Weekly Roundup | 24th August 2014
Last weeks Sol Seven Stories. The Sol Seven Stories will take a Sojourn until September.
Swaptions and total return swaps grow in popularity
The low interest rate environment is reportedly luring yield-hungry investors back to credit swaps. But despite the transformation of the over-the-counter swaps market into a market that is much more transparent for both regulators and investors, several of the credit swaps that are now growing in popularity fall outside the purview of regulators. In particular, total return swaps (TRS) and options tied to credit default swap indices, also known as “swaptions,” are on the rise.
Financial Times (tiered subscription model)
Credit default swap flaw fixed
The International Swaps and Derivatives Association has rewritten credit default swap documentation to address a critical flaw. The flaw appears when companies are reorganized to stave off failure. Contracts are tied to the majority of a company’s debt, so when a company is reorganized, swaps don’t necessarily stay tied to their original securities. With the new rule, scheduled to take effect Sept. 22, swaps stay tied to the original securities they were meant for.
TriOptima compression reaches $500 trillion in notional outstanding eliminated
Post-trade derivatives services company TriOptima says its trade compression service triReduce has eliminated $500 trillion in notional principal outstanding since it was first introduced in 2003. This includes cleared and uncleared interest rate swaps in 27 currencies, credit default index and single name swaps, and commodity swaps. triReduce plans to soon introduce compression of inflation swaps and compression cycles for FX forwards.
Massive cross-asset clearing project goes live in Brazil
Brazil’s BM&FBovespa has launched the first phase of a comprehensive post-trade integration project that will migrate the company’s four existing clearinghouses onto a single platform. Derivatives clearing is now up and running on the new platform, with phase two – equities – set for launch in 2015. Cinnober Financial Technology is BM&FBovespa’s technology provider, charged with integrating all post-trade activity across BM&FBovespa’s business units and markets, including derivatives, equities, spot FX, and corporate and government bonds.
Bank of America nearing a $16.5 billion deal over mortgages
Bank of America Corp. is close to agreeing to a $16.5 billion deal with regulators stemming from mortgage securities the bank and its units sold in the period leading up to the financial crisis. The deal would be record-breaking in size. Terms have not been officially released but Reuters reports that the bank is expected to pay $9 billion in cash and the rest in assistance to struggling homeowners. Much of the investigation centers on securities sold by Merrill Lynch, which the bank acquired in 2008.
Asset managers could face tighter regulations as lobbying fails
The Financial Stability Board is weighing tough regulations for the asset management industry that might limit their trading activity in times of crisis. The regulations would be a new frontier for the FSB as its proposed changes so far have been directed at banks rather than asset managers. The FSB first gave clues about the upcoming regulations in January when it revealed it was considering restrictions for asset managers with more than $100 billion under management. Upon hearing the first hints of regulations, the asset management industry lobbied hard against them, but their lobbying may have backfired. Reuters reports that the FSB is now considering stiffer regulations affecting even more of the industry.
Credit-linked note sales near six year low
Sales of credit-linked notes are nearing historic lows and the prices and the issuance of the securities are nearing levels last seen in 2008. A form of funded credit derivative, these notes, which are tied to investment-grade corporate bonds, contain an embedded credit default swap that allows the issuer to transfer certain credit risk to credit investors. The connection to investment grade corporate debt is a big part of the reason for the lows. The Markit iTraxx Europe index of credit default swaps on 125 investment-grade companies fell seven basis points this month to 58 basis points, two points from the lowest since January 2008. Meanwhile, banks issued $714 million of credit-linked notes this month, a 70 percent decline from the same period last year.