Monday, June 4, 2012

VOLCKER's RULE: Is it the right time for stringent regulation?

The 2008 sub-prime crisis, which saw the failure of many big banks, like Lehman Brothers, led the entire world blaming the regulators of US, for their negligent regulation on excessive risk-taking practices that led to collapse of the entire financial system. In the light of the crisis that led to Federal bailouts for many banks, the US President Barack Obama pushed for greater financial regulatory reforms. The former Federal Reserve Chairman, Paul A Volcker, drafted the Volcker Rule, as a part of 2010 Dodd-Frank Financial Reform.

The Volcker Rule would restrict the ability of banks whose deposits are federally insured from trading for their own benefit. The rule would prohibit the banks from Proprietary Trading (i.e., using their own money to place directional market bets that are unrelated to serving customers), and investing their own money in Hedge Funds and Private Equity operations. The rule is applicable to the Bank Holding companies. In 2008, many financial Institutions of Wall Street decided to convert themselves to Bank-Holding companies, to avail the Fed-discount window and become eligible for Troubled Assets relief Program (TARP) and other emergency lending facilities by Fed. At the same time, they came under greater regulation. Hence, this rule becomes applicable to many Wall Street Financial Institutions.

The first draft was introduced in October, 2011. It provides for exemptions to banks for market-making and hedging for risk. Market-making is trading that a financial firm undertakes on behalf of its customers or to keep a specific market functioning fluidly. A marketer maker is a broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order.

All the major financial institutions expressed their concerns over the new regulations, saying that they were too costly and complex. They have been lobbying for more exemptions. While the proponents of the stricter regulation have been demanding that only hedging related to a specific position, or a customer, should be exempted, the Financial Institutions have been demanding that broader hedges related to the risk of company as a whole should also be exempted. Another concern is how to draw the line whether the company is trading for genuine market making or trading for its own benefit.

The recent loss of $2 bn in synthetic credit derivatives trading by JP Morgan, which they describe as broad hedging for overall risk of the company, further bolsters the case for stricter regulations under the Volcker’s Rule.

At a round-table hosted by US Commodities and Futures Trading Commission (CFTC) on May 31, 2012, Former Federal Deposit Insurance Corp. Chairman Sheila Bair said regulators should push derivatives out of federally backed banks and tighten the hedging exemption of the still-unfinished rule. She suggested that under Volcker’s Rule, banks should publicly disclose their hedges and continuously disclose how these hedges are performing. Her idea is that hedging is for minimizing risk and not generating profit. A good hedge should lose money.

At the same time, banks continued to argue that a very narrowly defined exemption would damage liquidity by discouraging banks from making markets and hedging risk. Shawn Johnson, investment committee chairman of State Street Global Advisors believes that a diversified bank is a safer bank. He believes that banks would become more vulnerable to crises if they "go backwards" and concentrate primarily on taking deposits and making loans, to avoid violating a tough Volcker rule. Banks also argue that they need the ability to trade derivatives and other products in order to serve clients. They also argue that just because a hedge centre made profit for a month or a quarter doesn’t mean that it’s a profit-making centre.

While the debate is on, it seems that the Volcker Rule, which was slated to be finalized by July, 2012 might miss its deadline. We can only hope that despite delays the rule that is finalized is in the best interests of the economy.

Tuesday, July 5, 2011

Market Moves: 5th July 2011

The Market yet again struggled to hold its gain at higher levels and the 5700 level still seems to be a significant overhang on the market.The Nifty closed with a loss of one-third of a percentage with selling pressure observed at higher levels. On the global front the rally in Asian markets with significant gains in dollar.The rupee is also expected to be under pressure in the coming days.Reliance turned out to be a significant drag in the Nifty with it giving almost 2.5%.European markets are trading flat and seem to have factored in most of the good news in short term on the Greek front whereas the US markets trading weaker at the moment on back of weaker economic data on concerns of growth in Manufacturing sector. From a technical point of view market needs to cross 5700 to show strength whereas major supports are down around 5525 levels.

Pavan (for SOFIA)
Class of 2012

Monday, July 4, 2011

Market Moves: 4th July 2011

The markets traded in a narrow range today after showing good upward movement in the morning session. Realty and consumer durables were the biggest gainers of today's trade while FMCG and capital goods closed with marginal declines. The Nifty closed with a gain of 0.41% up 23 points from the previous day close. The world markets helped the gain and the prevailing cheerful mood after the euro area approved its share of a 12 billion-euro ($17.4 billion) aid payment for Greece on July 2 and pledged to complete work in the coming weeks on a second rescue package for the cash-strapped nation. Finance ministers agreed to disburse 8.7 billion euros of loans under last year’s 110 billion-euro bailout, rewarding Greek Premier George Papandreou for pushing an extra austerity plan through parliament. The other major news which affected the Asian markets was the rise of Thailand's baht to a one-week high on back of a clear political mandate erasing the fears of political instability to Yingluck Shinawatra who is set to become the new prime minister.


Class of 2012
Goa Institute of Management

Thursday, June 30, 2011

Market moves: 30-Jun-2011

A sixth consecutive day on a trot and the Nifty closed with a gain of nearly eight tenth of a percent finishing near the level of 5650. Banks, FMCG and metals were the leaders of the rally today. The broader markets were, however, quiet in today's trade and closed with modest gains. The volumes were significantly higher today being the F&O expiry day though technically there were first signs of momentum easing off and also the very crucial level of 5700 is approaching.The market for now seems to be following the global footsteps with European stocks trading with gains of near half a percent and S&P trading at a four week high.On the commodity side Silver prices rose further at the bullion market here today on hectic buying from speculators and stockists on the back of a strong rally in global markets.

Gold, however, declined owing to profit selling amidst subdued demand from jewellery makers despite firm overseas trend.The All India Retail inflation for industrial workers in May fell to 8.72% from 9.41% in the previous month on the back of decrease in prices of wheat atta, vegetable and pan leaf.The overall inflation based on the Wholesale Price Index (WPI) was 9.06% in May, while it was 8.66% in the previous month.The inflationary pressure still presents a prominent danger though there was a positive surprise on the retail inflation front.

Pavan (PGP-2) for SOFIA

Wednesday, June 29, 2011

Market Moves : 29-Jun-2011

The Market had yet another session of gains with the Nifty notching up 55 points with a nearly 1% gain in the index.It was the fifth consecutive day it closed with gains.

The Market was well supported by the global cues on expectations of positive news from on the Greek front. Metals, FMCG and banks were the leaders of the rally today
and the sugar sector too saw broad gains. Greece's parliament approved a five-year austerity plan on today with 155 votes in favor and 138 votes against, suggesting
Prime Minister George Papandreou was on track to win backing for a second law tomorrow.Greece's government must now win approval on tomorrow for legislation
detailing specific implementation measures for the 28-billion-euro austerity package, but today's vote clears a major hurdle in its bid to win access to international funding.

Technically market faces the next hurdle at 5700 level which may act as a level that can make or break this rally. For present Bull's seem to have the upper hand.

Pavan (PGP-2) for SOFIA

Tuesday, June 28, 2011

Market Moves : 28-Jun-2011

Today was a day of consolidation for the market as the market closed with marginal gains with Nifty ending up with a gain of 0.34% and ending near the crucial level of 5500.The consumer durables, FMCG and capital goods were the best performers whereas there was pressure on oil marketing companies and realty also closed with marginal declines.

There was significant rebound in the other Asian markets with bounce with South Korean Won raising on back of the seven month high current account surplus.

There is significant optimism ahead of the Greek vote on austerity vote being reflected in pick up in the Euro and the European markets.Crude has also bounced from its lows and is up 1.7 % on positive expectations.Overall International markets seem to be rebounding this week from their oversold levels and are expected to provide support to our markets. Lets if the rally in our stock market does extend for tomorrow which is expected.

By Pavan Kumar P
Batch of 2010 - 12
Goa Institute of Management


Monday, June 27, 2011

Market Moves : 27-Jun-2011

The Market closed the opening day of the week on a good note with Nifty gaining 1% which can be presumed as decent follow up for the Friday's rally and the icing on the cake was it finished above the level of 5500.The Indian Market outperformed all other major Asian markets and the rally was supported by the surge in European stocks in the closing moment. Globally commodities have tumbled to 5 month lows and the crude oil level near 90$ still seems to be supporting the market.

There was buying observed in Banking and Oil marketing companies whereas marginal declines observed in defensives like FMCG and Pharma sectors indicating a relatively bullish sentiment and fresh longs. The real test of Nifty would be whether it can cross the next very curtail gap between 5540 and 5583.The fuel price hike has been absorbed as a positive news by the market though its impact on inflation
may yet has to be taken into account. So the bullish sentiment prevailed at least for today and lets watch out for tomorrow.

Pavan (PGP-2) for SOFIA