curious timings in Wednesday yen currency-cross slumps? Societe Generale’s head of currency research, Kit Juckes, certainly did:
Overnight, the news flow out of Japan continued to deteriorate in a high stress environment defined by the 27-40 regime in the VIX.
Who’s been selling Japanese stocks?
A plea for calm, from Atsushi Saito, president of the Tokyo Stock Exchange:
To All Investors and Trading Participants
The Tokyo stock market has been experiencing sharp drops over the last couple of days.
The where and what of regulatory arbitrage
Get the little flags at the ready: on Tuesday JP Morgan Cazenove published the final installment of its trio of reports on regulatory arbitrage.
It is stirring patriotic sentiment up on Capitol Hill,
Synthetic junk
Here’s an interesting Wednesday story from the Financial Times’ Aline van Duyn.
It concerns growing demand for a synthetic product — this time linked to junk, or high-yield, bonds. The market size of the product (which is tranched and linked to Markit’s CDX index) is still relatively small.
Volatility as the new Black-Scholes
Here’s a timely discussion following the Vix smashing through the 20 level.
It comes via Euromoney columnist, Theo Casey, and it concerns a 2010 paper by Eckhard Platen, professor of quant finance at the University of Technology,
US default risk is 0.05 per cent, Moody’s says
Once upon a time, credit default swaps on US sovereign debt hovered around 2 basis points. They’ve since gone up to a record 100bps and are now at about 40bps:
So the credit market’s pricing in higher default risk,
The $29bn problem with one-way CSAs
That’s $29bn for just five banks with derivatives deals covered by one-way credit support annexes (CSAs).
For the entire financial system it might be closer to a whopping $150bn, according to Risk’s clever Duncan Wood.
Legerdemath, or, derivatives dubiousness
Currently doing the rounds — an alleged instance of derivatives fraud, or at least, mispractice. With individual names (Omer Rosen) and banks (Citigroup) attached.
It’s written for the Boston Review,