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Market structures and systemic risks of exchange-traded funds
April 13, 2011--Abstract:
Crisis experience has shown that as the financial intermediation chain lengthens, it becomes complicated to assess the risks of financial products due to a lack of transparency as to how risks are managed at different levels of the intermediation chain. Exchange-traded funds, which have become popular among investors seeking exposure to a diversified portfolio of assets, share this characteristic, especially when their returns are replicated using derivative products. As the volume of such products grows, such replication strategies can lead to a build-up of systemic risks in the financial system.
This article examines the operational frameworks of exchange-traded funds and identifies potential channels through which risks to financial stability can materialise.
FSB publishes note on Shadow Banking
April 12, 2011--The Financial Stability Board (FSB) published on 12 April a note entitled Shadow Banking: Scoping the Issues.
This note provides information on the work of the FSB to develop recommendations to strengthen the oversight and regulation of the shadow banking system. This work is taking place through a task force that will develop initital recommendations for discussion that will:
clarify what is meant by "the shadow banking system";
set out potential approaches for monitoring the shadow banking system; and
explore possible regulatory measure to address the systemic risk and regulatory arbitrage concerns posed by the shadow banking system.
The FSB welcomes comments from the public on this note by 16 May 2011.
view the Shadow Banking: Scoping the Issues.
US Financial Crisis Was "Avoidable" US Inquiry Commission Tells MEPs
April 12, 2011--The findings of the US Financial Crisis Inquiry Commission were presented by its chairman Phil Angelides to the European Parliament's Financial, Economic and Social Crisis Committee on Monday afternoon. MEPs found its account of the causes of the crisis plausible, and stressed the need for EU-US co-operation to help overcome it.
"How did it come to pass that in 2008 we were forced to choose between two stark and painful alternatives - either risk the total collapse of our financial system and economy - or inject trillions of taxpayers dollars into the system and into private companies - even as millions of people still lost their jobs, their savings and their homes?" asked US Financial Crisis Inquiry Committee Chairman Phil Angelides, before outlining a serious of failures that led to the collapse.
The US Commission's final report, presented on 27 January, concluded that the crisis was "avoidable". Its causes included "widespread failures" in financial regulation and supervision as well as in corporate governance and management, which allowed the formation of an "explosive brew of excessive borrowing, risky investments and lack of transparency". The crisis itself was triggered by "breaches in accountability and ethics", but key policy makers were clearly "ill prepared" for it.
NASDAQ-100 Index to Undergo a Special Rebalance on Monday, May 2, 2011
April 12, 2011--This year marks the 40th anniversary of The NASDAQ Stock Market and its flagship index, the NASDAQ Composite (COMP). Upon launch in 1971, the Composite tracked 2,048 securities listed on NASDAQ with a base value of 100.00.
Today, the Composite measures 2,662 NASDAQ domestic and international-based common type stocks. On its 40th anniversary on February 8th, the Composite closed at a value of 2,797.05, representing a 2,697.05% return since 1971. Because of its broad reach, the Composite is one of the most widely followed and quoted major market indexes.
GIG’s Harry Tutwiler, Vice President, has been involved with the Composite since its inception. Harry began his career with NASDAQ in 1971 and has watched the index world grow over the last 40 years. “The big inflection point was the adoption of indexes as a portfolio management tool, as opposed to being just a benchmarking tool,” Harry said. “Our indexes had always been just a gauge for measuring market performance, but what we suddenly found was that people were calling us and had an interest in licensing and tracking the Index. With the simultaneous evolution of Efficient Market Theory and Modern Portfolio Theory the research suggested that, not only was picking winners in an active investment strategy extremely difficult, but picking winners was unnecessary. Voila… passive investment through index tracking provided the winning investment strategy."
DB- Equity Research - Q1-11 ETP Market Review & Outlook : ETF market advances despite an unsettled start to the year
March 12, 2011--ETP asset growth meets expectations despite a bumpy market over Q1-11
Political unrest in a number of Middle Eastern oil producing countries, as well as the earthquake and its aftermath in Japan, managed to raise question marks over the very strong asset market growth rates observed in the first month of the year. While the impact of these events on the pace of global economic recovery remains uncertain, they have managed to raise questions about its strength.
Strong performance of the equity ETF market, especially in the first two months of the year, contributed to delivering 6.9% asset growth in the global ETP market over Q1-11. The growth picture was by no means consistent among global regions. The US market, which accounts for 69% of the global ETP market, registered a growth rate close to 7%, supported by strong domestic equity asset prices as well as very favorable inflows ($26.2 billion). In Europe, while cash flows came in at satisfactory levels (€8.2 billion), asset prices lagged resulting in a growth rate under half that of the US market (2.9%). The Asian market was adversely impacted by events in Japan, and while growth remained positive at 1.7%, cash flows were very weak registering at just $700 million for the entire region.
The US market accommodated 65.5% of all new flows, while Europe saw 20.2% and Asia gathered just 1.5%. With the exception of Asia, cash flow strength reflects the market share of the US and European regions.
The global equity ETF market started the quarter very strongly, ramping up to $20 billion by the beginning of February. Events in the Middle East and Japan clearly slowed down the largest asset class’ ascent, however, no significant overall outflows were observed. Once clearer information regarding the Japan events transpired, in the second and third week of March, equity cash flows begun to climb once more finishing the quarter at close to $27 billion.
Strong Q1-11 flows were led by equity ETF investors
Overall global ETP market cash flows over Q1-11 point to a good start to the year. The global ETP market saw flows of $40.2 billion, with healthy flows across all regions except Asia. Global ETP market cash flow levels in Q1-11 were almost double those of Q1-10.
The global ETP cash flows were driven by equity ETFs, which gathered $27.1 billion of inflows, more than three times those observed in Q1-10. Both the US as well as the European ETF markets registered the majority of their flows – 60% and 70% respectively - in the equity part of the market. The US equity ETF market raised $16.6 billion while the European equity ETF market gathered €5.8 billion.
Global fixed income ETF flows were satisfactory ($8.8 billion), however they were driven primarily by the US market ($7.8 billion). Europe’s fixed income cash flow performance was particularly weak, managing to accumulate just €400 million. The biggest component of the European fixed income ETF market remains sovereign debt (56%), and the return of investors to the equity market – largely by liquidating defensive sovereign positions, hurt the European fixed income market’s growth potential.
Equity was the asset class that defined investment patterns over Q1-11, indicating that investors have continued their return to riskier assets. Commodity flows were at the same level as those in Q1-10, and at levels much lower than the preceding four quarters.
High yield continued to be the fixed income market’s driver
Inflows in the global fixed income market were primarily driven by the US market. The global corporate sector, including high yield in the US, registered $5.2 billion of inflows while money market ETFs, primarily in Europe, added $1.2 billion.
The US fixed income high yield ETF sector registered consistent inflows throughout the quarter, while investment grade benchmarked ETFs had a good run starting at the end of February 2011. Overall, global high yield benchmarked ETFs registered inflows of $2.3 billion, while investment grade benchmarked ETFs gathered new money totaling $2.1 billion.
The vast majority of fixed income outflows occurred in Europe and they represented money leaving sovereign benchmarked ETFs. These outflows totaled $1.2 billion over Q1-11. The US comparable part of the market registered net inflows of $0.3 billion, somewhat off-setting the march out of European sovereign benchmarked ETFs.
Change of temperature in the non-precious metals commodity ETP market
There was a distinct change in commodity ETP investing temperature in Q1-11. Over the past few quarters, the space has been dominated by precious metals, especially gold, inflows. Diversified commodity indices as well as energy benchmarked ETPs registered combined flows of $2.8 billion, while precious metals registered outflows of $1.7 billion.
Non precious metals inflows were consistent throughout the quarter, picking up at the beginning of February, a point at which gold outflows peaked at $3.8 billion. Gold had the greatest impact in shaping precious metals outflows in the first quarter of 2011, with its outflows reaching $2.5 billion, while silver and platinum experienced inflows of $700 million and $238 million respectively.
Medium sized providers gain ground
Provider competitive dynamics on a global level remained fairly stable among the top 5 global providers. Blackrock (nu.1, 39.7%) and StateStreet (nu.2, 17.3%) lost 0.5% and 0.6% of market share respectively over Q1-11, while the world’s number 3, Vanguard gained 0.4% reaching 11.1%.
US market dynamics have slightly changed in the last two quarters with the Tier 1 providers yielding 1.3% of market share to Tier 2 and 3 providers. In addition, Van Eck Funds has been added to our Tier 1 US providers as their AUM surpassed the $20 billion milestone. The top 6 providers managed over 90% of the AUM of the region.
In Europe, three medium sized ETF providers experienced particularly strong inflows. UBS, Amundi and Source, all of which are not in the region’s top five, registered flows of €2.3, €1.1 and €1.0 billion each. This largely contributed to the top 5 European ETP providers loosing 1.5% of combined market share, all of which went to these three rising stars.
To request a copy of the report
IEA releases first Clean Energy Progress Report
April 11, 2011-On April 6, 2011 the IEA released thr first Clean Energy Progress Report. Notable successes in deployment of clean-energy technologies are being overshadowed by continued hunger for fossil fuels, report says
The International Energy Agency on Wednesday released its first Clean Energy Progress Report, which assesses global deployment of clean energy technologies and provides recommendations to countries on future action and spending.
The report was presented on 6 April in Abu Dhabi at the second Clean Energy Ministerial meeting. The report finds that while impressive progress has been made in developing clean energy technologies in recent years, the success stories are being overshadowed by surging demand for fossil fuels, which are outstripping deployment of clean energy technologies. Coal has met 47% of the global new electricity demand over the past decade, eclipsing clean energy efforts made over the same period of time, which include improved implementation of energy efficiency measures and rapid growth in the use of renewable energy sources.
In order to change this status quo, the IEA argues that more aggressive clean energy policies are required, including the removal of fossil fuel subsidies and the implementation of transparent, predictable and adaptive incentives for cleaner energy options.
view the Clean Energy Progress Report
The OECD composite leading indicators signal continued expansion
April 11, 2011--Composite leading indicators (CLIs) for February 2011, designed to anticipate turning points in economic activity relative to trend, continue pointing to expansion in most OECD countries.
CLIs continue pointing to robust expansion relative to trend in Germany and the United States and a possible regained momentum in France and Canada. The CLI for the United Kingdom points to a slow but stable pace of expansion. The CLI for Italy points to a loss of momentum in economic activity.
Because of the exceptional circumstances the country is facing, it is not possible to provide reliable estimates of the CLI for Japan at this stage.
The CLI for China points to a possible moderation in economic activity. For Brazil the CLI indicates that economic activity should remain near its long-term potential. The CLI for India continues pointing to a slowdown and the CLI for Russia continues pointing to expansion.
Oil falls from 32-month high on demand concerns
April 11, 2011--Oil dropped nearly 3 percent on Monday, falling from 32-month highs as concerns that rising fuel costs will erode demand and threaten the economic recovery spurred profit-taking.
In early activity, Brent crude extended its rally to top $127 a barrel and U.S. crude reached $113 due to ongoing concerns about unrest in Libya.
When crude turned negative, analysts and brokers cited technicals indicating it had become overbought in recent sessions, as well as a client recommendation from Goldman Sachs warning it saw a strong chance commodity prices may reverse and saying they should take profits.
Goldman noted "nascent signs of oil demand destruction in the United States" that could drag prices down, as well as the possibility of a Libya ceasefire. The bank also said Nigeria's elections, which had added further risk to oil markets, had thus far not caused supply disruptions.
Junk bond funds back in demand
April 11, 2011--Funds investing in junk bonds had record inflows last week as individual investor demand for higher-yielding corporate debt roared back after a brief pause last month.
On a global basis, $1.47bn was invested in junk bond or “high-yield†funds last week, the biggest weekly inflow ever seen, according to EPFR, which tracks funds flows. In the US, inflows totalled $933m, also one of the biggest ever weeks. “All major high-yield markets have seen fund inflows in the search for yield,†said analysts at Barclays Capital.
The Oil Trading Markets, 2003 – 2010:Analysis of market behaviour and possible policy responses Paper
April 11, 2011--In this working paper Adair Turner et al. consider price movements in the oil trading markets between 2003 and 2010 and provide an analysis of factors which potentially explain the significant trends in this period.
The authors also discuss the impact of different forms of oil price volatility and propose the type that matters most from an economic standpoint is medium-term price trends. The authors then discuss possible public policy actions that could be employed to prevent or mitigate such trends with the paper concluding that proposals solely related to the operation of the financial markets will not address the fundamental drivers of instability.