FT : Why clearing matters to the City of London

Why clearing matters to the City of London
European efforts to grab valuable business from UK alarms markets

European efforts to force the business of clearing euro-denominated derivatives into the EU as Britain prepares to leave pits the will of politicians against that of the market.

This unflashy, but critical part of financial markets, has become a key battleground as it threatens to erode one of London’s great strengths and a key part of the City’s success over the past decade.

What is euro-denominated derivatives clearing?

Derivative instruments such as swaps are used by companies and financial services companies to protect against adverse interest rate and currency moves. The risk management of derivative agreements, which can stretch for months or even years, is conducted via a clearing house. They are independent parties that sit between the two counterparties in a trade and are tasked with managing the risk if one side defaults on payment.

How big a player is London?

London clears around three-quarters of all euro-denominated derivatives. The UK capital also leads in clearing other derivatives such as currency swaps. It has also been a big beneficiary of a surge in inflation swaps clearing in recent months.

That said, London has lost a little of its sheen in recent years. The persistent low level of interest rates in the eurozone left daily turnover for interest rate swaps clearing in London down 12 per cent to $1.2tn by April of this year 2016, compared with 2013, according to data from the Bank for International Settlements. That saw the US rob the UK of its crown as the world’s leading hub clearing for interest rate derivatives.

Potentially skewing the figures is the fact that swaps clearing is mandatory in the US, but still coming into effect in Europe.

Why is the industry concerned?
The fear among users of derivatives and the customers of clearing houses is palpable, and not restricted to the UK. Last week, for example, the head of the US derivatives watchdog said it was “a mistake to restrict where clearing can occur”.

Banks prefer to keep as much of their derivatives portfolios together, making management of them more efficient and keeping costs down to end users.

Companies and financial institutions that use swaps may want a complex product that involves multiple legs in different currencies. As a result, the margin requirements for them may be in several currencies. Euro-denominated contracts may be collateralised with US dollars or UK gilts, for example. While swaps are cleared in locations around the world, London accounts for a hefty slice reflecting the attractiveness of the City and its legal system for investors.

London not only clears contracts denominated in euros and sterling, but the US dollar, yen and 14 other currencies. In Chicago, the CME has cleared €13.3tn of euro-denominated contracts over the past three years. Of the average notional $1.3tn in dollar-denominated swaps that are cleared every day, around $329bn is cleared outside the US, the BIS found.

Who would lose if clearing moved from London?

The clearing house offsets the margin requirements or can tear up redundant swaps deals, saving the industry billions in margin and capital requirements. So it therefore suits the industry to build up huge pools of capital. Forcing euro-denominated clearing into the EU would fragment those pools and raise costs.

Estimates vary as to how much more margin the industry would have to find although it could be as high as $77bn.

Ciaran O’Flynn, European head of bank resource management at Morgan Stanley, says fragmentation is a “daunting prospect”. “Looking at the increased margin and capital costs projections, those are big numbers. That is one area for derivatives where Brexit can be poisonous,” he told a conference held by Isda, a trade association last week.

Others have warned that efforts by the EU are tantamount to protectionism that would hurt the euro, the world’s second-largest reserve currency. “It could severely damage confidence in the currency,” said Intercontinental Exchange, a US exchange that operates one of Europe’s largest clearing houses.

And if it happens, others argue it could lead to the loss of thousands of jobs in the City, across trading, asset management, technology and data.

>>> US Gapping down:

Gapping down

Select metals/mining stocks trading lower on weakness in precious metals post-Fed: CDE -6.0%, GFI -5.6%, EGO -5.3%, HMY -5.0%, AU -4.8%, AG -4.5%, GOLD -4.3%, SLV -4.3%, FSM -4.1%, SSRI -4.1%, HL -3.7%, SLW -3.6%, RIO -3.5%, NEM -3.2%, FCX -3.1%, AEM -3.0%, GG -3.1%, ABX -2.9%, AUY -2.9%, PAAS -2.7%, SAND -3.1%, BTG -2.7%, TSU -2.6%, TECK -2.6%.

Other news: SGY -25% (filed voluntary petitions under chapter 11 to pursue a pre-packaged plan of reorganization ), FOLD -12.0% (announces an offering of $225 mln convertible senior notes due 2023 in a private placement), KCAP -8.0% (reduces quarterly distribution to $0.12/share from $0.15/share), MPEL -5.3% (confirms launch of underwritten, secondary public offering of its American depositary shares by Crown Resorts), FANG -4.0% (Diamondback Energy to acquire Brigham Resources and Brigham Resources Midstream for $2.43 bln (immediately accretive), consisting of $1.62 bln in cash and 7.69 mln FANG shares; announces 10.5 mln share offering and notes offering; raises FY17 production 25% ), DNR -3.5% (still checking), YHOO -3.4% (confirms it has identified data security issues concerning certain Yahoo user accounts; has taken steps to secure user accounts and is working closely with law enforcement), GPOR -3.1% ( to acquire approx. 46,400 net surface acres in the core of the SCOOP for a total purchase price of $1.85 bln from Quantum Energy Partners; commences underwritten public offering of 29,000,000 shares of its common stock and launches proposed $600 million offering of senior notes due 2025 ), CLF -2.7% (names new CFO and new COO).

>>> Pacific Biosciences announces F. Hoffman-La Roche (RHHBY) terminated the lic

--> -24% pre open 15k shares traded @ 5.50 - 5.20/5.25

Pacific Biosciences announces F. Hoffman-La Roche (RHHBY) terminated the license agreement for the development and supply of diagnostic products; PACB 2016 product & service rev on pace to grow 55-65% y/y

  • The previously announced agreement provided the option for Roche (RHHBY) to terminate the agreement for any reason with sixty days' prior notice. Upon termination, other than retaining certain non-exclusive rights with respect to using products already purchased from Pacific Biosciences under the agreement, Roche will have no rights to SMRT technology, and Pacific Biosciences will be free to commercialize products based on the Sequel sequencing platform into the clinical research and sequencing market, directly or with other distribution partners.
  • Pacific Biosciences continues to see strength in its business. The company's product and service revenue for 2016 is on pace to grow between 55% and 65% over 2015. The co is targeting to grow product and service revenue by another 40% to 60% in 2017.
  • Management will host a conference call to discuss the announcement today at 12:00pm Eastern Time / 9:00am Pacific Time.

Reuters - -Pollsters tune-up for French election after Trump, Brexit shocks

Pollsters tune-up for French election after Trump, Brexit shocks


Pollsters hoping to avoid further election shocks are trying to improve the quality of their data ahead of the 2017 French presidential election by asking questions differently and fine-tuning collection methods.
Opinion polls have come under scrutiny after the unexpected election of Donald Trump as U.S. president and the surprise British referendum vote to leave the European Union.
Financial market participants and EU partners are watching France closely for signs of another shock, especially one in which far-right National Front leader Marine Le Pen wins on her anti-EU platform.
"Measuring participation is the real challenge," said Jean-Daniel Levy, head of political polling at the Harris Interactive institute.
The problem with turnout is that some groups express a preference then fail to show up to vote, while others, missed by the polling machine, vote in large numbers. Pollsters say a better sample is key to ironing out sources of inaccuracy.
Many modern polls are conducted by mobile phone, whose numbers have no regional prefix, so reaching a representative sample has become labor intensive.
"Basically, if you're looking for the mobile number of someone who lives in Marseille, you have to make a huge number of calls," said Bruno Jeanbart of Opinion Way, whose operation is talking with phone operators to get hold of databases that tell them where their voters are located.

WRONG QUESTIONS?
Pollsters are also looking at the questions they ask. For example, Jeanbart said, Opinion Way got better turnout results in the last conservative primary by asking voters how important voting was to them on a sliding numerical scale, rather than asking simply whether they were certain to or likely to vote.
But other questioning techniques could be difficult to improve upon, especially when it comes to measuring the degree to which the surge of populism seen in the Trump and Brexit votes could translate into support for Le Pen.
Jean Chiche, a voting science researcher at Sciences-Po university in Paris, reckons the gulf in life experience between highly educated, urban-based pollster statisticians and less educated working-class voters in rural or suburban areas is a hard one to bridge.
"The people who write the questions are not capable of imagining the ones you need to ask to identify those ... who voted Trump in the U.S.," he said.
Chiche suggests the industry needs to study social media for ways to reach the people it might not have been reaching so far.
Polling institutes should also make clear that their polls have margins of error, Erwan Lestrohan of pollster BVA said.
In 2002, insisting on the 3 percent margin of error or giving a polling range could have helped people realise there was a possibility that Marine Le Pen's father Jean-Marie could beat Socialist leader Lionel Jospin, he said.

Jean-Marie Le Pen edged out Jospin by gathering 16.86 percent of first-round votes, 0.8 percentage points more than Jospin. Polls before the election had Le Pen around 14 percent.
With the first round of voting due in April, polls show the gap Marine Le Pen needs to bridge is much larger than the one faced by Trump or Britain's Brexiteers at the same stage.
A poll this week by Ipsos Sopra Steria for Cevipof and Le Monde newspaper has Le Pen on a first-round vote of 24-25 percent, depending on who she faces, which would put her into a second-round run-off against conservative Francois Fillon, seen getting 26-29 percent in the first round.
The poll did not make second-round predictions, but other polls since November, when Fillon became candidate for Les Republicains, have shown Fillon winning the second round with a two-thirds majority.

>>> US Gapping up

Gapping up

In reaction to strong earnings/guidance: PIR +26.5%, ARWR +9.5%, SAFM +5.3%, LLY +3.7% (reaffirms FY16 expectations, guides FY17, reaffirms financial expectations through the remainder of the decade).

Other news: CBIO +48.7% (Catalyst Biosciences entered into an agreement with Pfizer subsidiary Wyeth for the exclusive license to Wyeth's rights applying to CB813a & CB813d; co to make a $17.5 mln cash payment to Wyeth upon the achievement of milestones), BOSC +30.2% (receives $1.6 mln order for electronic components from an Indian electronics manufacturing co in the defense/aerospace industry; order is for delivery in 2017 and 2018), ACUR +11.0% (FDA has provided it with advice on the continued development of LTX-04; co intends to advance new formulations of LTX-04 tablets to a second pharmacokinetic study which is expected to start in late 1Q17), ONVO +5.7% (continued strength), NMM +4.9% (still checking for anything specific), MDLZ +4.9% (moved higher on rumor that Kraft Heinz (KHC) could be interested in acquiring co; subsequent reports have denied the rumor), WTW +1.9% (announces new subscription plan that includes a new Apple Watch Series 2 with the purchase of a Weight Watchers OnlinePlus membership), PPC +1.2% (up with SAFM).

Analyst actions: XLNX +1.8% (upgraded to Overweight from Equal-Weight at Morgan Stanley), COF +1.2% (upgraded to Neutral from Underperform at BofA/Merrill), MA +1.1% (upgraded to Buy from Neutral at BofA/Merrill).