Regulatory Arbitrage applied to Total Return Swaps (Levine)

Published: Tue 24 May 2022
Updated: Tue 22 November 2022
By steve

In Markets.

Tuesday 24, May 2022

Housing-led recession?

This

Five year breakevens rolling over

Five Year breakevens via trading view https://www.tradingview.com/x/1kdTOYjT/

Wrap

The market seems to have decided that a recession is coming. The shorter and longer yield curves are inverted. Bonds rallied across the board today. Although the DJIA eked out a gain, the broad and tech indexes were down. The NDX is now down 13.5% YoY, I think more than 20% below its ATH. Commodities were mixed, but generally up. Crude is up 67% YoY, so it’s not surprising it has difficulty going higher. Gold and silver were up, against the yearly trend: YoY pretty flat. Maybe were are going into stagflation.

Matt Levine on Total Return (Equity) Swaps

This is worth a read. It explains how a bank can hedge a total return swap via a swap with a counterparty that doesn’t have the bank’s capital adequacy requirements. It’s a classic regulatory arbitrage, which Levine admires, and so do I, to an extent. But it shows how it is very difficult to regulate big business, when that big business employs very clever people to work out how to bypass that regulation. It’s not that these people are bad, it’s just that they’ll go out of business if they don’t behave competitively. Anyway, it explains what these banks do, and what they get paid for doing it. Which makes it a bargain to promise Jamie Dimon and extra $50M of bonus.

Image

Bonus Image

Comments !

links

social