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New framework to increase transparency and ensure coordination for short selling and Credit Default Swaps
September 15, 2010--The European Commission today adopted a proposal for a regulation on short selling and certain aspects of Credit Default Swaps (CDS). Its main objectives are to create a harmonised framework for coordinated action at European level, increase transparency and reduce risks. The new framework will mean regulators – national and European - have clear powers to act when necessary, whilst preventing market fragmentation and ensuring the smooth functioning of the internal market.
Internal Market and Services Commissioner Michel Barnier said: "In normal times, short selling enhances market liquidity and contributes to efficient pricing. But in distressed markets, short selling can amplify price falls, leading to disorderly markets and systemic risks. Today’s proposal will increase transparency for regulators and markets, and make it easier for regulators to detect risk in sovereign debt markets.
Regulators will also gain clear powers to restrict or ban short selling in exceptional situations, in coordination with the new European Securities and Markets Authority (ESMA). Today's proposals are a further step towards greater financial stability in Europe."
Short selling is the sale of a security the seller does not own with the intention of buying it back at a later point in time in order to deliver it. Naked short selling is where the seller has not borrowed the securities, or ensured they can be borrowed before settlement prior to the short sale. It can lead to specific risks of settlement failure (i.e. not completing the transaction). Since the onset of the financial crisis, many Member States have taken actions to suspend or ban short-selling. Uncoordinated actions can be less effective and lead to difficulties on the market, including impacting on investor confidence.
Greater transparency
At present, there is little reliable information available on short selling: it is difficult for market participants and regulators to know which securities are being traded "short" and their overall significance. Today’s proposal enhances transparency by requiring that all share orders on trading venues be marked as 'short' (so-called "flagging") if they involve a short sale, so that regulators know which transactions are short. In addition, investors will have to disclose significant net short positions in shares to regulators at one threshold (0.2% of issued share capital), and to the market at a higher threshold (0.5%). These measures will mean market participants are better informed whilst allowing regulators to monitor markets and detect developing risk. Concerning sovereign bonds, regulators will be better able to detect possible risks to the stability of sovereign debt markets by receiving data on short positions, including those obtained through sovereign Credit Default Swaps (a derivative sometimes regarded as a form of insurance against the risk of default).
view REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Short Selling and certain aspects of Credit Default Swaps
Source: Europa
August 2010 Euro area annual inflation down to 1.6% EU down to 2.0% [Rapid]
September 15, 2010--Euro area1 annual inflation was 1.6% in August 20102, down from 1.7% in July. A year earlier the rate was -0.2%. Monthly inflation was 0.2% in August 2010.
EU3 annual inflation was 2.0% in August 2010, down from 2.1% in July. A year earlier the rate was 0.6%. Monthly inflation was 0.2% in August 2010.
These figures come from Eurostat, the statistical office of the European Union.
Inflation in the EU Member States
In August 2010, the lowest annual rates were observed in Ireland (-1.2%), Latvia (-0.4%) and Germany (1.0%), and the highest in Romania (7.6%), Greece (5.6%) and Hungary (3.6%). Compared with July 2010, annual inflation rose in ten, remained stable in nine and fell in eight Member States.
The lowest 12-month averages4 up to August 2010 were registered in Ireland (-2.3%), Latvia (-2.0%), Portugal and Slovakia (both 0.3%), and the highest in Hungary and Romania (both 5.0%) and Greece (3.5%).
Euro area
The main components with the highest annual rates in August 2010 were alcohol & tobacco and transport (both 3.3%) and housing (2.6%), while the lowest annual rates were observed for communications (-0.5%), recreation & culture (-0.1%) and clothing (0.2%). Concerning the detailed sub-indices, fuels for transport (+0.31 percentage points), heating oil (+0.13) and vegetables (+0.08) had the largest upward impacts on the headline rate, while garments (-0.08) and telecommunications (-0.07) had the biggest downward impacts.
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Source: Eurostat
Proposal for a Regulation on Short Selling and Credit Default Swaps - Frequently asked questions
September 15, 2010--What is short selling?
Short selling is the sale of a security that the seller does not own, with the intention of buying back an identical security at a later point in time in order to be able to deliver the security. Short selling can be divided into two types:
1."Covered" short selling is where the seller has borrowed the securities, or made arrangements to ensure they can be borrowed, before the short sale.
2."Naked" or "uncovered" short selling is where the seller has not borrowed the securities at the time of the short sale, or ensured they can be borrowed.
Who engages in short selling and why?
Short selling is used by a variety of market participants including hedge funds, traditional fund managers such as pension funds and insurance companies, investment banks, market makers and individual investors. Short selling can be used for the following reasons:
for speculative purposes (e.g. to profit from the expected decline of a share price);
to hedge a long position (e.g. to limit losses in comparable shares in which a long position is held);
for arbitrage (e.g. to profit from the difference in price between two different but inter-related shares); and
for market making (e.g. to meet customer demand for shares which are not immediately available).
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Source: Europa
Commission proposal on OTC Derivatives and Market infrastructures – Frequently Asked Questions
September 15, 2010--What are derivatives?
A derivative is a financial contract linked to the future value or status of the underlying to which it refers (e.g. the development of interest rates or of a currency value, or the possible bankruptcy of a debtor).
Over-the-Counter (OTC) derivative contracts are not traded on an exchange (for example the London Stock Exchange) but instead privately negotiated between two counterparts (for example a bank and a manufacturer).
OTC derivatives account for almost 90% of the derivatives markets. In December 2009, the notional value of outstanding OTC derivatives was around $615 trillion or €435 trillion. The OTC derivatives market comprises a wide variety of product types across several asset classes (interest rates, credit, equity, foreign exchange (FX) and commodities) with widely differing characteristics and levels of standardisation. OTC derivatives are used in a variety of ways, including for purposes of hedging, investing, and speculating. Contrary to derivatives traded on exchanges, OTC derivatives are not automatically cleared through CCPs (cf next question) or subject to reporting rules.
A hypothetical example of hedging: a plane manufacturer has a contract to build 6 planes in the next 6 months and will need 10 tonnes of steel per plane. He may want to guarantee that whatever the fluctuations in the market of the price of steel, he gets steel at a certain fixed price for the next 6 months so as to be able to deliver the planes on budget. To cover for the risk of steel rising, the plane manufacturer could enter into an OTC contract with a bank for example. They could agree on a set price for a set quantity of steel for 6 months. If, after 6 months, when the contract matures, the market price turned out to be lower, the bank would make a profit; but if the market price turned out to be higher, then the plane manufacturer would be able to purchase the steel a price lower than the market price and thus save money.
What are market infrastructures?
Central Counterparties (CCP)
A CCP is an entity that interposes itself between the two counterparties to a transaction, becoming the buyer to every seller and the seller to every buyer. A CCP's main purpose is to manage the risk that could arise if one counterparty is not able to make the required payments when they are due –i.e. defaults on the deal.
CCPs are commercial firms. There are currently about a dozen CCPs, all but one located in Europe or the USA, clearing interest rates, credit, equity and commodities OTC derivatives. There is currently no CCP clearing FX OTC derivatives.
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Source: Europa
Turkey: Recovery a chance to reinforce long-term economic growth, says OECD
September 15, 2010--Turkey’s economic growth is likely to be among the strongest of OECD countries in 2010, supported by financial stability, international investor confidence and a dynamic business sector, according to the OECD’s latest survey of the country.
After falling nearly 5% in 2009 in the wake of the global crisis, Turkey’s GDP is expected to expand by more than 6% this year. Unemployment is likely to fall markedly.
Presenting the survey in Ankara, OECD Secretary-General Angel Gurría said: “Turkey should build on the positive shock it produced by emerging from the crisis with a strengthened economy. It should now finish the job by completing the fiscal architecture to consolidate its credibility.”
He said the task also requires implementing a number of key reforms so that the entire business sector can benefit from the stronger economic environment.
But he added Turkey’s largest export markets, notably in Europe, remain fragile. Strong, sustained growth will depend on Turkey reducing further its economic vulnerabilities and stimulating labour productivity.
Addressing the weaknesses includes modernising how public finances are managed, says the survey. Plans for well thought out rules, transparency and comprehensive auditing must be pursued.
The survey also says the Turkish economy needs to move away from its dependence on undeclared and informal business. Although informality and semi-informality have helped Turkish firms maintain flexibility in a competitive international environment, they have become a trap as they slow down economic modernisation and productivity growth. Reducing informality is also crucial for improving public finances and distributing taxes more equitably.
The survey recommends reducing rigidities in the labour market to make the jobs market more flexible in areas such as severance pay, the minimum wage and temporary work.
view the Economic Survey of Turkey 2010
Source: OECD
REGIS-TR Fully Complies with New European Trade Repository Requirements
Sptember 15, 2010--BME and Clearstream welcome the details of the European Commission’s Market Infrastructure Regulation on trade repositories for OTC derivatives // Trade repository REGIS-TR fully complies with the new requirements // Flexible and transparent pricing scheme for financials and corporates // Efficiency gains through REGIS-TR expected to compensate customers for additional cost for regulatory compliance //Admission of third country applicants and details on timeline require further clarification
Bolsas y Mercados Espanoles (BME), the Spanish stock exchange operator, and Clearstream, the post trade arm of Deutsche Börse Group, welcome the published details on trade repositories for OTC derivatives that the European Commission has provided today in the context of the proposed European Market Infrastructure Regulation. There is need for clarification regarding the suggested design of the access for third country trade repository providers and the planned timeframe for implementation. BME and Clearstream will therefore continue their close dialogue with the Commission and other political stakeholders.
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Source: Clearstream
EU unveils crackdown on derivatives
September 15, 2010--The European Union has unveiled tough new rules to control derivative trading and restrict short-selling in response to the financial crisis.
The proposed rules, covering over-the-counter derivatives, will require standardized contracts to be cleared centrally for the first time
They will also require OTC contracts -- bilateral agreements between buyers and sellers -- to be reported to "trade repositories" or data banks, and for this information to be available to regulators.
The proposals follow agreement by G20 leaders last year to standardize derivative trading move them onto exchanges or electronic trading platforms where appropriate. The proposals will closely align the EU with the new regime which is coming into force in the US.
The new rules will need approval from member states and the European parliament, but the aim is to operate them from the end of 2012.
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Source: CNN
ICMA-ERC survey shows growth in European repo market to surpass pre-crisis levels.
September 15, 2010--The European Repo Council of the International Capital Market Association (ICMA) today released the results of its 19th semi-annual survey of the European repo market. The survey sets the baseline figure for market size at EUR 6,979 billion representing an increase of 25% on the figure of EUR 5,582 billion for the previous survey in December 2009.
This figure takes the size of the market above the previous highest figure of EUR 6,775 billion recorded in June 2007 before the financial crisis.
The results of the survey confirm the continuing recovery of the European repo market and the underlying trading activity that it supports. The survey is based on returns received from 57 offices of 52 financial groups, mostly banks, including most of the the largest European repo market participants. The aggregate figure for market size masks a very varied picture for participating institutions; some have emerged from the recent financial crisis with unimpaired balance sheets and have been able to exploit their strength in a market where many competitors have been forced to consolidate or even contract, and some have disappeared altogether. These institutions have consequently captured greater market share, as is evident in the growing degree of market concentration, 10 firms in the survey accounted for over 68% of the total repo business, well above the historical norm for the survey which started in June 2001.
view the ICMA European repo market survey June 2010
Source: European Repo Council of the International Capital Market Association (ICMA)
Investor confidence continues to drain from green funds
September 15, 2010--Green themed and norms-based European RI retail funds continued to suffer from a lack of investor confidence during June this year with sector assets down by €96m during the month, according to the latest available figures compiled for Responsible Investor by Lipper FMI, the investment data group.
That followed a slump of €373.9m during May and losses of €95.9m during April. The fund class, labelled by Lipper FMI as ‘RI Extended’, includes those with multiple ethical exclusions, those following a norms-based strategy and themed climate change and microfinance funds. Of those fund manager’s taking in money, highest grosser was French funds house OFI’s Trésor ISR fund, a cash fund, with new assets of €145.7m, including market appreciation.
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Source: Responsible Investor
Euronext-European ETF activity highlights for August 2010
September 14, 2010-- At the end of August, NYSE Euronext had 533 listings of 485 ETFs from 17 issuers. These ETFs cover more than 300 indices exposed to an extended range of assets and strategies (Equity, Fixed Income, Commodities, Short, Leverage, etc…).
The number of ETFs increased by 8% YTD compared to the end of 2009. So far this year, 46 new ETFs have been listed, while 8 ETFs have been the subject of mergers by absorption and 2 ETFs have been delisted.
Both the daily average number of trades and daily average turnover figures again showed solid YOY growth in August 2010. On average, there were 7 683 trades on a daily basis, representing an increase of 11.3% versus August 2009. Daily average turnover increased from €262.7 million in August 2009 to €297.4 million in August 2010, or 13.2%.
At the end of August, the combined Assets Under Management of all ETFs listed on the NYSE Euronext European markets totaled €118.1 billion, an increase of 23.86% from the €95.3 billion at the end of August 2009.
The combination of the flow of 21 first-class Liquidity Providers, competitive market makers, client orders and our high capacity, low latency technology contributed to a median spread of 28.89 bps of all listed ETFs, down from 35.47 bps in August 2009.
At the end of August 2010, NYSE Euronext’s Liquidity Providers program featured 21 Liquidity Providers that had a total of 1049 liquidity provision agreements, providing firm bid/ask quotes with minimum size and maximum spread requirements for the entire trading session on all ETFs.
Visit www.euronext.com/etf for more info.
Source: NYSE Euronext
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