Monthly Archives: February 2011

Tokyo Bourse Updates Indexes Every Millisecond to Lure Traders

The Tokyo Stock Exchange started updating key indexes every millisecond today from every second as it seeks to attract more high-frequency traders.

The Topix index, Topix Core 30 Index and Topix 500 Index will refresh every thousandth of a second, the bourse said in a statement this month.

High-frequency trading programs and other algorithm-based systems account for more than 30 percent of daily trading on the Tokyo exchange, Atsushi Saito, president of the bourse, told reporters at a briefing on Feb. 22.

“We aim to welcome more market players with high-frequency trading with the service,” Saito said at the briefing.

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Time for Next Move on Yuan Liberalization

Peter Stein reports for The Wall Street Journal that last year, China made waves by letting foreign investors get their hands on more of its currency. This year, the big question for many is what China will let them do with that money.

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AFP/Getty ImagesA Chinese bank worker counts a stack of 100-yuan notes at a bank in Hefei, east China’s Anhui province on February 27, 2011.

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The first stage of a grand experiment took place last year, when China put in place measures that let people outside its borders for the first time trade in the currency of the world’s second-biggest economy, creating a new market for offshore yuan and yuan-based securities.

The take-up has been swift and enthusiastic. Daily trading in offshore yuan now totals more than $600 million, according to Deutsche Bank AG. That’s small by the standards of the $4-trillion-a-day foreign-exchange market but up sharply from only around $100 million in October. After helping sell about 36 billion yuan ($5.48 billion) of “dim sum bonds” last year in Hong Kong, bankers reckon this year’s issuance could easily double that figure. One company is already working on launching what could be Hong Kong’s first ever yuan-denominated share offering.

The reforms are having a global impact, allowing traders in London and New York to buy and sell what was until recently an isolated, walled-off currency. But the impact in Hong Kong, an offshore finance center that’s nonetheless part of China, is especially powerful. Peter Pang, deputy chief executive of the Hong Kong Monetary Authority, told investors at a Goldman Sachs conference last week the ex-British territory’s role as incubator of this new market is “probably the most important development in Hong Kong’s evolution as an international financial center in recent decades.”

Feeding this market are the piles of yuan mounting in this city’s bank accounts. These totaled 314.9 billion yuan ($47.9 billion) as of Dec. 31, up fivefold from a year earlier, boosted by Beijing’s efforts to promote use of yuan over dollars to settle China’s overseas trade deals, as well as by expectations that the yuan’s value will continue to rise over time. Economists are expecting those deposits to reach anywhere between 500 billion and 1 trillion yuan by the end of the year.

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Economists list U.S. budget deficit as No. 1 worry

Reuters’ Rachelle Younglai reports that the massive U.S. budget deficit is the gravest threat facing the economy, topping high unemployment and the risk of inflation or deflation, according to a survey of forecasters released on Monday.

The National Association for Business Economics said its 47-member panel of forecasters increased its estimate for the 2011 federal deficit to $1.4 trillion from $1.1 trillion in its previous survey in November.

Economists list U.S. budget deficit as No. 1 worry

“Panelists continue to characterize excessive federal indebtedness as their single greatest concern,” with state and local government debt the second-biggest worry, the survey said. It was conducted between January 25 and February 9.

The panel’s deficit forecast is lower than the Obama administration projection of a record $1.65 trillion this fiscal year, or 10.9 percent of U.S. gross domestic product.

Although the White House budget proposes $1.1 trillion in deficit reductions over 10 years, Republicans in the House of Representatives say that is not enough.

Republicans are pressuring the administration to reduce spending by $61 billion by September, and the dispute threatens to shut down the government if Democrats and the White House refuse to go along.

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Mergers loom as “flash crash” back in spotlight

The merger frenzy among the world’s top exchanges could cast the U.S.-centric “flash crash” debate in a global light, as experts on Friday pitch some possibly radical changes meant to avoid another market breakdown.

A special committee is set to meet in Washington to make its long-awaited recommendations to regulators — now more than nine months since the unprecedented market crash sent the Dow Jones industrial average down some 700 points before rebounding, all in a matter of minutes.

The May 6 crash rattled investors, exposed flaws in the structure of today’s electronic markets, and set regulators on a mission to fix the high-speed system.

The exchanges at the center of the breakdown, however, added a new wrinkle to the debate when in the last week they set off a new wave of planned global mergers, including the takeover of Big Board parent NYSE Euronext (NYX.N) by Germany‘s Deutsche Boerse (DB1Gn.DE).

While the deals could strengthen the oversight of cross-border trading and boost the flow of global liquidity, they also tie the world’s interconnected markets tighter together, possibly setting the stage for larger-scale crashes, some observers said.

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Banks Find Loophole on Capital Rule

The Wall Street Journal’s David Enrich reports from London that some foreign banks are moving to restructure their U.S. operations to avoid one of the most-burdensome requirements of the new Dodd-Frank law.

In November, Barclays PLC quietly changed the legal classification of the U.K. bank’s main subsidiary in the U.S. so that the unit would no longer be subject to federal bank-capital requirements. Several other banks based outside the U.S. are considering similar moves, according to people familiar with the matter.

The maneuver allows them to escape a provision of the financial-overhaul law that forces the pumping of billions of dollars of new capital into the U.S. entities, known as bank-holding companies.

“It’s just not worth it to have all that capital trapped” in the holding company, said a New York lawyer who is advising banks on how to restructure.

The moves are the latest example of how banks are scrambling to cushion the impact of new laws and rules around the world.

Policy makers are demanding banks hold more capital and cash to help prevent a repeat of the financial crisis. But bank executives are worried that all the changes will crimp profits without making the financial system safer.

Last summer’s Dodd-Frank law beefed up rules governing the quantity and types of capital banks must keep to protect themselves from potential losses. The provision also closed a loophole that allowed foreign banks to run their U.S. subsidiaries with thinner capital buffers than those of their local rivals.

For example, Barclays Group US Inc., the U.K. bank’s Delaware-based holding company, had a Tier 1 leverage ratio of just 1.37% as of Sept. 30. That put the holding company below almost all its peers of similar size, which had an average ratio of 9.13%, according to Federal Reserve data.

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China flexed its muscles using U.S. Treasuries

REUTERS/Jason Lee

Reuters’ Emily Flitter reports that confidential diplomatic cables from the U.S. embassies in Beijing and Hong Kong lay bare China’s growing influence as America’s largest creditor.

As the U.S. Federal Reserve grappled with the aftershocks of financial crisis, the Chinese, like many others, suffered huge losses from their investments in American financial firms — from Lehman Brothers to the Primary Reserve Fund, the money market fund that broke the buck.

The cables, obtained by WikiLeaks, show that escalating Chinese pressure prompted a procession of soothing visits from the U.S.Treasury Department. In one striking instance, a top Chinese money manager directly asked U.S. Treasury Secretary Timothy Geithner for a favor.

In June, 2009, the head of China’s powerful sovereign wealth fund met with Geithner and requested that he lean on regulators at the U.S. Federal Reserve to speed up the approval of its $1.2 billion investment in Morgan Stanley, according to the cables, which were provided to Reuters by a third party.

Although the cables do not mention if Geithner took any action, China’s deal to buy Morgan Stanley shares was announced the very next day.

The two Treasury officials to whom the cables were addressed, Deputy Assistant Secretary for Asia Robert Dohner and Deputy Assistant Secretary for International Monetary and Financial Policy Mark Sobel, declined through a spokesperson to comment for this story. The State Department also declined to comment.

China is America’s biggest foreign lender, playing a crucial role in the U.S.Treasury auctions that allow Washington to borrow what it needs to keep its government running. At the same time, the United States is China’s top export destination: America’s trade deficit with the nation reached a record $273.1 billion in 2010. Most economists describe the two economies as co-dependent.

The concern in certain influential Washington and Wall Street circles is that Beijing would leverage its position as the main enabler of U.S. overspending. And the cables provide a glimpse into how much politics inform relations between the world’s two largest economies.

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NYSE Deal Bears Big Breakup Fee

The Wall Street Journal’s Jacob Bunge and Charles Forelle report that the tie-up agreement between NYSE Euronext and Deutsche Börse AG would cost

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a rival bidder $337 million to break up, according to documents filed with regulators Wednesday.

NYSE Euronext and Deutsche Börse each agreed to pay the other party a €250 million ($337 million) termination fee should the deal be spoiled. That is equal to about 3.4% of the deal’s value of $10 billion when it was announced Tuesday. Analysts said the breakup fee is on the high side.

“By putting something like this in, you’re trying to make sure it’s too expensive for anybody else to step in,” said Brad Hintz, an analyst at Sanford Bernstein.

In a securities filing Wednesday, NYSE Euronext disclosed additional details on how the combined company would operate.

In a sign of how carefully executives are trying to balance the interests of shareholders, regulators and political leaders in the U.S. and Europe, the company said its management committee would meet “alternately in Frankfurt and New York.”

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