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Ryan McCarthy, Reuters, Counterparties: Commisioners Found Taken Captive, here. This could have gone better I suspect.
The 2010 Dodd-Frank act included a provision to bring the opaque world of derivatives — including the kind of trades which nearly brought down AIG — into something like an open market. Over the last three years banks have held 80 meetings with the CFTC officials on how swaps should be brought into public exchanges. Along the way, a proposed rule got pared back: Buyers would have to solicit two prices quotes from banks before purchasing a swap, instead of the proposed five quotes. That requirement will eventually increase to three.
The resulting rule is a small reform, but also preserves much of the status quo. Ben Protess writes that the move “could effectively empower a few big banks to continue controlling the derivatives market, a main culprit in the financial crisis.” (Five big Wall Street banks dominate more than 90% of the derivatives market.)
Haley Sweetland Edwards, Washington Monthly, He Who Makes the Rules, here.
In late 2010, Bart Chilton, one of three Democratic commissioners at the U.S. Commodity Futures Trading Commission (CFTC), walked into an upper-floor suite of an executive office building to meet with four top muckety-mucks at one of the biggest financial institutions in the world.
There were a handful of staff members present, but it was a pretty small gathering—one, it turns out, that Chilton would never forget.
Deus Ex Macchiato, Lehman, five years later, here.
We had 87 derivative transactions (interest rate swaps) outstanding with a subsidiary of Lehman Brothers, Lehman Brothers Special Financing, Inc. (“LBSF”), with a total notional principal amount of $5.7 billion. Under the provisions of our master agreement, all of these swaps automatically terminated immediately prior to the bankruptcy filing by Lehman Brothers. The terminations required us to pay LBSF a net fee of $189 million, which represented the swaps’ total estimated market value at the close of business on Friday, September 12… … On Tuesday, September 16, we replaced these swaps with new swaps transacted with other counterparties. The new swaps had the same terms and conditions as the terminated LBSF swaps. The counterparties to the new swaps paid us a net fee of $232 million to enter into these transactions based on the estimated market values at the time we replaced the swaps.
Reed Smith, The Swap Report, CFTC Open Meeting Scheduled…, here. Derivatives regulation.
The proposed agenda covers:
- Minimum Block Sizes for Swaps;
- The ”Made Available to Trade” Rule Under section 2(h)(8) of the Commodity Exchange Act and Swap Transaction Compliance and Implementation Schedule;
- Core Principles for Swap Execution Facilities (SEFs); and
- Anti-disruptive Practices Authority – Interpretive Guidance and Policy Statement.
You can obtain information about participation by clicking here.
Shane Parrish, Farnam Street, The Divine Comedy, here.
Last month poet and critic Clive James released a new translation of The Divine Comedy. Although, in fairness, it’s more of an interpretation than a strict translation. I don’t think the purists would enjoy it, but if you’re not doing a masters thesis on it, I think you’ll love this translation. I know I’m certainly enjoying it.
Deus Ex Macchiato, The missing futures data repository, here.
Congress mandated that swap transactions be reported to a “Swap Data Repository” that regulators can monitor to conduct real-time market surveillance and that the public can access immediately and for free. Nothing comparable exists in the futures market. There is no “Futures Data Repository,” and no real-time public reporting of futures data, which means that the public will no longer have the access to market data that it was supposed to have under Title VII. This also creates a firewall between the markets and regulators, denying them access to the real-time trading data they need to determine whether speculators are manipulating the energy markets.
Joshua M Brown, The Reformed Broker, The End is Where We Start From, here.
Right at the closing bell of trading Friday, Hilsenrath dropped the first of what I presume will be many hints about the Fed’s new initiative to begin cooling things off. There’s a well-worn Churchill quote that springs to mind: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
Peter Tchir, BI, The Gold Plunge May Have Been The First Etf-Led Death Spiral, here.
So the “arb” would be to buy the ETF and sell more gold. It is cheaper to own gold outright than via the ETF and the “arb” appears rather large now. This NAV is tricky, not because it is hard to value, but because the volatility is so great – but it is a decent signal.
While in theory buying the ETF and selling gold is risk neutral, we have argued that this act is actually negative. That the “underlying” asset, when relatively illiquid, has a bigger impact on the direction than the ETF. We will send the “ETF death spiral” article along in a separate e-mail, but that is our strong view. That “cheapness” in a down market is bad, as we saw it time and again in CDX indices.Read more: http://www.tfmkts.com/the-t-report-gold-etf-flows-death-spirals-and-fixed-income/#ixzz2QlBBfAeh
LCH.Clearnet, Swapclear, here.
SwapClear is the only truly global clearing service for over-the-counter (OTC) interest rate swaps and currently clears more than 50% of the interest rate swap market. The 2.5 million trades in SwapClear have an aggregate notional principal amount of over $371 trillion, with a further $175 trillion of cleared transactions removed through multilateral trade compression.
Launched in 1999 by LCH.Clearnet, SwapClear initially cleared plain vanilla interest rate swaps in four major currencies. Today it clears swaps in 17 currencies: USD, EUR and GBP out to 50 years, JPY to 40 years, AUD, CAD, CHF & SEK to 30 yrs, NZD out to 15 years and the remaining 8 currencies out to 10 years.It also clears OIS out to 2 years in USD, EUR, GBP, CHF and CAD.
Markit, MarkitSERV, here.
MarkitSERV handles processing and confirmation for all OTC rates trade life-cycle events with the greatest efficiency. Achieve true straight-through processing (STP) and reduce your risk while meeting and exceeding the quickly evolving and challenging regulatory commitments.
The MarkitSERV platform offers real-time connectivity that standardizes complex post-trade workflows for confirmation and T+ 0 clearing. Whether you are buy side or sell side, MarkitSERV delivers a complete solution with one centrally integrated hub to all counterparties and third-party platforms. Advanced workflow tools support inter-dealer broker-arranged trades, prime broker give ups, client to dealer and dealer to dealer clearing, novation consent, electronic allocation delivery and tie-outs for all OTC derivative transactions, whether or not electronically eligible for confirmation.
The MarkitSERV solution supports:
- interest rate swaps
- forward rate agreements
- overnight index swaps (OIS)
- swaptions, caps and floors
- ZC inflation swaps
- non-deliverable transactions for IRS and OIS.
- cross currency interest rate swaps
- cross currency basis swaps
- basis swaps
MarkitSERV works closely with leading industry participants and the principal trading associations to streamline OTC rates documentation and expand coverage for new frequently traded products. New product and platform enhancements are developed and released in coordination with industry take up, ensuring that they are electronically confirmable on day one.
Cathy O’Neil, mathbabe, We don’t need more complicated models, we need to stop lying with our models, here; and Ina Drew: heinously greedy or heinously incompetent? here. mathbabe is on a roll dealing out Justice – Ina is certainly claiming incompetence and no one sensible believes it for a second. And boy did she ever throw her guys right under the bus in her Senate testimony. I suspect Ina was a passenger in the genesis of this whole escapade – she presents a whiff of being out of the loop with the big boys in London doing God’s work. Ina wouldn’t last a round head to head with contemporary ex-Masters of the Universe like Zoe Cruz or even Blythe Masters, for example. The 52 Shades of Greed Queen of diamonds cards makes Ina look a little like Jennifer Aniston – get her to play Ina in the Game of Whales movie.
Just to be clear on the models and modelers as scapegoats, even in the face of the above report, please take a look at minute 1:35:00 of the C-SPAN coverage of former CIO head Ina Drew’s testimony when she’s being grilled by Senator Carl Levin (hat tip Alan Lawhon, who also wrote about this issue here).
Ina Drew firmly shoves the quants under the bus, pretending to be surprised by the failures of the models even though, considering she’d been at JP Morgan for 30 years, she might know just a thing or two about how VaR can be manipulated.
Tevi Devor, Intel, Pin: Intel’s Dynamic Binary Instrumentation Engine, here.
Andrew Gelman, Blog, Statistical Modeling, Causal Inference, and Social Science, My talk at the University of Michigan today 4pm, here.
Andrew Gelman, Statistics and Political Science, Columbia University
Wed 27 Mar, 4pm, Betty Ford Auditorium, Ford School of Public Policy
Causal inference is central to the social and biomedical sciences. There are unresolved debates about the meaning of causality and the methods that should be used to measure it. As a statistician, I am trained to say that randomized experiments are a gold standard, yet I have spent almost all my applied career analyzing observational data. In this talk we shall consider various approaches to causal reasoning from the perspective of an applied statistician who recognizes the importance of causal identification yet must learn from available information.
Matt Levine, DealBreaker, Some Senators Think U.S. Banks Could Use An Extra Trillion Dollars Or So Of Capital. here.
- Every U.S. bank would have to have a minimum 10% capital ratio,
- The biggest banks – those with over $400 billion in assets – would have to have up to 15%,
- The ratio is just (Tangible Common Equity) ÷ (Total Assets plus some off-balance-sheet things including lending commitments); i.e. it’s not risk-weighted at all, and
- “the [Federal Deposit Insurance] Corporation, the [Federal Reserve] Board, and the Comptroller [of the Currency] shall be prohibited from any further implementation of [Basel III].”
This feels like it may not be intended all that seriously, but whatever, let’s do the math and see what it gets us.
Floyd Norris, NYT, Finding a Rate That’s Fairer Than Libor, here.
Now it is ridiculous. It purports to be the rate at which banks can borrow from each other. Every day banks submit the rates at which they could borrow money, on an unsecured basis, in various currencies and varying maturities. Those rates are averaged, after the highest and lowest ones are eliminated, and that becomes that day’s Libor rate.
These days there is a problem: banks almost never borrow from each other, particularly at longer maturities. So the rates are fictitious — or at least not based on any information that could be verified.
Kenneth Rogoff, Project Syndicate, The Long Mystery of Low Interest Rates, here.
My best guess is that when global uncertainty fades and global growth picks up, global interest rates will start to rise, too. But predicting the timing of this transition is difficult. The puzzle of the global savings glut may live on for several years to come.
Read more at http://www.project-syndicate.org/commentary/why-are-long-term-interest-rates-so-low-by-kenneth-rogoff#XbW4e8RKBHxLLBfy.99
Jon Shazar, DealBreaker, Gary Gensler Is Holding A Sit-Down Strike, here.
Earlier this week, Mr. Gensler delayed until May a meeting at which the commission was widely expected to vote on rules related to swap-execution facilities, or SEFs, amid a continuing dispute, according to a people familiar with the commission’s deliberations….
Swaps Dealers to Become Futures Brokers In Case Swaps Get Too Expensive, here.
New regulations designed to curb systemic risks have added costs and complexity for the banks and asset managers that trade swaps, prompting some to evaluate futures contracts as a cheaper alternative for hedging risks.
That potential migration represents a threat to the franchises of interdealer brokers like GFI, which have for decades been the facilitators of swap trades among Wall Street banks.
Matt Levine, DealBreaker, Lawsuit Claiming Banks Worked Together To Fix Libor Dismissed Because Banks Were Supposed To Work Together To Fix Libor, here. Judge Naomi Reice Buchwald is awarded 50 points
[T]he process of setting LIBOR was never intended to be competitive. Rather, it was a cooperative endeavor wherein otherwise-competing banks agreed to submit estimates of their borrowing costs to the BBA each day to facilitate the BBA’s calculation of an interest rate index. Thus, even if we were to credit plaintiffs’ allegations that defendants subverted this cooperative process by conspiring to submit artificial estimates instead of estimates made in good faith, it would not follow that plaintiffs have suffered antitrust injury. Plaintiffs’ injury would have resulted from defendants’ misrepresentation, not from harm to competition.
Nandini Sukumar, Bloomberg, Nasdaq to Buy ESpeed Platform from BGC for $750 Million, here. Hat tip jb. Did not realize EUR sov debt traded over ESpeed
Robert Greifeld, Nasdaq’s chief executive officer, is joining other exchange executives using takeovers to boost profit amid declines in stock trading. The operator of the biggest American stock trading venue, NYSE Euronext (NYX), agreed in December to be acquired by commodity exchange InterContinental Exchange Inc. for about $8 billion.
“The U.S. Treasury market is the most electronic of the fixed-income markets,” Greifeld said in an interview today. The market “functions in many ways, shape and form like an exchange,” he said. “As customers make their decisions, we’ll be in a strong position to fulfill their needs. We are diversifying in a measured way.”
Oliver Ludwig, IndexUniverse, Malkiel: China And ETFs Are The Future, here.
One of the reasons that I favor all these program trades and so forth is that this is the mechanism that makes ETFs better than closed-end funds. The basic mechanism is that if an ETF is at a discount, some arbitrageur can quickly do a program trade selling short all the securities and buy the ETF. And I think this is a good thing, because what it means is—unlike closed-end funds, which sometimes sell at 10, 20 percent discounts—that arbitrage mechanism gives the man on the street a good deal.
I’ve loved index funds all my life, and I love ETFs because they’re actually a cheaper way of buying index funds. So I’m a big fan of ETFs and I don’t think it is correct that a lot of people are saying that ETFs are an instrument of the devil and are what’s responsible for all of our problems.
Nathaniel Popper, NYT, As market Heats Up, Trading Slips Into Shadows, here.
The movement, under way for several years, has gathered force recently. The portion of all stock trading taking place away from the public exchanges hit new highs over the last few weeks, amounting to close to 40 percent on several days, up from an average of 16 percent in 2008, according to Rosenblatt Securities.
The trend has bucked the government’s broad effort in recent years to move more of the financial industry out of the back rooms and into the light. The increasing opacity of stock trading in the United States, long the most transparent place in the financial world, is troubling for investors and regulators.
Martin Feldstein, Project Syndicate, BI, Interest Rates Will Rise, And Bubbles Will Burst, here. Centrally cleared SEF-exchanged Interest Rate swaps to the rescue.
Here is how the arithmetic works for an investor who rolls over ten-year bonds for the next five years, thus earning 2% more each year than he would by investing in Treasury bills or bank deposits. Assume that the interest rate on ten-year bonds remains unchanged for the next five years and then rises from 2% to 5%. During those five years, the investor earns an additional 2% each year, for a cumulative gain of 10%. But when the interest rate on a ten-year bond rises to 5%, the bond’s price falls from $100 to $69. The investor loses $31 on the price of the bond, or three times more than he had gained in higher interest payments.
ATT Research, The Achievement of The Online Encylcopedia of Integer Sequences, here.
It was the mid-60s when Neil J. Sloane began collecting sequences. Then a student at Cornell, Sloane was looking at tree-like neural networks, which were little understood at the time. He needed to know how far on average would any random node be from the root of a tree containing n total nodes. He figured it out for the first few n’s to get the sequence 0, 1, 8, 78, 944, 13800, 237432, . . .
Not seeing the pattern that dictated the eighth term he figured he could simply look it up in a combinatorics or other math book, saving the trouble of calculating it himself. He didn’t find it, but he realized that the same situation could happen again. He would need to know a sequence and not be able to find it. He started a list, noting down on file cards the ones he encountered in his own work, and then expanded the search, actively collecting sequences from all the obvious places—math books and colleagues—and the not-so-obvious places (magic and gambling books).