Are FX swaps and forwards missing global debt? Why the BIS is wrong.

In a fascinating piece of statistical detective work published in the latest BIS Quarterly Review, three of its foremost staff members argue that the use of FX swaps and forwards is hiding a massive quantity of debt because current accounting conventions place it off  balance sheet. They estimate that, in respect of US dollar debt,…

Still fretting about re-hypothecation

There is a widely quoted paper re-use and re-hypothecation by Egemen Eren — Intermediary Funding Liquidity and Rehypothecation as Determinants of Repo Haircuts and Interest Rates (Institute of Global Finance, 2015) — which provides another example of the danger for researchers of disregarding the difference between the re-use of collateral sold in repo (re-selling) and…

Academics, you re-hypothecate at your risk!

In a blog in May 2015, I tried to explain that, outside the US repo market, it was incorrect to use the term ‘re-hypothecation’ to describe the use of collateral purchased in a repo by its buyer. Such use is usually termed ‘re-use’ but would be better called ‘re-sale’. The crux of the matter is…

ESMA offers hope for the grammatically challenged

Dear students I recently jokingly suggested, in response to the draft assignments you submitted, that some of you had such poor grammar and punctuation that your only future in finance might be as an internet fraudster. This profession is notable for slack drafting. You may recall that a spelling mistake recently led to the discovery…

How to make regulation even more complicated

I have been reading through the Basel Committee of Banking Supervisors’ (BCBS) Consultative Document of 5 November 2015 on Haircut Floors for Non-Centrally Cleared Securities Financing Transactions. This sets out the proposed incorporation into Basel III of the recommendations of Workstream 5 of the Financial Stability Board (FSB) on securities financing transactions. In particular, the…

Emerging market repo news

New bond and repo market segment opened in China  China announces retail repo market. On 14 February, the PBOC announced a measure to boost the development of the bond market and increase direct financing by opening the Bank OTC Market. This is an extension to the existing interbank bond market. It is open to a…

Careless talk on Bank Undeground

Last year, the Bank of England took a leaf out of the FRBNY’s book and launched a blog site for its analysts. The site is called Bank Underground. Notwithstanding this attempt to sound a big edgy and an unfortunate tendency towards silly titles (eg “Izzy Whissy let’s get Vizzy”), there’s good stuff here. But there…

Repo markets in East Africa

Let’s cut to the quick: there are currently no true repo markets in East Africa! In Kenya, Rwanda, Tanzania and Uganda, there is an interbank instrument called a ‘horizontal repo’ (as opposed to the ‘vertical repo’, which is an instrument between commercial banks and the central bank in each of those countries). In Burundi, there…

Is it true that the unsung virtue of derivatives is embedded financing?

A recent report by the US consultancy Finadium lauded a paper by Professor Bruce Tuckman of the NYU Stern School of Business who wisely cautioned against too severely discouraging the use of derivatives through regulation. The main argument by Prof Tuckman is that derivatives and forwards can provide synthetic positions that have equivalent risk exposures…

Anxiety, Overconfidence and Excessive Risk-Taking

I have been doing some work on money market codes of conduct. In my research, I came across a fascinating article on “Anxiety, Overconfidence and Excessive Risk-Taking” by Thomas Eisenbach and Martin Schmalz (FRBNY Staff Report No.71, March 2015). The authors note that it is widely accepted and well substantiated that people tend to systematically…