First Impressions

Is it Time to MAT the Entire Curve?
Tod Skarecky – Clarus Financial Technology
Scrutinizing the most recent OTC data tells a fairly consistent picture over the previous months. The percentage of trades registered On-SEF in recent times is, at best, inching up. In fact the preliminary August data shows no change from July, hovering right around 58% of all trades (and 67% of all cleared trades).

Let’s not forget that the late spring and early summer had the benefit of No-action relief runoffs for most of the packaged trades (curve trades, butterflies, spreadovers, etc). The only carrot, or should I say stick, left in the bag is the November “non-swap” package trades. Will that lead to any uptick? I am not even aware that anyone has gotten their head around how such a product, notably an invoice spread (futures + swap) is going to be traded pursuant to the rules. But let’s face it, even if a mysterious SEF figured it out, we might see a small uptick in adoption.

***DA: Most of us who watched the transition of OTC markets to SEFs kind of stopped watching after the initial mandates were put in place. The guys at Clarus have been watching closely, and what they see is at times eye-opening.

Quote of the Day

It is good as far as it goes, but our work is far from complete in getting at the fundamental conflicts of interest present in both the issuer-pay and subscriber-pay business models.

SEC Commissioner Kara Stein on the new credit ratings rules, as quoted in the Bloomberg story “Credit-Rater Profit Spared in SEC Rules Banning Conflicts”

Lead Stories

SEC Shelves Plan for Private Asset-Backed Bond Disclosure
Jody Shenn, Dave Michaels and Matt Robinson – Bloomberg
The U.S. Securities and Exchange Commission, while expanding disclosure requirements for one set of asset-backed securities, has stepped back from a plan to shed more light on a major part of the market.

***DA: Baby steps.

Credit-Rater Profit Spared in SEC Rules Banning Conflicts
Dave Michaels and Matt Robinson – Bloomberg
Sweeping changes imposed by U.S. regulators on the credit-rating industry will force firms to disclose more about their methods and prove analysts aren’t pressured to issue bond grades that please Wall Street.

***DA: There is only one credit rating rule that matters, and the new regulations have not altered it one bit: Caveat Emptor.

Sovereign Bond Gauge Climbs Toward Record High on ECB Outlook
Wes Goodman and Mariko Ishikawa – Bloomberg
A gauge of government bonds around the world approached a record high on speculation the European Central Bank is preparing to buy debt to combat disinflation.

***DA: Every pump-and-dump scheme needs a chump on the buyside.

Why Taxpayers Will Be on the Hook When It’s Time to Raise Rates
Paul H. Kupiec – American Banker
The financial crisis has changed the mechanics of monetary policy. When economic growth improves to the point that the Federal Reserve finally decides to increase short-term interest rates, it will need a new approach to do so. For the first time in history, to engineer the federal funds rate, the Federal Reserve will have to funnel billions of dollars of taxpayer money into financial institutions to borrow back the excess reserves it has injected into the banking system.

***DA: I repeat: every pump-and-dump scheme needs a chump on the buyside.

ECB signs up BlackRock to advise on bond buying
Alice Ross in Frankfurt – Financial Times
The European Central Bank has stepped up preparations for a fresh move to combat deflation by appointing BlackRock to advise on a possible bond-buying scheme.

Bank forex trading revenues fall by a third
Delphine Strauss – Financial Times
Investment banks’ earnings from foreign exchange trading fell at their fastest rate since the global financial crisis in the first half of 2014, hit even harder than other trading areas by low volatility and volumes.

***DA: No price action = no revenue.

PPF Q&A: Direct lending shift ‘very much geared’ to bond market fears
Mark Cobley – Financial News
The Pension Protection Fund, a £17 billion lifeboat fund that absorbs UK pension schemes orphaned by bankrupt companies, is the latest big investor to warn that banking regulations are creating a liquidity drought in the bond markets.

Opportunist shareholders must embrace commitment
By Martin Wolf – Financial Times
Limited-liability, privately owned joint-stock companies are the core institutions of modern capitalism. These entities are largely responsible for organising the production and distribution of goods and services across the globe. Their role is both cause and consequence of the revolution in the scale and diversity of economic activity that has taken place over the past two centuries.

Quebec Joins Stampede by Canadian Provinces Into Kangaroo Bonds
Benjamin Purvis – Bloomberg
Quebec added to a swathe of Canadian provinces borrowing in Australia, joining Manitoba, Ontario and British Columbia in raising funds in the Kangaroo bond market over the past month.
Canada’s largest province by area sold A$100 million ($94 million) of 4.2 percent Kangaroo notes due in March 2025 at a yield 87.5 basis points above Australian federal government securities, according to an e-mailed statement from Toronto-Dominion Bank’s TD Securities unit, which managed the sale along with Royal Bank of Canada’s capital markets unit.

***DA: If these bonds are ever defaulted upon, a la Argentina, will the dispute be settled in a kangaroo court?

Central Banks

The Federal Reserve can wait to act on interest rates
Editorial Board – The Washington Post
THE FEDERAL Reserve has taken a consistent position on the “extraordinary measures” it has employed to salvage the stricken U.S. economy: Any withdrawal of the Fed’s support will depend upon progress in the labor market. Continuing policies bequeathed by her predecessor, Ben S. Bernanke, Fed chair Janet Yellen has responded to the downward drift in the unemployment rate by gradually winding down the Fed’s bond purchases, also known as “quantitative easing”; they are scheduled to end in October. And the Fed is still expected to raise short-term interest rates — which it has held near 0 percent for almost six years — by mid-2015.

***DA: No matter when they hike, it will be seen as too soon by some.

Powell says Fed will ‘make sure’ swap market can ditch Libor
Joe Rennison, Duncan Wood –
Derivatives markets have two years to end their Libor love affair, but may need help to do so. They will get it, says Jerome Powell, a member of the Board of Governors of the Federal Reserve System.

Macro Horizons: If Draghi Doesn’t Act After All This, There’ll Be Hell to Pay
Alen Mattich and Michael J. Casey – MoneyBeat – WSJ
Euro-zone bond yields slide to yet new record lows as expectations grow that the European Central Bank is lining up a massive dose of quantitative easing—perhaps focused on purchases of private sector assets, such as ABS, rather than government bonds.


Korea’s Current Account Surplus Adds Pressure on Won
Cynthia Kim and Eunkyung Seo – Bloomberg
Income from overseas factories is swelling a South Korean current account surplus that’s got so big it’s becoming a problem. The excess reached $47.1 billion in the seven months through July, according to data today from the Bank of Korea, which forecasts a record $84 billion for 2014.

BitBeat: More People Know About Bitcoin, But Few Willing to Use It
MoneyBeat – WSJ
While awareness of cryptocurrencies is rising, very few people have actually used them. A new survey, from the Conference of State Bank Supervisors and the Massachusetts Division of Banks, found that 51% of people in the U.S. were aware of bitcoin and other currencies, albeit only about 3% had said they used it.

***JM: There’s for sure a class of people (raises hand) who simply doesn’t see much point in using it. It’s just a way to pay for things, and I already have a bunch of those, thanks.

Canada seeks to become Renminbi (RMB) trading centre for the Americas
The Toronto Financial Services Alliance (TFSA) and AdvantageBC today announced they would work together, with officials from the federal, Ontario and BC governments, and the financial industry, to promote Canada as a trading hub for the Chinese currency, the Renminbi (RMB).

When FX wars become negative interest wars
Izabella Kaminska – Financial Times
Beat Siegenthaler, FX strategist at UBS, has been wondering about what the Swiss National Bank may do if the ECB’s measures to weaken the euro begin to test its 1.20 EURCHF floor.

***DA: Keeping an eye on this one. EUR/CHF has dropped nearly 3 big figures this summer.

Argentina’s Low Foreign Reserves Hit Peso
Ken Parks – WSJ
Argentina’s international reserves are starting to dwindle in the wake of the country’s second sovereign-debt default in almost 13 years, putting added stress on the peso and an economy believed to be in recession.


Gold-Price Indicator Fading as ETPs Tumble by $71 Billion
Debarati Roy – Bloomberg
Gold-backed funds that heralded record prices in 2011 and last year’s biggest sell-off in three decades are becoming less useful as market predictors.

Artist Hid $16,000 Worth of Gold on a Beach, and You Have to Find It
There is about £10,000 ($16,000) worth of gold bullion buried in the sand on a beach in England as part of an innovative public art installation. Oh, and starting today it’s finders-keepers.
German artist Michael Sailstorfer buried the bars in the sand of Outer Harbour beach in Folkestone, England as part of the Folkestone Triennial, a public art project. The mad dash to uncover the buried treasure will begin this afternoon when the tide goes out, and if you find one of the gold bars, it’s yours.

***DA: It’s a mad mad mad mad world.

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