Conversation Starter

GFI Group Inc. Becomes JLN IR & MarketsWiki Sponsor

John Lothian News is pleased to announce GFI Group Inc. has become a Partner level sponsor of JLN Interest Rates and a Friend level sponsor of MarketsWiki and MarketsReformWiki.

“We are pleased to begin an advertising sponsorship with John Lothian News, MarketsWiki and MarketsReformWiki. All are great news and reference sources for the financial services industry and we look forward to participating in the coming year,” said Helena Jarabakova, vice president and head of marketing for GFI.

“We are grateful for the support of GFI,” said Christine Nielsen, managing editor of John Lothian News and editor of JLN IR. “There is so much going on in the interest rate sector in terms of regulation and market development, and GFI is a part of it. We look forward to working closely with GFI in the coming year.”

About GFI Group Inc.

GFI Group Inc. (NYSE: “GFIG”) is a leading provider of wholesale brokerage services, clearing services, electronic execution and trading support products for global financial markets. GFI Group Inc. provides brokerage services, market data, trading platform and analytics software products to institutional clients in markets for a range of fixed income, financial, equity and commodity instruments.

Headquartered in New York, GFI was founded in 1987 and employs more than 2,200 people with additional offices in London, Paris, Nyon, Hong Kong, Seoul, Tokyo, Singapore, Sydney, Cape Town, Santiago, Bogota, Dubai, Dublin, Tel Aviv, Calgary, Los Angeles and Sugar Land (TX). GFI Group Inc. provides services and products to over 2,600 institutional clients, including leading investment and commercial banks, corporations, insurance companies and hedge funds. Its brands include GFI(SM), GFInet, CreditMatch, GFI ForexMatch, EnergyMatch, FENICS, Starsupply, Amerex, Trayport and Kyte.

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– Note: Christine Nielsen is starting 2012 with a holiday. Nicole V. Rohr, JLN web content editor, was the editor for this newsletter.

Lead Stories

Fed Forecasts Pose Risk For Soft Interest-Rate Futures Volume
NASDAQ
Trading in futures contracts linked to U.S. interest rates could decline following a decision by the Federal Reserve to publish an explicit timetable for when it expects to take action.
http://jlne.ws/yqRmKR

Fed Boosts Transparency With Decision to Reveal Rate Forecasts
Bloomberg Businessweek
A decision to reveal forecasts for the federal funds rate starting this month represents the biggest step toward openness since Bernanke took office in 2006 promising greater transparency, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. and a former Fed board economist. The central bank didn’t even start announcing changes in interest rates until 1994.
http://jlne.ws/zv8jEs

Q+A: Why the Fed is publishing interest rate forecasts
Reuters
The Federal Reserve will begin this month to publish policymakers’ forecasts for interest rates, including when interest rates, which are currently near zero, will rise. The move, announced on Tuesday, could give the sluggish economic recovery a bit more lift by better aligning bets in financial markets with the consensus view at the central bank.
http://jlne.ws/x6hHQh

The Fed’s new openness policy will create confusion, not clarity
Christian Science Monitor
We believe Fed officials publishing their expectations for the timing of the first rate increase could increase market volatility as differences between the members’ economic forecasts and actual figures that do not impact the projected policy path may confuse market participants. The Fed acknowledges these risks but views these concerns as “manageable.” We view the step as making the Fed more transparent while not doing much to improve clarity.
http://jlne.ws/zavZtp

Fresh Data Damp Hopes for Europe
WSJ.com
Doubts over Europe’s strategy to overcome its debt woes re-emerged Thursday amid fresh evidence that the region is in recession, reinforced by concerns about the fragility of its banks. With investors worried about the government funding needs this year—euro-zone governments will need to refinance more than 1 trillion euros (about $1.29 trillion) of maturing short-term and long-term debt in 2012—yields on Italian 10-year bonds crept above 7% and Europe’s bailout fund had to offer higher interest rates than in the past to place 3 billion euros of debt.
http://jlne.ws/wRBeyc

Euro hit as investors fret over Europe’s banks
Yahoo! News
For a second day running, market concern has centered on the state of the banks following UniCredit’s announcement Wednesday that it was selling new shares at a 69 percent discount to Tuesday’s closing price. Renewed fears over Europe’s shaky banking sector sent the euro skidding to a 15-month low against the dollar Thursday, while stock markets failed to get much of a boost from another round of upbeat U.S. economic data
http://jlne.ws/x5u4dG

European Stocks Decline on Bank-Capital Concern; UniCredit Sinks
Bloomberg Businessweek
European stocks declined for a second day as concern that the region’s banks will have to raise capital overshadowed a report showing that U.S. companies added more workers to their payrolls than economists had predicted. UniCredit SpA, which announced a rights offer at a 43 percent discount yesterday, slumped to a 19-year low. Societe Generale SA dropped 4.5 percent after announcing it will cut corporate- and investment-banking staff.
http://jlne.ws/wqnl5x

Eurozone crisis, MF Global chill trading at CME Group
Chicago Tribune
CME Group and IntercontinentalExchange said on Wednesday that trading volume dropped last month, which analysts attributed to MF Global’s collapse and Europe’s debt crisis chilling trading in U.S. futures markets. Chicago-based CME, the biggest U.S. futures exchange operator, said trading dropped 9 percent last month to an average of 9.6 million contracts a day, taking the shine off a record-setting year.
http://jlne.ws/wumvvI

Hungary ready to discuss IMF loan: report
MarketWatch
Hungary on Thursday indicated it was ready to negotiate a standby loan with the International Monetary Fund without setting preconditions and was also open to discussing a recent law that critics say compromises the independence of the country’s central bank, The Wall Street Journal reported. “The government is aware of how severe the situation is and what’s at stake at the talks with the IMF,” said Tamas Fellegi, the country’s chief negotiator with the Fund.
http://jlne.ws/A8P4yr

Consumer bureau to wield new powers, but challenges loom
CNN Money
Obama on Wednesday made a recess appointment of former Ohio attorney general Richard Cordray to be the first director of the Consumer Financial Protection Bureau. With President Obama’s recess appointment of a new chief to run the consumer bureau, the agency can flex new powers regulating financial products from non-banks — including student loan providers, debt collectors, payday lenders, and mortgage originators and servicers.
http://jlne.ws/z6Mnmj

Obama Chooses Politics Over Principle in Naming Consumer Bureau Head: View
Bloomberg
President Barack Obama bypassed the U.S. Senate and summarily installed Richard Cordray, the former Ohio attorney general, as director of the Consumer Financial Protection Bureau yesterday. Hours later, Obama filled three vacancies on the National Labor Relations Board, possibly the only agency Republicans dislike more than the consumer bureau.
http://jlne.ws/zNdEA1

Cordray: Consumer agency to target shadow banks
Reuters
In his first speech as head of the Consumer Financial Protection Bureau, Richard Cordray said his agency will immediately begin overseeing lenders outside the banking industry, and will take a tough stance against any financial players that break the law.
http://jlne.ws/xGC9xw

The Use of ABX Derivatives in Credit Crisis Litigation
NERA
Since 2007, the losses and write-downs resulting from the credit crisis have reached over $2 trillion worldwide. As the losses have mounted, securities litigation has followed and over 450 related securities cases, both class actions and others, have been filed. Of particular interest to the litigation are a set of credit default swaps (CDS), or credit derivatives, known as the ABX indices (ABX).
http://jlne.ws/xqIu3x

Events

Fixed Income Markets 2012
January 24, 2012
Tabb Forum Looks At Changes Ahead And Staying Ahead In Fixed Incomes
http://jlne.ws/snQ3VO

Treasury Futures: Using International Fixed-Income and Money Market Spreads
January 31, 2012
The IFM Instructs On Using Fixed Income And Money Market Spreads
http://jlne.ws/u7MgUK

Eurodollar (LIBOR): Building Blocks for Interest Rate Swaps
January 26, 2012
The Institute for Financial Markets
http://jlne.ws/woUeXp

National Association of Home Builders’ Show
February 10, 2012
Special Session With Fed’s Bernanke Open To All Registered Attendees
http://jlne.ws/tEcqjW

Economic News

The Fed’s Advice on the Housing Crisis
NYTimes.com
The Federal Reserve tried Wednesday to stir interest among policy makers in the problems afflicting the housing market, sending a white paper to Congress outlining suggestions for easing those problems.
http://jlne.ws/xGhBLf

Treasury prices fall after auto sales and jobs data point to improving economy
The Washington Post
Americans bought about 10 percent more cars in 2011 than in 2010 and analysts expect the momentum to continue in 2012. Also the Labor Department reported that unemployment rates fell in three-quarters of large U.S. cities in November. The improved economic news sent the benchmark U.S. Treasury note down 31.2 cents for every $100 invested on Wednesday. Its yield, which trades in the opposite direction, rose to 1.98 percent from 1.95 percent Tuesday.
http://jlne.ws/xiMBPI

Number of people seeking unemployment aid falls to 372,000, signaling stronger job market
The Washington Post
The number of people seeking unemployment benefits fell further last week, ending the year on a three-month run of declines that point to stronger hiring in 2012. Weekly applications dropped by 15,000 to a seasonally adjusted 372,000 last week, the Labor Department said. That’s 11 percent lower than the same time last year and a positive sign ahead of Friday’s important read on December job growth.
http://jlne.ws/zNyIj3

Manufacturing in U.S. Expands by Most in Six Months
Bloomberg Businessweek
U.S. factories expanded in December at the fastest pace in six months, adding to evidence manufacturing is improving from India to the U.K. entering 2012.
http://jlne.ws/wt7kGW

New Pentagon defense strategy puts more focus on Asia
Yahoo! News
President Barack Obama unveiled adefense strategy on Thursday that calls for greater U.S. military presence in Asia and envisions cutting troops in Europe as thePentagon seeks to reduce spending by nearly half a trillion dollars after a decade of war.
http://jlne.ws/y75QHn

Exchanges, Clearing Houses & MTFs

LCH.Clearnet appoints Lisa Rosen as Group Head of Compliance and Public Affairs
Press Release
LCH.Clearnet Group Ltd (LCH.Clearnet) has appointed Lisa Rosen as Group Head of Compliance and Public Affairs. Previously, Lisa was Managing Director, Global Head of Regulatory Affairs at Barclays Capital in London. In this newly created role, Lisa will oversee LCH.Clearnet’s regulatory and lobbying activities. She will report to Christophe Hémon, Group COO.
http://jlne.ws/zFnSVu

OCC Cleared Contract Volume Reached 4.6 Billion Contracts in 2011 for Record Year
MarketWatch
OCC announced today that total cleared contract volume in 2011 reached 4,600,955,949 contracts, a 17 percent increase over the 2010 volume of 3,925,686,805 contracts. 2011 marked the ninth consecutive year of record volume for OCC and the first time cleared contract volume surpassed 4 billion contracts.
http://jlne.ws/wlLcpc

Firms & Banks

UniCredit selloff highlights bank sector woes
MarketWatch
Shares in UniCredit SpA have tumbled after the Italian lender announced it would sell shares at a massive discount, shaking investor confidence in the health of European banks.
http://jlne.ws/Abd9z8

SocGen Leads French Bank Shares Lower Before Nation’s Debt Sale
Bloomberg Businessweek
Societe Generale SA, France’s second- largest bank, fell as much as 5.4 percent in Paris trading, leading declines among the country’s lenders as the government plans its first debt sale of 2012.
http://jlne.ws/z4y4PB

SNB Chief to Stay On Amid Deals Controversy
WSJ.com
Swiss National Bank President Philipp Hildebrand Thursday sought to defuse a controversy over currency transactions he and his wife made last year, asserting that he broke no rules and would not resign but admitting that the incident had raised ethical questions.
http://jlne.ws/AEx3iM

Gross Backs Away From New Normal After Missing Bond Rally
Bloomberg Businessweek
Bill Gross is backing away from Pacific Investment Management Co.’s outlook for a “new normal” after lagging behind the majority of his peers during the biggest bond-market rally in nine years. The period of muted growth in developed economies, high unemployment and “relatively orderly” deleveraging that Mohamed El-Erian, who shares the title of chief investment officer with Gross, coined in the aftermath of the 2008 financial crisis appears to be morphing into a world of credit and zero-bound interest-rate risk, said Gross, the founder of Pimco and manager of the world’s biggest bond fund.
http://jlne.ws/A1siHm

Barclays Sets Pricing On Sterling Covered Bond, Swaps +1.90 Area
NASDAQ
Barclays Bank PLC (BCS) has set pricing on its sterling- denominated, benchmark-sized, 10-year covered bond in the area of 190 basis points over midswaps, one of the banks running the deal said Thursday.
http://jlne.ws/AbuoeE

Blackstone reaches megafundraising finish line
Yahoo! News
Blackstone Group LP will conclude fundraising for its latest buyout fund in January, raising just over $16 billion, three people familiar with the matter said on Wednesday, in a 4-year process challenged by the global financial crisis.
http://jlne.ws/wjSfcm

Auctions & Statistics

French bond auction fails to dissuade downgrade worries
CNN Money
The French auction of about € 7.9 billion on bonds included more than € 4 billion worth of 10-year bonds, with a yield of 3.29% and a bid-to-cover ratio of 1.64%. That’s not too shabby, considering the 10-year is trading at 3.32%, but anxiety continues to dog European bond markets.
http://jlne.ws/AeagQk

Market Morning: Looking Lower
The Street
France sold mostly 10-year notes in the bond auction Thursday. Investors asked for an interest rate of 3.29% to lend France €4.02 billion in 10-year money, up from 3.18% in December, according to The Associated Press. Demand was strong at the auction.
http://jlne.ws/Ar36r8

Bunds up, focus turns to Italian, Spanish auctions
Reuters
German Bunds rallied on Thursday and French paper reversed earlier losses after France drew solid demand at an auction of almost 8 billion euros of bonds. However, bonds issued by Italy, Spain and Belgium were under pressure ahead of Spanish and Italian auctions next week which are seen as their first major financing tests of the year and Bunds may find further support ahead of them.
http://jlne.ws/xVfbfM

Regulators

New Fed voters make weaker U.S. dollar likely for 2012 (UUP, AUS, BZF)
NASDAQ
The three incoming members of the Federal Reserve Open Market Committee are much stronger advocates of monetary measures to stimulate the US economy, almost ensuring that a third round of quantitative easing is on the way. If so, look for the US dollar to go on the defensive.
http://jlne.ws/wNpwOb

Geithner plans Asia trip to discuss Iran
UPI.com
U.S. Treasury Secretary Timothy Geithner will travel to Asia to discuss pressuring Iran to rethink its alleged nuclear weapons program, the department said.
http://jlne.ws/AAgiwB

A New Diversity Monitor for the S.E.C.
NYTimes.com
A provision of the Dodd-Frank Act aimed at bringing more women and minorities to the male-dominated world of finance is moving one step closer to being implemented, after the Securities and Exchange Commission announced this week that it had named Pamela A. Gibbs to head its recently created Office of Minority and Women Inclusion.
http://jlne.ws/xA6Her

OTC

AMR shares to trade over the counter
Yahoo! News
American Airlines parent AMR Corp., whose shares are being removed from the New York Stock Exchange, says the stock will be available on over-the-counter markets beginning Thursday. It will trade on the OTCQB market under the ticker symbol “AAMRQ,” the company said.
http://jlne.ws/xBjWPs

Simba Energy Inc. Joins OTCQX
MarketWatch
OTC Markets Group Inc. (otcqx:OTCM), the financial information and technology services company that provides the world’s largest electronic marketplace for broker-dealers to trade unlisted stocks, announced that Simba Energy Inc. (otcqx:SMBZF)(tsx.v:SMB) is now trading on the highest tier of the OTC market, OTCQX®. Simba Energy is an oil and gas exploration company focused on overlooked and under explored basins in Africa.
http://jlne.ws/AE2jnQ

Global News

Brazil Suffers Assault on Bank Integrity With Tombini Rate Cuts
Businessweek
Brazilian central bank board member Carlos Hamilton so disagreed with a surprise interest-rate cut in August that he slammed phones and stomped through hallways, according to three bank officials familiar with his reaction.
http://jlne.ws/xyzurs

Treasuries Advance as Europe’s Debt Crisis Boosts Demand for Safe Assets
Bloomberg
Treasury 30-year bonds rose for the first time in three days as an increase in borrowing costs in France and Hungary added to concern the region’s debt crisis is spreading, boosting demand for the safest securities.
http://jlne.ws/zdqh1l

Hungary open to discuss standby deal with IMF
Yahoo! News
Hungary’s top financial negotiator said his nation is open to working out a standby loan with the International Monetary Fund but insisted Thursday that Hungary was still able to finance its debts from the markets. That situation could change soon. Hungary’s debt management agency sold less than the full amount on offer at an auction Thursday of 12-month Treasury bills, with the average yield rising to 9.96 percent — more than 2 percentage points higher than at a similar auction Dec. 22. That is also significantly higher than the 7 percent level that forced three other European nations to seek bailouts.
http://jlne.ws/zfqYNi

India’s Monetary Cycle Has Peaked: Deputy Central Banker
CNBC
The deputy governor of India’s central bank said the equation between growth and inflation in the country has become much more balanced in the last few months and indicated that interest rates were unlikely to rise further, though he stopped short of saying whether the next move would be a rate cut.
http://jlne.ws/yscNAz

Swiss central bank chief to explain dollar deals
Yahoo! News
Switzerland’s central bank chief was breaking his silence Thursday over a private currency deal that appeared to net his family big profits at a time when he was spearheading efforts to lower the value of the Swiss franc. In a bid to counter a national uproar, the Swiss National Bank said its President Philipp Hildebrand would hold a news conference in Zurich to discuss “financial transactions and events of recent days.”
http://jlne.ws/wBeBpO

Sweden Shows Europe How to Cut Debt, Weather the Recession: View
Businessweek
Sweden faces a difficult year, like every other European economy, but unlike the rest of the European Union, it’s equipped to cope. There are lessons here, especially for the EU’s other non-euro countries. Scandinavia’s biggest economy will see growth slow to less than 1 percent in 2012, down from an impressive 4.5 percent in 2011, according to the National Institute of Economic Research. Sweden relies heavily on exports to the rest of Europe, and the EU’s protracted economic crisis will set it back.
http://jlne.ws/yqESFg

Will China Come in for a Hard or Soft Landing?
Morningstar
Many issues have been causing concern for global investors over the past few months. Front and center is the never-ending European debt crisis. The situation in Greece is not improving, and lately investors have been dumping the bonds of even those countries previously considered to be sheltered from the storm, such as France. In this climate, China’s slowing pace of growth has not been grabbing as many headlines. But it remains a major issue for managers trying to position their portfolios.
http://jlne.ws/xZ3IKT

Launched on March 21, 2011 with 10 clearing member firms, New York Portfolio Clearing (NYPC) – a joint venture of The Depository Trust & Clearing Corporation (DTCC) and NYSE Euronext – clears U.S. interest rate futures and cross-margins such positions against fixed income cash instruments through DTCC’s subsidiary, the Fixed Income Clearing Corporation (FICC). Ira J. Krulik, chief operating officer of NYPC spoke this week with JLN Managing Editor Christine Nielsen. He shared what he believes are the advantages of NYPC’s risk management, “one-pot” cross-margining and clearance operations and its settlement efficiencies, in addition to his thoughts on where the NYPC may be headed from here.

Takeaways:

• Already, there are 11 approved clearing members, and several more in the pipeline.
• NYPC hopes to add options on futures by the end of this year.
• Locked-in delivery makes the process seamless.

 1) How did you come to be at the NYPC?

Ira Krulik: After over 30 years in the futures industry, I was approached at the 2010 annual Futures Industry Association (FIA) conference about my interest in the new venture. Once I understood who the parent organizations were and what they were planning to do, the concept became more intriguing. They were giving clients additional choice in the marketplace with a real value-add attached. Upon returning from the conference, I had the opportunity to meet with Walt Lukken, who had recently been named CEO of NYPC; but I spoke with my most important counsel, Mrs. Krulik, about the opportunity and she said, ‘Go for it!’

Press Release
20 April 2011

LCH.Clearnet Limited (LCH.Clearnet) has enhanced its market leading interest rate swap (IRS) clearing service, SwapClear, with the successful implementation of Murex’s world-class capital markets platform MX.3. The technology, which has been adapted by LCH.Clearnet and Murex, replaces a series of legacy systems and provides enhanced risk management capabilities.

The enhanced solution can handle 25,000 IRS trade sides per hour and a total portfolio of 4 million trade sides, doubling SwapClear’s previous capacity. The system has been designed to scale to 10 million trade sides in anticipation of global market developments in centralised clearing.

SwapClear has been the world’s leading OTC IRS clearing service for the past decade and, as the global regulatory landscape changes, is committed to staying at the forefront of OTC derivatives clearing. This successful customisation of Murex’s established derivatives trading and processing platform has provided LCH.Clearnet with the flexibility, scalability and performance to continue to lead the way in bringing further products and services to centralised clearing.

“This go-live with the most experienced clearing house in the OTC space is a validation of our technical capability and a proof of our strong commitment to assist our client base managing ongoing market shifts”, adds Maroun Eddé, CEO of Murex.  “We position our platform at the heart of the trade life cycle management and risk management processes of an enterprise, which explains why a native management of OTC clearing is so natural and important to us”.

Michael Davie, CEO of SwapClear said: “SwapClear currently offers the most comprehensive range of products to the cleared OTC IRS market. Our customised Murex platform will make it quicker and easier for us to launch new products and services to end-user clients and members. It will facilitate faster and more comprehensive risk management which is critical as OTC markets move to more pervasive adoption of centralised clearing. We’d like to thank Murex for their excellent partnership and look forward to leveraging this investment to provide more and better solutions for clients and members alike”.

Press Release – February. 22, 2011

LCH.Clearnet Ltd (LCH.Clearnet), the world’s leading independent clearing house, will launch its SwapClear Futures Commission Merchant (FCM) service for U.S. clients on March 8, 2011, as all regulatory requirements are now complete. LCH.Clearnet has been a CFTC registered Derivatives Clearing Organization clearing OTC interest rate swaps (IRS) since 2001 and, in 2010, cleared over 120,000 trades involving U.S counterparties, with a notional value of over $64 trillion.

U.S. customers will access LCH.Clearnet’s SwapClear service through a U.S.-based FCM of their choice.  This is an important milestone in SwapClear’s supporting compliance by U.S. customers with the range of provisions foreseen within the terms of the Dodd-Frank Act.  SwapClear hereby offers end-user clients the centralized clearing of an unparalleled range of OTC IRS via the well-established FCM network under CFTC regulation.

“SwapClear sets the standard globally for OTC clearing,” said Floyd Converse, Head of U.S. SwapClear Sales and Marketing. “Beginning on March 8, U.S. clients will be able to access SwapClear’s unique expertise and product range within the security of the familiar FCM framework.”

The SwapClear FCM model will offer U.S. customers several key benefits, including:

    * Reduced counterparty risk
    * Default protection
    * Proven default management expertise
    * Portability of client collateral and positions
    * Initial margin collateral held solely in the U.S. and fully subject to U.S. law and the CEA

In addition, SwapClear’s U.S. customers will benefit from the service’s broad product range, which covers over 90% of the “plain vanilla” IRS market, and which will be expanded in 2011 to cover U.S. dollar denominated amortizing swaps. SwapClear currently clears trades in 14 currencies and tenors out to 50 years.

Established more than 11 years ago, SwapClear is the only truly global clearing service for IRS.  Since launch in 1999, it has cleared close to 1.5 million OTC IRS trades, approximately 35% of which are U.S. dollar denominated.  SwapClear currently has 37 clearing members and its portfolio contains 850,000 trades with a notional value in excess of $252 trillion, down from $291 trillion as a result of terminating $39 trillion cleared IRS transactions through on-going compression.  It is the only OTC clearing service to have successfully handled a significant OTC default, when it resolved Lehman Brothers’ $9 trillion IRS default in 2008. In that instance, SwapClear’s default management process ensured that more than 66,000 trades in 5 currencies were hedged and auctioned to other clearing members. SwapClear’s process resulted in no loss to any market participants.

In June 2010, following extensive industry consultation, LCH.Clearnet became the first derivatives clearinghouse in the world to use overnight index swap (OIS) rate curves to discount IRS.  This important step not only ensured the highest standards of risk management within a CCP; it has also increased certainty and transparency in the interest rate swap market more generally.  This type of industry thought leadership was recognized by Risk Magazine in naming LCH.Clearnet 2011 Clearing House of the Year in its Risk Awards. 

About LCH.Clearnet

LCH.Clearnet (then The London Produce Clearing House Limited) began clearing commodity futures in 1888.  Today it is the leading independent clearing house group, serving major international exchanges and platforms, as well as a range of OTC markets.  It clears a broad range of asset classes including: securities, exchange traded derivatives, energy, freight, interest rate swaps and euro and sterling denominated bonds and repos; and  works closely with market participants and exchanges to identify and develop clearing services for new asset classes.

A clearing house sits in the middle of a trade, assuming the counterparty risk involved when two parties (or members) trade.  When the trade is registered with a clearing house, it becomes the legal counterparty to the trade, ensuring the financial performance; if one of the parties fails, the clearing house steps in.  By assuming the counterparty risk, the clearing house underpins many important financial markets, reducing risk, facilitating trading and increasing confidence within the market.

Initial and variation margin (both collateral) is collected from clearing members; should they fail, this margin is used to fulfill their obligations.  The amount of margin is decided by the clearing house’s highly experienced risk management teams, who assess a member’s positions and market risk on a daily basis;  in IRS, 6 times intraday.  Both the soundness of the risk management approach and the resilience of its systems have been proven in recent times.

LCH.Clearnet is regulated or overseen by the national securities regulator and/or central bank in each jurisdiction from which it operates.

Press Release
London, January 25th, 2011 – Newedge, a global leader in multi-asset brokerage and clearing, announces its appointment by Aspect Capital Limited, as swap counterparty to the Aspect Diversified Trends Fund, a Dublin domiciled UCITs-compliant fund with daily liquidity.

Newedge Group’s UCITS III servicing capability offers comprehensive solutions to fund managers looking to launch regulated products such as UCITS-compliant investment funds. Funds using the Newedge service offering are able to use total return swaps (TRS) to create a synthetic exposure to a financial index, catering specifically for the needs of liquid systematic CTA & Global Macro investment strategies. This is in addition to the extensive synthetic prime brokerage services already offered by Newedge to UCITS fund structures in the equity long-short space.

By using an open-architecture approach to working with other service providers, including administrators and custodians, Newedge provides its clients with the maximum flexibility to structure products to suit their business model.

Andrew Dollery, Origination & Structuring for UCITS Funds at Newedge said, “The functionality of the Newedge UCITS III service offering is a significant advantage in providing innovation and value added services to fund managers who are looking to diversify their product range and investor base. Working with leading fund managers specialized in alternative investment strategies such as Aspect Capital Management is further validation that our strategy is adding value to managers seeking to offer UCITS investment solutions.”

About Newedge Group

Newedge, a 50/50 joint venture between Société Générale and Crédit Agricole CIB, is a major force in global multi-asset brokerage business and amongst the world leaders in the execution and clearing of listed derivative products. With a presence in more than 20 locations in 17 countries, Newedge offers a full range of clearing and execution services covering options and futures contracts for financial products and commodities, as well as for money market instruments, bonds, FX, equities, and commodities on OTC markets. Newedge provides a range of value added services, including prime brokerage, asset financing, an electronic platform for trading and order routing, cross margining, and the centralized reporting of client portfolios. Newedge, which primarily serves institutional clients, provides access to more than 85 exchanges. Newedge’s 2,800+ employees form a close-knit, multinational team that can innovatively respond to its clients in fast-moving markets. For more information, visit www.newedge.com (012511N02)

By Kevin McPartland, Senior Analyst, TABB Group

Whatever you think of credit default swaps after the financial crisis and global recession that ensued, they did have some worth: those that bought them were left protected against what turned out to be a real risk – “credit events.”

So what if we were to take their intrinsic value and lay that over what’s rapidly developing in the OTC derivatives market today?

To wit: OTC derivatives clearinghouses act as an outsourced risk management department for market participants who use them. Rather than managing the counterparty risk internally via collateral and other mechanisms, clearinghouses mitigate counterparty risk for its members via margin requirements, guarantee funds and other tools in their decades-old toolkit.

Clearinghouses, however, though built with the sole purpose of reducing risk, do not completely eliminate risk for OTC derivative transactions. By the nature of the clearinghouse model, clearinghouse member firms are still left exposed (although less so) to other member firms. But perhaps even more importantly, members are exposed to the clearinghouse itself. What if the clearinghouse fails? To that point, the New York Times recently published an article that called clearinghouses “the next too-big-to-fail.”

The last few years (hopefully) have taught us to never say never. Regardless of how unlikely they are to occur, systemically risky events can’t be ignored and must be mitigated. So although clearinghouses are built to never fail (they are not investment banks after all, and don’t seek to take on risk), an economic calamity no one has yet to think of could indeed cause the unthinkable.

So what’s a market participant to do? Dealers today use credit value adjustments (CVAs) to hedge the risk that their counterparty in a bilateral OTC derivative deal fails by adding a few basis points to the cost of the trade for the buyer. Among other things, this CVA calculation takes into account the current CDS spread for the counterparty to predict the potential loss due to counterparty risk.

But theoretically, this practice is unnecessary in the centrally-cleared world since there is no risk that a counterparty will default. But that’s not really the case. Enter the CDS on CCP.

I’m no financial engineer, quant, PhD or trader, but I’m quite sure one of the aforementioned individuals can find a way to create an instrument to hedge the risk of a clearinghouse default. So why not a CDS on the CCPs? We already have CDS on U.S. Treasuries (the ultimate too-big-to-fail, right?) so it only seems logical. Maybe even a CDS CCP Index product that hedges against the risk of any CCP in the world failing.

Alas, the idea creates a huge paradox however – who’s going to clear them?

See the entire report here: 
Reinventing the Credit Default Swap: CDS on CCP (Login required)

Opening Remarks: Public Policy Symposium on OTC Derviatives Clearing

Thank you, Ed. Good morning. On behalf of the Federal Reserve Bank of Chicago, I would like to thank you for joining us today at this Public Policy Symposium on OTC Derivatives Clearing. I’m delighted to be here to welcome you and provide some brief comments that, I hope, will help frame the discussion of the important issues related to the central clearing of over-the-counter (OTC) derivatives.

The Chicago Fed has had a long-standing interest in clearing and settlement issues. In particular, we have an obvious interest, since Chicago is home to the Chicago Mercantile Exchange and its clearinghouse, The Options Clearing Corporation and ICE Clear U.S. We are proud of our role in producing cutting edge research relating to clearing and settlement and facilitating dialogue among academics, policymakers and financial industry participants.

In 1996, we co-sponsored a conference on derivatives and public policy at which the Nobel laureate Merton Miller explored the competitive boundary between exchange-traded and over-the-counter derivatives and the impact of new technologies that were then changing the financial landscape. Miller recognized even then how clearing and settlement functions were central to the operation of financial markets.

Many of you will no doubt recall that we co-sponsored a conference on central counterparty clearing with the European Central Bank in 2006. That event, like today’s, brought together industry leaders, policymakers and academics in a multidisciplinary discussion of key legal, risk-management and public policy issues relating to central counterparty clearing. In addition, the Chicago Fed has actively participated in the ongoing work of the OTC Derivatives Regulators’ Forum since its formation in 2009.

We recently experienced the worst financial crisis since the 1930s. As we emerge slowly from that crisis, we have become engaged in a vigorous debate on how best to address the major weaknesses in our financial regulatory framework—and the issue of centralized clearing of derivatives has taken a prominent role. As you all know, the Dodd-Frank bill seeks to address these weaknesses and put forward a structure that will help prevent another crisis of this magnitude.

Notwithstanding the amount of work that has already been completed, making financial reform work will not be easy. We face complex problems that will require a comprehensive, multipronged approach. But make no mistake; reform is critical for ensuring our long-term economic and financial stability. And much of that reform will address the implications of the increasing interconnectedness of the global payment, clearing and settlement infrastructure that supports financial market operations today. In a 2008 report titled The Interdependencies of Payment and Settlement Systems, the Committee on Payment and Settlement Systems said:

The development of tighter interdependencies has helped to strengthen the global payment and settlement infrastructure by reducing several sources of cost and risk. Yet, tightening interdependencies have also increased the potential for disruptions to spread quickly and widely across multiple systems and markets.[1]

The clearing of derivatives through central counterparties, or CCPs, is one important manifestation of the interdependencies in the financial system. CCPs interpose themselves between the counterparties to financial contracts by becoming the common buyer to each seller and the seller to each buyer. The centralization of clearing functions at the clearinghouse has obvious benefits, including multilateral netting and the centralization of the information needed to manage risk exposures in a robust manner. However, policymakers also recognize that central clearing concentrates risk and responsibility for risk management in the CCP.

This means the clearinghouse itself becomes a potential single point of failure. Accordingly, adequate capital, good risk management and prudential oversight are essential for such clearing facilities. The events of the recent financial crisis have certainly reinforced our recognition of the importance of these post-trade institutions.

As you know, the central clearing of over-the-counter derivatives is a core feature of the legislation recently enacted to reform financial market regulation—a development that has important implications for market structure. Interest in this topic isn’t merely local or even national—in fact, it’s global, as is evident from the attendance at this event.

Today’s symposium has brought together leaders from industry, the policy and regulatory communities and academia from around the world to have an open and frank discussion on issues related to central counterparty clearing. Four questions will dominate the discussion:

    * Who should own and control a central counterparty?
    * Who should participate in central clearing?
    * What is the appropriate capital structure for a central counterparty?
    * What should the market structure look like?

These are all difficult questions. I doubt that a consensus will be reached quickly on all of the relevant issues. But it is important for us to understand all parties’ perspectives and to consider the costs and benefits of the policies that are being implemented for the regulation of these markets. Good policy making depends upon this interaction.

This symposium has been organized to take full advantage of the collective wisdom and body of expertise that exists in this room. The panelists’ remarks are designed to initiate the discussion of each set of topics and then open the discussion to all. Thank you all for coming. I look forward to a good discussion and further debate on the importance of OTC derivatives clearing and settlement.

[1] Bank for International Settlements, Committee on Payment and Settlement Systems, 2008, The Interdependencies of Payment and Settlement Systems, Basel, Switzerland, June, p. 1.

There is a potential for electronic trading to take off in interest rate swaps (IRS). Research firm Celent notes in a written report this week that regulatory pressures to improve efficiency and increase transparency could provide the impetus to boost screen trading.

The improvement in post-trade services has allowed the over-the-counter (OTC) market to hold its own against competition from the exchanges, which are trying to break the OTC monopoly in the interest rate market, Celent says.

According to Celent, this is expected to continue, because the main business in the IRS market is conducted by broker-dealers that have created an efficient infrastructure along with service providers in the field of clearing services, portfolio reconciliation and compression, and matching and confirmation. For interest rate derivatives on exchanges to compete with OTC IRS, the entry barriers are quite high. Celent believes it would be difficult for exchanges to challenge the OTC business without any regulatory intervention that might work to the detriment of the business.

In the report, Celent analyzes the growth of electronic trading and post-trade processing in the global IRS market. The IRS market is divided into the inter-dealer broker and dealer-to-client (D2C) segments. The value of the IDB market in H1 2009 was $317 trillion, a growth of 53 percent since H2 2006. It is expected to grow to $340 trillion by H2 2010. Similarly, the value of the D2C market in H1 2009 was US$120 trillion, a growth of 41 percent since H2 2006. It is estimated to go up to $135 trillion by H2 2010.

Here is a link to a synopsis of the Celent report:
Electronic Trading of Interest Rate Swaps: Post-Trade Processing Shows the Way

LONDON, Dec 14, 2009 /PRNewswire-FirstCall via COMTEX News Network/ — IntercontinentalExchange(R) (NYSE: ICE), a leading operator of regulated global futures exchanges, clearing houses and over-the-counter (OTC) markets, announced that ICE Clear Europe has launched clearing services for single-name credit default swap (CDS) contracts after receiving regulatory approval in the U.K. The first tranche of single name CDS references companies in the European utility sector. ICE also announced that BNP Paribas and Nomura have been approved as CDS clearing members of ICE Clear Europe and are actively clearing as of this week. ICE Clear Europe now has 13 CDS clearing members.

Said Paul Swann, President of ICE Clear Europe: “We are pleased to announce the successful launch of single name clearing on behalf of our clearing participants. This capability complements numerous industry initiatives underway to restructure the market and enables the reduction of counterparty credit risk. Together these steps promote the recovery of the CDS markets and the global lending markets.”

Single-name CDS instruments reference individual corporate or sovereign government debt instruments. ICE has developed a proprietary risk assessment methodology specifically for single-name CDS contracts. This methodology complements the risk assessment methodology employed in clearing CDS indexes, in recognition of the unique risk profile of single-name contracts. ICE’s methodology was reviewed and validated by an independent risk management consultancy as part of the regulatory approval process.

The risk assessment methodology is relied upon to determine initial margin, variation margin and guaranty fund requirements. This customized risk management model, together with ICE’s industry-leading process to utilize executable pricing to provide the critical daily settlement prices of single-name contracts, is the cornerstone of its risk management framework.

On a global basis, ICE has cleared over $4.3 trillion in notional value of CDS indexes and has aggregate open interest of $343 billion. ICE Clear Europe’s CDS clearing commenced in July 2009 with European index (iTraxx) contracts, and has cleared more than 800 billion euro in notional. ICE Trust, ICE’s U.S. CDS clearing house, launched in March and has cleared more than $3.1 trillion in notional of North American index (CDX) contracts to date. CDX and iTraxx indexes consist of 125 North American companies and 125 European-based companies, respectively. The single-name reference entities cleared by ICE are components of these indexes.

ICE has established CDS risk frameworks for ICE Trust and ICE Clear Europe that are separate from its futures businesses, including separate risk models, guaranty funds and margin accounts, as well as a CDS-focused risk management system and an independent governance structure. Through ICE’s CDS clearing services, ICE is providing a common infrastructure to global CDS market participants within their respective regulatory jurisdictions, while leveraging the legal framework, operational and risk management processes, treasury systems and trade warehousing systems currently in use by the industry.

About IntercontinentalExchange

IntercontinentalExchange(R) (NYSE: ICE) operates leading regulated exchanges, trading platforms and clearing houses serving the global markets for agricultural, credit, currency, emissions, energy and equity index markets. ICE Futures Europe(R) hosts trade in half of the world’s crude and refined oil futures. ICE Futures U.S.(R) and ICE Futures Canada(R) list agricultural, currency and Russell Index markets. ICE offers trade execution and processing for the credit derivatives markets through Creditex and ICE Link(TM), respectively, and CDS clearing through ICE Trust(TM) and ICE Clear Europe(R). A component of the Russell 1000(R) and S&P 500 indexes, ICE(R) serves customers in more than 50 countries and is headquartered in Atlanta, with offices in New York, London, Chicago, Winnipeg, Calgary, Houston and Singapore. www.theice.com

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 – Statements in this press release regarding IntercontinentalExchange’s business that are not historical facts are “forward-looking statements” that involve risks and uncertainties. For a discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see ICE’s Securities and Exchange Commission (SEC) filings, including, but not limited to, the risk factors in ICE’s Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the SEC on February 11, 2009.

Editors Note:

About Nomura

Nomura is a leading financial services group and the preeminent Asian-based investment bank with worldwide reach. Nomura provides a broad range of innovative solutions tailored to the specific requirements of individual, institutional, corporate and government clients through an international network in over 30 countries. Based in Tokyo and with regional headquarters in Hong Kong, London, and New York, Nomura employs about 26,000 staff worldwide. Nomura’s unique understanding of Asia enables the company to make a difference for clients through five business divisions: retail, global markets, investment banking, merchant banking, and asset management. For further information about Nomura, please visit www.nomura.com.

About BNP Paribas

BNP Paribas (www.bnpparibas.com) is one of the 6 strongest banks in the world according to Standard & Poor’s*. With a presence in 85 countries and more than 205,000 employees, 165,200 of which in Europe, BNP Paribas is a global-scale European leader in financial services. It holds key positions in its three activities: Retail banking, Investment Solutions and Corporate & Investment Banking. The Group benefits from its four domestic markets: Belgium, France, Italy and Luxembourg. BNP Paribas also has a significant presence in the United States and strong positions in Asia and the emerging markets. * Within its peer group

SOURCE IntercontinentalExchange

http://www.theice.com

Investor Contacts:
Kelly Loeffler, VP, Investor Relations & Corp. Communications
IntercontinentalExchange
770-857-4726
kelly.loeffler@theice.com

Media Contact:
Lee Underwood, Director, Communications
IntercontinentalExchange
770-857-0342
Lee.Underwood@theice.com

Sarah Stashak, Director, Investor & Public Relations
IntercontinentalExchange
770-857-0340
sarah.stashak@theice.com  

Bloomberg reports today that China’s Ministry of Finance will sell 50-year bonds for the first time next week. The ministry will sell 20 billion yuan of the debt on Nov. 27, according to a statement it posted today on chinabond.com.cn, the official Web site of the nation’s largest debt-clearing house. The coupon will be set through an auction, the statement said.