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OTC Derivatives Clearing Technology: Bringing the Back Office to the Forefront (pdf), TABB Group (Summary)

related items:
Tech upgrade needed for derivatives clearing, Financial Times

Businessweek writes:
The risk-weighting system is far too complex and too easily manipulated to provide a reliable picture of how much capital a bank really has. For a large bank such as JPMorgan, coming up with a risk-weighted ratio requires sorting assets into more than 200,000 different buckets. Even unintentional errors can skew reported capital ratios by several percentage points [sic, emphasis mine]. That’s a problem when the starting point is only 10 percent.
Financial Alchemy Foils Capital Rules in Europe, Bloomberg
Banks in Europe are undercutting regulators’ demands that they boost capital by declaring assets they hold less risky today than they were yesterday.

Banco Santander SA (SAN), Spain’s largest lender, and Banco Bilbao Vizcaya Argentaria SA (BBVA), the second-biggest, say they can go halfway to adding 13.6 billion euros ($18.8 billion) of capital by changing how they calculate risk-weightings, the probability of default lenders assign to loans, mortgages and derivatives. The practice, known as “risk-weighted asset optimization,” allows banks to boost capital ratios without cutting lending, selling assets or tapping shareholders.

Bloomberg: Morgan Stanley was burned by a wager on U.S. inflation expectations in the second quarter, three people informed of the dealings said.

Traders at the bank bet that inflation expectations for the next five years would rise in Treasury markets, while forecasts for the next 30 years would fall, according to two of the people. Such wagers on so-called breakeven rates involve paired purchases and short sales of Treasuries and Treasury Inflation Protected Securities, or TIPS, in both maturities.

The TIPS market was roiled last week by the combination of a slump in the price of crude oil and a stronger-than-expected auction of new 30-year TIPS. Source

FT: [The size of the Spanish black economy] helps to explain one of the more embarrassing economic mysteries of modern Spanish society: an extraordinarily high rate of official unemployment without much of the civil unrest and popular anger that such a problem would normally generate. If it were true that 4.9m people, or more than 21 per cent of the workforce, were jobless, Spain would not be as peaceful as, barring a few demonstrations, it has so far been, say economists and business leaders.

It is an open secret that the Spanish jobless rate – double the European average – is a fiction. Hundreds of thousands of people claim unemployment benefit when they actually have some kind of work; millions are not registered as working, which means that neither they nor their employers are paying social security contributions. One proof, say employers, is that when unemployment fell to 8.5 per cent at the height of the boom in 2006-07, they could find no workers to hire. Yet that figure, the recent Spanish minimum, is high enough that it would be associated with a deep economic recession in almost any other industrialised country. [Story]


A different way to view probability distributions, Probability and Statistics Blog

For central banks it poses a big problem when inflation is not "home made" but imported through higher energy prices. In this case inflation is not the result of a booming domestic economy but of external factors (political turmoil, peak oil, ...). Interest rate hiking be the central bank would be pretty ineffective except when it leads to a strengthening of the home currency.

Thanks to the ECB statistical Data Warehouse one can now easily download data on the contribution to the inflation rate (in percentage points) of various components of the harmonized consumer price index. Currently, 50% of the yearly inflation rate in the Euro area is due to higher energy prices even though energy only makes up 10% of the index.
The good news: Many people look at the price of oil as a crude proxy for energy prices. Though it is true that the variation in the crude oil price explains the variation in consumer energy prices very well, the "beta" is pretty low. Crude oil prices (in EUR) have increased 700% since 1999 whereas consumer energy prices have "only" increased 90%. Given that many market participants think that at current oil prices the price elasticity of demand is no longer negligible the pressure might abate.

There has been some talk about the high level of the Credit Suisse Fear Barometer lately (e.g. SurlyTrader).
Bloomberg: The CS Fear Barometer measures investor sentiment for 3-month investment horizons by pricing a zero-cost collar. The collar is implemented by the selling of a 10% OTM SPX call option and using the proceeds to buy an OTM put. The CSFB level represents how far out-of-the-money that SPX put is. The higher the level, the greater the fear.
With the proceeds of selling a 10% OTM call you can currently only buy a 28% OTM put:


{Click to enlarge}

But what does that mean? When comparing the CS Fear Barometer with the level of the S&P 500 over the last 15 years you will notice that
  1. Fear had a very low reading at the time of the dot-com crash and it stayed pretty low during the whole 2000-2003 equity market downturn
  2. Fear trended upwards during the equity market recovery
  3. Fear fell off a cliff quite some time before the global financial market meltdown (false sense of security?)
  4. Fear was close to its all-time low at a time where many bankers where talking about buying farmland
  5. Fear has been rising since the markets turned in March 2009
So it seems like the indicator could measure anything but fear. In 2009, when Credit Suisse introduced the index Reuters wrote: "The index would rise when there is excess investor demand for portfolio insurance or lack of demand for call options."

Obviously, it could also be a glut in the market. For example in case fund mangers think that there is not much upside in the current market they would start writing covered calls and reduce implied call volatility in the process. That shouldn't count as "fear".

Anyway, since for the last couple of years the CS Fear Barometer was just a blurred version of the inverse VIX I wonder whether anybody can distill some additional information: