Top Interest Rate Headlines 01-14-11: Pimco Cuts U.S. Holdings, Sees Outflows

Pimco Cuts U.S. Holdings, Sees Outflows 
http://jlne.ws/fqp9SY

J.P. Morgan Profit Jumps 47%
http://jlne.ws/eQMdig

China Central Bank Raises Reserve-Requirement Ratio 
http://jlne.ws/exBQAi

New York Fed ends AIG assistance with full repayment
http://ht.ly/3E0ex

Jamie Dimon: More Municipal Bankruptcies
http://jlne.ws/e2ZXff

Newedge Hires Duo to Head London Fixed-Income Group
http://jlne.ws/gzmepW

Consumer Confidence Slips Surprisingly on Jobs, Fuel Costs
http://jlne.ws/hOKDM6

Fed Says Banks Eased Credit to Hedge Funds, Private Equity
BusinessWeek
Wall Street's largest dealers during the fourth quarter eased credit terms to hedge funds and private-equity firms that borrow against securities while provisions for private derivatives trades were little-changed, according to the Federal Reserve.
http://jlne.ws/hAlcDP

Geithner doubts ability to spot vital banks
By Tom Braithwaite in Washington - Financial Times
Tim Geithner has questioned the feasibility of identifying financial institutions as "systemically important" in advance of a crisis, just as the regulatory council the Treasury secretary chairs is supposed to start doing precisely that.
http://jlne.ws/gBL5KT

New Round of Bank Stress Tests Planned in Europe
New York Times
In addition, international regulators said that they were going to require a broader range of securities holders to assume some of the cost if a bank failed.
http://jlne.ws/hXBvot

Spain passes debt test, in eurozone respite
Eu Business
(MADRID ) - Spain passed a pivotal test in its first bond auction of 2011 on Thursday, spurring hope it can avoid an emergency bailout that would rock the entire eurozone.
http://jlne.ws/f7fKj6

Basel hardens bank hybrid bond rules
By Jennifer Hughes and Brooke Masters in London - Financial Times
Global regulators have imposed tough requirements on the bonds that banks can count towards their regulatory capital in a bid to kill off a funding technique that has been blamed as a key contributor to banks' need for taxpayer bail-outs.
http://jlne.ws/eZX8Ba

Goldman reveals fresh crisis losses
By Francesco Guerrera in New York and Kara Scannell in London - Financial Times
Goldman Sachs has revealed details of about $5bn in investment losses suffered during the crisis for the first time this week, in a move that will deepen the debate over companies' financial disclosures.
http://jlne.ws/gzHrBV

Goldman Seeks Redemption: Here's Everything You Need to Know
The Motley Fool
A rundown of Goldman's new rules in plain English.
http://jlne.ws/gyVxsY

Citigroup Remains 'Too Big to Fail': Report
TheStreet.com
NEW YORK (TheStreet) -- Citigroup remains "too big to fail" and federal regulators still do not have a comprehensive system in place to prevent another bailout from being needed, according to a report issued today by a government watchdog. "While the year-plus of Government dependence left Citigroup a stronger institution than it had been, it remained, and arguably still remains, an institution ...
http://jlne.ws/eGZUkV

Bair Urged Citigroup Changes 'At the Top' in 2009
BusinessWeek
Federal Deposit Insurance Corp. Chairman Sheila Bair told regulators in early 2009 that Citigroup Inc. executives lacked sufficient experience and management changes were needed, a U.S. bailout watchdog said.
http://jlne.ws/gEiwUN

Morgan Stanley's Greg Fleming to Head Brokerage; DiMaio Leaves
BusinessWeek
Morgan Stanley shook up its top management ranks, naming Greg Fleming to replace Charles Johnston as president of the retail brokerage and picking Ken deRegt to take over for Jack DiMaio in attempting to turn around its fixed-income trading unit.
http://jlne.ws/hMWDaV

Lehman sees $US60bn bankruptcy payout
Business Spectator
Permitted creditor claims likely to reach $US322bn.
http://jlne.ws/fMefFj

Top Interest Rate Headlines 01-12-11: Big Banks Brace For Curbs

Big banks brace for curbs
By John Maggs, Politico
Big banks and other financial players are gearing up for new regulations in the next few weeks on the “Volcker rule” that are designed to curb “proprietary trading” by banks using their own cash without depriving the financial system of needed capital.
http://jlne.ws/fgpWAK

LCH.Clearnet Group - Fixed Income volumes increase by 28% yoy
Press Release
The nominal value of European government bond and repo trades cleared by LCH.Clearnet Group (LCH.Clearnet) in 2010 increased by 28% year on year, a record fueled by increased demand as banks seek to manage their counterparty risk exposures.  19 new participants signed up to clear their fixed income business through LCH.Clearnet, taking the total to 70 and resulting in an increased proportion of inter-bank repo trades being cleared.
http://jlne.ws/eqfMXL

Debate rages over muni bond defaults
By Nicole Bullock - Financial Times
Warren Buffett has warned of difficulties ahead. So has hedge fund manager Jim Chanos and Meredith Whitney, who foresaw the problems at US banks ahead of the financial crisis. If they are right, then the $3,000bn US municipal bond market could be on the verge of a crisis to rival that in the eurozone, as cash-strapped states and cities facing big budget and pension deficits struggle to pay their debts.
http://jlne.ws/eEwjJi

US Senate report to criticise Goldman
By Tom Braithwaite in Washington and Francesco Guerrera in New York - Financial Times
Goldman Sachs will come in for harsh criticism from an influential US Senate report into the financial crisis that will highlight alleged conflicts of interests in the bank's dealings with clients, according to people familiar with the matter.
http://jlne.ws/eJ9fLO

Greece clears first 2011 funding hurdle
Business Spectator
Greece sells T-bills, focus now on upcoming Portugal sale.
http://jlne.ws/fBRKTn

Merkel treads cautiously in shifting bond market
By Quentin Peel, Financial Times
There is an awful feeling of déjà vu about what is happening in the eurozone's sovereign bond market. Portugal is suffering the same collapse of investor confidence that forced first Greece and then Ireland to beg for help from their European partners last year.
http://jlne.ws/ewOPlE

CME Interest Rate Products Update: Coming January 24, 2011: Choice, Precision, Opportunity
Press Release
Weekly Options on U.S. Treasury futures begin trading on Sunday, January 23, 2011 (trade date Monday, January 24, 2011), offering an expanded range of standardized, short-dated options. Complementing the standard and the Flexible Options on U.S. Treasury futures, Weekly Treasury Options (WTOs) provide users with increased flexibility in managing existing option positions, and new opportunities to trade high impact economic events, such as Treasury auctions and economic reports.

Citi Prepares Tranche Market For Muni-Bond Derivatives
By KATY BURNE, WSJ.com
Citigroup Inc. is planning to start quoting derivatives on different slices of the MCDX, a derivatives index tracking 50 municipal issuers. The move comes as the typically placid muni-bond market has grown turbulent in recent months. Among several concerns in the market is the potential for cash-strapped municipalities to default on their debt.
http://jlne.ws/ffjX0P

UBS Offers Electronic Trading for Single-Name Credit Swaps
By Matthew Leising and Mary Childs, Bloomberg
UBS AG is offering customers electronic trading of credit-default swaps for European sovereign debt and indexes of corporations, a change being made ahead of regulations mandating greater transparency. Switzerland's biggest bank is one of the first dealers to allow clients to trade via computer for so-called single-name credit swaps, and is the only one now offering the service, said Kevin McPartland, a senior analyst with Tabb Group in New York.
http://jlne.ws/f00ALu

Osborne Says `Nothing off Table' in Lower U.K. Bank-Bonus Push
Bloomberg
Chancellor of the Exchequer George Osborne said he'll push Britain's biggest banks to follow state- controlled Royal Bank of Scotland Group Plc in awarding lower bonuses in 2011 and left open the possibility of further action.
http://jlne.ws/dS88l6

Canadian Banks May Buy SunTrust, Zions in 'Fire Sale'
BusinessWeek
Canadian banks, involved in a record $15.9 billion of acquisitions last year, may target U.S. lenders such as SunTrust Banks Inc., Zions Bancorp and Regions Financial Corp. to expand abroad, analysts said.
http://jlne.ws/hZicRS

FINRA Orders Schwab To Pay $18 Million To Investors For Improper Marketing Of YieldPlus Bond Fund
Press Release
The Financial Industry Regulatory Authority (FINRA) announced today that it has ordered Charles Schwab & Company, Inc., to pay $18 million into a Fair Fund to be established by the Securities and Exchange Commission (SEC) to repay investors in YieldPlus, an ultra short-term bond fund managed by Schwab's affiliate, Charles Schwab Investment Management. The $18 million consists of the $17.5 million in fees that Schwab collected for sales of the fund, plus a fine of $500,000, both of which will have been designated as restitution to customers.
http://jlne.ws/cxgbC7

Eris Exchange Chief Executive Neal Brady Talks About Building A Swaps Futures Exchange From The Ground Up

Neal Brady has spent the last five months or so working to get the Eris Exchange up and running as the first swaps futures exchange created after Congress passed the Dodd-Frank financial reform bill ordering swap trades onto public exchanges. As the deadline looms on finalizing Dodd-Frank, Eris aims to be the venue of choice for clearing services to reduce systemic risk in the over-the-counter market. Thus far, the new exchange for interest rate swap futures has handled over $19 billion in notional value since trading started in August.


Q: How did you get involved with the Eris Exchange?

Brady: I was previously managing director and head of business development globally for the CME. While I was at CME I was very involved in a variety of initiatives related to OTC clearing and trading. After leaving CME to run a venture fund where I was involved with many of the Eris founding partner firms, we began discussing with CME the possibility of clearing an interest rate swap futures product as a way to broaden access to the OTC interest rate swap market and respond to the new regulatory environment. I've been in the exchange and derivatives business for a long time and founded a venture several years back called Liquidity Direct which was eventually acquired by the CME. A number of proprietary trading firms were involved in that earlier venture as well as founders and partners, and that's how I ended up being involved with Eris. 

At Eris Exchange, we’re up and running with a product and clearing solution that is very much within the spirit and guidelines of the Dodd-Frank legislation. There is a lot of talk in the marketplace about what new cleared OTC products and platforms will look like a year or two from now. What distinguishes Eris is that we are operational today with a product that meets the Dodd-Frank guidelines for OTC clearing and trading while using the tried and true infrastructure of the futures markets and not forcing firms to cut over to new and untested ways of doing business and processing derivatives trades. Eris also opens up access to a market that hasn't traditionally been open to all. To trade in this market, it has traditionally required bilateral arrangements, ISDAs, lengthy OTC documentation procedures, and a willingness for each dealer to admit each customer, one by one, as an acceptable counterparty. At Eris, we have created a product that directly replicates - dollar for dollar - an OTC interest rate swap product, but  it is cleared and so available to a much wider community – anyone with a clearing relationship with an FCM who also qualifies as an Eligible Contract Participant as defined by the CFTC.

The Eris swap futures contract is very flexible – you can trade at any coupon rate you'd like and at any maturity day out to 30 years. If you have a valid customer account with a futures commission merchant at the CME that has more than $50 million in capital, you're eligible to participate. So it's an open access model that replicates the OTC market. We are also applying to the CFTC to become a designated contract market (DCM), at which point the Eris contracts will sit in 4d accounts at the FCM. A 4d is the account class that traditional futures accounts sit in - so Eurodollar futures, Treasury Futures, etc. all sit in 4d accounts. Once we become a DCM, our contracts will sit in that same pool and then will be eligible for cross-margining at CME against Eurodollar and Treasury futures. That will be a big capital savings for users of our product and we’re very excited about it.  Once that’s available, there will be an even more significant cost advantage and capital efficiency advantage to using our product. We expect to become approved as a DCM this year.

Last but not least, we are also promoters of increased transparency in the market, so we announced a technology partnership with State Street Bank who is providing a matching and trading platform for us. When we launch on the State Street platform early this year, you will see liquid quotes for 2-, 3-, 5-,7- and 10-year benchmark maturities in interest rate swaps-- two-sided, transactable streamed quotes from dedicated liquidity providers-- the founding partner firms plus others that have signed up to stream quotes as well. This liquidity will be available to any customer or front end provider that is connected to State Street’s global trading platform. We’re very excited about offering that to buy side users and others interested in accessing the market.


Q: So this is strictly swaps? You have no interest in trying to compete with, say, the CME Group on Treasury products?

A: No, we have no interest in that. We are here to tackle the OTC-cleared market with a unique futures product. We think the CME's core business is their core business and they are very good at what they do.  CME is purely a clearing services partner for Eris and they have an open clearing facility. They are not an equity owner in the exchange. We are an independent exchange, but cleared through the CME, and we’re very happy to have them as our clearing partner.


Q: Who do you see as your main customers at the Eris Exchange?

A: The main customers are anybody who today is an interest rate swap user - asset managers, corporates, hedge funds, insurance companies, GSEs like Freddie Mac and Fannie Mae – anybody who is a participant in this market that wants to lay off or put on a position at the Eris Exchange. There is also a lot of interest from emerging dealer banks that don’t have the same ISDAs and bi-lateral arrangements that the top tier dealers have. We are targeting anybody who trades interest rate swaps today. Many of these participants will be required to do all their business - cleared - on the date that Dodd-Frank becomes effective. If Dodd-Frank becomes effective a year from last July, at that date many firms will no longer be able to trade bilateral standardized swaps; they will need to do them cleared,  either on a DCM or on a SEF. There are a number of emerging SEFs, but we aim to be the benchmark interest rate futures venue that also fulfills the Dodd-Frank mandate. Lastly, we also think there are non-traditional users, who currently do not have access to these markets, who will come into the market once it is a cleared marketplace. These are the users who don't have the time, resources or back office expertise to set up ISDAs and bilateral arrangements with the dealer banks.


Q: Could you tell me a little bit more about these new users?

A: We think there are banks and a variety of other users that would like to participate in the interest rate swap market but don’t because it's too much of an operational burden to set up proper bi-lateral arrangements. In terms of market-making, there is a large community that would more actively make prices upon request or stream transactable prices if they had access to this market. These firms are not making markets today because they don't have access. Once you provide clearing, the issue simply becomes who can reliably provide the most competitive prices and significant size.


Q: It seems there is an awful lot happening right now in terms of OTC and swaps. Who would you see as your main competition? Do you have a first-in advantage?

A: We think it will be a very interesting couple of years as the industry migrates to cleared interest rate swap trading. There are a number of swap execution facilities (SEFs) that are in the early stages of being formed, and that are only waiting for the specific rules from the regulators on what it means to be a SEF and details on required trading platform protocols. Right now the CFTC has put out proposed rules for public comment and the market is waiting for the official rules to be published and the time line for implementation. The CFTC has recently proposed rules to describe how to register as a SEF and there are a number of initiatives and corsortia discussing the possibility of forming SEFs.  So certainly we think there will be a number of SEFs out there. I think anybody who has seen markets develop would probably assume that there will be some sort of consolidation and aggregation. There will be a number of SEFs and liquidity pools that consolidate down to a handful of primary venues. What we aim to be is the primary benchmark futures market equivalent that exists alongside the major SEF platforms.

It's a very large market, and if we can get a meaningful percentage of that overall market we will definitely be considered a success. We think our futures product in all likelihood will be carried on a number of third-party front ends and put in front of major buy side firms -- along with prices from various other SEFs. The legislation mandates that swaps need to trade either on a SEF or a DCM and we believe the clients should be free to decide which execution and clearing venue most suits their needs. 

We also think our unique contract design distinguishes us from the rest of the market as it fully “futurizes” the economic exposures of a standard, cleared OTC interest rate swap. We do that by embedding all of the economics of the swap into a single futures price that gets independently marked-to-market and settled every day. Periodic cash flows are accrued and paid on a daily basis and get reflected in the futures price. We only move cash via the daily variation margin process that is well-known to the futures industry. Our product design is novel enough that we have even filed for a patent on some aspects of our final settlement calculation that allows us to truly match the economics of a standard OTC swap dollar-for-dollar.

We passed $18 billion in notional trading the other day - which relative to the overall OTC rates market is small, but we've shown that trades can occur and get seamlessly processed by futures back office infrastructure. Customers can use their existing futures systems and are not required to implement any new modules.  

Q: Could you give any examples of the early interest in the Eris Exchange and its products? Examples of how enthusiastic the financial industry is about your services?

A: In every major client segment, we have interested participants that are actively pursuing or testing this out and working with us. We have a number of major FCMs that have processed trades, and many more in the pipeline getting ready. On the end user side, we’ve had interest from all the major participant types including asset managers, insurance companies, corporate, GSEs, hedge funds and major proprietary trading shops. 

We are up and running and are available to almost the entire CME FCM population, so we are unique, and that draws a lot of interest. Every one of the major client groups is actively looking at how they are going to respond to and meet the coming regulatory requirements.


Q: How do you see the exchange evolving?

A: Our product road map involves moving from spot-starting, dollar-denominated interest rate swaps to forwards, which is a big part of the market, and then onto swaptions (options on forwards). That will require a lot of organizational focus from the exchange and support from our clearing and technology platform providers, and we’re very busy at the moment executing on that roll-out plan. Beyond that, we could eventually move into different asset classes and other non-dollar-denominated products.



Q: What would be a rough time line for these other products?

A: We are actively working on a number of product fronts with our various partners and will come to market as we have agreed upon time lines for launch. Dollar-denominated forwards is the next product in the queue for us to launch. 


Q: Does the public, or at least the investing public, have a better handle on the OTC market and how the market works, or will the OTC market always be on the fringe to the educated retail user?

A: We are certainly targeting an institutional user base and not the retail market. Even if it is centrally cleared, an over-the-counter interest rate swap is a product tailored to the institutional user. However, after the recent financial crisis, the educated retail market and even the general public has become much more aware of the systemic risk and the pitfalls of bilateral, over-the-counter trading. The general investor and the general U.S. taxpayer is now aware of the risks inherent in OTC derivatives trading and the importance of assessing risk exposures daily and not letting losses accumulate. One of the major lessons we can all take away from AIG and the financial crisis is that futures-style margining works very well, and the system works because there is an independent risk assessment made and money moves daily based on the settlement prices determined by the independent clearing house. So even if the retail investor will not participate in institutional products on Eris Exchange, I think in the post-crisis environment an educated investor or even general taxpayer can appreciate the role this product fills in the marketplace.

Now, do I think OTC products will come into the mainstream? Potentially, for other asset classes, but I don't think interest rate swaps will be a major area of growth in the near term for the retail market. Retail investors are much more involved in equities, metals, agricultural commodities and ETFs. Interest rate swap futures are a little more capital intensive and more of a customized product for institutional clients.


Q: Were you hoping to do something like you are doing now when you were in school?

A: I studied government and international economics in school, I got an MBA and a master’s in international affairs and I started my career at the IFC-World Bank (International Finance Corporation), so I worked heavily in emerging market finance.

I was based in the U.S., but traveled to Asia, Africa, Latin America. I did a lot of work around the world. Then I came back to Chicago, where I grew up, and worked at the CME in emerging market product development. I was involved in international market development and then worked at the CBOT in a similar area. At CBOT we provided international consulting to emerging market exchanges who wanted to set up their own derivatives exchanges.

I've been involved in markets and new market development from early on in my career, and then started Liquidity Direct, which was an options spread trading platform focused on the interest rate options market and supported by a number of major trading firms in the industry. After we were acquired by CME, I ended up  running CME’s business development, working on things like CME’s investment in BMF in Brazil and a variety of OTC clearing initiatives.

So could I have predicted that I would be running an OTC interest rate swap futures exchange? No, that's based on the particular moment in time and the specific macroeconomic context today. But I've been involved in starting new product ventures, new exchange-type ventures my whole career. That's the logical progression. I moved from emerging markets to something more close to home, but it still involves opening up new markets and providing access to new products.


Q: Is there anything else that we haven't talked about that people should know about the Eris Exchange or its products?

A: I think the message that we haven't touched on is this is a very exciting time for the futures industry. The futures market performed extremely well during the recent financial crisis. It handled the Lehman default and bankruptcy without a hitch.

Whereas major players were having issues in the OTC market, the futures market was a stable source of liquidity throughout that crisis. I believe if the industry transition to cleared OTC trading occurs the way we envision, it will be a boon to the futures industry in general. This is a major shift in the futures markets and the capital markets in general, and it's a whole new world of opportunity.

It will ultimately result in a much better, more stable product for the current OTC end users. They get
transparency, they get independent marks, they get a more robust credit facility on the back end and they don't have to worry about balance sheet exposure. They get all the benefits they currently have and they remove a significant part of the risk.

Overall, it's a big win-win for everybody. And it will be a very interesting couple of years as this all plays out.

Top Interest Rate Headlines 1-11-11: Citi Prepares Tranche Market For Muni-Bond Derivatives

Citi Prepares Tranche Market For Muni-Bond Derivatives
BY KATY BURNE, WSJ.com
Citigroup Inc. is planning to start quoting derivatives on different slices of the MCDX, a derivatives index tracking 50 municipal issuers. The move comes as the typically placid muni-bond market has grown turbulent in recent months. Among several concerns in the market is the potential for cash-strapped municipalities to default on their debt.
http://jlne.ws/ffjX0P

Narayana Kocherlakota Speech - It’s a Wonderful Fed - January 11, 2011
The Federal Reserve Bank of Minneapolis
Thank you very much for that generous introduction, and thanks to the Wisconsin Bankers Association for the invitation to join you here today. I’ve visited Madison several times, and I’ve always enjoyed the experience. I’ve always felt that Madison and the Twin Cities are pretty similar as a pair of state capitals with beautiful water views and great universities. Of course, at that level, they sound a lot like Venice, Italy. My speech today will have two distinct parts. In the first part, I will discuss my outlook for the economy in 2011. In the second part, I will look back in time to the Great Recession of 2007-09. My discussion will parallel the classic Frank Capra movie, “It’s a Wonderful Life.” In that movie, the hero, George Bailey, is granted the miraculous opportunity to see how other lives would have been affected if he had never existed. I will do the same for the Federal Reserve and describe how I believe the Great Recession of 2007-09 would have unfolded if the Fed did not exist...
http://jlne.ws/hk1NCp

UBS launches electronic trading of CDS
Credit Flux
UBS has launched electronic trading of credit default swaps on Bloomberg for the major iTraxx and CDX global indices, including SovX WE and CEEMA SovX and also for Western sovereign single names. The bank will publish live prices across these instruments. UBS says it is positioning in the electronic market in anticipation of changes under Dodd-Frank.
http://jlne.ws/fdvnB8

Brevan Howard Says Failure to Address Debt Crisis Is Biggest Growth Risk
By Warren Giles, Bloomberg
Brevan Howard, Europe’s biggest hedge-fund firm, said the greatest risk to global economic growth would be the failure of European Union leaders to tackle the sovereign-debt crisis.
http://jlne.ws/fLmyQm

An inside view of the Fed’s bond buying
Graham Bowley, the Globe And Mail
Deep inside the Federal Reserve Bank of New York, the $600-billion man is fast at work. In a spare, government-issue office in Lower Manhattan, behind a bank of cubicles and a scruffy copy machine, Josh Frost and a band of market specialists are making the Fed’s ultimate Wall Street trade. They are buying hundreds of billions of dollars of U.S. Treasury securities on the open market in a controversial attempt to keep interest rates low and, in the process, revive the economy.
http://jlne.ws/gzHEkL

ELX Reduces Minimum Block Trade Levels to 300 Contracts for the 5, 10 and 30 Yr U.S. Treasury Futures
Press Release
ELX Futures, L.P. (ELX), a leading electronic futures exchange, announced today that it has reduced minimum block trade levels to 300 contracts from 1,000 contracts for the 5, 10, and 30 year U.S. Treasury futures contracts as well as the Ultrabond. The new block trade sizes are effective immediately. The block trade size for the 2-year futures contract remains at 1,000 contracts.
http://jlne.ws/hRveVg

Geithner: The first man blamed becomes last man standing on economic team
By Peter Schroeder, The Hill
Treasury Secretary Timothy Geithner has fended off repeated calls for his resignation to become the last man standing from President Obama’s original economic team.While the president’s inner circle is undergoing a makeover as part of the pre-election “retooling,” Geithner remains the economic mainstay from the earliest days of the administration.
http://bit.ly/gEd5qH

Global accord targets credit bubbles
By Brooke Masters in London - Financial Times
Banking regulators have quietly taken a major step towards harmonised global regulation by agreeing to raise worldwide capital requirements whenever an individual country declares a credit bubble.
http://jlne.ws/ev3SFe

Moody's clashes with EU on advance warnings
By Nikki Tait in Brussels and Richard Milne in London
Moody's, one of the three big credit rating agencies, is mounting strong opposition to potential European Union proposals which would give countries several days' advance warning when sovereign debt ratings were being issued.
http://jlne.ws/gpPZIp

UBS analysts foretell Barclays overhaul
eFinancial News
Barclays is likely to announce a major restructuring of its business along with its full-year results next month, with its investment bank following domestic rival RBS by offloading billions of risky assets into a new "bad bank", according to UBS analysts.
http://jlne.ws/h3kDWU

UBS Global Asset Management Launches Fixed Income Opportunities Fund
Business Wire
CHICAGO--(BUSINESS WIRE)--UBS Global Asset Management today announced the launch of its new UBS Fixed Income Opportunities Fund, an opportunistic fixed income strategy that seeks returns with low correlation to traditional equity and fixed income markets. The Fund seeks to outperform 3-month LIBOR by 3%, net of fund ordinary operating expenses, over rolling five-year time horizons.
http://jlne.ws/exCGj4

Bank of China Brings Yuan Trading to the U.S.
By LINGLING WEI, WSJ.com
Bank of China Ltd., one of the country's four major state-owned banks, has opened trading in the Chinese currency to customers in the U.S., representing a symbolic endorsement by Beijing of foreign trading in the yuan. Until the middle of last year, the buying and selling of yuan, had largely been confined within China's borders by the country's strict capital controls. Trading in the yuan has ballooned in Hong Kong since Beijing first opened it up to offshore trading this past July.
http://jlne.ws/eZQ5uk

Fubon bids to take bank private
The Standard
Taiwan-based financial services company Fubon Financial Holding yesterday said it plans to privatize its Hong Kong unit - Fubon Bank (Hong Kong) (0636.HK) - for HK$1.47 billion in an effort to lower costs.
http://jlne.ws/9kLhcr

Here's That Big Citigroup Report On Why Absolutely No Sovereign Debt Is Safe
Business Insider
Citigroup economists have brought into question what is assumed to be the world's risk free asset, sovereign debt.
http://jlne.ws/hsnSGn


CBOE To Launch Options Alternative To Credit Default Swaps
http://jlne.ws/ghY98w

CME Group Celebrates One-Year Anniversary of the Ultra Treasury Bond

CME Group Celebrates One-Year Anniversary of the Ultra Treasury Bond
Fastest Growing Interest Rate Product Ever Launched
CHICAGO, Jan. 11, 2011 /PRNewswire/ -- CME Group, the world's leading and most diverse derivatives marketplace, today marked the one-year anniversary of the Ultra Treasury Bond contract.  The contract, which is listed with and subject to CBOT rules, is the fastest growing interest rate product ever launched by the CME Group exchanges.   

Robin Ross, Managing Director of Interest Rate Products, and Jonathan Kronstein, Associate Director of Interest Rate Products, discuss the one-year anniversary of the Ultra Bond contract here.
The Ultra Bond was launched on January 11, 2010, in response to strong customer demand for a contract that mimics the duration of a 30-year Treasury bond.  Milestones include:

Nearly 4,500 contracts changed hands on its first day of trading;
First quarter average daily volume surpassed 14,000 contracts;
Fourth quarter average daily volume exceeded 52,000 contracts;
On November 24, the Ultra experienced record volume of 349,000 contracts traded, and record open interest of 380,000;
As of December 31, open interest was more than 307,000.


For more information about the Ultra Bond, please visit www.cmegroup.com/ultra. 

As the world's leading and most diverse derivatives marketplace, CME Group (www.cmegroup.com) is where the world comes to manage risk.  CME Group exchanges offer the widest range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, weather and real estate.   CME Group brings buyers and sellers together through its CME Globex® electronic trading platform and its trading facilities in New York and Chicago.  CME Group also operates CME Clearing, one of the largest central counterparty clearing services in the world, which provides clearing and settlement services for exchange-traded contracts, as well as for over-the-counter derivatives transactions through CME ClearPort®.  These products and services ensure that businesses everywhere can substantially mitigate counterparty credit risk in both listed and over-the-counter derivatives markets.

The Globe logo, CME, Chicago Mercantile Exchange, CME Group, Globex, E-mini and CME ClearPort are trademarks of Chicago Mercantile Exchange Inc.  CBOT and Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago.  NYMEX and New York Mercantile Exchange are trademarks of New York Mercantile Exchange, Inc.  COMEX is a trademark of Commodity Exchange, Inc.  All other trademarks are the property of their respective owners.  Further information about CME Group (NASDAQ: CME) and its products can be found at www.cmegroup.com. 

Top Interest Rate Headlines 01-10-11: CME Sees Jump In Swaps Clearing Later This Year

CME sees jump in swaps clearing later this year
By Ann Saphir, Reuters
CME Group Inc (CME.O), which began clearing interest-rate swaps in October, expects a jump in business this year after a U.S. legislative mandate on clearing goes into effect, a CME executive said on Monday.
http://jlne.ws/gecvo3

Consumers & the Economy, Part I: Household Credit & Personal Saving
By Reuven Glick and Kevin J. Lansing, Federal Reserve Bank Of San Francisco
In the years since the bursting of the housing bubble, the personal saving rate has trended up from around 1% to around 6%, while the ratio of household debt to disposable income has dropped from 130% to 118%. Changes over time in the availability of credit to households can explain 90% of the variance of the saving rate since the mid-1960s, including the recent uptrend, according to a simple empirical model.
http://jlne.ws/fJCVY5

Dallas Fed Chief Richard Fisher: 'Slow Haul' to Add Jobs in 2011
Dallas Federal Reserve Bank President & CEO Richard Fisher tells WSJ's Michael Derby job growth will be slow in 2011, and that he does not support extending QE2 beyond the current plan.
http://jlne.ws/fScex3

Bond Distress Tumbles to Lowest Since '07 on Refinancings
By Bryan Keogh and John Detrixhe, Bloomberg
The percentage of corporate bonds considered in distress is the lowest in more than three years as the U.S. economic recovery gives fixed-income investors the confidence to lend to the riskiest borrowers.
http://jlne.ws/erjC3V

Germany denies plan to press Portugal to seek bailout
AFP
Germany on Sunday denied a report saying it plans, together with France, to press Portugal to seek a bailout in order to stop Spain and Belgium from becoming the next euro crisis casualties.
http://jlne.ws/geObI2

Economists foretell of U.S. decline, China's ascension
By Mark Felsenthal, Reuters
To hear a number of prominent economists tell it, it doesn't look good for the U.S. economy, not this year, not in 10 years.
http://jlne.ws/gfnllc

UK govt will not limit banks' bonus pools
Reuters
The British government will not set limits on the total amount of bonuses banks can pay their staff this year, a spokesman for Prime Minister David Cameron said on Monday.
http://jlne.ws/hWkEjn

Fed Turns Over Record Profit $78.4 Billion to Treasury
Reuters
The Federal Reserve reported Monday its earnings jumped by more than 50 percent in 2010 to a record $80.9 billion on its massive holdings of securities, and it is turning the bulk of it over to the U.S. Treasury Department.
http://jlne.ws/hAULWu

ISDA Brings Back Huey Evans as Europe Prepares for Swaps Rules
By Shannon D. Harrington and Matthew Leising, Bloomberg
The International Swaps and Derivatives Association hired Gay Huey Evans, a former Barclays Plc executive and Financial Services Authority regulator, as it seeks to shape regulation of the swaps market in Europe.
http://jlne.ws/fJLnUe

Transcript: Walter Lukken - Forbes.com
Steve Forbes: Walter, good to have you with us. Thank you for joining us. What is New York Portfolio Clearing?
Walter Lukken: New York Portfolio Clearing, or NYPC as we call it, is a derivatives clearinghouse that we're building from the ground up...
http://jlne.ws/hEezos

Buyside seeks clearer view of OTC trading reconstruction
By Jeremy Grant - Financial Times
Working nights and weekends is probably not in the job description of many government employees, and certainly not at the two US market regulators charged with coming up with detailed rules and regulations to implement sweeping reform of the over-the-counter (OTC) derivatives markets. read the full report
http://jlne.ws/eNTeR3

Quantitative easing is working, says Fed
By Robin Harding in Washington - Financial Times
Inflation is a percentage point higher and there will be 3m more jobs in 2012 because of the US Federal Reserve's programme of asset purchases, Fed vice chair Janet Yellen said at the weekend, drawing on new Fed research.
http://jlne.ws/faCuyM

SIFMA Releases Study: "Considerations For Implementation Of Proprietary Trading Restrictions"
Press Release
SIFMA today released a study outlining the issues and challenges facing regulators in implementing the proprietary trading ban under Section 619 of the Dodd-Frank Act (the "Volcker Rule"). The study focuses on a sample of different asset classes in U.S. financial markets to illustrate the dynamics that are representative of the full range of capital markets activities in which dealers operate.
http://jlne.ws/cxgbC7

British Bankers' Association Welcomes EU Framework For Bank Recovery And Resolution
Press Release
New EU proposals to put in place new safeguards for taxpayers against the failure of financial institutions were welcomed by the British Bankers' Association today.
http://jlne.ws/cxgbC7

UBS reorganises FICC structuring team
eFinancial News
Swiss investment bank UBS has reorganised its senior fixed-income, currencies and commodities structuring team after the departure of Paul Czekalowski from the division, according to sources familiar with the matter.
http://jlne.ws/gNc2Im

RBS admits to 'laziness' at elite bank
Scotland on Sunday
THE global head of Royal Bank of Scotland's wealth management business has admitted that "laziness" at its Adam & Co private bank was to blame for a crisis of confidence that swept through the business last year.
http://jlne.ws/fFRxuT

HSBC delays bonus payments
Daily Telegraph
Bonus payments at HSBC have been delayed by a month following a decision by the bank not to reward its staff before its financial results have been approved and published.
http://jlne.ws/g00mDu

Next up for Barclays - a bad bank?
Posted by Tracy Alloway - Financial Times
Here's a brave call from UBS bank analysts on Monday. They reckon Barclays could be moving towards a restructuring - that is, shedding some of its "value destroying" pre-crisis assets and refining its business ops in an effort to avoid a Basel III-induced earnings drag and boost pay-offs to shareholders.
http://jlne.ws/eJcNYe

Credit Suisse Tweaks Bonus Plan
BY KATHARINA BART - WSJ
ZURICH-Credit Suisse Group said Monday it will alter how it pays banker bonuses, including having a greater portion of year-end rewards deferred and linked to the bank's future performance.
http://jlne.ws/gBHnH2

US Fiscal Policy and the Global Outlook, Speech by John Lipsky, First Deputy Managing Director, IMF

US Fiscal Policy and the Global Outlook
Speech by John Lipsky, First Deputy Managing Director, International Monetary Fund
At the American Economic Association Annual Meetings, Roundtable on "The United States in the World Economy"
Denver, January 8, 2011

Good morning. I’m delighted to take part in this Roundtable, and to have the honor to appear with such an eminent, productive and distinguished panel. I’d like to address three topics in my brief remarks today: the outlook for U.S. fiscal policy, its impact on the global economy, and how new mechanisms for international policy cooperation hold out the promise of improving global economic balance and delivering stronger and more stable growth.

U.S. Fiscal Policy

Turning first to U.S. fiscal policy, the slow pace so far of economic recovery and weak job creation—despite the wide margin of excess capacity—argues for maintaining supportive monetary and fiscal policies in the very near term. Indeed, expansionary fiscal policy already played a critical role in averting a deeper U.S. recession. According to IMF analysis, fiscal measures contributed about 2 percentage points to GDP growth in 2009, and another one percentage point last year. At the same time, federal debt held by the public has risen from about 36 percent of GDP in 2007 to about 62 percent of GDP in 2010, while prospective debt dynamics have worsened significantly. In the absence of corrective measures, and taking into account underlying fiscal pressures that predated the crisis, debt could reach about 95 percent of GDP by the end of this decade—a level last reached immediately following World War II. Without policy adjustments, subsequently the debt simply would keep rising. From this perspective, the need for urgent action to secure medium-term fiscal sustainability appears to be self-evident.

Given the sluggishness of the recovery, the recent adoption of a new U.S. fiscal package is understandable. The measures likely will boost growth this year by about half a percentage point. Of course, it also will raise the deficit. Maintaining a supportive fiscal policy stance at this time reflects the reality that with policy interest rates near zero, the effectiveness of monetary policy is uncertain. Having said this, the Fed’s latest quantitative easing program—that likely will have only a modest impact on growth—appears nonetheless to have reduced perceptions of downside risks, by reinforcing the Fed’s commitment to preventing an ongoing decline in already-low long-term inflation expectations and to supporting the recovery. Although causality is difficult to demonstrate convincingly, inflation expectations rose notably last August—as reflected in the yields on Treasury Inflation Protected Securities (or TIPS)—after the Fed signaled the imminent prospect of further unconventional easing.

The new fiscal package includes several measures that are likely to help boost aggregate demand, although the package also includes other measures that may be less likely to do so. The extension in unemployment benefits will put cash directly into the hands of those with a high propensity to spend—although that is not the sole justification for such a move. The extension of temporary tax breaks for low and middle-income households also will have a positive impact on spending, although with the well-known limitations of temporary tax measures. Other measures were not as well targeted, and the package entails a sizable increase in the deficit—by about 1 percent of GDP in both FY2011 and FY2012—compared to the IMF’s previous forecast, that already included the impact of some anticipated measures (like not changing marginal tax rates for low and middle-income households).

Despite the expected positive impact on growth, the new measures also will make it more difficult for the United States to meet the commitment made by G-20 members at last year's Toronto Summit to halve the deficit as a percent of GDP between 2010 and 2013. In this sense, the stakes are being raised on the development of credible plans to attain medium-term fiscal sustainability.

Indeed, the challenges facing U.S. public finances should not be underestimated, given the sluggish recovery and the prospect of significant increases in aging and health-related spending.

Nonetheless, it’s important to note that only about one-fifth of the overall increase in U.S. public debt projected by the IMF through the end of the decade—a little over 10 percentage points of GDP—is accounted for by the discretionary fiscal measures implemented in response to the recent downturn. And of this, the net cost of the financial sector rescue efforts probably will represent less than 1½ percentage points of GDP (including the support provided to Fannie Mae and Freddie Mac). The bulk of the projected debt increase reflects the severity of the recession that lowered output, raised spending and depressed tax revenues. The prospect that the crisis will have lowered potential growth—thereby lowering the future rate of revenue growth, as well as its current level—also could play a role. Of course, to the extent that growth surprises on the upside, the eventual burden of needed fiscal adjustment could be lightened.

In fact, there may be a brief near-term window of opportunity opening for U.S. fiscal policy adjustment that shouldn't be missed. For now, U.S. interest rates remain low by historical standards—in part due to low growth and inflation prospects, but also reflecting a low risk premium on U.S. government debt. As a result, total public debt service payments have not risen relative to GDP, despite the sharp rise in the U.S. debt-to-GDP ratio. Moreover, as the economy gains momentum, automatic stabilizers will help to lower the deficit—at least in the short run. In our view, the United States needs to make the most of this window of opportunity to tackle structural fiscal problems—especially entitlements—before real rates begin to renormalize, and the positive impact of the automatic stabilizers on the deficit recedes, adding to the perceived difficulty of making progress on longer-run fiscal challenges.

The ongoing debate on how best to achieve medium-term fiscal consolidation has received an important boost from the National Commission on Fiscal Responsibility and Reform. In its recent report, the Commission proposed an ambitious consolidation plan, emphasizing the need for broad-based revenue and spending measures. The plan sets very ambitious targets—to stabilize public debt by FY2014 and return it to its pre-crisis level of about 40 percent of GDP by 2035. Under the Commission's proposals, tax expenditures would be scaled back, allowing marginal tax rates to be reduced. Social Security would be put on a sound financial footing through measures such as means-testing benefits and increasing the retirement age. And to contain health care costs, significant medium-term savings would be attained through a reform of cost-sharing rules and of certain public programs, and also by setting limits—beginning in 2020—on the growth of all federal health-related transfer programs. Another widely-cited idea to support fiscal consolidation—although not put forward by the Commission—is to introduce a national consumption tax, such as a value-added tax—or VAT. Such a measure could enhance national savings while raising revenue with limited economic distortions.

The Commission also calls for reforming budgetary processes to help keep deficit reduction on track. These would include caps on discretionary spending through 2020—with the goal of bringing such spending in real terms back to 2008 levels by 2013; and from then onwards limiting its growth to one-half the projected inflation rate. More generally, by enshrining fiscal targets (including the debt-to-GDP ratio) in budget proposals and by enacting concrete legislation relatively soon, private sector expectations could become progressively more optimistic about fiscal policy prospects, helping the sustained effort that will be needed to anchor fiscal credibility.

Fiscal consolidation not only is a challenge for the federal government, but also for state and local governments. State and local debt currently amounts to about 20 percent of GDP, or about a third of the size of the federal debt. However, unfunded state and local pension and retirement health care entitlements pose significant medium-term risks, as they are estimated at anywhere from $1 trillion to $3 trillion, or possibly equal in size to their outstanding debt. In some states and localities, servicing such a debt burden under current constitutional and other legal strictures would require significant cuts in discretionary spending and/or huge tax increases. Although many states and localities already have started facing these issues, for example by scaling back retirement benefits for new employees, much more decisive action will be required over time in order to reduce medium-term solvency risks.

In contrast to the federal government, most state and local governments are mandated to maintain balanced operational budgets. While this arrangement has prevented a greater run-up in debt, it also has mandated cuts in discretionary spending (and other measures like staff furloughs), following a period in which such spending had increased significantly. Emergency federal transfers, covering about a third of the states’ shortfalls in FY2009 and FY2010, have helped to cushion the blow some extent. For now, state and local revenue appears to be recovering, with tax receipts up 5 percent on an annual basis in the third quarter of 2010. However, the expected phase-out of federal emergency transfers, combined with the need to re-build fiscal reserves and create room for rising entitlements, mean that fiscal consolidation at the local level will remain an ongoing and urgent challenge for some time to come.

Implications for the global economy

With the United States still accounting for a quarter of the global economy, a strengthening of the U.S. recovery would have positive global implications. For example, it is estimated that the effect of fiscal stimulus boosted U.S. imports in 2010 by about $100 billion. Although this represents only about 1 percent of global imports, this added demand undoubtedly made a larger contribution through indirect effects on partner country growth. Perhaps more importantly, the stimulus played a helpful role in underpinning confidence by reducing the risk of a sharper and more sustained global downturn.

Looking forward, sound U.S. public finances will be essential for achieving the G-20 Leaders’ triple goals of strong, sustainable and balanced global growth. Moreover, the absence of a credible, medium-term fiscal strategy eventually would drive up U.S. interest rates, with knock-on effects for borrowing costs in other economies. According to IMF calculations, each percentage point increase in the U.S. debt-to-GDP ratio could drive up long-term interest rates by roughly 3 basis points. Under the baseline IMF forecast, therefore, the expected higher U.S. debt could contribute up to an additional 100 basis points to long-term bond yields by 2016, over and above the expected baseline rate increases. And the longer fiscal consolidation is delayed, the more likely would be a sharper rise in Treasury yields—which could prove disruptive for global financial markets and for the world economy.

In these circumstances, if the U.S. makes a meaningful down-payment on medium-term consolidation—for example, by making clear progress on reforming the tax system and entitlements—it would represent a “demonstration effect” that would add credence to global adjustment efforts.

United States fiscal consolidation therefore could provide a powerful example of the potential benefit of global policy cooperation. As discussed in the October 2010 World Economic Outlook, fiscal consolidation—when analyzed in isolation—tends to depress near-term growth, but boost it over the longer term. Thus, it is understandable that Governments may be reluctant to adopt fiscal adjustment measures in light of the short-term cost. However, if at the same time trading partners adopt policies that support their own domestic demand, the resulting boost to their imports will help to offset their partners' costs of fiscal consolidation, thus making the adjustment more likely to occur. In other words, collective policy action can help to deliver a solution that is better for all.

International policy cooperation

Although it is still early days, there is potential progress to report on international cooperation. In the wake of the crisis, the world’s largest economies are creating a novel mechanism to help guide fundamental economic policies in the post-crisis era, underpinned by what is intended to be a serious and specific process of mutual assessment. I am referring to the G-20’s Framework for Strong, Balanced and Sustainable Growth, launched at their Pittsburgh Summit in September 2009.
The backbone of this Framework is a multilateral process through which G-20 countries have identified objectives for the global economy and the policies needed to reach them. There is a broadly shared consensus that coherent and consistent adjustment efforts will be required by all G-20 economies if the goals are to be attained. In general terms, there is agreement regarding the nature of the required policies.

Framework Policy Matrix

The G-20 members also have committed to the “Mutual Assessment Process”, or MAP, through which their progress towards meeting shared objectives will be assessed. For its part, the IMF has been asked to provide technical and analytical support, with inputs from other international organizations on issues such as labor and product markets, financial markets, and trade.

In an initial stage, G-20 members shared with each other—and with IMF staff—their policy plans and economic projections for the next 3–5 years. These were evaluated by the IMF, against the common framework goals. In the Fund’s view, the projections were relatively optimistic and subject to notable downside risks. In addition, they did not provide for sufficient fiscal adjustment, and implied limited progress towards external rebalancing.

The IMF used two alternative scenarios to highlight the central aspects to judging prospective outcomes. First, a downside scenario quantified the implications of the key risks to the authorities’ projections. At the same time, an upside scenario suggested actions that could improve the outlook and bring all countries closer to their objectives. The basic insight of the upside scenario is that there is a coherent set of alternative policies that reflects a process of optimization in a global setting that—if implemented—would be expected to produce a superior outcome (relative to the baseline) for all G-20 economies.

Growth Payoff At Stake in Policy Choices

In this sense, prospects for whether the MAP upside policies will be implemented depend principally on the answers to two questions. First, do the G-20 authorities accept that the superior alternative policy set is real and realistic? If so, it is in every G-20 member's interest to implement the indicated policy adjustments. Second, does each G-20 member trust that the others will follow the policies indicated for each of them?

At their Toronto and Seoul Summits in 2010, the Leaders affirmed and reaffirmed their intention to aim for the MAP’s superior outcome. In Seoul, they endorsed new aspects that are designed to increase the likelihood that all G-20 members will implement the intended policies, including the use of agreed "indicative guidelines" to gauge progress on reducing imbalances. They also made detailed, country-specific policy commitments that could bring the global economy closer to the upside scenario. These were published as a 49-page attachment to the Seoul Leaders' Declaration.

Of course, the MAP lacks enforcement “teeth”. And its development will take time, as all countries want to be assured that the process reflects their views and interests. But so long as each authority accepts that the upside potential exists, each will have a concrete incentive to seek it.

Returning to the initial topic, early action that boosts prospects of a credible medium-term U.S. fiscal consolidation would enhance the prospects for effective international policy coordination. By demonstrating that the United States is ready to do its part in taking the steps needed to deliver strong, stable and balanced global growth, other countries will be encouraged to follow through on their commitments, as well. And my Fund colleagues and I are convinced that effective international policy cooperation can improve global economic outcomes, and that the chances of success in this effort are the most promising that we have seen.