Paging Bruno Iksil.
It’s well known that JPMorgan lost $6bn in its ill-fated “London Whale” investment. What is less known is that shortly before the bank’s unwieldy multi-legged play on corporate credit ballooned to unsustainable proportions, the positions taken on by JPMorgan produced almost half a billion dollars worth of profits thanks to the bankruptcy of a single company — American Airlines. In fact, one could easily make the case (as the US Senate did) that the easy money reaped by JPMorgan from the AMR filing helped catalyse the CIO’s doomed love-affair with low-cost default protection. Read more
Regulators have long extolled the virtues of central clearing, championing it as a favourite solution for managing risk within the financial system.
Others, however, have been less enthusiastic about their potential. Concerns in that case have focused on the propensity of CCPs to concentrate wrong-way risk and to create a single-point of failure problem.
Regulators, however, seemed reluctant to listen.
Until last week that is when the ECB’s Benoît Cœuré, gave a speech in which he provided the first hint that regulators may be coming around to the dangers posed by too much central clearing. Read more
The Sage of Omaha is folksy, down to earth and on the whole entirely open about his philosophy and his approach. But he has also managed a trick almost unheard of in the modern corporate era: he discusses the business he has run for half a century entirely on his own terms.
If you are a investor in Berkshire Hathaway you can read the annual letter to shareholders, you can trek to Omaha to try to ask a question at the annual meeting, and that is it. When Berkshire publishes quarterly results it does so on Friday evenings without commentary beyond the dry notes to the financial statements. Just the numbers and in the name of fairness, the Sage either speaks to all shareholders, or none.
But that does leave some mysteries and Pablo Triana, a Professor at ESADE business School, has followed up his look at how Berkshire’s very large legacy derivatives positions contribute cheap financing, with an examination of what can be inferred about the derivatives contracts themselves. Read more
Much accounting intrigue in JPMorgan’s recently-released fourth-quarter results.
According to the bank, it incurred a $1.5bn hit to net revenue after “implementing a funding valuation adjustment.” Read more
Actual new information about the great man and his methods is rare indeed. Warren Buffett is the investment equivalent of Churchill, endlessly dissected but forever in the context of a history he wrote himself — the annual letters to the shareholders of Berkshire Hathaway.
However Pablo Triana, Professor at ESADE business School, has shed some new light on the way the Sage has made money when it comes to his large but non mass-destructive portfolio of derivatives. Read more
The derivatives industry has been up in arms over this little footnote that spans pages 22 and 23 in the new Dodd-Frank-inspired CFTC rules, Core Principles and Other Requirements for Swap Execution Facilities. Click the images to read:
Imagine spending an entire career evaluating bad things that might happen to financial institutions. It’s no mere thought experiment done in passing, but rather a task that one slaves over in excruciating detail. For years upon years on a constantly moving chessboard of potential disaster.
So, who wants to be a regulator? Read more
How much would you pay to make Goldman Sachs feel slightly uncomfortable?
The City of Oakland, California plans to dish out $226,378. Read more
Ohhh, who’s being naughty now? Read more
Well, the apparent uselessness of Finland’s Greek ‘collateral’ is all very embarrassing, and it’s also terribly public by this point. But surely there can’t be that much backlash over this rather arcane derivatives transaction.
Ah, hold on. Read more
Over 20 of them, actually.
Jan Hurri, a journalist for Taloussanomat, noticed that a number of documents were missing from the Finnish government’s recent, court-ordered disclosure about the ‘collateral’ for its Greek bailout loans… Read more
Abuse of official secrecy. It’s been one of the more corrosive but — by definition — shadier aspects of the eurozone crisis.
It can take the form of a report on money-laundering in Cyprus. Or the opaque process by which Troika debt sustainability analyses are drawn up. Emergency liquidity assistance to banks, even. Read more
“What happens when one bank defaults across six CCPs? The remaining members will have to pick up the bill. Given that they are almost certainly members of the other CCPs, this will result in a default contribution bill so large it could potentially lead to their failure also.”
That’s Gary Dunn, senior manager for regulatory and risk analytics at HSBC, being quoted by Risk at Isda’s AGM last week. Given the increasing concentration of risk in central counterparties, he thinks that they would ultimately have to be bailed out by taxpayers, after the CCP’s buffers were exhausted. Read more
Barclays views it as imperative that the market has access to Benchmarks that are well constructed, transparent and that inspire the confidence of other market participants and regulators…
You can say that again.
Some (more) Libor reading landed this week — the responses from banks, and other cogs and gears of the market, to a recent report by Iosco about reforming financial benchmarks. Everyone from Thomson Reuters to the European Central Bank, Blackrock to Calpers, has weighed in here. Read more
Netting of the mark-to-market of derivatives positions is attractive. It’s more efficient when it comes to posting and receiving margin, decreasing the amount of operational and counterparty risk. The ultimate in netting efficiency is, of course, the newest too-big-to-fail institutions — central counterparties (CCPs) and clearinghouses.
There’s another place where offsetting positions is attractive: financial statements. It can make a big difference. Citi demonstrates this with estimates of what derivatives exposures (including repos, brokerage receivables, and associated collateral) would look like if you applied full netting instead of that dictated by respective accounting standards… 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.
A survey of financial market participants most likely to be negatively affected by new regulations on uncleared swap trades revealed that they don’t like this new-fangled way of doing things at all. No, no, they really don’t.
The completely predictable result was published in an article in Risk on Wednesday: Read more
On the surface, the story around Libor is relatively easy to understand, hence easy to write something about. All one needs to reel readers in is a big, flashy headline number. Or so goes the theory…
Unfortunately, there aren’t any easy numbers to hand. This has not, however, stopped people from finding some figures to abuse. Read more
Isn’t it annoying when particular clients insist on being treated differently to everyone else? Like, just because your client is well, England, or Italy, or some other sovereign nation, doesn’t make them ‘special’. It’s also kind of annoying when they make regulations that make business tougher for banks and then still expect to be treated differently.
Interestingly though, the Bank of England just stopped asking for one such special exception when it comes to certain derivatives that it enters into on behalf of the nation in order to best manage its balance sheet and the Treasury’s foreign exchange reserves. Read more
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
April 2012 was a pretty big month in Dodd-Frank Act rulemaking; the SEC and CFTC agreed how to define “swap dealer”, “major swap participant”, et al. under Title VII of the Act, dealing with over-the-counter derivatives.
Still a way to go though. Read more
‘Greece Pays Finland Collateral Money,’ goes the Bloomberg headline.
Well, that’s broadly true we suppose. Technically, Greek banks which cannot be named have transferred €311m of Greek government bonds which then moved into the custody of an international investment bank which cannot be named which (at some point) will sell them, put the revenues in safe assets, and release the collateral to the Finnish government if Greece does things which cannot be named to its EFSF bailout loans of which Finland provides a portion. (Finland pays a fee as part of its end of an exchange of cash-flows.) Read more
If you read some of the regulations written recently, you may be forgiven for thinking that central clearing is the solution to all the risks in the over-the-counter (OTC) derivatives market. Some rules mandate clearing for certain market participants and trades, while others impose higher capital requirements for staying outside of the system. There is, of course, an implicit assumption in all of this that central clearing is an unequivocally good thing.
If only it were that easy. In fact, there are lots of issues with OTC derivatives clearing. Today, we’ll just look at one aspect: that of margin. Read more
Before the crisis, it wasn’t too hard for a corporate client to trade over-the-counter derivatives. They just had to find a bank willing to sign them up, agree some documentation, and they were good to go. For most corporates, banks were eager to help, so the client could probably find someone willing to meet their needs both in terms of what they want to trade and how they wanted to trade it.
If they didn’t want to post collateral, then that was fine. Certain trading arrangements had a cost, sure, but derivatives sales people are known for being accommodating (especially given that they get paid based on the deals that they close). No collateral? No problem, sir! Read more
The Basel III capital rules for credit valuation adjustments (CVA) create new, large capital requirements for over-the-counter derivatives trading with counterparties who don’t post daily cash collateral. Yesterday we saw how these rules were inspired by CVA losses on credit protection written by monolines like MBIA and Ambac. Today we’ll examine the unintended consequences of the new rules.
First we have to get a bit technical about how the CVA capital charges work. Sophisticated banks will be required to put their CVAs and eligible hedges into a value-at-risk (VaR) model. That model will use historical credit spread movements to estimate possible losses for the current CVA and its hedges. The capital charge is based on the one-in-a-hundred loss. Read more
Yesterday we saw how bank credit risk management imposed credit valuation adjustments (CVA) on over-the-counter derivatives trading to charge for the credit risk being taken. CVA is biggest where the counterparty does not post collateral, is not a good credit, and owes a lot of money under the derivative contract in question.
Act 1 Read more
For those new to the story, Bloomberg and WSJ reported on Friday that a handful of hedge funds and dealers claimed that a trader in JP Morgan’s Chief Investment Office has been selling so much protection on the Markit CDX.NA.IG.9 credit index that it was “distorting” the market — making the index too cheap.
While FT Alphaville thinks that a lot of this is getting way overblown, the story is performing a few useful useful functions. Namely, it’s: Read more
In the first post of his series for FT Alphaville, Deux Ex Macchiato writer David Murphy introduces us to credit valuation adjustments (CVA) by providing some historical perspective. More on David and his background beneath the post.
Whenever you are promised cash in the future by someone who might not pay you back, you have credit risk. In derivatives trading, situations often arise where someone might owe you money in the future, perhaps because you have purchased an option from them, or because a coupon on a swap goes your way rather than theirs. This means that derivatives trading often includes taking some credit risk, along with the more obvious market risks. Read more
The story so far:
In Part 1, we reminded you of Morgan Stanley’s footnote in their fourth quarter earnings, whereby the bank stated that it had reduced its exposure to Italy by $3.4bn while benefiting from a positive hit to net revenue of $600m. All of this was as a result of restructuring certain derivatives transactions with the sovereign. Read more