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? 

Default reinforces wariness over Chinese corporate bonds

Bondholders in China’s Wuyang Construction Group are furious over the company’s default as they note its failure to reveal a long list of problems when the bonds were sold. The tale of woe is just one casting a pall over China’s efforts to build up its corporate bond market, where companies are more accustomed to government bailouts than the possibility of failure.

Hedging points to rising caution over corporate debt

Money continues to flow into the US investment-grade bond market but there’s also hedging as investors turn to credit default swaps. Analysts see the recent growth in that market as a sign of caution and possibly a leading indicator of bond market weakness.

Mckinsey : Impact investing finds its place in India

Rising demand for socially responsible and purpose-driven finance has resulted in new ways of putting capital to work the world over. In the past decade, what is now known as “impact investing” has challenged the long-held view that social returns should be funded by philanthropy and financial returns should be funded by mainstream investors.

ISDA Webinar : The Foundations of an Efficient Market Infrastructure, 14 Sept 8am ET

ISDA will host an introductory webinar tomorrow (Thursday, September 14) at 8:00 am NY time / 1:00 pm London time to provide an overview of an initiative to facilitate the adoption of emerging technologies, such as distributed ledger and smart contracts. The webinar will cover the importance of common data and process standards to aid interoperability, and will provide an update on ISDA’s work to identify and define core lifecycle events and actions and consolidate them within a so-called common domain model (CDM).

All participants must register in advance to listen to the webinar by clicking here.

Register now

https://services.choruscall.com/links/isda170914.html

Treasury bill yield curve signals 15% chance of US default

 

There is a 15% chance Congress will fail to raise the federal government’s debt limit in time to avoid sending the debt into technical default, according to the Treasury bill yield curve. The conclusion is based on a formula that looks at Treasury yields for debt maturing around the date the government would run out of cash, and compares it with yields on bills maturing at other times

Big banks signal approaching downturn

Analysts at Citigroup, HSBC Holdings and Morgan Stanley are warning that the end is near for the world’s market rallies and that the business cycle is headed into a downturn. They say investors are ignoring important data and market valuations, putting debt and equity markets at risk of sharp corrections

What the debt ceiling debate means for corporate debt

 

If the US were to lose its AAA credit rating due to failure to raise the debt ceiling, markets would certainly react. But two Bank of America Merrill Lynch strategists say the rating change would have little immediate effect on investment-grade corporate debt, although the Washington dysfunction suggested by the situation would

Mortgage bonds gain ground over corporate debt

Big investors — including PIMCO, Goldman Sachs Asset Management and Columbia Threadneedle — are abandoning high-yield corporate debt for bonds tied to pre-crisis subprime mortgages. They say the assets offer more attractive yields for the risks assumed

Sales of investment-grade US corporate debt surge

Major US corporations have sold more than $1 trillion of investment-grade debt this year, exceeding that threshold earlier in the year than ever before. The market for corporate bonds usually slows in August, but several large offerings, including $17.25 billion from British American Tobacco, have surfaced in recent weeks. Read More

Lessons From the Quant Liquidity Crunch

Commentary: A decade after the August 2007 “Quant Liquidity Crunch,” Peter J. Zangari, global head of research and product development, writes about the changes and lessons learned from this event and the ensuing financial crisis. Among them: Best-in-class risk management is now integrated into the investment process and investors have placed greater emphasis on alternative sources of return, from factor investing to private asset classes.

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A Tesla 2017 Update: A Disruptive Force and a Debt Puzzle!

These are certainly exciting times for Tesla. The first production version of the Tesla 3 was unveiled on July 28, with few surprises on the details, but plenty of good reviews. Elon Musk was his usual self, alternating between celebrating success and warning investors in the stock that the company was approaching “manufacturing hell”, as it ramps up its production schedule to meet its target of producing 10,000 cars a week. It is perhaps to cover the cash burn in manufacturing hell that Tesla also announced that it planned to raise $1.5 billion in a junk bond offering. Investors continued to be unfazed by the negative and lapped up the positive, as the stock price soared to $365 at close of trading on August 9, 2017. With all of this happening, it is time for me to revisit my Tesla valuation, last updated in July 2016, and incorporate, as best as I can, what I have learned about the company since then.

The market risk that makes Nobel laureate Robert Shiller ‘lie awake worrying’

Yale University economics professor Robert Shiller has a warning for investors.

The Nobel laureate says low volatility paired with a questionable price-earnings ratio could wipe out a chunk of the stock market’s value.

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