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Remarks Before EUROFI Financial Services Forum
September 28, 2010--Good morning. I thank the Belgian E.U. Presidency and Eurofi for inviting me to speak this morning on regulatory reform of over-the-counter (OTC) derivatives, or swaps, markets. I also want to thank Commissioner Michel Barnier for his open invitation to come to Brussels to continue our partnership and coordination on these issues. Lastly, I want to thank each of my fellow CFTC Commissioners and our staff for all of their hard work.
This is my third trip to Brussels since last September. As the crisis once again so proved, capital and risk know no geographic boundaries. We are partners in the global effort to lower risk throughout our economies.
In 2008, both the financial system and the financial regulatory system failed. Though there were many causes of the crisis, as evidenced by the $180 billion that U.S. taxpayers put into an ineffectively regulated AIG, derivatives did play a significant role. Over-the-counter derivatives – initially developed to help manage and lower risk – can actually concentrate and heighten risk in the economy and to the public.
CFTC Seeks Comment Regarding Agricultural Swaps
September 28, 2010--The Commodity Futures Trading Commission today published an Advance Notice of Proposed Rulemaking (ANPRM) seeking public comment regarding the appropriate regulatory treatment of agricultural swaps.
The Dodd-Frank Wall Street Reform and Consumer Protection Act provides that swaps in an “agricultural commodity” (as defined by the Commission) are prohibited unless entered into pursuant to a rule, regulation or order of the Commission adopted pursuant to section 4(c) of the Commodity Exchange Act, the Commission’s general exemptive authority.
Joint Statement by CFTC Chairman Gary Gensler and European Commissioner Michel Barnier on the Financial Reform Agenda
September 28, 2010--United States Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler and European Commissioner Michel Barnier spoke today and reaffirmed their strong determination to cooperate closely in strengthening the global financial system. Specifically, Chairman Gensler and Commissioner Barnier discussed regulatory reform of the over-the-counter (OTC) derivatives markets with respect to Dodd-Frank Wall Street Reform and Consumer Protection Act and the September 2010 European proposal for a Regulation on OTC derivatives, central counterparties and trade repositories.
Commissioner Barnier and Chairman Gensler discussed a number of issues pertaining to enhancing oversight and reducing risk in the OTC derivatives market including: (i) comprehensively regulating derivatives dealers for capital and margin, recordkeeping and reporting and business conduct standards; (ii) requiring standardized OTC derivatives to be cleared by central counterparties, imposing stringent prudential and organization rules for central counterparties and imposing risk mitigation standards for non-standardized contracts that are not centrally cleared; and (iii) increasing transparency of the OTC
Derivatives markets through trading, where appropriate reporting to data repositories and reporting to the public. Commissioner Barnier and Chairman Gensler emphasized the need for international co-operation to ensure global access to all data on derivatives transactions maintained by trade repositories.
iShares Announces Changes to Its Semiconductor ETF Including Changing to the PHLX Semiconductor Sector Index
September 28, 2010-BlackRock, Inc., today announced that the iShares Exchange Traded Funds (ETFs) business, the world's largest provider of ETFs, is changing the index, name, ticker and primary listing exchange of the iShares Semiconductor ETF. The changes will provide investors, for the first time, with an unlevered ETF that will seek investment results that correspond generally to the price and yield performance, before fees and expenses, of the PHLX Semiconductor Sector Index. The PHLX Semiconductor Sector Index is managed by NASDAQ OMX Group and known as the "SOX Index."
Fund shareholders are not required to take any action as a result of this announcement. The changes are effective October 15, 2010, and are generally summarized below.
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Current New
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Fund Name iShares S&P North American iShares PHLX SOX
Technology-Semiconductors Index Semiconductor Sector Index
Fund Fund
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Index S&P North American Technology- PHLX Semiconductor Sector
Semiconductors Index Index ("SOX")
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Ticker IGW SOXX
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Exchange NYSE ARCA NASDAQ
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Index Names 52 (as of 8/31/10) 30 (as of 8/31/10)
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Weighting Modified market cap Modified market cap
Methodology
----------------------------------------------------------------------------"There has been increased investor interest in a SOX based ETF with the ongoing evolution of the Index, therefore we're pleased to provide investors with the iShares PHLX SOX Semiconductor Sector Index Fund that will track such a well-known sector index," said Noel Archard, Head of U.S. iShares Product at BlackRock.
The PHLX Semiconductor Sector Index(SM) (SOX(SM)) is a modified
capitalization-weighted index composed of companies primarily
involved in the design, distribution, manufacture, and sale of
semiconductors. PHLX is a wholly owned subsidiary of the NASDAQ OMX
Group.
BlackRock(R) Canada Launches the iShares(R) DEX HYBrid Bond Index Fund
The First ETF in Canada to Invest in both High-Yield and Investment-Grade Corporate Bonds
September 28, 2010--BlackRock Asset Management Canada Limited (BlackRock Canada), an indirect, wholly-owned subsidiary of BlackRock, Inc., today announced that the iShares Exchange-Traded Funds (ETFs) business, the world's largest provider of ETFs, launched the new iShares DEX HYBrid Bond Index Fund , the first ETF in Canada to invest in both high-yield and investment-grade corporate bonds.
XHB, which will begin trading on the Toronto Stock Exchange today, is a unique vehicle designed to provide investors with regular monthly income by investing in both BBB-rated corporate bonds and the high-yield bond market. XHB will invest exclusively in Canadian-dollar denominated securities.
"XHB is unique in Canada as the only ETF to give investors exposure to the expanding Canadian high-yield marketplace. Historically, we have had a relatively small high-yield market, with most high-yield issuers looking to raise capital in the US. However, over the last 18 months we have seen a number of new high-yield issues within Canada, and the number of issuers is expected to grow as the our marketplace becomes more established," said Oliver McMahon, Director of Product Management for iShares ETFs at BlackRock Canada.
What’s the Hoopla? Can an ETF Really Collapse?
September 28, 2010--Recently a short paper was written by Andrew Bogan, Brendan Connor and Elizabeth Bogan1 which
suggested an ETF could collapse due to the fact that the published short interest can be larger than the
shares outstanding of the ETF trust. Our point of view differs.
The authors proposed that if all the shares covering the short interest were to be redeemed at the same
time an ETF could be depleted of assets and therefore close. The authors suggested the remaining
shareholders of the ETF would be left with a worthless asset which isn’t backed by any underlying
assets. This is simply not possible.
The true focus of the article should be on the process of the securities lending industry, which
encompasses all equities, not just ETFs. First we need to examine how a short is established. If
someone wishes to sell a security short they must first “locate” the shares. They enter into a lending
agreement to borrow the shares from someone who is long. Once this agreement is in place the short
seller can sell the shares in the market. This agreement is open ended and the shares can be recalled at
any time. This recall forces the short seller to either find new shares to borrow or be forced to cover
their short in the market.
Let us now follow those shares. For every share sold, there is a share bought. The short seller has now transferred ownership to someone else. There are now two owners of the same shares. The original owner whose shares are being borrowed, and the new owner who bought the shares from the short seller. Now assuming the new owner was not covering a short, those shares can then be lent again in a new lending agreement. This process can continue on and on.
What the article insinuates is that short sellers are “naked short selling”, which is the process of selling short without a locate or a borrow. This activity would violate Regulation SHO which mandates that short sellers arrange to borrow the shares to make delivery. The ETF creation redemption process is a completely different process that can only be done by specific market participants called Authorized Participants (AP’s).
Authorized Participants are mostly large institutional brokerage houses that are self-clearing members of the Depository Trust & Clearing Corporation (DTCC.) AP’s are governed by specific rules on how they are allowed to interact with the ETF trust. When the authors suggest a run on the ETF by authorized participants trying to redeem the ETF without shares in hand, they are accusing them of naked short selling. The ETF trust has several provisions in it to protect itself from this “run on the trust”.
ETF sponsors have several ways to protect ETF shareholders from a malicious short redeemer from collapsing an ETF trust. First an authorized participant can only redeem with settled shares, meaning they must have the shares in their possession. This also requires those shares to be released from any stock lending agreement. Secondly, no one Authorized Participant can enter an order to redeem the entire amount of shares outstanding.
Lastly they have a provision specifically directed to ETFs that have or historically have had large short interest. If an Authorized Participant wishes to redeem more than 25% of the shares outstanding of the ETF, the AP must verify that the shares are in their possession before the redemption order is accepted.
A perfect case study can be found in the iShares Russell 2000 ETF, IWM. In June 2007 during the annual Russell rebalance, the IWM trust experienced massive redemptions on the trust. Over the period of a week the trust shrank from 136 million shares outstanding to only 150 thousand shares outstanding. In the week to follow, the trust grew an amazing 219 million shares outstanding in the same time period. During these two weeks, the net asset value of the IWM trust performed exactly as the Russell 2000 Index that it tracks.
Aaron Kehoe is a Director, Head of ETF Strategies at Knight Equity Markets.
1 Can an ETF Collapse? Andrew A. Bogan, Ph.D., Brendan Connor, and Elizabeth C.Bogan, Ph.D. Seeking Alpha,
September 21, 2010.
U.S. International Reserve Position
September 28, 2010--The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets totaled $132,375 million as of the end of that week, compared to $130,249 million as of the end of the prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
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September 24, 2010 |
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A. Official reserve assets (in US millions unless otherwise specified) 1 |
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132,375 |
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(1) Foreign currency reserves (in convertible foreign currencies) |
Euro |
Yen |
Total |
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(a) Securities |
9,593 |
15,433 |
25,026 |
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of which: issuer headquartered in reporting country but located abroad |
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0 |
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(b) total currency and deposits with: |
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(i) other national central banks, BIS and IMF |
14,124 |
7,576 |
21,700 |
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ii) banks headquartered in the reporting country |
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0 |
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of which: located abroad |
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0 |
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(iii) banks headquartered outside the reporting country |
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0 |
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of which: located in the reporting country |
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0 |
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(2) IMF reserve position 2 |
12,370 |
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(3) SDRs 2 |
57,278 |
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(4) gold (including gold deposits and, if appropriate, gold swapped) 3 |
11,041 |
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--volume in millions of fine troy ounces |
261.499 |
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(5) other reserve assets (specify) |
4,960 |
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--financial derivatives |
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--loans to nonbank nonresidents |
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--other (foreign currency assets invested through reverse repurchase agreements) |
4,960 |
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B. Other foreign currency assets (specify) |
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--securities not included in official reserve assets |
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--deposits not included in official reserve assets |
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--loans not included in official reserve assets |
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--financial derivatives not included in official reserve assets |
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--gold not included in official reserve assets |
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--other |
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FTSE 100 Index Futures: 7:00pm Opening Begins October 3rd
September 28, 2010--eginning on Sunday October 3rd, for the trade date of Monday October 4th, FTSE 100 Index Futures will open at 7:00pm Central time.
The contract will be available to trade from 7:00pm until 1:50am on the following day (Central time), when the market will enter a ten minute Pre-Open period from 1:50am to 2:00am.
During this period orders may be submitted, revised and pulled in the Central Order Book but no business will be transacted. Resting orders will remain in the market.
The contract will re-open at 2:00am Central time, the same time the UK cash market opens, and trade continuously until 3:00pm Chicago time.
ProShares files with the SEC
September 28, 2010--ProShares filed a post-effective amendment, registration statement with the SEC.
read more
Component Change Made to Dow Jones Transportation Average
United Continental Holding, Inc. to Replace Continental Airlines, Inc.
September 28, 2010--Dow Jones Indexes, a leading global index provider, today announced a component change in the Dow Jones Transportation Average. Continental Airlines, Inc. Class will be deleted from the Dow Jones Transportation Average at the open of trading on Friday, October 1, 2010.
Continental is being removed due to the airline's merger with UAL Corporation. Concurrent with the merger, UAL Corp. will change its name to United Continental Holding, Inc. and its exchange listing to the New York Stock Exchange from NASDAQ.
UAL Corp. was in the Dow Jones Transportation Average from January 2, 1970, until December 6, 2002, when it was removed from the index because the company filed for bankruptcy protection and trading of its stock was suspended on the New York Stock Exchange. (UAL Corp. was renamed Allegis from early 1987 until June 1988, when the original name was readopted).
The Dow Jones Transportation Average tracks 20 U.S. transportation stocks. Other members of the Dow Jones Averages family are the Dow Jones Industrial Average, the Dow Jones Utility Average, the Dow Jones Composite Average and The Global Dow.
Further information as well as the component list of the Dow Jones Transportation Average can be found at http://www.djaverages.com.
Company additions to and deletions from the Dow Jones Transportation Average do not in any way reflect an opinion on the investment merits of the companies.
S&P Launches MegaCap Index for Canadian Equity Market
Comprised of 25 of the largest, most liquid stocks listed on the Toronto Stock Exchange
September 27, 2010--Standard & Poor's, the world's leading index provider, announced today the launch of the S&P/TSX MegaCap Index, a large-cap index highlighting the 25 largest, most liquid stocks listed on the Toronto Stock Exchange. The Index is derived from the S&P/TSX Composite Index, a widely followed gauge of the Canadian equity market.
"The S&P/TSX MegaCap Index will provide investors with exposure to 25 of the largest, most liquid publicly traded companies in Canada," says Sid Oberoi, Senior Director at S&P Indices. "The Index covers over 50% of the market-cap of Canadian listed equities, providing investors with a gauge to measure the performance of this segment of the market."
To be included in the S&P/TSX MegaCap Index, securities must be among the 25 largest constituents in the S&P/TSX Composite in terms of float quoted market value (the value determined by multiplying the number of float shares of a security by the price for one such float share), and have listed options on the Montreal Exchange. In order to minimize turnover, additions and deletions from the S&P/TSX MegaCap are made at the Index's quarterly review.
The S&P/TSX MegaCap Index employs a buffer rule during the quarterly review where a security must be amongst the 35 largest constituents in the S&P/TSX Composite Index, and continue to have listed options on the Montreal Exchange. The top 5 constitutions by weight within the Index include: Barrick Gold Corp, Potash Corp of Saskatchewan, Suncor Energy Inc, Royal Bank of Canada, and Toronto-Dominion Bank.
"Toronto Stock Exchange is very pleased with the launch of this new index," says Andre Craig, Vice President, TMX Datalinx. "It provides a complementary offering to the core S&P/TSX benchmark indices and further demonstrates our joint commitment to providing new and innovative products for the capital markets."
For more information on the S&P/TSX MegaCap Index, including the methodology and fact sheet, please visit: www.standardandpoors.com/indices.
ETSpreads, LLC files with the SEC
September 27, 2010--ETSpreads, LLC
has filed an amended and restated application for exemptive relief with the SEC. The Initial Fund, the ETSpreads US Inflation Linked Fund.
The Initial Fund will be based on a domestic fixed income securities Index (the “Initial Index”) and certain Future Funds may also be based on domestic fixed income securities Indexes.
Brazil in ‘currency war’ alert
September 27, 2010--An “international currency war” has broken out, according to Guido Mantega, Brazil’s finance minister, as governments around the globe compete to lower their exchange rates to boost competitiveness.
Mr Mantega’s comments in São Paulo on Monday follow a series of recent interventions by central banks, in Japan, South Korea and Taiwan in an effort to make their currencies cheaper. China, an export powerhouse, has continued to suppress the value of the renminbi, in spite of pressure from the US to allow it to rise, while officials from countries ranging from Singapore to Colombia have issued warnings over the strength of their currencies.
Emerging Markets Week in Review - 9/20/2010 - 9/24/2010
September 27, 2010--The Dow Jones Emerging Markets Sector Titans Composite Index returned 1.86% last week, its fourth consecutive weekly increase, and reached its highest close since July 2008. Technology led the market up, climbing 4.32%, and now leads all sectors this quarter and in 2010.
Energy and Utilities were the worst performers for the week, increasing 1.02% and 0.18% respectively. Last week's strong performance pushed all sectors into positive territory for the year as investors continue to favor emerging markets over their developed counterparts.
Exchange-Traded Funds: US ETF Weekly Update- September 27, 2010
September 27, 2010--Weekly Flows:$6.1 Billion Net Inflows
ETFs Traded $345 Billion Last Week
Launches: 10 New ETFs
First Trust to Cut BICK Fee
Claymore Officially Changes Name to Guggenheim
Old Mutual Announces ETF Closures
US-Listed ETFs: Estimated Flows by Market Segment
For the fourth week in a row, ETFs generated net inflows —$6.1 blnlast week
Weekly net inflows driven by US Sector & Industry ETFs (6 of top 10 largest net inflows)-ETF assets stand at $885 bln; up 13.5% YTD
13-week flows are mixed among asset classes
$28.0 bln net inflows into ETFs over 13 wks; International -EM equity has strongest net inflows ($13.3 bln)
US-Listed ETFs: Estimated Largest Flows by Individual ETF
US-Listed ETFs: Estimated Largest Flows by Individual ETF
QQQQ posted net inflows of $3.2 blnlast week, the most of any ETF
QQQQ’sflows have been choppy this year, but we estimate YTD net inflows of $1.9 bln
Over 13-wk period, 2 EM equity funds (EEM & VWO) have taken in most new money ($9.8 blncombined)
US-Listed ETFs: ETF Dollar Volume
Market share of mthly ETF volume as % of listed volume has more than doubled over 5 yrs
US Large-Cap accounts for 45% weekly ETF volume, but only has 21% of market cap
Fixed Income accounts for only 3% weekly ETF volume, but has 16% of market cap
