FT : ECJ to rule on legality of EU-US data transfer

ECJ to rule on legality of EU-US data transfer

Privacy case at Europe’s highest court focuses on mechanism used across tech sector

The EU’s highest court will rule on whether the way Facebook and other technology companies transfer users’ pictures, emails and other personal data to the US should be outlawed, in a decision which will have huge implications for the sector.

Judges in Ireland, where Facebook has its European headquarters, have asked the European Court of Justice for a preliminary ruling on whether to strike down the data transfer mechanism used by thousands of tech groups, following a legal challenge by Max Schrems, an Austrian lawyer and privacy campaigner.

A separate challenge by Mr Schrems two years ago led the ECJ to ban the “safe harbour” data pact, after it was argued that Facebook had not done enough to protect users’ private information from US intelligence services. 

The referral, which places the fight over data protection and commercial interests in the hands of the Luxembourg-based court, concerns one of the main alternatives to safe harbour used by companies, including Facebook, to transfer data out of Europe to non-EU countries.

Known as “model” or “standard contractual” clauses, the system allows Facebook US to enter into a contract with its Irish entity and pledge to meet the EU’s privacy rules. The mechanism has been considered legal by the European Commission since 2001 and is used by thousands of companies across the digital economy as an efficient and legal way to transfer data.

But Ireland’s data protection authority, which is regulator to nine of the world’s top 10 social media companies — which, like Facebook, are based in Ireland — has said the system does not give sufficient protection to European citizens in countries such as the US which are not considered to have adequate data protection laws. 

Referring the case to the ECJ on Tuesday, Caroline Costello, an Irish high court judge, said: “European Union law guarantees a high level of protection to EU citizens. They are entitled to an equivalent high level of protection when their data is transferred outside of the European Economic Area.”

She added that there were “well founded concerns” over the legality of a mechanism which acts as a crucial workaround for companies seeking legal certainty. 

The EU has some of the toughest privacy laws anywhere in the world and only allows transfers to countries with equivalent protections against surveillance. Mr Schrems reacted to the referral by saying it paved the way for the ECJ to issue a “massive new judgment on mass surveillance and how far countries can go”.

Facebook said the ECJ must consider the “extensive evidence demonstrating the robust protections in place under standard contractual clauses and US law, before it makes any decision that may endanger the transfer of data across the Atlantic and around the globe”. It added that the referral would have “no immediate impact” on its business. 

The ECJ's ruling, which could take as much as two years to deliver, strikes at the core of whether the data flows that underpin much of the global economy can ever be considered legal in Europe. 

Eduardo Ustaran, a partner at Hogan Lovells, the law firm, said that although the referral would generate uncertainty for business, Brussels would probably come up with alternative ways to allow legal data transfers while a judgment was pending. 

“It is more likely than not that the ECJ will agree with the Irish authorities and rule model clauses do not provide enough redress for European citizens,” Mr Ustaran said. “But the European Commission will try and pre-empt another negative judgment against them and have time to draft another system which addresses the weaknesses of model clauses.” The commission said it had taken note of the decision.

(ZH) It Has Never Been Cheaper To Hedge A Market Crash Using This One Trade

It Has Never Been Cheaper To Hedge A Market Crash Using This One Trade


In mid-August, at the height of the North Korea geopolitical turbulence, and amid uncertainty about the Fed balance sheet unwind, fears of a government shutdown and the US debt ceiling, as well as the fate of Trump tax reform and Obamacare repeal, when the VIX soared following a series of missile launches by Kim Jong Un only to crash right back to near all time lows, we used an analysis from BofA's derivatives analyst Benjamin Bowler to show "How To Hedge A Near-Term Market Shock: Here Are The Best Trades"
As we said then "if the events from last week demonstrated something, it is that just when there appears to be virtually no risk, is when the likelihood of a historic surge in volatility is greatest, as many experienced first hand last Thursday. Hence the need to hedge. But what? And using which product?" As Bowler explained "the decision about whether it’s rational to hedge is really a matter of looking at the price of tail insurance embedded into option markets and asking if the probabilities they assign are “fair” or not." As he further wrote, when it comes to predicting what the next "severe tail event" could look like, "we find that not only are some markets like Gold pricing in a very low probability of Korean risk escalation, there are significant differences across assets in terms of what they imply about potential risks."
He then presented the chart below which shows how historical worst 3M drawdowns since 2006 are priced by 3M 25- delta options across asset classes; hedges that are most underpricing their historical drawdowns are at the top and those most overpricing their tails are at the bottom. What the chart shows is that gold call options imply less than a 1 in 100 chance of a severe tail event over the next month, despite being among the most reactive assets to rising Korean tensions last week. With record low Gold vol slaved to record low real rates vol, this represents a loose anchor which likely won’t hold in any significant geopolitical risk escalation. In contrast to gold, Nikkei is at the other end of the spectrum with options assigning over a 5% chance of a near term tail-event.

In other words, as of mid-August, BofA's analysis found that Gold was pricing in the smallest probability of a “tail event”. The implication also is that should a "tail event" occur, the return from a gold-based hedge would be the one with the highest return (more details in the full article).
Fast forward almost two months to today, when not only have there been no crashes since mid-August, but complacency has returned to all time highs as the VIX is back within shouting distance of an 8-handle, after a record low September; of note, the VIX closed at 9.51 on Friday, down 0.08 points week-over-week. It was the third consecutive close below 10 and the eighth during September. It has remained in that ballpark since.
And with complacency once again the norm, traders, at least those who are not confident that stocks will keep rising in perpetuity, are again looking to reload hedging trades, and obviously, the cheaper the better.

Which brings us to the latest analysis from BofA's Benjamin Bowler released overnight, who has again broken down the cheapest way to hedge against a market crash.
What he finds is more of the same, namely gold. As he writes, "gold traded in a wide range between 1,159 and 1,349 in 2017, pulled in multiple directions by the forces that drive it-the main two being US rates and geopolitical risks and to a lesser extent, dollar strength, oil prices and Asian demand."
More importantly, on the implied vol side, short dated gold vol has been cheap for most of the year and gold calls have repeatedly screened as the cheapest proxy hedge. With the most recent US rates rebound, however, short dated gold implied vol has ticked up, while longer dated implied vol remains subdued. The price of a GLD 6m 95/105 strangle has averaged 3.8% in 2017 (7.4% since 2008) and has recently dropped to an all-time low just below 3%.
But most notably, as the chart below shows, "gold strangles with 6m maturity have never been cheaper in history.
His advice: "Position for gold's divergence from its current price with a 6m 95/105
GLD strangle for 3%."
For institutional investors who find gold a little too "exotic" of a vol hedge, BofA also provides two other cheap market selloff hedging trade recommendations:
  • Trade #1: Hedge a coordinated bond/equity sell-off via long HYG Dec17 88 puts for 1.3% or 88/84 put spreads for 0.9% (ref. 88.8)
  • Trade #2: Hedge a flight-to-bonds risk-off event via long 0.4x IWM (Russell2000) Dec17 139 put (ref. 148.2) and short 1x HYG 85 put (ref. 88.8) for zero cost
The details:


Hedge a coordinated bond/equity sell-off via long HYG Dec17 88 puts for 1.3% or 88/84 put spreads for 0.9% (ref. 88.8): HYG's sensitivity to both rates (see Chart 12) and equities makes it an ideal candidate to hedge a simultaneous sell-off in the two asset classes à la Taper tantrum in May-13, in light of high valuations, Fed balance sheet reduction and uncertainty over a change in leadership. With short dated vol on HYG on its 10yr floors and put skew rarely trading as expensive (see Chart 13), we consider HYG puts/put spreads attractive to hedge a coordinated bond+equity sell-off.


Hedge a flight-to-bonds risk-off event via long 0.4x IWM Dec17 139 put (ref. 148.2) and short 1x HYG 85 put (ref. 88.8) for zero cost: Small cap equities remain mired in a low vol regime with Russell2000 realizing the least vol in 20-years. This has contributed to compress the IWM-HYG implied vol spread to its lowest level over the past year (see Chart 14). Notably, in a risk-off event where investors flock into perceived safe-haven bonds, any sell-off in HYG is likely to be partly offset due to the diversification benefits stemming from its rates exposure. Hence, in such a scenario we prefer owning IWM puts against HYG puts, a strategy that at current pricing has offered a highly asymmetric risk-reward (see Chart 15).
The bottom line: for those worried that the current blow off top "Icarus rally" will end some time in the next few weeks, as BofA's Michael Hartnett predicted yesterday, ignore S&P puts (or selling calls), and just buy either outright gold calls, or 6M gold strangles, which as noted above, have never been cheaper. Wary of gold? Then buy HYG puts/put spreads to hedge a coordinated bond+equity sell-off, or alternatively, own IWM puts against HYG puts, "a strategy that at current pricing has offered a highly asymmetric risk-reward."

WSJ :Tesla Has a Forecasting Problem

Tesla Has a Forecasting Problem
Inability to predict near-term Model 3 production should give investors pause about Elon Musk’s vision

The mass-market car of the future is taking its sweet time to arrive.

Tesla TSLA -1.43% announced Monday that it delivered 220 Model 3 sedans in the third quarter and produced just 260. The company had predicted it would produce 1,500 in the quarter. Tesla attributed the shortfall to various “production bottlenecks.”

That news overshadowed an otherwise strong delivery report and shares fell only slightly Tuesday morning.


It is unlikely that this stumble will immediately reverse much of the 55% gains Tesla shareholders had reaped so far this year. After all, the company said in a statement that there are no fundamental issues with the supply chain. No American company enjoys a more loyal shareholder base than Tesla and this moment is unlikely to be different.

Still, Tesla’s persistent inability to forecast its results should raise concerns. Tesla issued the forecast of 1,500 cars just two months ago and missed it by over 80%. Monday’s announcement marked the third time since January that Tesla has cited production issues as a reason for a missed forecast, yet Tesla is no startup—the company has been in business since 2003.

Given those stumbles, the longer-term forecasts that have investors so excited deserve some scrutiny. Analysts expect Tesla to deliver 748,000 cars by 2020, according to FactSet. That is up from a forecast of 114,000 this year.

To reach that goal, Tesla will have to consistently deliver reliable cars while selling them at a profit, something the company has never been able to accomplish. It will also have to fend off new competition from better-capitalized rivals showing renewed interest in developing electric cars of their own.

Long-term shareholders have been richly rewarded for their faith. Exiting before the story sours would be a wise decision.

(Challenges) Safran dévoile son open rotor, le moteur d'avion du futur

Safran dévoile son open rotor, le moteur d'avion du futur
Safran a fait tourner pour la première fois sur banc d'essai un prototype de son futur moteur, à technologie dite "open rotor". Une innovation de rupture qui permettrait de réduire la consommation de carburant de 15% par rapport aux moteurs actuels.

C'est tout le charme de l'aéronautique, secteur de long terme par excellence : le moteur Leap, bestseller aux 14.000 commandes de Safran et GE, commence à peine à être produit que Safran travaille déjà sur son possible remplaçant. Le motoriste français a officialisé mardi 3 octobre à Istres (Bouches-du-Rhône) les premiers essais au sol de son démonstrateur d' "open rotor", un moteur à l'architecture révolutionnaire. Ce prototype doit ouvrir la voie, à l'horizon 2030-2035, au développement de moteurs plus sobres en carburant, de l'ordre de 15% par rapport aux Leap, et 30% par rapport aux CFM56 actuels. "On parle beaucoup d'innovation de rupture dans l'aéronautique, mais on en fait très peu, estime Philippe Petitcolin, directeur général de Safran. Là, c'est vraiment une rupture technologique. J'espère voir voler ce moteur sur un avion."

En quoi consiste la technologie open rotor ? A l'inverse des réacteurs actuels, ce moteur n'est pas protégé par un carénage, la coque circulaire caractéristique des moteurs d'avions à réaction. L'open rotor intègre au contraire un couple de grandes hélices de 4 mètres de diamètre en matériaux composites, qui tournent, à l'air libre, dans le sens inverse l'une de l'autre : en jargon aéronautique, on dit qu'elles sont contra-rotatives. Ce type de moteur, bien plus grand que les réacteurs actuels, a vocation à être installé en queue de fuselage, un peu comme sur les MD-80 de feu McDonnell Douglas, et non plus sous les ailes. "L'avantage est double : il y a plus d'air qui entre, donc plus de puissance, et on économise le poids et la trainée générée par le carénage", indique Jérôme Bonini, directeur recherche et technologie de Safran Aircraft Engines, l'ex-Snecma.

Pales d'hélices tissées en 3D
Cette architecture doit permettre, selon Safran, une performance bien meilleure que celle des moteurs classiques. Le taux de dilution, sorte de juge de paix de la performance des moteurs d'avions (rapport entre flux froid et flux chaud), est de 6 sur le CFM56, qui équipe les A320 et 737 actuels, de 11 sur le tout nouveau moteur Leap, et atteint plus de 30 sur le fameux open rotor. "Sur les moteurs carénés classiques, on ne peut pas aller au-delà de 15 ou 16", estime Stéphane Cueille, directeur R&T et innovation de Safran. Malgré l'absence de carénage, le bruit serait équivalent à celui d'un Leap, selon Safran, grâce notamment au design des pales des hélices. Celles-ci sont tissées en 3D par des métiers à tisser dérivés de l'industrie textile, selon le même procédé que les aubes de soufflante (ailettes à l'entrée du moteur) du moteur Leap.

Safran n'est pas le premier à envisager cette architecture technique open rotor. Le britannique Rolls-Royce développe aussi son propre programme, qui a été mis en sommeil ces derniers temps. Quant à l'américain GE, il avait testé un prototype d'open rotor, le GE36, dans les années 80. Ce dernier devait équiper le 7J7 de Boeing, un remplaçant du 727 qui ne fut finalement jamais lancé, actant la mort du projet à la fin des années 80. Mais Safran croit dur comme fer dans sa technologie : "Il y avait deux limites sur les premiers open rotor, le bruit et les vibrations, nous avons réussi à résoudre les deux", pointe Jérôme Bonini. Si aucun avionneur n'a encore acteurs le choix de cette nouvelle architecture pour un futur programme d'avions, le motoriste français estime que le premier à tirer bénéficiera d'un avantage comparatif majeur : "Le premier avionneur qui choisira ce produit emportera le morceau", assure Philippe Petitcolin.

200 millions d'euros investis
Le prototype présenté à Istres, qui sera testé jusqu'à la fin de l'année sur l'énorme banc d'essai flambant neuf de Safran (un pylône de 18m de haut, qui surveille 1.200 mesures), n'a pas vocation à être intégré tel quel sur un avion. Il s'agit avant tout d'un programme de recherche destiné à explorer de nouvelles architectures de moteurs pour réduire encore leur consommation et leurs émissions de CO2. L'open rotor de Safran s'inscrit ainsi dans le programme de recherche européen Clean Sky, qui vise à développer un transport aérien plus propre. Sur les 200 millions d'euros investis dans le projet, la Commission européenne a apporté 65 millions. Safran a aussi pu s'appuyer sur des partenaires industriels, comme GE Avio Aero, GKN, Leonardo et Airbus.

Seul hic, le moteur open rotor n'a pas encore trouvé d'avion pour effectuer des tests en vol. Airbus, candidat le plus crédible vu le caractère européen du programme, semble pour l'instant privilégier une solution technique intermédiaire : un moteur caréné de type UHBR (Ultra High Bypass Ratio). Celui-ci ne permettrait que 5 à 10% d'économies de carburant par rapport au Leap actuel, contre 15% pour l'open rotor. Mais il présente l'avantage d'être disponible plus tôt (2025, contre 2030-2035), et d'être intégrable sous les ailes, l'architecture majoritaire sur les avions actuels. Chez Safran, on assure de toute façon avancer de front sur les deux options technologiques. "Aucune architecture n'est privilégiée à ce stade", indique Philippe Petitcolin.

A encore plus long terme, Safran travaille sur des architectures de propulsion dite distribuée, c'est-à-dire répartie sur 10 ou 20 moteurs le long des ailes. Un choix technique particulièrement adapté à un possible avion 100% électrique, mais le mur technologique est encore trop haut à franchir. "Pour faire un avion de ligne électrique, il faudrait remplir un A320 de batteries", résume Philippe Petitcolin.

FT : EU to hit Amazon with bill for Luxembourg back taxes

EU to hit Amazon with bill for Luxembourg back taxes

Latest fallout from crackdown on tax avoidance by big multinationals

Brussels will hit Amazon on Wednesday with a bill for Luxembourg back taxes worth several hundred million euros, in the latest fallout from the EU crackdown on tax avoidance by big multinationals.

The European Commission’s move, confirmed by several people familiar with the case, comes on the heels of Apple’s record €13bn bill for Irish back taxes last year, which prompted a fierce political backlash from Washington.

Launched almost three years ago, the commission’s investigation alleged that the US online retailer benefited from a sweetheart tax deal that granted it almost a decade of illegal state support from Luxembourg, the hub for its European operations.

The commission recovery order could rekindle transatlantic tensions over Europe’s tax clampdown, just as Washington considers White House tax reforms that pave the way for US multinationals to repatriate foreign profits.

US business and Congress reacted with anger to the Apple decision last year, warning it could threaten to undermine foreign investment and potentially prompt retaliation. Tim Cook, Apple’s chief executive, described the commission’s case as “total political crap”.

Margrethe Vestager, the EU competition commission, will on Wednesday challenge a 2003 tax ruling underpinning Amazon’s European business that allegedly permitted it to improperly cut European profits by paying intergroup royalties shielded from taxes. Luxembourg and Amazon have long denied any wrongdoing.

The case against Amazon is the fourth of around half a dozen tax probes launched by the commission since 2013. Decisions have been taken against Apple in Ireland, Starbucks in the Netherlands and Amazon and Fiat in Luxembourg, while Belgium separately was required to recover tax from some 35 companies benefiting from an illicit scheme.

Investigators are also nearing the end of inquiries into McDonald’s, the fast-food chain. An investigation is ongoing into the tax affairs of Engie, the French utility, in Luxembourg.

At the heart of the Amazon case is Goldcrest project, which restructured its European operations in 2004 and moved its intellectual property, such as software and customer data, into a non-taxable Luxembourg partnership.

Luxembourg’s “comfort letter” to Amazon in 2003 introduced an effective cap on the retailer’s profits that could be taxed in Luxembourg, an upper limit Brussels saw as giving Amazon an unfair advantage over rivals. The ruling was agreed before Amazon set up its main Luxembourg companies, which is today the hub for its European operations.

An FT analysis of Amazon’s Luxembourg accounts shows that over the next decade the EU sites paid the partnership nearly €4bn in royalties for using Amazon’s name and know-how. In the same period, Amazon’s European operations reported a total profit of €11m on net turnover of around €60bn.

While Amazon sent around €1bn of those royalties back to the US, where they were taxed, the remaining €3bn was not. A US tax court ruling in March has forced Amazon to restate its European figures and move some of that €3bn stateside to be taxed — a decision that will change how much Luxembourg will be required to recover.

The commission and Amazon declined to comment.

Multinational companies have come under fire since the global financial crisis for shifting profits between subsidiaries to use the gaps between countries to minimise taxes. US corporations held an estimated $1.3tn offshore cash pile at the end of last year, according to rating agency Moody’s.