Wt Pcom Usd Discussion Threads

[energyi] 11/11/2008 13:08

xx

Hello SSS
It was good meeting you again. I enjoyed our talk over lunch. It is good to sit in a nice sunny place like that and contemplate what might happen in the future.

I wanted to follow-up on a few matters we discussed:

(1) Oil Swaps
I have included a scanned copy of the XX 1987 article from Euromoney on Oil Swaps. You can also find something of my work at that time in the best selling book called Managing Energy Price Risk, from RISK magazine. This book has had at least 3 editions. I wrote the chapter called "Energy Options".
Link:

(2) Presentation Called "Coping with Financial Turmoil"
This runs 20-30 minutes, and maybe double that with a full question and answer session. (A soft copy of the presentation is attached.) I am happy to offer this to you and your colleagues on a complimentary basis. I think it will help to stimulate an interest in Innovation, as a way of growing your business out of the current downturn.

(3) Just below in the Post-script, I have some notes on another presentation that might interest you. (I wouldnt charge for that either- maybe I could help LB develop a fund around this?) It is about Investing in Distressed Property Investment Trusts. There are about 50 of these quoted on the London AIM market, including 9 that focus on property in Asia.

I hope we can meet again, either at a Harvard event, or otherwise. Please let me now if you or your colleagues are interested in a presentation about Coping with the Downturn, or the Property Investment Trusts.

Best R.

[energyi] 11/11/2008 03:15

CME suffers from pullback in derivatives trading
By Hal Weitzman in Chicago

Published: October 30 2008 02:00 | Last updated: October 30 2008 02:00

The CME Group, the world's biggest futures exchange, said yesterday that its third-quarter profits were up slightly from the same period last year as growth in the derivatives trade was hit by falling volumes from financial institutions damaged by the crisis.

Excluding extraordinary items, the CME's net income was $278m or $4.13 per share, up 3 per cent from $269m or $4 per share a year ago, on revenues of $787m, up 6 per cent from last year's figure of $744m. The company has enjoyed extraordinary growth in recent years, fuelled by a secular increase in trading volumes and high-profile acquisitions such as the Chicago Board of Trade and Nymex.

However, that strategy may have run its course for the time being: most of the profit for the third quarter was accounted for by a $7m decrease in expenses.

The CME, which controls 98 per cent of listed futures in the US, has suffered from a pullback in derivatives trading by hedge funds and other big financial institutions.

Morgan Stanley said yesterday as a result of economic turbulence, financial exchanges should brace themselves for a continuing fall in trading volumes next year.

"We believe post-crisis landscape will exert significant pressure on growth and forecast a decline in most key products in 2009, the broadest decline since 1988," said Patrick Pinschmidt, an analyst at Morgan Stanley. "CME enjoys dominant market shares across its core products, but we worry this will be insufficient to overcome weaker volume trends."

Craig Donohue, chief executive, confirmed hedge fund volumes had decreased, but said that had been offset by increased proprietary trading by other financial institutions, which have beefed up their use of algorithmic trading to take advantage of highly volatile markets.

As it seeks new revenue streams, the CME is attempting to position itself to benefit from the turmoil, in particular, regulators' wish to reduce risk in the overthe-counter credit derivatives market. Mr Donohue said the turmoil in the financial world presented "tremendous strategic opportunities" for the exchange.

US regulators are keen to see a clearing house established for the OTC contracts as soon as possible.

"As customers in the over-the-counter derivative markets move increasingly toward more regulated, transparent and centrally cleared markets, CME Group is extremely well positioned to benefit," said Mr Donohue.

/see:

[energyi] 11/11/2008 03:13

Regulators 'hopeful' on derivatives clearing plan
By Aline van Duyn in New York

Published: November 1 2008 02:00 | Last updated: November 1 2008 02:00

US regulators are "hopeful" that at least one of the groups vying to provide centralised clearing for the thus-far unregulated credit derivatives market will begin operations before the end of the year.

The comments from the Federal Reserve Bank of New York came as dealers and users of over-the-counter derivatives, which include credit derivatives, said they would further strengthen the market's operational infrastructure.

In a letter to Tim Geithner, president of the New York Fed, 16 banks and several industry bodies said turbulent market conditions "brought into even sharper focus the systemic risk concerns the industry faces".

The Fed, which has been working closely with other US financial regulators including the Commodity Futures Trading Commission and the Securities and Exchange Commission, emphasised in response that a central counterparty for credit default swaps, the most common type of credit derivatives, was top of its list of priorities.

"We are hopeful that one or more central counterparties can begin operations in November or December 2008, enabling market participants to rapidly move trades on to a central counterparty," the letter said.

The collapse of Lehman Brothers, a counterparty to many credit derivative trades, and continued concerns of further bank failures have gummed up the workings of the credit markets.

Reducing such "counterparty risks" through the introduction of a central counterparty is considered to be an important step to reducing the systemic risks to the global financial markets.

Four groups are vying to set up a central counterparty: the IntercontinentalExchange, the US-based electronic futures exchange; the CME Group, the world's largest futures exchange; Liffe, the derivatives arm of NYSE Euronext; and Eurex, the derivatives arm of Deutsche Börse.

Other concerns for the over-the-counter derivatives markets centre on whether trades are recorded and settled quickly enough. The market has grown so fast in the past decade that its supporting infrastructure failed to keep pace.

/see:

[energyi] 11/11/2008 03:09

Future of clearing: Clearers step into limelight
By Jeremy Grant

...Attention is on the over-the-counter (OTC) derivatives markets, and efforts are under way to kick-start a CCP for credit default swaps.

That marks a stark shift in the priorities of the post-trade industry – which, in Europe at least, had for the past year been focused on efforts by the European Commission to bring about a more open and competitive European clearing industry.

Brussels had brokered a "code of conduct" with the industry that is supposed to see the creation of choice by clearers making themselves "interoperable" with each other – a so-called horizontal clearing model.

Users of exchanges have been calling for more clearing choice. Yet some exchanges have moved to create or reinforce ownership over their own clearing houses in a so-called "vertical silo" model.

Tony Freeman is director of European industry relations at Omgeo, a company that specialises in the automation and confirmation of the economic details of trades executed between investment managers and broker-dealers.

He says that the recent market turmoil has "reinforced the case for robust post-trade processes".

Issues such as interoperability and the horizontal versus vertical debate "will be supplanted by risk-focused initiatives" as a result of the financial crisis.

Mr Freeman says: "The speed at which a counterparty can implode such as with Lehman and Iceland, combined with the opacity of many OTC instruments, means that 'systemic risk' has to be redefined. The biggest systemic risk in today's market is the lack of clarity about what risks exist – and who is vulnerable."

/see:

[energyi] 11/11/2008 03:03

Oil trading down
Straits Times, Singapore - Oct 22, 2008
More than 70 firms trade in OTC derivatives here daily, said Platts Asia senior editorial director Dave Ernsberger. They range from global energy majors and

[energyi] 11/11/2008 02:59

CFTC petitioned to allow clearing of OTC agricultural contracts
Agora-X an electronic trading and negotiation platform for commodities, has petitioned the Commodity Futures Trading Commission (CFTC) to allow the clearing of over-the-counter (OTC) contracts in major agricultural commodities.

The petition calls on the CFTC to amend Regulation 35 (Part 35) to allow for swap and swaption (option on swap) agreements – two-party OTC contracts priced off of agricultural commodity futures – to be cleared through a registered derivative clearing organization (DCO) such as CME or Nymex. Currently, specific permission from the CFTC is required.

According to Agora-X, enacting this amendment would promote the clearing of agricultural derivatives, reduce counterparty credit risks and enhance transparency in agricultural markets since cleared swap transactions would be reported to the CFTC.

/see:

[energyi] 11/11/2008 02:29

RISKS of Launching New Contracts

+ 50% Viable after 5 years, and
+ Only 20% viable after 10 years

Ten Factors:
=========
1/ Large Cash market
2/ Price Volatility
3/ Good information on Cash prices
4/ Lack of close substitutes for the new contract (liquidity wins)
5/ Similar contracts, but not the same, is good for business
6/ Contract must be well-designed
7/ Strong support from exchange members
8/ A large deliverable supply of the cash settlement goods
9/ Absence of legal barriers
10/ Underlying good must be fungible

Futures, Options, and Swaps By Robert W. Kolb, James A. Overdahl

[energyi] 11/11/2008 02:17

BOOKS

Aug.2007:
Analysis of the Unfolding OTC Derivatives Melt Down
BY ROB KIRBY

Conclusion[s]

Losses being reported by Citibank are inconsistent with observable, comparable, already reported data from both Bear Stearns and Goldman Sachs. We have yet to hear from either J.P. Morgan Chase or B of A.

The financial system is, shall we say, fragile. Globally, Central Banks seem intent on bailing out their brethren – as the Prudent Bear's Martin Hutchinson reported in Helicopter over Wall Street,

Federal Reserve Chairman Ben Bernanke first achieved fame with a November 2002 speech in which he repeated Milton Friedman's assertion that the Fed could "drop money out of helicopters" if deflation or a credit crunch occurred. The Fed and the European Central Bank now appear to be doing this, having injected $300 billion into the world monetary system in the last two business days. What Bernanke didn't tell us in 2002 was that his helicopter would hover only over Wall Street.

In the face of this brazen money creation, more than ever, investors should be well served in holding an appropriate percentage of their investment portfolios in both physical precious metals and high quality precious metals producing equities.

Unfortunately, this whole mess is likely to get worse before it gets better.

/see:

(2)
Derivatives Handbook By Robert J. Schwartz, Schwartz. Robert J., Clifford W. Smith

[energyi] 11/11/2008 02:09

Comex : Can they take over OTC derivatives?
=================================

What are "OTC derivatives''?

A derivative contract which is privately negotiated is called an OTC derivative. OTC trades have no anonymity, and they generally do not go through a clearing corporation. Every derivative product can either trade OTC (i.e., through private negotiation), or on an exchange. In one specific case, the jargon demarcates this clearly: OTC futures contracts are called "forwards'' (or, exchange-traded forwards are called "futures''). In other cases, there is no such distinguishing notation.
Related Questions

How do privately negotiated (OTC) derivatives differ from futures?

Background Information - OTC Derivatives Documentation
First, the terms of a futures contract-including delivery places and dates, volume, technical specifications, and trading and credit procedures-are standardized for each type of contract. For swaps, the same characteristics are subject to negotiation by the parties to the contracts. Second, futures contracts are always traded on an exchange, while swaps are traded on a bilateral basis.

/see:

Level
Now let's look at level III assets as a percent of shareholder equity:


These ratios have ballooned as a direct reflection of the deterioration of their balance sheets. They are sinking ever more deeply into insolvency as their assets VAPORIZE in value and become increasingly impaired and unmarketable. The more these assets sink the more they try to hedge their exposure to further losses. So the holders of these toxic securities have turned to the unregulated over the counter insurance market known as the credit default swaps (CDS) for protection from losses. It has grown by over 15 trillion dollars since the first of the year and now is over $60 trillion in size. What's even worse is that these companies above are buying these CDS from EACH OTHER and from hedge funds trying to trade in and out of them whose ability to perform their counterparty responsibility is unknown. Let's look at the definition of the credit default swaps from Jim Sinclair's www.jsmineset.com:

Keep in mind that over the counter derivatives generally have the following characteristics:

1.Without regulation.
2.Without listing on public exchanges.
3.Without standards.
4.Therefore not in the least bit transparent.
5.Therefore without an open market of the bid/ask type.
6.Dealt in by private treaty negotiations.
7.Without a clearinghouse.
8.Unfunded without financial guarantee of any kind.
9.Functioning as contracts of specific performance.
10.Financial character or ability to perform is totally dependent on the balance sheet of the loser in the arrangement.
11.Evaluated by computer assumptions made by geek, non market experienced mathematicians who assume religiously that all markets return to their normal relationships regardless of disruptions.
12.Now in the credit and default category alone considered by accepted authorities as totaling more than USD$20 trillion in notional value.
13.Notional value becomes real value when the agreement is forced to find a real market for ending the obligation which is how one says sell it.

/see:

= = = = =
LINKS:
Petrov's LIst of Instruments : THE TENTACLES OF THE CREDIT CRISIS:

EnergyRisk Magazine :