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,








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).

More Cyprus, what else.

This morning’s news talks about a Cypriot initiative to bring the depositor “tax” threshold down to 20K Euro’s rather than affecting all accounts below 100K Euros. This is clearly an effort to protect the little guy, rather than the overseas account holder (with multiple accounts just under the 100K deposit insurance threshold)! Anyway, from what I read, those guys will move their accounts to Latvia as soon as the banks open on Thursday. And the Cyprus parliament rejected the whole “tax” proposal  a little while ago.

This cannot be only about Europe.

Headlines are almost unanimously attributing every market pop and every drop to Europe.  There is no denying the  sovereign debt crisis. There is no denying that the roots of that crisis lie in the policies of the last several decades.  There is however considerable amount of denial about the situation in the US, and that has to be responsible for some of this market nervousness.   This market is behaving like a teenager with hormones running amock. One aspect of teenage behavior is to conveniently attribute causes to something other than yourself in times of stress isn’t it?

And the German parliament votes on Greece tomorrow. Methinks it passes with all sorts of constraints on Greek economic behavior. It is not in Germany’s interest to give up on the Euro. Imagine how high the Deutschmark would be if there wasn’t a common market and how troubling that would be for the German economic engine. Of course that does not mean anything is fixed. That will take forever, so I am only reading short-term tea leaves. As well as an FT special report from last Friday (here).

What I am not sure is whether US markets have it in them to pop for the umpteenth time on that news. End of quarter games suggests they just might. These games also mean that asset values are affected adversely when the perceived garbage is being trashed and will lead to useful long opportunities later. We will find out soon enough.

A simulation war game on the European financial crisis….

On September 13-14, the Brussels-based think tank BRUEGEL and the Peterson Institute for International Economics hosted a conference on Resolving the European Debt Crisis. Held in Chateau Les Fontaines in Chantilly, near Paris, the conference assembled about four dozen policy experts and practitioners, mainly from Europe and the United States. The conference was designed to contribute to a better understanding of the implications of alternative approaches to resolving the crisis, in particular, the dynamics of interaction among various stakeholder groups as policy decisions evolve. Support for the conference was provided by Tudor Investment Corporation and BlackRock Investment Management.

The website is here. If you have any interest in such policy issues and you SHOULD, then read it…