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   Non-TechDerivatives: Darth Vader's Revenge

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From: ggersh9/9/2018 6:17:17 PM
   of 2704
At Jesse's Cafe

This op-ed is total rewrite of history, a real cya
piece and total BS

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From: Worswick9/24/2018 9:17:25 AM
1 Recommendation   of 2704
The ongoing now pervasive world wide unraveling ...

First the nonsense of China ... China being on of my fields for the last 40 years .... and the world's greatest current Ponzi ....ranking just after the repayment of government debt.

As Paul T said to me last year, "Everyone who doesn't have both feet nailed to the floor is trying to escape China with his money."

The belt road and opening central Asia and Middle Europe/ Africa ... of course these markets are absolutely central to the world of the future ... according to China.

For the sort of of China non issue drivel out there ... just today!

The now turning to more weighty matters: Europe and dislocation and derivatives.

Brexit: Circling the Drain? Posted on September 14, 2018 by Yves Smith

Due to managing to take a bit of holiday (and that meant not keeping up with the news) and being distracted by CalPERS (that will hopefully tail off by the end of the month) I have been neglecting Brexit. Even though I am writing this post in the form of an update, it is as much a forcing device for reader to tell me about stories and issues I may have missed that would affect some of the tentative conclusions below.

As this very far remove, I don’t see anything that has happened in the last two weeks that would change the very high odds of a crash out next March.

The EU graciously offering some token concessions is not tantamount to a softening of position. The new “we are gonna have a deal” date is now November, moved back from October. This is not a surprise; some commentators have opined that the negotiations could go as late as January….if there were actual negotiations, as opposed to the EU having to figure out what to do with UK inaction followed by obviously unworkable offers.

Jean-Claude Juncker making positive noises about Checquers is awfully reminiscent of his behavior during the 2015 Greece negotiation, where he would regularly try to play a more central role in the dealmaking than he really had, only to be slapped down or quietly pushed to the sidelines. Juncker has been looking statesmanlike compared to 2015, but that is also not hard with the likes of David Davis and Boris Johnson setting a baseline.

Another rumor, that the EU would let the UK largely out of the “defining the future relationship” seems dodgy. If you recall early on, many Tories, including some noisy Ultras, were insisting that the UK not agree to the Brexit bill unless it also got an “iron clad” trade agreement along with it. Someone apparently pulled them aside and told them it was impossible to get a trade pact done in anything less than a few years, with “five” a realistic minimum.

Shorter: quite a few people on the UK side were noisily of the view that the UK should firm up its trade deal as much as it could before Brexit because it would have more negotiating leverage then than during the transition period. Since all the exit agreement would include is a political statement of intent, it’s not binding.

However, the idea that the UK would manage to get an exit agreement done but decide to omit or fudge the “future relationship” part would seem daft, until you remember that we are already well into asylum territory. The UK needs to come to an agreement as to what sort of trade/legal relationship it wants with the EU going forward. If it can’t get that done in the context of a transition deal, pray tell how will it ever sort that out?

It makes every sense for the EU to be as gracious-appearing as it can be, not just for appearance’s sake, but for the historical record.

The Chequers plan is dead, yet May keeps flogging it. Even EU business leaders are telling the UK to get real. F rom the Financial Times earlier this month:

German business leaders have raised the alarm over the state of Brexit negotiations and are urging the UK government to soften its position ahead of make-or-break talks with Brussels in the coming weeks…

Mr [Joachim] Lang [director-general of Germany’s BDI industry federation] also voiced criticism of the UK position as set out in London’s recent Brexit white paper, in particular with regard to its proposal on trade. Among other points, the paper calls for a post-Brexit scenario in which the UK remains part of a single market for goods with the EU, while excluding the free movement of services, capital and people.

“The UK says it wants to keep the free movement for goods but become independent with regard to the other freedoms. We believe that cannot work,” said Mr Lang. Separating goods from services and the flow of people and finance, he added, was simply not possible in the modern economy.

“When we sell a piece of machinery today, we don’t just sell the product. We also sell services, data and maintenance,” he said. “You cannot pick one freedom but leave the other three on the sidelines. That simply does not work with modern industrial goods. We are not selling a piece of chocolate.”

His stance was supported by Bernhard Mattes, the president of Germany’s VDA car industry federation, which represents groups such as Volkswagen, Daimler and Bosch. Mr Mattes told the FT: “When you sell an industrial good you don’t just sell iron, steel and plastic — there is always a service that comes with the product.”

Honestly, this is all you need to know about the Checquers plan. As with every half-baked UK idea, it does not solve the problem it purports to solve. But these barmy proposals allow British pols to present themselves falsely as being oh-so-reasonable and depict the EU as obstructionist when they reject them.

No progress on the Irish border. No surprise, but this is yet another “crash out is coming” indicator.

Possible fading cred of the Ultras not likely to make much difference. Over the weekend, Richard North described how the Ultra’s alternative to May’s Chequers plan was widely ridiculed by the UK press. On the one hand, finally having the media willing to treat the rabid Brexiteers with scorn is long overdue. However, even in decline (if that is really happening), they still have enough votes in Parliament, and enough loyalists in the heartlands to be able to thwart reasonable outcomes, and in particular, a retreat.

Latest dire warning unlikely to have the impact it should. Yesterday, Mark Carney told the Cabinet that Brexit could be as crippling as the crisis of 2008.

Carney is wrong. A crash-out would be worse.

I hope to work this out in more detail in a future post, but the short version is that the financial crisis hit the heart of the financial system. While as we saw, the potential knock-on effects were catastrophic, the concentrated nature of the banking system in the UK and Europe meant that the authorities could identify the institutions and markets that were failing. They had to scramble to find and in some cases create the mechanisms to rescue them, but as we saw, the scale of the problem, although it taxed them to the max, was not beyond the operational capacity of central bankers, financial regulators, and politicians to handle on an emergency basis (as we know, for reasons of convenience and intellectual capture, they were uninterested in holding executives accountable, in restructuring the financial system so as to reduce the risk of large crises, and providing adequate support to real economy victims of the crisis).

The UK civil service is so crippled it can’t even manage to prepare competent Brexit white papers. How is it going to negotiate a trade with the EU and every other country with which it needs to enter into new treaties, let alone negotiate a new airlines pact, gear up massively for new customs requirements, while coping with the immediate chaos of a crashout or hard Brexit at the end of 2020? Another ugly secret is given the UK’s inability to get anything done, it is highly unlikely to be in all that much better shape at the end of a transition period than it will be in March 2019 (however, the damage would be less by virtue of the EU and multinationals being better prepared).

The point is that the UK government will be utterly overwhelmed. It will face real economy problems it is not remotely equipped to handle, and worse, for which it is making hardly any preparation, and will also be hit with stress to its banking system and a probable banking crisis.

The one difference with 2008 is my guess is the damage will not come as fast and dramatically as the Lehman collapse, but will accelerate as real economy and financial upheaval play into each other.

Again, I hate to seem high level and unduly simplistic, but it does not seem that anything significant has changed in the last two weeks. Please feel free to correct me if you think I am wrong, or as important, flag developments that could lead to shifts in due course.

Disorderly Brexit Would Trigger Mayhem in Derivatives Market by Don Quijones • Sep 20, 2018 • 22 Comments Time is running out. March 29 is the deadline. Urgent action is needed. But it’s not happening. By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET. With less than six-and-a-half months to go before the UK’s deadline to leave the EU expires, progress is still lacking in the Brexit negotiations, in particular on crunch issues such as the Irish border and the equivalency of financial services. As the doomsday clock ticks down, jitters are rising on both sides of the English Channel, particularly the English-speaking one.

On Monday, Moody’s said the probability of a no-deal Brexit has “risen materially,” and “would be negative for an array of issuers.” Such an outcome could bring with it a host of ugly consequences for the UK economy, ranging from a further weakening pound to higher inflation and sliding real wages, as well as undesirable knock-on effects for EU economies.

The longer the uncertainty drags on, the more likely it is that companies and banks will activate plan-B contingency plans, which in many cases involve moving a large chunk of their UK-based operations across the Channel. Once those plans are activated, stalling or reversing them will not be easy.

Deutsche Bank is mulling transferring up to three-quarters of the capital it has invested in the City — estimated to be worth around €600 billion — to its Frankfurt headquarters, the Financial Times reported on Sunday, citing sources close to the bank’s senior management. Tellingly, Deutsche Bank hasn’t made the move yet, since it knows that relocating key operations and staff across the channel is a costly, complex undertaking. It would much prefer to play a waiting game in the hope that the need for such drastic measures can be averted.

Most of the corporate moves that have taken place so far have involved small parts of firms’ operations, with few jobs lost in the City. But that dynamic appears to be changing as the Brexit deadline approaches. According, UK-based brokers and traders have already started activating contingency plans for a no-deal Brexit. Not even a last-minute agreement between UK and EU politicians will be enough to reverse those plans, they claim.

For the City of London, arguably its biggest fear is losing its hold over the global clearings business, which it has dominated for decades. Clearing is where a company acts as a middleman between financial trades, collecting collateral and standing between derivatives and swaps traders to prevent a default from spiraling out of control. London is home to the world’s largest clearing-house, LCH, which clears almost €1 trillion in euro-denominated derivatives a day, representing around three-quarters of the global market.

For City-based firms, the clearing business provides jobs and billions of pounds in annual profits. But those are now on the line. Euro-denominated contracts make up roughly a quarter of LCH’s daily volumes and with Brexit fast approaching, the ECB and certain European governments, with France leading the way, want a sizeable piece of that action, for largely justifiable reasons.

They’ll probably get it, said UBS analysts in a note last week. The analysts expect LCH to suffer a “25% loss of market share of the euro-denominated clearing market.” The authors also warn the clearing house will lose sales volumes “no matter the outcome” of Brexit, as “regulators like the European Banking Authority are encouraging institutions to prepare for a worst-case outcome to mitigate Brexit-related market disruptions.

This is spurring financial institutions to increase their business with Eurex, Germany’s largest clearing house, in a bid to reduce their Brexit exposure. The more customers Eurex attracts, the more competitive it becomes. Deutsche Bank shifted around half of its euro clearing volumes from LCH to Eurex in July. HSBC and Barclays also transferred volumes to Eurex earlier in the year, according to the FT.

In the UBS analysts’ best-case scenario, in which the UK and EU sign a provisional exit agreement by the March 29 deadline, LCH’s owner, the London Stock Exchange, will lose around 2-3% of its earnings per share.

In their worst-case scenario — a hard or no-deal Brexit — the resulting economic carnage could be huge. If the UK crashes out of the EU without any deal on future trading arrangements, it “would prohibit the clearing at LCH of ANY derivative contracts (not just euro-denominated contracts) by EU-domiciled entities,” the UBS analysts warn.

This doom-laden prognosis chimes with recent warnings by the Bank of England and the UK’s Financial Conduct Authority that derivatives contracts, valued in the tens of trillions of pounds, could be thrown into confusion by a disorderly Brexit. The London Metal Exchange (LME), the world’s largest market in options and futures contracts on base and other metals, has also chipped in, warning that its clearing house could struggle to provide services to European Economic Area ( EEA) countries after Britain leaves the European Union.

Of course, these dire predictions could be construed as good old-fashioned Brexit fearmongering, which is in endless supply these days. But it’s no longer just the Brits who are peddling this narrative. So, too, is the German financial regulatory authority, BaFin, which recently exhorted EU officials to take urgent action to prevent mayhem in the derivatives market and insurance industry after Brexit.

“It is almost impossible to fix that problem exclusively just by one side of the stakeholders involved, let it be the industry itself or individual supervisors,” BaFin’s president, Felix Hufeld said at a forum in Frankfurt at the end of August. There has to be “a solution on a political level” aimed at building a legislative or regulatory structure to prevent disruption, Hufeld said.

Time is running out. Until now, the European Commission and ECB have shown scant willingness to accept any form of equivalency between British and EU financial services. And without that, there is a genuine risk that a disorderly Brexit on March 29 could set in motion an unraveling of an already hugely volatile, highly interconnected derivatives industry.

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From: Worswick10/10/2018 1:57:03 PM
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Ah, here we re again with previously unknown problems now unhappily marching forwards into the grim spotlight of current day realities ....

Has The Derivatives Volcano Already Begun To Erupt?

by Tyler Durden
Wed, 10/10/2018 - 13:20



Authored by David Goldman via The Asia Times,

For the charts

The cure for the last crisis always turns into the cause of the next one...


The economies of southern Europe – Greece, Italy, Spain and Portugal – nearly collapsed in 2011, and Europe’s monetary authorities responded with negative interest rates. So did Japan.

Europeans and Japanese pay to hold cash or own 10-year German government bonds, which means that every pension fund and insurer will fold in a finite time horizon. They responded by exporting more, saving more, and buying American assets that still pay a positive, if low, real yield.

Hedging the foreign exchange risk in this half-trillion-dollar per year business has exhausted the balance sheet of the global banking system. That explains a large part of the jump in the US 10-year note yield to 3.2% last Friday from 2.85% in early September. Hedging the foreign exchange risk in these massive flows created a derivatives mountain, and it has started to spew smoke and lava.

Banks are rationing foreign-exchange swap lines, making hedges so expensive that German and Japanese investors can no longer afford to buy US bonds. If the foreign bid for US debt dries up, the cost of financing America’s $1 trillion annual budget deficit will rise, and so will interest costs around the world.


The mechanics of hedging trillions of dollars of capital flows are complex, but the economics are simple. Germany and Japan together export half a trillion dollars a year of goods and services more than they import. America imports more than half a trillion dollars of goods and services more than it exports.

Germany and Japan have negative real interest rates, so their investors buy American bonds at positive real interest rates. But Germans and Japanese have to pay out Euros and yen, not dollars. They go to their banks to swap dollar income into local-currency income. The banks borrow dollars in the United States, sell them in the forward market and receive Euros and yen.

European banks are running out of borrowing capacity. After five years of negative short-term rates, their profitability is low, their stock prices are falling and their credit is deteriorating. They can no longer borrow the dollars required to construct the hedges that local investors need.

Foreign exchange derivatives form the biggest mountain of obligations in the world financial system – a notional amount of about $90 trillion, up from $60 trillion in 2010. Breaking down the numbers, Bank for International Settlements (BIS) economists showed that the foreign exchange derivatives taken on by non-financial corporations tracked the growth of world trade, and the derivative obligations of nonbank financial institutions – money managers and insurance companies – tracked international securities investments (see chart below).


The BIS economists led by Robert McCauley note that non-US banks now owe $10.7 trillion in US dollars, most of which reflects the hedging requirements of these global flows. The banks don’t report foreign exchange swaps with their customers on their balance sheets, but the BIS estimates that these obligations amount to $13 or $14 trillion.


The USFor more than one year, international bank regulators and the International Monetary Fund have warned that the banking system no longer can support these enormous flows. The Federal Reserve is tightening liquidity in the US, and in a volatile market, European banks might not be able to roll over nearly $11 trillion of short-term obligations – and might default.

As the BIS warned in September 2017:

The combination of balance sheet vulnerabilities and market tightening could trigger funding problems in the event of market strains. Market turbulence may make it more difficult for banks to manage currency gaps in volatile swap markets, possibly rendering some banks unable to roll over short-term dollar funding. Banks could then act as an amplifier of market strains if funding pressures were to compel banks to sell assets in a turbulent market to pay their liabilities that are due.


Funding pressure could also induce banks to shrink dollar lending to non-US borrowers, thus reducing credit availability. Ultimately, there is a risk that banks could default on their dollar obligations.


The market turbulence of which the BIS warned in its September 2017 quarterly report is now upon us: Italy’s populist government threatens to increase the country’s sovereign debt, already at an unsustainable 130% of GDP. Yields on Italy’s debt have soared, and bank stocks have collapsed.

The creditworthiness of some of Europe’s largest banks has deteriorated. In the case of Deutsche Bank, the cost of hedging against bond defaults over the next five years has doubled since the Italian crisis erupted in May.

As the credit of European banks deteriorates, US regulators require American banks who lend to them to put up more reserves against their exposure. That raises the cost of refinancing the $12 trillion or so of European bank borrowings from American banks, and it probably has led to a reduction in credit lines. European banks, in return, have to charge exorbitant rates to customers for hedging.

The crunch hit at the end of the third quarter, when European banks’ short-term credit line in US dollars had to be renewed. Data for the volume of interbank lending aren’t available yet, but the cross-currency “basis swap” between Euros and US dollars – the spread that banks charge their customers for expanding their balance sheets to provide foreign exchange hedges – suddenly widened.


The 0.3%, or 30 basis points, shift in the so-called basis swap was big enough to wipe out any advantage that European investors might obtain from buying US dollar securities and swapping the cash flows back into euro.

Meanwhile, Deutsche Bank researchers noted in an October 3 report: “On 27 September, the cost of dollar-denominated forex-hedged investments from Japan jumped to 315bp, the highest level since the 2008 financial crisis .”

Effectively, that wiped out the incentive for Japanese investors to buy US bonds. Japanese 10-year notes yield about 0.14% and US Treasuries yield 3.23%, so the 3.15% cost of hedging wipes out the yield advantage for Japanese investors. The reason for the shift was a 0.46% jump in the yen-dollar basis swap in a single business day. Dollar loans are getting scarce for Japanese banks as well.

If overseas investors can’t recycle the half-trillion-dollar US current account deficit into dollar-based securities because the banking system can’t provide the foreign exchange hedges, US yields will rise, perhaps sharply. It will be harder for the US Treasury to borrow the $1 trillion it requires each year, and the cost of debt service will add to the US budget deficit – every 1% increase in borrowing costs adds $200 billion in debt service to the budget.

I doubt that European governments would allow their banks to default on dollar obligations; long before that could happen, European regulators would arrange shotgun mergers and emergency recapitalizations. But the risk remains that dollar credit will seize up globally, with disastrous consequences for countries that have to borrow dollars to cover deficit

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From: Worswick3/6/2019 9:08:05 AM
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After "Irreparable Damage" Warnings, Wall Street Finally Cracks Down On CDS Manipulation by Tyler Durden Tue, 03/05/2019 zero hedge

Wonderful: “Meanwhile, regulators have also barged in, and confirming that an official crackdown on the CDS market may be imminent, the CFTC warned last April that “manufactured credit events may constitute market manipulation and may severely damage the integrity of the CDS markets.”

Goodness..... Who knew?

Last January, after several perplexing instances when credit default swaps mysteriously traded in precisely the opposite direction of where they were supposed to, derivatives traders finally "cried foul" over the Blackstone-led refinancing deal for US housebuilder Hovnanian, saying what they had just observed threatened to further undermine the shrinking market for credit default swaps.

So what happened? Well, heading into the end of 2017, the credit derivatives swaps of Hovnanian were soaring as if New Jersey’s largest homebuilder was about to default, even as its stocks and bonds show no signs of panic.

As it subsequently turned out, the catalyst behind this divergence was a bizarre battle raging among hedge funds, with one group saying that the other has offered Hovnanian financing in return for taking steps that would trigger payouts on those derivatives. The claim came in a letter from law firm White & Case, which said it’s been made aware of a proposal in which Hovnanian would pursue a refinancing deal with the main intention of triggering a credit event that would lead to a payout on the credit-default swaps.

At the time, Bloomberg identified the main actors as hedge fund Solus Alternative Asset Management, which owned both Hovnanian’s bonds and sold CDS guaranteeing the company won’t miss a debt payment, while its counterparty was Blackstone’s GSO Capital partners hedge fund, an investor with which Hovnanian has explored a restructuring that would trigger a CDS payout.

What makes the deal unique, is that in order to secure the funds from GSO, Hovnanian had agreed to skip a payment on some of its existing bonds, triggering a technical default and a big payday for the hedge fund, which unlike Solus, was long Hovnanian CDS.

As we then explained last May, this particular fiasco in the CDS market was hardly isolated, but it served to demonstrate how any human system - when enough money is at stake - will eventually be gamed beyond its breaking point.

Furthermore, while legal, traders said the arrangement made a mockery of a market designed to be used to hedge the risk of real defaults at companies in genuine financial distress. Furthermore, while the tactic of making refinancing conditional on triggering CDS had been used on various occasions before, the Hovnanian situation was unusual because of the size of the deal and because the company was not in financial distress.

Finally, as one would expect, the most vocal opponent of the scheme was Solus, which claimed that the "illegal" scheme could cost it and other sellers of Hovnanian credit default swaps hundreds of millions of dollars.

And just to underscore the above point, Solus also stated that "the integrity of the CDS market - which is predicated on the expectation that companies seek to avoid payment default, not to accept illicit payments to default intentionally - will be irreparably damaged," Solus said (for a recap of all "bizarre" CDS deals, read our primer on Orphan CDS and manufactured credit events from last May).

* * *

Fast forward to today, when in an attempt to finally reverse the "irreparable damage" to the CDS market, Wall Street banks and hedge funds were set to implement a fix that would finally clean up the $8 trillion CDS market that had gained a reputation for being one of the shadiest corners in finance.

As Bloomberg reports, after months of negotiations, CDS market titans such as Goldman Sachs, JPMorgan, Apollo Global and Ares Capital have agreed to a plan that’s intended to ensure defaults are tied to legitimate financial stress, not traders’ derivatives bets, and as a result, the infamous International Swaps and Derivatives Association, or ISDA (which several years ago made a mockery of CDS as hedges for sovereign defaults as pertains to the case of Greece, but that's another story) is likely to propose the overhaul as soon as Wednesday.

The proposed fix, however, far from a "silver bullet" will be limited to just "manufactured default" deals - the kind we profiled one year ago - and it remains unclear whether it will bolster confidence in the broader CDS market.

“There have been concerns that narrowly tailored credit events negatively impact the efficiency, reliability and fairness of the overall CDS market,” Jonathan Martin, director in market infrastructure and technology at ISDA, said in a statement. “We hope these proposed changes will address that.”

So what will the proposed change entail? Simply stated, it will force events of default to be linked to actual underlying creditworthiness (or lack thereof), instead of events of default prearranged in some dark alley between a corporate CFO and some billionaire hedge fund manager.

Additionally, the changes will be non-binding, voluntary and unenforceable.

However while the overhaul will be voluntary, firms that refuse to sign on could have trouble finding trading partners. Additionally, while the overhaul could be completed in the next few months, but full implementation could take much longer, effectively allowing a long-enough window for many more Hovnanian-type manufactured defaults to emerge in the coming months. If the proposal passes, the new standards would apply to new CDS contracts, and existing agreements could also be amended. Still, it’s unclear whether the coming directive will capture all the creative ways that firms have structured CDS trades to make money.

Yet while the proposal may be toothless for now, ISDA’s decision to clamp down is a recognition that manufactured defaults might be deterring some investors from entering the market. In addition, as Bloomberg notes, the industry wants to show global regulators it can address the problem on its own to stave off stiff rules and beefed-up government oversight.

“People had become gun shy about using the CDS product to invest in and manage credit risk,” said John Williams, a law partner at Milbank who represents buyside firms active in the CDS market including Apollo and Ares. “This is a very serious effort to make the rules fair.”

Ironically, in the wake of the Hovnanian controversy, GSO founder Bennett Goodman - who in 2017 was eager to take advantage of the loopholes in the CDS market is now actively petitioning to clean it up - said that Blackstone would back revamping the standards that govern CDS trades. And while Blackstone wasn’t formally part of the group that reached the preliminary agreement, one of the people said, but there is no indication it will oppose the plan.

Meanwhile, regulators have also barged in, and confirming that an official crackdown on the CDS market may be imminent, the CFTC warned last April that “manufactured credit events may constitute market manipulation and may severely damage the integrity of the CDS markets.”

That said, CFTC chairman, Christopher Giancarlo has offered the industry to solve its issues on its own, and said that he hoped ISDA would resolve the matter with market participants. Meanwhile, U.K. Financial Conduct Authority CEO Andrew Bailey said in July that “this is a practice that’s the wrong side of the line.”

Meanwhile, until a solution is found, the tensions in the market will remain, and as Milbank's John Williams said, “when the rules can be manipulated it’s very painful to be the second-smartest guy on the street"; of course since he also represents Blue Mountain Capital Management, CQS and Brigade Capital Management, his clients tend to be the ones who do the manipulation and end up with the profits.

And, as we said last May, even if a "fix" is implemented, any human system - when enough money is at stake - will eventually be gamed beyond its breaking point. As such, when a market is dominated by a handful of bloodthirsty hedge funds and nobody else as the CDS market has become over the past decade, it is only a matter of time before whatever fix ISDA implemented in the coming days is quietly violated by the next "smartest-guy on the street."

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From: ggersh3/25/2019 11:34:19 AM
2 Recommendations   of 2704

By Pam Martens: March 24, 2019 ~

The Office of the Comptroller of the Currency (OCC), the Federal regulator of national banks, which includes the largest banks on Wall Street, quietly issued its quarterly report on trading in cash instruments and derivatives on Friday. The report contained a shocker: stock (equity) trading had plunged 88.6 percent in the fourth quarter of 2018 versus the fourth quarter of 2017 on a consolidated basis at the bank holding companies, which includes the results of their commercial and investment banks. Equally stunning, stock trading was down an even more staggering 91.7 percent from the third quarter of 2018. (See chart above from the report.)

This bombshell statistic is something that we have not heard a peep about from either the Wall Street banks on their earnings calls or the business media.

In fact, Wall Street banks have been telling business media that their trading pain in the fourth quarter came from fixed income (bond) trading. The media reports now read like something from Alice in Wonderland when compared to the OCC report.

Reuters reported on February 25, 2019 that while Wall Street banks overall did better than their European counterparts “The biggest losers, however, were the divisions that trade fixed income, currencies and commodities…However, equity trading picked up, particularly for Wall Street banks, where revenue rose 10 percent.” That statement contrasts with this statement in the OCC report: “The quarter-over-quarter decrease in trading revenue was across all instrument categories with the largest decrease due to equity trading.”

We’ve reached out to the OCC to explain the dramatic difference in what the banks are reporting versus its report and will also reach out to the Wall Street mega banks next week for their explanation. We’ll provide the details to our readers if we receive any meaningful clarification.

Not only did stock trading collapse in the fourth quarter according to the OCC, but according to another chart in the report (see Graph 9b) equity trading revenue plunged to multi-year lows, coming in at $441 million in the fourth quarter of 2018 at the bank holding companies. That compared to $3.86 billion in the fourth quarter of 2017; $3.0 billion in the fourth quarter of 2016; and $3.7 billion in the fourth quarter of 2015.

We can think of one possible reason that the Wall Street mega banks did not want to talk about the staggering results of their equity trading in the fourth quarter. If they are simply matching buyers with sellers (or vice versa) which Wall Street calls market-making, instead of engaging in risky trading for the house (proprietary trading), how could they have had such disastrous results in the quarter?

Table 7 in the OCC report shows that the Federally-insured commercial bank unit of JPMorgan Chase lost $644 million in the quarter trading equity positions while Goldman Sachs Bank USA lost $119 million. Scarier still, Citibank N.A., the Federally insured unit of Citigroup, lost $151 million trading credit derivatives while Goldman Sachs Bank USA, also Federally insured, lost $407 million trading credit derivatives. Credit derivatives played a major role in the 2008 financial crash and the need for an epic taxpayer bailout of Wall Street banks, and yet, here we are today, still writing about Federally insured banks, backstopped by the taxpayer, trading credit derivatives.

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From: Worswick6/16/2019 7:22:15 PM
1 Recommendation   of 2704
Ah, time to post again ....

Still posting after years here on this thread:

21 years I think with nothing, nada, squat, zip resolved. Amazing!

With rumours of a world 2.5 trillion derivative exposure outstanding currently...



See: Tyler DurdenSun, 06/16/2019

Deutsche Bank To Launch €50 Billion "Bad Bank" Housing Billions In Toxic Derivatives

... will stuff its "bad bank", known internally also as "the non-core asset unit", with - drumroll - long-dated derivatives.

According to the FT, the CEO will likely to announce the changes with the bank’s half-year results in late-July.

While the final scale of the bad bank has not been decided and the number “continues to oscillate”, executives are reportedly discussing at least €30bn of risk-weighted assets with an eventual size of €40bn to €50bn most likely, at the high end almost exactly 4 times greater than DB's current market cap, and accounting for 14% of Deutsche’s balance sheet.

"The cuts need to be radical,” one senior banker told the FT. “It makes sense for us to put all these long-term, nil-revenue assets in a non-core unit.” The person added: “We now have the capital and liquidity freedom to do what needs to be done; we couldn’t have acted decisively much sooner because we needed to have built up those buffers.”

"Nil-revenue" but far more than nil expenses.

Recall that last April, IFRE reported that then CEO John Cryan "came clean" about a €60 billion portfolio of years-old trades that were costing the German lender about €500 million a year. Never previously disclosed, the revelation stunned analysts. Deutsche had done several clean-ups since the crisis – including one by Cryan just 17 months earlier – but had never mentioned the trades, some of which were over a decade old.

It got worse: although a relatively small piece of its balance sheet, which at the time stood at €1.6 trillion, the positions were consuming between €4bn and €5bn of equity – equivalent to 10% of the bank’s entire core equity Tier 1 capital base, and more than half the amount shareholders were being asked to cough up.

Worse still, Cryan admitted that some of the positions wouldn’t run off until after 2030, more than two decades after some were initially booked. Christian Sewing, who was running Deutsche’s private and commercial bank and oversaw the failed efforts to spin off its Postbank subsidiary, said at the time: “We just want to create the transparency that these are things we are going to work out.”

Unfortunately, as of last April, and shortly after raising €8bn in a critical rights offering which Deutsche at the same said is all the funds it would need, the bank had not updated investors on the portfolio, other than to say late last year that it “continues to roll-off as planned”.

It now appears we know the fate of this €60 billion toxic derivative portfolio: it will be rolled up and into the "bad bank" of a bank many already call "bad" (so bad bank squared perhaps). While the derivatives destined for the non-core unit still provide some cash flow, all the profit on the deals — and therefore the associated bonuses for those who arranged them — were booked up-front.

Now that the bank is sitting on €260bn of cash and similarly liquid securities, it no longer relies on these assets for cashflow and can attempt to run them down or sell them to other banks with lower funding costs and capital pressures, or to private equity investors eager to scoop them up at a discount, one of the people said.

In response to the FT article, DB said in a statement: “Deutsche Bank is working on measures to accelerate its transformation so as to improve its sustainable profitability. We will update all stakeholders if and when required.”

Of course, DB's derivative woes are just a small - if costly - part of the equation: once a Wall Street gem, Deutsche’s investment bank has weighed on earnings in recent years, and made losses in the past two quarters. Along with a series of fines for misconduct scandals, the poor performance of its core business has driven down the bank’s share price to the lowest in its 149-year history.

Sentiment darkened in April when a long-rumoured merger with Commerzbank collapsed.

The lender is targeting a return on tangible equity — a measure of profitability — of at least 4 per cent this year, below most rivals. But it generated only a 1.3 per cent return in the first quarter. None of the analysts that cover the group forecast it can achieve its goal without major structural changes.

So why now? Deutsche Bank believes it can divest the assets without taking large hits to its profit or capital "because the long-dated interest rate derivatives are not toxic and have a predefined run-off plan", an FT source said.

Of course, it is debatable whether a €60 billion derivative portfolio which is bleeding half a billion each year and will continue doing so for decades is "not toxic", but we'll leave that discussion for the semantic purists... and whoever is Germany's Chancellor in a few months when the nationalization of Deutsche Bank is once again sprung upon the German government.

Additionally, a reason the bank has waited so long to make the changes was a fear it would close down large parts of the equities and rates businesses at the bottom of the cycle, people briefed on the plan said.

In another amusing tangent, sources said the new non-core unit "comprises mainly non-strategic assets and would be different to its prior bad bank, which contained far more loss-making and toxic assets. From 2012 to 2016, Deutsche ran down a non-core unit with about €125bn in risk-weighted assets — including a $4.3bn Las Vegas casino it took over when the developer defaulted — resulting in a cumulative pre-tax loss of €14.6bn over the period. When Deutsche dissolved the bad bank, the roughly €10bn of assets left were reintegrated into the core businesses."

All we know, is that if Deutsche Bank is the "good" bank, it's becoming impossible to track its "bad banks."

Meanwhile, the bank will retain its better-performing bond trading business — which is ranked in the global top-five by industry monitor Coalition — and its currency-trading operation, which reclaimed the second spot in the Euromoney FX survey last year.

Will that help DB become viable? Probably not: JPMorgan recently estimated that Deutsche’s US operation was losing 25 cents for every dollar of business it does and its global equities business alone loses about €600m annually.

There is one final problem: in the summer of 2016, just a month before fears about the viability of DB sent its stock careening lower and prompting Angela Merkel to discuss whether or not DB will be nationalized, the IMF found that Deutsche Bank is "the bank that poses the greatest risk to the global financial system":

Network analysis suggests a higher degree of outward spillovers from the German banking sector than inward spillovers. In particular, Germany, France, the U.K. and the U.S. have the highest degree of outward spillovers as measured by the average percentage of capital loss of other banking systems due to banking sector shock in the source country.

Here is the IMF's chart showing the key linkages of the world's riskiest bank: See url here

Since then, the gross notional value of derivatives on DB's balance sheet has indeed shrunk, but so has its equity market cap... which has never been lower and the buffer to absorb losses is virtually nil - DB's market cap is now just €12.5 billion, the same as Friday's IPO star, Chewy. Which makes sense: one creates dog shit, the other is collateralized by it.

So should things turn bad, it is virtually certain that Germany's taxpayers will once again be on the hook for the most important bank bailout in European history.

But the biggest irony of all, is that Deutsche Bank may actually have a chance of survival, if the ECB were to ever hike rates. As it stands now, however, with the ECB set to cut rates in the near future and possibly resume QE, the Frankfurt banking giant is as good as nationalized.

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From: Worswick6/24/2019 2:11:34 PM
   of 2704
Escobar: One Quadrillion Reasons Why Washington Fears Iran's "Maximum Counter-Pressure" by Tyler Durden Sun, 06/23/2019 Authored by Pepe Escobar via The Strategic Culture Foundation, ( my opinion: a Russian state tilted site)

Sooner or later the US “maximum pressure” on Iran would inevitably be met by “maximum counter-pressure”. Sparks are ominously bound to fly...

The extent of a possible derivatives crisis is an uber-taboo theme for the Washington consensus institutions. According to one of my American banking sources, the most accurate figure – $1.2 quadrillion – comes from a Swiss banker, off the record. He should know; the Bank of International Settlements (BIS) – the central bank of central banks – is in Basle.

The key point is it doesn’t matter how the Strait of Hormuz is blocked.

It could be a false flag. Or it could be because the Iranian government feels it’s going to be attacked and then sinks a cargo ship or two. What matters is the final result; any blocking of the energy flow will lead the price of oil to reach $200 a barrel, $500 or even, according to some Goldman Sachs projections, $1,000.

Another US banking source explains:

“The key in the analysis is what is called notional. They are so far out of the money that they are said to mean nothing. But in a crisis the notional can become real. For example, if I buy a call for a million barrels of oil at $300 a barrel, my cost will not be very great as it is thought to be inconceivable that the price will go that high. That is notional. But if the Strait is closed, that can become a stupendous figure.”

BIS will only commit, officially, to indicate the total notional amount outstanding for contracts in derivatives markers is an estimated $542.4 trillion. But this is just an estimate.

The banking source adds, “Even here it is the notional that has meaning. Huge amounts are interest rate derivatives. Most are notional but if oil goes to a thousand dollars a barrel, then this will affect interest rates if 45% of the world’s GDP is oil. This is what is called in business a contingent liability.”

Goldman Sachs has projected a feasible, possible $1,000 a barrel a few weeks after the Strait of Hormuz being shut down. This figure, times 100 million barrels of oil produced per day, leads us to 45% of the $80 trillion global GDP. It’s self-evident the world economy would collapse based on just that alone.

War dogs barking mad

As much as 30% of the world’s oil supply transits the Persian Gulf and the Strait of Hormuz. Wily Persian Gulf traders – who know better – are virtually unanimous; if Tehran was really responsible for the Gulf of Oman tanker incident, oil prices would be going through the roof by now. They aren’t.

Iran’s territorial waters in the Strait of Hormuz amount to 12 nautical miles (22 km). Since 1959, Iran recognizes only non-military naval transit.

Since 1972, Oman’s territorial waters in the Strait of Hormuz also amount to 12 nautical miles. At its narrowest, the width of the Strait is 21 nautical miles (39 km). That means, crucially, that half of the Strait of Hormuz is in Iranian territorial waters, and the other half in Oman’s. There are no “international waters”.

And that adds to Tehran now openly saying that Iran may decide to close the Strait of Hormuz publicly – and not by stealth.

Iran’s indirect, asymmetric warfare response to any US adventure will be very painful. Prof. Mohammad Marandi of the University of Tehran once again reconfirmed, “even a limited strike will be met by a major and disproportionate response.” And that means gloves off, big time; anything from really blowing up tankers to, in Marandi’s words, “Saudi and UAE oil facilities in flames”.

Hezbollah will launch tens of thousands of missiles against Israel. As Hezbollah’s secretary-general Hasan Nasrallah has been stressing in his speeches, “war on Iran will not remain within that country’s borders, rather it will mean that the entire [Middle East] region will be set ablaze. All of the American forces and interests in the region will be wiped out, and with them the conspirators, first among them Israel and the Saudi ruling family.”

It’s quite enlightening to pay close attention to what this Israel intel op is saying. The dogs of war though are barking mad.

Earlier this week, US Secretary of State Mike Pompeo jetted to CENTCOM in Tampa to discuss “regional security concerns and ongoing operations” with – skeptical – generals, a euphemism for “maxim pressure” eventually leading to war on Iran.

Iranian diplomacy, discreetly, has already informed the EU – and the Swiss – about their ability to crash the entire world economy. But still that was not enough to remove US sanctions.

War zone in effect

As it stands in Trumpland, former CIA Mike “We lied, We cheated, We stole” Pompeo – America’s “top diplomat” – is virtually running the Pentagon. “Acting” secretary Shanahan performed self-immolation. Pompeo continues to actively sell the notion the “intelligence community is convinced” Iran is responsible for the Gulf of Oman tanker incident. Washington is ablaze with rumors of an ominous double bill in the near future; Pompeo as head of the Pentagon and Psycho John Bolton as Secretary of State. That would spell out War.

Yet even before sparks start to fly, Iran could declare that the Persian Gulf is in a state of war; declare that the Strait of Hormuz is a war zone; and then ban all “hostile” military and civilian traffic in its half of the Strait. Without firing a single shot, no shipping company on the planet would have oil tankers transiting the Persian Gulf.

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To: Worswick who wrote (2696)6/24/2019 2:37:07 PM
From: ggersh
   of 2704
Remember this

‘If Iran can't export oil no-one in Middle East will,’ Tehran warns.

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From: Worswick7/21/2019 11:11:32 AM
2 Recommendations   of 2704
A Bank With $49 Trillion In Derivatives Exposure Is Melting Down Before Our Eyes

An abbreviated article ... for the full article see:

In particular, some of the largest “too big to fail banks” in the United States are “heavily interconnected financially” to Deutsche Bank. The following comes from Wall Street On Parade

We know that Deutsche Bank’s derivative tentacles extend into most of the major Wall Street banks. According to a 2016 reportfrom the International Monetary Fund (IMF), Deutsche Bank is heavily interconnected financially to JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America as well as other mega banks in Europe. The IMF concluded that Deutsche Bank posed a greater threat to global financial stability than any other bank as a result of these interconnections – and that was when its market capitalization was tens of billions of dollars larger than it is today.

Until these mega banks are broken up, until the Fed is replaced by a competent and serious regulator of bank holding companies, and until derivatives are restricted to those that trade on a transparent exchange, the next epic financial crash is just one counterparty blowup away.

As long as I have been doing this, I have been warning my readers to watch the global derivatives market. It played a starring role during the last financial crisis, and it will play a starring role in the next one too.

The fundamental structural problems that were exposed during 2008 and 2009 were never fixed. In fact, many would argue that the global financial system is even more vulnerable today than it was back during that time.

And now it appears that the next “Lehman Brothers moment” may be playing out right in front of our eyes.

Now more than ever, keep a close eye on Deutsche Bank, because it appears that they could be the first really big domino to fall.

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From: Worswick7/22/2019 9:49:46 AM
4 Recommendations   of 2704
Here we go ....

July 22, 2019 Gains Pains Capital

Is This What Has Got the Fed So Spooked?

Just what exactly is terrifying the Fed? Over the last week, multiple Fed officials have surfaced to suggest the Fed needs to start cutting interest rates right now.

Indeed, on Thursday, John Williams, who runs the NY Fed (the branch in charge of market operations) suggested the Fed needs to cut rates to ZERO again. Not 2%, or 1%, ZERO.

This is happening at a time when economic data is rebounding, unemployment is below 4% and GDP growth is north of 3%.

So what exactly is going on? What does the Fed know that has it so terrified, because it’s obviously not the US economy.

1) Deutsche Bank (DB) is imploding.

Sitting atop over $49 trillion in OCT derivatives, DB is like Lehman Brothers 2.0. And despite the best efforts of management and the authorities, the bank is imploding. DB shares were rejected by resistance last week, ending the “hope bounce” from recent moves to curtail the blow up.

2) China’s banking system is freezing.

China experienced its first financial institution failure in 21 years in June. Depositors and creditors lost 30% of their deposits in the process.

Put another way, nearly 30% of their money is GONE.

The Chinese banking authorities are attempting to piece the system back together, but it’s not working. The duress has yet to spill over into the Chinese stock market, but on Friday interbank lending in the mainland temporarily spiked to 1,000%, meaning a large bank was willing to pay ANYTHING in order to get access to capital.

This is EXTREMELY similar to what happened to the US credit markets n 2008. And finally…

3) The Everything Bubble has burst.

The single most important bond in the world is the 10-Year US Treasury Bond. And thanks to the Fed’s tightening policy in 2018, it burst, with the yield on the 10-Year US Treasury breaking its 20-year downtrend.

The Fed is trying to get yields back into this downtrend. But it’s not going well. The yield temporarily broke back below the downtrend last month, but is beginning to bounce again.

If the Fed cannot get this situation under control, there’s $555 trillion in derivatives at stake. Yes, TRILLION with a T.

Something BIG is coming and the Fed knows it.

Now we do too...

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