The Real "Margin" Threat: $600 Trillion In Off-Exchange Derivatives Moving To Central Clearing, A Multi-Trillion Variation Margin Call, And What Collateral Will Be Used

Submitted by Tyler Durden on 06/05/2011 21:42 -0400

While the dominant topic of conversation when discussing margin hikes (or reductions) usually reverts to silver, ES (stocks) and TEN (bonds), what everyone is so far ignoring is the far more critical topic of real margin risk, in the form of roughly $600 trillion in OTC derivatives. The issue is that while the silver market (for example) is tiny by comparison, it is easy to be pushed around, and thus exchanges can easily represent the illusion that they are in control of counterparty risk (after all, that was the whole point of the recent CME essay on why they hiked silver margins 5 times in a row). Nothing could be further from the truth: where exchanges are truly at risk is when it comes to mitigating the threat of counterparty default for participants in a market that is millions of times bigger than the silver market: the interest rate and credit default swap markets. As part of Dodd-Frank, by the end of 2012, all standardised over-the-counter derivatives will have to be cleared through central counterparties. Yet currently, central clearing covers about half of $400 trillion in interest rate swaps, 20-30 percent of the $2.5 trillion commodities derivatives, and about 10 percent of $30 trillion in credit default swaps. In other words, over the next year and a half exchanges need to onboard over $200 trillion notional in various products, and in doing so, counterparites, better known as the G14 (or Group of 14 dealers that dominate derivatives trading including Bank of America-Merrill Lynch, Barclays Capital, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, RBS, Societe Generale, UBS and Wells Fargo Bank) will soon need to post billions in initial margin, and as a brand new BIS report indicates, will likely need significant extra cash to be in compliance with regulatory requirements. Not only that, but once trading on an exchange, the G14 "could face a cash shortfall in very volatile markets when daily margins are increased, triggering demands for several billions of dollars to be paid within a day." Per the BIS "These margin calls could represent as much as 13 percent of a G14 dealer's current holdings of cash and cash equivalents in the case of interest rate swaps." Below we summarize the key findings of a just released discussion by the BIS on the "Expansion of central clearing" and also present a parallel report just released by BNY ConvergEx' Nicholas Colas who independetly has been having "bad dreams" about the possibility of what the transfer to an exchange would mean in terms of collateral posting (read bank cash payouts) and overall market stability, and why a multi-trillion margin call could result in the biggest buying spree in US Treasurys... Ever.  

Summary Of Key Events In The Upcoming Week

Submitted by Tyler Durden on 06/05/2011 20:03 -0400

The week ahead brings a barrage of IP data for April from all round the world, the momentum of which will be closely examined after the sharp drops in the manufacturing business surveys last week. Expectations – both ours and the consensus – are a mixed bag, but broadly, we expect momentum to slow in April. The data will be dissected for evidence of supply chain issues – which probably should be faded given the Japanese production plans published last week – and for evidence of a broader slowdown. In addition, manufacturing orders data from Germany, Taiwan, Japan and Sweden will be watched similarly. Away from IP, the week brings a bunch of inflation prints, which are all broadly expected to show a further rise in the headline readings. Outside of the data, developments in Greece will remain on the radar screen, particularly any colour on a new package. 

 

 

 

 

 

"Escaping The Clutches Of Financial Markets" - An Essay On Europe's Debt-For-Democracy Prepackaged Bankruptcy

Submitted by Tyler Durden on 06/05/2011 19:46 -0400

In today's Europe, the people are no longer in control. Instead, politicians have become slaves to financial institutions and the markets. We are partly to blame -- and changes are urgently needed to nurse European democracy back to health.We are doing well. In fact, we're doing splendidly. The economy is booming, with 1.5 percent growth in the first quarter. We are as prosperous as we were before the crisis, which has finally been overcome. Congratulations are in order for everyone. The banks, Deutsche Bank above all, deserve particular congratulations. In the first quarter, it earned €3.5 billion ($5.1 billion) in pretax profits in its core business, and by the end of the year the bank will likely report a record €10 billion in pretax profits, its best results ever. That number is expected to rise to €11 billion or even €12 billion in two or three years. Less than three years after the peak of the crisis, it seems as if it never happened. That is true of the economy, but it also true of us as economic subjects. But is that all we are? No, we are also citizens and participants in a democratic society. As such, we have no reason to be celebrating. Instead, we ought to be sad and outraged. Democracy, after all, is not doing splendidly, or even well. It is gradually becoming a casualty of the financial crisis. 

 

 

 

 

Paulson's Flagship Fund Down 6% In May, Down Over 13% For The Year Following Latest Sino-Forest Debacle

Submitted by Tyler Durden on 06/05/2011 18:50 -0400

The halo of invincibility surrounding the world's largest hedge fund/smallest mutual fund (because last we checked a hedge fund that is $37 billion in size has about the same turn radius as Vanguard), Paulson & Co., is starting to wear thin. According to the FT's Sam Jones, Paulson's flagship fund, the $9 billion Advantage Fund, dropped "close to 6 per cent in May, echoing losses across the industry." May’s loss means that in the year to date, the $9bn Paulson & Co Advantage Plus fund is down 7.6 per cent. The average hedge fund lost 1.39 per cent over the month according to preliminary data from Hedge Fund Research, with “event-driven” strategies such as that operated by Paulson & Co’s main fund down on average 0.62 per cent.  Investors in the firm's other fund have little cause for cheer: "The Paulson & Co Gold fund dropped 6.39 per cent in May, erasing much of its 8.5 per cent April gain. The fund is up 0.9 per cent in the year. Paulson & Co is the world’s largest non-sovereign gold investor. Performance was better for the firm’s other funds. Its Credit fund was down 0.05 per cent for May, while the Recovery fund, which is geared to the prospects of the US economy, dropped 0.69 per cent. Paulson & Co declined to comment." Naturally, Paulson, who once upon a time saw Bank of America, soon to be embroiled in multi-billion dollar litigation to settle the fact that an unimaginable number of its mortgages are fraudulent through and through (thank you Agent Orange), would hit $30/share by the end of 2011 and soon will need a reverse stock split to get there, continues to be bullish: "In the firm’s most recent correspondence with investors Mr Paulson said difficulties for US banks had been a particular drag on his portfolios but that he remained optimistic...The US stock market could rally as much as 40 per cent from its first quarter level this year, he said." Sorry, John, not without QE 7 it won't.

Victory For Social Democrats - Follow Portugal's Irrelevant Election Results Live

Submitted by Tyler Durden on 06/05/2011 15:43 -0400

As expected, the Portuguese elections appear to be a massive victory for the Social Democrats' Pedro Passos Coelho, who is now guaranteed to replace Socrates as Portugal's next PM. The latest results indicate a 41.08% lead for the PSD compared to 28.77% for the PS. What will this change in terms of national policies for this latest IMF vassal state? Absolutely nothing (as discussed earlier). Follow the latest district by district data live here. 

 

 

 

 

 

 

 

 

 

Golden State is poised to outlaw gold prospecting

 

Gene Arensberg: Tired of 'dire'?

 

 

Jim Sinclair’s Commentary

This has the Formula written all over it.

US house price fall ‘beats Great Depression slide’ By Stephen Foley
The ailing US housing market passed a grim milestone in the first quarter of this year, posting a further deterioration that means the fall in house prices is now greater than that suffered during the Great Depression.
The brief recovery in prices in 2009, spurred by government aid to first-time buyers, has now been entirely snuffed out, and the average American home now costs 33 per cent less than it did at the peak of the housing bubble in 2007. The peak-to-trough fall in house prices in the 1930s Depression was 31 per cent – and prices took 19 years to recover after that downturn.
The latest Case-Shiller house price index was just one of a slew of disappointing economic data from the US yesterday, which suggested ebbing confidence in the recovery of the world’s largest economy. The Chicago PMI manufacturing index showed a sharp slowdown in the pace of expansion in May, missing Wall Street forecasts and sending the index to its lowest since November 2009.
And in the latest Conference Board consumer confidence survey more people expressed uncertainty over their future economic prospects. The confidence index fell unexpectedly to 60.8 from a revised 66.0, when economists had expected it to rise to 67.0. Falling house prices and negative equity combined with high petrol and food prices and a still-weak jobs market to raise consumers’ fears for the future.
Thomas Di Galoma, the managing director of government securities at Oppenheimer & Co, said: "Based on the weakness in housing prices, Chicago PMI and consumer confidence, it appears as though the economy could be headed for a double dip, especially as federal and state spending slows rapidly over the next six months."
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UK economic recovery on the verge of collapse 

By David Prosser, Business Editor
Saturday, 4 June 2011
The prospect of Britain’s economy moving decisively into recovery mode were dealt another blow yesterday, with two new reports highlighting mounting difficulties.
Markit, the analyst that compiles the closely watched monthly surveys of activity in the services, manufacturing and construction sectors, said its latest research suggested the UK economy was on target to record growth of just 0.3 per cent during the second quarter of the year, even more disappointing than the first quarter’s 0.5 per cent.
Figures published by Markit yesterday showed that the services sector, which accounts for more than two-thirds of Britain’s economy, continued to grow last month, but at a muchslower rate. The purchasing managers at services companies, who Markit surveys to compile a picture of activity in the sector, said their businesses expanded in May at their slowest rate for three months.
The downbeat services surveyfollows the depressed picture Markit revealed of the manufacturing sector earlier this week, with economists warning that the extra bank holidays last month could not fully account for the setbacks.
Chris Williamson, Markit’s chief economist, warned that the Bank of England’s most recent forecasts for economic performance this year, which had to be downgraded from its earlier estimates, might have to be cut once again. "There is an increased risk that growth in 2011 will fall below the 1.8 per cent expansion forecast in the latest Bank of England forecast," he said.
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