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’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,
Anglo Irish indigestion, off-balance sheet
What on earth has been going on in Anglo Irish’s derivatives book?
Irish citizens might want to find out, now that they’re guaranteeing it.
According to the European Commission, which just approved Ireland’s latest restructuring of its banks (emphasis ours):
Don’t fight China, upgrade it, says JPM
The dash for trash has led JP Morgan’s emerging markets team to … China.
Seriously. The JPM analysts, led by Adrian Mowat, are upgrading China from underweight to neutral (for the first time since September 17,
Fitch on how sovereign CDS helps fund deficits
Memo to financial regulators who want to ban or limit CDS:
Fitch Solutions finds that the liquidity of a sovereign’s credit default swap (CDS) is highly correlated with the level of the underlying bond yield.
Basel takes aim at the negative basis
Basel is busy bolting stable doors.
Indeed, one of the big drivers behind new Basel III counterparty risk capital requirements is the infamous negative basis trade.
UBS banking analysts had a good example of the trade last week:
A year in the life of sovereign CDS
With Ireland spreads widening on Friday, it’s an apt time to turn to Fitch’s latest edition of its annual survey of credit derivative traders.
Not least because it offers some revealing insights on how sovereign CDS contracts are actually used in the market. Or at least,
CSAs the Spanish way [updated]
Hot on the heels of Portugal’s two-way CSA, comes a partial step from Spain.
From the excellent Chris Whitall, over at Risk Magazine:
The Spanish debt office is in negotiations to amend collateral agreements on its derivatives trades to ease the funding burden for its bank counterparties.
Derivatives reform: now what?
You may have heard that the signing of financial reform in the US wasn’t just the end of a long and difficult process but also the beginning of another, with a host of federal agencies given discretion to study and define the rules for the areas they oversee.
How Dodd-Frank travels – all the way to Canadian ABCP
DBRS’s Andrew Fitzpatrick has a wonderfully understated way of putting things:
. . . it would be something between ironic and sad if the best-laid plans of the Montréal Accord, a difficult but ultimately successful private-sector restructuring in response to the financial crisis,
Sovereign CDS all a-lite at LCH.Clearnet
To post collateral or not to post collateral?
That is the sovereign derivatives question of the week.
Earlier this week we learned that Portugal’s debt office is now posting collateral to derivatives dealers — a two-way CSA largely unheard of in the sovereign sphere.
CDS Port(ugal) in a sovereign storm
Warning: This is not your standard PIIGS Club Med European peripheral CDS post.
Risk’s excellent Duncan Wood reports on Tuesday that Portugal’s debt office is now agreeing to post collateral to derivatives dealers.
HMT’s very own synthetic CDO
It exists.
And it’s detailed in the first ever annual report from the UK’s Asset Protection Agency (APA).
It covers the period from December 2009 to the end of March 2010, and features some great bits of detail on the UK government’s Asset Protection Scheme (APS),
Goldman’s Q2 really was ‘exciting with risks’
Does anyone remember Goldman Sachs’ 2010 Outlook?
The bank’s year-ahead piece, which carried the title “The Outlook for 2010/11: Exciting, with risks!”, is being given a second life after its December 2009 publication.
Will derivatives reform take us from CCPs to GSEs?
Confused about just how the Dodd-Frank Act would actually change derivatives markets? Happily, Barclays Capital’s Rajiv Setia and team have tried an answer.
Not so happily, the answer is a bit disconcerting.
A US derivatives compromise?
…Well, we’re about to find out.
Details of a compromise on the most controversial bit of US financial reform still outstanding — derivatives trading — emerged on Monday, as legislators tried to merge the House and Senate bills.
In praise of synthetic CDOs (not)
Here’s an argument you rarely see ventured forth nowadays:
Synthetic CDOs were good for everybody…
…Like any product, a synthetic CDO is only as good as the materials used to make it. Most synthetics exposed investors to investment grade corporate debt and resulted in light credit losses.
‘It is forbidden to write or enter into currency derivatives…’
FT Alphaville’s resident germanophone Joseph Cotterill has tracked down the Finanzmärkte Diskussionspapier relating to Germany’s newest and most far-reaching draft law to ban all forms of naked short selling.