Sunday 14th February 2016
NEWS TICKER: FRIDAY, JANUARY 12TH: Morningstar has moved the Morningstar Analyst Rating™ for the Fidelity Global Inflation Linked Bond fund to Neutral. The fund previously held a Bronze rating. Ashis Dash, manager research analyst at Morningstar, says, “The fund’s rating was placed Under Review following the news that co-manager Jeremy Church was leaving Fidelity. Lead manager, Andrew Weir, who has managed the fund since launch in May 2008, remains in charge and is further supported by the new co-manager, Tim Foster. While we acknowledge Weir’s considerable experience in the inflation-linked space, some recent stumbles and below-benchmark returns over time have led us to lower our conviction in the fund. This is currently reflected by our Neutral rating.” - Italian GDP growth looks to have stalled to 0.1pc in the last quarter of 2015, falling below analyst expectations of 0.3% growth. The Italian economy grew by just 0.6% last year having come out of its worst slump since before the pyramids were built. The slowdown will put further pressure on reforming Italian prime minister Matteo Renzi, who has been battling to save a banking system lumbering under €201bn (£156bn) of bad debt, equivalent to as much as 12% of GDP. It is a serious situation and one which threatens Italy’s traditionally benign relationship with the European Union. The EU’s bail in rules for bank defaults seeks to force creditors to take the brunt of any banking failures. Italy suffered four bank closures last year, which meant losses of something near €800m on junior bond holders (with much of the exposure held by Italian retail investors). No surprise perhaps, Italian bank stocks have taken a beating this year, Unicredit shares are currently €3.06, compared with a price of €6.41 in April last year. In aggregate Italian banking shares are down by more than 20% over the last twelve months. Italian economy minister Pier Carlo Padoan told Reuters at the beginning of February that there isn’t any connection between the sharp fall in European banking stocks, as he called on Brussels for a gradual introduction of the legislation. He stressed that he did not want legislation changed, just deferred - Is current market volatility encouraging issuers to table deals? Oman Telecommunications Co OTL.OM (Omantel) has reportedly scrapped plans to issue a $130m five-year dual-currency sukuk, reports the Muscat bourse. Last month, the state-run company priced the sukuk at a profit rate of 5.3%, having received commitments worth $82.16m in the dollar tranche and OMR18.4m ($47.86m) in the rial tranche. Meantime, Saudi Arabia's Bank Albilad says it plans to issue SAR1bn-SAR2bn ($267m-$533m) of sukuk by the end of the second quarter of 2016 to finance expansion, chief executive Khaled al-Jasser told CNBC Arabia - The US Commodity Futures Trading Commission (Commission) announces that the Energy and Environmental Markets Advisory Committee (EEMAC) will hold a public meeting at the Commission’s Washington, DC headquarters located at 1155 21st Street, NW, Washington, DC 20581. The meeting will take place on February 25th from 10:00 am to 1:30 pm – Local press reports say the UAE central bank will roll out new banking regulations covering board and management responsibilities and accountability – Following yesterday’s Eurogroup meeting, Jeroen Dijsselbloem, says that “Overall, the economic recovery in the eurozone continues and is expected to strengthen this year and next. At the same time, there are increasing downside risks and there is volatility in the markets all around the world. The euro area is structurally in a much better position now than some years ago. And this is true also for European banks. With Banking Union, we have developed mechanisms in the euro area to bring stability to the financial sector and to reduce the sovereign-banking nexus. Capital buffers have been raised, supervision has been strengthened, and we have clear and common rules for resolution. So overall, structurally we are now in a better position and we need to continue a gradual recovery”. Speaking at the press conference that followed the conclusion of the February 11th Eurogroup, Dijsselbloem also acknowledged that “good progress” has been made in official discussions between Greece and its officials creditors in the context of the 1st programme review. Yet, he noted that more work is needed for reaching a staff level agreement on the required conditionality, mostly on the social security pension reform, fiscal issues and the operation of the new privatization fund. On the data front, according to national account statistics for the fourth quarter of 2016 (flash estimate), Greece’s real GDP, in seasonally and calendar adjusted terms, decreased by 0.6%QoQ compared to -1.4%QoQ in Q3. The NBS Executive Board decided in its meeting today to cut the key policy rate by 0.25 pp, to 4.25%. - Today’s early European session saw an uptick in energy stocks, banking shares and US futures. Brent and WTI crude oil futures both jumped over 4% to $31.28 a barrel and $27.36 respectively before paring gains slightly; all this came on the back of promised output cuts by OPEC. That improving sentiment did not extend to Asia where the Nikkei fell to a one-year low. Japan's main index fell to its lowest level in more than a year after falling 4.8% in trading today, bringing losses for the week to over 11%. Yet again though the yen strengthened against the US dollar, which was down 0.1% ¥112.17. Swissquote analysts says, “We believe there is still some downside potential for the pair; however traders are still trying to understand what happened yesterday - when USD/JPY spiked two figures in less than 5 minutes - and will likely remain sidelined before the weekend break.” Japanese market turbulence is beginning to shake the government and may spur further easing measures if not this month, then next. Trevor Greetham, head of multi asset at Royal London Asset Management, says “When policy makers start to panic, markets can stop panicking. We are seeing the first signs of policy maker panic in Japan with Prime Minister Abe holding an emergency meeting with Bank of Japan Governor Kuroda. We are going to get a lot of new stimulus over the next few weeks and not just in Japan. I expect negative interest rates to be used more in Japan and in Europe and I expect this policy to increase bank lending and weaken currencies for the countries that pursue it”. Greetham agrees that both the yen and euro have strengthened despite negative rates. “Some of this is due to the pricing out of Fed rate hike expectations; some is temporary and to do with risk aversion. In a market sell off money tends to flow away from high yielding carry currencies to low yielding funding currencies and this effect is dominating in the short term”. Australia's S&P ASX 200 closed down 1.2%. In Hong Kong, the Hang Seng settled down 1.01. in New Zealand the NZX was down 0.89%, while in South Korea the Kospi slid 1.41%. The Straits Times Index (STI) ended 1.25 points or 0.05% higher to 2539.53, taking the year-to-date performance to -11.91%. The top active stocks today were DBS, which declined 0.91%, SingTel, which gained 1.13%, JMH USD, which declined 1.39%, OCBC Bank, which gained 0.13% and UOB, with a0.34% advance. The FTSE ST Mid Cap Index declined 0.50%, while the FTSE ST Small Cap Index declined0.31%. Thai equities were down 0.38%, the Indian Sensex slip 0.71%, while Indonesian equities were down another 1.16%. The euro was down 0.3% against the dollar at $1.1285, even after data showed Germany's economy remained on a steady yet modest growth path at the end of last year. Gold fell 0.7% to $1238.80 an ounce, after gold gained 4.5% Thursday to its highest level in a year. Greetham summarises: “Like a lot of people, we went into this year's sell off moderately overweight equities and it has been painful. What we have seen has been a highly technical market with many forced sellers among oil-producing sovereign wealth funds and financial institutions protecting regulatory capital buffers. However, economic fundamentals in the large developed economies remain positive, unemployment rates are falling and consumers will benefit hugely from lower energy prices and loose monetary policy.”

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New report says Asian OTC derivatives reform continue challenging for the buy side

Wednesday, 07 December 2011
New report says Asian OTC derivatives reform continue challenging for the buy side New Celent report looks at OTC derivatives market conditions in Asia, traded volumes, and structure, and the impact of regulatory changes on the segment. http://www.ftseglobalmarkets.com/

New Celent report looks at OTC derivatives market conditions in Asia, traded volumes, and structure, and the impact of regulatory changes on the segment.

The leading Asian economies have been active in their quest for more centralised clearing in the over-the-counter (OTC) derivatives markets. Japan and Singapore have taken the lead in setting up clearinghouses to deal with OTC derivatives such as credit default swaps and interest rate swaps, according to a new report, OTC Derivatives Reforms in Asia: Challenging for the Buy Side, from Celent, a Boston-based financial research and consulting firm.

The Asian central clearing model is slightly different than models in the US and Europe. In those markets, there are norms for the trading of standardised OTC products. There too, it is expected that trading will take place on regulated platforms and that CCPs will undertake the clearing for such trades. In Asia, however, there are no regulations governing the move of trading to regulated platforms, and trading is still expected to happen in a bilateral manner. In that context: “There are doubts over the sustainability and viability of central clearing in Asia, because there is a great deal of fragmentation,” says Anshuman Jaswal, Celent senior analyst and author of the report. “The existence of multiple jurisdictions could lead to regulatory arbitrage.”



The share of the Asian OTC derivatives market in global notional outstanding is around 15% for both OTC equity derivatives and interest rate swaps. It is only 2% for credit default swaps (which are not very popular in Asia) and 26% for OTC FX derivatives, with Japan contributing a majority of this volume.

Among the other findings of the report, it is clear that collateral and margin management will become more complex and expensive. One of the important changes will be the higher cost of collateral management. Right now, bilateral clearing allows the counterparties to decide on the necessary collateral. The mutual understanding and experience of trading with counterparties plays an important part in ensuring that the collateral requirements are not very high. However, it is expected that CCPs would be more conservative in their approach and set higher collateral and margin requirements going forward. Any cross-margining benefits that the larger participants currently derive from trading larger volumes might not carry into the new regime, and CCPs are expected to be more cautious in this regard.

The report also finds that central clearing would lead to significant IT and infrastructure costs. Market participants in leading Asian markets are expected to bear any increase in costs resulting from a move to central clearing. Certainly, connectivity requirements are going to increase and it is going to be difficult for the smaller buy side firms and regional banks to create and maintain the infrastructure required to trade in the OTC markets. “It is expected that the leading sell side firms will try to meet the buy side requirements by providing this infrastructure as an additional service that would resemble the connectivity they provide for exchange-based trading and post-trading services. Besides clearing, in most instances, connectivity would be required to the trade repositories that are expected to improve the post-trade transparency across these markets,” says the report.

Moreover, the report suggests that CCP clearing will invariably become a revenue-generating opportunity for clearinghouses and clearing brokers in the global markets. However, this might not be the case in Asian markets because the volumes in a number of these markets are not significant. There are also some doubts voiced in the report over the sustainability and viability of central clearing in Asia, because there is a great deal of fragmentation. One or two clearinghouses would be ideal for such a scenario, but the existence of different CCPs in each national market means higher costs for firms that are trading in more than one market because they have to create a separate infrastructure in each market.

The report mentions the obvious benefits of the introduction of central clearing, such as improved risk management and efficiency benefits. Once the infrastructure is ready and clearing is taking place on an ongoing basis, risk management and efficiency are going to improve for the OTC derivatives markets. Clearinghouses performed well during the financial crisis, and it is expected that central clearing will perform in a similar fashion. Additionally, Portability will be an important aspect of central clearing. A crucial aspect of the strategy to reduce systemic risk has to be the mechanism to cope with a clearing member's default. This can be done through portability, which allows a market participant to move their trades from a defaulting clearing member to another clearing member, thereby ensuring continuity and reducing systemic risk. While it plays a vital role, portability has complications. In markets where the mechanism has been provided, there would still be the added complication of ensuring it works even under stressful market conditions, such as a broker default.

There is, however, a possibility that regional and global players that operate across a number of markets would choose to move their OTC business to markets with the least regulation and lowest collateral and margin requirement costs. This would be undesirable for both the market that loses the business and the market that gains it. The market that loses business might not be able to sustain its CCP due to low volumes. The market that gains the business might have artificially high volumes and therefore would have more complex issues with regard to systemic risk in case of a default by a clearing member or even a CCP. Multiple markets with CCPs also mean that the jurisdictions will have to address extra-territoriality and interoperability issues that will arise.

It is a sensitive time for the OTC derivatives segment as it undergoes change. While volumes in the global OTC derivatives market have recovered from the lows of 2008, the move to central clearing is expected to lead to a dip in volumes globally for the next couple of years. Volumes are expected to fall in 2012 and 2013, with the recovery beginning in 2014.

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