Wednesday, September 29, 2010

OCC wins S&P clearing deal

The Options Clearing Corporation, the world’s biggest derivatives clearing organisation, announced a licensing deal on Monday with Standard & Poor’s, the index provider, to clear over-the-counter (OTC) options based on the S&P 500 index.

The landmark agreement will allow Chicago-based OCC to offer the first central clearing facility in the US for the $6,500bn OTC equity derivative market by next year. Equity indexes account for some $4,800bn of the OTC market, and the S&P 500 is thought to be the biggest single index product.

Basel III

At its 12 September 2010 meeting, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached on 26 July 2010. These capital reforms, together with the introduction of a global liquidity standard, deliver on the core of the global financial reform agenda and will be presented to the Seoul G20 Leaders summit in November.

The Committee's package of reforms will increase the minimum common equity requirement from 2% to 4.5%. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%. This reinforces the stronger definition of capital agreed by Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative and securitisation activities to be introduced at the end of 2011...

JP Morgan ponders the death of securitisation

Friday, September 24, 2010

Hedge funds reap rewards from Treasuries

Research by the National Bureau of Economic Research, the foremost economic think-tank in the US, says markets have been beset by “astonishing” pricing anomalies, the opportunities on which relative value arbitrage depends, since the collapse of Lehman Brothers in 2008.

“The arbitrages reported are stunning in magnitude and likely the largest ever documented in any fixed-income market,” says NBER – referring, specifically, to anomalies in US Treasuries, the world’s deepest and most liquid bond market...


The group’s most profitable trade was the startling anomaly in the Treasuries market identified by the NBER. The prices of inflation-linked Treasury bonds, known as Tips, and the prices of regular Treasury bonds – even when matched for maturity – were diverging sharply.

Since both securities had identical default risk profiles, there was no obvious reason for the divergence. Even once the effect of inflation expectations had been split out from the Tips yield, the bonds’ prices differed hugely.

For Barnegat the opportunity was clear: the fund bought Tips bonds and went short on regular Treasury bonds of a matched maturity, hedging out the effect of inflation along the way with a swap contract. The result was a trade that would make money if the divergent prices between the two securities converged.

Mackenzie: Bond markets vs QE2

Stopping the current disinflation trend and preventing deflation could entail a lot of bond purchases under QE2. In turn, there is the real risk of a substantial weakening in the world’s reserve currency, accompanied by a surge in dollar-denominated commodity prices. A weaker dollar should boost exports and will foster import price inflation for the US economy. That’s at odds with other central banks such as the Bank of Japan and those of emerging market countries, which want competitive currencies versus the dollar...


This places investors in a bind as it’s not wise to fight the Fed and central banks when they want something. But, mindful of the lessons from the mortgage bubble bursting in 2007, investors at some point will probably need to run for the exit from QE2, and fast.

Tri-party Repo Infrastructure Reform; The Federal Bank of New York, May 17 2010; Task Force on Tri-Party Repo Infrastructure; May 17 2010

Tett: on repo market reports

the repo market – or the part of finance where banks raise short-term loans backed by collateral – ... the total volume of so-called “tri-party repo contracts” – or those arranged via a third-party broker – in the US peaked at about $2,800bn in early 2008 and is now at about $1,700bn.