First Impressions

FX Derivatives: A Special Case?
By Douglas Ashburn, John Lothian News

According to today’s FT, Europe is going through the same exercise the U.S. went through a few years ago regarding FX forwards. Are they swaps or are they not, and how tightly should they be regulated? Now, as was the case in the U.S., what hangs in the balance is whether the trillions of dollars exchanged each day should be subject to heightened reporting rules, central clearing and other mandates.

Again, the fundamental question has no clear answer – is FX a “special case” in that it is used primarily to facilitate commercial activity and to balance global payments, or is it an asset class with systemic risks and thus deserving of strict oversight and arguably cumbersome rules. At issue is where to draw the as to when a forex trade becomes a derivative. Some say anything that settles more than two days after the trade date is a forward. The U.K. would like to see a much broader interpretation.

Read the entire commentary =>

Quote of the Day

We don’t think there’s an investor in the world of any consequence that will invest in the new version of Fannie and Freddie.

Hedge fund manager and activist investor Bill Ackman, as quoted in the WSJ story “Ackman: Fannie, Freddie Essential to Mortgage Market.”

Lead Stories

Europe aims to resolve FX dispute by late summer
Philip Stafford –
European regulators aim to finalise their definition of foreign exchange derivative by late summer, in a dispute that will determine whether part of the $5tn-a-day forex market could face tougher legislation.

***DA: No easy way to delineate FX as a payment facilitator vs. as an asset class. So how do we monitor systemic risks without impeding commerce? The answer is somewhere between T+2 and T+7 apparently.

Javelin’s CEO James Cawley Departs SEF
Ivy Schmerken – Wall Street & Technology
Javelin Capital Markets, an electronic derivatives trading platform, is parting company with its founder and CEO, James Cawley who has led the firm’s swap execution facility. In a statement, Cawley indicated that the interest-rate swap trading platform and its founder and CEO have decided to part ways.

***DA: The first of many changes among SEFs. There needs to be some consolidation or outright folding of platforms. Javelin, though first out of the gate with its MAT request, is squarely in the second tier among D-to-C SEFs.

Draghi Grapples With Money Markets Showing Revival Too Soon
Jeff Black and David Goodman – Bloomberg
Mario Draghi may need to take action to stop money-market investors getting ahead of themselves. For the first time since 2008, overnight interbank rates are starting to exceed the European Central Bank’s benchmark interest rate, signaling a return to pre-crisis behavior even as the economy remains fragile.

***DA: In other words, this idea that the market can set its own equilibrium rate must be beaten down immediately!

BondEdge Launches Analytics Suite for Equities
Becca Lipman – Wall Street & Technology
BondEdge Solutions has launched a portfolio analysis system for both fixed income and equities, marking the first time it has expanded into equity analytics.

***DA: BondEdge and discipline are the keys to minimizing risk.

China’s GDP Passing That Of The US Is Not A Threat To Traditional Western Capitalism And Free Markets
Tim Worstall – Forbes
We’ve all heard the news that, by one measure, the GDP of China has now passed that of the US. What we’d all like to know is well, what effect does that have on anything? And the truth is, not a lot. It doesn’t make very much difference to anything at all: other than that we can congratulate the Chinese on being a little less poorer than they used to be.

***DA: Oh, such a cynic this Worstall guy. I like him.

US labour market slack: the difficulty with “structural” vs “cyclical” labels
Cardiff Garcia | FT Alphaville
The uncertainty about the extent of US labour market slack continues, and last week’s employment situation report certainly didn’t clarify the issue. The tentative stabilisation and mild increase in the labour force participation rate since December (from 62.8 per cent to 63.2 per cent) was reversed in its entirety.

***DA: This recession and its aftermath require a longer debate than what would fit on a bumper sticker.

Moody’s Seen Playing Catch-Up With Plans to Change CoCo Ratings
John Glover – Bloomberg
Moody’s Investors Service is seeking to grade a wider range of bank capital securities to catch up with competitors rating bonds designed to absorb losses in a crisis.
Moody’s is asking investors to comment on a proposed framework for grading high-trigger contingent capital bonds, the second time it has sought to revise the way it rates CoCos. The New York-based company changed its methodology last year to allow it to rate certain types of CoCos after saying in 2010 it probably wouldn’t rate the securities at all.

Treasuries Rise as Ebb in Risk Appetite Stokes Demand for Haven
Susanne Walker – Bloomberg
Treasuries rose, with 10-year note yields headed toward the lowest level in six months, as risk appetite ebbed and U.S. stock futures erased gains, stoking demand for U.S. government debt.
Treasury three-year notes being sold by the U.S. today yielded the most in pre-auction trading since May 2011 amid concern an improving economy strengthens the Federal Reserve’s case for a potential interest-rate hike next year. The U.S. will auction $29 billion of the securities today. Thirty-year bond yields fell. Federal Reserve Chair Janet Yellen will testify to lawmakers tomorrow.

SGX’s April Bond Listings Hit 2014 High
SGX hosted its largest number of new bond listings for 2014 in April with 56 issues introduced in the month, up 40% from March and beating this year’s previous high of 44 in January. Many of the new listings were driven by growing interest in variable rate bond structures.

Ackman: Fannie, Freddie Essential to Mortgage Market
MoneyBeat – WSJ
Hedge-fund manager Bill Ackman spelled out his bullish case on housing firms Fannie Mae and Freddie Mac, calling them “essential” to the U.S. mortgage market.

Loans That Avoid Banks? Maybe Not
It was that rare thing, scarcely seen in the financial world since the debut of the A.T.M. or microfinancing: an innovation to help regular people. When peer-to-peer, or P2P, lending began in the middle of the last decade, it offered an easy way for people to lend money to each other over the Internet. Now, as the industry matures, a new class of investors is storming the P2P gates, and they include the very institutions that P2P had set out to bypass.

Central Banks

RBA holds rates as budget cuts loom large
The Australian
THE Reserve Bank of Australia left interest rates on hold today for the ninth month in a row as it waits to size up the potential impact of the massive spending cuts expected to be unveiled in the Coalition’s first budget next week.

Romania Keeps Rates at Record Low as Inflation to Quicken
Andra Timu – Bloomberg
Romania left its benchmark interest rate at a record low as policy makers are changing course with inflation poised to accelerate from the slowest since communism collapsed in 1989 and economic growth rising to a six-year high.

Monetary Authority Of Singapore: Agreement To Facilitate Compliance By Singapore Financial Institutions With US Tax Laws


TriOptima Completes First Cross Currency triReduce Compression Cycle Eliminating JPY12.318 Trillion Notional Principal in JPY/USD Swaps
TriOptima, provider of OTC derivative post trade services, announces that it eliminated JPY12.318 trillion ($120 Billion) notional in JPY/USD cross currency swaps with 12 institutions participating. This is the first ever triReduce cross currency compression cycle.

***DA: Whittling down net exposure, one line at a time.

RMB settlement of LME commodities futures could impede market progress
Xiao Wang –
Hong Kong Exchanges and Clearing’s (HKEx) plans to launch renminbi-denominated metals and coal futures contracts on its trading platform later this year will create a potential foreign exchange risk for investors and may deter participants until the “through train” trial is extended beyond equities, say market experts.

BitBeat: Dogecoin Makes its Nascar Debut; Ripple Signs a Bank
MoneyBeat – WSJ
Much Vroom, dogecar. Dogecoin, the altcoin created just six months ago, scored a major PR coup on Sunday, when Nascar driver Josh Wise piloted his #98 Moonrocket Ford on the track at Talladega Superspeedway in Alabama in the Aaron’s 499. How? Dogecoin users on reddit funded and purchased a sponsorship for the car, giving the upstart cryptocurrency a level of visibility usually reserved for major corporate sponsors.

***DA: The more digital currencies there are out there, the more they start to look like actual currencies, with exchange rate risks and all.

ETF Bonanza Skirts $5.3 Trillion Market on Outflows: Currencies
Cordell Eddings – Bloomberg
Axel Merk has filed the paper work, picked a name and is ready to launch Merk Investments LLC’s first exchange-traded currency fund. Problem is, no one wants to put money into it.
Foreign-exchange ETFs have seen investors withdraw $1.1 billion this year, or 23 percent of assets, according to data compiled by Bloomberg that tracks 47 funds. That’s more than double the amount from funds investing in commodities, the only other sector to suffer outflows.

***DA: We can’t even agree whether or not FX is an asset class, let alone whether such an ETF makes sense.

Currency Risks Force CFOs to Rethink Strategies
Maxwell Murphy –
Violent currency swings are the new normal for finance chiefs, forcing them to go beyond traditional hedging strategies.

***DA: Maybe they should contact Axel Merk.


Banks Sued on Claims of Fixing Price of Gold
Frustrated traders and offbeat activists have complained for years in whispers and in online screeds that the price of gold has been subject to collusion. On Monday, these accusations of manipulation found a more august arena for expression: the federal courts.

Geographical Arbitrage
Trade Talk – Trading Technologies
Have you ever wanted to buy something in one location to sell it in another location at a higher price? Imagine buying gold on CME only to turn around and sell it on TOCOM at a higher price. This type of trade is known as geographical arbitrage. While there is risk in every trade, geographical arbitrage is relatively low risk.

Gold reaches 3-week high on rising Ukraine tensions
Gold prices rose to a three-week high on Monday, extending the previous session’s gains as simmering tensions in Ukraine and a break above a key $1,300 an ounce technical level fuelled buying.

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