Category Archives: Fixed Income

Rising Above the Noise in ESG: Green Bonds

The emergence of ethical and sustainable concerns and the need for environmental investing has come with a wide range of options for fixed income market participants to navigate. One approach has been to rely on evaluation metrics, or ratings that measure the environmental and social impact of companies’ operations. The main challenge of this approach is that currently there is no clear standard of measurement in the market. Researchers at MIT working on the Aggregate Confusion Project found that when they compared “two of the top five ESG rating agencies and compute the rank correlation across firms in a particular year, we are likely to obtain a correlation of the order of 10 to 15 percent. At least the correlation is positive! It is very likely (about 5 to 10 percent of the firms) that the firm that is in the top 5 percent for one rating agency belongs to the bottom 20 percent for the other.”

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Can SDGs Shape the Future of Corporate Disclosure?

Businesses are showing increasing interest in using the Sustainable Development Goals (SDGs) to inform and enhance their social and environmental programs and ultimately their business strategies.  The SDGs were adopted by the United Nations in 2015 and include 17 ambitious goals and 169 targets aimed at ending poverty, protecting the planet, and ensuring prosperity for all.

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What the Central Banks Are Saying About Cryptocurrencies

Eight years since the birth of bitcoin, central banks around the world are increasingly recognizing the potential upsides and downsides of digital currencies.

The guardians of the global economy have two sets of issues to address. First is what to do, if anything, about emergence and growth of the private cryptocurrencies that are grabbing more and more attention — with bitcoin now surging toward $10,000. The second question is whether to issue official versions.

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Bond traders see MiFID’s silver lining as rules crack open data

European bond traders are looking on the bright side of tougher transparency rules — unprecedented market data that can help them make sure they’re not getting ripped off. New regulations will require details on many transactions to be published within 15 minutes, and sometimes before the trade has gone through, previously unheard of in the traditionally opaque bond market. Some dealers and investors are starting to plan how they will capture and analyze the data to help them work out fair values for trades.“Everyone should be analyzing and using the data to better understand the market,” said Mehmet Mazi, HSBC Holdings Plc’s global head of credit trading, and a speaker at this week’s Fixed Income Leaders Summit in Amsterdam. “Firms who do this smarter will have an edge.”Traders are welcoming the influx of data even though it risks making their jobs harder by potentially exposing their intentions to other parties in the predominantly over-the-counter market.  Read more

ISDA – Asia-Pacific OTC Derivatives Study

Derivatives markets have grown markedly in Asia-Pacific in the past decade, with Hong Kong and Singapore now pre-eminent in regional trading of FX and interest rate derivatives (IRD). Total IRD daily average turnover in Asia-Pacific markets increased to $298.3 billion (US dollars unless otherwise specified) in April 2016 from $187.4 billion in April 2007, while the equivalent figure in FX increased to $1.7 trillion from $1 trillion.

This rate of growth has outstripped that of global derivatives markets. Between 2007 and 2016, IRD turnover in Asia-Pacific markets grew at 5% compound annual growth rate (CAGR), while FX turnover grew at 6%. Global IRD and FX turnover grew at 4% and 5% CAGR, respectively, over the same period.

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Webinar: Liquidity Risk Management: What’s Next? – WebEx – Nov 14, 2017, 10am ET/1pm ET

As the debate over the SEC rule 22e-4 continues, one fact remains constant: for mutual fund managers and ETF sponsors, prudent liquidity risk management practices are critical to fulfilling their fiduciary responsibility. Whether the rule is altered or delayed, firms will ultimately need to revisit these practices and their compliance programs. Compliance requires robust data and valuation coverage as well as a strong multi-asset class risk framework and reporting capabilities.

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Join Carlo AcerbiManaging Director of Risk and Regulation Research at MSCI, and Dan HuscherExecutive Director of Fixed Income Pricing Product Development at IHS Markit, who will discuss how the latest industry developments may impact the implementation of SEC rule 22e-4 and the role data and analytics play in establishing a liquidity risk management program.

AGENDA TOPICS

  • Practical Guidance for Establishing a Liquidity Risk Management Program
  • IHS Markit’s Approach to Gathering Data on Thinly-traded Instruments
  • Overview of MSCI LiquidityMetrics Multi-asset Class Liquidity Risk Management Framework

REGISTER NOW

Session 1
7:00AM PST (San Francisco)
10:00AM EST (New York)
3:00PM GMT (London)
4:00PM CET (Paris)
7:00PM GST (London)

Session 2
10:00AM PST (San Francisco)
1:00PM EST (New York)
6:00PM GMT (London)
7:00PM CET (Paris)

U.S. Corporate Debt Issuance on Pace for Record Year

U.S. corporations continue to take advantage of the accommodative conditions created by a protracted period of low interest rates and strong market participant demand.  As of Oct. 1, 2017, U.S. investment-grade corporate debt issuance surpassed USD 1 trillion—three weeks ahead of 2016’s pace.  Additionally, the amount of speculative-grade corporate debt issued through the first three quarters of 2017 is 17% higher than it was after the first three quarters of 2016.  Combined, U.S. corporate issuance is on pace for another record year, which would mark the sixth consecutive year of increased corporate debt issuance (see Exhibits 1 and 2).

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China: Corporate Governance risks for investors

China adopted its first corporate governance code in 2001, ahead of many APAC peers, with updates in 2011 and 2016. As China’s market becomes more accessible to global investors, corporate governance practices will likely face increased comparison to global standards.  Our report references MSCI ESG Research’s rich corporate governance data to examine the opportunities and risks to minority shareholders presented by current corporate governance practices in the MSCI China Index.

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Delhi Event Invite – Challenges in FRTB Implementation, Oct 27, 7pm

Challenges in FRTB Implementation
Register Now
Date: Friday, October 27, 2017
Time: Registration: 7:00-7:30 PM
Presentation: 7:30-9:00 PM
Networking Reception: 9:00-10:00 PM
Location: Ramada Gurgaon Central
Plot 2 Sector 44, Central Emerald Hall
Gurugram , Haryana , 122003
India
Speaker: Udit Mahajan
Co-Head of Market Risk Projects, Deloitte UK
Synopsis: The Fundamental Review of the Trading Book (FRTB) represents an evolution of Basel regulation impacting Capital Markets with a deep focus on addressing the failings identified in the financial crisis. FRTB is a material overhaul of the Market Risk framework which impacts all core functions in Capital Markets (front office, risk, finance, treasury, and technology).

This session is focused on some of the key challenges faced by front office, risk methodology, and technology teams when adopting FRTB. Out of the many challenges being faced by banks today, five will be covered in detail:

  1. Front Office-Risk-Finance Alignment
  2. External Transactions and NMRF
  3. Multiple Revaluations in IMA
  4. Capital Optimization and Business Strategy
  5. Trading Desk Structure
 This event is organized as Chapter meeting for GARP
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Rising Fear of Extreme Events

High skew levels indicate heightened fears of “tail risk” – the chances of unlikely but highly consequential events that could sink share prices. Low market volatility largely continued through the summer, but how has options skew behaved – has it fallen to more “normal” levels? Do institutional investors appear to be dropping or keeping their downside protection?

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New market risk code won’t trigger big bank capital hikes: Basel

LONDON (Reuters) – Most banks will not have to hike capital significantly to meet stricter rules to counter trading risks, a survey showed on Tuesday, after Asian nations sought to delay introducing the code citing concerns about the need for more funds.

The code, known as the “fundamental review of the trading book” or FRTB, was drawn up by the Basel Committee on Banking Supervision and tightens “market risk” capital requirements.

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Global debt may be understated by $13 trillion: BIS

LONDON (Reuters) – Global debt may be under-reported by around $13 trillion because traditional accounting practices exclude foreign exchange derivatives used to hedge international trade and foreign currency bonds, the BIS said on Sunday.

Bank for International Settlements researchers said it was hard to assess the risk this “missing” debt poses, but that the main worry was a liquidity crunch like the one that seized FX swap and forwards markets during the financial crisis.

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Placing liquidity at the heart of risk management

Financial regulators around the world have sought to reduce the systemic risk to liquidity caused in periods of market volatility. SEC 22e-4, the US’s most recent regulatory response to liquidity risk, will start to require compliance as early as of June 2018 and while it may feel like there’s enough time to prepare, the challenge of implementing liquidity risk systems at financial firms is actually a significant undertaking.

Correlation Analysis of VIX® and High Yield and Emerging Market Bonds

The CBOE Volatility Index® (VIX) measures the implied volatility of the S&P 500® over a 30-day period.  It is widely followed by market participants across asset classes to gauge market sentiment.  Traditionally, fixed income market participants have incorporated it into macro analysis.

Can VIX-related products be used as hedging tools for some bond sectors that exhibit certain equity-like features?  For high yield and emerging market bonds, credit and liquidity risks are more defining than duration risk.  Dor and Guan (2017) demonstrated that equity futures can be used to hedge high yield portfolios.  We investigated a correlation analysis of high yield and emerging market bonds to VIX and VIX futures.

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The Risk in CoCo Bonds You Could Be Missing

Contingent Convertible bonds – known as “CoCos” – have grown popular among European (and increasingly Asian) financial institutions since the 2008-09 financial crisis. They offer attractive yields but come with a challenge: figuring out when a CoCo bond is at risk of being converted to equity, which effectively can eradicate the bond’s value.

The answer, as MSCI’s Gergely Szalka writes in a new blog post, may lie in having a dedicated risk model that picks up on early warning signs. Gergely shows how MSCI’s CoCo pricing podel would have detected the rising risk that preceded this year’s collapse of Spain’s Banco Popular ahead of a standard risk model.

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How the Liquidity of S&P 500 Investment-Grade Bonds Compares Against Non-S&P 500 Bonds

Liquidity may be defined as the ability to buy or sell a bond within a reasonable period of time and at a reasonable price.  A simple way to compare two bonds is through the use of Trade Reporting and Compliance Engine (TRACE) daily volume data.  The data represents the daily aggregation of each reported trade throughout the day.  The existence of reported volume data can be indicative of the frequency of trading.  For example, if a bond has volume data for 20 of the last 22 trading days, then it trades relatively frequently—nearly every day.  The volume data itself can also indicate the size in which it trades daily.  For two bonds, we can compare the turnover rate, defined as the total volume traded in 22 days as a percentage of the amount outstanding.  For example, a bond may be considered more liquid relative to another one if a larger portion of its total outstanding is traded over a one-month period.

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[Webcast] Examine Risk-Based Approaches to Multi-Asset Strategies, Sept 28, 2pm ET

TRADITIONALLY, THE RETURNS FROM ONE ASSET CLASS have tended to be uncorrelated with the returns of other asset classes, leading to the widespread investment practice of diversification. As investors continue to seek positive returns with lower levels of risk, the time is right for examining Risk-Based Approaches to Multi-Asset Strategies.

Register now, Sept 28, 2pm EST

TOPICS OF DISCUSSION
Economics now—where are we in the cycle and what can we expect next?
Hedging—what can mainstream investors do to hedge against future events?
Diversification—a foundation stone of Modern Portfolio Theory—is it still one of the best solutions for asset allocation and management?