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    Today's Post

    Central Clearing and the Bank of England A Bank of England paper discuses the "cover 2" standard for the adequacy of the default funds of central clearing houses, an issue of increasing importance as the push to centrally-clear everything picks up steam. One question it raises somewhat incidentally is the proper pronunciation of the acronym SLOIM, for "stressed losses over initial margins."

    A new Financial Stability Paper from the Bank of England offers some re-assurance about the adequacy of the ‘cover 2’ standard for the default fund of central counterparties. It also suggests, though, that supervisors should monitor the distribution of tail risks to ensure that it remains adequate. The paper, by David Murphy and Paul Nahai-Williamson, begins with the definition of the cover 2 standard: systemically important clearing houses “must have sufficient financial resources to … be robust under the failure of … their two largest members in extreme but plausible circumstances.” The authors observe that this standard is unusual, because it makes no reference to the total number of members involved. Thus, as they write ”adding new clearing member risk to a CCP does not necessarily increase the risk to be covered by the default fund” unless the increase contributes one of those two worst-loss scenarios. For any scenario, the pertinent loss is that which remains after the initial margin is subtracted. So the report details matrixes of “stressed losses over IMs,” or ...

Featured Post


The Skorina Report: Another try at herding Gotham’s five-headed fund

Guest columnist Charles Skorina looks at the five-headed NYC pension system with its new leader, Scott Evans.

By Charles Skorina In July, Scott Evans reported for duty as Chief Investment Officer in New York City's Bureau of Asset Management, where he'll manage $160 billion in employee pension funds. Traditionally the city's CIO is replaced when the political wheel turns, which it did last fall. Retiring Mayor Michael Bloomberg was succeeded by William De Blasio; and Comptroller John Liu, the independently-elected custodian of the city's pension funds, was replaced by Scott Stringer. Mr. Stringer beat back a last-minute primary challenge from disgraced ...


One Ordinary Week in the Life of Climate Change


We thought it would be instructive to share with you links and the odd quote from recent press reports on the subject of climate change.  As a professional investor,  you no doubt want to be ahead of trends in the investment world.   Investment opportunities arise when there is a divergence of opinion, as is uniquely the case in the United States (unlike the other nations on Earth) on the subject of climate change.  The headlines of a few days tell ...

Guest Posts


The Skorina Report: Another try at herding Gotham’s five-headed fund
Guest columnist Charles Skorina looks at the five-headed NYC pension system with its new leader, Scott Evans.

By Charles Skorina In July, Scott Evans reported for duty as Chief Investment Officer in New York City's Bureau of Asset Management, where he'll manage $160 billion in employee pension funds. Traditionally the city's CIO is replaced when the political wheel turns, which it did last fall. Retiring Mayor Michael Bloomberg was succeeded by William De Blasio; and Comptroller John Liu, the independently-elected custodian of the city's pension funds, was replaced by Scott Stringer. Mr. Stringer beat back a last-minute primary challenge from disgraced ...


CAPM / Alpha Theory

Hedge vs. Mutual Funds and the ‘Timing of Information Acquisition’
A new paper by a scholar at the McCombs School of Business looks at what causes what on Wall Street, starting with how (if at all) analyst downgrades cause price declines.

A recent paper by Nathan Swen, of the McCombs School of Business, University of Texas, compares the “timing of information acquisition” by hedge funds and mutual funds, focusing especially on the release of broker-dealer analyst reports. I won’t follow Swen’s argument, which you can study for yourself here. I will instead just use his interest as a way of catalyzing my own thoughts on an underlying subject. Specifically: do broker/dealer analysts move markets and, if so, how much? And precisely how? Did the price of XYZ stock really fall yesterday because an ...

Legislation/Court rulings

Two Types of Secrecy: Proprietary Trading Data and the Doomsday Book
Christopher Faille offers some personal thoughts about the Starr International/AIG litigation, and about the hush-hush Federal Reserve Doomsday Book. This leads to the deeper question of the openness of the U.S. as a society.

Unseal the Doomsday book! Yes, though, I know: governments never run out of excuses to keep secrets. Further, in some situations no need arises to split the hair between “government” and “the central bank.” The Federal Reserve loves secrecy as much as does the Treasury, especially when the two work hand in hand. That observation brings us to the AIG trial, properly known as Starr International v. the United States of America. A primer on the case For those who came in late: the former CEO of AIG, Maurice R. (“Hank”) Greenberg, the principal ...

Hard metals

November Vote: Do the Swiss Believe in Gold?
The Swiss National Bank and the government oppose a pending referendum that would drastically change the country's policy on gold. But of course the anti-establishment nature of the petition is the whole point.

Early this month the price of gold dipped briefly below $1,200 an ounce. Since then it has risen, not all that dramatically but more-or-less steadily, and it is as I write above $1,240. The latest move may have a lot to do with the Swiss vote on gold scheduled for the end of November. Specifically, the people will vote on a question put forward by three members of parliament, and endorsed by the necessary 100,000 petitioners. A “yes” vote will mandate the repatriation of foreign-held gold owned by the Swiss National Bank; a ...

Insolvency

Detroit Bankruptcy: Foes Become Allies
The legal environment in The United States remains averse to the sort of bold-faced repudiation of debt that Detroit attempted in the matter of its so-called Certificates of Participation (COP). Fortunately on several fronts, Detroit has decided to repudiate the repudiation.

Detroit filed for bankruptcy court protection in July 2013. In December, challenges to its eligibility for such protection failed. The case, since then, has moved along at a rapid pace, at least by the usually-glacial standards for large complicated re-organizations. It has attracted, meanwhile, a large body of commentary and punditry, some of which I have reviewed in my personal blog. With AAA’s indulgence I’ll link interested readers there. What piques my interest again just now is the new agreement between the City and the largest hold-out counter-party, an agreement that will have ...

Socially responsible investing

Microfinance and Its Critics: An Update
The convergence of a central banker and micro financiers at a recent ceremony in Port Moresby, Papua New Guinea inspires a look at where the MFI industry stands, and where it is headed.

On August 15, 2014, an official of the Bank of Papua New Guinea spoke at the opening of the Women’s Micro Bank Limited. The address, by Ellison Pidik, whose title at the Bank of PNG is “Assistant Governor for Financial System Stability,” gives us a chance to check back in on the world of micro-finance. This is the widely lauded practice of lending to small-scale producers, “microenterprises.” Institutions engaged in such lending, MFIs, operate now in ...

Performance, Analytics & Metrics

Hedge Funds and Position Crowding
Move over! It's crowded in here. What happens when hedge funds crowd a trade? Guest columnist Andrew Beer looks at hedge fund performance and the crowded trade.

By Andrew Beer As of mid-month October, the S&P 500 was down over 5% and the MSCI World was down 6%. In this context, drawdowns among hedge funds have been unexpectedly large.  Before fees, the HFRX Global Investable index was down over 4%, while the Equity Long/Short and Event-Driven sectors were down 5% and over 7%, respectively (note that the reported losses are lessened by the reversal of accrued performance fees).  The average alternative multi-manager mutual ...

Performance, Analytics & Metrics

Hedge Funds: Good Run for India, but Troubles in Brazil
India accounts for much of the positive showing of Asia ex-Japan in the hedge fund world YTD. That positive showing, in turn, may be attracting asset flow.

 The independent data provider Eurekahedge says in its most recent report that funds investing in India are still recording large gains. Specifically, such funds have enjoyed eight consecutive months of positive returns, and are now up 30.65% year to date. India’s equities have also had a very strong year 2014, up 25.79% through the first three quarters. To India’s east, stimulus measures by the People’s Republic have kept Chinese equities moving upward, but late in September Hong ...

Retail Investing

Liquidity Makers and Takers: A Nobel Prize
The latest Economics Award has drawn the attention of the world briefly to a body of work that has a number of points of interest for the alt-investment community.

The Nobel Prize in Economics, formally the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel,” went this year to Jean Tirole, a French economics professor at the Toulouse School of Economics, and the chairman of the board of the Institut d’Economie Industrielle(IDEI). One somewhat unusual fact about this award: Tirole doesn’t have to share the glory or the money with anyone. In recent years, most of the economics awards have been shared among ...