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More daylight and stricter rules for the derivatives market
June 15, 2010--Proposed EU rules on derivatives trading must be made clearer and tougher, so as to reduce speculative trading and ensure that as many derivatives as possible are traded through open channels that are subject to rules, the European Parliament said in a resolution adopted on Tuesday. The resolution also suggests ways to regulate the trade in credit default swaps and reduce the regulatory burden on corporate end-users of derivatives.
Caught in the eye of the storm of the Greek debt crisis and widely criticised for the opaque way in which they are traded, derivative products are currently being scrutinised at national level, EU level and also by the G20. This resolution comes a few weeks before the European Commission publishes its legislative proposals to regulate derivative trading.
More transparency and also strict rules
The resolution, which was adopted by show of hands, advocates "abandoning the prevailing view that derivatives need no further regulation because they are only used by experts and specialists" Instead, it calls for strict rules to prevent inexperienced users and speculators from building up dangerous levels of risk.
The proposed legislation should include rules banning purely speculative trading in commodities and agricultural products, adds the resolution. Upper risk limits should be considered for trade in agricultural products and in each specific commodity, including greenhouse gas emission allowances so as to reduce speculation and help these markets to function transparently.
view the Derivatives Markets: Future policy actions
European Parliment
db x-trackers launches two daily short bond ETFs on LSE
June 14, 2010--db x-trackers, Deutsche Bank’s exchange-traded fund platform, has listed two daily short bond ETFs on the London Stock Exchange.
One ETF tracks a daily short UK sovereign index and the other tracks a daily short US sovereign index.
The indices replicate the daily inverse performance of the overall universe of the respective sovereign bond market of all maturity buckets.
The daily short bond ETFs are suitable for institutional investors who want to use them for hedging strategies to react in real time to intra-day market fluctuations and take advantage of declining bond markets.
Source: Online News
FESE response to CESR Consultation Paper on Equity Markets
June 15, 2010--The most important challenge to confront in the MiFID review concerns the regulatory boundaries and requirements among the different execution venues. CESR’s Consultation Paper includes an estimate of OTC trading – a figure which was yet to be confirmed by an official source - and it also discusses some aspects of the business models used by OTC platforms. This is a welcome step in the right direction.
Going forward, EU decision-makers should ensure that the principle ‘same business same rules’ is applied. Regulation must deliver efficient price formation, fair and orderly markets and a level playing field. These concepts need to be re-strenghtened in MiFID; to uphold these principles means re-installing much needed investor confidence in equity markets.
view FESE Response_CESR CP equity markets
Source: FESE
End "bankers' bonus" culture, says Economic Affairs Committee
June 15, 2010--New rules to end the bankers' risk-taking culture that led to the global economic crisis were backed by Economic and Monetary Affairs Committee MEPs on Monday evening. Bailed-out bank directors must get no bonuses until banks have repaid public support, bankers' bonuses must be capped at 50% of total remuneration, and bankers' bonus payments should be deferred until profits are actually earned, not just forecast, added the committee. The rules will be put to a plenary vote in July.
The new rules are designed "to deliver a robust and fair remuneration system that encourages long-term stability, not excessive risk taking. The new rules on bank capital will ensure that banks put aside enough money to cover losses on high-risk trading, such as complicated mortgage-backed securities, which they are still holding on their books from before the crisis. It is too much of a risk to leave taxpayers exposed to these potentially toxic assets”, said Arlene McCarthy (S&D, UK), who is steering them through Parliament, before the vote.
Welcoming the result of the vote, committee chair Sharon Bowles (ALDE, UK) said "I want banking to return to the idea that existed in private banks when partners had their own money on the line and had a vested interest in the long-term health of the bank. If bankers and traders want to leave and go to other jurisdictions, it just shows that they do not have confidence in their own performance. To those that would leave I say good riddance.”
Dubbed the "Capital Requirements Directive III" (CRD3), upon which Parliament has equal decision-making rights with the Council, the new rules give legal shape to the recommendations of the Basel Committee, a body of banking supervisors from around the world. Reviewed at regular intervals, this directive updates laws on some of the fundamentals of banking. CRD3 aims to end unsound bonus policies and step up disclosure and capital requirements in areas where speculative activity is common.
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Source: European Parliment
Private equity ‘barbarians at the gate’ of ESG: conference report
June 14, 2010--Some of the world’s largest private equity companies, battling an image problem and a shift in market dynamics, had very warm words about incorporating environmental, social and governance (ESG) factors into their operations at a conference in London last week.
The likes of Carlyle Group and Kohlberg Kravis Roberts (KKR), with some $140bn in assets under management between them, are not perhaps best known for their responsible investing credentials. Indeed, the industry still suffers from its ‘Barbarians at the Gate’ image, a reference to the book about the huge, controversial buyout of RJR Nabisco in the 1980s. But their appearance at the PEI Responsible Investment Forum, co-hosted by the United Nations Principles for Responsible Investment, showed which way the sector wants to head.
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Source: Responsible Investor
ETF Securities to expand Currency ETC platform with 22 new Currency ETCs including Europe’s first listing of emerging market currencies
June 14, 2010--Four new emerging market Currency ETCs with long or short exposure to the Chinese Renminbi and Indian Rupee
18 new GBP-based Currency ETCs with long or short exposure to G10 currencies
28 existing Currency ETCs accumulate $200m on London Stock Exchange and Deutsche Börse
Exposure to world’s most liquid asset class through a total of 50 Currency ETCs
ETF Securities (ETFS), the global pioneer in Exchange Traded Commodities (Commodity ETCs) and 3rd generation Exchange Traded Funds (ETFs) is planning to expand the world’s largest and Europe’s first Exchange Traded Currency (Currency ETCs) platform with the launch of four emerging market and 18 GBP-based Currency ETCs on London Stock Exchange (LSE) in the coming weeks. The Currency ETCs are based on the MSFXSM Index Family, which are designed by Morgan Stanley as a tradable benchmark for foreign exchange rate performance.
For the first time in Europe, investors will have access to emerging market Currency ETCs which enable investors to go long or short the Chinese Renminbi (CNY) or the Indian Rupee (INR). Since launching its Currency ETC platform, ETF Securities has received significant interest for emerging market currencies such as the Chinese Renminbi and the Indian Rupee, which are traditionally difficult to access for non-domestic investors.
With booming local economies, investment demand for emerging market equities, bonds and currencies continues to grow. Many emerging market currencies are not accessible to foreign investors due to restrictions or capital controls however foreign investors are able to access these markets through Non Deliverable Forward (NDF) contracts and now Currency ETCs.
Currency ETCs and NDFs provide access to otherwise inaccessible markets. NDF markets are impacted by many factors including expectations of the relevant exchange rates and central bank policies. Therefore even though a currency such as the Chinese Renminbi is pegged to the US Dollar (USD), it is possible for emerging market Currency ETCs to change in price. For example, if there is a change in investor's expectations regarding the Chinese Renminbi such that CNY is expected to appreciate versus USD at some point in the near future, then the price of ETFS Long CNY Short USD would likely rise, and the value of ETFS Short CNY Long USD would likely fall.
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Source: ETF Securities
Public consultation on Short Selling and Credit Default Swaps-Frequently asked questions
June 14, 2010--What is the purpose and subject of the consultation?
The purpose of the document being published today is to consult market participants, regulators and other stakeholders on the options being considered by the Commission services for a forthcoming legislative proposal dealing with potential risks arising from short selling and Credit Default Swaps.
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.
A Credit Default Swap (CDS) is a derivative which is sometimes regarded as a form of insurance against the risk of credit default of a corporate or government (or sovereign) bond. In return for an annual premium, the buyer of a CDS is protected against the risk of default of the reference entity (stated in the contract) by the seller. If the reference entity defaults, the protection seller compensates the buyer for the cost of default.
In addition to short selling on cash markets, a net short position can also be achieved by the use of derivatives, including Credit Default Swaps (CDS). For example, if an investor buys a CDS without being exposed to the credit risk of the underlying bond issuer (a so-called "naked CDS"), he is expecting, and potentially gaining from, rising credit risk. This is equivalent to short selling the underlying bond.
Why is the European Commission planning a legislative initiative in this area?
During the financial crisis and more recently in the context of market volatility in euro denominated sovereign bonds, Member States have reacted differently to short selling issues, with a variety of measures being put in place using different powers. A fragmented approach can limit the effectiveness of the measures imposed, lead to regulatory arbitrage (which basically means shopping around for the least onerous regime) and create additional costs and difficulties.
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Source: Europa
Turkey slowly but surely on its way to sustainable growth
June 14, 2010--Having already attracted the attention of many international institutions and credit rating agencies with its current strong economic performance, Turkey is taking firm steps forward to maintain a sustainable expansion of its economy, observers argue.
The country’s success in overcoming the adverse impacts of the 2009 global credit crunch has been largely attributed to certain austerity measures taken by the government along with a strong financial sector. Having rebounded sharply since the second quarter of last year -- when the economy grew by 6 percent over the same period of 2008 -- the coming months look good for the Turkish economy. A recently launched fiscal rule, which is accepted as an important anchor for the markets, has also been effective in this regard.
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Source: Todays Zaman
Economy : G20 keeps investment flows open, but continued vigilance needed, say OECD, UNCTAD
June 14, 2010-- The OECD and UNCTAD have commended G20 countries for avoiding new protectionist barriers to inward investment, while warning that continued vigilance is needed in the face of emergency measures to address the economic crisis that still pose a threat to competition and international investment.
In their third report to the G20 on this issue, the two organisations find that “by and large, G20 governments have continued to honour their commitment to refrain from raising new barriers to international investment.”
However, as governments wind down their emergency schemes and dispose of financial assets acquired in the crisis, they must ensure they do so at an appropriate pace and not use the crisis “as a pretext to discriminate directly or indirectly against certain investors, including foreign investors.”
“With the economic recovery still fragile and unemployment high, protectionist pressures will remain,” said OECD Secretary-General Angel Gurría. “Countries must hold firm and keep trade and international investment open to boost their economies.”
Most investment measures taken in the six months to May 2010 have continued to point towards liberalisation of international capital flows or increased regulatory clarity, according to the OECD.
read OECD Third Report G20 Investment measure
Companion report for the G20
Source: OECD
Consultation on Derivatives and Market Infrastructures - frequently asked questions
June 14, 2010--Why has the Internal Market and Services Directorate General of the European Commission launched another public consultation on Derivatives and Market Infrastructures?
The European Commission adopted a Communication on "Ensuring efficient, safe and sound derivatives markets – future policy actions", on 20th October 2009 after a full consultation on a previous Communication of July 2009 (COM(2009)332) and accompanying Staff Working Paper and Consultation Paper (see IP/09/1546).
In this Communication, the Commission outlined the policy actions it intended to take to address the problems of OTC (over-the-counter) derivatives markets.
Since then, the Internal Market and Services Directorate General of the European Commission has been developing more detailed measures in this respect. Following better regulation principles and considering the significant impact that the announced policy actions are likely to have on the markets, the Internal Market DG would now like to consult all interested stakeholders on these detailed measures. This consultation, which is open until 10 July 2010, is the final step before the Commission proposes legislative proposals in September.
What is the status of this consultation? Is this a legislative blue-print?
This document is a working document of the Internal Market DG for discussion and consultation purposes. It does not purport to represent or pre-judge the formal proposal of the Commission. However, it does give an overview of the Internal Market DG's current thinking on how to practically implement some of the actions outlined in October 2009.
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Source: Europa
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