Derivatives Deja Vu

I just raced through the latest book from Satyajit Das titled “Traders, Guns and Money” and you would think it was a year in review on the global financial markets…WRONG.  The book was penned in 2006 and describes his last 25 years in the derivatives market which happens to be what is ailing most investment funds and banks.  Many of the financial products that were used in the past have made their reappearance, repacked and rebranded.  Structured products, foreign currency convertible bonds (FCCB’s) and yen carry trades are just the tip of the iceberg.  In India all 3 have been in vogue lately and peddled by the banks.  It’s very easy to compare a product giving 8% vs 6% when all other factors are the same but with structured products it’s not so easy to decipher what the fu#$% is going on. 

India’s version of the sub-prime mess is the yen carry trade.  Many locals banks pitched the idea to corporate treasuries as a way to get funds cheaply and grow their business.  Instead many took the loans at 1-2% and speculated in the local equity markets which were giving over 45% returns in 2006 and 2007. Now that the markets have tanked and the yen has gone to hell, most companies are sitting on hugh losses. Most won’t report these losses as yen carry trades but some other financial engineering exercise.  Which leads to the whole issue of credibility, can you really trust what a company pimps in their annual and quarterly numbers.  

The last 50 pages of the book starts to drag as he gets into detailed calculations. However, the book is a great read and provides insight into a sector of the financial markets that most people have no clue exists or how it functions.  If you plan on getting into these complex derivatives transactions…read this book first.

The Business of Cricket

We are just days away from the launch of the Indian Premier League (IPL) on April 18th.  There was a ton of hype around the end of January when the 8 teams were sold to the highest bidders,  the owners were a mix of industrials and Bollywood – surprising I know.  Over USD 720 million was put on the table to buy the teams and players.

The IPL is the brain child of Lalit Modi a VP at the Board of Control of Cricket in India (BCCI). BCCI is said to have made over USD 1 billion on the television rights for the IPL over many years. Some of the numbers being thrown around are a bit suspect, but I love the fact they are trying to create an entertainment option that could rival the likes of the NFL, NBA or Major League Baseball. 

My only concern is they are already watering down the brand with 59 matches in 6 weeks, a minimum of one match a day starting April 18th.   

Will it work? That’s the billion dollar question everyone is waiting to see. I just hope it’s successful so they use the money to build world class stadiums and really enhance the overall fan experience.

DMA…Welcome to India

At last the Securities & Exchange Board of India (SEBI) has agreed to allow Direct Market Access (DMA) which will facilitate wire speed Straight Through Processing (STP) on the exchanges. If the previous sentence is as difficult to understand as Kevin Federline’s role in life then you may want to pass on this blog entry.

Let me try and demystify the above (as far as Kevin Federline…no clue):

India will allow computers to make buy/sell decisions and issue those orders directly to the exchanges via a broker.

Previously a broker was required to hit the enter key once the order was received from a client. The announcement although technical in nature will change the landscape of the Indian markets. Similar to the announcement back in the early 90’s that Foreign Institutional Investor’s (FII’s) would be allowed trading access to India.

Pros:
– lower impact costs for FII’s
– less chance of errors
– wire speed transactions
– allow computer driven trading algorithms
– potentially greater volumes

Cons:
– local brokers will no longer see “order flow” from clients. Granted the orders have to hit the brokers infrastructure but the ability to act on that information is much more difficult.
– arbitrage shops who will have to settle for a smaller spread or move to a computer driven model

On a personal level this is very exciting for me as it combines two of my passions: technology and the capital markets.

Trivia: The very first FII to register with SEBI was Pictet, a private Swiss bank, in June 1993.

I am Liquid

boiler_room.jpg Although at the moment the financial markets seem okay, there is still an undertone of pessimism. When thinking of the current mess in the markets, one of my favorite quotes that comes to mind is from the movie Boiler Room…
“And best of all kids, I am liquid.” – Jim Young (Ben Affleck)

Unfortunately, that’s not the case for many people. Many hedge funds have collapsed due to margins calls from being over-leveraged and unable to trade their suddenly illiquid investments such as MBS (mortgage backed securities).

Now there is word that many people participating in auction-rate securities are getting hammered. These investments were sold as “cash equivalents” meaning no chance of losing your principal. Of course, now they are losing money due to the lack of participants in these auctions and hence making these investments you guessed it – illiquid.

Trivia: Boiler Room was released Feb 2000 a month before the Nasdaq hit its highest closing ever at 5,048.62 on March 10, 2000. In retrospect the movie was more of a documentary on what was happening during the dot.com bubble.