An Australian judge has found S&P [MHP] liable for its opinion in assigning AAA ratings to two ABN Amro structured debt issues in 2006, which lost over 90% of value during the GFC — the first time a ratings agency has been held liable for such an opinion.
S&P was “misleading and deceptive” in its rating of two structured debt issues in 2006, Federal Court Justice Jayne Jagot said in her ruling released today in Sydney.
via McGraw-Hill Plummets After Australian Court Ruling – Bloomberg.
…The law created a unique class of financial instruments [credit default swaps or “CDS”] that was neither fish nor fowl: It trades like a financial product but is not a security; it is designed to hedge future prices but is not a futures contract; it pays off in the event of a specific loss-causing event but is not an insurance policy.
Given these enormous exemptions from the usual rules that govern financial products, you can guess what happened with the swaps. A very specific set of economic behaviors emerged: Companies that wrote insurance typically set aside reserves for expected risk of loss and payout. When it came to swaps, the companies that underwrote them had no such obligation.
This had enormous repercussions. The biggest underwriter of default swaps was AIG, the world’s largest insurer. Without that reserve-requirement limitation, it was free to underwrite as many swaps as it could print. And that was just what it did: AIG’s Financial Products unit underwrote more than $3 trillion worth of derivatives, with precisely zero dollars reserved for paying any potential claim.
via Credit default swaps are insurance products. It’s time we regulated them as such. | The Big Picture.
In the first 6 months of 2011, the total outstanding notional [amount] of all derivatives rose from $601 trillion at December 31, 2010 to $708 trillion at June 30, 2011. A $107 trillion increase in notional in half a year. Needless to say this is the biggest increase in history. So why did the notional increase by such an incomprehensible amount? Simple: based on some widely accepted (and very much wrong) definitions of gross market value (not to be confused with gross notional), the value of outstanding derivatives actually declined in the first half of the year from $21.3 trillion to $19.5 trillion (a number still 33% greater than US GDP). Which means that in order to satisfy what likely threatened to become a self-feeding margin call as the (previously) $600 trillion derivatives market collapsed on itself, banks had to sell more, more, more derivatives in order to collect recurring and/or upfront premia and to pad their books with GAAP-endorsed delusions of future derivative based cash flows.
via $707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months | ZeroHedge.
CHICAGO, Nov. 5, 2011 — /PRNewswire/ — CME Group today is clarifying its notice to clearing firms regarding margins. In light of the issues customers transferring out of MF Global are facing, while still maintaining appropriate risk management protections for the market, CME Clearing is setting the “initial” margin upcharge to zero. This upcharge is normally applied to customer accounts when they are receiving a margin call.
The intention and effect of these changes are to decrease the size of any margin calls resulting from the bulk transfer of MF Global customers to new clearing members not to increase them.
This is a short term accommodation to maintain market integrity and provide temporary relief to customers whose accounts have been disrupted by this event.
We apologize for any confusion our initial advisory may have created.
via CME Group Clarifies Maintenance Margin Ratios – Exchange to Reduce Initial Margin Ratio to 1.00 – PR Newswire – sacbee.com.
ZeroHedge has also updated the post, so it seems that everyone is in agreement. Margins aren’t being hiked on everyone, they’re being lowered, most likely so that ex-MF Global customers can transfer trades without having to post a ton of new margin to keep their trades on.
via Because Of A ZeroHedge Post, Tons Of People Are Worried About A Commodity Market Meltdown On Monday.
Last night the CME sent out a margin advisory. They do this all the time, changing margin requirements in different products, but this notice was different:
The notice was picked up (and spread, like financial news Herpes) by ZeroHedge, who predicted a plethora of margin calls on Monday, and of course, imminent Financial Armageddon. There is of course an alternative potential explanation……….the initial/maintenance ratios were previously greater than 1.0. They are being LOWERED to 1.0.
via The CME Margin Notice That Has Everyone In a Tizzy | Kid Dynamite’s World.
There have been many cries to regulate or ban the existence of Sovereign CDS, both from the sovereigns that felt their nations under attack, and by the masses who see them as one of Satan’s investment bank tools designed to steal from the poor………
But there is a viable alternative. TMM would like to introduce their readers to the humble Bond Future. That long-standing, well-understood derivative that has provided liquidity, transparency and price discovery to bond markets in many countries for 40 years. Bond futures with deliverable bond baskets allow basis trading, speculation and hedging, without the idiosyncrasies of CDS contracts. But of course, futures markets aren’t that profitable for banks… well, you reap what you sow, right?
via Ex-Product Sketch | The Big Picture.