Tag Archives: Over-the-counter (finance)

Global Forex Trends

The average daily turnover in the global FOREX market rose to $4,0 trillion from April 2007 to April 2010, the latest survey by BIS show. The increase was driven by a 48% growth in spot transactions, as the market become more global  and trading activity by non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks increased.

“For the first time, activity of reporting dealers with other financial institutions surpassed inter-dealer transactions.”

Bank of International Settlements

In April this year, 53 central banks and monetary authorities participated in the eighth Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, conducted by Bank of International Settlements (BIS). The preliminary results indicates a strong growth and increased activity amongst non-reporting financial institutions.

The objective of the survey is to provide the most comprehensive and internationally consistent information on the size and structure of global foreign exchange markets, allowing policymakers and market participants to better monitor patterns of activity in the global financial system.

Coordinated by the BIS, participating institutions collect data from some 1,300 reporting dealers on turnover in foreign exchange instruments and OTC interest rate derivatives.

The triennial survey has been conducted every three years since April 1989, and has been modified since April 1995 to include OTC interest rate derivatives.

Previous triennial surveys have used the expression “traditional foreign exchange markets” to refer to spot transactions, outright forwards and foreign exchange swaps. This expression excludes currency swaps and currency options, which are under OTC instruments, BIS writes in a press release.

Beginning with the 2010 survey, the expression “global foreign exchange markets” will include all five foreign exchange instruments.

(Turnover on global foreign exchange markets and in interest rate derivatives is analyzed in the reports tables 1 to 5,  and in Tables 6 to 9, respectively, BIS points out).

The headline figures from the April 2010 survey are the following:

Turnover on the global foreign exchange markets.

  • Global foreign exchange market turnover was 20% higher in April 2010 than in April 2007, with average daily turnover of $4.0 trillion compared to $3.3 trillion.
  • The increase was driven by the 48% growth in turnover of spot transactions, which represent 37% of foreign exchange market turnover. Spot turnover rose to $1.5 trillion in April 2010 from $1.0 trillion in April 2007.
  • The increase in turnover of other foreign exchange instruments was more modest at 7%, with average daily turnover of $2.5 trillion in April 2010. Turnover in outright forwards and currency swaps grew strongly. Turnover in foreign exchange swaps was flat relative to the previous survey, while trading in currency options decreased.
  • As regards counterparties, the higher global foreign exchange market turnover is associated with the increased trading activity of “other financial institutions” – a category that includes non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks, among others. Turnover by this category grew by 42%, increasing to $1.9 trillion in April 2010 from $1.3 trillion in April 2007. For the first time, activity of reporting dealers with other financial institutions surpassed inter-dealer transactions (ie transactions between reporting dealers).
  • Foreign exchange market activity became more global, with cross-border transactions representing 65% of trading activity in April 2010, while local transactions account for 35%.
  • The percentage share of the US dollar has continued its slow decline witnessed since the April 2001 survey, while the euro and the Japanese yen gained relative to April 2007. Among the 10 most actively traded currencies, the Australian and Canadian dollars both increased market share, while the pound sterling and the Swiss franc lost ground. The market share of emerging market currencies increased, with the biggest gains for the Turkish lira and the Korean won.
  • The relative ranking of foreign exchange trading centers has changed slightly from the previous survey. Banks located in the United Kingdom accounted for 36.7%, against 34.6% in 2007, of all foreign exchange market turnover, followed by the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%).

Read the full post (and download the report) at The Swapper:

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Response To The BP Derivatives Story

The recent post “So, You Thought BP Was An OIL Company?” is currently the most read story ever published at the Econotwist’s Blog. And of course there’s been some comments. There’s particularly one comment I can’t refrain from replying to.

It can be found at Seeing Alpha:

“That article is about as credible as me writing about nuclear technology. Off-balance sheet transactions? SPEs? Interest Rate and Currency Swaps? Has that idiot even looked at a Annual report for BP? Does the moron know the difference between mark-to-market and accrual accounting? Does he understand that Enron and Lehman were both ‘paper’ companies vs. BP which owns $billions in physical assets. And what actual substance other than quoting some Moody’s % is he actually providing? Sure the derivatives market is $trillions, but most of that is paper (i.e. debt securities and currencies which DWARF energy derivatives). In a word, simply a fool that’s probably talking his book…..”

Well. I’m the idiot/moron/fool who wrote the article in question.

This idiot has in fact read several of BP’s annual reports, and let me quote from the 2009 annual:

Derivatives:

Gas and power marketing and trading activity is undertaken market both BP production and third-part natural gas, support LNG activities and manage market price risk as well as to create incremental trading opportunities through the use of commodity derivative contracts. Additionally, this activity generates fee income and enhanced margins from sources such as the management of price risk on behalf of third-party customers. These markets are large, liquid and volatile.”

“In connection with the above activities, the group uses a range of commodity derivative contracts and storage and transport contracts. These include commodity derivatives such as futures, swaps and options to manage price risk and forward contracts used to buy and sell gas and power in the marketplace. Using these contracts, in combination with rights to access storage and transportation capacity, allows the group to access advantageous pricing differences between locations, time periods and arbitrage between markets.”

BP has been able borrow with AAA yield anywhere on the curve and lend to less credit worthy entities at attractive spreads. These lending differentials are the fuel of the $430 trillion Interest Rate Swap OTC market.

BP has been able to spin off $20 billion of earnings for the last 5 years, and $15 billion in cash last year.

Accounting

“Natural gas futures and options are traded through exchanges, while over-the-counter (OTC) options and swaps are used for both gas and power transactions through bilateral and/or centrally cleared arrangements.”

These contracts (OTC) are typically in the form of forwards, swaps and options. Some of these contracts are traded bilaterally between counterparties; others may be cleared by a central clearing counterparty. These contracts can be used for both trading and risk management activities. Realized and unrealized gains and losses on OTC contracts are included in sales and other operating revenues for accounting purposes.”

This moron does in fact know the difference between mark-to-market and accrual accounting, and why the OTC contracts are included in “sales and other operating revenues for accounting purposes,” which totaled $213 billion in 2009, in where sale of crude oil through spot and term contracts amounted to $35, 6 billion.

Off-Balance Sheet

BP uses derivative instruments to manage the economic exposure relating to inventories above normal operating requirements of crude oil, natural gas and petroleum products as well as certain contracts to supply physical volumes at future dates. Under IFRS, these inventories and contracts are recorded at historic cost and on an accruals basis respectively. The related derivative instruments, however, are required to be recorded at fair value with gains and losses recognized in income because hedge accounting is either not permitted or not followed, principally due to the impracticality of effectiveness testing requirements.”

“Gains and losses on these inventories and contracts are not recognized until the commodity is sold in a subsequent accounting period.”

According to the 09 annual statements, financing agreements of $6, 48 billion is held off balance sheet.  Additionally, the BP group has issued third-party guarantees with amounts outstanding at $319 million of liabilities of jointly controlled entities and associates, and $667 million in respect of other third parties – also off balance sheet.

Contagion

BP’s subsidiaries in the Gulf – Arosa Funding Limited, Halliburton, Anadarko Petroleum, Transocean Inc., and Cameron International – are all placed under credit watch with negative outlook.

BP own (fully or partly) 3.689 refineries around the word, and 22.400 retail sites. These retail sites are not just gas stations, but increasingly expanding into new areas like food and clothing.

This fool does in fact understand the difference between Enron, Lehman, Bear Stearns and BP. But he also sees the similarities; these companies failed because their primary assets deteriorated rapidly, which in turn triggered materialization of their exposure to the derivative market, resulting in insolvency and finally default.

BP may have billions in physical assets, so did Enron, but this fool have also noticed that the market value of the company (and its assets) have been cut in half since April 20.

Liquidity

BP borrowed $11 billion in 2009, and have (as of January 2010) $34, 6 billion in debt – most of it cut in pieces and sold worldwide through their banking network as a mighty fine collection of collateralized, securitized, synthesized and highly leveraged fixed income assets.

BP’s issue of CSOs equals 18% of the global total rated by Moody’s.

BP’s credit rating has been cut to junk by Fitch, to BBB from AA. As a result, the price of BP’s Credit-default Swaps has jumped to nearly 600 bps, up from 44.

One of BP’s 5-year bond series, maturing in 2012, was recently trading with a yield of 9, 48%.

And on top of this, BP is supposed to come up with another $50 billion to clean up the oil spill, as public pension funds are preparing to sue the company for the money they’ve lost by investing in BP shares.

Now, before you call someone an “idiot”, a “moron” or “fool”, be sure you know what you’re talking about, or you will be the one ending up looking stupid….

SOURCES:

(1)   06-21-10 BP’s Bankruptcy Would Impair 117 (18% Of Total) Collateralized Synthetic Obligations, Lead To Pervasive Losses Zero Hedge

(2)   06-16-10 BP CDS Curve Goes Nuts, 1 Year Passes 1,000 Bps, No Offers In Market Zero Hedge

(3)   06-25-10 BP Getting Crushed: What Does its ‘Yield Inversion’ Mean? WSJ

(4)   06-28-20 Interactive timeline: BP oil spill disaster Financial Times

(6)   06-25-10 BP reassures on cash pile as shares plunge Financial Times

(7)   06-18-10 Macondo, in historical Hollywood context FT Alphaville

(8)   06-10-10 BP short interest, other facts and stuff (updated) FT Alphaville

(9)   06-24-10 BP Bankruptcy in U.K. Is Obama’s Worst Nightmare Caroline Baum  Bloomberg

(10) 06-21-10 BP and Anadarko turn on each other FT Alphaville

(11) 06-20-10 Internal BP Document Confirms Matt Simmons’ Worst Case Prediction Of Spill Rate Of 100,000+ Barrels Per Day Zero Hedge

(12) 07-01-10  ”Sultans Of Swap” Tipping Point

(13) 02-26-10 BP Annual Report 2009

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