Citi-Split May Trigger Margin Calls

According to a market statement, Citigroup will have a reverse stock split effective after the close of trading on May 6, 2011, and Citigroup’s common stock will begin trading on a split adjusted basis on the New York Stock Exchange at the opening of trading on Monday morning. If you’re in the market you should check your mailbox.

If a corporate action materializes, the client accepts that FxPro reserves the right to make appropriate adjustments to the value and/or the size of a transaction and/or number of any related transactions.

FxPro Financial Services

Although I’m not trading, I receive many of the same alert that ordinary investors do. This morning I got a warning of a possible margin call from the online broker FxPro Financial Services.

The following statement was issued Friday afternoon through the usual market information channels:

Please note that Citigroup Inc. (NYSE: C) will have a reverse stock split which will be effective after the close of trading on May 6, 2011, and that Citigroup Inc. common stock will begin trading on a split adjusted basis on the New York Stock Exchange (NYSE) at the opening of trading on May 9, 2011. When the reverse stock split becomes effective, every (10) ten shares of issued and outstanding Citigroup common stock will be automatically combined into (1) one issued and outstanding share of common stock without any change in the par value per share.

The following small print message was also attached:

Note: A reverse stock split reduces the number of shares in the market and increases the share price proportionately. For example in a 1:10 reverse stock split the number of shares in the market is reduced by 10 times and stock price increases by 10 times (although the opening price after a reverse split may have a deviation from this price).

The result of a maneuver like this is a reduction in the number of a corporation’s shares outstanding that increases the par value of its stock, or its earnings per share.

The market value of the total number of shares (market capitalization) remains the same.

For example, a 1-for-2 reverse split means you get half as many shares, but at twice the price.

It’s usually a bad sign if a company is forced to reverse split – firms do it to make their stock look more valuable when, in fact, nothing has changed.

A company may also do a reverse split to avoid being delisted.

Thou, I can’t really imagine Citigroup being delisted on NYSE – that would really stir the pot, I guess…

A 17 percent plunge in the Citigroup share price last Friday triggered a five-minute trading pause.

It also triggered at debate about the three-week old curcit=braker system that’s been implemented.

Whether the drop in Citigroup’s market value was justified or not, didn’t seem to bother anyone…

Anyway –  this morning I received the following notice from the online broker FxPro:

FxPro Terms and Conditions (CORPORATE ACTIONS 8.1):

If a corporate action materializes, the client accepts that FxPro reserves the right to make appropriate adjustments to the value and/ or the size of a transaction and/ or number of any related transactions; any such adjustment aims in preserving the economic equivalent of the rights and obligations of both the client and the Firm immediately prior to a corporate action. It should be noted that these adjustments are conclusive and binding upon the client; the client will be informed accordingly by the Firm as soon as reasonably practicable.

Thank you for your collaboration.

Sincerely yours,
Dealing Desk,
FxPro Financial Services Ltd.

Well, it doesn’t matter much to me, but I guess if you’re in the market, either directly as an investor in Citigroup, or indirectly by EFT‘s, CFD’s or other derivatives, you should check your mailbox immediately to avoid any nasty surprises on Monday morning.

Related articles:

• Anticipating the Citigroup Reverse Stock Split, Trading Implications are Major and Many (C, AIG, NYX, BAC, WFC, JPM, RF, KEY, BPOP, IRE, AIB, NBG) (247wallst.com)
• Is Citi Worth $5.60? Or $56 Soon? (C, GS, BAC) (247wallst.com)
• Citigroup Reverse Split: Analysts React (blogs.wsj.com)
• Banner Corp approves reverse stock split (bizjournals.com)

The Pros & Cons of Credit Default Swaps

The CDS market, currently perceived as the most toxic market of all, has existed for nearly 20 years. But most people have only just begun to understand what all the fuzz is about. Said as simple as possible; a CDS is a kind of  insurance a lender buys to secure oneself against a possible default by the borrower. These insurance contracts usually has a maturity period between 1 to 10 years, and usually prized as a percentage of every 10 million units (dollars, euro, yen). A new research paper shred a little more light on this rather unknown market.

“In general, CDS trading has lowered the cost of issuing bonds and enhanced the liquidity in the bond market. Nevertheless, CDS trading has also introduced a new source of risk.”

Ilhyock Shimy/Haibin Zhu

According to the two researchers employed by the Monetary and Economic Department of the Bank for International Settlements, CDS trading has lowered the cost of issuing bonds and enhanced the liquidity in the bond market. The positive impact is stronger for smaller firms, non-…nancial …rms and those fi…rms with higher liquidity in the CDS market, while the negative is that companies included in CDS indices must face higher bond yield spreads than those not included.

The rise and fall of the credit derivatives market is considered the single most important event in the global credit market in the past decade.

Even thou it has existed for nearly 20 years, no one has paid much attention to it.

Until it blew up like an Icelandic volcano in 2008 and covered the whole world with a black cloud of hidden financial risks, that is.

By then the credit derivative market had swollen up to a huge, unmeasurable, uncontrollable market, with an estimated value of more than 60 trillion dollar. Credit-default swaps is one of the most traded credit derivatives, making up almost 90% of the totals.

According to the new research, the notional value of this market have been cut in half since the peak in 2008.

A Short Lesson

By the way – to compare a CDS with a credit insurances is not quite accurate:

A (CDS) is a swap contract and agreement in which the protection buyer of the CDS makes a series of payments (referred to as the spread) to the protection seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) experiences a credit event. In fact, it’s a form of reverse trading.

The simplest credit-default swap is a bilateral contract between the buyer and seller of protection. The CDS will refer to a “reference entity” or “reference obligor”, usually a corporation or government.

The reference entity is not a party to the contract. The protection buyer makes quarterly premium payments—the spread —to the protection seller.

If the reference entity defaults, the protection seller pays the buyer the par value of the bond in exchange for physical delivery of the bond, although settlement may also be by cash or auction.

A default is referred to as a “credit event” and include such events as failure to pay, restructuring and bankruptcy.

So, with that out-of-the-way, I’ll go on.

A Double-Edge Sword

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The CDS contracts have been perceived as the main root of all evil in the credit market because of its complex distribution of risk.

The new research paper by Ilhyock Shimy and Haibin Zhu do not confirm, nor dismiss the allegation.

They point, however, to the fact that the CDS market have both positive and negative impact on the financial markets in general.

This is their main findings:

“First, we …find strong evidence that CDS trading is associated with lower cost and higher liquidity for new bond issuance in Asia. This is consistent with the hypothesis that CDS trading helps create new hedging opportunities and improve information transparency for investors. Noticeably, this result is contrary to similar studies based on US data. This contrast provides supporting evidence for our conjecture on the jump-start e¤ect in Asia.“

“Second, we …find that the positive impact of CDS trading on the bond market tends to be more remarkable for smaller fi…rms and non-f…nancial …firms. In addition, those …rms with higher liquidity in the CDS market bene…t more in the primary bond market in terms of cost and liquidity.”
“Last, we also …nd that the impact of CDS trading on the bond market is di¤erent during the crisis period. The global …nancial crisis that occurred during the sample period o¤ers a good case study to examine the behaviour of the CDS and bond markets under distress and their linkages. Our analysis shows that, at the peak of the global …nancial crisis, those firms included in CDS indices had to face higher spreads than those not included in CDS indices, above and beyond the general increase in credit spreads observed in the bond market during this period. This suggests that CDS trading could be a double-edged sword: it also introduces new sources of shocks to the bond market.”

Here’s a copy of the full report.

Related by The Swapper:

• Survey: Market Surprised By Negative Derivative Perception
• Derivative Trading Just Keeps Getting Bigger
• Living In A Derivative World
• Flight to Mystery
• The Dirty Little Secret Of The Dodd-Frank Legislation
• Killing My CDS Softly

Related Articles:

• Credit Default Swaps: The Next Crisis? (time.com)
• China Credit-Default Swaps Trading Begins in Interbank Market (businessweek.com)
• Credit default swaps on the wane, for now (ftalphaville.ft.com)
• Parsing Credit Default Swaps (online.wsj.com)

Here Comes The QE2!

The rally in risky assets gained momentum today following the dovish FOMC minutes published after the European close yesterday. It had become clear in recent weeks that a consensus was reached by investors that further quantitative easing was inevitable.

“This assumption appears to have been proved correct when the minutes pointed towards a distinct shift in the Fed’s policy stance.”

Gavan Nolan

Some members of the committee noted that if growth remained too slow or inflation too low then additional monetary policy accommodation would be appropriate “soon”. This suggests that a decisive majority is in favour of further easing before the end of the year.

QE is not the only “unconventional” policy tool available to Ben Bernanke and his fellow governors.

The committee also discussed ways of affecting short-term inflation expectations, including targets for the price level and for nominal GDP.

This was rejected by Bernanke earlier this year but he appears to have changed his mind. The delivery of policy may also change.

The committee’s view that policy would “be most effective if within a framework that was clearly communicated to the public” suggests a more gradual, transparent approach.

“Either way, the Fed’s expected monetary easing should be positive for risky assets judging by the experience of 2009,” Gavan Nolan at Markit Credit Research writes.

Earnings season in the US contributed to today’s rally. Intel Corp’s solid Q3 after the close yesterday boosted sentiment, with the firm’s profits and sales both slightly above expectations. More importantly, Intel didn’t disappoint with its Q4 outlook.

“Today we had the first major bank to post results, and JPMorgan did its usual trick of beating expectations.,” Mr. Nolan notes.

The bank’s net income of $4.4 billion exceeded consensus estimates, helped by declining credit loss provisions and a solid retail banking performance.

As expected, lower trading volumes led to a fall in profits at the investment bank.

JPMorgan’s spreads were little changed on the news and spreads were mixed elsewhere in the banking sector.

Bank of America, reporting next Tuesday, was wider while Goldman Sachs (also on Tuesday) and Morgan Stanley (Weds) were marginally tighter.

Unique Market Activity

Markit BOAT is a trade reporting platform which consolidates pan-European cash equity trade data from MTFs, Dark Pools and OTC transactions. The trading activity in this report took place on 12th October 2010 and was published by Markit BOAT on the same day. Trading activity reported with the ‘Market Condition’ flag is excluded from this report. Such trading activity is not relevant because the trade price and/or trading process does not reference or correlate with the then current market price.

The Unique Market Activity section lists stocks which were not active on Markit BOAT on the previous trading day.

Name	Sector	Volume	Turnover €
TOSHIBA	Industrials	6,756,400	24,376,310
TOYOTA	Consumer Goods	849,850	21,321,440
TORAY INDUSTRIES	Basic Materials	4,075,000	16,817,447
MITSUBISHI	Industrials	690,500	12,491,010
NIPPON TELEGRAPH & TELEPHONE CORP	Telecoms	298,500	9,657,792
SONY	Consumer Goods	416,100	9,529,790
HONDA	Consumer Goods	361,200	9,337,280
TDK	Industrials	214,300	8,831,855
NTT DOCOMO	Telecoms	6,878	8,254,325
MITSUBISHI ELECTRIC	Industrials	987,000	6,597,168

Top 10 ETF

Name	Volume	Turnover €
ISHARES EBREXX GVG 5.5-10.5	540,077	69,215,068
DJ STOXX 600 OPTIMISED AUTOMOBILES & PARTS SOURCE ETF	266,389	46,737,774
LYXOR ETF SGI DAILY DOUBLE SHORT BUND	254,411	21,038,708
DJ STOXX 600 OPTIMISED INDUSTRIAL GOODS & SERVICES SOURCE ETF	177,121	19,649,896
DB X-TRACKERS II – IBOXX EU SOVEREIGNS EUROZONE 1-3 TR INDEX ETF	95,300	14,737,934
AXA EASYETF S&P GSNE	74,775	13,571,663
DOW JONES EURO STOXX 50 SOURCE ETF	301,900	13,503,715
DB X TRACKERS – DJ EURO STOXX 50 ETF	450,000	12,717,000
DJ STOXX 600 OPTIMISED UTILITIES SOURCE ETF	91,500	12,628,913
EASY ETF – GSCI FCP ETF UNIT CAP EUR NPV	334,926	10,419,548

Top 10 Trades

Name	Sector	Volume	Turnover €
BBVA	Financials	12,970,335	125,682,541
AKZO NOBEL	Basic Materials	1,175,000	52,052,499
SNAM RETE GAS	Oil & Gas	13,000,000	48,458,020
TELEFONICA	Telecoms	1,972,702	37,362,977
BANCO SANTANDER	Financials	3,556,756	33,326,803
E.ON	Utilities	1,385,000	29,384,992
L’OREAL	Consumer Goods	300,000	24,070,500
ENI	Oil & Gas	1,411,438	22,723,749
DEUTSCHE BANK	Financials	500,000	20,000,000
COLRUYT	Consumer Services	100,000	19,025,000

Major Movers

Name	Sector	Volume	Volume (T-1)	% Change
NATIONAL GRID	Utilities	9,637,110	775,700	1142%
TELEFONICA	Telecoms	28,578,987	2,454,761	1064%
RSA INSURANCE GROUP	Financials	10,881,950	1,352,935	704%
LLOYDS	Financials	33,070,285	6,662,311	396%
INTESA SANPAOLO	Financials	9,746,158	2,947,217	231%
RBS	Financials	12,306,213	4,446,329	177%
SNAM RETE GAS	Oil & Gas	60,991,980	25,797,181	136%
BBVA	Financials	40,990,221	18,682,987	119%
BAE SYSTEMS	Industrials	9,098,474	5,515,663	65%
VODAFONE	Telecoms	26,191,430	18,644,216	40%

Related Articles

• QE hopes spark FTSE rally, JP Morgan beat views (reuters.com)
• QE2 Means A Lower Dollar and Higher Gold Price (blogs.forbes.com)
• Here’s Why Quantitative Easing 2 Will Fail Spectacularly (businessinsider.com)
• Ins and outs of QE2 (theglobeandmail.com)
• QE-stion marks (ftalphaville.ft.com)
• Stephen Roach: QE1 Didn’t Work, QE2 Won’t Work, And QE 12 Won’t Work Either (businessinsider.com)