The endeavour below is to – explain a very complicated circular trading (round tripping algorithm) nonsense that became a crisis – in a simple way.
MARY is the proprietor of a bar in Dublin. She realises that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronise her bar – she will go broke.
To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later.
She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).
Word gets around about Mary’s ‘drink now, pay later’ marketing strategy and, as a result, increasing numbers of customers flood into Mary’s bar. Continue reading
If you are deployed in the Investment banking space front office, middle office or back office, you should have come across phrases such as “collateral liquidity crunch” and “collateral scarcity”, and new terms such as “collateral transformation” and the “collateral upgrade trade.
Came across an interesting paper on Collateral management sharing some of the highlights, need for collateral management, how we got there, some of the Best Practices to collateral.
The 2008 financial crisis and the role derivatives played in it compelled regulators to re-examine and reengineer the entire derivatives market structure. The disruption to the derivatives market is already underway, primarily as a consequence of behemoth regulations such as the Dodd-Frank Act (DFA), European Market Infrastructure Regulation (EMIR), Basel III and others. But new global regulations are not the only driver. Continue reading
Europe finally has agreed on the terms of MiFID II, extending its regulatory reach into fixed income, FX, OTC trading and commodity speculation. Here are seven details you need to know as implementation begins.
We still have technical meetings to go through to finalize details, so the complete text is unlikely to be available until won or close to January 27, but here is what we understand so far:
1. HFT will be restricted through greater testing of algorithms, but there will be no 500 m/s rule.
- Final organizational requirements for investment firms engaged in algorithmic trading have been passed to ESMA Technical Guidelines for greater analysis concerning the risks potentially raised by technology-advanced trading practices. Continue reading
Reading between the lines from the Bank of Italy , Back to 2012 in the month of July Mario Draghi, on the verge of yet another Eurozone collapse, promised the world that he would do literally “whatever it takes” to defend the Euro, banks in the insolvent continent took his promise seriously, and ramped up their participation in the most epic Ponzi scheme conceived in Europe to a whole new level. The scheme, of course, was one where banks would buy sovereign bonds issued by their host country (most notably Spain and Italy), and subsequently repo them back to the ECB for near full cash (net of a minuscule haircut) collateral.
The IMF also published a crucial paragraph doing the spillover analysis indicates that a shock from Italy could have a marked impact on the Europe and beyond through trade and financials channels. Continue reading
Recently Jörg Bibow was interviewed have tried to put the points in English stating that Mario Draghi’s announcement promise of ECB support for government bond markets seems to have calmed fears of an imminent euro breakup, at least for the time being. That does not mean the euro crisis is over though. Not at all, as the underlying problems remain largely unresolved. Liquidity can buy time but it cannot solve the imbalances inside the euro area and related debt overhangs that are the deeper cause behind the euro crisis. It is important in this context that the ECB promise is for conditional support. As liquidity support comes along with mindless austerity and asymmetric adjustment pressures imposed on debtor countries, debt problems are bound to get worse rather than better. Markets are currently in complacency mode about these prospects. The crisis may resurface at any time.
He pointed out Germany as the main culprit behind the euro crisis. Being the largest economy in Europe, Germany’s performance and policies inevitably impact Europe. In the currency sphere Germany is also Europe’s traditional anchor of stability. As a result, the policy regime of Economic and Monetary Union agreed at Maastricht is largely of German design, based on the Bundesbank success story and deutschmark stability. It was not understood that the pre-EMU success of the German model of export-led growth required that other countries behaved different from Germany. Continue reading