Levine on Wall Street: It's All Derivatives

Physically settled forwards, analyst surveys, publicly traded partnerships, research leading to banking mandates, currency manipulation, cold storage, hot wallets, it's all here.

Everything is a derivative.

Here is a story about how the European Securities and Markets Authority is in a bit of a tizzy because different European securities regulators have different views about what derivatives trades need to be reported, because they have different views about what is a derivative. For instance, the U.K. is "more permissive" than some other countries:

The U.K.'s Financial Conduct Authority views physically-settled commodities contracts and foreign exchange forward trades with settlement dates up to seven days as spot trades rather than derivatives, allowing them to go unreported.

Fun fact: In the U.S., when you buy a share of stock, you're actually entering into a physically settled equities forward trade with a settlement date of three days. (Because you enter an agreement now, at a fixed price, to exchange cash and stock in three days. This is called "T+3 settlement." 1 ) And I don't even know what a really spot physical commodities trade would look like; it would be very inconvenient to bring your barrels of oil with you to the exchange. If you're looking for derivatives everywhere, you'll find them everywhere, which is possibly ESMA's problem here.

Stay away from surveys .

I feel some obligation to mock Eric Schneiderman's crusade to make equity analysts stop filling out surveys, especially since I've mocked it previously. But this Jonathan Weil post right here at Bloomberg View mocks Schneiderman sufficiently for both of us, I think, so just go read it. Particularly the update describing the actual settlement agreement, under which equity research analysts can't respond to "any formal, systematic, and periodic question or set of questions concerning the U.S.-listed equity securities of a company or companies that are directed to research analysts by buy-side clients in order to gather non-published analyst sentiment." But picking up the phone when big buy-side clients call is fine! Go ahead and answer their questions; that, after all, is your job. It's only the surveys that are a problem. Well done, Eric Schneiderman, you have leveled the playing field.

Why not tax private equity more ?

I don't really put a lot of stock in "guy introduces new tax bill" as a way of predicting what the tax law will be, but Representative Dave Camp, the chairman of the House Ways and Means Committee, has a plan that "would lower the top income tax rate to 25 percent from 39.6 percent," but "would also add a 10 percentage point tax surcharge for carried interest, creating a 35 percent tax rate for the millions of dollars in such income that private equity executives take home." I guess the theory is that carried interest has been taxed at unfairly low rates, so rough justice requires that it be taxed at unfairly high rates? Strange. Camp's bill apparently also would subject publicly traded private equity partnerships to corporate tax. David Rubenstein of the Carlyle Group gets the last word in this story, saying "I don't think that there will be any tax legislation passed by this Congress at all," and that seems more likely than the extra 10 percent thing.

Nice work Morgan Stanley .

Is it a little suspicious that on Tuesday Morgan Stanley released a big bullish research report on Tesla, and on Wednesday Morgan Stanley was mandated as a bookrunner on Tesla's $1.6 billion convertible notes financing? Ehhhhhh. I mean, the analyst was sort of fishing for a financing, but at the same time, the underwriter lineup on the convertible is identical to the one on Tesla's 2010 initial public offering. (And, in particular, Morgan Stanley is not lead left.) I'd say it's more a case of underwriting begets research begets underwriting begets etc., in a gentle supportive cycle, than it is "they released that report to get that mandate."

Nice work RBS .

Royal Bank of Scotland is "the least trusted company in the least trusted sector of the economy," says some hater. Oh wait no that's RBS's chief executive officer. Anyway today RBS "posted the biggest full-year loss since its bailout in 2008" but they'll get better, they promise, just trust them.

Nice work People's Bank of China .

"China's central bank engineered the recent decline in the country's currency to shake out speculators as it prepares to allow a wider trading range for the tightly tethered yuan," which is just fantastic. The way to prepare for a market-based currency regime is definitely to get rid of all the potential market participants you don't like. There are some parallels to recent tech IPOs.

We're gonna get a Men's Wearhouse/Jos. A. Bank trial .

"A Delaware judge on Tuesday expedited Men's Wearhouse's lawsuit against its smaller rival, Jos. A. Bank, in an ugly takeover battle between the men's suit retailers," which is a weird bit of editorializing. I think the takeover battle is quite attractive, though perhaps she's talking about the suits?

Welcome to Brooklyn , JPMorgan!

Oh you wacky hipsters. Seriously MetroTech Center, where 2,000 JPMorgan employees are moving, is about the least hip place on earth; Park Avenue in the 40s is more bohemian.

How's your Bitcoin tolerance ?

Here is a long interesting article on "Why Bitcoin Matters For Bankers," if you're still up for that sort of thing. Here is Felix Salmon being skeptical about claims that the most popular Bitcoin exchange turning out to be a massive fraud will be good for Bitcoin. (Uh?) And here is an absolutely bonkerssauce "MtGox Situation: Crisis Strategy Draft" that says things like "At this point 744,408 BTC are missing due to malleability-related theft which went unnoticed for several years. The cold storage has been wiped out due to a leak in the hot wallet." That does sound bad!

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

  1. An even more fun fact is that settlement dates up to 5 or 10 days are treated as spot trades, in U.S. equities, for at least some purposes, but this has gotten a little arcane for a linkwrap.

(Matt Levine writes about Wall Street and the financial world for Bloomberg View.)

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Toby Harshaw at tharshaw@bloomberg.net

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