Derivatives
Structured Finance: Unleash the Inefficiency
Nov 29th, 2020 | Filed under: Derivatives, CDO Structuring and Credit RIsk, Newly Added, Credit Derivatives, CAIA Alternative Viewpoints, Structured Credit Products, Structured Products
By Shreekant Daga, CAIA, CFA, FRM What is structured finance? Finance has several theoretical traditional and modern frameworks in practice. Needless to say, often the frameworks have conflicting assumptions. The sub-prime mortgage crisis is a modern classic example. Data-reliant credit rating agencies (CRAs) had not seen such a large drawdownRead More
A CLO-ser look at structured products
Jul 12th, 2020 | Filed under: Derivatives, Newly Added, Credit Derivatives, Structured Credit Products, Structured Products
By Robert Hoffman, Managing Director, Investment Research and Kara O’Halloran, Associate, Investment Research, FS Investments Structured products are no stranger to the limelight. Once only garnering interest from niche Wall Street trading floors, collateralized debt obligations (CDOs) and mortgage-backed securities (MBS) have become household names, as these products were cited asRead More
CRE Debt & the Downturn: What’s Next?
Jun 23rd, 2020 | Filed under: Derivatives, Newly Added, Credit Derivatives, Alternative Investments in Context, Structured Products, Other Topics in A.I.
By Matt Malone, Managing Director, Real Estate and Andrew Korz, Associate, Investment Research, FS Investments As the COVID-19 pandemic has swept across the world, it has become clear that the necessary steps being taken by governments to protect human life have thrust the global economy into a recession. In theRead More
Bitcoin Derivatives Behaving Just Like Other Underlying Assets
Oct 15th, 2019 | Filed under: Derivatives, Newly Added, The Global Economy & Currencies, Digital currencies, Other Issues in Private Investments, The A.I. Industry, Risk Management Strategies & Processes, Frontier markets, Structured Products, Other Topics in A.I.Bitcoin derivatives act a lot like the derivatives of other asset classes. Two scholars at the University of London recently looked at bitcoin’s “volatility smiles and skews” as found in the short and long dated maturity of options traded at the Deribit Exchange in 2019. Helyette Geman and Henry Price,Read More
Restrictions on Pension Plan Investments: A Global Survey
Jul 16th, 2019 | Filed under: Derivatives, Newly Added, Institutional Investing, The A.I. Industry, Institutional Asset Management, Hedge Funds, Commodities, Structured Products, Allocating to A.I.A new report from the Organization for Economic Cooperation and Development surveys the main quantitative investment restrictions to which pension funds and other pension providers are subject in both OECD countries and a selection of International Organization of Pension Supervisors’ (IOPS) member countries. It reminds us of the general desireRead More
The Value of Speculation Limits, or Lack Thereof
Jun 18th, 2019 | Filed under: Commodities, Derivatives, Newly Added, Commodity Forward Pricing, The A.I. Industry, CommoditiesCFTC Commissioner Daniel Berkovitz recently spoke to the FIA Commodities Symposium, in Houston, Texas, about the reduction of systemic risks and the strengthening of market integrity under the Dodd-Frank Act. He gave the usual disclaimer, that the views he expressed in this address were his own not those of theRead More
Trade Tensions, Tariffs and European Volatility
May 30th, 2019 | Filed under: Derivatives, Newly Added, The Global Economy & Currencies, Business News, Economics, The A.I. Industry, Macroeconomics, Finance & EconomicsBy Mark Shore As the discussions of trade wars and tariffs persisted throughout 2018 and into 2019, it may have influenced a sense of uncertainty in the global financial and commodity markets as companies might have to rethink their supply chains and manage potential disruptions and at least in theRead More
Corporate Distress and Its Derivatives
Mar 31st, 2019 | Filed under: Derivatives, CDO Structuring and Credit RIsk, Newly Added, Event-Driven Hedge Funds, Credit Derivatives, The A.I. Industry, Structured Credit Products, Hedge Funds, Structured ProductsHenry T.C. Hu, of the University of Texas at Austin, School of Law, has written an article on the “information asymmetries” that are associated with corporations that are in financial distress, but not under bankruptcy court protection. It is an article that sends us back to the Christmas selling seasonRead More
A Proposed Model for VIX Derivatives Pricing
Feb 14th, 2019 | Filed under: Derivatives, Newly Added, The A.I. Industry, Commodities, Structured ProductsThe VIX may be about to get some competition. VIX is the “fear gauge,” the very visible measure of expected price fluctuations in the S&P 500 index options. On the foundation of its popularity, CBOE has built a monopoly on exchange-traded volatility products. VIX derivatives have become among the mostRead More
Can LIBOR Be Replaced?
Feb 12th, 2019 | Filed under: Derivatives, Newly Added, Credit Derivatives, Economics, The A.I. Industry, Macroeconomics, Structured Products, Finance & EconomicsGiven a long wave of scandals that lasted from 2008 until 2012, most of the derivatives industry, and most of its regulators, have agreed that the London Interbank Offered rate [Libor] ought to be replaced by a more tamper-resistant mechanism. Surely there must be an index that will measure theRead More
CEOs and the effect of education on use of convertible bonds
Nov 29th, 2018 | Filed under: Derivatives, Newly Added, Credit Derivatives, Equity-linked Structured Products, The A.I. Industry, Structured Credit Products, Structured Products, Finance & EconomicsThree scholars affiliated with the University of Manchester have published a paper that reaches a striking view of corporate leadership and the decision to issue convertible bonds. Cynics have long suspected that Wall Street smart-alecks have roped the executives of corporations into issuing instruments that are contrary to the bestRead More
Hedging or Trading? Why Italian Banks Use Derivatives
Aug 23rd, 2018 | Filed under: Derivatives, Newly Added, Risk management, Credit Derivatives, The Global Economy & Currencies, Economics, The A.I. Industry, Institutional Asset Management, Risk Management Strategies & Processes, Hedge Funds, Commodities, Risk Management & OperationsA recent report by the Bank of Italy looks at why the various banks of Italy use derivatives. Specifically, the central bank of that country wanted to know: is it a matter of hedging? Or is it a matter of keeping a proprietary book? Hedge fund managers and other pursuersRead More
The State of the OTC Index Dividend Swap Market
Feb 9th, 2017 | Filed under: Derivatives, Newly Added, Equity-linked Structured Products, Structured Products, Risk Management & OperationsIn a new article in the Journal of Alternative Investments, Scott Mixon and Esen Onur quantify the over the counter index dividend swap market. Along the way, they provide a good example of the scientific method: positing a relationship, testing it against the data, and then abandoning it when theRead More
After Seven Years: Philosophical Implications of the Madoff Fraud
Dec 30th, 2015 | Filed under: Derivatives, Due Diligence Process, Newly Added, Operations, Equity-linked Structured Products, Personalities in AI, Risk Management & OperationsIt has been seven years and a few days more now since Bernard Madoff acknowledged to authorities that “there is no innocent explanation” for the story they had just heard from his sons. It has been 15 and a half years since Harry Markopoulos ran the numbers regarding Madoff’s performanceRead More
A Fresh Look at Bubbles: Revising Assumptions
Sep 16th, 2015 | Filed under: CAPM / Alpha Theory, DerivativesIf it is possible for bubbles to arise in frictionless circumstances, then it follows that any theory that treats bubbles as the consequence of friction is, at very best, incomplete. And that is important to know especially if policy makers are busy drawing their own conclusions from those incomplete-or-worse theories. Read More
The LIBOR Fixing Scandal Gets a Conviction and a Book
Aug 9th, 2015 | Filed under: Currencies, Derivatives, ForexWhen it all hit the fan, U.S. investigators in particular (the Brits somewhat less so) came to see Hayes as a mastermind behind its digestive generation. But Arvedlund seeks in her new book on the Libor Rigging scandal to place the role Hayes played in context. Read More
Overtrading and the Danger of Pro Rata
Jul 30th, 2015 | Filed under: Commodities, Algorithmic and high-frequency trading, Currencies, Derivatives, ForexGuest columnist Ginger Szala looks at pro rata and what happens if...Read More
Usury Law: Not Too far From the Madden Crowd
Jul 7th, 2015 | Filed under: Derivatives, Regulatory, Legislation/Court rulingsNational and international markets have long been accustomed to the fact that various states in the United States have their own usury laws. Still, litigation in the 2d Circuit, arising out of New York, may have a substantial impact on credit markets and their derivatives. Read More
Bitcoin and Kin: The View from Europe
Jul 1st, 2015 | Filed under: Currencies, Derivatives, Digital currenciesBitcoin's price charts nowadays seem to have settled into an equilibrium between $240 and $220 per. But ESMA, and the authorities in Sweden, are both paying attention. Read More
Vindication for Pirrong and Irwin: Why Are Trafigura’s Profits Up?
Jun 22nd, 2015 | Filed under: Commodities, Derivatives, Media Coverage of Hedge Funds, IndexesTrafigura has done quite well from the decline in crude oil prices in recent months. So well, in fact, as to throw a harsh light on a story that appeared in The New York Times in December 2013. Read More
Spoofing: The ‘It’ Enforcement Action
Jun 17th, 2015 | Filed under: Algorithmic and high-frequency trading, Hedge Fund Strategies, Derivatives, Regulatory, TechnologySpoofing is probably about as ubiquitous as texting-while-driving. And it is possible to make an example of a spoofer caught red-handed. But it isn't clear what purpose that will serve. The real problem is that a broken market contains a broken set of incentives. Read More
A Close Look at the Deutsche Bank Findings
Jun 10th, 2015 | Filed under: Derivatives, Risk managementJudy Collins might suggest looking at risk from ‘both sides now.’ But it appears that according to DB at a critical moment in global financial history, risk existed only to the extent that it worked to enhance the value of DB positions: it didn’t exist in any sense that might have required a haircut.Read More
Comparing SPM to Elliott: And Other Thoughts on MBS Funds
May 6th, 2015 | Filed under: Derivatives, Alpha Hunters, Risk management, Alpha SeekersSPM "sticks out in [his] mind" as a successful manager with a "17 year track record" with returns in the mid 20s. "Where else are you going to get that?" Well, there is at least one other place that then comes to Brian Shapiro's thoughts: SPM's return compares to the return available from Elliott.Read More
Tavakoli on Death, an Industry’s Culture, and Decisions
Apr 29th, 2015 | Filed under: Derivatives, Risk managementBill Broeksmit, with whom Tavakoli worked closely at the interest-rate swaps desk at Merrill Lynch in the late 1980s, killed himself in January 2014. The manner of this death, and the circumstances surrounding it, give this book even more gravitas than would a global financial crisis or two. Read More
Authorities Offer Revisionism About Flash Crash
Apr 22nd, 2015 | Filed under: Algorithmic and high-frequency trading, Derivatives, IndexesAuthorities now claim that the shenanigans that set off the flash crash of May 2010 were the work of Navinder Singh Sarao. Does this mean Waddell & Reed were unjustly maligned? Almost certainly. Read More
Eurelectric Speaks Up For Grushenka
Apr 16th, 2015 | Filed under: Derivatives, Risk management, RegulatoryIs it possible or desirable to separate "speculation" from operational hedging, so as to clear the way for industries to do the latter without the regulatory burdens that planners want to impose upon the former? Once Europe has decided that speculation is a bad thing, won't it end up pursuing the demon ways that will collapse the proposed distinction? Read More
Liquidity, Leverage and Those Nimble Hedge Funds
Apr 9th, 2015 | Filed under: Hedge Fund Strategies, Derivatives, Risk management, RegulatoryBasel III has given us three different statistics with a common goal, to keep banks to a stable funding profile, neither too illiquid nor too highly leveraged. As these requirements come on-line, what will be the consequences for the relationship between prime brokers and hedge fund managers? Read More
A Taylor-Swift Lawsuit: ‘I’ve Got a Blank Space Baby.’
Mar 26th, 2015 | Filed under: Algorithmic and high-frequency trading, Hedge Fund Strategies, Derivatives, TechnologyThis is the story of one high-frequency trading firm suing one or more others and giving detailed credence to everything that has been said over the last year or so by those who bemoan the rise of HFT firms. Read More
Intraday Momentum Confirmed: Day Traders Credited
Mar 24th, 2015 | Filed under: CAPM / Alpha Theory, Derivatives, Behavioral finance, ETFsThe first half-hour return of the S&P 500 ETF predicts the last half-hour return of the same trading day rather well. Why isn't this effect arbitraged away and a random walk restored? Read More
Most Investors Sanguine About Central Clearing Mandates
Mar 22nd, 2015 | Filed under: Hedge Fund Industry Trends, Derivatives, RegulatoryThe international push to mandate central clearing has expanded the clearinghouses "well beyond levels the market has ever seen," Greenwich Associates reminds us in a new report. This is an experiment, and there remains some grounds for uncertainty about the outcome. Read More
On First Looking Into SEC’s Homer: A Final Rule on Swaps Reporting
Feb 23rd, 2015 | Filed under: Derivatives, RegulatoryCommenters successful pressed for certain changes in this massive new rule during its years of gestation. For example, the rule incorporates a T + 24 approach for the reporting of block trades. But warned, though, blizzards in NYC don't stop the ticking of that 24 hour clock. Read More
A Basis for Pursuing the Pursuers? Sonar-based Whale Hunts
Feb 17th, 2015 | Filed under: Algorithmic and high-frequency trading, Derivatives, Institutional Investing, Alpha Hunters, RegulatoryTo the extent that high-frequency trading is analogized to 'insider trading,' it may be in trouble with securities regulators but still in the clear with commodities regulators. After all, the latter do allow hedgers to use non-public material information to protect themselves. But Gregory Scopino doesn't believe pinging and related HFT practices should be in the clear with the CFTC at all. Read More
The SEC Takes a Limited View of Janus’ Limited View
Dec 29th, 2014 | Filed under: Derivatives, Regulatory, Legislation/Court rulingsA December 15 opinion by the SEC limits the significance of a Supreme Court decision of three years ago, and so at least pending appeal it broadens the applicability of the basic anti-fraud rule 10b-5 to the employees of an investment adviser. Read More
Capital Markets, Derivatives and the Law
Nov 23rd, 2014 | Filed under: Derivatives, Legislation/Court rulingsAlan Rechtschaffen quotes two definitions of "moral hazard" in this book. The first, from Ben Bernanke, seems to get the book off to a rather awkward start. The second, from Zachary Gubler much later on, represents something of a recovery. Read More
Is Liability Insurance an Estate Asset in Bankruptcy?
Sep 16th, 2014 | Filed under: Derivatives, Insolvency, Legislation/Court rulingsThe Manhattan bankruptcy court has now granted individual defendants in the MF Global matter, including Jon Corzine, access to funds from their D&O insurance. But it wasn't easy for them to get here, and therein lies our moral. Read More
SEC Adopts Changes to Regulation AB: More Transparency
Sep 3rd, 2014 | Filed under: Derivatives, RegulatoryThe SEC's new rules for asset backed securities require asset level disclosures both at the time of offering and later, on an ongoing basis. The disclosures are required to appear in a standardized XML format.Read More
Clearing Obligation: ESMA Releases CP Comments
Aug 26th, 2014 | Filed under: Derivatives, RegulatoryThe clearing-for-everything parade continues. Christopher Faille reviews three representative comments among those just released by ESMA, elicited by its consultation paper on the new clearing obligation for interest-rate swaps. Read More
How Not to Nationalize the Clearinghouses
Aug 17th, 2014 | Filed under: Derivatives, Risk management, InsolvencyLet's not make clearinghouses too big to fail. Or if, through, Dodd-Frank, we already have, let's turn back and reconsider that decision. That's how not to end up bailing them out or nationalizing them in due course. Read More
Eurex Clearing and DB Group: New Paper on CCPs
Jul 29th, 2014 | Filed under: Derivatives, Risk management, RegulatoryIf such institutions as the ECB keep rewarding indebtedness, then over time they get their way. They'll get a lot of deal making, even if it amounts to a frenzy. Then investors will demand funds that play to that frenzy. Read More
Winner Takes All, and Liquidity Takers Win
Jul 22nd, 2014 | Filed under: CAPM / Alpha Theory, Algorithmic and high-frequency trading, DerivativesIt does appear that speed is helpful in generating alpha. How is it helpful? Here there are two views, and the less HFT-friendly of these views has received some scholarly/empirical support. Read More
Does a Firm Insist on Historical Cost Accounting? Short!
Jun 23rd, 2014 | Filed under: Derivatives, Alpha Strategies"Isn't there anything good to be said for the practice of historical cost accounting, especially when the cost figures are higher than the mark-to-market figures? Well ... no. It's reality avoidance."Read More
MiFID Implementation Consultation: A Rocky Start
May 28th, 2014 | Filed under: Algorithmic and high-frequency trading, Derivatives, RegulatoryESMA defines HFT as “a special class of algorithmic trading in which computers make decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe and of taking a decision in relation thereto.” It then decides that needs further definition.Read More
The Wind and the Leaves: Causality in Commodity Prices
Jun 5th, 2013 | Filed under: Hedge Fund Industry Trends, Commodities, CTA, DerivativesThree scholars find a very real possibility that there is a cause and effect relationship between index flows in the derivatives markets, at least the agricultural index markets, on the one hand and price moves in the underlying commodity on the other. Read More
CFTC Approves New Swaps Rules: Uses Some Old Jargon
May 22nd, 2013 | Filed under: Derivatives, RegulatoryUnder the Dodd-Frank Act, and the implementing rules now approved by the CFTC, trades that aren't "large notional swaps" are to be reported more rapidly and thoroughly than those that are. This of course makes the definition of a large notional swap (a/k/a a block trade) an important matter.Read More
The Extraterritorial Effect of Swaps Rules
May 13th, 2013 | Filed under: DerivativesA new SEC proposal, promulgated May 1, would provide that Dodd-Frank requirements regarding swaps apply if a transaction is entered into by a U.S. person or conducted within the U.S. but that an entity operating outside the U.S. may be able to substitute foreign regulatory requirements for the U.S. requirements if the extraterritorial party's home system produces comparable regulatory outcomes.Read More
Stop the Presses: IOSCO Calls for Balancing and Monitoring
Apr 4th, 2013 | Filed under: Derivatives, RegulatoryIOSCO's new draft report says that regulators ought to do a lot of "monitoring" of the consequences of changes in market structure. A little less predictably: it goes into some detail on the diversity of regulatory systems that bear on the question of fragmentation. Read More
ISDA & EDHEC Respond to Benchmarks Paper
Mar 26th, 2013 | Filed under: Retail Investing, DerivativesThe benchmarking consultation paper from ESMA/EBA has produced intriguing responses from, among others, the International Swaps and Derivatives Association and the EDHEC-Risk Institute.Read More
A Rebel Speaks Against the Hub-and-Spoke World
Mar 17th, 2013 | Filed under: DerivativesJust as one buys bourbon from a retailer who buys it from a distributor who buys it from the manufacturer, so in the world of stocks someone desiring a share of Apple will call a broker who will often go through an exchange which matches him with the broker for a seller. But in a networked world, one can disintermediate. Read More
Lehman: Don’t Blame Canada: Blame Iksil!
Mar 4th, 2013 | Filed under: Derivatives, RegulatoryLehman's adversary proceeding may yet raise the important issues of risk management that arise out of the relationships among the major Wall Street players at times of crisis. But the latest 'Blame the whale' request by the bankruptcy lawyers involved is a blatant distraction and diversion. Read More
Basel/IOSCO ‘Near Final’ Proposal: Part Two
Mar 3rd, 2013 | Filed under: Derivatives, Regulatory, ForexThis is the second of a two-part discussion of a paper jointly issued by Basel and IOSCO on margin requirements for non-centrally cleared derivatives. The new paper solicits feedback on the phase-in timeline it proposes, a phase-in designed to provide flexibility so the affected markets can meet "operational and logistical challenges" by which they might otherwise be stymied. Read More