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Sunday, April 28, 2013

Your forexlive.com ENewsletter

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Mike & Ryan are heading up to Scotland today in the ForexLive helicopter to get some Scottish Pounds

Posted: 27 Apr 2013 05:37 PM PDT

Mike and Ryan are heading up to Scotland today in the ForexLive helicopter (OK, its not actually ours, its just on loan from Mr. Bernanke for the weekend) to get as many Scottish pound notes, in any denomination, they can.

They’ll be FedEx-ing the notes to me in Hong Kong (I’m about jump on a plane), where I’ll be arbitraging them against the British pound at Hong Kong money-lender Mega Foreign Exchange. Mega Foreign Exchange pay out HK$11.50 for a Scottish pound but only HK$11.30 for an English one. (I’m not making this up: Scottish independence gets boost from Hong Kong’s money markets). We’ll be splitting the profits.

(Adam, don’t worry about the charges on the ForexLive Amex for the first-class flight to Hong Kong and week at the Shangri-La; arbitrage profits will easily cover these. Unless I scarper with them, of course :-) ).

helicopter

Japanese PM Abe: ‘Women are Japan’s most underused resource’

Posted: 27 Apr 2013 05:12 PM PDT

Japan’s Prime Minister Shinzo Abe may be moving to include more women in the Japanese workforce. This could be a powerful economic reform (bolding in the quote is mine):

By expanding what are too often tightly circumscribed career opportunities for women, from the executive suite on down, Abe said he hoped to draw more women into employment and reverse a decline in the country's working population that has constrained output and stretched public finances.

Japan's Abe: Too few women in boardrooms

For background on Japanese women’s status in the workplace, this article from Noah Smith: Will Abe address Japan’s number one problem after all?

 

Why segregated funds may be better under European regulation

Posted: 27 Apr 2013 10:30 AM PDT

Until the Lehman collapse, customers thought that having a segregated account meant that if the firm went under, only the firm's money would be at risk, and customers would promptly get back their money.  The Lehman collapse proved this perception wrong when administrators froze large pools of collateral.  In response to this and the MF Global problems, both U.S. and European regulators are taking steps to restructure how futures commodity merchants (FCMs) and derivative clearing organizations (DCOs) segregate client funds.

Each model has its pros and cons.

The U.S. adopted a new segregation model for cleared swaps, the legal segregation with operational commingling (LSOC) model.  The LSOC model allows FCMs and DCOs to operationally commingle funds, but requires firms to maintain legally segregated customer accounts.  Further, it prohibits firms from using a non-defaulting customer's collateral to cover the losses caused by a defaulting customer of the firm.

The LSOC model has risks and limitations:

  • No Effect on Futures. It only applies to cleared swaps and not futures.  Even if the LSOC model had been in place at the time, it would not have protected the futures customers of MF Global and it still doesn't.
  • No Additional Restrictions to Limit Operational, Fraud, or Investment Risk. The LSOC model doesn't address these fundamental issues that underlie the MF Global situation. The FCM can still experience investment risk.  Fellow customer risk, although greatly reduced, still persists.  Should a default occur, due to netting practices, there will be some exposure to non-defaulting customer collateral.
  • No Optional Segregated or Third-Party Custodial Accounts at DCOs. The final LSOC rule does not provide customers with the option of individually segregated collateral accounts to hold customer collateral that is passed to the DCO.

The LSOC model is a one-size-fits-all approach that fails to fit all customers' needs and may call for greater complexity and cost than circumstances would otherwise require. More complexity in today's environment probably means greater regulatory oversight and involvement.  As the regulators ramp up to enforce these new regulations, FCMs and DCOs can only wait to see how these regulations will play out for their operations.

In contrast, the European Union (EU) is implementing the European Market Infrastructure Regulation (EMIR) to regulate derivatives, central counterparties and trade repositories.  The regulation will require anyone who has entered into a derivatives contract to report and risk-manage their derivative positions.  EMIR applies to any entity established in the EU that has entered into (or is a legal counterparty to) a derivatives contract, and it applies indirectly to non-EU counterparties trading with EU parties. The relevant technical standards came into force on March 15, 2013.

EMIR imposes three new requirements on those who trade derivatives:

  • Clearing.  To clear OTC derivatives that have been declared subject to the clearing obligation through an EMIR-authorized or recognized central counterparty
  • Risk Management.  To put in place certain risk management procedures for OTC derivatives transactions that are not cleared.
  • Reporting.  To report derivatives to a trade repository.

EMIR provides more flexibility than LSOC.  It is not so narrow or limited.  EMIR requires customers to be given a choice between omnibus client segregation and individual segregation.  Individual segregation allows for both transparency and protection.  Further, EMIR also allows the collateral model to be either pledge or title transfer, whereas LSOC is limited to pledge only.  Clearly, EMIR's flexibility is an advantage for customers who don't fit the LSOC model.  It's also an advantage to firms that want to offer more choices than LSOC will allow.  In closing, the EMIR model may prove to be the better approach.

China Industrial Profit Growth Slows in March

Posted: 27 Apr 2013 09:02 AM PDT

China Industrial Enterprises Total Profits were released on Saturday, from the National Bureau of Statistics.

  • Profits showed an increase of 5.3% in March from a year earlier
  • Down from a 17.2 percent pace in the first two months

The slower profit growth could be suggesting China’s key industries are still struggling with weak demand and overcapacity:

"Profits are only growing in line with sales and with problems of overcapacity and the sluggish global picture, it doesn't bode well for a speedy return to higher profit margins," said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong. "Heavy industries especially still face destocking and higher costs, but if there is a silver lining, industries catering to the consumer, like textiles, food and beverages, seem to be doing much better."

Chinese Industrial Companies' Profit Growth Slowed in March

$US160,000 for a cup of cofee. Pfft, that’s cheap.

Posted: 27 Apr 2013 08:38 AM PDT

On Thursday I posted: $US160,000 for a cup of coffee!

Using 20/20 hindsight I can now confidently proclaim that $160k was cheap.

The current bid for sitting down for a chat with Apple CEO Tim Cook over a cup of coffee is $US605,000

Proceeds are going to charity.

Enrico Letta has told the Italian president that he can form a government

Posted: 27 Apr 2013 08:33 AM PDT

An Italian official has confirmed that Enrico Letta has told President Napolitano that he can form a government.

  • Bank of Italy governor (Director General) Fabrizio Saccomanni named as economy minister
  • Former European commissioner Emma Bonino is foreign minister
  • Berlusconi’s party secretary Angelino Alfana is named as deputy PM & Interior Minister
  • The government will be sworn in on Sunday
  • Letta is expected to go before parliament to seek a vote of confidence on Monday

Reuters

Abe Aide: More Stimulus to Kick In Before Election

Posted: 27 Apr 2013 08:17 AM PDT

This article from the Wall Street Journal has a (tiny) bit more detail on the news we saw on Friday that Abe and his cabinet are to compile a 'growth strategy' before the July election. What’s also interesting in the article is where it says: “The fast pace of policy announcements is intended to keep Japanese voters engaged until national elections scheduled for July”. Could just have easily said that the fast pace of policy announcement is intended to keep the market engaged … They certainly have.

There is not much detail on what the ‘more stimulus’ to come actually is, but the article is nonetheless interesting. The Japanese upper house election is scheduled for July 11, 2013.

Abe Aide: More Stimulus to Kick In Before Election (Wall Street Journal articles are often gated, a Google news search on the headline may turn the article up somewhere else).

ADDED: Here you go – if you don’t have WSJ access, the article is also available on Fox Business: More Stimulus to Kick In Before Japanese Election

Everything you think you know about the Fed is wrong

Posted: 27 Apr 2013 08:00 AM PDT

Great weekend reading (even though the article was published during the week) from the excellent Mark Dow. He hits on sensitive points guaranteed to upset a few constantly parroted fixed views:

  • The Fed does not control the money supply.
  • QE is not "pumping cash into the stock market".
  • QE has not created hyperinflation, and there is no conspiracy to understate the inflation rate.
  • QE is not the reason we have high oil/gasoline prices.
  • QE has not debased the dollar.

Everything you think you know about the Fed is wrong


at 5:05 PM

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