Bernanke Urges Banks to Forgive Portion of Mortgage Debt
Bernanke Urges Banks to Forgive Portion of Mortgage DebtAssessment: The Fed's remarks predicts further distress in residential real estate and mortgage markets. The Fed's recommendations will negatively impact mortgage backed securities and derivatives markets. Expect credit markets to be tighten and become increasingly illiquid. Long term interest rates will have higher risk premiums. Long term borrowing costs will increase even as the Fed reduces the Fed Funds and/or Discount Rate.[
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Federal Reserve Chairman Ben S. Bernanke, battling the worst housing recession in a quarter century, urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting.
``Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,'' Bernanke said in a speech in Orlando, Florida today. ``Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.''
Bernanke's call goes beyond the stance of the Bush administration and previous Fed comments. By comparison, the central bank's Feb. 27 report to Congress called for lenders to ``pursue prudent loan workouts'' through means such as modifying mortgage terms and deferring payments.
The Fed chief highlighted the threat posed by home values falling below mortgage balances, something Treasury Secretary Henry Paulson played down yesterday. Bernanke said the ``recent surge'' in delinquencies has been ``closely linked'' to the slide of home equity.
Paulson said in an interview with Bloomberg Television yesterday that ``almost too much'' has been made out of concerns about homeowners whose house prices have dropped below their mortgages. He also said the administration's strategy of encouraging lenders to modify loans is ``the right approach and we are making substantial progress.''
Democrats' Push Democrats in Congress, by contrast, have said relying on lenders to alter loan terms hasn't yielded enough progress and are pushing for a stronger government response. Bernanke warned today that the housing crisis may deepen.
``Delinquencies and foreclosures likely will continue to rise for a while longer,'' Bernanke said in the comments to the Independent Community Bankers of America. A surfeit of homes for sale indicates ``further declines in house prices are likely,'' he said.
Subprime borrowers are about to see their mortgage rates increase more than 1 percentage point, he said. ``Declines in short-term interest rates and initiatives involving rate freezes will reduce the impact somewhat, but interest-rate resets will nevertheless impose stress on many households.''
In the past, homeowners could refinance, though that option is now ``largely'' gone because sales of bonds backed by subprime mortgages ``have virtually halted,'' Bernanke said. ``This situation calls for a vigorous response.''
Interest Rates Bernanke didn't comment in his speech text on the outlook for the economy or interest rates. Traders expect the Federal Open Market Committee to lower the benchmark rate by 0.75 percentage point by or at the panel's next meeting on March 18, based on futures prices.
``Lenders tell us that they are reluctant to write down principal,'' Bernanke said. ``They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.''
The Fed chairman countered that by reducing the amount of the loan, this ``may increase the expected payoff by reducing the risk of default and foreclosure.''
Bernanke also urged investors in mortgage bonds to accept ``short payoffs'' of loans by allowing borrowers to refinance at a lower principal.
OTS PlanFor investors, a reduction in principal that's ``sufficient to make borrowers eligible for a new loan would remove the downside risk'' of further writedowns or defaults, Bernanke said. Investors may be able to share in future gains in home prices under some plans, he said, citing a proposal by the Office of Thrift Supervision.
Paulson, by contrast, has declined to endorse the OTS plan. John Reich, director of the OTS, last month proposed a program where borrowers would refinance mortgages at current home values. The lender would receive a ``negative equity'' certificate that could be redeemed if the house is sold.
The number of U.S. homeowners entering foreclosure rose 75 percent in 2007, with more than 1 percent in some stage of foreclosure during the year, according to RealtyTrac Inc. of Irvine, California. For the year, more than 2.2 million default notices, auction notices and bank repossessions were reported on about 1.3 million properties.
Yesterday, the Fed and other regulators sent letters to institutions they supervise, encouraging the banks to report on their efforts to modify mortgages at risk of default.
``This will make it easier for regulators, the mortgage industry, lawmakers and homeowners to assess the effectiveness of these efforts,'' Fed Governor Randall Kroszner said in a statement yesterday.
Bernanke spoke in a state that's among the worst affected by the housing collapse. Miami home prices have dropped 17.5 percent in the past year, the most of 20 large U.S. cities, according to the S&P/Case-Shiller index. Foreclosures in Florida jumped at more than double the nationwide pace, rising 158 percent in the past year, according to RealtyTrac.
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Labels: credit derivatives, FED, federal reserve, mortgage backed securities, mortgage derivatives, real estate
Hedge fund issues could cause economy to slow
Hedge fund issues could cause economy to slowWhile hedge fund failures are typically seen as a Wall Street problem, economists are forecasting that recent hedge fund meltdowns could impact Main Street and may even slow the U.S. economy. Turmoil in credit markets could push up borrowing costs for businesses and consumers and cause a ripple effect.
Hedge fund woes could hit Main StreetUpheaval in credit markets could hit consumer, business borrowing - and slow the economy; risk premiums already rising.
By Chris Isidore, CNNMoney.com senior writer
June 21 2007: 3:21 PM EDT
NEW YORK (CNNMoney.com) --
When Bear Stearns's hedge funds melted down this week because of too big a bet on subprime mortgages, it may have seemed like a Wall Street problem.
But numerous economists said the latest turmoil in the nation's credit markets could spill over to Main Street as well, raising borrowing costs for consumers and businesses alike - and possibly putting the brakes on the surprisingly resilient U.S. economy.
Subprime mortgages, made to home buyers with less than top credit ratings, have been skidding since early this year as delinquencies and foreclosure rates soared. Now problems with those mortgage loans have sparked a big headache for Bear Stearns (Charts, Fortune 500) and the Wall Street firms that lent it money to invest in subprime mortgages, such as Merrill Lynch (Charts, Fortune 500), JPMorgan Chase (Charts, Fortune 500) and Citigroup (Charts, Fortune 500).
But the problems threatening the credit markets could mean far more than just billions in possible losses for those firms. It could push rates higher for corporate debt, which has been relatively cheap even for companies with poor credit ratings.
Even if those companies don't fall behind in their debt payments the way many subprime borrowers have on their mortgages, the investors making money available for those riskier loans are now demanding a much higher premium than they had until just recently.
Deadly ripples threaten subprime funds That could choke off the supply of relatively cheap money that has kept the U.S. economy humming in recent years, putting a dent in everything from business investment to consumer spending.
"That's clearly high on my list of things to worry about," said David Wyss, chief economist at credit-rating agency Standard & Poor's. "I think it's healthy that pricing for risk changes. I think it's too loose now. But the transition could be painful. It depends on how fast it happens."
Wyss doesn't believe that the rise in borrowing costs for most companies will plunge the U.S. economy into recession - and many economists agree with him. They said there's enough underlying strength in the economy to keep it growing. But it will mean slow growth in the second half of this year rather than more normal "trend" growth of 3 percent a year or greater, said John Silvia, chief economist at Wachovia.
"I would think that that as you reprice risk, it will have a negative impact on economic growth going forward," said Silvia. "It will extend the workout in the housing market. And at the margin, they [higher rates] will crimp consumers and their spending."
Others see an even more drastic correction. Peter Schiff, president of Euro Pacific Capital, a brokerage firm specializing in overseas investments, said he had already been expecting a recession in late 2007. Now he believes the recession will come sooner, and hit harder, because of the problems with the Bear Stearns hedge funds.
"This is just another graveyard they can whistle by," he said, referring to Wall Street firms. "Eventually they're going to be overwhelmed. Interest rates are going to rise across the spectrum, and spreads are going to widen considerably."
That widening of the spreads - the difference between what it costs top borrowers and those deemed more risky - has already started. The spread between corporate debt that is not investment grade, popularly known as junk bonds, and a basket of U.S. government bonds was 2.89 percentage points on Thursday, according to Wyss, up from a record low of 2.65 percentage points on May 25.
Wyss said the spread had gotten too narrow and that a correction was likely even without the Bear Stearns problems. A more typical spread is close to four percentage points, and it was as high as 3.85 percentage points as recently as last September.
But he said an event in the credit market such as this week's meltdown typically sends spreads soaring. He noted the rise of roughly one percentage point in just two months in 2005 from a then record low in March following General Motors (Charts, Fortune 500) and Ford Motor (Charts, Fortune 500) debt being cut to junk bond status for the first time.
Full articlehedge funds, economics, capital markets, interest rates, bond yields, valuations, CDO, credit derivatives, derivatives, pooled securitiesLabels: bond yields, capital markets, CDO, credit derivatives, derivatives, economics, hedge funds, interest rates, pooled securities, valuations
Hedge fund future bleak with Merrill sell-off
Hedge fund future bleak with Merrill sell-offMerrill Lynch's planned auction of about $800 million of bonds held by a money-losing Bear Stearns hedge fund could signal the end of a Bear Stearns effort to save the fund. The 10-month-old fun run by Bear Stearns senior managing director Ralph Cioffi has lost 20% this year and is under increasing pressure from creditors, including Merrill. Bear Stearns has attributed the falloff of the fund and a sister fund to the slump in the U.S. housing market.
Some Lenders Dislike Plan to Save Bear Stearns FundBy JULIE CRESWELL and VIKAS BAJAJ
An effort to save a troubled hedge fund at Bear Stearns hit a major hurdle yesterday when Merrill Lynch signaled that it would move forward with plans to auction $850 million in subprime securities that had been held as collateral.
While negotiations are continuing and the auction could be averted, the move signaled that some lenders in the High Grade Structured Credit Strategies Enhanced Leverage fund are not happy with some terms of the Bear Stearns bailout plan.
Executives at the bank have been scrambling to shore up the fund since three lenders — Merrill, Citigroup and JPMorgan Chase — asked the bank to put up more capital. The executives had offered to inject $1.5 billion in new loans into the fund, and a consortium of other banks, including Citigroup and Barclays, would infuse $500 million in new capital.
In return, the Wall Street banks and brokerage firms that had provided nearly $6 billion to the hedge fund would have had their own exposure reduced but would have had to agree not to demand more cash or collateral from the fund for a year, according to people briefed on the plan who were not authorized to speak for attribution.
If Merrill moves forward with an auction, it could make it much more difficult for Bear Stearns and the longtime portfolio manager of the fund, Ralph Cioffi, who has spent the last few days scrambling to try to bring in new money, to save the 10-month-old fund. If other lenders decide to follow Merrill’s lead and seize and sell assets, it could lead to the dissolution of the hedge fund.
Late yesterday, some people briefed on the plan said that one option might be for Bear Stearns to buy out Merrill’s stake. Representatives at Bear Stearns and Merrill declined to comment.
But if the assets — securities and bonds backed by subprime mortgages that can be difficult to value — are sold at prices well below where they are currently valued, the reverberations across Wall Street would be strong. Not only would Merrill be forced to post losses on its holdings, but other banks, hedge funds and investors owning similar securities would have to mark down the value of those holdings to new, lower prices.
“If we end up seeing these assets sold at significantly distressed prices, it will likely cause other funds to have to re-evaluate how effective and fair the values that they have been carrying these securities have been.” said Josh Rosner, a managing director at Graham Fisher, an investment research firm in New York.
The potential for a large ripple effect across the financial markets has been one reason many of the other lenders, even those unhappy with the terms of the bailout plan, stayed at the negotiating table with Bear Stearns, according to people briefed on the talks.
Started just last year, the Bear Stearns hedge fund was hit by a combination of bad bets on bonds backed by subprime mortgages as well as high levels of leverage. Investors originally put $600 million into the fund and another $6 billion was borrowed from the Wall Street banks.
Through the end of April, the fund had lost about 23 percent, prompting investors to try to redeem their investments. In May, the fund froze redemptions and soon faced margin calls from its banks.
While Bear Stearns has little exposure to the fate of the fund — the company and individual executives invested just $40 million in it — its stock nonetheless declined 2.2 percent, to $146.79. in the last two days.
Investors are probably concerned about how the outcome could affect the larger Bear Stearns business of underwriting and trading bonds backed by mortgages.
Full articleVideohedge funds, mortgage backed securities, CDO, CDS, credit derivatives, mortgage derivativesLabels: CDO, CDS, credit derivatives, hedge funds, mortgage backed securities, mortgage derivatives
CBOE prepares to list, trade credit derivatives
CBOE prepares to list, trade credit derivativesThe world of electronic derivatives trading continues to expand. First Eurex, now CME, CBOE and CBOT. Everyone wants to get into Credit Derivatives. I think some buy side participants may see these contracts as cost effective alternatives to OTC Credit Default Swaps. Yet it will take time to build market acceptance.
On June 19, the Chicago Board Options Exchange will launch credit-default options on a handful of companies including Ford, Lear, General Motors, Standard Pacific and Hovnanian Enterprises. "We are very pleased to receive US Securities and Exchange Commission approval for these products which we first proposed last June," said William Brodsky, chairman and chief executive officer of CBOE. "Investors can now take advantage of the synergies between options prices, volatility and credit risk, hedging all three on one electronic platform."
CBOE latest to add credit derivatives
Shanny Basar
08 Jun 2007
The Chicago Board Options Exchange has become the second US market this week to receive regulatory approval to list and trade credit derivatives.
The CBOE is going to launch credit default options on five individual companies on June 19 - General Motors, Ford, Lear, Hovnanian Enterprises and Standard Pacific - with Jane Street Specialists as the designated primary market maker.
William Brodsky, chairman and chief executive of CBOE, said: “We are very pleased to receive US Securities and Exchange Commission approval for these products which we first proposed last June. Investors can now take advantage of the synergies between options prices, volatility and credit risk, hedging all three on one electronic platform.”
Regulatory approval for CBOE’s credit default baskets is expected soon.
This week the Chicago Mercantile Exchange received regulatory approval for its Credit Index Event contract which is due to start trading on June 18 based on an index of 32 investment grade entities.
Last week the US Futures Exchange, which was formed last year when hedge fund Man Group invested in the former Eurex US, said it expects to offer contracts in the fourth quarter which are based on credit default swaps on Fannie Mae and Freddie Mac, the US government-backed agencies and the Chicago Board of Trade said it planned to launch credit futures on June 25.
David Boberski, head of interest rate strategy at Bear Stearns, said in a report: “The new CBOT contract offers a smart combination of design choices and is the most promising structure to date for an exchange to tackle corporate bond credit indices.”
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http://www.financialnews-us.com/?page=ushome&contentid=2347986664CBOT launches into credit derivatives
Shanny Basar
31 May 2007
The Chicago Board of Trade is launching its first product in the fast growing world of credit derivatives with an investment grade index futures contract for credit default swaps.
Credit default swaps are over-the-counter derivative contracts that allow buyers to hedge against potential credit losses, while sellers assume credit risk in exchange for payment. Market participants include banks, hedge funds and other institutional investors.
Bob Ray, senior vice-president for business development at CBOT, said: “The growth rate in the over-the-counter credit default swap market has been stunning but that brings heightened risk and the CBOT is an expert in helping price discovery and risk management. We wanted to create a product that would best emulate the trading and pricing in the OTC market.”
The new CBOT CDR Liquid 50 North American Investment Grade Index for futures contracts is scheduled to begin trading on June 25.
Gene Mueller, managing director for research & development at CBOT, said approximately a third of credit default swap trade volumes relate to index trading and two thirds is investment grade.
The new product is based on the CDR Liquid 50 NAIG Index developed and maintained by Credit Derivatives Research, an independent research provider. It includes 50 North American investment grade reference entities and is reconstituted every three months to ensure it includes the most liquid entities from the OTC market.
Credit Market Analysis, a data provider used by many buyside firms, will provide pricing information for all the underlying component issues within the CDR Liquid 50 NAIG index.
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http://www.financialnews-us.com/?contentid=2447933037CBOT, CBOE, EUREX, CME, derivatives products, electronic trading, credit derivativesLabels: CBOE, CBOT, CME, credit derivatives, derivatives products, electronic trading, EUREX
Algorithms Finding A Foothold In Fixed-Income Markets
Fixed-income algorithms find their wayThe main object of algorithms in the equities market is to find price discrepancies between markets offering the same security. The fixed-income market is made of markets with different structures, making algorithms harder to gauge. For the last few years, however, an algorithmic strategy for the fixed-income world has been taking place.
Algorithms Finding A Foothold In Fixed-Income MarketsAs Advanced Trading first attempted to gauge the extent to which algorithms have been deployed in the fixed-income market in the
November 2005 issue, it became apparent that it would be some time before these strategies became as prevalent in the market as they are in equities. While many of the structural issues discussed in
that first article — such as the format of the dealer-to-customer trading venues, which use a request-for-quote (RFQ) system — still exist, some of the major interdealer venues now are seeing high levels of automated trading, and there is automated arbitrage between them.
There now are algorithms that can be used on RFQ venues, and perhaps more important, algorithms are being written on the buy side to support decision-making and assist in transaction processing, lowering the effective cost of transactions. And while the entry of a new participant,
NYSE Bonds, has yet to cause a major ripple, its unconventional firm-quote platform for the most-active corporate bonds has the potential to change the paradigm for this dealer-driven market.
It is clear that the fixed-income market will never look like the equities market — which has few parameters and security types, and where the main object of algorithms is to capitalize on price disparities between markets offering the same security. In contrast, the fixed-income world is comprised of several markets that are structured quite differently from one another and each of which has thousands of securities and many specialized order types.
However, if one expands the definition of "algorithm" beyond the typical equities function of splitting an order and executing against a benchmark to include any automated routine that processes incoming market data and provokes trading activity, one could conclude that algorithms indeed are prevalent in the fixed-income world.
"Algorithmic trading has two pieces: one, decision support; and two, execution," explains Jon Dean, head of global connectivity at MarketAxess. Algorithms have been used in decision support — for example, tracking price correlation between bonds and futures contracts derived from those bonds, and creating hedging strategies based on the information — for some time. And now that price data is improving and electronic trading is becoming more prevalent, according to Dean, bond algorithms are moving closer to combining decision support and execution. Pricing data has become much easier to obtain since the National Association of Securities Dealers (NASD) began offering the
Trade Reporting and Compliance Engine (TRACE) in 2002, with adoption increasing steadily in 2005 and 2006, Dean says, making corporate bonds a much less murky category and paving the way for further automation.
If You Want It, Build ItAt present, most of the buy-side firms using fixed-income algorithms extensively build and deploy them in-house. Because of the amount of IT effort this requires, some firms, including Bank of New York (BNY) Asset Management, are making algorithmic development part of a firmwide integration strategy.
BNY recently completed an 18-month IT overhaul that produced a common trading and data information backbone called the Transaction Processing Layer (TPL). The goal of the initiative was to integrate trading and analytical platforms in all asset classes so that traders could see a representation of the market at any given point, says Eric Karpman, a VP at the firm and head of its FIX fixed-income technical committee.
The strategy came about because the bank was concerned with updating its asset allocation strategies across multiple asset classes, part of a growing trend toward sector-based trading, according to Karpman. The availability of TRACE data convinced bank executives that this would be a sound investment. "The proliferation of data gave us a reason to go forward," Karpman says. "Algorithmic trading was just a natural exploitation of the resources that were made available by the TPL."
The FIX-based TPL was built on Informatica's data-integration software. Drawing historical and real-time price and portfolio data off this backbone, BNY Asset Management's algorithms facilitate cross-asset trading across all desks, including the personal, global and institutional fixed-income desks; short-term money markets; institutional equities; and index funds, Karpman says. A team of 11 technologists built the system, but frequent input from other bank divisions, including securities master data, market data and quantitative analysts, also was required in order to obtain timely data and satisfy the business needs for each desk, he relates.
The first tier of assets to be automated consisted of foreign exchange, credit derivatives, government bonds and to-be-announced mortgage-backed-securities (TBA-MBS), Karpman notes. The second tier consisted of corporate bonds, municipal bonds and other structured products, he adds.
About 25 percent to 30 percent of BNY Asset Management's fixed-income trades in liquid areas, such as U.S. Treasury bonds and
credit default swaps (CDSs), are conducted algorithmically, Karpman says. "We use the TPL as the glue — there is indicative data, market data, price data, all in one central place," he relates. "We were able to easily create plug-ins for the trading systems to send the trades electronically through our custom algorithms."
Karpman admits that the system is probably more cutting-edge than what reigns at most institutions, which tend to be dependent upon vendors for technology solutions. However, he believes most large institutions working in multiple asset classes are close behind BNY on the way to an algorithmic apotheosis. "All the large buy-side firms have some kind of quantitative framework to analyze liquidity and find the best strategy for execution," Karpman asserts. "That is the first step in building an algorithm."
Buy-Side Demand on Rise
The increasing availability of price data and the shift of the entire financial services industry toward sector-based, cross-asset trading means that the production of elaborate strategies to capitalize on miniscule price adjustments across multiple asset types has probably only just begun, industry observers suggest.
"Corporates have been very interesting," notes Brad Bailey, senior analyst at Aite Group. "There has been more transparency in that market, and the credit default swap has risen as a means of giving greater transparency in pricing." Credit derivatives, typically used as a hedge against corporate bonds, have grown at about a 200 percent annual rate for the past few years, according to Bailey.
In the interdealer world, Icap and eSpeed have indicated that more than 20 percent of their order flow is from automated strategies, Bailey adds. Increasingly, this traffic is from hedge funds, such as those operated by Citadel Investment Group, as much as traditional dealers, he says. Algorithms are being used in the market both to arbitrage one platform against the other and to support the decision-making process, Bailey contends. Icap, eSpeed and Citadel officials did not return calls seeking comment.
In the dealer-to-customer area, algorithms are being deployed on the dealer side in order to generate prices, and to modulate those prices based on the class of customer requesting them and the up-to-the-second price data being fed in, says John Bates, founder and VP of Progress Apama Software, which creates risk management, event processing and trading algorithms for financial firms. "The more-recent engines are skewing the price of the bond in real time, based on data changing in real time, and may be changing the spread as corresponds to the tier of customer," Bates comments. "When a request comes in, you spawn a millisecond-length calculation that uses your analytic libraries built up over the years." In other words, dealer firms now can offer not only up-to-the-millisecond pricing based on real-time data feeds and historical information, they also can offer more-loyal customers a better price, or selectively offer improved pricing to less-frequent customers as an incentive to trade more frequently.
Algorithms also come into play when firms take a position in both futures and bonds at the same time, Bates adds. They can be programmed, he explains, to rehedge when set thresholds are crossed.
On the dealer-to-customer sites, such as MarketAxess, which primarily deals in corporate bonds, a few customers have created algorithms that attempt to exploit the latency in the RFQ model, MarketAxess' Dean says. "You can perform intraday arbitrage between RFQ and an order-driven system," he relates. "It can be solved programmatically, but it is not as optimum as in an equities scenario." Traders still must manually press the button to ensure the order has been executed because the information the algorithm was acting on was only an indicative price, Dean explains.
Dean says he believes that nearly all of the 100-plus buy-side firms that write to MarketAxess' application program interface (API) are using some type of automated strategy to inform their trading. But, he predicts, it will be six to 12 months before execution algorithms and cross-platform strategy trading really takes off among the mainstream institutional customers. And it may be even longer before traditional vendors of buy-side order management systems (OMSs) offer algorithmic fixed-income capability, Dean notes.
This frustrates potential customers, such as Travis Bagley, head of fixed-income transitions at Russell Investment Group in Tacoma, Wash. Bagley says his main goal in trading on behalf of his fund customers is cost-minimization rather than rapid profits.
"We are ready and poised to include some kind of algorithmic trading into our process as soon as they become available from vendors," Bagley says. "The algorithms that are out there and working today are created by proprietary users, such as hedge funds and prop trading desks doing arbitrage and alpha-generation strategies. What we'd like to see is one of the trading software vendors create an algorithm for cost minimization as we trade across multiple venues."
It seems that buy side-focused vendors, most of which grew up in the equities marketplace, may still be overwhelmed by the flurry of algorithms that brokers continue to develop for equities.
Sell Side PrioritiesFor the sell side, it makes sense to allocate technology and resources for the business lines that are most likely to pay off in the shortest amount of time. That means that fixed-income algorithm development ranks behind foreign exchange, options and futures at Credit Suisse's Advanced Execution Services (AES), according to Guy Cirillo, AES global sales channel manager. "We would develop fixed income further down the road as that pent-up demand matures," says Cirillo. "Once these markets are ready for algorithms, we will develop them."
There also must be a global market for the technology in order to fully commit to it, Cirillo notes. "With everything we do, we want to see it applied to not only the North American market, but also Europe and Asia," he says. "If there is something that is only in demand in one region of the world, we are more hesitant to develop that."
Another factor preventing widespread deployment of fixed-income algorithms is the variety of FIX flavors in the marketplace, according to Gary Maier, CIO at Five Mile Capital. Version 4.4, which has the greatest support for fixed income, has yet to be adopted by many brokers, and FIX 5.0 already is on the horizon, notes Maier. "They are mainly doing 4.2," he says.
In the structured product arena, FpML [Financial products Markup Language] is probably better than FIX. "Algorithmic trading will become more pervasive, but it is hard to anticipate when that happens," Maier adds.
FOR MORE ON ALGORITHMIC TRADING in the fixed-income space, view Wall Street & Technology's Editorial Perspectives TechWebCast at advancedtrading.com/events/ondemand.full articleelectronic trading, structured products, credit derivatives, fixed income, CDS, IRD, EQD, algorithmic tradingLabels: algorithmic trading, CDS, credit derivatives, electronic trading, EQD, fixed income, IRD, structured products
Credit-Default Swaps Spur Fastest Derivatives Growth
Derivatives market grows at fastest pace in nine yearsThe Bank for International Settlements said today that the global derivatives market during 2006 rose $15 trillion, the fastest pace in nine years. To beat estimates, Bear Stearns, Deutsche Bank and Morgan Stanley relied on credit derivatives. "Derivatives are now a major contributor to investment bank earnings," said Jerry Del Missier, co-president of Barclays Capital in London.
Credit-Default Swaps Spur Fastest Derivatives GrowthThe global derivatives market grew at the fastest pace in at least nine years during 2006 as the amount of contracts based on bonds more than doubled to $29 trillion, the Bank for International Settlements said today.
Derivatives covering bonds and loans rose by $15 trillion last year, the Basel, Switzerland-based bank said on its Web site. The total amount of over-the-counter contracts whose value is derived from price changes of bonds, currencies, commodities and stocks, or events like interest rates or the weather rose 39.5 percent to $415 trillion, the biggest jump since the BIS began compiling the data.
Morgan Stanley, Bear Stearns Cos. and Deutsche Bank AG depended on credit derivatives to report first-quarter profits that beat analyst forecasts. Federal Reserve Chairman Ben S. Bernanke said last week that the contracts ``increased the resilience'' of financial markets, while warning that they may be exploited by investors to profit from insider trading.
``Derivatives are now a major contributor to investment bank earnings,'' said Jerry Del Missier, co-president of Barclays Capital in London, the biggest underwriter of European bonds last year.
``Credit derivatives will continue their high growth path for a long time yet, and that growth rate will be higher than any other market.''
The actual money at risk through credit derivatives increased 93 percent to $470 billion last year, the BIS said. The amount at stake in the entire derivatives market is $9.7 trillion, according to the BIS, which was formed in 1930 to monitor financial markets and regulate banks.
Salomon Brothers
The market, started by Salomon Brothers Inc. in 1981 when the firm arranged for International Business Machines Corp. and the World Bank to swap debt payments in Swiss francs and German marks for dollar obligations, has become Wall Street's most- profitable activity.
Morgan Stanley, the world's second-biggest securities firm by market value, said a jump in revenue from credit products helped spur a 70 percent increase in first-quarter profit to an all-time high.
Bear Stearns, the fifth-biggest U.S. securities firm, said credit derivatives trading contributed to an 8 percent increase in first-quarter profit.
Deutsche Bank reported record revenue from trading debt and credit derivatives, helping lift first-quarter profit by 30 percent.
Contracts on bonds took off in the 1990s when New York-based JPMorgan Chase & Co. led banks creating credit-default swaps. The contracts allow bond investors to hedge against the risk of a company or country defaulting on interest payments or speculate on its creditworthiness.
Market DeclinesDerivatives helped investors hedge their risks and contained a decline in bond prices during 2005 when the credit ratings on debt of Ford Motor Co. in Dearborn, Michigan, and Detroit-based General Motors Corp. was reduced to below investment grade.
The contracts also limited the fallout from Greenwich, Connecticut-based Amaranth Advisors LLC's record $6.6 billion loss last year and this year's slump in the U.S. subprime mortgage market, said Anshu Jain, head of global markets at Deutsche Bank in London.
``We have been through several market corrections in the past few years and in each case, markets have recovered,'' Jain said in an e-mail. ``In retrospect, people think the market has been characterized by calm, continuous and even benign conditions. Derivatives are a big part of explaining that phenomenon.''
Financial StabilityIn a separate report, a group of central bankers, finance ministries and financial regulators known as the Financial Stability Forum called on hedge funds to improve risk management to prevent shocks to the financial system. The group's Secretariat is based at the BIS.
The Forum's report, dated May 19, said there has been ``some erosion in counterparty discipline recently,'' citing the competition among banks for hedge fund business. The world's more than 9,000 hedge funds move money in and out of markets faster and in larger quantities than mainstream funds, raising concerns about the stability of global markets.
Banks and hedge funds say it's cheaper and easier to use credit-default swaps than buying or selling the underlying securities. Investors who buy the contracts are paid the face value of the underlying debt in exchange for the defaulted notes should the company fail to adhere to debt agreements.
Interest-rate swaps remain the biggest part of the derivatives market, growing 15 percent to $292 trillion, compared with 38-percent growth the previous year, the report said. The contracts allow companies to switch between fixed-rate and floating-rate interest payments.
Growth in the overall derivatives market outpaced the previous record increase of 39.2 percent in 2003.
Foreign-exchange derivatives rose 28 percent to $40.2 billion in 2006. Contracts based on commodities such as gold and oil expanded by 27.7 percent to $6.9 trillion.
The BIS surveyed 62 institutions for its semi-annual report.
The outstanding amounts of derivatives ($ trillion).
End-Dec 2006 End-June 2006 End-Dec 2005
- Interest rates 292 262 212
- Credit 29 20 14
- Equity 7.5 6.8 5.8
- Commodities 6.9 6.4 5.4
- Foreign Exchange 40 38 31
Full ArticleLabels: capital markets, credit derivatives, investment banking
Derivatives Pricing Modules
Derivatives Pricing Modules
SciComp serves the derivatives marketplace, leveraging our patented automated pricing technology so that our customers can reduce time to market. Looking for the ultimate flexible coding solution for in-house derivatives pricing and risk modeling?Need a sophisticated derivatives pricing and risk model quickly, but don't have the time or resources to develop in-house?Searching for single-tranche CDO pricing?
www.scicomp.comLabels: credit derivatives, financial modelling, software
With credit-derivatives backlog clearing, Fed eyes equity derivatives
With credit-derivatives backlog clearing, Fed eyes equity derivativesThe backlog of unconfirmed trades in the credit-derivatives market plunged 94% last year, following efforts by the Federal Reserve to persuade market participants to clean up their acts. Now the Fed is turning its attention to the backlog in equity derivatives.
full storycredit derivatives, CDS, CDO, confirmations, FEDLabels: CDO, CDS, confirmations, credit derivatives, FED, federal reserve
Credit Derivatives go electronic
Credit Derivatives go electronic.
Key index and single name CDS products migrate from OTC to exchange traded products.
Business Impact
- Transparent pricing, valuation and public market data on CDS products
- Potential STP for order routing, execution, margin, confirmation & settlement processes.
- Reduced processing costs via automation of key processes
- Reduced spreads per trade
- Increased trading volume & time (23hrs x 5days/week)
- Migration of OTC positions to exchange traded positions (especially on buy-side: hedge funds, asset managers)
Technology Impact
- Interconnectivity to major exchanges for CDS trading (EUREX,CME) via order routing gateways
- Real time market data (quotes, spreads, market depth, executions/fills)
- Increased trading volume
Eurex will start trading in credit futures in March 2007
European exchange Eurex will start futures trading in iTraxx index beginning March 27, 2007. Additionally, trading will start at some date in future on the segments of iTraxx index too.
The Eurex iTraxx® credit futures will closely mimic the risk structure of credit default swaps traded in the over the counter (OTC) market. Trading on Eurex will involve Eurex Clearing as central counterparty thereby reducing the counterparty and systemic risk and adding to the benefits the product will offer to users.
The contract will be based on the 5 year series, with a fixed coupon and semi annual maturity dates in March and September. The contract size is EUR 100,000; the tick size is set at 0.005 percent translating into 5 euros per tick. It will be quoted in percent with three decimal places. The product will be cash settled, with reference to the iTraxx® index values of IIC.
In the case of a credit event, cash settlement of the single name entity will be made with reference to the ISDA CDS protocol. The Eurex iTraxx® Europe futures contract will be supported by designated market makers, ensuring liquidity from launch.
This is claimed to be the world's first exchange traded credit derivative product.
In the meantime, Chicago Mercantile Exchange has also reported that it will start trading in credit event futures in the 1st quarter of 2007. Regulatory approvals, it seems, are still pending.
Questions or comments, contact our subject matter expert: Victor Smith [victor7@bizanalyst.net]
Labels: CBOT, CME, credit derivatives, credit futures, derivatives, electronic trading, EUREX, exchange, LIFFE, market gateway, OTC, risk management, technology, trading
CDOs cubed: The first-ever triple derivative
CDOs cubed: The first-ever triple derivativeExamine the newly created ‘CDOs Cubed’, which are the first-ever triple derivative, that is, a derivative of a derivative of a derivative. Not surprisingly, CDOs Cubed are often called, ‘derivatives on steroids’. Unlike traditional derivatives, which are utilized for risk reduction and/or leveraged speculation, this innovation has created thousands of new investment assets, covering the entire spectrum of risk and return. This paper traces the evolution of this innovation, and examines how this triple derivative is created, structured, and priced.
Read this report on new CDO structured products.
Labels: credit derivatives, derivatives, regulation, risk management, trading
Exchange New Product News - Jan 2007
Exchange New Product News - Jan 2007The latest updates on global exchange traded derivatives. New products, new contract features, regulatory issues and industry initiatives.
Read this reportLabels: credit derivatives, derivatives, regulation, risk management, trading
Foreign exchange hedging in Chile
Foreign exchange hedging in Chile
Jorge A Chan-Lau
jchanlau@imf.orgPolicy makers have expressed interest in fostering the development of local foreign exchange derivatives markets with a view to reducing risks arising from currency mismatches between assets and liabilities in the corporate sector. This paper assesses foreign exchange exposure in the corporate sector in Chile, analyses the current state of the foreign exchange derivatives market in Chile, and argues that liquid and developed foreign exchange derivatives markets can help promote financial stability.
Read this articleLabels: credit derivatives, derivatives, regulation, risk management, trading
Risk management for derivatives
frances.cowell@morleyfm.com
For conjuring fear, few aspects of investments rival derivatives. This is not surprising given the history of august institutions humbled or even demolished as a result of poor risk management of their derivatives exposures. While some types of derivatives strategies certainly demand a very specific approach to risk management, it cannot be said that derivatives defy risk management.
This paper
—describes how derivatives are used in portfolio management;
—explains how to measure the effective economic value of the investment achieved by a derivative transaction and the role of collateral;
—discusses the different types of risk associated with derivatives, the interaction between derivatives and conventional instruments and, from this,
—addresses the question of how derivatives risk can be measured, managed and, where necessary, controlled.
Read this report
Labels: credit derivatives, derivatives, regulation, risk management, trading
Local politicians buy derivatives in "recipe for disaster"
Local politicians buy derivatives in "recipe for disaster"Cash-strapped public school districts and other local governments are increasingly making bets on arcane financial derivatives, often in hopes of quickly raising needed funds. But sometimes, as Bloomberg News recounts, those bets go awry. The schools suffer, but the financial firms clean up.
Read this articleLabels: credit derivatives, derivatives, regulation, risk management, trading
New York Institute of Finance (eLearning)
New York Institute of Finance believes that eLearning can play a valuable role in the total training solution. We have drawn on our extensive experience as trainers of financial professionals to design courseware that provides a high-quality, electronic learning experience, covering a variety of topics in the financial industry.
Visit the NYIF e-learning portal.Here are some current courses...
- Asset Backed Securities
- Margin I: Introduction to Margin Regulations
- Margin II: Advanced Margin for Options
- Mergers & Acquisitions
- Business Valuation & Corporate Finance
- Corporate Credit Analysis
- Derivative Instruments
- Finance for Non-Financial Managers
- Overview of Trusts
- Financial Statement Analysis
- Fixed Income Securities
- Portfolio Management I
- Portfolio Management II
- Forwards & Futures
- Risk Management Using Derivatives
- Hedge Funds
- Wealth Management
Learn more about the program.
Labels: credit derivatives, derivatives, regulation, risk management, trading
More info about Derivatives industry (BizAnalyst Network - User Research Request)
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Labels: credit derivatives, derivatives, regulation, risk management, trading
Electronic Trading increases transparency in OTC markets
Electronic Trading increases transparency in OTC marketsJP Morgan has launched an electronic trading platform for its clients on Bloomberg terminals. The platform, which enables investors to view accurate, real-time tradeable volatility levels, increases transparency in the over-the-counter market for basic interest rate options, appealing to clients who disliked the opacity of the derivatives.
Read articleLabels: credit derivatives, derivatives, regulation, risk management, trading
Understanding the ISDA Master Agreements
Understanding the ISDA Master AgreementsWednesday, January 31, 2007
The New York Helmsley Hotel, New York
Key Topics
- Key differences between the 2002 and the 1992 ISDA Master Agreements
- The 2002 ISDA Master Agreement
- Negotiating the Schedule to the 2002 ISDA Master Agreement
- The 2003 ISDA Credit Derivatives Definitions
Agenda Register
Labels: credit derivatives, derivatives, regulation, risk management, trading
Fundamentals of Derivatives Seminar
Fundamentals of Derivatives SeminarTuesday, January 30, 2007
Global Financial Markets Conference Center, New York
Key Topics
- Fundamentals of Derivative Products
- Introduction to Derivative Contract Valuation and Risk Management
- Counterparty Credit Risk
Agenda Register
Labels: credit derivatives, derivatives, regulation, risk management, trading
Documenting and Confirming Equity Derivative Transactions
Documenting and Confirming Equity Derivative Transactions ConferenceThe Equity Derivatives Specialist
Thursday, February 15, 2007
Global Financial Markets Conference Center, New York
Program Topics Include:
- An indepth discussion of how to use the 2002 ISDA Equity Derivatives Definitions for documenting share and index swaps, forwards and options.
- Treatment of extraordinary events, including consequences of tender offers, merger events, index adjustments and elective additional disruption events.
- Focus on market disruption events, including trading disruptions, exchange disruptions and early closures.
- Featuring Afternoon Confirmation Workshops (Beginner & Advanced)
View agenda To register More info
Labels: credit derivatives, derivatives, regulation, risk management, trading
