Banks moving swaps overseas

The WSJ reports today (disclosure: I'm quoted in the article) that banks are moving their swap businesses (in particular credit default swaps) overseas. According to the article, this move could be to avoid the stricter regulatory environment in the US. While some see this as potentially reducing risk here in the US, others worry that risk isn't being reduced but rather just shifted around. 

What do you think?

Barclays loses a LIBOR case at the 2nd Circuit

Reuters reports that the 2nd Circuit Court of Appeals reversed a SDNY court decision and allowed a shareholder suit against Barclays related to LIBOR manipulation to move forward. A copy of the decision can be seen here and the notice from plaintiff's counsel, Robbins Geller, can be accessed here. Will this case be appealed to SCOTUS? 

The Raters Are Fine

As this recent WSJ article points out, the rating agency business are performing phenomenally well, riding the wave of bond and debt issuance. Rating agency stocks are the essential beta stock, a good way for investors to express a view of the debt markets. Interesting to note that despite the wide spread criticism of their business model, it has not changed and seems less likely than ever to do so.

Are Asset Managers Still Using the WM Reuters Benchmark Fix? Here are 2 Alternatives.

For almost a year the FX benchmark allegations against the banks have been in the news, as well as regulator and internal bank investigations.  Many asset managers use the fix to execute their FX trades.  There have been stories that trading at the fix has seen somewhat smaller volumes (OTC markets do not have published volume figures).

What are some alternatives available to a manager that wants to avoid fix trading?

1) This article in FX Week (subscription) says that there is anecdotal evidence that some managers, but not many, have switched to using time slicing algorithms over the period around the fix.  This allows a manger to establish how they want to trade to minimize the risk (e.g., time intervals and size) , rather than giving the entire trade to a bank to manage.  This sounds like an attractive methodology for many managers, but for those not currently using algorithms, may take some time to implement.  It requires time to learn about them, choose algos with which to execute as well as prepare operations and systems.

2)  Execute trades with banks in the same fashion as non-fix trades currently, but at a time of day other than the fix.  This avoids any potential manipulation and volatility from the fix.  This would include such methods as phone and the online portals.  Simplicity is the benefit but tracking error to the fix can be substantial.

What are some reasons to continue trading the fix in the same manner as it has been?

1) Confidence that there has not been any manipulation or that if there has, it will have stopped now that everyone is watching.

2) Legal constraints on particular funds require fix trading.

3) Tracking error being a bigger concern than achieving potentially better execution.

Credit Suisse Concludes FX Benchmark Rate Investigation

At the end of March the Swiss Competition Commission named 8 banks including Credit Susisse to be investigated for collusion in manipulating FX rates.  Reuters reported Credit Suisse to be "astonished" to be included in the investigation after not being included in a preliminary investigation in 2013.

Last week during the Q1 earnings release conference call, Credit Suisse's CFO stated that the bank's internal FX benchmark investigation was completed and nothing "materially untoward" was found.

It is not clear why the regulators feel that there may be collusion involving Credit Suisse while the bank sends out the "all clear" message after an internal investigation.  Time will tell.

UK Authorities Continue to Make Progress in LIBOR Prosecution Effort

Dealbook reports that 3 Former ICAP Brokers Appear in British Court in Libor Manipulation Case.  Efforts in the UK seem to advance faster than those in the US.  Can't wait to see what evidence will be revealed once the cases proceed.

If FX Benchmarks were Manipulated, How Often did it Occur?

FX Week (subscription) reports that the counsel for one of the plaintiffs in the FX benchmark class action suit says that their analysis of London Close benchmark trades for the six most liquid pairs on the last day of the month for the past 10 years shows manipulation occurred between 26% and 34% of the time.  The headline of the article, however, is a bit misleading: FX benchmark manipulated more than 25% of the time, plaintiffs say.

Even if the interpretation of these results can be said to be true, this still would not mean that there was that much manipulation on all trading days.  The last day of the month was most likely reviewed because most asset managers that hedge the FX in their portfolios adjust the hedges on that day, leading to particularly high volumes.  These high volumes, and the tendency for these hedge adjustments to be in the same direction, would make those the days most likely for manipulation if there was any.

So even if you did accept the results, it does not answer the question of how extensive was any FX benchmark manipulation.