Derivatives, margins and reform (hot off the press, 5 years later).

In 427 class the other day, we talked about transparency and exchange trading of OTC derivatives. In this piece, you get an update on OTC derivatives reform for the G-20 meetings from the Financial Stabiility Board. If you want more details on the nitty-gritty of margins for OTC derivatives, go here. The paper is long, at least read the executive summary. The procedures and processes described in these documents are European in origin, but similar concerns pervade our markets as well,







Titbits from my mailbox.

1. More opaqueness in the algo trading space. Dark pools are trading platforms for anonymous institutions where orders are typically hidden until execution. No open order book for these guys. Estimates are that such platforms now account for 35% trading volume. More detail (From Hedgeworld, here).

2. Gary Gensler talks about LIBOR risks  (From GARP, here), fixing it will take till at least 2014 says Canadian Financial Stability Board Governor Carney (here).

3. Convertible bond modeller, SciComp, offers fancy convertible bond pricing models for active users. The blurb from Wilmott, says:

Developed over 15 years with the input and guidance from top tier practitioners around the world, SciComp’s PDE-based convertible bond pricing models provide smooth, fast price convergence while supporting a broad range of convertible bond features including:

  • Cash/percentage/hybrid dividend model
  • Choice of hazard rate/credit spread models
  • Treasury/benchmark curve spreads
  • Structured coupons
  • Choice of models for foreign stocks
  • Flexible hard call/soft calls models
  • Discrete puts
  • Flexible COCO provisions
  • Many variants of make whole
  • Change of control / Poison put
  • Called bonds

Some of you are probably saying “Huh?”

Choices for hedging equity exposure.

As the pump and dump continues, here is a partial (?) list of hedging alternatives for equity exposure. Thinking non-derivatives, your choices broadly are: a) some kind of bond fund; b) some kind of volatility ETF; c) some kind of inverse or 2x or 3x ETF; d) acurious ETN from Barclays that I came across, that does some kind of dynamic allocation between stocks, bonds and cash (here). Once you throw derivatives into the mix your choices are: a) index futures, we already saw these along with the tracking error and’ b) index options that we are beginning to explore.

And a Bloomberg update on Monte Paschi of Siena who is expected to report a € 760 million loss this week (here).

Good banks, bad banks redux.

Shades of 2009 in the Cyprus proposal taking shape over the weekend. Much has been written about the good bank/bad bank idea since then, it is easier for me to redirect you to some good primers  (here) and (here). Naked Capitalism  sets the record straight in terms of the tax have status of Cyprus (here). A Sheila  Bair interview on US banking regulation (here).

The Senate Report on the London Whale Derivatives Trades that I mentioned in class is here. It is titled “A Case History of Derivatives Risks and Abuses.”

Of a valuation sort.

FINRA gets multiple bids for setting up an markets oversight system to prevent flash crashes (here),

Ernest and Young report on FASB’s comprehensive plan for the valuation of various financial instruments (here),

Since we are talking LIBOR these days, here is a wrap up of last year’s LIBOR scandal,.

This and that.

Recurring medical events prevent me from posting as frequently as I usually do.  Watching markets provides a brief distraction from thinking about raging cancer cells. So here are the beginnings of a list of eye-catchers,

1. Someone asked about the behavior of Brent vs WTI crude futures. Here is a story that may shed some light.

2. The treasury’s purchase schedule (here), tells you all you need to know about the recent equity market melt-up. Forget the fundamentals.

More Monte dei Paschi di Siena.

There is very little detail that I can unearth regarding the derivatives transactions at Monte dei Paschi di Siena (let us call them MPS shall we). All I can figure out so far is that it is 500+ years old,  the Italian Central bank bailed them out yesterday (here) , the head of the Italian Banking Association just resigned, Mario Monti is implicated and so on. The derivatives appear linked to Italian Sovereign debt. Surprise, surprise and shades of MF Global!.

From here the media stories degenerate further into financial pornography. Apparently, MPS  were also bailed out six-months ago, says the Guardian (here) for financial troubles relating to an overpriced acquisition.  Said acquisition was the purchase of another bank from Santander of Spain. Santander  purchased Antonveneta from ABN Amro for 6.6 billion and flipped it a few days later for 9 billion to MPS says the Financial Times (here). Which idiot did due diligence (if any )?  All this is part of a story on colorful, Murdochian Emilio Botin of Santander.

In these searches, I came across another FT report on a disclosure by  Deutsche Bank (here) on how close they came to insolvency during the financial crisis because of synthetic CDOs.  GAAH. Should I watch Downton Abbey instead?

Update: The NYT does a story on MPS (here), says the Antonveneta flip was a few months rather than a few days, but is again more illuminating on the political fall out. It does acknowledge that the transactions still remain opaque.