Regulation, Briefly, Falls Off The Radar
Market participants have been focusing less on upcoming regulatory changes in Europe and the U.S. as markets have rallied.
Market participants have been focusing less on upcoming regulatory changes in Europe and the U.S. as markets have rallied. “Basel III implementation, Volcker, and Dodd-Frank was a big focus last year. It was a central conversation piece for hours on end in client meetings,” Marc Pagano, head of emerging market credit trading at Citigroup, told DI. Since then, he said, not one meeting has focused on those regulations.
The longer-term refinancing operation by the European Central Bank extending credit for borrowers to take advantage of higher yielding Spanish and Italian debt, and the debt negotiations with Greece have dominated the minds of traders, strategists and funds.
The comment period for the Volcker rule, one of the most controversial sections of the Dodd-Frank financial regulatory overhaul in the U.S., closed Feb. 13. Firms like Goldman Sachs, JPMorgan and Citigrouphave already anticipated the effect of the rule, though, and closed or sold proprietary trading desks. Morgan Stanley has said it will close its prop desk by the end of 2012. The European Basel III regulations, which necessitate firms hold tier one capital at 9% of their assets, have already been priced in, traders say.
“I don’t know if it’s a little bit of Europe fatigue, or just that people are saying ‘it’s a new year, I can’t see anything horrific in the short term, so let’s buy.’ It is clear we have seen a steady flow of inflows into emerging markets, over the course of last year and the beginning of this year and that is now being put to work ,’” Pagano added.
Ever since the ECB introduced its LTRO program in December, firms have been borrowing cash at 1% interest from the central bank and investing in higher yielding assets, like Spanish and Italian sovereign and bank debt.
With credit markets strengthening—Italian sovereign debt yield had fallen from 7% in November 2011 to about 5.6% as of press time—the credit default indices have tightened and volume has fallen. According to the Depository Trust & Clearing Corp., open CDS contracts week-on-week for Feb. 10 fell by 3,627. The 70% haircut on Greek bonds has made buyers of protection wary about getting payouts from other sovereigns, namely Portugal.
One London trader said because of the lack of clarification on some rules—in particular, how the Volcker rule, which could eliminate proprietary trading by market-making firms—has pushed market participants to take advantage of current opportunities than wait for regulatory language to be solidified. “There are so many questions right now that people haven’t bothered to do much,” the trader said. “There is still a lot of clarification that’s required and we’re just not there yet.”