Chinese Gold and Silver Exchange Has 'Almost Run Out of Available Gold Bullion' Awaits Imports

Hong Kong's century old Chinese Gold and Silver Exchange has reportedly almost run out of gold bullion at these price levels and is waiting for imports to come on Wednesday of next week from Switzerland and London. This information is from an April 19th interview.

Apparently they are not able to source from within their region which is a bit of a surprise since China is a major gold and silver producer.  Gold seems to be moving from West to East.

Why aren't they also going to New York for available bullion supply at the Comex?  

The Hong Kong Gold and Silver market seems to be more of what is called a 'bullion market' rather than a paper speculative market dealing in highly leveraged position trading with only small amounts of actual metal changing hands.

"The Chinese Gold and Silver Exchange Society operates in Hong Kong as a registered society. At present, we have 171 member firms which are sole proprietorships, partnerships or limited companies. Among these 171 firms, 30 are bullion group members. Bullion group members who want to manufacture good delivery bars may apply for the qualification of accredited refineries. Upon accreditation, these member firms may produce 99% fineness 5-tael gold bullions and 999.9% 1-kg gold bullions for delivery on the Exchange. The bullions they produce also circulate widely in the open market."

Please see the attached interview from Bloomberg Asia with the President of the exchange.

I do not want to make too much of this as it may be temporary. And since this is a metals exchange rather than a derivatives market a shortage of metal is not a default. A default is a paper promise to deliver that fails.

But it seems to call into question, if not shoot all to hell, the theory that the precipitous decline in the price of gold marked by the dumping of huge numbers of contracts into quiet markets was based on market fundamentals rather than brazen naked short selling and highly leveraged speculation in the London and especially New York markets, which both deliver only a fraction of the metals volumes which are traded on their exchanges.

And still hardly anyone is talking about the dog that didn't bark, and that is silver.



h/t to Delray and Liberty Mike

Sorry but I do not have any way to turn off the autoplay feature with the Bloomberg player. You will have to pause it yourself.

SEC Charges OptionsXpress with Naked Short Selling Scam

And the fails just keep on coming.

MF Global was check-kiting (in addition to outright theft) and OptionsXpress was 'stock kiting' in some targeted and fairly impressive volumes.

Their mistake was involving the retail side of the trade.   Naked short selling and price manipulation is only permitted for professionals of TBTF institutions and  campaign contributing hedge funds.

Bloomberg
OptionsXpress Accused by SEC of Naked Short-Sale Violations
By Joshua Gallu
Apr 16, 2012 5:15 PM ET

OptionsXpress Inc. (OXPS), the Chicago brokerage acquired by Charles Schwab Corp. (SCHW) last year, was accused by U.S. regulators of using sham “reset” transactions as part of an abusive naked short-selling scheme.

The company and four executives violated Securities and Exchange Commission rules in conducting trades from at least October 2008 to March 2010 designed to give the illusion of compliance with rules governing short sales, the SEC said in a statement today. An OptionsXpress customer was also accused by the SEC of participating in the alleged violations.

In a short sale, an investor borrows shares and sells them with the goal of profiting from a price decline by repurchasing at a lower price and repaying the loan. The SEC’s Regulation SHO requires brokers to close out clients’ short sales within three days and bars them from executing further bets against individual companies until previous sales have been settled.

OptionsXpress, its former chief financial officer Thomas Stern and the customer, Jonathan Feldman, are fighting the agency’s claims, which were filed in administrative court in Washington today...

OptionsXpress helped its customers buy shares while simultaneously selling call options that were essentially the economic equivalent of selling shares short, the SEC said. The purchase of shares created the illusion that the firm had satisfied the close-out obligation even though they were never actually delivered to the purchasers, according to the order.
Stock-Kiting Scheme

The transactions allowed OptionsXpress and its customers to engage in a “stock-kiting scheme” that deprived true stock purchasers of the benefits of ownership, the SEC said in its order. OptionsXpress had repeated failures to deliver stock in firms including Sears Holdings Corp. (SHLD), American International Group Inc. (AIG) and Chipotle Mexican Grill Inc. (CMG), according to the order.

In January 2010, customers involved in the OptionsExpress trades accounted for an average of 48 percent of daily trading volume in Sears, the SEC said. In 2009, six OptionsXpress accounts purchased about $5.7 billion worth of securities and sold short about $4 billion of options, according to the order.

The SEC settled related claims against three OptionsXpress employees: Peter Bottini, Phillip Hoeh and Kevin Strine, according to a separate administrative order filed today. Attorneys for Strine and Hoeh declined to comment. A phone call to Steven Biskupic, a lawyer for Bottini, wasn’t immediately returned.

In resolving the action, Bottini, Hoeh and Strine agreed to cooperate with the SEC’s investigation without admitting or denying wrongdoing or paying any financial penalties.

Charles Schwab, the San Francisco-based brokerage, agreed to buy OptionsXpress for about $1 billion in stock last year, adding the retail options brokerage founded in 2000 to its equity and mutual fund offerings. The acquisition was completed in September.

Merkel to The Banks and Hedge Funds: Sprechen Sie Deutsche? Then Droppen Sie Dead

There is much surprise that the German government has declared a ban on naked short selling, including CDS, as of midnight tonight, with no prior notice and the courtly deference demanded by the Banks when government chooses to regulate them. This action seems to have perturbed some and confused many.

The reason for this may be quite simple.

After tonight, when hedge funds and The Banks call upon German financial firms and European governments to make payments on Credit Default Swaps or other financial instruments that are subject to the ban, the Germans will have a rather large hammer in hand to help them to negotiate the terms, and respond to any threats and coercion.

Since the CDS will be deemed to be no longer legal, at least in the quantity and leverage desired by those gaming the system, the opportunity to default on them with the backing of the government may be an option. This seems quite similar to the stance that the Chinese government took on behalf of some Chinese firms that were caught on the wrong side of energy derivatives.

I have heard from several sources that there was a general disappointment in Europe and in some parts of Asia at the lack of progress being made in the US Congress towards creating meaningful reforms in their financial system. In fact, there is a widespread belief that Washington is being dictated to by the Banks, and that their lobbyists are directing the conversation, and in many cases writing the actual legislation. The final straw was when the Obama Administration itself sought to water down and block key provisions of the legislation to limit the power and size of the Banks.

"To some degree this is a battle between the politicians and the markets," she said in a speech in Berlin. "But I am firmly resolved -- and I think all of my colleagues are too -- to win this battle....The fact that hedge funds are not regulated is a scandal," she said, adding that Britain had blocked previous efforts to do this. "However, this will certainly have taken place in Europe in three weeks," she said, without giving more details." Reuters 6 May 2010

"German Chancellor Angela Merkel accused the financial industry of playing dirty. 'First the banks failed, forcing states to carry out rescue operations. They plunged the global economy over the precipice and we had to launch recovery packages, which increased our debts, and now they are speculating against these debts. That is very treacherous,' she said. 'Governments must regain supremacy. It is a fight against the markets and I am determined to win this fight.'"UK Telegraph 6 May 2010

The financiers have been saying that 'Europe cannot print money faster than Goldman Sachs can create naked Credit Default Swaps.' Well, Goldman can still create those swaps, but they may have trouble finding counterparties for them in Europe. And those who buy them may do so at their peril, since Europe is obviously seeking to isolate itself from the consequences of speculative excess by an overleveraged financial system.

Merkel said she was going to reassert the primacy of government over the multinational speculators.

This is only the opening salvo. It will not be effective without further effort. And it is likely to draw the ire and criticism of the corporate media in NY and London, and the financiers' well-kept demimonde.

"Oh no, naked CDS are essential to price discovery. Naked shorting adds liquidity. The system will fall apart if you do not let the Banks have their way with the global economy. Oh my God, someone in government actually did something that was not vetted and pre-approved by the Wall Street Banks. They have actually outlawed naked shorting, which is tantamount to legalized counterfeiting. How dare that headstrong and impertinent frau Dr. Merkel attempt to protect her people from the gangs of New York!"

But one has to admit that the lady has style, and, unlike her American counterpart, is not afraid to occasionally take the wheel and drive, rather than sit in the back seat offering platitudes, and fine sounding words, and toothlessly petulant criticism.

Bloomberg
Germany to Ban Naked Short-Selling at Midnight
By Alan Crawford
May 18, 2010

May 18 (Bloomberg) -- Germany will temporarily ban naked short selling and naked credit-default swaps of euro-area government bonds at midnight after politicians blamed the practice for exacerbating the European debt crisis.

The ban will also apply to naked short selling in shares of 10 banks and insurers that will last until March 31, 2011, German financial regulator BaFin said today in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, the regulator said.

The move came as Chancellor Angela Merkel’s coalition seeks to build momentum on
financial-market regulation with lower- house lawmakers due to begin debating a bill tomorrow authorizing Germany’s contribution to a $1 trillion bailout plan to backstop the euro. U.S. stocks fell and the euro dropped to $1.2231, the lowest level since April 18, 2006, after the announcement.

“You cannot imagine what broke lose here after BaFin’s announcement,” Johan Kindermann, a capital markets lawyer at Simmons & Simmons in Frankfurt, said in an interview. “This will lead to an uproar in the markets tomorrow. Short-sellers will now, even tonight, try to close their positions at markets where they can still do so -- if they find any possibilities left at all now.”

Merkel, Sarkozy

Merkel and French President Nicolas Sarkozy have called for curbs on speculating with sovereign credit-default swaps. European Union Financial Services Commissioner Michel Barnier this week called for stricter disclosure requirements on the transactions.

Allianz SE, Deutsche Bank AG, Commerzbank AG, Deutsche Boerse AG, Deutsche Postbank AG, Muenchener Rueckversicherungs AG, Hannover Rueckversicherungs AG, Generali Deutschland Holding AG, MLP AG and Aareal Bank AG are covered by the short-selling ban.

“Massive” short-selling was leading to excessive price movements which “could endanger the stability of the entire financial system,” BaFin said in the statement.

The European Union last month proposed that the Financial Stability Board, the group set up by the Group of 20 nations to monitor global financial trends, should “closely examine the role” of CDS on sovereign bond spreads. Merkel said earlier today that she will press the Group of 20 to bring in a financial transactions tax.

Merkel’s ‘Battle’

“In some ways, it’s a battle of the politicians against the markets” and “I’m
determined to win,” Merkel said May 6. “The speculators are our adversaries.”

Germany, along with the U.S. and other EU nations, banned short selling of banks and insurance company shares at the height of the global financial crisis in 2008. The country still has rules requiring disclosure of net short positions of 0.2 percent or more of outstanding shares of 10 separate companies.

The disclosure of the rules drew criticism from lawyers who said that they should have been announced well ahead of time.

“The way it’s been announced is very irresponsible, and it’s sent many market participants into panic mode,” said Darren Fox, a regulator lawyer who advises hedge funds at Simmons & Simmons in London. “We thought regulators had learned their lessons from September 2008. Where is the market emergency that necessitates the introduction of an overnight ban?”

Short-selling is when hedge funds and other investors borrow shares they don’t own and sell them in the hope their price will go down. If it does, they buy back the shares at the lower price, return them to their owner and pocket the difference.

Credit-default swaps are derivatives that pay the buyer face value if a borrower -- a country or a company -- defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent. Traders in naked credit-default swaps buy insurance on bonds they don’t own.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

NY Post: Trader Blows Whistle On Gold and Silver Price Manipulation

"Every society gets the kind of criminal it deserves. What is equally true is that every community gets the kind of law enforcement it insists on." Robert Kennedy

The CFTC hearing in Washington was about safeguards against, and limits on, naked short selling at the COMEX. The LBMA in London is a 'cash market' and while short selling is accepted, large leverage and blatant naked short selling is not. The crux of the scandal is that the Banks and hedge funds have been selling what they do not have in order to manipulate the price and cheat investors, in this market as they have been shown repeatedly to have done in other markets.

The story gets sticky in the States because, as disclosed in the motions in a New Orleans trial, the players filed a motion claiming immunity because they were acting in partnership with the Treasury and the Federal Reserve, and other central banks who were not within the Court's jurisdiction.

Watch this story unfold, and then make up your own minds. But be prepared for smears, diversions, misconceptions, and false denials. The accused parties will consistently try to ignore this, and change the subject. The attempts to pressure the media to ignore tihs altogether are a 'tell' if there ever was one.

I am shocked at the extent to which the Banks influence and control the American media. This was testimony at a public hearing, and it has been largely squashed. Judging by history, this is going to get ugly.

Thanks to the NY Post for breaking ranks with the mainstream media. Despite some significant behind the scenes pressure, the Post is actually publishing some words that the Banks do not wish the American people to hear. And many Americans to not wish to hear it, because it shakes their faith in the system, and threatens them with the unknown. And too many, including economists and even bloggers, are only too willing to 'go along to get along' and be invited to the posh gatherings of the famous, and receive some sinecure from the monied interests.

I do not know if this is true or not, or what the truth may be. But I do have a strong passion for bringing the light of day to shine on this, and for these markets to be much more transparent, as a reform, to prevent frauds which we do know have occurred and most likely are still occurring. For me the light of day is not smearing the messenger and making their life dangerously miserable, but that is what too often passes for journalism in the US today, as is seen in the case of other whistleblowers, most famously in the Plame affair.

Naked short selling in size is a cancer in the financial markets. And the way in which the Banks are obstinately fighting against any and all reforms that attempt to limit naked short selling shows the objective observer that they are firmly committed to a status quo that is designed to distort the markets and the real economy for their short term advantage.

Let's be clear about this: naked short selling in size is not a trading strategy, it is a means to a fraud.

This may be the Madoff ponzi scheme writ large, the heart of the darkness in the financial fraud that is the US financial system. The crowning achievement of the financial engineers at the Fed, who have built a Ponzi economy and an empire of fraud.

NY Post
Metal$ are in the pits
By MICHAEL GRAY
4:33 AM, April 11, 2010

Trader blows whistle on gold & silver price manipulation

There is no silver lining to the activities of JPMorgan Chase and HSBC in the precious-metals market here and in London, says a 40-year veteran of the metal pits.

The banks, which do the Federal Reserve's bidding in the metals markets, have long been the government's lead actors in keeping down the prices of gold and silver, according to a former Goldman Sachs trader working at the London Bullion Market Association.

Maguire was scheduled to testify last week before the Commodities Futures Trade Commission, which is looking into the activities of large banks in the metals market, but was knocked off the list at the last moment. So, he went public.

Maguire -- in an exclusive interview with The Post -- explained JPMorgan's role in the metals pits in both London and here, and how they can generate a profit either way the market moves.

"JPMorgan acts as an agent for the Federal Reserve; they act to halt the rise of gold and silver against the US dollar. JPMorgan is insulated from potential losses [on their short positions] by the Fed and/or the US taxpayer," Maguire said.

In the gold pits, Maguire sees HSBC betting against the precious metal's price without having any skin in the game in the form of a naked short.

"HSBC conducts an ongoing manipulative concentrated naked short position in gold. Silver is much easier to manipulate due to its much smaller [market] size," Maguire added.

"No one at JPMorgan is familiar with Andrew Maguire," said Brian Marchiony, a company spokesman. HSBC declined to comment. (Maguire seems to be creeping into the corporate consciousness. Earlier, JPM tried to deny that he even existed. Now they admit he exists but no one there knows him, despite his have traded alongside them for 40 years, and traded at a sister firm, Goldman. HSBC has at least enough conscience to simply sulk. - Jesse)

Also during the CFTC hearing, Jeff Christian, founder of the commodities firm CPM Group, said that the LBMA, the physical delivery market for gold and silver in the UK, has been using leverage, which is another way to depress the price of gold and silver.

Christian said that the LBMA -- the same market Maguire trades in -- has leverage of about 100-1 on the gold bars settled on the exchange. In layman's terms, that means if 100 clients requested their bullion bars be delivered, the exchange could only give one client the precious metal. (Note: the LBMA is not a 'futures' market like the COMEX where naked short selling is an accepted, if not entirely explicit, practice. The CFTC hearing was essentially about safeguards against and limits on naked short selling on the COMEX, despite the noise and distractions surrounding it. - Jesse)

The remaining requests would have to be settled for cash equivalent. "That is tantamount to a default on the trade," says Bill Murphy, chairman of the Gold Antitrust Action committee...

Read the rest here.

Cracking Down on Naked Short Selling of Treasuries

The 'fails to deliver' statistics on debt instruments is almost as interesting, and a bit less opaque, than the naked short selling of equity instruments.

A "fail to deliver" occurs when someone sells an asset such as a Treasury note to another party and then does not deliver it within a reasonable period of time.

As you can see from the chart, this had become a pandemic fraud recently as investors flocked to Treasuries as a safe haven and the usual front running hedges started falling apart.

Let's see how this works, and if the 'financial charge' is more than a wristslap to the hedge funds and banks who engage in these practices.

Now, if someone could kindly turn some attention to the obvious naked short selling in commodities and equities, other than when their banking friends are in trouble, we might see a return to markets based on some reasonable approximation of the fundamentals and price discovery of value, rather than blatant manipulation of nearly everything as facilitated by the demimondes of Wall Street.

The banks must be restrained, and the financial system reformed, before there can be any sustained recovery in the real economy.


New York Fed Applauds Implementation of the TMPG's Fails Charge Recommendation
May 1, 2009

The Federal Reserve Bank of New York welcomes today’s implementation of the Treasury Market Practices Group’s (TMPG) recommendation that settlement fails in U.S. Treasury securities transactions be subject to a financial charge when short-term rates are low. The TMPG worked with both buy- and sell-side market participants to address a weakness in market practices that became apparent last fall when short-term market interest rates neared zero.

The New York Fed has adopted this new trading practice in its own market operations and continues to encourage its adoption by all market participants. (The New York Fed was frontrunning Treasuries and selling them naked short? LOL Maybe they were getting tired of the abusive insider trading since they were now in a position to support the bonds. - Jesse)

"We applaud the dedicated efforts of the TMPG in spearheading the development and implementation of this targeted solution to the settlement fails problem," said New York Fed President William Dudley. "This significant milestone in the evolution of Treasury market practice demonstrates that groups, such as the TMPG, are effective in addressing deficiencies in market functioning and facilitating market best practices."

The New York Fed acknowledges all of the market participants who joined this effort to develop this new trading practice guidance. In particular, the Securities Industry and Financial Markets Association, the Fixed Income Clearing Corporation, the Securities and Exchange Commission and the U.S. Treasury Department have provided critical support and guidance throughout this process.

Brokers Recalling Loaned Shares in Citi

Since this morning Bloomberg reports that major brokerages have been calling in the loaned shares that have been used for legitimate short sales in Citigroup.

This in part explains the rally in Citi today, as the shortsellers cover their positions ahead of a 2:30 PM deadline today by which they must return the borrowed shares.

It does seem rather calculated, particularly its conjunction with the Federal Reserve announcement.

We have not seen this in the general news, just on the Bloomberg TV analyst reporting.

There is the implication that this is a calculated market operation being conducting among big traders and the major brokerage houses who hold the shares for borrowing from customer accounts. Marketwatch seems to imply that this is being precipitated by 'the authorities.'

Nice timing to help bolster the financials after the FOMC announcement. This has the Larry Summers/Robert Rubin touch.

It would be a good thing indeed if the Obama Adminstration did something meaningful to curb naked short selling and enforce the existing regulations. But if they are doing so for only their favorite companies, then this is not market regulation, it is crony capitalism and insider trading.

Seeking Alpha

Citigroup Inc. – Shares are being squeezed once again today and the company has a valuation some 23% higher today with shares stretching above $3.00.

Intrigue continues in the June 5.0 strike options where arbitrageurs are using conversion plays that typically land a credit to take advantage of the squeeze. The volume in that line has more than 150,000 contracts trading both sides today with puts bought and calls sold when investors can position long of the stock.

Earlier in the week rumors did the rounds that the authorities might be on the hunt for hard-to-borrow stock certificates in select financial names.

This in itself has created a surge at AIG and Citigroup as desperate short-sellers try to cover their positions. The conversion trade could be established earlier in the week for a credit of 20 cents, but given the near-panic buying in the stock has shifted to a 1.10 cost to traders.

Goldman Sachs Target of Naked Short-Selling and Price Manipulation Complaints in High Yield Loan Markets

The charge is that as an agent bank Goldman Sachs has access to private information that gives it an advantage in the opaque market of high risk debt, and they have been using that information to target certain portions of the market with naked short selling to drive down prices and reap large profits for themselves at the expense of their clients and other market participants.

This is the template for potential market fraud that we described previously on several occasions. The banks have privileged information and access to funds that precludes a level playing field with other market participants. The uneven enforcement of the rules by the SEC and CFTC and lack of transparency in other markets is another significant factor.

We should note that the fails in this end of the markets are relative small change when compared to the fails in the Treasuries markets as we have previously shown, overseen by the Fed.

Now that Goldman is trading with public funds from the Treasury granted without oversight or restrictions by their former chairman the situation becomes even more outrageous, almost incredible.

Perhaps there is no explicitly legal wrong-doing. And we are only using this allegation against Goldman Sachs as an example. But even a simple top down examination of the market structures shows the weakness of our regulatory process, and the failure of crony capitalism and laissez-faire self-regulation to create markets that are transparent and worthy of trust and confidence for all participants. They more closely resemble dishonest poker games.

Until the financial system is reformed there can be no sustainable recovery.

Bring back Glass-Steagall and honest, responsive, and transparent regulation of the markets.


Bloomberg
Goldman Targeted by Investor Complaints of Naked Short-Selling
By Pierre Paulden and Caroline Salas

Nov. 17 (Bloomberg) -- Investors in the $591 billion high- yield, high-risk loan market are accusing Goldman Sachs Group Inc. of naked short selling to profit from record price declines.

At least two fund managers complained verbally to officials of the Loan Syndications and Trading Association, saying they believe Goldman helped drive down prices by using the technique, according to people with knowledge of the objections. New York- based Goldman is acting against its clients by trying to profit at their expense, the investors said.

A $171 billion drop in the value of the loans in the past year is pitting banks against investing clients on assets once considered so safe they typically traded at par. The drop exposed flaws in an unregulated market where trades can take from several days to months to settle and banks may have information unavailable to investors. In a naked-short transaction, a firm would sell debt it didn’t already own, betting the price will fall before it purchases the loan and delivers it to the buyer.

“The LSTA is closely monitoring issues of naked short selling,” Alicia Sansone, head of communications, marketing and education at the New York-based industry association, said in an e-mail.

The group, comprising banks and money management firms that trade the debt, plans to tighten rules to ensure transactions are settled more quickly and prices reported accurately, Sansone said. She wouldn’t elaborate or discuss the claims against Goldman....

Most Aggressive

The bank was seen as the most aggressive in recent months in selling loans at prices below other dealers’ offers and taking longer than the LSTA’s recommended seven days to settle the deals, according to the investors complaining to the trade group.

There’s no rule preventing naked short selling of loans. The U.S. Securities and Exchange Commission this year banned the practice for 19 stocks including Lehman Brothers Holdings Inc. and Fannie Mae and Freddie Mac from July 21 to Aug. 12 as share prices plunged. New York-based Lehman, once the fourth-biggest securities firm, eventually went bankrupt and Fannie and Freddie, the two largest mortgage-finance providers, were brought under government conservatorship. (Excuse us but isn't naked short selling of stocks illegal in the US? The SEC just does not enforce the law and the list of 19 was just a declaration of vigilant enforcement for a select group of 'special companies.' - Jesse)/em>

The slump in loan prices during the global seizure in credit markets is causing particular disruption in the loan market because the debt typically trades close to 100 cents on the dollar. Prices never were below 90 cents until February this year. By October they had fallen to a record low of 71 cents, according to data compiled by Standard & Poor’s. The decline, which S&P said equated to losses of about $171 billion, helped drive the complaints from fund managers.

‘Shell-Shocked’

“Investors are shell-shocked” by the decline, said Christopher Garman, chief executive officer of debt-research firm Garman Research LLC in Orinda, California. “In many ways they’re all but wiped out.”

Because prices were so stable, short sales of loans were unheard of until now, Elliot Ganz, general counsel of the LSTA, said at the group’s annual conference in New York last month.

“No one ever shorted loans,” Ganz said. “Prices never went down.”

High-yield, or leveraged, loans are given to companies with below-investment grade ratings, or less than Baa3 at Moody’s Investors Service and under BBB- at S&P. Banks typically form a group to arrange the financing. They then find other investors to take pieces of the debt, helping spread the risk.

Those loan parts can trade through private negotiations between banks and hedge funds or mutual funds. One of the lenders involved in the initial deal remains the so-called agent bank, which keeps track of who owns what piece. Unlike bonds and stocks, the debt doesn’t trade on an exchange and has no central clearinghouse.

Agent Banks

When a loan changes hands, the agent bank must sign off on the transaction, meaning it knows exactly who is buying and who is selling. The rest of the market is in the dark. Getting an agent to sign off, also can delay settlement.

“An agent will have a bird’s-eye view of who owns what and when,” said John Jay, a senior analyst at Aite Group LLC, a research firm that specializes in technology and regulatory issues in Boston. “They have information that no one else has....”

Three Days

In the bond market, the standard settlement time is three days following the trade. In a bond short sale, a trader acquires debt by borrowing the security in a deal known as a repurchase contract. The two sides specify how long the bond will be borrowed with the right to renew the pact. Because loans can’t be borrowed through such agreements, any short seller would have to go naked.

While the LSTA doesn’t track the amount of loans currently unsettled, at least 700 trades made by Lehman Brothers Holdings Inc. before it filed for bankruptcy hadn’t cleared, Ganz told last month’s conference....

A Record Number of Buyers Cannot Take Delivery of the US Treasuries that They 'Own'

He who sells what isn't his'n
Must buy it back or go to Prison.
Daniel Drew

Naked short selling and float and reserve plays are causing a record 'failures to deliver' in the US Treasuries markets. Some of this may be a 'kiting' scheme in which the sellers are playing an aribtrage against the slight fees and penalties versus returns on price distortions and extremes in volatility.

Or it might be a case of selling and using the same thing so many times as collateral that you don't really know what is your actual condition, solvent or insolvent. We can think of several (roughly nine) derivative and instrument laden banks that are utterly insolvent if forced to deliver their net obligations.

The Fed cannot even regulate its own products among its own dealer circles. What could possibly possess anyone to believe that they can do this with any other product in a larger, less exclusive market?

There are system breakdowns that have caused signficant spikes in failures, such as the widespread technical failures following the distruptions caused by 911.

But we are not aware of any massive computer system failures and shutdowns at this time. This may be a case of when the going gets tough, the frat boys bend the rules until they break, and then line up for a slap on the wrist from dad's business associates.

Is this because of the failures of Lehman and Bear Stearns and AIG? Hard to believe but we have an open mind. Transparency builds confidence more effectively than rhetoric and empty promises.

Who are the responsible parties? Let's have a list of the prime offenders of this market. We might *not* be surprised at who is failing to deliver what they sell. It might be an indication that they are in trouble. Oops, perhaps that is why we can't have it.

We suspect the Fed is turning a 'blind eye' to this activity. But more transparency would be helpful to alleviate that concern.

And do not be surprised when other things that you think that you are buying or think you own fail to show up.

There are some who see an approaching 'fail to deliver' spike at the COMEX and they may be right. There were some who believed that LTCM was short 400 tons of gold at the time of its failure, and that several central banks stepped in to depress price and increase supply to alleviate the potential shock on counterparties.

Replay in progress? It could get interesting if it is.



Stand and Deliver: Significant Fails in the US Treasury Market - 10 Oct 2008


Delivery failures plague Treasury market
Total hit a record $2.29 trillion as of Oct. 1
By Dan Jamieson
October 19, 2008

The credit crisis is causing a growing number of delivery failures with Treasury securities.

The latest data from the Federal Reserve Bank of New York showed that cumulative failures hit a record $2.29 trillion as of Oct. 1. The federal settlement period is T+1 (trade date plus one day).

The outstanding U.S. public debt is $10.3 trillion.

"Current [fail] levels are at historic levels," said Rob Toomey, managing director of the Securities Industry and Financial Markets Association's funding and government and agency securities divisions. "There's been significant flight to quality" with the market turmoil, he said.

With the strong demand for Treasury securities, "some of the entities that bought Treasuries are not making them available in the [repurchase] market, which is the traditional way to get them," Mr. Toomey said.

Unlike some past bouts with high failure rates that involved particular bond issues, the current high fails involve all types of maturities, he said. (Such as in the 2001-2003 market crash - Jesse)

This month, New York- and Washington-based SIFMA came out with a set of best practices to reduce failed deliveries.

This year, the New York Fed revised its own Treasury market trading guidelines. Its guidelines, originally released last year, warned that short-sellers "should make deliveries in good faith." (And all good boys and girls should remain pure until they are married - Jesse)

LACK OF LIQUIDITY

Chronic failures can increase illiquidity problems in the market and expose market participants to losses in the event of counterparty insolvency, according to the New York Fed.

"There is a question about there being some impact on liquidity if [delivery failures] last for a long period," Mr. Toomey said.

Many retail investors also own Treasury securities, either directly or indirectly. The Treasury market is also an important fixed-income benchmark, so any liquidity problems can affect all participants.

In extreme cases, chronic fails could cause participants to limit their trading in secondary markets, the New York Fed said.

"Who wants to buy what they're not going to get?" said Susanne Trimbath, a market researcher with STP Advisory Services LLC of Santa Monica, Calif. In a September research paper, she estimated that based on failure rates in 2007 and 2008, the cost to investors from failed deliveries is about $7 billion annually. (Pays for the facials - Jesse)

The cost arises because sellers don't have access to their money. In addition, the federal government loses $42 million a year in lost revenue, and the states miss out on an additional $270 million in revenue due to excessive claims of tax-exempt income on state-tax-free Treasury securities, Ms. Trimbath said.

She and researchers at the New York Fed said that some delivery failures are intentional. (We're shocked, shocked! - Jesse)

As with naked shorting of stocks, naked shorting of Treasuries "allows you to avoid the borrowing costs," Ms. Trimbath said.

"There can be circumstances in a low-rate environment where it's cheaper to fail" than deliver, Mr. Toomey said. Such an environment also reduces incentives to act as a lender of securities, he said.

A 2005 study by the New York Fed confirmed that episodes of persistent settlement fails are often related to market participants' lack of incentive to avoid failing. (Thanks for the kind of knowledge that most mothers, teachers, and adults over the age of 25 could have told us for free, propeller heads - Jesse)

"We've got to get the [Securities and Exchange Commission], the Fed and SIFMA in there to force" Treasury traders to deliver securities, Ms. Trimbath said. (That ought not to be hard. We hear the Fed has people on premise every day with most of the probable perpetrators - Jesse)

The Department of the Treasury has a buy-in rule for the cash markets, but the repurchase markets rely on contracts, Mr. Toomey said. Currently there are no penalties for failures, and regulators to date have not required disclosure whether the dealer or the client fails to deliver. (Self regulation at its finest. Sounds like the honor system my neighbor uses to sell tomatoes in the summer from a box in her front yard. Except for the most part the people here in our neighborhood are not greedy, self-centered, shameless, hedonistic shits - Jesse)

By industry convention, fails are generally allowed to roll over until they are eventually closed out, Ms. Trimbath said.

SCRUTINY

She said that scrutiny by the SEC and the Fed, and widespread investigations into short-selling practices, are driving the industry to rein in questionable practices with Treasuries. (Apparently with 'great success,' Borat, given the record number of fails - Jesse)

Mr. Toomey said that one of SIFMA's best-practices suggestions is to require that extra margin be provided by the party that is underwater due to a failed delivery. (Wrist slap by fines is a real deterrent - Jesse)

SIFMA also said that it is establishing a Treasury fails monitoring committee, with representatives from the Fed and Treasury.

The committee will alert the market "when marketwide mitigation, remediation and the attention of management is warranted" because of a high level of fails, SIFMA said in a statement.