The Italian government has not collapsed in a flurry of post-bunga bunga recrimination, at least not yet.
With the ECB standing ready, the debt markets are calm, and investors in the banks are feeling good about improvements in asset quality and the direction of earnings. Read more
Ready for pop quiz? Don’t worry, it’s only one question and it involves pictures. Ready?
In the below picture, a pension fund governed under the Employee Retirement Income Security Act (Erisa) has a trading relationship with a bank… Read more
David at Deus Ex Macchiato = disturbed:
I went to a conference yesterday which started very well, but ended up about as scary as Romney’s economic policy. Why? Because a regulator from a minor European country (but who nevertheless is apparently influential at ESMA) suggested that it was official policy to substantially reduce the size of the OTC markets in general, and the inter-dealer market in particular.
Central counterparty clearing and settlement was always intended to make the financial system safer.
If you use a CCP, the idea goes, you’re far more robustly protected against counterparty default. The counterparty default risk has been absorbed by the much larger central entity. (The CCP can weather the default risk because its exposure is spread across numerous members.) Read more
Dressing up a pig as a princess, doesn’t make the pig a princess, and concentrating all the counterparty risk in the financial system into one place, doesn’t make it vanish. It’s still there. For the most part.
Given that you haven’t done anything with the risk other than shift it, the logical conclusion is that regulators have to be ready to either backstop or wind-down a central counterparty (CCP) in order to prevent some potentially rather cataclysmic disruption to markets. Read more
There’s to be no last-minute deal to salvage MF Global: the futures brokerage and sometime European debt specialists filed for bankruptcy on Monday in New York. Click through to access the filing (H/T John Carney):
Britain is bracing for defeat in Brussels on a critical piece of financial regulation, which would force it to cede control over the shape of key markets in the City of London, home to more than three-quarters of Europe’s derivatives trading, the FT reports. George Osborne, UK chancellor, is insisting that European Union finance ministers next week continue to debate new requirements for clearing derivatives, in spite of his counterparts making clear that London is alone in opposing the package. Mr Osborne is expected to break from next week’s Conservative party conference in Manchester and travel to Luxembourg to seek a reprieve over the derivatives regulation, as well as press his European colleagues for action on the eurozone crisis and fight a proposed financial transaction tax that would hit trades that are overwhelmingly routed through the City of London.
Deutsche Börse and NYSE Euronext, the exchange operators planning to create the world’s largest bourse, have significantly raised their estimate of savings by banks from the deal, saying customers would save about $1bn more than previously estimated. Duncan Niederauer, NYSE Euronext chief executive, told the FT customers collectively would not have to post about $4bn in money as “margin” in the clearing process through the combination of the exchanges’ two European derivatives platforms – Eurex and NYSE Liffe. The groups had estimated that customers would be able to post $3bn less than they do now. The disclosure comes as the merger undergoes intense scrutiny by European antitrust authorities.
Encumbrance – along with collateral-shortage — is one of our favourite post-financial crisis terms.
A new paper from the Bank for International Settlement’s latest Quarterly Review deals with both in relation to central clearing, scheduled to cover all OTC derivatives by the end of next year. Read more
And dare we say, a glimpse into the future?
Regulators around the world seem set to install central counterparties (CCPs) as part of their efforts at post-financial crisis reform. But not without criticism — some commentators have likened their efforts to creating a series of AIG-type companies, or Too Big to Fail institutions, acting as insurers. Read more
Silver prices rose by over 60 per cent between the start of the year and April 25.
They’ve now fallen by over 30 per cent — unwinding some 80 per cent of the upward move in the space of two weeks, according to Société Générale figures. Such violent swings have lead to margin call hikes on the precious metal (along with other commodities) at the Chicago Mercantile Exchange, and have also unleashed a wave of debate about just how much margin moves may have attributed to price falls. Read more
Friday’s stunning announcement from the EU Commission below:
The European Commission has opened two antitrust investigations concerning the Credit Default Swaps market. CDS are financial instruments meant to protect investors in the event a company or State they have invested in default on their payments. They are also used as speculative tools. In the first case, the Commission will examine whether 16 investment banks and Markit, the leading provider of financial information in the CDS market, have colluded and/or may hold and abuse a dominant position in order to control the financial information on CDS. If proven such behaviour would be a violation of EU antitrust rules. In the second case, the Commission opened proceedings against 9 of the banks and ICE Clear Europe, the leading clearing house for CDS. Here, the Commission will investigate in particular whether the preferential tariffs granted by ICE to the 9 banks have the effect of locking them in the ICE system to the detriment of competitors. Read more
First — a friend of FT Alphaville points out that Portugal’s 10-year bond yields have now breached LCH.Clearnet’s famous ‘margin call’ spread for the first time.
The threshold is 450bps: the spread was 454bps at Wednesday’s close. The bonds have been on their way there for some time. Read more
The UK financial regulator the FSA appears (finally) to be on to the complexity issue that has been affecting the ETF industry for a long while now.
From the FSA’s ‘Retail Conduct Risk Outlook 2011″ out on Monday — emphasis FT Alphaville’s: Read more
Markit credit analyst Lisa Pollack investigates why 2007 is still haunting a number of CDS index products when it comes to off-the-run volumes.
According to ISDA, there were $62,000bn of credit default swaps (CDS) at the end of 2007. What exactly is this number though? First, it’s gross, not net. If one desk at a dealer is a buyer of $10m of CDS protection and another desk at the same dealer is a seller of $10m of CDS protection, the dealer as a whole has a net position of zero. In order to be perfectly fungible, the two CDS contracts have to have the same attributes, meaning reference entity, tier, maturity, currency, and restructuring clause. Read more
The world of credit default swaps = one huge, amorphous, indefinable ocean of trillions worth of contracts, right?
How ’bout a dwindling, drying, puddle, instead? Read more
Deus Ex Machiatto might be talking about bank funding in his latest blog post, but you could well extract his thinking to the sovereign market too:
Just being solvent is not enough. The market withdraws funding long before insolvency, typically. So the real safety threshold is being able to roll your funding. The problem is, this is an epistemic soundness criteria. That is, it depends on others’ beliefs. Read more
The spread between Irish government bonds and German bunds hit another record wide on Wednesday — although what’s really worth noting is the fact it’s now trading wider than 500bps (chart via Bloomberg):
Has LCH.Clearnet single-handedly saved the Spanish financial system?
Early this month, and as the FT Trading Room reported, the Anglo-French clearing house announced a new service for Spanish government bonds and repos. And Spanish banks, as we all know now, have plenty of Spanish bonds. Read more
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. Read more
Corporate bond trading should be centrally cleared and made more transparent, according to a French-led group of market participants that invited exchanges and platforms to submit proposals to improve trading, reports the FT. The Paris project, known as Cassiopeia, on Monday published a list of 18 “needs” for a marketplace, including an equity-style order book – where users can see how many bids and offers there are rather than just a current price – to help investors gauge the depth of the market.
Industrial companies have won recognition from European regulators that they should be granted exemptions from sweeping regulation of the over-the-counter derivatives markets, the FT says. It marks a partial victory amid fears that a crackdown on off-exchange derivatives markets, blamed by some for exacerbating the financial crisis, could unfairly penalise corporate users of such instruments.
France will host clearing of credit default swaps on Monday — shortly after Christine Lagarde, the French economic minister, mulled banning them. FT Alphaville can only note the record. Oh, and quote Molière. Read more
The French arm of LCH.Clearnet, Europe’s largest independent clearing house, will on Monday launch clearing of credit default swaps – a victory for French efforts to ensure the processing of such off-exchange derivatives instruments is done in Paris, the FT said. The development will be seen by some as a blow to London, which has long dominated the markets for OTC derivatives.
This is a big one: Fannie Mae and Freddie Mac will start using central counterparty clearing on their massive interest rate swaps portfolio, according to a Reuters report.
It’s worth noting that the combined size of Fannie and Freddie’s interest rate portfolio is $3,000bn – or about than 0.5 per cent per cent of the gross market value of the global interest rate swap market, according to BIS data as at June 2009. Read more
Lawmakers in DC are due to resume debate on major financial reform legislation currently working its way through the US House of Representatives. One closely-watched aspect of that debate is sweeping overhaul of over-the-counter derivatives markets. Lawmakers are pushing to mandate that most derivatives be centrally cleared and traded either on exchanges or swap execution facilities. Professor Craig Pirrong of the University of Houston discusses some of the proposals.
In attempting to impose standardization on the ways that derivatives are traded, and derivatives counterparty risks are managed and shared, the legislation reflects a one-size-fits-all mentality (not to say fetish) that is sadly typical of most legislative attempts to construct markets. These standardization directives fail to recognize that market participants are diverse, with diverse needs and preferences, and that as a consequence, it is desirable to have diverse trading mechanisms to accommodate them. Read more
Flying somewhat under bankers’ radars on Thursday, obfuscated as they are by new bonus taxes, are the maneuverings of the Basel Committee.
The Committee met on Tuesday and Wednesday to discuss a package of potential reforms to the global banking system. Under discussion were issues such as living wills, liquidity buffers, possible leverage ratios (the three `L’s if you like). And if the below story, from Risk.net, is anything to go by it looks like they’ve made some early progress on the draft reform — which is due to be published by the end of January. Read more