Dollar-Funding Stress Falls as Libor Declines to Year’s Low

Money-market indicators showed short-term dollar funding stress declined as the rate banks in London say they can borrow from each other reached a low for the year.


Three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, fell to 0.2796 percent, the lowest since Aug. 9, 2011, according to the British Bankers’ Association. The Libor- OIS spread, a gauge of banks reluctance to lend, narrowed to 13.9 basis points from 14.8 basis points yesterday.

Overnight index swaps, or OIS, give traders predictions on where the Fed’s effective funds rate will average for the term of the swap. The central bank’s target rate is set in a range of zero to 0.25 percent.

Predictions in the forward market for Libor-OIS, known as the FRA/OIS spread, fell to the lowest since October, at 15.1 basis points, according to the second rolling three month contracts.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, narrowed 0.13 basis point to 13.6 basis points. The gap is a gauge of investors’ perceptions of U.S. banking sector credit risk as swap rates are derived from expectations for dollar Libor.

Swap rates serve as benchmarks for investors in many types of debt, including mortgage-backed and auto-loan securities.

The seasonally adjusted amount of U.S. commercial paper rose $200 million to $1.0631 trillion in the week ended Feb. 27, according to Federal Reserve data.
Euribor-OIS Spread

The cost for European banks to convert euro-denominated payment streams into dollars-based funding via the cross currency swaps market increased. The three-month cross-currency basis swap was 18.1 basis points below Euribor, from 17.1 basis points below yesterday.

Foreign-exchange swaps are typically for periods of less than a year, while cross-currency basis swaps usually range from one to 30 years. The latter are agreements in which a person borrows in one currency and simultaneously lends in a different currency. The trade involves the exchange of two different floating-rate payments, each denominated in a different currency and based on a different index.

The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, was little changed. The measure of banks’ reluctance to lend to one another was 13 basis points.
Repo Rates

The overnight Treasury general collateral repurchase agreement rate opened today at 0.24 percent, according to ICAP Plc, the world’s largest inter-dealer broker.

The average rate for borrowing and lending Treasuries for one day in the repo market was 0.168 percent yesterday, according to a GCF repo index provided on a one-day lag by the Depository Trust & Clearing Corp.

Securities dealers use repos to finance holdings and increase leverage. Securities that can be borrowed at interest rates close to the Fed’s target rate are called general collateral. Those in highest demand have lower rates and are called “special.”

The average rate for overnight federal funds, known as the fed effective rate, was 0.15 percent yesterday. The rate opened today at 0.16 percent. The effective rate is a volume-weighted average of trades between major brokers for overnight funds, reported on a day lag by the Federal Reserve Bank of New York.

Source: http://www.bloomberg.com/news/2013-03-06/dollar-funding-stress-falls-as-libor-declines-to-year-s-low.html

Libor: CNBC Explains

If you’ve read financial news in the last few years, you’ve come across the term Libor. Libor is the London InterBank Offered Rate, a key interest rate used by banks for short-term lending with other banks. For those who are fuzzy on the topic, Salman Khan of the Khan Academy explains what Libor is and how it is used.

From this video, you’ll understand:

• How Libor is calculated
• How this differs from the Federal Funds Rate
• Why banks use Libor

Source: http://www.cnbc.com/id/43266422

What Was Libor?

Matt Levine at Dealbreaker points out something that I had never quite realized: A lot of smart people believed that Libor was the risk-free rate of interest.


The Libor scandal has always puzzled me in part because I grew up believing this:

There is a small chance that an AA-rated financial institution will default on a LIBOR loan. However, they are close to risk-free. Derivatives traders regard LIBOR rates as a better indication of the "true" risk-free rate than Treasury rates, because a number of tax and regulatory issues cause Treasury rates to be artificially low. To be consistent with the normal practice in derivative markets, the term "risk-free rate" in this book should be interpreted as the LIBOR rate.

That quote is from 2006, and looks sort of adorably naive now—banks are close to risk-free! and AA-rated for that matter!—but the guy, as the saying goes, literally wrote the book on derivatives. In financial markets, pre-crisis, Libor (and Euribor) was less "the rate at which banks borrow from each other" (or "the rate at which banks don't borrow from each other") and more "the risk-free rate for discounting stuff."

Plenty of people – in derivative markets, but also lots of people who borrowed using Libor—thought of Libor that way: it was just "the interest rate," intended to be risk-free. Making it relatively insensitive to big-bank credit would be, on this theory, a feature, not a bug.

In other words, if you think that Libor is supposed to be just a measure of the risk-free rate of interest, then having people manipulate it during a crisis so that it did not accurately reflect the market view of risk in bank lending is not a big deal. The manipulators were helping Libor stay risk-free.

What strikes me as so odd about this view is that I never, ever encountered it in the entire five years or so I spent arranging gargantuan Libor loans.

I was a corporate lawyer at a couple of the biggest law firms in the United States and my specialty was leveraged loans. Every single loan I lawyered was a Libor loan. No one ever communicated to me their view that Libor was meant to be risk free.

Our credit documentation made it very clear that we used Libor because it was usually pretty good at reflecting the cost of funding for banks. Since these loans were usually syndicated and held by a broad group of banks, it was simpler to use Libor than to calculate the funding costs for each bank separately. And, usually, the market didn't charge different banks very different rates anyway.

But we had a sneaky clause in our credit agreements that made it very clear that what borrowers were going to pay was the cost of funding or Libor, whichever was higher. That clause said that if for some reason some of the lender's cost of funding was significantly higher than Libor, the borrower was going to pay that higher cost of funding.

That's right. If a bank's cost of funding went up idiosyncratically, the borrower got penalized. If a bank was suddenly considered a big credit risk, it's borrowers paid the premium.

This, to me, demonstrated that we were using Libor because it usually reflected the cost of funding. But, apparently, folks in the derivatives world had a very different view of things.

Source: http://www.cnbc.com/id/100501839/What_Was_Libor

A Retiring Official Raises The Alarm About Derivatives in India

CENTRAL bankers are supposed to be obscure while in office and demure upon their retirement. But V.K. Sharma, a former executive director of the Reserve Bank of India (RBI), marked his recent departure by giving an almighty kicking to India’s over-the-counter interest-rate derivatives market. In a speech at the end of 2012 he called it disturbing, preposterous, perverse, the antithesis of responsible financial innovation, weird and warped.


Two things do look odd. First, there is the sheer scale of activity. Although India’s regulators tolerate frisky stockmarkets, they typically keep a lid on debt markets. Yet the notional value of outstanding interest-rate swaps is $685 billion, or 37% of GDP. They are mainly held by foreign banks’ local subsidiaries, which are puny. Their gross exposure may be 100 times core capital.

The second oddity is that prices are behaving strangely. That could be a sign of distress, much as haywire interbank rates portended the West’s financial crisis. In theory the interest rates indicated by India’s swap market should roughly match those in the government-bond market. For most of the past decade that has been the case, but since mid-2011 the two markets have diverged, with swap interest rates for five-year money as much as 1.5 percentage points below cash interest rates (see chart). The gap is an intellectual “dilemma a lot of us have struggled with over the last couple of years,” says one banker.

What is going on? The two markets are separate worlds. Government-bond trading is done by local banks and insurers, which are forced to buy lots of debt, partly for prudential reasons but also to help the state plug its deficit. Banks are scared that wild government borrowing will mean an excessive supply of new bonds. That has kept yields high. The interest-rate swap market, meanwhile, is dominated by foreign banks and seems to reflect directional bets on policy rates. Since 2011 traders at these banks have wagered that the RBI will ease policy to revive the economy. That has pushed swap rates down.

Textbooks say that arbitrage activity should eliminate this kind of gap. But that has not happened in India. The public-sector banks that dominate the bond market are not much interested in dabbling in derivatives: they are not required to mark their bonds to market and need not hedge. Regulators are unlikely to change this because banks might face losses if forced to book their bonds at market prices.

Without big institutions to straddle both markets, India is an inhospitable place for the hedge funds and hustlers who normally play the arbitrage game. Some outfits are prevented from trading swaps. The RBI frequently buys and sells bonds to massage the market. Foreign portfolio investors own just 1% of government bonds.

At least the rate gap has narrowed recently, thanks to government belt-tightening, hawkish noises from the central bank, and, say traders, a bit of arbitrage activity by banks. But India’s derivatives anomaly is likely to persist. And it raises a question: what on earth are foreign banks up to?

One view is that official figures grossly exaggerate their activity. To annul a swap trade most banks find it easier to write a new, offsetting contract rather than rip up the existing one; the effect of this is to inflate the total. But India has had three rounds of “trade compression” since 2011, aimed at tidying up such redundant contracts. The notional outstanding value of all swaps has already roughly halved. One official involved says the shrinkage does not have much further to go, suggesting foreign banks’ positions are not wildly overstated.

Traders retort that the figures exaggerate their activity in another way. If they use short-term swaps to hedge longer-term bonds (which are more sensitive to interest rates), the notional size of the derivatives position can legitimately exceed that of the underlying position by many times. “Most of derivatives outstanding are plain vanilla,” says a trader at a foreign bank.

India has a good record on monitoring derivatives. It stress-tests banks’ positions and had a central repository of trades before most rich countries. It is also keen to make its debt markets more sophisticated. Still, the swaps market has a slightly unnerving feel to it. Foreign banks seem to be involved in a trading game that dwarfs their balance-sheets and bears a minimal relationship to India’s real economy. It may be harmless but regulators should be on their guard.

Source: http://www.economist.com/news/finance-and-economics/21571901-retiring-official-raises-alarm-about-derivatives-india-derivatiff

Action on Interest Rate Swap Report Demanded by Small Businesses

The Financial Services Agency (FSA) has been doing its best in making certain reviews in light of the interest rate swap scandal that has been affecting small business and business owners in the UK. Business leaders want more action in responding to the scandal. An organization called the Federation of Small Businesses and the Bully Banks that has been representing the small business sector are not that satisfied with FSA’s report. A review on the scandal was conducted by different banks to put clarity into the ongoing scandal.


The announcement made by the FSA says that the small business that was affected would need to prove that upon purchasing the product, they weren’t clarified about it or knew less about the terms of the interest rate swap. The groups have complained that the FSA have been ignoring their calls. A spokesperson from the FSB added that they knew a little about the process and what has been happening. Most of the business establishment continues to give their pay out while waiting. It was reported that this could drive them in to financial problems while waiting for their claims.

The interest rate swap scandal emerged when different banks were mis selling interest rate swaps that were complicated and often not even explained. The small businesses purchased the product when the banks offered the loans. With the onset of the recession, the Bank of England was made to cut its interest rates to help UK borrowers, but the businesses who had bought the interest rate swaps were stuck into paying higher rates only. Now, most of the banks are cooperating with the FSA to undergo the reviews.

Source: http://www.coffeecornernews.com/finance/action-needed-on-the-interest-rate-swap-report-demanded-by-the-small-business/

Sale of Interest Rate Swaps on Probe

The interest rate swap fiasco is still being probed by the Commerce Commission. The commission has continuously worked on investigating about the interest rate swaps. The said probe was triggered by some of the claims from farmers saying that they were having to pay too much to break free and were not happy with the confusing contracts. In August 2012, the Commerce Commission started their probe and has received a number of forty-two complaints.


The said complaints were aired in the media. The interest rate swap is allowing the clients to manage the rate of interest exposure to those who borrows. It was in 2005 that the banks were getting the market form the commercial and rural clients. Mainly, the farmers were part of the group who are seeking to have a review coming from the regulator are Federated Farmers. The president of the Fed, Bruce Wills said that the interest rate swap is a complicated.

The interest rate swap is one of the most discussed issues because it can have a huge implication affecting primary sectors. The confusion about the swap could be considered. The Spokesman, Damien O’ Conner of the Labor Primary Industry have stated that selling of finance products to the farmers that are complicated was extensive.It was noted that the regulator had already been receiving information from the complainants and the related bank will broaden the inquiries to seek for more information from those people who has interest rate swaps. The investigation is aiming to establish and see if the swaps were marketed, thus causing the customers to be misled at their own suitability, nature and risk.

Source: http://www.lastnewssite.com/finance/sale-of-interest-rate-swaps-is-on-probe/

Interest Rate Swap – An Unending Process

There are many financial derivatives that have threatened our banking and financial systems. Interest rate swap is probably the most important of it all posing a serious threat to the banks. You need to have the basic rights if you honestly want to understand the complexities of such an important derivative that affects our financial system in a large scale.

The Interest rate swap is nothing but a liquid financial derivative or more of an instrument that includes the exchange of interest rate cash flows between two parties. You should know that one of these parties in most cases is the bank itself, occasionally both parties being banks or other financial institutions. This is a lot more complicated to understand. So if you want to understand in simple terms, then it is just a kind of a agreement that different institutions like small businesses enter with banks just to protect themselves from the continuous change and market fluctuations in the interest rates.

In this process both the parties agree to pay fixed interest rates that are usually made under a common currency not a different one. Last few years have seen many new features being incorporated in the field of interest rate swapping, the major one being the exchange of rates based on different currencies. Banks make use of these rate swaps just for extending credit facilities to small business organizations. But this doesn’t come without its disadvantages. It has been a subject of massive litigation giving rise to interest rate swap mis selling.

Small business organizations enter into such an agreement to protect themselves from the ever changing market. But the recent past has seen some serious exploitation on the part of top banks that have encouraged serious irregularities in sales practices adopted by these banks. As a result the small businesses are left crippled by this type of mis selling. Even they end up completely broke and nothing else to do.

Legally, the law enforcement is trying to bring order in this and have so ordered the top financial institutions the big names in the banking industry to properly compensate these small and hardworking business enterprises for these mis sellings. But this order is yet to be seen followed seriously by the banks. There have been penalties on the banks to do such thing but still mis selling are a thing that still thrives on. There is no place of trust in the equation contrary of the time when trust was most important in banking relations.

For customers (small time business owners) have ensued a battle for this injustice. Many have rather tasted success in winning and getting the money back. Yes they have thwarted the plans of the banks and get the right amount of compensation. Law enforcement has been strict and massive but still the interest rate swaps are going on and businesses are still being prey to such banks. Though the law regulations have become somewhat strong, the banks still find a way to do such things and still evade the law.

Source: http://www.pressbox.co.uk/detailed/Legal/Interest_rate_swap_An_unending_process_1123576.html

FSA letter to Treasury committee on Interest Rate Swaps

The Interest Rate Swap mis-selling saga has taken a few twists and turns over the past year. On the 3rd of June 2012 the FSA released their findings on Interest Rate Swaps to the Public. However in correspondence between the FSA and the Treasury Committee, the FSA reveals that they are “aware about the issue involving SMEs and sale of interest rate products in 2010 and 2011″.

FSA, Treasury Committee & Interest Rate Swap Mis-Selling

On March 19, 2012, Treasury Committee Chairman Andrew Tyrie sent a letter to Financial Services Authority Chairman Lord Turner and the Board of the Financial Service Chairman Sir Nicholas Montagu. He expressed his concern about the reports coming from small businesses about the way major banks sell complex interest rate products. He pointed out the following areas of concern.

• Actions that the FSA had taken to date or investigations
• Outcome of the investigations
• Evidence that banks sold these products to small businesses inappropriately
• Confirmation that FSA plans on investigating these problems and actions to address
• Number of complaints that FSA received similar to these issues
• Referral of individual complaints that the Financial Ombudsman Service deems ineligible to be considered.

On April 23, 2012, the FSA sent the answers to the Treasury Committee through a letter. The FSA provided information on the regulatory and compliance regime for small and medium-sized enterprises. The letter also explained the rules for the conduct of firms that offer SMEs either advised or non-advised investment transactions.

The Regulatory Regime at Present

The letter emphasized that the level of customer protection being delivered varies depending on the customer category. This idea has been derived from the EU’s 2007 Markets in Financial Instruments Directive. It is the current regulatory regime that the FSA observes.

• Eligible counterparties include stockbrokers, investment banks and other financial institutions.
• Professional categories includes larger companies that are not FSA-authorized and regulated.
• The retail category includes smaller business and private individuals that are not FSA-authorized and regulated.

However, there may be cases that customers are treated differently. For instance, professional customers may choose to be treated as retail customers and take advantage of a higher investor protection level. Similarly, a retail customer may be treated as a professional customer only with a bit lower investor protection level.

The letter also explained the difference between the existing regulations and the ones from 2007. According the FSA, they were already aware of certain problems related to the interest swap products. It could have been the result of the changes in the 2007 regulatory regime. It was the time when some small businesses shifted from the professional to retail category. They also noted that the number of SMEs categorized as professional had been greatly reduced. However, the FSA reiterated that there were no implications that any sales were made prior to 2007.

Financial Complaints

The existing regulatory regime restricts the right to complain to ombudsman services to a subset of retail customers. The FSMA states that it is the ombudsman’s responsibility to provide informal and fast dispute resolution in lieu of the courts. The FSA’s duty is to set the ombudsman’s services. However, the 2001 regime restricts ombudsman access to SMEs with turnover of less than £1,000,000 every year. The FSA admits that it is mindful that the reason behind the existence of an ombudsman is to address differences in the bargaining power and resources that may come between authorized firms and customers when there is a dispute. It also covers the fact a complainant need not pay fees.

The 2007 regulatory regime has changed the definition of retail customers. The FSA thought that it was not important to connect eligibility to complain to the ombudsman service. SMEs can file their complaints with the ombudsman about breaches of the FSA rules. However, they have to consider an SME taking the action to court if it does not meet the requirements set by the ombudsman and they believe that they have obtained losses bigger than £150,000.

FSA Answer to Interest Rate Swaps

The FSA is aware about the issue involving SMEs and sale of interest rate products in 2010 and 2011. The FSA categorized these issues in different ways and required firms involved to conduct a review of their systems and address problems. The FSA is now doing more work in order to understand the type of products sold.

The FSA understands that there are a number of products made available for SMEs intended to reduce vulnerability to fluctuating interest rates. The FSA is looking at areas such as product design, practices, sales processes and incentives. Should they find evidence of mis-selling or rule breaches, they will take appropriate measures to address them. The letter pointed out that the committee also has some issues to address.

We have a specialist team of solicitors dedicated to dealing with the mis-selling of interest rate swap protection products by the banks. We are very happy to review these relatively complex arrangements and to claim compensation for our clients where appropriate.

Source: http://www.maplefinancial.co.uk/fsa-letter-to-treasury-committee-on-interest-rate-swaps/

China Rate Swap Rises to Two-Week High as Inflation Gathers Pace

China’s five-year interest-rate swap climbed to a two-week high after government data showed February’s inflation was the fastest in 10 months.


China’s consumer prices climbed 3.2 percent from a year earlier, according to figures released March 9, exceeding January’s 2 percent gain and the median estimate for a 3 percent increase in a Bloomberg survey of analysts. The government set an annual inflation target of 3.5 percent at an annual congress meeting that started in Beijing on March 5.

“The higher-than-expected CPI headline number is boosting traders’ inflation expectations,” said Liu Junyu, a bond analyst in Shenzhen at China Merchants Bank Co., the nation’s sixth-biggest lender.

The five-year swap contract, the fixed cost needed to receive the floating seven-day repurchase rate, climbed two basis points to 3.71 percent as of 10:33 a.m. in Shanghai, the highest since Feb. 25, according to data compiled by Bloomberg. It averaged 3.28 percent in the past 12 months.

The seven-day repurchase rate, which measures interbank funding availability, jumped 51 basis points to 3 percent, according to a weighted average rate compiled by the National Interbank Funding Center. It dropped 195 basis points, or 1.95 percentage points, last week.

The People’s Bank of China gauged demand for seven and 14- day reverse-repurchase contract operations this week, according to a trader required to bid at the auctions. The central bank also asked banks to submit orders for 28-day repos.

Source: http://www.bloomberg.com/news/2013-03-11/china-rate-swap-rises-to-two-week-high-as-inflation-gathers-pace.html

Oakland Might Sue Banks Over Rate-Rigging Conspiracy

As the Express reported last week, Richmond and East Bay MUD have both filed lawsuits in federal court alleging collusion among the world's biggest banks to steal millions from the public through an elaborate interest-rate scam. And Oakland city officials said this week that they're also considering filing a lawsuit after estimating that banks might have fleeced the city of several hundred thousand dollars.

Barbara Parker

Oakland's losses likely stem from several interest-rate swaps purchased by the city in 2004 from UBS and Bank of America. By the manipulation of interest rates over several years, both UBS and Bank of America appear to have increased the amount of money Oakland owed them through the swaps. The UBS and Bank of America interest-rate swaps ran for four years until Oakland terminated them in 2008, paying millions to both banks to unwind the deals. The termination payments Oakland made were also likely inflated by the banks' rigging of LIBOR (the London Interbank Offered Rate).

"We're outraged that the banks would potentially defraud residents and taxpayers of the city of Oakland," said City Attorney Barbara Parker. Parker's office is working on a strategy to seek any stolen money back, which may mean a new lawsuit, or joining existing litigation.

UBS has already admitted to criminal wrongdoing in the global conspiracy to manipulate LIBOR. In December 2012, the bank paid a $1.5 billion fine to US and British regulators. Bank of America is currently under investigation for its role in the conspiracy. But Bank of America has admitted no wrongdoing, and is even seeking a dismissal of a class action lawsuit led by the City of Baltimore that is currently being heard before a federal judge in New York. Along with JP Morgan Chase, Citibank, and another fourteen foreign banks, Bank of America filed a motion for summary judgment in an effort to have the case thrown out. Richmond and East Bay MUD's lawsuits have already been consolidated into this case and are thus imperiled by the banks' efforts to seek a dismissal.

The Oakland City Council has already authorized a lawsuit, if need be, after discussing the problem in several closed sessions with attorneys and finance staff. Councilwoman Libby Schaaf said the financial damage done to Oakland could be around $300,000, but city staffers are still working to determine exactly how the rigged rates would have harmed Oakland. Under US and California laws plaintiffs in antitrust and financial fraud cases can seek treble damages plus punitive fines against defendants, meaning that Oakland could potentially recoup more than $1 million.

Oakland's interest rate swap deal with Goldman Sachs, the subject of much controversy last year, would also have been affected by the bank conspiracy to rig LIBOR. However, Goldman Sachs is not a member of the British Bankers Association LIBOR rate setting panel, as are both UBS and Bank of America, and so it's uncertain if the fraud legally affects Goldman.

Source: http://www.eastbayexpress.com/SevenDays/archives/2013/03/07/oakland-might-sue-banks-over-rate-rigging-conspiracy

CME Books Victory in Regulator Row Over Swaps Data

The top derivatives regulator sided with the CME Group Inc in a row over client data on Wednesday, a decision which could lead to a contentious lawsuit by a rival firm.


The fight, which has pitted Wall Street against Chicago's powerful commodity traders, comes as regulators finalize many of the new rules of the Dodd-Frank financial reform law.

On Wednesday, the Commodity Futures Trading Commission (CFTC) said it would allow the CME to send swaps trading data to its own data warehouse.

The Depository Trust & Clearing Corporation (DTCC), which performs back-office functions for banks and operates a rival data warehouse, wants clients to have the choice where their data go.

It says the plan of the CME - which operates the world's largest futures exchange - contravenes the gist of the new legislation, and risks fragmenting the data.

In a statement, DTCC's General Counsel Larry Thompson blasted the CFTC's decision, calling it "inconsistent with the principles of the Dodd-Frank Act."

It will "cripple market participant choice, is anti-competitive and compromises regulators and market participants' ability to understand, assess and manage systemic risk effectively," said Thompson, who added that the DTCC will continue to engage with opponents of the CME's plan to determine their next steps.

A spokesman for the CME Group could not be immediately reached for comment.

Data reporting is a central tenet of new global rules to regulate the $650 trillion swaps industry, drawn up after the 2007-09 financial crisis brought to light systemic flaws.

Under the 2010 Dodd-Frank overhaul of Wall Street, data registering trading in complex derivatives will need to be stored in databases called swap data repositories, or SDRs.

The conflict heated up in January, when the DTCC threatened to sue the CFTC if it approved the CME's plan, laid down as rule 1001 in the CME's rule book.

Rule 1001 says that any transaction that runs over its clearing house will be reported to its own swaps data repository. If a client chooses, CME will also share the data with rival SDRs.

Outsiders say the conflict is about who will be the dominant swaps data warehouse and generate more revenue, making the data more valuable and in turn lure more clients.

Under new global rules, swaps will need to be traded on exchange-like platforms, with central clearing houses standing in between buyers and sellers to reduce risk.

LCH.Clearnet, which is being bought by the London Stock Exchange, dominates interest rate swaps clearing, while the Intercontinental Exchange is the biggest player by far in clearing credit-default swaps.

Unlike the CME or ICE, DTCC does not offer clearing services. Instead it is relying on LCH.Clearnet to receive sufficient data in its SDR.

The CME has no such dominant position in either of these two products, but hopes to build up substantial market share in new areas that will need to be cleared from next week, because of the tighter rules.

Source: http://articles.chicagotribune.com/2013-03-06/business/sns-rt-us-cftc-cme-tradedatabre92603p-20130306_1_interest-rate-swaps-swaps-data-data-warehouse

JPMorgan to Join UBS in Exiting Australian Swap Rate Panel

UBS AG (UBSN) and JPMorgan Chase & Co. (JPM) are withdrawing from a panel that sets Australia’s benchmark swap rate and Citigroup Inc. (C) is reducing its role in Malaysia amid increased scrutiny following the global rate-rigging scandal.


UBS stopped contributions for the bank bill swap rate on Feb. 4 and JPMorgan will pull out by the end of this month, David Lynch, Sydney-based executive director at the Australian Financial Markets Association, said by phone today. Citigroup ended submissions for Malaysian ringgit interest-rate swaps and the ringgit spot reference rate against the dollar last week, said two people with knowledge of the matter.

The withdrawals underscore the risk that some rates will become less efficient at determining borrowing costs with fewer global banks participating. Royal Bank of Scotland Group Plc (RBS) and Barclays Plc (BARC) are among lenders that have withdrawn from some panels as countries review their benchmarks.

“The reason why they’re pulling out is they’re concerned about regulations and about legal liabilities,” said Sandy Mehta, chief executive officer of Value Investment Principals Ltd. in Hong Kong. “If you have a smaller number of players, you’ll end up in the same spot where you’ll have the risk of inefficient rates over the risk of manipulation.”

JPMorgan advised AFMA on its decision to withdraw from the Australian panel, said Andrew Donohoe, a Sydney-based spokesman for the U.S. bank, without elaborating. Caroline Gurney, a spokeswoman for UBS in Sydney, declined to comment.
More Costly

“The compliance cost of contributing to global benchmarks has definitely increased in the wake of global regulatory actions,” said Lynch, whose organization represents more than 130 financial firms and publishes the Australian rate.

James Griffiths, a Hong Kong-based spokesman for Citigroup, declined to comment on the lender ending its submissions to the two rates in Malaysia. The New York-based bank continues to contribute to the Kuala Lumpur Interbank Offered Rate, according to data compiled by Bloomberg.

Barclays, UBS and RBS have been fined about $2.5 billion by U.S. and U.K. authorities for attempts to rig benchmarks including the London Interbank Offered Rate, and more than a dozen other firms are under investigation.

UBS through its own investigation found its traders attempted to manipulate benchmarks including the Australian bank bill swap rate, according to a footnote in a Dec. 19 order by the U.S. Commodity Futures Trading Commission imposing sanctions against the Zurich-based bank.

RBS Withdrawal

UBS and New York-based JPMorgan follow RBS, which withdrew from the Australian rate-setting group in April. RBS pulled out of several panels last year including for the Tokyo and Hong Kong interbank offered rates following a January announcement of changes to its strategic priorities.

AFMA will look for replacements, Lynch said. JPMorgan’s departure would reduce the panel to 12 members from the maximum 14 if the positions aren’t filled.

The bank bill swap rate is calculated by asking panelists for the actual rates they observe in the brokered market at around 10 a.m. Sydney time. The highest and lowest bids are then sequentially eliminated until six remain.

The quote is used for short-term debt issued by the four main Australian lenders -- Australia & New Zealand Banking Group Ltd. (ANZ), Commonwealth Bank of Australia, National Australia Bank Ltd. (NAB) and Westpac Banking Corp. (WBC)

In Malaysia, the ringgit swap and exchange rates are used by traders for hedging against interest-rate and currency moves and speculating on their direction. Excluding Citigroup, 11 banks now contribute to fixing the rates daily, the data show.

Citigroup in September said it withdrew from the panel of lenders that sets the euro interbank offered rate, citing a dearth of trades between banks in the region. Rabobank International, the biggest Dutch savings bank, exited the panel in January, while Deutsche Bank AG said in February that it would end participation in some Euribor rates.

“The fewer the players in any market, the less liquidity and the less depth to the market,” said Mehta of Value Investment. “It’s not a good sign.”

Source: http://www.bloomberg.com/news/2013-03-06/jpmorgan-to-join-ubs-s-withdrawal-from-australia-swap-rate-panel.html

Australian Dollar Rises Versus Peers After Economy Grows

Australia’s dollar rose against most major peers after data showed the nation’s economy grew last quarter, driven by household consumption and exports.


The currency, nicknamed the Aussie, climbed to its highest level in a week versus the yen as traders pared expectations for interest-rate cuts this year. New Zealand’s currency, known as the kiwi, declined for the first time in four days and the Aussie fell against the U.S. dollar after commodities fell for the sixth time in seven days.

“The previous quarter was revised higher, and the annual rate was lifted, so that’s a good outcome,” said Peter Dragicevich, a Sydney-based currency economist at Commonwealth Bank of Australia (CBA), the nation’s largest lender. “We’ve seen market pricing for more rate cuts by the RBA get pared back and that obviously helps support the Aussie.”

The Australian dollar fell 0.2 percent to $1.0238 as of 1:11 p.m. in New York, after advancing 0.6 percent yesterday, the most since Feb. 22. It gained 0.4 percent to 96.11 yen after earlier touching 96.29, the highest since Feb. 25.

New Zealand’s currency fell 0.3 percent to 82.84 U.S. cents after climbing 0.8 percent in the previous three days. It strengthened 0.3 percent to 77.76 yen.

Swaps Data

Interest-rate swaps data compiled by Bloomberg show traders see a 75 percent chance the Reserve Bank of Australia will keep the overnight cash rate target at 3 percent when they next meet on April 2. That’s up from 29 percent odds a month ago.

Australia’s economy grew 0.6 percent in the fourth quarter from the previous three months, when it gained a revised 0.7 percent, a Bureau of Statistics report released in Sydney showed today. The result was in line with the median of 28 estimates in a Bloomberg News survey. The economy expanded 3.1 percent from a year earlier.

The RBA refrained from cutting the highest benchmark interest rate among major developed nations for a second- straight meeting yesterday, after Governor Glenn Stevens and his board implemented 1.75 percentage points in borrowing-cost reductions in the 14 months through December.

There are signs the “significant easing in monetary policy” last year is having an impact, Stevens said in a statement, while reiterating the inflation outlook allows “scope to ease policy further.”

‘Solid Growth’

“With an unchanged RBA and relatively solid growth, we would expect a short squeeze in the Aussie back above $1.03 over the next few days,” said Callum Henderson, the head of currency research at Standard Chartered Plc in Singapore. “We’re expecting an upturn in global growth in the second half of the year, and as such, for the RBA to refrain from its relatively dovish comments.”

The Standard & Poor’s GSCI Index of 24 raw materials fell 0.9 percent today, and is down 5.3 percent during the past month.

The kiwi fell even as prices of milk powder for May delivery rose 19.3 percent, the most since Sept. 1, 2010, according to a trade-weighted index on Fonterra Cooperative Group Ltd.’s GlobalDairyTrade website. Auckland-based Fonterra is the world’s biggest dairy exporter and accounts for about 40 percent of the global trade in dairy products.

Source: http://www.businessweek.com/news/2013-03-05/aussie-rises-versus-peers-on-prospects-growth-accelerated

Indian Bonds Advance as Chidambaram Favors Lower Interest Rates

Indian bonds gained for a second day after Finance Minister Palaniappan Chidambaram said yesterday he hopes interest rates will be cut.


The Reserve Bank of India cut the repurchase rate by 25 basis points to 7.75 percent on Jan. 29, lowering it for the first time in nine months. The next policy review is due on March 19. The economy expanded 4.5 percent from a year earlier in the final three months of 2012, the weakest pace in almost four years, the government reported last week.

“Bonds are recovering after last week’s fall on expectations of further monetary easing,” said Vaidyanathan Iyer, Mumbai-based executive director at AK Capital Services Ltd. (AKCPS) “The central bank may cut rates by 25 basis points this month to revive growth.”

The yield on the 8.15 percent notes due June 2022 fell two basis points, or 0.02 percentage point, to 7.87 percent in Mumbai, according to the central bank’s trading system.

Last week, the 10-year yield rose 11 basis points, the most since August, after Chidambaram unveiled plans to boost debt sales by 13 percent to 6.29 trillion rupees ($115 billion) in the fiscal year starting April 1.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell one basis point to 7.57 percent, according to data compiled by Bloomberg.

Source: http://www.bloomberg.com/news/2013-03-05/indian-bonds-advance-as-chidambaram-favors-lower-interest-rates.html

Oz Firm Eyes NZ Farm Loan Investigation

An Australian law firm which recently won a big payout for disgruntled investors is eyeing the ongoing investigation into hundreds of millions of dollars in "interest rate swaps loans" allegedly "mis-sold" to New Zealand farmers.


The Commerce Commission is currently investigating whether farmers were misled or deceived by banks who sold them complex loans as a means of managing the risk of rising interest rates during the run up to the 2008 global financial crisis.

Falling interest rates since the crisis has seen farmers who took the loans paying interest rates far higher than market rates, causing significant financial hardship.

Commission officials last week told a Parliamentary committee that the value of loans they were investigating was in excess of $100 million and there was anecdotal evidence that some farmers may have been forced into accepting them. The loans were reportedly made by ANZ National and Westpac banks but the commission says it is investigating three banks.

This week Australian law firm Johnson Winter & Slattery told the Herald it was keeping an eye on the investigation.

The firm recently won a significant victory on behalf of Australian charities, local authorities and other investors who lost money in the 2008 collapse of Wall St investment bank Lehman Brothers.

Johnson Winter & Slattery partner Jim Hunwick told the Herald there appeared to be some parallels between the Lehman Brothers case which involved the sale of complex investments based on collateralised debt obligations, and the sale of interest rate swap loans to New Zealand farmers.

"We've got clients buying complex financial products who are not necessarily regarded as retail investors so they're not benefitting from the same legislative requirements as to disclosure. Nevertheless the person arranging the product and selling it may at law owe them some duties, and if the products are really complex, one of those duties might be to consider whether it's suitable in the first place."

Mr Hunwick also said one of the issues in the Lehmans Brothers case which may have relevance to the swap loans affair was "a huge information imbalance".

"The banks have all these complex models and data where they can value the derivatives and they can value the risk that they're taking, but their clients don't have that.

"The clients don't know that they're getting the right price for the risk that they're taking and that's how the banks make their money. They're getting the clients to take the risk for a relatively small price then they're repackaging what they're selling on the market for the real price of the risk and they're pocketing the difference."

Labour's primary industries spokesman Damien O'Connor who has been pushing for a Parliamentary inquiry into the loans told the Herald he was also aware of a British law firm monitoring the issue.

Britain's banks are facing compensation bills that may top STG10 billion after financial watchdog the Financial Services Authority analysis found more than 90 per cent of swap rate loans, sold mainly to businesses, did not comply with at least one or more regulatory requirements.

Mr O'Connor said the majority of New Zealand farmers affected by the loans were not in a position to undertake lengthy and expensive litigation, "that's why you need a thorough investigation that is outside the court process".

Mr O'Connor said the Commerce Commission's investigation dealt with the fairly narrow test of whether banks complied with the Fair Trading Act when selling the loans and it could not deal with the issue of potential redress.

"That's where the Financial Markets Authority or a select committee may be able to come in."

Source: http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10869109

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Did the Banks Act Fairly?

Kaikoura MP Colin King and Green MP Steffan Browning of Marlborough have welcomed a Commerce Commission investigation into whether banks breached the Fair Trading Act by misleading marketing of complex interest rate swaps to farmers.


Mr King and Mr Browning sit on Parliament's primary production select committee which is considering doing its own investigation into the swaps at the request of Labour primary industries spokesman and West Coast-Tasman MP Damien O'Connor.

Mr Browning said a parliamentary inquiry could consider whether clients signed contracts under duress, which was outside the Commerce Commission brief.

"It's a concern how much clients . . . had their arms twisted behind their backs to accept these clearly harsh loan swaps," he said.

Also, parliamentary privilege would protect people scared of talking because of confidentiality agreements with banks, Mr Browning said.

Janette Walker, who represents interest swap victims, said four Marlborough vineyard owners contacted her after she was quoted in the Marlborough Express last week. Ms Walker slammed Federated Farmers president Bruce Wills for criticising swaps products last week when previously he ignored the problem.

She asked Federated Farmers and Beef + Lamb in July last year to create a portal for farmers with interest swaps problems on their websites but they refused.

Many farmers signed swaps agreements under duress, she said. One who rang last week said the bank manager turned up the day his four- to five-year swaps agreement ran out and said unless it was renewed, he would not sleep at night.

The day after making a verbal agreement to extend, the farmer changed his mind but the bank said the agreement was binding, and insisted he sign.

The Commerce Commission said so far 42 complaints had been received involving three banks which it did not name.

Commission chairman Mark Berry told the committee if it found the swaps were marketed misleadingly, banks would have to decide whether to settle or be taken to court.

The issue had major implications for primary sector financing where debt ran close to $50 billion, he said.

Swaps allow clients to manage the interest rate exposure on borrowing and are typically marketed to large corporations and institutions. After the global financial crisis, interest rates plunged to historic lows and holders found themselves locked into interest rates of up to 10 per cent, with punitive break fees if they tried to exit.

The case has parallels with Britain where banks were reportedly forced to sell more than $1b in assets to compensate clients for similar loan swap losses.


Source: http://www.stuff.co.nz/marlborough-express/news/8377427/Did-the-banks-act-fairly

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Defending Interest Rate Swap Mis-Selling Claims; Lessons Learnt

The latest stage of the FSA’s investigation into the mis-selling of interest rate hedging products (IRHPs or “swaps”) has seen the regulator announce that 90% of the sales reviewed in its pilot study did not comply with its requirements. The FSA ordered the four banks under investigation to review their sales and offer appropriate compensation to their clients where applicable. Seven other banks have also agreed to review their sales of IRHPs.


The FSA has come under sustained political pressure to investigate this issue and take appropriate action. This is because there is a widely held view that complex interest rate swaps were sold to unsophisticated small businesses, and that the banks did not do enough to explain the nature of the product and the associated risks. Swaps were typically sold between 2004 and 2008, when interest rates were higher, but have performed poorly after interest rates fell to historic lows in 2008. As a result of this, companies found themselves tied into making repayments at much higher rates than would have been available on the open market. The banks have also been criticised for failing to explain, at the time of sale, the charges that would apply if the company wished to terminate the agreement at an early stage.

With small and medium sized enterprises (SMEs) at the heart of the coalition government’s strategy for stimulating the UK economy, and often reported as being in a vulnerable position relative to their larger counterparts, this has become a very hot political potato. It will also be viewed as another example of the banks’ mis-selling of financial services products in recent years, following on from PPI, and will not help the banks’ cause as they look to regain the trust of their customers and the wider public.

Yet, it is encouraging to note from the recent victory for a defendant bank in Green & Rowley v RBS, heard in the Manchester Mercantile Court, that some sales of these products can be defended. RBS sold a swap to Mr Rowley, a hotelier, and his business partner, Mr Green, in 2005, in order to hedge against movements in the interest rate on an underlying loan of £1.5 million. The swap was relatively straightforward and the claimants benefited from it until market conditions changed in 2008. They enquired in 2009 about terminating the swap, but were told this would cost them as much as £138,650, so they decided not to take any action.

Green and Rowley did not have sufficient evidence to substantiate their claims of negligence and breach of duty. By contrast, the bank had a helpful contemporaneous note of what was discussed at the initial meeting when the advice was given. Furthermore, the claimants were unable to pursue claims under section 150 of the Financial Services and Markets Act 2000 (FSMA) – which should have been their strongest line of argument – since claims under the FSMA were statute-barred.

This claim very much turned on its own facts and does not constitute a panacea against the majority of claims that will arise from swaps. Whilst it should be noted that only 10% of claims in the FSA’s recent investigation were fully compliant, this case confirms that judges will find in favour of banks in appropriate cases. There are however steps banks must now take when dealing with sales of IRHPs and similar financial products.

First, any bank that sold IRHPs to relevant customers can expect to have to conduct the same review of its past business as the aforementioned eleven banks are doing now. This will have wide-ranging implications for banks, from resources to financial provisioning. The overall redress expected to arise from IRHP mis-selling, though very substantial, is not however expected to be as significant as that from PPI mis-selling.

It is also important to note the FSA’s emphasis on the “sophistication test”, with “unsophisticated” customers deemed to be unlikely to have understood the risks associated with these products. This underlines the importance for banks to explain the product fully to customers and to pay regard to the customer’s profile and standing, from the smallest SME to a large plc.

Similarly, banks may be able to raise causation defences if it can be proved that the customer would have gone ahead anyway, following a non-compliant sale, had the sale been fully compliant. This possible defence is referred to in the FSA’s recent findings, and harks back to the “insistent customer” defence is outlined in guidance issued previously by the FSA on pension and endowment mis-selling.

Finally, the decision in Green & Rowley reminds us of the importance of keeping careful notes of meetings when advice is given regarding the sale of interest rate swaps and other financial products.

Source: http://www.globalbankingandfinance.com/Tax-Legal/Defending-interest-rate-swap-mis-selling-claims-lessons-learnt.html

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State College Area makes $6 Million Payment Toward Swap Settlement

STATE COLLEGE — The State College Area School District has made good on a big chunk of the $9 million the school board agreed on to settle a lawsuit over the ill-fated interest rate swap with a Canadian bank in 2006.


On Friday, the school district wired $6 million, the first payment toward the settlement, to the Royal Bank of Canada, business administrator Randy Brown said. The money came from a combination of the fund balance and the general operating fund, Brown said.

The remaining $3 million will be paid out over a period of five years, due each March 1. Next year’s payment will be $800,000, and the four years after that, the district will pay $550,000, Brown said.

Superintendent Bob O’Donnell said in January, when the board agreed to the settlement, the result is unfortunate because the district has nothing to show for the money spent.

At the time in 2006, the board saw the interest rate swap with the bank as a way to finance the State College Area High School renovation project. The board wanted to lock in a low interest rate on $58 million of debt.

The high school renovation project was shelved in 2007 after bids came in over budget, and the board never borrowed the money. Facing a $3 million termination fee, the board extended the start date of the swap another three years.

But interest rates fell, and the cost to end the agreement kept rising. By summer 2010, termination fees would cost the district between $10 million and $11 million.

In August 2010, the district sued, arguing the swap was invalid.

In May 2011, the board did not make the first payment due to the bank of $978,285. The bank sued to recover a $10.3 million termination fee.

The death knell came in October when a federal judge ruled in favor of the bank, saying the swap was valid.

In January, school officials said they opted to settle the lawsuit rather than fighting it in court, which would cost more money to resolve.

The settlement ends up saving the district $1 million it would have had to pay in fees to terminate the swap.

The district will recover $160,000 from financial advisers that were consulted during the swap matter. The law firm of Rhoads and Sinon LLP, which was the district’s bond counsel for the swap, owes State College Area $100,000. Public Financial Management Inc., a financial adviser for the swap, owes the district $60,000.

Source: http://www.centredaily.com/2013/03/02/3523045/state-college-area-makes-6-million.html

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Super-Rich Are Hosed As Anglo Swaps Deal Crashes

Several well-known figures claim to have lost millions on a notorious interest rate swap product they were persuaded to take out by former Anglo Irish Bank (now IBRC) in a transaction that netted the rogue bank €20m in lucrative fees.

Those taking legal action against IBRC's UK arm (which is unaffected by the liquidation) include Harcourt Development's Pat Doherty, Sean O'Driscoll of Dimplex, Kevin Lagan of Lagan Cement, and hotel group boss Garvan O'Doherty.

The case relates to a €100m investment in a British chain, Somerston Hotel Group, in which dozens of wealthy Irish business figures are stakeholders since 2007.

Anglo's wealth division attached an interest rate swap of 7 per cent to a €100m investment it arranged.

"As a result of the swap, the value of the interest bought by investors has been destroyed by €87m," the Sunday Independent has been told.

A complaint is also being made to Britain's financial watchdog the FSA as part of the litigation, regarding how Anglo's wealth arm conducted itself while putting together the deal.

Interest rate swaps are hugely controversial financial instruments sold to many business people during the boom, and have been linked with serious mis-selling issues.

In Ireland alone, it is estimated that banks are on the hook for €3.5bn in compensation related to these products. In Britain it is put at over €11bn.

IBRC's boom-era interest rate hedging derivatives are being looked at as part of a major ongoing FSA probe.

On a €100m loan deal Anglo is believed to have netted a startling £20m-£25m in fees associated with the transaction that it promoted and underwrote.

The FSA complaint will assert that Anglo committed "very significant breaches" of FSA rules in the way it marketed the deal, by issuing unsolicited information memos to prospective investors and backdating documentation that hadn't been completed as it should have been ahead of the transaction closing.

"This thing is riddled with conflicts of interest," an individual with knowledge of the case said.

Although loans were sold to investors for periods of two or three years, Anglo put in place a seven-year interest swap. Because sterling has plummeted since then, this has cost shareholders a fortune.

Many investors are hugely perturbed that there has been no shareholder meeting of Somerston in over four years, despite repeated requests by investors.

"The same investors constantly asked for meetings and Anglo constantly refused. Over two years ago, 30 of the investors wrote to Anglo to ask for it to call a general meeting. It hides behind the fact that it can't force the company to hold one," we're told.

"The loan has been refinanced twice by Anglo without any consultation with the majority of shareholders," one investor said.

Other Anglo Private Wealth investors include Galway developer brothers Brian and Luke Comer; boxing impresario Barney Eastwood; Ballymore's Sean Mulryan; former Anglo banker John Rowan; and John Moulton, whose Better Capital has contracts with the National Pension Reserve Fund.

The former Anglo Irish Bank boss Sean FitzPatrick had a €4.2m stake.

Source: http://www.independent.ie/business/irish/superrich-are-hosed-as-anglo-swaps-deal-crashes-29105370.html

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Interest Rate Swap Investigation At Early Stage

Farmers will be able to speak to the Commerce Commission in confidence over the sale of controversial interest rate swaps, a Parliamentary select committee was told today.


But the commission is less sure whether it will be able to prosecute unless some of those affected are prepared to be identified.

The commission was asked to update the primary production select committee on its early-stage investigation into the complex bank products, and whether those who bought them understood them or were misled.

Labour MP and committee member Damien O'Connor said the heart of the matter was whether the committee should also hold an investigation, because he had heard some farmers were afraid of ruining their chances of a loan adjustment if they went public.

"I have heard that banks would prefer to go through a Commerce Commission inquiry rather than a parliamentary inquiry," he said.

"We have the ability to hear their evidence in private and protect their identity."
Commission chair Mark Berry assured MPs that "we will hear farmers in confidence ... and we will not divulge that information to the banks".

But anonymity also meant the committee might not be able to use that information if the matter reached the courts.

The commission's general counsel on competition, Mary-Anne Borrowdale, said it became problematic if the commission was seeking compensation for an individual in a court of law.

So far three banks are being investigated and 42 complaints have been received about the swaps, which were sold before and during the global financial crisis.

It is understood the swaps were sold to farmers as a way of hedging against rising interest rates, but when interest rates fell to historic lows, swap-holders were left locked into crippling loan repayments.

Those affected are reported to be paying interest rates about 10 per cent, with punitive break fees if they tried to exit.

The banks involved, including Westpac and ANZ, have refused to say how many swap loans they sold.

But pushed to put a dollar value on the magnitude of the problem, the Commerce Commission's general manager of competition Kate Morrison said she had to assume there were "more than tens of millions" of dollars involved.

However, sources said the figure runs into the billions of dollars.

Source: http://www.stuff.co.nz/waikato-times/farming/8364751/Interest-rate-swap-investigation-at-early-stage

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ICAP plc : TriOptima Eliminates JPY271.6 Trillion Notional In Interest Rate Swaps from LCH SwapClear in Record-Breaking Compression Cycle

TriOptima announces today that it eliminated JPY 271.6 trillion (USD3 trillion) in cleared interest rate swap notional principal outstandings from LCH SwapClear, the largest ever triReduce compression cycle in JPY interest rate swaps. Since TriOptima began offering its triReduce early termination service in JPY in 2004, almost JPY1,600 trillion (USD18.3 trillion) in cleared and uncleared swaps have been eliminated.


"The banks, LCH SwapClear and TriOptima worked together to achieve these record-breaking results," said Ken Nishimura, head of TriOptima Japan. "Contributing to the success of the cycle was an increase in participants as institutions recognize the benefits of compression. We anticipate continued expansion of the process in 2013."

About triReduce Compression
Compression services are offered through TriOptima's triReduce service to swap market participants with significant two-way flow. In triReduce, participants are able to tear up their existing trades at their own mid mark-to-market valuations avoiding the difficult negotiation process of bilateral termination. Multilateral terminations leverage off the expanded number of participants and result in increased numbers of terminated trades.

Eliminating unnecessary swaps in an OTC derivatives clearinghouse promotes the efficient use of capital and collateral and contributes to overall financial stability by moderating the pace of growth in outstanding notional principal in the market.

About TriOptima
TriOptima, an ICAP Group company, is the award-winning provider of OTC derivatives post trade risk management services including triResolve, triReduce, triBalance, and the recently-launched triQuantify.

triBalance facilitates proactive counterparty risk management by rebalancing counterparty risk exposure between multiple CCPs and bilateral relationships (in Rates, Credit and Commodities) enabling an efficient use of capital and collateral and reducing systemic risk.

triQuantify offers risk analytic models that leverage recent developments in state-of-the-art massively parallel computing devices to calculate metrics such as CVA, PFE and GVA on a global scale and with more realistic and accurate risk models.

triResolve is a network community service that provides counterparty exposure management services including proactive portfolio reconciliation of OTC derivative portfolios, margin call management, and dispute resolution.

Source: http://www.4-traders.com/ICAP-PLC-9590201/news/ICAP-plc-TriOptima-eliminates-JPY271-6-trillion-notional-in-interest-rate-swaps-from-LCH-SwapClear-16246043/

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Commerce Commission Still Working On Probe Of Sale Of Interest Rate Swaps

The Commerce Commission says it is still working on its investigation into whether interest rate swaps were misleadingly marketed after claims from farmers that they got locked into confusing contracts with excessive break fees.


The commission began its probe in August last year and has received 42 complaints since concerns over the way the financial derivatives were sold first aired in the media, chairman Mark Berry told Parliament's primary production select committee.

The swaps allow clients to manage the interest rate exposure on their borrowing and are typically marketed to large corporations and institutions. However, from 2005 banks began marketing them to their rural and commercial clients.

Farmer lobby Federated Farmers was among groups seeking a review by the regulator, saying the instruments were mostly sold to its members between 2007 and 2009, with concerns about them only surfacing in the wake of the global financial crisis.

Fed president Bruce Wills called the swaps "incredibly complicated instruments." Farmers had reported that margins had been changed on fixed term swap rates and that loan contract clauses might have been changed to allow that to happen.

"There appears to be considerable confusion about swaps, with them being sold to farmers as though they are fixed rate products," Wills said. While farmers had to take responsibility for their financial decisions, the lobby group "will not excuse the wilful mis-selling of any product, financial or otherwise."

Not many farmers use swaps and some that do rate them highly, he added.

Labour's primary industries spokesman Damien O'Connor said last week that "the practice of selling complicated finance products to farmers has been far more extensive than previously stated."

"This is a serious issue that needs careful consideration because it has major implications for primary sector financing where debt currently runs at close to $50 billion," he said.

The commission's Berry said his investigation's primary aim is to establish whether the swaps were marketed "in ways that may have misled customers as to their true risk, nature and suitability."

The regulator had received a large amount of information from complainants and banks and will shortly widen its inquiries, seeking further information from people who have entered into interest rate swaps.

Source: http://www.sharechat.co.nz/article/920827a3/commerce-commission-still-working-on-probe-of-sale-of-interest-rate-swaps.html

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Aussie Dollar Rises Versus Peers on Bets RBA to Hold Rate

Australia’s dollar rose versus most of its 16 major counterparts on prospects Reserve Bank officials meeting next week will refrain from cutting borrowing costs.


The so-called Aussie climbed for a third day against the yen and reversed an earlier decline versus the dollar, following reports that signaled a slowdown in Chinese manufacturing expansion. New Zealand’s currency, known as the kiwi, strengthened versus the dollar and yen as a pullback in Asian stock losses outweighed data today that showed an unexpected drop in the country’s terms of trade.

“The RBA is in wait-and-see mode,” said Andrew Salter, a currency strategist at Australia & New Zealand Banking Group Ltd. (ANZ) In Sydney. “We’re coming to the bottom of the range in the Aussie. We see value at current levels.” ANZ predicts the Australian currency will trade at $1.05 by Dec. 31.

The Aussie added 0.2 percent to $1.0235 as of 4:48 p.m. in Sydney, set for a weekly drop of 0.8 percent. It gained 0.2 percent to 94.76 yen.

New Zealand’s currency rose 0.3 percent to 82.74 U.S. cents. It’s poised to fall 1.3 percent this week, the biggest decline since Dec. 21. It climbed 0.3 percent to 76.60 yen.

The MSCI Asia Pacific Index of shares was little changed after earlier falling as much as 0.4 percent.

Interest-rate swaps data compiled by Bloomberg show traders see an 82 percent chance RBA Governor Glenn Stevens will keep his nation’s key interest rate at 3 percent on March 5.
China Slowing

China’s manufacturing Purchasing Managers’ Index dropped to 50.1 last month from 50.4 in January, the National Bureau of Statistics and China Federation of Logistics and Purchasing said today in Beijing. That compares with a 50.5 median estimate in a Bloomberg News survey of economists before the report. China is Australia’s largest trading partner.

A similar gauge of Chinese factory output by HSBC Holdings Plc and Markit Economics fell to 50.4 in February from 52.3 in the previous month. Analysts in a separate poll predicted a decline to 50.6.

In New Zealand, a government report showed the terms of trade declined 1.3 percent in the three months through December from the previous quarter, when it fell 3.2 percent. Analysts polled by Bloomberg expected a 1.2 percent gain.

Australia’s 10-year government bond yield slid one basis point, or 0.01 percentage point, 3.34 percent. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates that are sensitive to expectations for borrowing costs, was at 2.96 percent from 2.97 percent yesterday.

Source: http://www.businessweek.com/news/2013-02-28/aussie-dollar-halts-drop-before-china-manufacturing-data

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Text-Fitch Affirms 4 PIMCO Closed-End Funds Preferred Share Ratings

Fitch Ratings has affirmed the 'AAA' ratings assigned to the auction rate preferred shares (ARPS) issued by the following four closed-end funds sub-advised by Pacific Investment Management Company LLC (PIMCO) and managed by Allianz Global Investment Fund Management LLC (AGIFM):


PIMCO High Income Fund (NYSE: PHK)
--$292,000,000 of ARPS consisting of Series M, T, W, TH and F, each with a liquidation preference of $25,000 per share, affirmed at 'AAA';

PIMCO Corporate & Income Strategy Fund (NYSE: PCN)
--$169,000,000 of ARPS consisting of Series M, T, W, TH and F, each with a liquidation preference of $25,000 per share, affirmed at 'AAA';

PIMCO Income Strategy Fund (NYSE: PFL)
--$78,975,000 of ARPS consisting of Series T, W and TH, each with a liquidation preference of $25,000 per share, affirmed at 'AAA';

PIMCO Income Strategy Fund II (NYSE: PFN)
--$161,000,000 of ARPS consisting of Series M, T, W, TH and F, each with a liquidation preference of $25,000 per share, affirmed at 'AAA'.

KEY RATING DRIVERS
The affirmations follow Fitch's annual reviews of the funds. The 'AAA' ratings are based on the following:
--Sufficient asset coverage provided to the ARPS by the funds' underlying portfolios of assets;
--The structural protections afforded by mandatory cure and de-leveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the funds' operations; and --The capabilities of PIMCO as the sub-adviser.

Fitch's ratings assigned to the ARPS speak only to timely repayment of interest and principal in accordance with the governing documents and not to potential liquidity in the secondary market.

FUND PROFILES
As of Jan. 31, 2013, the portfolios consisted mainly of high-yield and investment grade corporate securities, structured finance securities, preferred stock and taxable municipal bonds issued by U.S. domiciled issuers. The PCN fund had a higher allocation to investment grade corporate securities while the other three funds had a higher allocation to high-yield corporate and non-agency mortgage bond securities. The top sector concentration in each fund was to 'Banking, Finance and Insurance'.

FUND LEVERAGE
As of Jan. 31, 2013, the funds had the following assets, leverage and derivative
profiles:

--PHK: total portfolio assets of approximately $1,393 million, current liabilities of $51 million and cash leverage of $292 million, or 22% of net portfolio assets. Cash leverage consisted entirely of rated ARPS.

Fitch's criteria also consider the fund's use of economic leverage in the form of derivatives, which amounted to $85 million in notional of credit default swaps, $5 million in excess (unhedged) forward currency exposures, and $4,030 million in notional of interest rate swaps (long) positions (although the fund also utilized a $700 million short position to hedge some of this risk).

--PCN: total portfolio assets of approximately $786 million, current liabilities of $9 million and cash leverage of $169 million, or 22% of net portfolio assets. Cash leverage consisted entirely of rated ARPS.

The fund also utilized $600 million in notional of interest rate swaps (long)
for current income, and $0.3 million in excess (unhedged) forward currency exposures.

--PFL: total portfolio assets of approximately $394 million, current liabilities of $4 million and cash leverage of $83 million or 21% of net portfolio assets. Cash leverage consisted of approximately $4 million of reverse repurchase agreements and $79 million of rated ARPS.

The fund also utilized $299 million in notional of interest rate swaps (long) for current income, $1.5 million in credit default swaps, and $0.2 million in excess (unhedged) forward currency exposures.

--PFN: total portfolio assets of approximately $794 million, current liabilities of $9 million and cash leverage of $163 million, or 21% of net portfolio assets. Cash leverage consisted of approximately $2 million of reverse repurchase agreements and $161 million of rated ARPS.

The fund also utilized $609 million in notional of interest rate swaps (long) for current income and $0.3 million in excess (unhedged) forward currency exposures.

ASSET COVERAGE
As of Jan. 31, 2013, the funds' asset coverage ratios for the ARPS, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC tests) per the 'AAA' rating guidelines outlined in Fitch's closed-end fund criteria, were in excess of 100%. This is the minimum asset coverage guideline required by the fund's governing documents and evaluated as such by Fitch.

Also at the time of the rating affirmation, the funds' asset coverage ratios for rated ARPS, as calculated in accordance with the Investment Company Act of 1940 (1940 Act), were in excess of 200%, which is the minimum asset coverage required by the 1940 Act and the fund's governing documents.

Should the asset coverage tests decline below their minimum threshold amounts (as tested on the last business day of each week), the governing documents require the fund to alter the composition of its portfolio toward assets with lower discount factors (for Fitch OC Tests), or to reduce leverage in a sufficient amount (for both the Fitch OC Tests and the 1940 Act test) to restore compliance within a re-specified period (a maximum of 38 business days for the Fitch OC Tests and a longer period for the 1940 Act test).

THE ADVISOR
PIMCO acts as the sub-adviser to the funds, performing all investment management and distribution functions. As of Dec. 31, 2012, PIMCO had $2 trillion in assets under management. Allianz Global Investors Fund Management LLC (AGIFM) acts as the investment manager to the funds, performing all legal, operations and compliance functions. PIMCO and AGIFM are indirect, majority owned subsidiaries of Allianz SE.

RATING SENSITIVITY
The ratings may be sensitive to material changes in the credit quality or market risk profiles of the fund, including the risk exposure assumed by the funds' use of interest rate swaps. A material adverse deviation from Fitch guidelines for any key rating driver could cause the rating to be lowered by Fitch.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

The sources of information used to assess this rating were the public domain, PIMCO and AGIFM.

Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock', Aug 15, 2012;
--'Fitch: Taxable CEFs Rely on Select Few Banks for Funding' (Jan. 11, 2013);
--'2013 Outlook: Closed-End Funds' (Dec. 14, 2012);
--'Taxable Closed-End Funds Reliant on Short-Term Debt Reap Low-Cost Funding at
the Expense of Rollover Risk' (Sept. 25, 2012).

Applicable Criteria and Related Research Rating Closed-End Fund Debt and Preferred Stock 2013 Outlook: Closed-End Funds Taxable Closed-End Funds Reliant on Short-Term Debt Reap Low-Cost Funding at the Expense of Rollover Risk

Source: http://www.reuters.com/article/2013/02/28/idUSWNB003EU20130228

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