Ohhh, who’s being naughty now? 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
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
Isn’t it a problem if bank regulators depend, seemingly exclusively, on the banks themselves for information? Weren’t trade information warehouses, such as DTCC’s for credit derivatives, built in part to give regulators a bird’s eye view of markets? If so, why the hell does it sound like they aren’t being used?
JPMorgan management have put their hands up since the announcement of $2bn of losses, effectively saying, ‘yeah, whoops, we totally messed that one up. Buck stops here. We’re looking into preventing that from ever happening again. We’ve learned that no matter how good a division’s past performance, one simply cannot ever be complacent.’ They are taking their (very, very sizable) share of the blame. Read more
Coverage of the
$2bn $3bn loss emanating from JPMorgan’s Chief Investment Office on its synthetic credit portfolio continues a pace, and FT Alphaville’s tour continues too.
The desire to understand what the trade was and the rationale behind it continues to bug us and many others. Interestingly, some of the discussion of late has come full circle. Bloomberg kicked off the London Whale saga on April 6th, and their follow-up on April 9th contained a detail that has now come back into the narrative. This time, though, it’s more than a mere sidenote — more on this in a minute. Read more
“Synthetic credit portfolio”. That’s the book where the $2bn in mark-to-market losses took place for JP Morgan, according to an announcement made on Thursday. A result which has now cost them a their AA- rating from Fitch and landed them on negative outlook with S&P, as announced late on Friday.
FT Alphaville has analysed the credit trades that might be in that portfolio, in an attempt to reason through what may have gone on. The fact, however, remains that we know precious little. Why is that? Is this acceptable that after the financial crisis that this can happen to a bank, let alone a systemically important one like JP Morgan? Read more
Throughout FT Alphaville’s coverage of the credit trades of JP Morgan’s Chief Investment Office, there were two thoughts that kept nagging us. We’d think about them whenever we wrote about the technicals the trades might be creating. One was: could this really happen under CEO Jamie Dimon’s watch? The other was: where the hell are the regulators in all of this?
We’ll get to these questions a bit later, as we would first like to review how the $2bn mark-to-market loss announced on Thursday may have happened… Read more
“The question is,” said Alice, “whether you can make words mean so many different things.”
In a recent Alphaville post, I made the claim that if the monolines had been required to mark the credit risk that they had taken to market, they would not have played such a prominent role in the financial crisis. Here I want to provide some support for that claim. 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
Or, “This House believes all interesting things are in footnotes and FT Alphaville reader comments.”
Allow us to make the case in favour of the motion. Beginning with: Read more
In Part one, FT Alphaville asked whether there was reason to doubt the netted derivatives exposures reported by banks. Here, we discuss how netting works (or doesn’t, ahem) when counterparties collapse.
Valuing swaps when the world is crumbling Read more
On Friday, Jeffrey Snider of Atlantic Capital Management argued that finance now exists for its own exclusive benefit. The thrust of his argument is that derivatives have allowed banks to escape the bounds of actual cash assets and the real economy.
He introduced his argument by dissecting Bank of America’s derivatives disclosure, pointing out the distance between the net derivative asset that is reported ($79bn) and the market value of said asset before netting ($2,172bn). From there he goes on to marvel at the size of the derivatives market, and question whether there’s any good reason for it to be so big. Conclusion being as above: it’s so big that the link to the real economy is more or less gone. Read more
The International Swaps and Derivatives Association has a list of journalists who’ve been naughty or nice. They write about them on their Media Comment blog here.
Given FT Alphaville’s previous post about the Isda-organised Determinations Committee, which rules on behalf of the entire industry on whether credit derivatives will pay out, we’d like to make a few more points to address at least some of the possible counter-arguments. (To be clear: the quote boxes below display our versions of putative counter-arguments.) Read more
A year ago, Nicholas Vause of the Bank of International Settlements wrote about “Counterparty risk and contract volumes in the credit default swap market” and pointed out the relative increase in shorter maturity contracts.
Using a couple more surveys than he had then, we get (click to expand): Read more
It’s a well understood fact that credit derivatives markets are primarily dealer-to-dealer. We do, however, hear that there are clients, or “end-users”, hiding somewhere. The Bank of International Settlements’ Quarterly Review, out on Monday, invites us to take a closer look.
Introducing Nicholas Vause, who put the section of the Review together, and his informative graphs (click to enlarge): Read more
Depending on which way you want to look at it, over-the-counter derivatives either increased or decreased in size, as of mid-2011.
That’s according to Bank for International Settlements statistics that were released back in mid-November. Further discussion of the results came out on Monday as part of the BIS’s bigger quarterly review though. Read more
Over the last week, news outlets and bloggers have discussed Bank of America’s move to shift derivatives exposures from its Merrill Lynch unit to its deposit-taking, FDIC-insured bank.
A Bloomberg article kicked the whole thing off: Read more
If left standing when the music stops, you may still be trying to get your assets back years later.
While a deterioration in a bank’s creditworthiness may lead to a rather pleasurable accounting profit, it can have a negative impact too. As IFR’s Christopher Whittall and Helene Durand point out, clients don’t like it so much that their prime broker’s credit spreads are widening out and some have been reacting by shifting their trades elsewhere. Read more
Did you notice this bit from the reams of CRD IV material released on Wednesday?
Where an institution acting as a clearing member enters into a contractual arrangement with a client of another clearing member in order to ensure that client the portability of assets and positions referred to in point (b) of paragraph 5, that institution may attribute an exposure value of zero to the contingent obligation that is created due to that contractual arrangement.
Markets face a slowdown in over-the-counter derivatives trading if more than 100 new requirements mandated by the Dodd-Frank Act are held up by regulatory delays in finalising rules, the WSJ reports. The Act requires the provisions to take effect by July 16, 360 days after the law’s signing. The CFTC and SEC are meant to finish their guidance on derivatives by July 21 but are racing to supply further clarification before the July 16 deadline. Traders fear that deals made after the deadline could be subject to lawsuits seeking to make them null and void, even if regulators declare that swaps transacted in the period will not be illegal.
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