The Bank for International Settlements has released its report on OTC derivatives market activity in the second half of 2008:
Facing significant price drops, markets for commodity and equity derivatives recorded volumes which were 66.5% and 36.2% lower, respectively. Against a background of severely strained credit markets combined with efforts to improve multilateral netting of offsetting contracts, credit default swap (CDS) volumes decreased by 26.9%. Foreign exchange and interest rate derivatives markets recorded their first significant downturns. Amounts outstanding of foreign exchange contracts fell by 21.0%, while amounts outstanding of
interest rate contracts slid by 8.6%.Gross market values, which measure the cost of replacing all existing contracts, represent a better measure of market risk than notional amounts. Despite the drop in amounts outstanding, significant price movements resulted in notably higher gross market values, which increased by 66.5% to $33.9 trillion at the end of December 2008 (Graph 1, right-hand panel). The higher market values were also reflected in gross credit exposures, which grew 29.7% to $5.0 trillion.
…
In the second half of 2008 the market for OTC interest rate derivatives declined for the first time, after recording an above average rate of growth in the first half of the year. Notional amounts of these instruments fell to $418.7 trillion at the end of December 2008, 8.6% lower than six months before (Graph 2 and Table 3). Despite the decrease in notional amounts outstanding, declining interest rates resulted in a notable 98.9% increase in the gross market value of interest rate derivatives, to $18.4 trillion.
Their statement Gross market values, which measure the cost of replacing all existing contracts, represent a better measure of market risk than notional amounts. is incorrect. If I short a bond future, the market value at time of execution is zero, but I have full market exposure and counterparty risk to the extent that I might win money that doesn’t get paid. If the market moves in my favour, that increases my counterparty risk but doesn’t affect my market exposure.
There are straws in the wind that the too-big-to-fail problem will not be addressed by fixing extant rules, but by adding another layer of new rules that will grant politicians more discretionary power:
Neel Kashkari, former administrator of the $700 billion U.S. bank-rescue program, said firms deemed too big to fail have an unfair advantage over smaller rivals because they can more cheaply raise money in the debt markets.
Kashkari, who left government May 1, said in a speech last night that some officials have discussed the possibility of a “debt tax” or “systemic tax” on those institutions, without saying if he supported that approach.
“If you have some huge, global institution that is systemically important, too big to fail, too interconnected to fail, in a sense it will always be able to issue debt cheaper,” said Kashkari, 35, at the San Francisco campus of the University of Pennsylvania’s Wharton School. “People who buy that debt believe that the government is standing behind it.”
“Debt Tax”? “Systemic Tax”? Presumably this is much the same idea as existing deposit insurance, except that the degree of protection received in exchange for premia will not be spelled out. It is very simple to address the TBTF problem and systemic risk problem by adjusting extant rules:
- End the practice of risk-weighting bank debt according to the credit of the sovereign
- Impose an upwards adjustment to Risk-Weighted Assets based on size of the bank
Here’s a scary proposal: inflation targetting of 6%:
What the U.S. economy may need is a dose of good old-fashioned inflation.
So say economists including Gregory Mankiw, former White House adviser, and Kenneth Rogoff, who was chief economist at the International Monetary Fund. They argue that a looser rein on inflation would make it easier for debt-strapped consumers and governments to meet their obligations. It might also help the economy by encouraging Americans to spend now rather than later when prices go up.
“I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.”
Another strong day in the preferred market, with volume returning to elevated levels after the long weekend.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.7334 % | 1,095.0 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.7334 % | 1,770.8 |
| Floater | 3.44 % | 4.11 % | 84,806 | 17.14 | 3 | 0.7334 % | 1,368.0 |
| OpRet | 5.05 % | 4.09 % | 131,756 | 2.59 | 15 | 0.0584 % | 2,153.7 |
| SplitShare | 5.91 % | 6.79 % | 51,931 | 4.25 | 3 | 0.4672 % | 1,816.9 |
| Interest-Bearing | 6.00 % | 6.98 % | 29,066 | 0.60 | 1 | 0.0000 % | 1,987.2 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.3545 % | 1,701.0 |
| Perpetual-Discount | 6.43 % | 6.49 % | 157,719 | 13.19 | 71 | 0.3545 % | 1,566.6 |
| FixedReset | 5.74 % | 4.88 % | 490,761 | 4.47 | 36 | 0.1770 % | 1,976.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TRI.PR.B | Floater | -4.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 15.06 Evaluated at bid price : 15.06 Bid-YTW : 2.63 % |
| TD.PR.P | Perpetual-Discount | -1.63 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 21.06 Evaluated at bid price : 21.06 Bid-YTW : 6.31 % |
| PWF.PR.G | Perpetual-Discount | -1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 22.02 Evaluated at bid price : 22.02 Bid-YTW : 6.78 % |
| TD.PR.Q | Perpetual-Discount | -1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 22.43 Evaluated at bid price : 22.55 Bid-YTW : 6.27 % |
| CU.PR.B | Perpetual-Discount | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 24.47 Evaluated at bid price : 24.76 Bid-YTW : 6.07 % |
| ENB.PR.A | Perpetual-Discount | 1.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 24.30 Evaluated at bid price : 24.61 Bid-YTW : 5.60 % |
| BAM.PR.N | Perpetual-Discount | 1.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 14.76 Evaluated at bid price : 14.76 Bid-YTW : 8.22 % |
| GWO.PR.F | Perpetual-Discount | 1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 21.89 Evaluated at bid price : 22.24 Bid-YTW : 6.74 % |
| CM.PR.I | Perpetual-Discount | 1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 17.78 Evaluated at bid price : 17.78 Bid-YTW : 6.69 % |
| PWF.PR.H | Perpetual-Discount | 1.31 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 21.63 Evaluated at bid price : 21.63 Bid-YTW : 6.73 % |
| IAG.PR.A | Perpetual-Discount | 1.43 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 17.00 Evaluated at bid price : 17.00 Bid-YTW : 6.89 % |
| HSB.PR.C | Perpetual-Discount | 1.74 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 19.85 Evaluated at bid price : 19.85 Bid-YTW : 6.54 % |
| NA.PR.K | Perpetual-Discount | 2.32 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 23.08 Evaluated at bid price : 23.33 Bid-YTW : 6.31 % |
| BAM.PR.M | Perpetual-Discount | 2.68 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 14.96 Evaluated at bid price : 14.96 Bid-YTW : 8.11 % |
| POW.PR.A | Perpetual-Discount | 2.95 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 21.27 Evaluated at bid price : 21.27 Bid-YTW : 6.68 % |
| ELF.PR.G | Perpetual-Discount | 3.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 16.50 Evaluated at bid price : 16.50 Bid-YTW : 7.31 % |
| GWO.PR.G | Perpetual-Discount | 3.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 20.38 Evaluated at bid price : 20.38 Bid-YTW : 6.49 % |
| BAM.PR.K | Floater | 4.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 9.61 Evaluated at bid price : 9.61 Bid-YTW : 4.14 % |
| BAM.PR.B | Floater | 6.15 % | Quite real, as the issue traded 23,920 shares in a range of 9.25-84 before closing at 9.67-85, 5×5. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 9.67 Evaluated at bid price : 9.67 Bid-YTW : 4.11 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| MFC.PR.D | FixedReset | 48,948 | Nesbitt crossed 13,500 at 26.40, then another 15,000 at 26.50. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-19 Maturity Price : 25.00 Evaluated at bid price : 26.54 Bid-YTW : 5.14 % |
| TD.PR.P | Perpetual-Discount | 42,593 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 21.06 Evaluated at bid price : 21.06 Bid-YTW : 6.31 % |
| RY.PR.R | FixedReset | 31,665 | RBC crossed 10,700 at 26.60. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.55 Bid-YTW : 4.82 % |
| RY.PR.D | Perpetual-Discount | 30,945 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 18.19 Evaluated at bid price : 18.19 Bid-YTW : 6.23 % |
| RY.PR.G | Perpetual-Discount | 29,400 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-19 Maturity Price : 18.12 Evaluated at bid price : 18.12 Bid-YTW : 6.25 % |
| TD.PR.G | FixedReset | 29,290 | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 4.82 % |
| There were 42 other index-included issues trading in excess of 10,000 shares. | |||