March 28, 2024

European Union Charges 13 Banks and Others With Antitrust Breaches

The European Commission said the group, which included Citigroup, Goldman Sachs and UBS, shut out Deutsche Boerse and the Chicago Mercantile Exchange from the CDS business between 2006 and 2009.

Credit default swaps (CDS) are over-the-counter contracts that allow an investor to bet on whether a company or country will default on its bonds within a fixed period of time. Lack of transparency on such derivatives is a key target of regulators following the 2007-2009 crisis.

The case is one of several opened by the EU antitrust regulator into the financial services since the crisis. Banks and other companies involved could be fined up to 10 percent of their global turnover if found guilty of infringing EU rules.

The European Commission said on Monday it had sent a statement of objections, or charge sheet, which sets out suspected anti-competitive activities, to the companies.

“It would be unacceptable if banks collectively blocked exchanges to protect their revenues from over-the-counter trading of credit derivatives,” EU Competition Commissioner Joaquin Almunia said.

“Over-the-counter trading is not only more expensive for investors than exchange trading, it is also prone to systemic risks.”

The charges followed a two-year investigation. The other banks charged are Bank of America Merrill Lynch, Barclays, Bear Stearns, BNP Paribas, Morgan Stanley, Credit Suisse, Deutsche Bank, HSBC, JP Morgan and RBS.

UBS, Deutsche Bank, JP Morgan, HSBC and Barclays declined to comment, while the other banks and ISDA were not immediately available for comment. Markit had no immediate comment.

Almunia said some of the banks in the CDS case were also involved in separate investigations into suspected rigging of lending benchmarks Euribor and Libor, but he did not identify them.

“We are trying to follow the Article 9 route. We hope we are ready to adopt a decision towards the end of the year,” EU Competition Commissioner Joaquin Almunia told a news briefing, referring to a procedure where companies can get a 10 percent cut in fines in return for admitting wrongdoing.

(Additional reporting by Steve Slate and Laura Noonan, in London, Martin De Sa’Pinto in Zurich, Christian Plumb and Matthias Blamont in Paris, Kathrin Jones in Frankfurt; Editing by Adrian Croft and David Holmes)

Article source: http://www.nytimes.com/reuters/2013/07/01/business/01reuters-eu-banks-cds.html?partner=rss&emc=rss

Fair Game: One Safety Net That Needs to Shrink

Granted, the economic pain many are feeling now — the snail’s pace recovery, the stubbornly high unemployment — is foremost in voters’ minds. But given all we’ve gone through after the last binge in the financial industry, failing to confront the too-big-to-fail question is a serious oversight.

Many Americans probably think the Dodd-Frank financial reform law will protect taxpayers from future bailouts. Wrong. In fact, Dodd-Frank actually widened the federal safety net for big institutions. Under that law, eight more giants were granted the right to tap the Federal Reserve for funding when the next crisis hits. At the same time, those eight may avoid Dodd-Frank measures that govern how we’re supposed to wind down institutions that get into trouble.

In other words, these lucky eight got the best of both worlds: access to the Fed’s money and no penalty for failure.

Which institutions hit this jackpot? Clearinghouses. These are large, powerful institutions that clear or settle options, bond and derivatives trades. They include the Chicago Mercantile Exchange, the Intercontinental Exchange and the Options Clearing Corporation. All were designated as systemically important financial market utilities under Title VIII of Dodd-Frank. People often refer to these institutions as utilities, but that’s not quite right. Many of these enterprises run lucrative businesses, have shareholders and reward their executives handsomely. Last year, the CME Group, the parent company of the Chicago Mercantile Exchange, generated almost $3.3 billion in revenue. Its chief executive, Craig S. Donohue, received $3.9 million in compensation and held an additional $10 million worth of equity awards outstanding, according to the company’s proxy statement.

Make no mistake: these institutions are stretching the federal safety net. The Chicago Merc clears derivatives contracts with a notional value in the trillions of dollars. I.C.E. clears most of the credit default swaps in the United States — billions of dollars a day, on paper. No wonder they are considered major players in our financial system.

But placing them at the bailout trough is wrong, according to Sheila Bair, the former head of the Federal Deposit Insurance Corporation. In a recently published book, Ms. Bair wrote that top officials at the Treasury and the Fed, over the objections of the F.D.I.C., pushed to gain access for the clearinghouses to Fed lending.

The clearinghouses “were drooling at the prospect of having access to loans from the Fed,” she wrote. “I thought it was a terrible precedent and still do. It was the first time in the history of the Fed that any entity besides an insured bank could borrow from the discount window.” .

“The Treasury’s and the Fed’s reasoning was that since another part of Dodd-Frank was trying to encourage more activity to move to clearinghouses, we should provide some liquidity support to them,” she said in an interview last week. “Our argument back was, if you have an event beyond their control with systemwide consequences, then you have the ability to lend on a generally available basis. What they wanted was the ability to lend to individual clearinghouses.”

The clearinghouses have considerable clout in Washington. From the beginning of 2010 through this year, the CME Group has spent $6 million lobbying, according to the Center for Responsive Politics.

Did these players push for special treatment while avoiding other aspects of Dodd-Frank? Representatives of the Chicago Mercantile Exchange and the Options Clearing Corporation say no, noting that access to the Fed meant they would also be overseen by the central bank, in addition to the Securities and Exchange Commission or the Commodities Futures Trading Commission.

But the Fed’s involvement is not likely to be intrusive, because Dodd-Frank directed it to take a back seat to a financial utility’s primary regulator, either the S.E.C. or the C.F.T.C.

The CME said that it did not support Dodd-Frank’s designation of clearinghouses as systemically important, but once it received the designation, it believed the Fed should provide access to emergency lending. The O.C.C. echoed this point.

Whatever the case, the CME Group has argued that it should be exempt from the orderly liquidation authority set up under Dodd-Frank. This authority was designed to unwind complex and interconnected financial firms that could threaten the financial system if they failed. The law appointed the F.D.I.C. as receiver to resolve teetering entities. That authority is supposed to end the problem of institutions that are too big to be allowed to fail and also to hold their managers accountable.

BUT in a letter to the F.D.I.C. a few months after Dodd-Frank became law, the CME Group asked the F.D.I.C. to confirm that the exchange wouldn’t fall under that authority’s jurisdiction. It is not a financial company as defined by the law, the CME contended, and therefore should not be subject to the resolution process.

The F.D.I.C. has not confirmed the C.M.E.’s view on the matter. But it seems to be gaining traction among other regulators. At an Aug. 2012 presentation last August on resolving financial market utilities, Robert S. Steigerwald of the Federal Reserve Bank of Chicago noted that it was unclear whether a financial utility such as the Chicago Merc would have to be wound down as required under Dodd-Frank.

So these large and systemically important financial utilities that together trade and clear trillions of dollars in transactions appear to have won the daily double — access to federal money, without the accountability.

“Dodd-Frank should have been all about contracting the safety net,” Ms. Bair said last week.  “But this was a huge and unprecedented expansion of the safety net that provided expressed government support for for-profit entities. These financial market utilities are the new government-sponsored enterprises.”

Article source: http://www.nytimes.com/2012/11/04/business/one-safety-net-that-needs-to-shrink.html?partner=rss&emc=rss

Italy Bond Market as Euro Proxy

But a calmer market should not be confused with an optimistic one. Investors are still deeply worried about Italy’s mounting political and debt financing woes.

Even the seeming rallying point on Thursday — Italy’s ability to sell out an offering of 5 billion euros in one-year bonds — had a dark side. The interest rate was 6 percent, up from 3.5 percent only a month ago.

In fact, investors and analysts say, the very depth and sophistication of Italy’s 1.9 trillion euro ($2.6 trillion) bond market, the third-largest in the world after the United States and Japan, has made it a proxy of sorts for the euro zone’s deeper problems. Those include the possible exit of Greece from the euro and Germany’s resistance to assuming a larger financial burden in rescuing weaker economies.

Investors have been dumping Italian bonds that they own, and ramping up their negative bets by selling Italian bond futures as well.

The Italian bond market is the only large market in the euro zone outside of Germany to offer investors the ability to buy or sell futures contracts. That has allowed many investors to use Italian futures to place bearish bets on Italy, and as a proxy for the broader euro zone itself.

“The futures market for Italian bonds has become the main conduit now for all investor angst with regard to the euro zone,” said Yra Harris, a trader at Praxis Trading on the Chicago Mercantile Exchange.

In what has become a highly volatile trading environment, investor fears can shift sharply, turning sellers into buyers, especially if it becomes clear that the European Central Bank has started buying bonds. That is why, after Italian 10-year yields touched a dangerously high level of 7.4 percent on Wednesday, word that the bank had started buying the bonds sent yields as low as 6.7 percent on Thursday.

Market jitters were also calmed by indications that Italy was moving closer to appointing a new government with a revamped legislative initiative, making it more likely that the European Central Bank will follow through with additional Italian bond purchases. And further soothing came from the resolution of the Greek political drama, with the appointment of Lucas Papademos, the former vice president of the European Central Bank, as the country’s new prime minister.

Still, European officials are keeping the pressure on Italy. At a news conference Thursday, Olli Rehn, the European Union commissioner for economic and monetary affairs, insisted that Italy’s meeting its fiscal targets and adopting structural reforms was a “sine qua non for restoring confidence in the Italian economy.”

At the root of this confidence drain is the substantial size of debt that Italy must raise from local and foreign investors next year alone: about 350 billion euros. That is about the size of Greece’s total debt.

Over the years, Italy has become a very efficient debt-raising machine, with more than 50 percent of its financing needs met by local banks and investors.

But a substantial amount still must come from foreign investors, which in the past have largely been major European banks. Now these banks are selling their positions to avoid the prospect of having to book losses from their reduced value. And if they are continuing to participate in new bond auctions, as with Thursday’s one-year offering, they are demanding much higher interest rates.

Meanwhile, the negative betting continues. According to officials at Eurex, Europe’s main derivatives exchange, the market for Italian bond futures has increased substantially of late, to as much as one billion euros a day. That is more or less the same size as the market for buying and selling Italian bonds directly.

Many people entering into these futures trades are doing it for hedging purposes or to protect their portfolios if Italy defaults.

But as broader worries about Greece are added to the concern that Italy may no longer be able to finance its debt burden, traders have started to sell Italian bond futures directly — a bet that the euro zone itself might collapse and that Italian bonds will continue to lose value.

Louise Story contributed reporting from New York.

Article source: http://feeds.nytimes.com/click.phdo?i=16ed1dce76936e7b5ef36c0d4a2bfbd6

As Trade Volumes Soar, Exchanges Cash In

But there is a silver lining to even this latest market horror show, at least for the exchanges where the financial instruments change hands.

Businesses like the New York Stock Exchange and the Chicago Mercantile Exchange skim cents off each stock or contract bought or sold over their trading floors or computers. With the daily volumes of financial market contracts sent surging through their systems by nervous traders and investors up by billions, the latest trading rush is directly polishing their bottom line.

The effect, however, may be fleeting. The rising volumes have generally not translated into higher stock prices for the exchanges, and they and some analysts are worried that the volatility and downbeat economic news may frighten away investors in the long term.

“Volume is positive on a short-term basis but because it is based on negative macroeconomic factors, these volumes are not necessarily sustainable,” said Joseph M. Mecane, executive vice president for cash trading at NYSE Euronext, which operates the New York Stock Exchange.

The latest swings came Friday when the Standard Poor’s 500-stock index fell 2 percent in the morning, but climbed back up in the afternoon to finish 1.5 percent higher, as investors digested remarks by Ben S. Bernanke, the Federal Reserve chairman, that left the door open to further support for the economy. The Dow Jones industrial average swung about 363 points during the day, closing up 1.2 percent, to 11,284.54.

Across United States stock markets — including the big electronic exchanges like Nasdaq, BATS and Direct Edge — trading volumes so far in the latest quarter are 17 percent ahead of the same period last year, according to figures from Credit Suisse. Volumes have been hitting levels almost double what they normally are at this usually quiet time of year, Mr. Mecane said.

Markets have been sent wild this summer amid a number of exceptional events, like the showdown over the debt ceiling in Washington, the downgrade by the credit rating agency Standard Poor’s of the United States’ long-term debt on Aug. 5, the global fallout from Europe’s debt crisis and a raft of data pointing to a stalling United States economy.

On a couple of days earlier in August, stock market volumes touched about 15 billion daily trades, although volumes are now back to about eight billion or nine billion daily.

The stock exchanges on average charge 3.5 cents for every 100 shares traded, according to Credit Suisse. That has declined in recent years with greater competition between the exchanges, so the pop in volumes is not delivering as much to them in increased profits as it would have just a few years ago. The exchanges have also diversified into other business like providing trading technology to banks. That means revenue from stock and derivatives trading accounts for a smaller proportion of overall income. In the case of Nasdaq, for example, it makes up a third of overall sales.

The exchanges, most of which are public companies, generally will not comment on the effect these increased volumes will have on profits.

But analysts like Howard Chen, a financial analyst at Credit Suisse who watches the exchanges, said that because volumes were already tracking 15 to 20 percent above what he had been expecting, earnings should be up a similar amount.

It’s not just the stock market that is experiencing a lift.

Traders have been busily betting on interest rates, commodities, currencies and even volatility itself.

The Chicago Mercantile Exchange where these and other products like United States Treasury futures are in large part traded has recorded a big pick-up in trading volumes recently.

Aug. 9, for example, was a record day for the Chicago exchange, when nearly 25.7 million contracts were traded, beating the last record, which was during the so-called flash crash on May 6 last year, when 25.3 million contracts were traded, the exchange said.

So far during the third quarter, volumes on the Chicago exchange are up 39 percent compared with the same period a year ago, Credit Suisse said.

Futures in gold, oil and the broad stock market index, the S. P. E-Mini, are all up.

In an era when volatility has become the new norm, another instrument that has had a surge in volumes is the Chicago Board Options Exchange Volatility Index. The VIX, as it is known, measures the short-term implied volatility of options on the S. P. 500. Financial instruments based on the VIX are traded both electronically and in the exchange’s trading pits in Chicago — where there is a special VIX pit, and 60 dedicated VIX traders.

Article source: http://www.nytimes.com/2011/08/27/business/as-trade-volumes-soar-exchanges-cash-in.html?partner=rss&emc=rss

Pork Belly Futures Market Closes, but We’ll Still Have Bacon

CHICAGO, July 15 (Reuters) — Chicago’s pork belly market has closed after 50 years of being the subject of jokes for movies and TV shows and satisfying Americans’ hunger for bacon, lettuce and tomato sandwiches. The Chicago Mercantile Exchange said it shut the frozen pork belly futures market at the end of business on Friday.

The closing had been expected. Trading in pork belly futures had dropped to zero in recent years after the meat industry became integrated and used fresh pork bellies instead of frozen ones to make bacon.

The contract started trading in 1961 and was the oldest existing Chicago Mercantile Exchange livestock futures contract.

Pork bellies, as the name indicates, are cuts of pork that come from the underside of the hog and are made into bacon. Demand for pork bellies and bacon increases in the summer, when tomatoes ripen and people make bacon, lettuce and tomato sandwiches.

Because pork production peaks in the autumn, the frozen pork belly contract was created as a way to give pork companies a means to cover the cost of storing, or freezing, pork bellies until the next summer, when they were thawed and processed into bacon, said a longtime Chicago trader, Bob Short.

“The name sounded attractive. Nobody knew it was bacon. It made people laugh,” Mr. Short said.

“We primarily traded the pork belly market until about five to seven years ago, when there was then no one to trade with, so we quit,” he said.

Pork bellies had their heyday in the late 1960s and 1970s, when they were the exchange’s most popular agricultural contract.

“The glamour market was the pork bellies. There was a mystique about it. Maybe it was the name,” said Harvey Paffenroth, who has been at the Chicago Mercantile Exchange since 1968.

“That was probably the biggest traded commodity at the floor of the C.M.E. They had potatoes, eggs, cattle and hogs. Cattle was a pretty good-sized contract, but it wasn’t as big as the pork bellies,” said Mr. Paffenroth.

Article source: http://feeds.nytimes.com/click.phdo?i=62a745f124a111351cb78eb8a117814a