4.22.2013

A Bonds deficit back Derivatives bet

Starting next year, the new rules will force banks, Hedge funds and other traders to support more of their bets on derivatives markets 648000000000000 USD to post collateral. While the rules are designed to prevent another financial crisis, the Treasury bonds and other shortcomings of the top-rated debt to use as collateral could undermine efforts to make the system more secure. Derivatives allows consumers to bet on the direction of currencies, interest rates, and the market, insuring against default on the bonds, or lock in prices of commodities. The new guidelines root in the 2010 Dodd-Frank Act, passed in reaction to the imminent collapse of the financial system in 2008, due in part because of the derivative contract is not backed by collateral. American International Group (AIG) requires a $ 182.3 billion bailout from the U.S. government after failing to make good on derivatives trading by some of the largest banks in the world. In response, Congress has required that the majority of privately negotiated derivative transactions, known as the trading of over-the-counter through clearinghouses. For Clearinghouses, powered by companies such as Chicago-based CME Group (CME) and LCH.Clearnet Group based in London, making the warranty of entrepreneurs, including government bonds, which can be confiscated and easy- converted into cash to cover defaults. Traders may need from $ 2 trillion to $ 4 trillion in additional collateral to meet the new requirements, according to Timothy Keaney, CEO of BNY Mellon Asset Services. The problem is to find all the high-grade debt. With U.S. $ 10.8 trillion in Treasuries outstanding at the end of August. Other countries, including Japan and the European countries rate AAA or AA, with about $ 24 trillion of debt in the second quarter of 2011, according to the April report of the International Monetary Fund. They Sun is in heavy demand from central banks and solution investors.The:At least seven banks plan to allow customers to exchange low-rated securities that do not meet these criteria, in exchange for loans Treasuries or the same ownership are eligible, a process called "; collateral change" scheme that allows investors to assets that do not meet the standards clearinghouse for corporate bonds, mortgage or mortgage- relevant securities to banks in exchange for loans of Treasuries. Investors then post-Treasuries, which changed the collateral for clearing. Banks earn fees plus interest, and investors are obliged at some point to restore Treasuries. As a result, the guarantee rented.That increasing concerns among the investors, bank executives, and academics that are intended to prevent the risk of hiding instead. "We just kept piling on a lot of operational risk we convert a form of security to another," says Richard Prager, head of global trading at BlackRock (BLK), the world's largest asset manager. JPMorgan Chase (JPM) and Bank of America (BAC) will Mapping market their new mortgage-changing table, company executives said. Other banks confirmed that they plan to offer services as well, including the Bank of New York Mellon (ak), Barclays (BCS), Deutsche Bank (DB), and State Street (STT). "The change of the collateral is a client service that does not hide the risks," said Jennifer Zuccarelli, a spokeswoman for JPMorgan Chase. "It is a form of short-term secured loan, which is always an important part of the capital market, subject to strict capital and liquidity rules and fully transparent to regulators." Goldman Sachs Group (GS) is also planning offering of collateral changes, a person with knowledge of the matter. A spokesman for the bank declined the comment.For bank, securities lending market expanded to make billions of dollars in costs, even as the industry is facing shrinking revenues due to increased reporting and regulatory competition Prices in derivatives trading, according to a report from consulting firm Oliver Wyman Group. At the same time, they could suffer losses if a default dealer and took his bail. In this case, the banks were left holding losing Treasuries and low levels of bond traders, changing the collateral posted. New bank business loan '"smells like," said Anat Admati, finance and economics professor at the Stanford Graduate School of Business who studies markets and trade and bank regulators recommend systemically important companies. "The goal of the initiative is that the derivatives derivatives can hide a lot of risk," says Admati. "Now they just shuffle the risk around."

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