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BLOOMBERG NEWS IS REPORTING DERIVATIVES COLLUSION… Traders May Need From $2 Trillion To $4 Trillion In Extra Collateral To Meet The New Requirements… Margin Calls Coming On US Too-Big-To-Fail Banks


EU Accuses 13 Banks of Hampering CDS Competition

Thirteen of the world’s biggest investment banks were accused by the European Union of colluding to curb competition in the $10 trillion credit derivatives industry.

The EU sent a complaint, or statement of objections, to 13 banks, data provider Markit Group Ltd. and the International Swaps & Derivatives Association over allegations they sought “to prevent exchanges from entering the credit derivatives business between 2006 and 2009,” the European Commission said.

The probe is one of several by the Brussels-based commission into the financial industry, including whether banks colluded to manipulate U.K. and European benchmark interest rates.Joaquin Almunia, the EU antitrust chief, said he’s seeking to settle the probes into Libor and Euribor with some of the same banks in the CDS case by the end of the year.

The EU in April 2011 opened a probe into whether banks colluded by giving market information to Markit, a data provider majority-owned by Wall Street’s largest banks. Earlier this year, the EU extended its investigation to include ISDA, having found indications that it “may have been involved in a coordinated effort of investment banks to delay or prevent exchanges” from entering the credit swaps business.

The banks in the CDS probe are Goldman Sachs Group Inc.,JPMorgan Chase & Co. (JPM)Citigroup Inc. (C)Credit Suisse Group AG (CSGN)Deutsche Bank AG (DBK), Morgan Stanley,Barclays Plc (BARC)Bank of America Corp. (BAC)HSBC Holdings Plc (HSBA)Royal Bank of Scotland Group Plc (RBS)BNP Paribas SA (BNP) and UBS AG (UBSN), the commission said. Bear Stearns, which is now a unit of JPMorgan, was also named by the EU authority.

‘Desperate’ Banks

“I’m sure banks are desperate to keep these products from going on exchange and keep as much of the pie to themselves as they can, that sort of stands to reason,” said Robert Kendrick, a credit analyst at Legal & General in London. “As an investor in banks, I’d be surprised if it makes a huge difference. As an investor in CDS more generally, I’d like to see more transparency.”

http://www.bloomberg.com/news/2013-07-01/eu-accuses-13-investment-banks-of-hampering-cds-competition.html

 

A Shortage of Bonds to Back Derivatives Bets

Starting next year, new rules will force banks, hedge funds, and other traders to back up more of their bets in the $648 trillion derivatives market by posting collateral. While the rules are designed to prevent another financial meltdown, a shortage of Treasury bonds and other top-rated debt to use as collateral may undermine the effort to make the system safer.

Derivatives allow buyers to bet on the direction of currencies, interest rates, and markets, insure against defaults on bonds, or lock in a price on commodities. The new rules are rooted in the 2010 Dodd-Frank Act, passed in reaction to the near-collapse of the financial system in 2008, which was caused in part because derivatives contracts weren’t backed by enough collateralAmerican International Group needed a $182.3 billion bailout from the U.S. government after it failed to make good on derivatives trades with some of the world’s largest banks. In response, Congress required that most privately negotiated derivatives transactions, known as over-the-counter trades, go through clearinghouses.

Clearinghouses, run by firms such as Chicago-based CME Group and London-based LCH.Clearnet Group, make traders provide collateral, including government bonds, that can be seized and easily converted into cash to cover defaults. Traders may need from $2 trillion to $4 trillion in extra collateral to meet the new requirements, according to Timothy Keaney, chief executive officer of BNY Mellon Asset Servicing.

http://mobile.businessweek.com/articles/2012-09-20/a-shortage-of-bonds-to-back-derivatives-bets

 

Margin Calls Coming On US Too-Big-To-Fail Banks

Fed approves step one in a three step plan

Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organisations. Consistent with the international Basel framework, the rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent and a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from four percent to six percent and includes a minimum leverage ratio of four percent for all banking organisations. In addition, for the largest, most internationally-active banking organisations, the final rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures. (See the press release here)

I know you are thinking: Wow, this is the most interesting thing I have seen in years :-) but alas it is – because it is in fact a major margin call on the US holding banks.

Note how this adoption is only the first set of a series of new rules. Let me introduce you to: Daniel Tarullo, The Federal Reserve Governor in charge of regulation after the implementation of the Dodd-Frank law in 2010. (As a consequence of Dodd-Frank, the Fed got a permanent regulatory governor.)

I had nothing else to do so I read his latest speeches which are surprisingly clear (considering that he’s a policy guy).

Governor Daniel K. Tarullo At the Peterson Institute for International Economics, Washington, D.C.

May 3, 2013 Evaluating Progress in Regulatory Reforms to Promote Financial Stability

The speech considers the “additional charges” which are coming and today’s Basel III was only item number one:

First, the basic prudential framework for banking organisations is being considerably strengthened, both internationally and domestically. Central to this effort are the Basel III changes to capital standards, which create a new requirement for a minimum common equity capital ratio. This new standard requires substantial increases in both the quality and quantity of the loss-absorbing capital that allows a firm to remain a viable financial intermediary. Basel III also established for the first time an international minimum leverage ratio which, unlike the traditional US leverage requirement, takes account of off-balance-sheet items.

 

Second, a series of reforms have been targeted at the larger financial firms that are more likely to be of systemic importance. When fully implemented, these measures will have formed a distinct regulatory and supervisory structure on top of generally applicable prudential regulations and supervisory requirements. The governing principle for this new set of rules is that larger institutions should be subject to more exacting regulatory and supervisory requirements, which should become progressively stricter as the systemic importance of a firm increases.

 

This principle has been codified in Section 165 of the Dodd-Frank Act, which requires special regulations applicable with increasing stringency to large banking organizations. Under this authority, the Federal Reserve will impose capital surcharges on the eight large US banking organizations identified in the Basel Committee agreement for additional capital requirements on banking organisations of global systemic importance. The size of surcharge will vary depending on the relative systemic importance of the bank. Other rules to be applied under Section 165—including counterparty credit risk limits, stress testing, and the quantitative short-term liquidity requirements included in the internationally-negotiated Liquidity Coverage Ratio (LCR)—will apply only to large institutions, in some cases with stricter standards for firms of greatest systemic importance.

 

An important, related reform in Dodd-Frank was the creation of orderly liquidation authority, under which the Federal Deposit Insurance Corporation can impose losses on a failed systemic institution’s shareholders and creditors and replace its management, while avoiding runs and preserving the operations of the sound, functioning parts of the firm. This authority gives the government a real alternative to the Hobson’s choice of bailout or disorderly bankruptcy that authorities faced in 2008. Similar resolution mechanisms are under development in other countries, and international consultations are underway to plan for cooperative efforts to resolve multinational financial firms.

 

A third set of reforms has been aimed at strengthening financial markets generally, without regard to the status of relevant market actors as regulated or systemically important. The greatest focus, as mandated under Titles VII and VIII of Dodd-Frank, has been on making derivatives markets safer through requiring central clearing for derivatives that can be standardised and creating margin requirements for derivatives that continue to be written and traded outside of central clearing facilities. The relevant US agencies are working with their international counterparts to produce an international arrangement that will harmonise these requirements so as to promote both global financial stability and competitive parity. In addition, eight financial market utilities engaged in important payment, clearing, and settlement activities have been designated by the Financial Stability Oversight Council as systemically important and, thus, will now be subject to enhanced supervision.

A margin call is coming…

http://www.zerohedge.com/news/2013-07-05/margin-calls-coming-us-too-big-fail-banks

 

Collusion is an agreement between two or more parties, sometimes illegal and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage. It is an agreement among firms or individuals to divide a market, set prices, limit production or limit opportunities.[1] It can involve “wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties”.[2] In legal terms, all acts affected by collusion are considered void

https://en.wikipedia.org/wiki/Collusion

The European Commission said on Monday it suspected that 13 top investment banks including Barclays, Deutsche Bank and Goldman Sachs, colluded over derivatives trading in breach of EU antitrust rules.

A preliminary investigation showed that banks colluded to exclude exchanges from the over-the-counter market because they feared involvement by the exchanges “would have reduced their revenues from acting as intermediaries,” the Commission said.

The banks instead allegedly continued over-the-counter trading in the massive credit default swaps (CDS) market between 2006 and 2009 — an opaque business that was seen as contributing to the global financial crisis, the Commission said in a statement.

The EU’s Competition Commissioner Joaquin Almunia said the banks would now have the chance to respond to the accusations, and that if the charges were confirmed once the investigation was completed they could face fines.

“If it is confirmed that banks collectively blocked exchanges from the derivatives market, the Commission could decide to impose sanctions,” Almunia said at a press briefing.

“Exchange trading of credit derivatives improves market transparency and stability,” he said, adding that collusion between the banks to prevent this type of trading would be “a serious breach of our competition rules”.

http://www.bangkokpost.com/news/world/357814/eu-accuses-13-banks-of-derivatives-collusion

Banks accused by EU of stifling derivatives competition

Barclays and HSBC are among the 13 banks suspected by European Union regulators of using anti-competitive practices to stop rivals from offering alternative ways to trade highly profitable products such as credit default swaps, a form of insurance us…

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10152548/Banks-accused-by-EU-of-stifling-derivatives-competition.html

ONE THOUSAND TRILLION IS A QUADRILLION

https://en.wikipedia.org/wiki/Quadrillion

article from september 2012
NOT ENOUGH BONDS TO BACK DERIVATIVES BETS

Starting next year, new rules will force banks, hedge funds, and other traders to back up more of their bets in the $648 trillion derivatives market by posting collateral. While the rules are designed to prevent another financial meltdown, a shortage of Treasury bonds and other top-rated debt to use as collateral may undermine the effort to make the system safer.

http://www.businessweek.com/articles/2012-09-20/a-shortage-of-bonds-to-back-derivatives-bets

http://investmentwatchblog.com/1-5-quadrllion-dollar-shitstorm-eu-accuses-13-banks-of-derivatives-collusion-citigoldman-sachsbarclayshsbcjp-morgan-rbs-all-of-them/

Uncle

 

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  • Joe Shlabotnick

    So I can be first to make the comment? Well, let me tell you about how my sister’s friend is making the $60/hr from home… no just kidding. Nice article, can’t wait for the trillion dollar derivative thing to blow up. Doesn’t seem to ever happen though. Reminds me of my erectile dysfunction problem.

    • Sueychop

      So you keep taking pills, more pills, and more pills, but you still can’t get it up?

  • Vlad the Skewerer

    OK my heads swimming but a few questions. Isn’t tier 1 capital both money in the bank and government debt, are we saying you need more IOU’s to back up bets made with IOU’s parked in the bank already? If JP Morgan Chase has 3 trillion on hand but exposure to 70+ trillion in derivative bets aren’t they insolvent? Since I am considered an unsecured creditor to any bank I have money in, I am now out if the bank goes under right, the FDIC is liable only for small bank failures not systematic failure. After the secured stockholders of GM got screwed does that legal status/fiction even count for anything anymore?

    • Sueychop

      Yes, yes, yes, yes, and no.

  • Arizona

    IF the banks have haft the power they are claimed to have,I see a major war on the horizon to keep them all from going to prison,GET READY AMERICA,your about to be attacked by all these foreign troops that are here and it will be a bloodbath…………………