Making OTC Derivatives Safe - A Fresh Look
March 25, 2011--Summary:
Recent regulatory efforts, especially in the U.S. and Europe, are aimed at reducing moral hazard so that the next financial crisis is not bailed out by tax payers. This paper looks at the possibility that central counterparties (CCPs) may be too-big-to-fail entities in the making.
The present regulatory and reform efforts may not remove the systemic risk from OTC derivatives but rather shift them from banks to CCPs. Under the present regulatory overhaul, the OTC derivative market could become more fragmented. Furthermore, another taxpayer bailout cannot be ruled out. A reexamination of the two key issues of (i) the interoperability of CCPs, and (ii) the cost of moving to CCPs with access to central bank funding, indicates that the proposed changes may not provide the best solution. The paper suggests that a tax on derivative liabilities could make the OTC derivatives market safer, particularly in the transition to a stable clearing infrastructure. It also suggests reconsideration of a "public utility" model for the OTC market infrastructure.
view IMF Working Paper-Making OTC Derivatives Safe?A Fresh Look
Source: IMF
Managing Volatility - A Vulnerability Exercise for Low-Income Countries-IMF Working Paper
March 25, 2011--Summary:
This paper, introduces the analytical framework for a Vulnerability Exercise for Low-Income Countries (VE-LIC). The envisaged exercise will strive to identify vulnerabilities and emerging risks that arise from changes in the external environment in a consistent manner across countries and across time.
The objective is to strengthen the staff’s capacity to spot vulnerabilities and flag potential pressure points in LICs arising from external triggers before they materialize.
view the IMF Working paper-Managing Volatility: A Vulnerability Exercise for Low-Income Countries
Source: IMF
Fitch Ratings Global Structured Finance 2010 Transition and Default Study
March 25, 2011--Summary
The global recession’s impact on structured finance (SF) securities lingered in 2010, but signs of stability also surfaced, as both the number and severity of downgrades declined significantly year over year.
The investment-grade impairment (default and near-default) rate, in particular, contracted to 2.1% from 12.5% in 2009 and the ‘AAA’ impairment rate fell to 0.24% from 3.38% in 2009. While downgrades still affected a significant 33% of structured finance ratings, the share of investment-grade ratings downgraded was 22% in 2010.
This study analyzes the rating migration and default experience of global SF securities rated by Fitch Ratings in 2010, along with longer-term performance spanning the past twenty years. Rating transitions are examined across the major SF sectors, covering ABS, CMBS, RMBS and structured credit.
Highlights
Against the backdrop of emerging from the severe economic and financial crisis of 2008 and 2009, negative SF rating activity finally began to subside in 2010. Downgrades fell 57% year over year and affected 33% of ratings, compared with 55% in 2009. The biggest contributor to this was RMBS, which saw the share of ratings downgraded contract to 33% from 64% in 2009. SF upgrades remained scarce overall, affecting just 1% of ratings in 2010.
Global RMBS downgrades still accounted for almost half of all SF downgrades in 2010. The sluggish U.S. housing recovery contributed to mixed results for the sector. While subprime delinquencies associated with deals originated from 2005?2007 began to improve, delinquencies on prime mortgages rose in 2010. The RMBS impairment rate was 16% in 2010, down from 38% in 2009.
Source: Fitch Ratings
Regulation Win for Hedge Funds over Banks
March 25, 2011-"Non banks", which include hedge funds, private equity firms and pension funds, are likely to pick up an increasing share of financing services once provided exclusively by the big banks. The forecast comes in a report by US investment bank Morgan Stanley and consultancy Oliver Wyman, which predicts tough times ahead for the City.
Total hedge fund assets are expected to soar to $2.5 trillion (£1.5 trillion) by the end of 2012, from about $1.9 trillion at the end of last year, handing even more power to their secretive multi-millionaire managers. Morgan Stanley warns that regulators "underestimate" how much business will move from banks to hedge funds and other non-banks as regulation makes many previously lucrative products uneconomic for investment banks.
Source: The Telegraph
Barclays Capital Recommends More Cautious Stance on Risk
"Global Outlook" research forecast recommends a more cautious position on risk, as inflation pressures trigger policy normalization
NEW YORK/LONDON (March 24, 2011) – The global expansion continues, but policy normalization will be a constraint on market performance, Barclays Capital today said in its latest flagship quarterly research publication, Global Outlook: Winding Down the Recovery Trade.
“We are recommending that investors shift to a more cautious approach to markets than the risk-embracing positions we have recommended since the recovery got underway two years ago,” said Larry Kantor, Head of Research at Barclays Capital. “We generally favor developed country over emerging equity markets, particularly the US, where policy is still easing, immediate growth prospects are best and risks are relatively low.”
Additional themes of Barclays Capital’s Global Outlook include:
The events of recent weeks, in Japan as well as the Middle East and North Africa, should not derail the expansionary trend
Monetary authorities around the world are shifting their focus from growth to inflation
Emerging markets exposure should be focused on currencies and local markets that have not appreciated dramatically, such as Korea
Avoid government bonds; credit is now basically a range trade
Inflation breakevens have risen, but remain an effective way to hedge inflation risk.
Source: Barclays Capital
Component Changes Made to Dow Jones Italy Select Dividend 20 Index
March 24, 2011--Dow Jones Indexes, a leading global index provider, today announced component changes in the Dow Jones Italy Select Dividend 20 Index.
Fondiaria-SAI S.p.A. RNC (Italy, Insurance, FSA.MI) will be deleted from the Dow Jones Italy Select Dividend 20 Index and replaced by Davide Campari-Milano S.p.A. (Italy, Food & Beverage, CPR.MI). Fondiaria-SAI S.p.A. RNC is being removed due to the cancellation of its dividend payment. The changes in the Dow Jones Italy Select Dividend 20 Index will be effective as of the open of trading on Tuesday, March 29, 2011.
The Dow Jones Italy Select Dividend 20 Index represents the country’s top 20 stocks by dividend yield. Further information on the Dow Jones Italy Select Dividend 20 Index can be found on www.djindexes.com.
Source: Dow Jones Indexes
After Financial Crisis, IMF Reviews How it Assesses Risks
March 24, 2011--he IMF is taking a new look at how it assesses risks and prospects for economies around the world in the wake of the global economic crisis, reviewing the effectiveness of its monitoring and the coverage, candor, and evenhandedness of its reports.
In the process, it will look at ways to strengthen assessments of the advanced economies in which the global financial crisis originated.
The IMF regularly gives economies around the world at the country, regional, and global level a health check and provides policy advice through a process known as surveillance, publishing reports on its findings after consultation with country or regional authorities. The aim is to identify weaknesses that need addressing and possible risks for regional or global stability.
2011 Triennial Surveillance Review and Review of the 2007 Decision - Concept Note
Source: IMF
Japan Equity ETFs Post Record $1.2 bln Weekly Inflow
March 23, 2011--Japan-focused equity exchange traded funds (ETFs) received a record net inflow of $1.2 billion in the week ended March 18, as investors scrambled to take advantage of a stunning decline in the country's share market following a massive earthquake, tsunami and nuclear scare.
The ETFs took in $700 million on March 16 alone, the biggest one-day inflow and twice the size of the previous record set in 2003, according to data from fund tracker TrimTabs.
Source: Reuters
Survey says lower confidence in more gold gains
March 23, 2011--Investors have cooled on gold as their attention turns from financial risks to geopolitical turmoil, according to a leading survey.
None of the roughly 100 European institutional investors queried in an annual Barclays Capital survey said gold would be the best-performing commodity in 2011. The metal received the second-highest share of votes for worst performer after natural gas.
Source: FT.com
FTSE Group and ASFA launch Australia’s first after-tax benchmarks with capital gains tax
March 22, 2011--FTSE Group "FTSE" and ASFA (Association of Superannuation Funds of Australia), today announce the expansion of the FTSE ASFA Australia Index Series to provide superannuation funds with an additional set of industry standard after-tax benchmarks. These unique indices include the effects of capital gains tax, in addition to the effects of franking credits and off-market buy-backs.
Since the 2009 launch of the original FTSE ASFA tax-adjusted indices which include franking credits and off-market buy-backs, a significant number of superannuation funds have supported the need for a benchmark which also includes capital gains tax in order to facilitate after-tax assessments on a far more granular level. The structure of the series now provides greater flexibility, enabling superannuation funds to select the after-tax benchmark that best suits their requirements, whether it’s franking credits, participation in off-market buy-backs, capital gains tax, or all three.
Source: FTSE