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Mikhail Liebenstein

Kaboom - $14Trn of Hidden Offshore Debt Uncovered

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http://www.telegraph.co.uk/business/2017/09/17/bis-discovers-14-trillion-dollar-debt-offshore-hidden-footnotes/

Following an investigation by the Bank of International Settlement, they have determined that an extra $14bn of offshore debt above what was previously thought has been hidden in the margins of various derivative products and other financial exotica.

So question? Whose debt is it?

Anyone feeling a bank run or hedge fund trim coming on?

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1 hour ago, Calcutta said:

Any chance of a copy? I'm not a donator to the cause...

Bank for International Settlements:  FX swaps and forwards: missing global debt?

Quote

Even when this debt is used to hedge FX risk, it can still involve significant maturity mismatches.

 

Edited by Will!

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Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones. Donald Rumsfeld

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Right, well, cheers for the link, not going to pretend I understood more five words in the whole thing.

Just for clarity, should I get to Asda first thing Monday morning and buy all the spam before the looters wake up and realise the banks have been turned off?

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A non-story. There was a lousy 14 trillion that everyone forgot about. Happens all the time, it's nano-trivia. Move along nothing to see here.

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I think it is a bit of a stretch to count FX forwards as debt. Yes, you do have a future obligation to pay some amount in the future but you will also receive an amount of equivalent value in another currency. 

In a sense these contracts could be seen as debt but I felt a bit let down given the sensational headline. 

 

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12 hours ago, macca13 said:

"It should be noted that [former chief economist of the Bank for International Settlements, William] White has voiced many of these concerns for some time, in January of 2016 the Telegraph reported White said, "The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians." He then made it clear a major task awaiting the global authorities is how to manage debt write-offs - and therefore a massive reordering of winners and losers in society - without setting off a political storm."

I don't like the sound of that.

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1 hour ago, North London Rent Girl said:

"It should be noted that [former chief economist of the Bank for International Settlements, William] White has voiced many of these concerns for some time, in January of 2016 the Telegraph reported White said, "The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians." He then made it clear a major task awaiting the global authorities is how to manage debt write-offs - and therefore a massive reordering of winners and losers in society - without setting off a political storm."

I don't like the sound of that.

We are now told another crash would create bail ins, depositors would take hair cuts over 85k protected savings, share holders would also get screwed. The bankers would get another bonus.. 

blame it on the greedy poor, more cuts to services.. 

all back to one of their 10 houses for tea and cake, job done.. 

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1 hour ago, macca13 said:

We are now told another crash would create bail ins, depositors would take hair cuts over 85k protected savings, share holders would also get screwed. The bankers would get another bonus.. 

blame it on the greedy poor, more cuts to services.. 

all back to one of their 10 houses for tea and cake, job done.. 

Would you rather have a bail-in our a bail -out?

Of course shareholders lose if thecompany they own goes bust. 

Bankers bonuses are actually now mainly paid in shares or not released for 3 years. 

Details here:

http://www.bankofengland.co.uk/pra/Pages/supervision/activities/aboutremuneration.aspx

 

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I am surprised that the BIS know so little about the mechanics of FX swaps and forwards and cross currency swaps.  If one party to the transaction defaults at any time before maturity, the bankruptcy claim is for the net mark to market value of the contracts and not the gross amounts.  If one party defaults on the maturity date of the contract, there is a settlement risk that the surviving party makes the payment in one currency and doesn't receive the payment due in the other currency.  In this instance, the authors are correct if the surviving party is not vigilant about settlement risk.

Many of these types of contract are margined (typically cash or government securities) above a threshold amount with a minimum transfer amount so even the mark to market value is relatively well secured.

There are lots of things to be afraid of.  This is not one of them.

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39 minutes ago, LuckyOne said:

I am surprised that the BIS know so little about the mechanics of FX swaps and forwards and cross currency swaps.  If one party to the transaction defaults at any time before maturity, the bankruptcy claim is for the net mark to market value of the contracts and not the gross amounts.  If one party defaults on the maturity date of the contract, there is a settlement risk that the surviving party makes the payment in one currency and doesn't receive the payment due in the other currency.  In this instance, the authors are correct if the surviving party is not vigilant about settlement risk.

Many of these types of contract are margined (typically cash or government securities) above a threshold amount with a minimum transfer amount so even the mark to market value is relatively well secured.

There are lots of things to be afraid of.  This is not one of them.

Agreed. This is not hidden debt. It's not really debt at all. 

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41 minutes ago, LuckyOne said:

I am surprised that the BIS know so little about the mechanics of FX swaps and forwards and cross currency swaps. ...

Many of these types of contract are margined (typically cash or government securities) above a threshold amount with a minimum transfer amount so even the mark to market value is relatively well secured.

There are lots of things to be afraid of.  This is not one of them.

ive done some derivative and fx reporting to BIS for a large uk bank. Every 3 years BIS receive the net fx Marked to Market positions for every bank in europe on a return called the triennial and they attempt to net them. Presumably this is the source of this data. So the have a very clear idea of the MTM exposure and understand the lending and instrument patterns across europe as well as the specific techinical rules and behaviours across the industry. 

Interestingly the Bank of England dont capture any of this data.(or at least didnt to my knowledge when i was last involved 2 years ago). It was a real PITA to extract and net and the team doing this dreaded it every three years. The statistical reporting rules being materially different to the financial reporting rules.

FX hedging is still off balance sheet activity for banks and not disclosed to Central Banks. Even the MTMs arent disclosed in any meaningful way. Its a black hole. 

Having a read on the net it seems that the BIS are particularly concerned about a couple of potential shocks for the fx hedging market that could, at worst, cause a significant crisis similar to the mortgage issues triggering the 2008 financial crisis.

I understand that under basel 3 stricter rules will be in force regarding capital buffers to beheld in respect of hedging risks. Particularly for poor credit counterparties or counterparties engaging in 'long term hedging'. Presumably these hedges will become more expensive or the banks will withdraw from these riskier markets. In some cases the bank would have to hold substantially more capital to cover a hedged loan than an unhedged loan. A liquidity crisis in fx hedging perhaps? - http://www.financialexpress.com/industry/banking-finance/basel-iii-makes-hedging-unviable-for-firms-banks/8239/

- BIS has also expressed concern that fx hedging is often hedged against CIP - covered interest parity. Basically someone with a bucket of interest rate swaps looking for a return takes a 'cash' fx position with someone else to allow them to balance their fx hedging books. They can charge a high rate for this. This is obliquely mixing fx and interest rate hedges/derivatives .http://www.bis.org/publ/work590.htm

If you look at it in those terms it has a real sense of 'the big short' about it. Just think about those italian banks that almost went bust, or last years panic about deutsche banks dangerously large off balance sheet exposure. From an fx pov any of those failures could pull the rug out from under one half of a significant proportion of (euro denominated) mtm positions globally.

How long would it take a collapsed big bank to resolce/reconstruct/understand its off balance sheet commitments? As recently as 2 years ago people were still being recruited to work in IT at lehman brothers in the uk to help wind down the books...7 years after they folded and the staff walked out the door.

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21 hours ago, regprentice said:

ive done some derivative and fx reporting to BIS for a large uk bank.

...

 

If you look at it in those terms it has a real sense of 'the big short' about it. Just think about those italian banks that almost went bust, or last years panic about deutsche banks dangerously large off balance sheet exposure. From an fx pov any of those failures could pull the rug out from under one half of a significant proportion of (euro denominated) mtm positions globally.

How long would it take a collapsed big bank to resolce/reconstruct/understand its off balance sheet commitments? As recently as 2 years ago people were still being recruited to work in IT at lehman brothers in the uk to help wind down the books...7 years after they folded and the staff walked out the door.

Interesting, thanks.

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22 hours ago, regprentice said:

ive done some derivative and fx reporting to BIS for a large uk bank. Every 3 years BIS receive the net fx Marked to Market positions for every bank in europe on a return called the triennial and they attempt to net them. Presumably this is the source of this data. So the have a very clear idea of the MTM exposure and understand the lending and instrument patterns across europe as well as the specific techinical rules and behaviours across the industry. 

Interestingly the Bank of England dont capture any of this data.(or at least didnt to my knowledge when i was last involved 2 years ago). It was a real PITA to extract and net and the team doing this dreaded it every three years. The statistical reporting rules being materially different to the financial reporting rules.

FX hedging is still off balance sheet activity for banks and not disclosed to Central Banks. Even the MTMs arent disclosed in any meaningful way. Its a black hole. 

Having a read on the net it seems that the BIS are particularly concerned about a couple of potential shocks for the fx hedging market that could, at worst, cause a significant crisis similar to the mortgage issues triggering the 2008 financial crisis.

I understand that under basel 3 stricter rules will be in force regarding capital buffers to beheld in respect of hedging risks. Particularly for poor credit counterparties or counterparties engaging in 'long term hedging'. Presumably these hedges will become more expensive or the banks will withdraw from these riskier markets. In some cases the bank would have to hold substantially more capital to cover a hedged loan than an unhedged loan. A liquidity crisis in fx hedging perhaps? - http://www.financialexpress.com/industry/banking-finance/basel-iii-makes-hedging-unviable-for-firms-banks/8239/

- BIS has also expressed concern that fx hedging is often hedged against CIP - covered interest parity. Basically someone with a bucket of interest rate swaps looking for a return takes a 'cash' fx position with someone else to allow them to balance their fx hedging books. They can charge a high rate for this. This is obliquely mixing fx and interest rate hedges/derivatives .http://www.bis.org/publ/work590.htm

If you look at it in those terms it has a real sense of 'the big short' about it. Just think about those italian banks that almost went bust, or last years panic about deutsche banks dangerously large off balance sheet exposure. From an fx pov any of those failures could pull the rug out from under one half of a significant proportion of (euro denominated) mtm positions globally.

How long would it take a collapsed big bank to resolce/reconstruct/understand its off balance sheet commitments? As recently as 2 years ago people were still being recruited to work in IT at lehman brothers in the uk to help wind down the books...7 years after they folded and the staff walked out the door.

https://www.fca.org.uk/markets/european-market-infrastructure-regulation-emir/reporting-obligation

I was under the impression that EMIR reporting of derivative transactions ended up at the central bank. It is possible that forward FX deals were excluded from the reporting requirements because everyone felt that it was a bit OTT. 

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On 19/09/2017 at 9:59 PM, Ah-so said:

https://www.fca.org.uk/markets/european-market-infrastructure-regulation-emir/reporting-obligation

I was under the impression that EMIR reporting of derivative transactions ended up at the central bank. It is possible that forward FX deals were excluded from the reporting requirements because everyone felt that it was a bit OTT. 

Interesting thanks.

Short answer is I dont know. I only ever dealt with the BoE side not the FCA side. As they had been historically seperate entities the FCA reporting was done elsewhere. When i left that role one of the main worries the department had was that, post-merger, the FCA and the BoE would start comparing and reconciling the various reports that come in (Statistical, Basel, mortgage/credit cards, liquidity, FCA etc) which, in a large bank, is likely done in different areas by different teams who often don't know each other exist.

My experience is that BIS collects data the article refers to from Central Banks via the BoE statistical reporting path. As its largely about counterparty risk at bank level (where the various banks have taken positions between them to balance out their hedge positions). On this reporting BIS get avg turnover by instrument, currency, country and counterparty type. http://www.bis.org/publ/rpfx16.htm

Presumably they've looked at these reports, which show turnover of over €5Tn a day in FX trades, and then tried and largely failed to find the same values in banks balance sheets. The point being made in the article that, a decade after the financial crisis, such significant interbank trading and debt is virtually invisible to anyone who picks up a set of banks annual results.

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7 hours ago, regprentice said:

Interesting thanks.

Short answer is I dont know. I only ever dealt with the BoE side not the FCA side. As they had been historically seperate entities the FCA reporting was done elsewhere. When i left that role one of the main worries the department had was that, post-merger, the FCA and the BoE would start comparing and reconciling the various reports that come in (Statistical, Basel, mortgage/credit cards, liquidity, FCA etc) which, in a large bank, is likely done in different areas by different teams who often don't know each other exist.

My experience is that BIS collects data the article refers to from Central Banks via the BoE statistical reporting path. As its largely about counterparty risk at bank level (where the various banks have taken positions between them to balance out their hedge positions). On this reporting BIS get avg turnover by instrument, currency, country and counterparty type. http://www.bis.org/publ/rpfx16.htm

Presumably they've looked at these reports, which show turnover of over €5Tn a day in FX trades, and then tried and largely failed to find the same values in banks balance sheets. The point being made in the article that, a decade after the financial crisis, such significant interbank trading and debt is virtually invisible to anyone who picks up a set of banks annual results.

I think that post the FSA breakup, entirely the same data that is nominally collected by the FCA is also viewable by the PRA, which is now just an arm of the BOE.

I say this with a degree of certainty due to a query that emerged from the BOE over a group of derivative trades for a bank that appeared to be a large portion of the entire market in a particular derivative market . The bank in question was misreporting a field for a group of trades, skewing the reports.

But the point that a sizeable proportion  of a bank's financial obligations are not shown on the balance sheet is true. 

 

 

Edited by Ah-so

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