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Investors Dine on Fresh Menu of Credit Derivatives

By Tracy Alloway and Michael Mackenzie
Published August 19, 2014 Financial Times

In March of last year, Kyle Bass, founder of the hedge fund Hayman Capital Management, made a startling proclamation: aggressive young bankers in Japan were pushing complex over-the-counter derivatives similar to those that rapidly soured during the financial crisis of 2008.

Mr Bass warned of the return of the spectre of AIG, the giant insurer that required a huge bailout during the depths of the crisis, after selling billions worth of credit default swaps (CDS) that offered payouts to investors in defaulted mortgage bonds.

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CDS Notional Drops by 30%

By Beth Shah
Published August 18, 2014 Global Capital 

ISDA reported that there was a 31% decrease in the notional cleared for CDS and 32% less executed on swap execution facilities, compared with the previous week. Rates saw an increase, with 11% more volume cleared, and 14% more executed on SEFs last week.

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Eurex and LCH.Clearnet Seek OK for Inflation Swaps

By Tom Osborn
Published August 19, 2014 Risk 

A new front is set to open in the swaps clearing battle between LCH.Clearnet and Eurex, with both central counterparties (CCPs) on track to launch clearing for inflation swaps early next year, pending regulatory approval. That will come as a relief to market participants that are already struggling with the increased capital and funding burdens the product attracts, and that would face extra margin costs if interest rate swaps were subject to a clearing mandate while often-offsetting inflation swaps remained in the non-cleared world.

Dan Maguire, London-based chief executive of LCH.Clearnet's SwapClear business, confirms the CCP is in the throes of getting regulatory approval to clear inflation swaps. It is understood the CCP hopes to begin clearing the products in the first quarter of next year, pending approval by the Prudential Regulation Authority (PRA) and a European college of regulators.

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Eurex to Launch Swaps Compression Service

By Joe Parsons
Published August 19, 2014 FOW

Eurex will expand its over-the-counter (OTC) derivatives clearing house, EurexOTC Clear, with the addition of a trade compression service, as the German exchange looks to keep pace with the new regulatory environment.

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CDS Use Spikes as HY Bond Liquidity Evaporates

By Natalie Harrison and Christopher Whittall
Published August 15, 2014 IFR

Thin secondary bond market liquidity spurred investors to step up their use of credit default swaps during the past month’s sell-off in US high-yield. There is, however, still a risk of substantial losses even though there has been no major change to underlying credit fundamentals.

Huge outflows from the asset class, amounting to almost US$13bn in the past four weeks, according to Lipper, have sent yields on cash bonds some 100bp wider to 5.64% and brought the once robust primary market to a standstill.

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Market Ready if CFTC Mandates Aussie IRS Clearing

By Aaron Woolner
Published August 18, 2014 Asia Risk

Australian market players convinced US regulators are poised to expand their clearing mandate to include Australian dollar interest rate swaps

A potential move by the US Commodity Futures Trading Commission (CFTC) to extend its clearing mandate to include Australian dollar interest rate swaps (IRS) would have little practical impact on the market given the amount of these instruments which are already centrally cleared, according to Marcus Robinson, Australia country head for LCH.Clearnet.

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Derivative Basket Options Questioned

By Robert N. Gordon
Published August 17, 2014 Investment News

The Senate Permanent Subcommittee on Investigations has turned its attention to a derivative strategy that, from a tax standpoint, was rendered unusable in an earlier IRS memo.

I attended the July 2 hearing and was not very surprised by the information presented about the “basket option” transactions in question. What did make an impression was the focus on how few “large partnerships” were actually being audited, and the call for more audits from both sides of the aisle.

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ISDA Plays Down Speculative Activity

Published August 12, 2014 FOW

The International Swaps and Derivatives Association (ISDA) has published a report arguing that the amount of speculation in the over-the-counter (OTC) derivatives market is commonly misrepresented.

It makes the case that 65% of turnover activity is conducted as dealer-to-client and that "These participants, comprising non-dealer financial institutions and non-financial customers, use derivatives primarily to hedge risks and reduce volatility on their...

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ISDA: Dealer Derivs Activity Vital for Liquidity, Customer Hedging

By Beth Shah
Published August 11, 2014 Global Capital

Derivatives volumes pertaining to trades between reporting dealers is critical for market liquidity and the facilitation of client trades as it allows end users to put on risk-reducing and cost-effective hedges, according to a research study from the International Swaps and Derivatives Association.

According to the publicly available data published by the Bank of International Settlements, 35% of over-the-counter interest rate derivatives market turnover relates to dealer market-making and the hedging of customer transactions.

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Bill Gross’s Total Return ETF Allowed to Trade Derivatives

By Mary Childs
Published August 11, 2014 Bloomberg

The U.S. Securities and Exchange Commission approved the use of derivatives in Pacific Investment Management Co.’s Total Return exchange-traded fund, allowing it to more closely track the world’s biggest bond mutual fund.

The regulatory body’s approval of the Nov. 6 request to amend the ETF (BOND)’s description means it will be able to invest in options, futures or swap agreements, according to the July 24 filing.

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