Year: 2010

US market watchdogs and six major exchanges have agreed that new safeguards were needed to curb trading when markets are plunging, including circuit breakers for individual stocks, a source familiar with regulators’ talks said on May 10.

Securities and Exchange Commission Chairman Mary Schapiro, the leaders of major stock and option exchanges, and broker-dealer watchdog, the Financial Industry Regulatory Authority, met in Washington to discuss the causes of the market free fall on May 6 and possible reforms.

“As a first step, the parties agreed on a structural framework, to be refined over the next day, for strengthening circuit breakers and handling erroneous trades,” Schapiro said in a statement.

The SEC did not provide details on what the fixes would look like.

A source familiar with regulators’ talks said they have still not pinpointed the exact cause of the 20-minute market roller coaster, when stocks usually regarded as safe dropped precipitously for several minutes before recovering most of their losses.

Despite not knowing the cause, regulators have reached a general agreement on a three-part revamp of market safety valves, including a circuit breaker that applies across markets if individual stocks fall precipitously.

The agreement also covers the need for clear rules on dealing with erroneous trades, and on the need to update existing market-wide circuit breakers for severe market declines, the source said. The source spoke on condition of anonymity because the talks are private.

Currently, if the market falls more than 10 percent in a day before 2pm local time, a circuit breaker is triggered and shuts the market down for one hour. If the market falls more than 20 percent after 2.30pm, a circuit breaker is triggered, shutting down the market for the rest of the day.

Both the Dow Jones Industrial Average and Standard & Poor’s 500 Index never reached the crucial trigger point on May 6. The Dow fell as much as 9.2 percent and the S&P was off as much as 8.6 percent during the latter half of the trading day.

Schapiro held a two-hour meeting with the leaders of the New York Stock Exchange, the Nasdaq Stock Market, BATS, Direct Edge, the International Securities Exchange and Chicago Board Options Exchange.

NYSE Euronext Chief Executive Duncan Niederauer, Finra CEO Richard Ketchum and others told reporters afterward that the discussions were constructive, without providing  details.

The exchange heads also met at the Treasury Department with Treasury Secretary Timothy Geithner, along with Schapiro and Commodity Futures Trading Commission Chairman Gary Gensler.

Continuing to gather data
Four days after the market plunge and quick rebound, regulators are still scrambling for answers. The Dow Jones Industrial Average briefly went into a 1,000-point tailspin on May 6, rattling investors worldwide.

But a massive $1trn rescue package to safeguard indebted European nations cheered investors on the day of the meeting, with US stocks racking up their best one-day gain in over a year.

The CBOE VIX volatility index, known as Wall Street’s fear gauge, fell 29.6 percent – the largest percentage drop in its history – to end at 28.84 after leaping to its highest level in more than a year on May 7.

One prevailing theory is that the sharp fragmentation of the US stock marketplace and the accompanying patchwork of circuit breakers and safeguards exacerbated the market swoon.

That fragmentation is also slowing down regulators’ ability to piece together what happened, two sources familiar with the matter said.

The SEC continues to aggregate data from the 50 electronic trading venues, one source said, suggesting the fragmentation is hampering the ongoing investigation.

Senator Charles Schumer, a Democrat from New York, called for new systemwide circuit breakers that would put the brakes on free-falling individual stocks when a circuit breaker on one of the major exchanges is triggered.

NYSE curbs as template?
The NYSE introduced a trading curb on its floor May 6 that forced most trading to all-electronic exchanges such as the Nasdaq Stock Market and NYSE Euronext’s electronic Arca venue, which did not have similar curbs – a lack of uniformity seen as having worsened the wider market’s drop.

Now, regulators and the industry appear to be eyeing something like NYSE’s system as a template for the whole marketplace.

Trading speeds and volumes have ramped up over the last decade as regulators encouraged the proliferation of new trading venues to challenge the NYSE’s and Nasdaq’s near monopoly.

About five years ago, the NYSE executed more than 80 percent of trading in its listed securities. Now, parent company NYSE Euronext executes about 34 percent.

The SEC recently raised some red flags about the fragmented marketplace, proposing rules late last year that would shine more light on so-called dark pools, which are alternative trading venues that keep investors’ intentions anonymous.

The European Central Bank will buy eurozone government bonds to help
support fractured markets, abandoning firm resistance to full-scale
asset purchases in light of Greece’s debt crisis.

The ECB said in
a statement that the step, dubbed the ‘nuclear option’ by many
economists, was justified because of government promises to meet strict
budget targets and step up consolidation efforts.

Boosting its
firepower further, the ECB said it would also re-start dollar lending
operations and bring back some of the emergency liquidity measures it
had started to phase out.

“The European Central Bank decided on
several measures to address the severe tensions in certain market
segments which are hampering the monetary policy transmission mechanism
and thereby the effective conduct of monetary policy oriented towards
price stability in the medium term,” it said in a statement just after
European Union finance ministers announced their own 500 billion euro
crisis package.

On May 6, after the central bank’s monthly
meeting, ECB President Jean-Claude Trichet said policymakers had not
discussed buying government bonds.

 The scope of the purchases is
yet to be determined, but the ECB said they would be offset by
liquidity-absorbing operations so that the stance of monetary policy is
unaffected.

Under the plan the ECB will buy and sell both
government and private bonds on the secondary market.

“This
truly is overwhelming force, and should be more than sufficient to
stabilise markets in the near term, prevent panic and contain the risk
of contagion,” Marco Annunziata from UniCredit Group in London said of
the overall deal.

“Not only is the headline number stunning, but
the ECB’s decision to intervene in the secondary market should offset
concerns about the time it will take to deploy the stabilisation funds.”

The
fact that the bond purchases will be offset by liquidity absorbing
operations means they will not have the same potential impact on
inflation as straight purchases, such as those undertaken by the US
Federal Reserve and the Bank of England.

Arriving at the Bank for
International Settlemements for a second day of talks with fellow
central bankers, ECB President Jean-Claude Trichet said he would respond
to journalists’ questions later.

International Monetary Fund
chief Dominique Strauss-Kahn said market reaction to European
policymakers “bold steps” was heartening.

“I think we have to
wait a little more, but I think all this is rather encouraging,” he told
reporters on the sidelines of the BIS meeting.

Liquidity hose
In its early-morning
statement, the ECB said it would hold its next two three-month
liquidity operations at a fixed interest rate, rather than the planned
competitive tenders.

It will return to six-month loans, offering
banks all the money they ask for on May 12 at a fixed interest rate
linked to the main refinancing rate.

Speculation had increased
that the ECB would need to take drastic action to stem contagion from
Greece’s woes.

European laws prevent the ECB from buying debt
directly from governments in the way the US and British central banks
have done during the financial crisis, but not on the secondary market.

The
ECB announced a 60 billion programme to buy covered bonds last year but
this will be its first foray into buying government debt.

Greece’s
debt crisis has driven the cost of its sovereign debt and its insurance
to record levels. The problems have also started to push up debt costs
for other eurozone members with strained public finances such as
Portugal, Spain and Ireland.

Freddie Mac, the second-largest provider of US residential mortgage funds, has asked for an additional $10.6bn in federal aid after it lost $8bn in the first quarter.

The company warned it would continue to need billions more in government funds because the housing market remains fragile.

The loss was $6.7bn before a $1.3bn dividend payment on senior preferred stock owned by the US Treasury.

Freddie Mac has been struggling to contain losses sustained from its massive exposure to the US housing market, which has suffered its worst downturn since the 1930s.

Fearing that losses would harm Freddie Mac’s ability to support housing, the government put the company in conservatorship in September 2008 and late last year pledged unlimited financial backing.

Chief Executive Charles Haldeman said the company is focused on strengthening its underwriting standards and improving credit quality.

“Though more needs to be done, we are seeing some signs of stabilisation in the housing market, including house prices and sales in some key geographic areas,” Haldeman said in a statement.

“But as we have noted for many months now, housing in America remains fragile with historically high delinquency and foreclosure levels, and high unemployment among the key risks.”

Freddie Mac, in a regulatory filing, predicted that US home prices would fall further over the “near term” before any sustained recovery in housing. It said it expects “a significant increase in distressed sales.”

The loss of the federal homebuyer tax credit last month, as well as expectations of rising interest rates and high unemployment, will also sap home prices, Freddie said.

It said it expects to continue to rely on the government, in part because of changes to accounting rules adopted in 2010.

“The size and timing of such draws will be determined by a variety of factors that could adversely affect the company’s net worth,” the firm said.

Since late 2008, the Treasury has purchased about $62.3bn in Freddie Mac senior preferred stock, which is costing about $6.2bn a year in dividends.

The cost of the dividends alone exceeds what Freddie has earned in most years and will likely complicate efforts by Congress to overhaul the shareholder-owned, government-backed business model undone by the financial crisis.

Fannie Mae, the larger, government-controlled mortgage finance company, is in a similar position.

The Obama administration earlier this month began the process of overhauling the US housing finance system, asking for public comment on what should be done.

Treasury Secretary Timothy Geithner has said he does not expect any substantive changes to the system until next year at the earliest.

Representative Scott Garrett of New Jersey, a consistent critic of both Fannie Mae and Freddie Mac, said the latest figures demonstrate the need to address their future as Congress considers sweeping changes to the US financial system.

“Taxpayers are continually losing money on these failed enterprises, and at some point, we must say enough is enough,” Garrett said.

Indonesian Finance Minister Sri Mulyani Indrawati, a key reformer in Southeast Asia’s biggest economy, is leaving office in what could be a major blow to a crackdown on graft and tax evasion.

Indrawati, 47, was named managing director of the World Bank Group, a sign of the growing clout of emerging economies but also reflecting increasing pressure on her at home from politicians opposed to her clean-up campaign.

“It’s a good move for her, but not good for Indonesia,” said Nick Cashmore, head of CLSA in Indonesia.

“She’s leaving earlier than expected, not doing the full five years. It shows that all these undercurrents are gathering pace.”

President Susilo Bambang Yudhoyono has congratulated Indrawati on the move, indicating he is willing to let her go, but investors will be watching who he appoints as her replacement for a signal on where the reform programme is headed.

Investors have been big buyers of Indonesian assets in the past 18 months, largely attracted by its pace of reform and liberalisation and the prospect of a surge in demand for its vast natural resources, including timber, palm oil and coal, as the global economy recovers.

Local financial markets fell after the announcement of Indrawati’s move, but analysts said the weakening in the rupiah to 9,090 per dollar from 9,030 and a three percent drop in the stock market reflected broader investors concerns about emerging markets and risk related to the euro zone.

“The market will definitely react negatively to her departure,” said Destry Damayanti, an economist at Mandiri Sekuritas in Jakarta.

“Hopefully it is a short-lived one, but it all depends on who replaces her. That is the main concern for now, her replacement. What is needed is someone who is a professional, someone who is not politically biased.”

Strong growth
Indonesia’s economic growth is expected to be 5.7 percent this year and as much as 6.3 percent in 2011, Indrawati said recently.

Inflation, long the bane of Indonesia’s policymakers, remains tame, and interest rates are at a record low of 6.5 percent.

“I don’t think that this will hurt investment climate (in Indonesia) in the long term as I believe foreign investors see this as a democratisation process,” said Purbaya Yudhi Sadewa, an economist at Danareksa Research Institute in Jakarta.

“However, in the short term, it will create a temporary shock in the market as well as for the rupiah.”

Indrawati and Vice President Boediono were regarded as Yudhoyono’s top reformers, taking a tough public stance against corrupt politicians, officials and businessmen in a country that ranks among the most corrupt in the world.

Their reforms, for example in the tax and customs offices, have led to improvements in revenue collection but much more remains to be done to clean up the civil service, including the police and judiciary.

“A lot of the macroeconomic gains are secure but the question is reform. This may leave Boediono more exposed, depending on who her successor is,” said Cashmore at CLSA.

World Bank President Robert Zoellick said Indrawati has been an “outstanding finance minister”, adding that she would play a key role in helping to lead the Bank as it moves to strengthen client support and implement reforms.

Indrawati, who takes up her new job on June 1, has been Indonesia’s Minister of Finance since 2005, helping to put Indonesia firmly on the world map.

In her new role, Indrawati will supervise three World Bank regions: Latin America and Caribbean, Middle East and North Africa, and East Asia and Pacific, a World Bank statement said.

“It is a great honour for me and also for my country to have this opportunity to contribute to the very important mission of the Bank in changing the world,” Indrawati was quoted as saying in the statement.

The Bank of Japan has said it needs to do more to foster economic growth and renewed its commitment to ultra-loose monetary policy even as it forecast consumer prices would start rising again sooner than earlier thought.

As expected, the central bank refrained from new action at its policy meeting and kept its benchmark rate steady at 0.1 percent. It also left markets guessing what else it might have in store in its efforts to pull the world’s second-largest economy out of deflation.

“(Board) members shared the view that it was necessary for the bank to make new efforts to contribute to strengthening the foundations for economic growth,” the BOJ said in its policy statement.

It said, without elaborating, that the central bank’s staff had been instructed to look into ways of supporting financial institutions with funds.

It also forecast consumer prices would creep up 0.1 percent in the year to March 2012, bringing forward the expected end of persistent price declines that threatened to derail the recovery by hurting business and consumer spending.

Some market players took the central bank’s pledge to do more as a signal that it may try to bring down the benchmark interbank lending rate, which has remained relatively high.

“It appears that the Bank of Japan is thinking of some new form of market operation, or a tweak to its fund-supply tools to push down the longer end of the yield curve. I don’t think it is thinking of expanding the fund-supply operation it adopted in December,” said Yasuhide Yajima, senior economist at NLI Research Institute.

“I also think the BOJ won’t increase its government bond purchases. That’s the last thing they want to do. It may come up with something new to push down yields and will probably make an announcement in May or June.”

The announcement may also be seen as a way of pre-empting any future calls from the government for more action.

“That’s the mode they’ve been in for the past six months – making token shifts to demonstrate cooperation but without changing anything particularly fundamental,” said Richard Jerram, chief economist at Macquarie Securities in Tokyo.

In its twice-yearly outlook report, the central bank painted a rosier outlook of the economy to say it is expected to recover as a trend. It also forecast core consumer prices would rise 0.1 percent in the year to March 2012. Three months ago it had predicted a 0.2 percent decline.

But analysts said the upgrade was too subtle to warrant any policy shift.

“There will be no change to the BOJ’s stance of keeping the current easy policy stance. The central bank’s projections also don’t alter our view that the central bank will not raise interest rates until the latter half of fiscal 2012/13,” said Naomi Hasegawa, senior strategist at Mitsubishi UFJ Securities.

Core consumer prices fell 1.2 percent in March, the same pace of fall as in February and marking the 13 straight month of decline.

However, figures for the Tokyo area, available a month before nationwide figures, showed the decline was slowing when one factored out the impact of the government’s new policy of making public high school tuition free.

Finance Minister Naoto Kan, speaking as the central bank board met, noted the encouraging signs in the data, suggesting the government agreed with the BOJ’s assessment.

The BOJ has kept its main interest rate at 0.1 percent since late 2008 and eased its policy in December 2009 and again in March by setting up and later expanding a facility offering cheap funds to banks.

Goldman Sachs Group Inc Chief Executive Lloyd Blankfein told American television recently that he retains the support of the board as well as support from clients since the SEC accused the powerful but embattled bank of fraud earlier in April.

Blankfein, after testifying for more than three hours before the Senate’s permanent investigations subcommittee, maintained his stance that Goldman did nothing wrong when it sold an exotic mortgage derivative – the Abacus CDO – that cost its buyers $1bn when housing prices slumped.

“Synthetic CDOs allowed buyers and sellers to be able to take the kind of positions they wanted in the housing market. It wasn’t a casino,” he said in the interview. “These were highly sophisticated parties, some of the most sophisticated in the world.”

Blankfein defended the idea of synthetic CDOs – or derivatives built on credit derivatives – saying they let investors diversify or hedge their exposure to housing markets efficiently and quickly.

“These were professional investors who sought the risk and attained the risk they wanted in the market,” he said.

With regard to trading customers, Goldman fulfilled its duties as a middle man.

“When you are a market maker you have responsibility to make sure your client is suitable, is knowledgeable and that what you’re providing serve the purpose and provides the risk that the client wants.”

He was more contrite when it came to the broader economy, where businesses and individuals have suffered from the housing slump and the ensuing recession. Wall Street banks, including Goldman, have been blamed for exacerbating the crisis by creating exotic mortgage securities, enabling some poor underwriting and then shorting the housing market.

Blankfein said Goldman does bear some responsibility for the financial crisis of 2007 and 2008.

“I think that financial institutions let the public down and we are a very important, influential financial institution, and so we bear our share.”

Taiwan and China aim to sign a landmark free trade-style agreement by June aimed at bringing the political rivals closer while opening the often-isolated island’s $390bn economy to trade pacts around the world.

The economic cooperation framework (ECFA) agreement between economic powerhouse China and export-reliant Taiwan would conclude two years of trade and transit talks following decades of political hostilities.

The following is an overview of EFCA’s likely content and expected impact:

Contents of the deal
Tariffs would fall to varying degrees in sectors included on an “early harvest list”, seen as a highlight of the deal. Negotiators have taken LCD panels and agricultural products off a list of sectors eligible for early trade tariff reductions, putting off some to future talks.

China has also agreed to avoid hurting the most vulnerable sectors of Taiwan’s $390bn economy.

Import tariffs will remain highest for sectors in Taiwan that might lose ground to a greater flow of goods from China. Financial services and institutional investors will benefit from more open financial markets on each side, while legal transparency rules should help high-tech R&D in Taiwan.

Negotiation timeline
Chinese officials say they want to fast-track the deal, despite its complexity, while the Taiwanese government has said it aims to sign it at formal talks by the end of June.

Taiwan’s parliament could hold up the ECFA by demanding revisions subject to Beijing’s approval.

Market impact
The Taiwan Stock Exchange and the Taiwan dollar will firm slightly when the deal is signed. Shares of listed companies from China’s Fujian province, geographically closest to Taiwan, would gain in Chinese markets.

Likely gains for Taiwan, China
Taiwan will receive a first-time blessing from Beijing to discuss free-trade agreements with the US, Singapore and other countries, which would react positively to the export-dependent island’s tie-up with China’s much larger economy.

Beijing is hoping the deal will help it win points in Taiwan for any later talks about political unification.

Political risks
If negotiations carry into the second half of the year, the ECFA will become enmeshed in fractious Taiwan local elections, with anti-China opposition candidates saying the deal will flood the island with cheap Chinese goods or herald cross-Strait political unification.

The ruling KMT is staking much of the vote on the ECFA in polls seen as a bellwether for the 2012 presidential race.

US firms working in China are more concerned about regulatory and policy issues than about pushing China to revalue its currency, the head of the American Chamber of Commerce said in Beijing recently.

American businesses are encountering new obstacles to market access as China’s growing economy leads them to expand deeper into inland provinces, AmCham president Christian Murck told reporters.

Washington has been pressing China to allow its currency to appreciate and trade more flexibly, with politicians and labour groups blaming the undervalued yuan for the large US trade deficit with China and the loss of US manufacturing jobs.

“A singleminded focus on the yuan is a mistake,” Murck said, citing access for financial services, progress toward a market economy and domestic industrial policies as important concerns for US business operating in China.

Policy makers in Beijing worry that allowing too much of an appreciation in the yuan will make Chinese exports uncompetitive, hurting a sector that drives growth and jobs in China.

Half of member companies surveyed by AmCham said a Chinese economic slowdown ranked as one of the top three risks in upcoming years, while 30 percent cited rising labour costs in China, AmCham said in its annual white paper.

Some 15 percent viewed yuan appreciation as a risk.

Foreign investors have previously experienced steadily widening opportunity and market access in China, especially as China joined the World Trade Organisation and opened new sectors to investment and competition.

That trend is now bumping up against inconsistent applications of regulations, concerns over registering and protecting intellectual property and indigenous innovation rules.

“Now, when we look from the vantage point of 2009 and 2010, and look toward the future, we feel less certainty that trend will continue,” Murck said.

China’s measures to stave off the global economic crisis by channelling stimulus funding through state banks to state-backed sectors has contributed to foreign firms’ perceptions of increased obstacles.

“That represents a slowing in the processs of moving forward to a market economy,” he said.

American corporations have been increasingly reliant on returns from their businesses in China, as other markets continue to feel the effects of the global financial crisis.

Many firms are selling into second- and third-tier cities, or moving operations from the prosperous coast to inland regions where labour is cheaper but logistics are less developed.

That accounts for part of the increased concerns over regulatory issues, as firms contend with different applications of rules and local favouritism, Murck said.