THE EU will announce the methodology for its planned banking stress tests in early March, commissioner for the internal market Michel Barnier said yesterday.
Officials from his office said while March 2nd was the scheduled date, banking supervisors are expected to meet on March 2nd and 3rd, and suggested that the methodology may only be released after that meeting.

The EU plans to test the banks in the first half of this year and recapitalise those that turn out to be weak, a move to boost market confidence in the EU financial sector and draw a line under the sovereign debt crisis.

What happens when risk of loss due to default can be separately traded from the cash bond? As many have noted, the protection buyer may not actually own bonds of the company or country referenced in the swap. This means that the amount traded synthetically can be much greater than the outstanding amount of the bonds. This has been called “naked shorting” and we have heard much about it.
When the risk of a security can be split from its cash host, and the risk itself traded separately, things have changed. But what exactly has changed? This question has recently arisen with regard to credit derivatives.
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This notion of naked shorting is problematic. As a hedging instrument, CDS is useful for a much broader range of risks than just the risk of loss due to default on the debt of the reference entity. The earliest instance of this was during the 1997 to 1998 Asian crisis. It was a widely held view that the notional amount of CDS written on the Korea Development Bank was many times higher than the outstanding amount of KDB debt. CDS on the debt could be used to hedge Korea risk more generally and even risks in other Asian countries.

There are many examples like this, where the risks being hedged are correlated with the reference entity’s default, but are not exactly the reference entity. So it is basically impossible to determine what a “naked short” position is, or whether it is “pure speculation,” whatever that is. But the fact is some traders are trading CDS for purely information-based reasons.
So what does this naked shorting have to do with the insinuation that buying protection via CDS without owning the reference entity debt is destructive speculation? Well, CDS may have changed one thing. Previously, trading credit was much more difficult. Expressing a negative view was next to impossible because it is hard to find the bonds and short them for a longer period.

Even expressing a positive view would usually require finding off-the-run bonds to buy, not easy in size. More importantly, it simply would not pay to investigate, or analyze, and find information so important that it would affect a reference entity’s bond prices. Information always affects the equity because that is the residual claim, but information has to be fairly important to affect bond prices. That’s why, prior to the introduction of CDS, changes in the spreads on investment-grade corporate debt were functions of U.S. Treasury rates, but not of firm-specific information.
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CDS may well have changed some previously information-insensitive debt into information-sensitive debt. How? Suppose an analyst determines that new information about a company will have a small impact on the debt, changing its spread by, say, 50 basis points. That may not be enough to worry about if you have to find the cash bonds, so no one produces or trades on this information. But in the CDS market it is possible to take a very large position so as to profit from even such a small change.
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Source: Garp

The U.S. Senate will renew efforts this month to overhaul financial regulation, basing much of its work on a bill offered by Democratic Senator Christopher Dodd, who announced this week he will retire at the end of 2010.
Like legislation approved on Dec. 11 by the U.S. House of Representatives, the Dodd bill proposes the biggest regulatory changes since the 1930s for Wall Street and the banks.
Below is a summary of the House and Senate proposals.

SYSTEMIC RISK:

HOUSE BILL
* House bill creates inter-agency Financial Services Oversight Council with staff drawn from existing agencies
* Council members include heads of Treasury, Federal Reserve, SEC, FDIC, others; Fed acts as council agent
* Council can recommend that existing agencies impose stricter standards on large, interconnected financial firms that could threaten economic stability or that are troubled
* Fed limits leverage of financial holding companies subject to stricter standards at 15-to-1 debt-to-equity ratio
* Fed sets minimum capital ratio for financial holding companies that are subject to stricter standards at 2 percent of tangible equity to total assets
* Fed can impose other leverage, capital, liquidity rules on firms, taking off-balance sheet activities into account
* Fed can prohibit firms subject to stricter standards from proprietary trading done in-house using firms’ own money
* Firms subject to higher standards face routine “stress tests;” must submit “living wills” on unwinding quickly
* Firms can be ordered to hold contingent capital, or long-term hybrid debt convertible to equity in emergencies
* Firms failing to comply can be ordered to restructure, curb executive pay, sell businesses or otherwise break up
* Treasury secretary must approve any order to divest more than $10 billion in assets; president, more than $100 billion

DODD BILL
* Creates Agency for Financial Stability, governed by board similar to House’s council, also with rule-writing power only
* Agency relies less on Fed, more on new single bank regulator and FDIC to execute and enforce its orders
* Imposes incrementally tighter standards on firms with total assets above $10 billion as they present more risk to financial stability
* Regulators can impose tighter balance-sheet rules and “living will” requirements on firms, resembling House bill
* Regulators can force firms not complying with tighter rules, or that threaten stability, to recapitalize, be acquired, restructure, curb pay, dismiss executives, break up
* Firms’ credit exposure to unaffiliated companies can be limited to 25 percent of capital stock, as in House bill

DEALING WITH LARGE TROUBLED FINANCIAL FIRMS:

HOUSE BILL
* FDIC — with approval of council, Treasury and president — can guarantee debts of solvent firms up to $500 billion
* FDIC can dismantle insolvent firms through bankruptcy or receivership, much like it dismantles failing banks now
* Secured creditors in FDIC resolutions can have up to 10 percent of their claims treated as unsecured claims
* $200 billion fund pays for FDIC resolutions; fund gets up to $150 billion from fees charged to firms worth more than $50 billion, can borrow another $50 billion from Treasury; hedge funds’ worth $10 billion or more pay into fund

DODD BILL
* FDIC can guarantee debts of firms in receivership, with approvals from senior officials
* FDIC can dismantle large troubled financial firms
* Firms with assets above $10 billion pay fees for FDIC resolutions after they occur, not before, unlike House bill

Dazu haben insbesondere die internationalen Eigenkapitalregeln für Banken, im Fachjargon Basel II, beigetragen. Die Bonitätsnoten bestimmen, mit wie viel Kapital eine Bank den Besitz von Krediten und Wertpapieren unterlegen muss. Vor allem bei komplexen, also verbrieften, Wertpapieren ist dieser Weg praktisch alternativlos. Verankert in zahllosen Anlagerichtlinien und Verordnungen für Fonds und Versicherer legen Ratings auch für die meisten anderen Finanzmarktakteure fest, welche Wertpapiere käuflich sind und was ein Ladenhüter bleiben muss.
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Die Hauptschuld daran trägt die Politik. Erst hat sie die Ratings durch gewinnorientierte Firmen zum festen Bestandteil der Finanzmarktaufsicht gemacht. Und nun unterlässt sie jeden ernsthaften Versuch, Alternativen auszuloten.
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Neulich berichtete der Fondsmanager einer großen Kapitalanlagegesellschaft, sein Arbeitgeber biete institutionellen Anlegern an, die Anlagerichtlinien nicht allein an Ratings, sondern auch an weiteren Risikoparametern auszurichten. Leider liegt die Nachfrage bislang quasi bei null. Der Grund: Die angesprochenen institutionellen Investoren – Pensionskassen, Versicherer, Banken – sind selbst aufsichtsrechtlich an Ratings gebunden. So erstickt die regulatorische Allgegenwart von Ratings neue Ansätze schon im Keim.

Aufseher zementieren die Macht der Ratings (bei Handelsblatt.com am 05.01.2010 veröffentlicht)

Ein Grund für die kleine Rally dürfte ein Artikel in der japanischen Finanzzeitung «Nikkei» liefern: Dort heisst es, dass die Bankenaufsichtsbehörden bald die neuen Richtlinien für Eigenkapitalanforderungen veröffentlichen werden – konkret die Bank für Internationalen Zahlungsausgleich BIZ in Basel.

In dem Artikel werden brisante Details gemeldet: Den Banken soll eine lange Übergangsphase von über zehn Jahren gewährt werden, die strengeren Eigenkapitalanforderungen zu erfüllen. Zudem soll die nationale Aufsichtsbehörde jeweils mitbestimmen dürfen, wann die Finanzinstitute die neuen Regulatorien voll erfüllen müssen.

cash.ch

Eine Credit Spread Option ist eine Option, bei der das Underlying ein Credit Default Swap
ist.

Bei Credit Default Swaps zahlt der Sicherungsnehmer (Protection Buyer) an den Sicherungsgeber
(Protection Seller) eine einmalige oder annualisierte Prämie und erhält dafür bei Eintritt
eines vorab spezifizierten Kreditereignisses (Credit Event) beim Referenzschuldner vom
Protection Seller (im Falle von Cash Settlement) eine Ausgleichszahlung, bzw. (im Falle von
Physical Settlement) den Nominalbetrag gegen Lieferung einer im Vorfeld der Ausstattung
nach definierten Verbindlichkeit.

on brokerbase.eu :  The Big Bang : Standardized CDS Contract

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090424a1.pdf

Kamakura Corporation announced yesterday that its monthly index of troubled public companies showed the greatest one month increase since September 2001. The percent of public companies classified as troubled jumped 2.4 percent in November to 10.4 percent of the public company universe.

In September 2001, the index had leaped three percent to reach its all-time high of 28 percent of the public company universe. The index is now a full five percent higher than its all time low 5.4 percent, a level reached in April and May, 2006. Current credit conditions are still better than 63.3 percent of the monthly periods since the start of the index in January, 1990.

This is down sharply, however, from a 95.2 percent rank in July. The average value of the index has been 13.4 percent over the last 18 years.