Forex Trading Channel #5

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Saxo grim 2008 forecast

A forecast made by Denmark-based Saxo Bank, chaos will take a grip on the world in 2008. Oil prices will skyrocket to 175 dollars per barrel, the Chinese market will collapse by 40 percent, whereas the U.S. will suffer a 25-percent setback. All this will happen because of the mortgage crisis in the USA which already slows down the U.S. economy.... http://english.pravda.ru/world/americas/25-12-2007/103144-economy-0

Crisis may make 1929 look a 'walk in the park'

Section 13 (3) allows the Fed to take emergency action when banks become "unwilling or very reluctant to provide credit". A vote by five governors can - in "exigent circumstances" - authorise the bank to lend money to anybody, and take upon itself the credit risk. This clause has not been evoked since the Slump.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/23/cccrisis123.xml

Fatwa against the dollar

Fatwa against the dollar?

Posted by Ambrose Evans-Pritchard on 17 Dec 2007 at 14:38
Tags: oil, dollar, Saudi Arabia, Fatwa

To all intents and purposes, the Wahabi religious establishment of Saudi Arabia has just issued a fatwa against the US dollar. This bears watching.

Ali al-Naimi, Saudi Arabia's oil minister
Anti-dollar clerics have lobbied Ali al-Naimi, the Saudi oil minister

A message issued by 26 leading clerics warns that inflation has reached intolerable levels in the Gulf kingdom.

While it does not vilify the dollar explicitly, the apparent political aim is to undermine the country's dollar peg.

"The rulers should seek to try to remedy this crisis in a way that would ease people's suffering."

"We direct this message to the rulers and officials: we remind you of Prophet Mohammad's words that you are shepherds who are responsible for your flock," it said.

The statement was posted across the Islamic world. The background to this has been a raging debate in Gulf religious and economic circles about the destructive effects of the sliding dollar.

Among the lead-authors is Sheikh Nasser al-Omar, known for his fatwa against US-led forces in Iraq.

He has long preached the collapse of American-led capitalism, and now sees a perfect moment to plunge the knife. We can guess that al-Qaeda Inc is thinking along the same lines.

My own hunch is that the next al-Qaeda strike will not be a symbolic blow to a great building or city, but rather a carefully-timed economic blow: either by cutting – or trying to cut - the oil jugular, or by trying to precipitate a run on the dollar.

The Gulf pegs are preventing the region from taking action to stop the oil boom spiralling out of control.

Half the Mid-East is now overheating. Property booms have reached unstable extremes in almost all the oil states. Construction has become maniacal.

CPI inflation is 5.35pc in Saudi Arabia, the highest in over ten years. It has reached 10.1pc in the United Arab Emirates and 12.2pc in Qatar.

The dollar pegs – designed to anchor the currencies – are now forcing the Petrodollar economies to import US devaluation and monetary stimulus.

What has been a simmering problem for over a year, has become untenable since the Federal Reserve began slashing interest rates.

The Gulf has roughly $3.5trn under management in wealth funds and central banks, so a dollar shift makes waves.

Qatar has already slashed the dollar holding of its future generation fund from 40pc to 98pc.

Stephen Lewis, global strategist at Insinger de Beaufort, said the Fatwa was ominous.

"The Saudi government has been the one institution in the region battling to preserve the oil link with the dollar. If these clerics are able to wear down Saudi resistance, this could breach the bulwark. The dollar would quite likely be abandoned as the chief currency for pricing oil in world markets," he said.

If the Mid-East breaks the pegs, a chain reaction threatens to follow across Asia. China now has 6.9pc inflation. It may have to ditch its cheap yuan policy soon enough anyway, or face the sort of double digit rises that destroy regimes.

The Saudi royal family rules by a delicate compromise. Although pro-Western in military and economic alliances, it relies on the endorsement of the Wahabi clerics as a key source of legitimacy.

Reluctance to confront this menacing bloc is the main reason why Riyadh tolerated - and helped – the Bin Laden network for so long.

The statement called on the Saudis to take action to stop food price soaring to fresh highs, if necessary with subsidies on key staples.

For now, the dollar is bouncing back. Speculative flows have swung back from euros to dollars after America's CPI inflation shock of 4.3pc released last week.

One week's data mean nothing. As the Fed cuts rates ever further to the cushion US property crash bites, Mid-East inflation will go from bad to seriously ugly with the policies now in place.

The Saudis, Qataris, and Emirates have all said they will preserve the pegs. But fatwas tend to up the ante.
Posted by Ambrose Evans-Pritchard on 17 Dec 2007 at 14:38

http://blogs.telegraph.co.uk/business/ambrosevanspritchard/december07/fatwa.htm

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Forex Trading Channel #3

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Fed cuts deal with foreign central banks

"Today, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing measures designed to address elevated pressures in short-term funding markets.

Federal Reserve Actions
Actions taken by the Federal Reserve include the establishment of a temporary Term Auction Facility (approved by the Board of Governors of the Federal Reserve System) and the establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank (approved by the Federal Open Market Committee). 

Under the Term Auction Facility (TAF) program, the Federal Reserve will auction term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window.  All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank and that are eligible to borrow under the primary credit discount window program will be eligible to participate in TAF auctions.  All advances must be fully collateralized.  By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress.

Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate).  The first TAF auction of $20 billion is scheduled for Monday, December 17, with settlement on Thursday, December 20; this auction will provide 28-day term funds, maturing Thursday, January 17, 2008.  The second auction of up to $20 billion is scheduled for Thursday, December 20, with settlement on Thursday, December 27; this auction will provide 35-day funds, maturing Thursday, January 31, 2008.  The third and fourth auctions will be held on January 14 and 28, with settlement on the following Thursdays.  The amounts of those auctions will be determined in January.  The Federal Reserve may conduct additional auctions in subsequent months, depending in part on evolving market conditions. 

Depositories will submit bids through their local Reserve Banks.  The minimum bid rate for the auctions will be established at the overnight indexed swap (OIS) rate corresponding to the maturity of the credit being auctioned.  The OIS rate is a measure of market participants' expected average federal funds rate over the relevant term.
 The minimum rate for the December 17 auction along with other auction details will be announced on Friday, December 14.  Noncompetitive tenders may be accepted beginning with the third auction.  The results of the first auction will be announced at 10 a.m. Eastern Time on December 19.  The schedule for releasing the results of later auctions will be determined subsequently.  Detailed terms of the auction and summary auction results will be available at http://www.federalreserve.gov/monetarypolicy/taf.htm. 

Experience gained under this temporary program will be helpful in assessing the potential usefulness of augmenting the Federal Reserve's current monetary policy tools--open market operations and the primary credit facility--with a permanent facility for auctioning term discount window credit.  The Board anticipates that it would seek public comment on any proposal for a permanent term auction facility. 

The Federal Open Market Committee has authorized temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB).  These arrangements will provide dollars in amounts of up to $20 billion and $4 billion to the ECB and the SNB, respectively, for use in their jurisdictions.  The FOMC approved these swap lines for a period of up to six months."

http://www.federalreserve.gov/newsevents/press/monetary/20071212a.htm

 

http://news.bbc.co.uk/2/hi/business/7140771.stm The Federal Reserve, European Central Bank and central banks from the UK, Canada and Switzerland are to jointly help banks deal with the credit crunch

 

Bank of America shutting $12 billion cash fund

Bank of America Corp. said Monday that it's shutting a $12 billion a money-market fund of sorts and halting cash withdrawals after losses from complex investments tied to the mortgage crisis.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aX9QvlgE5JGo&refer=home

other articles…

• Fannie and Freddie are bracing for additional losses, which I'd pencil at somewhere between $10-$15 billion for the pair.
  
• H&R Block's losses were bigger than expected
  
• US ad spending aimed at consumers is nearly flat for the year - never a good sign in the much touted 'consumer-driven' economy.
  
• China continues to drag its feet raising the Yuan, although it has come up a tad.
  
• But the real story is how China is slamming the brakes on lending, understanding better than our Fed/bankster cabal that money is created into being by lending activities.  Gee, how about that?  The US M-3 reconstructed rate (since the Fed decided that doesn't matter!!!) is pressing 18%.
  
• And oil has continued in the $90 range with folks like Boone Pickens saying that $100 (+?) oil is almost a certainty within 6-months.
  

 

The End of Dollar as King – translated from French Le Monde

Le Monde, France

The End of Dollar as King

EDITORIAL

Translated By Elias Mokole

December 09, 2007

France - Le Monde - Original Article (French)

Will the fall of the dollar accelerate out of control? Will the euro, inflated like a balloon, rise without limit to $1.55, $1.60, $1.70 or more? As the headline in the British weekly The Economist declared last week, this black scenario brings "panic" to financial circles. The crash of the dollar is not the most probably scenario, but it is no longer considered to be impossible.

Since its backing by gold was ended on the 15 August 1971, the dollar has lost more than a third of its value against other currencies. Its fall, therefore, did not start yesterday. It had been foreshadowed by crises, particularly in the late 1980s when the Japanese sumo wrestler seemed to be able to shake the American empire. But neither run-of-the-mill devaluations nor other crises have managed to challenge the supreme role of the dollar as the core of the global monetary system.

On the contrary. Emerging economies of Asia and the rich nations of the Persian Gulf have, for convenience, attached ('pegged' in financial terms) their currencies to the dollar. It is as if the system born with the 1944 Bretton Woods Agreement, which died precisely on the 15 August 1971, had been restored de facto. Outside continental Europe, the planet has restored a virtual global monopoly - creating a "quasi-dollar zone." Economists called this system Bretton Woods II .

And it is this Bretton Woods II that now threatens to come completely apart. The dollar is now suffering from a myriad sources of distrust in the short and long terms.

The first factor is the weakness of the American economy. Will there be recession, or not? Martin Feldstein, a former advisor to Reagan, now estimates that the probability of a decline is 50%. Clinton advisor Larry Summers believes that there will be a recession, and predicts that it will be long, going "beyond 2010." The Federal Reserve is tempted to lower interest rates to give itself some air - but quietly - because doing so would risk reigniting fears of inflation. There is talk in the United States of the return of stagflation  - low growth with inflation – a terrifying hydra that has not been seen in 20 years. All of these considerations dull the shine of the dollar.

The second reason is the sub-prime crisis. It is now believed to be under control, but after two weeks it has re-emerged, casting doubt on the solidity of American banks (what is their maximum exposure?). And will it worsen in early 2008? None of these things are reassuring to those who invest in dollars.

The third element, more well known but even more serious, is the trade deficit. It fell a little with the value of the greenback, which makes American-made products more competitive. But the trade gap remains at 5.5 % of GDP: the dollar would have to be devalued significantly further to balance the books and eliminate the deficit.

All of the ingredients have come together to continue the slide. But another factor may contribute to the acceleration: the elimination of the fixed exchange rates used by developing nations and, more generally, the use of holding of currencies as reserves and to make payments.

Brazilian Gisele Bündchen, the world's most highly paid model, is not the only person who wants checks, "in any currency other than the dollar," according to Forbes (the beautiful woman later issued a denial; she accepts all checks). Ann Lauvergeon, the CEO of Areva, wants to be paid in Euros for Chinese nuclear reactors. Venezuela and Iran will soon reject dollars for political reasons. [Editor's Note: Iran has already stopped accepting dollars as payment for oils. See relevant articles on the Watching America homepage] Certain Gulf Emirates have officially decided to keep the dollar. Developing countries have accumulated $3 trillion in reserves, or 75 % of the global total. But what will China do, with $1.4 trillion? "This record reflects China's growing influence on the global economy and finance," says Jacques de Larosière, former head of the IMF. In particular, he says that it shows that "the world of finance" has passed into its hands. Will China challenge the dollar? "It is not in their interest to implement aggressive diversification policies, which could trigger a fall in the American currency and a depreciation of their assets," Larosière emphasizes. But since 2005, a trend toward diversification has become evident. The acquisition of businesses using "national funds" in emerging countries are part of this strategy.

We are "at the beginning of a relative decline of the dollar," summarizes Professor Michel Aglietta. The only way to reverse the process, he continues, would be to reduce the trade deficit rapidly, eliminating the primary cause of the greenback's weakness. Else, holders of the dollar will gradually get out of it, praying that their sales do not trigger "panic" in foreign exchange markets.

The dollar has been dethroned; the monetary multi-polar world has been born. How will it end up? Certainly, there will be a period of fluctuating exchange rates, according to Michel Aglietta. Within this context, since the euro is not the only rising currency, Asia should soon unite monetarily. According to Jacques de Larosière, "the IMF should regain its lost influence, and the United States, China and Japan, the three main sources of the disequilibrium, should accept the multilateral game." The wait for the post-dollar monetary world promises to be neither stable nor fair.

http://www.lemonde.fr/web/article/0,1-0@2-3232,36-987417,0.html

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Derivatives soar 27% to 681 Trillion

BofA money market fund dives 70%

Bank of America shuts new investors out of money fund--recently worth $40B -- citing credit crisis.... http://money.cnn.com/2007/12/10/news/companies/boa_trouble.ap/index.htm?postversion=2007121014

WaMu warns of loss, slashes jobs

Nation's largest thrift also cuts dividend in response to credit and housing market woes. Analyst says CEO is safe.... http://money.cnn.com/2007/12/10/news/companies/wamu/index.htm?postversion=2007121018

Posted On: Monday, December 10, 2007, 8:25:00 PM EST

 

Derivatives Trades Soar To Record $681 Trillion In Third Quarter

 

Derivative Trades Soar to Record $681 Trillion in Third Quarter By Hamish Risk in London, Bloomberg Dec. 10, 2007

 

Dec. 10 (Bloomberg) -- Derivatives traded on exchanges surged 27 percent to a record $681 trillion in the third quarter, the biggest increase in three years, the Bank for International Settlements said.

 

Interest-rate futures, contracts designed to speculate on or hedge against moves in borrowing rates, led the increase with a 31 percent increase to

$594 trillion during the three months ended Sept. 30, the Basel, Switzerland-based BIS said today in its quarterly review. The amounts are based on the notional amount underlying the contracts.

 

Trading surged as investors bet on losses linked to record U.S. mortgage foreclosures and policy changes by the Federal Reserve and the European Central Bank to offset the credit slump. The Fed cut its benchmark interest rate by half a point to 4.75 percent in September, the central bank's first reduction in four years.

 

``The turbulence in financial markets led to the busiest trading on record,'' BIS analysts Ryan Stever, Christian Upper and Goetz von Peter wrote in the report.

 

Trading in stock index futures and options rose 19 percent to a record $81 trillion in the third quarter, as investors speculated on whether the credit-market losses would spread to the equity markets.

 

The Standard & Poor's 500 index rose 1.74 percent in the three months to Sept. 30. The Dow Jones Stoxx 600 Index in Europe fell 3 percent in the same period.

 

``Equity investors are using derivatives more aggressively as they have come to understand the more sophisticated instruments over time,'' said Jim Josephson, head of derivatives flow trading at Bear Stearns Cos. in London.

 

Currency Swings

 

Swings in currencies increased as the turmoil in the U.S. subprime mortgage market prompted investors to dump high- yielding assets financed through low-interest currencies such as the yen and Swiss franc. Volatility among the seven most-traded currencies surged almost 24 percent in August, the most since December 1996, a JPMorgan Chase & Co. index shows.

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=ad71potU0EbM&refer=home

 

Weekend News, CompUSA closing, House prices falling, hedge fund manager found dead in FL pool

CompUSA, Falling to Competition, to Shut Down After Holidays

CompUSA, the computer retailer that Mexican billionaire Carlos Slim owned since 2000, will shut its doors after 23 years, succumbing to competition from Best Buy Co. and Wal-Mart Stores Inc.

Home Price Drop Biggest in 25 Years

U.S. home prices dropped the most in a quarter century in the three months to end-September on an annualized basis as inventories, restrictive lending and a credit crunch yanked support from the market, a Freddie Mac index showed Tuesday.

Florida Just First to Face National Run on the Bank

The investment pool, which contained $27 billion this summer, now has $14 billion, the result of withdrawals by municipalities with keenly developed senses of self- preservation. On Nov. 29 the board told the remaining participants they couldn't withdraw any more money from the pool.

House prices seen falling 30 pct

Housing markets from Punta Gorda, Florida, to Stockton, California, will crash and suffer price drops of more than 30 percent before the housing crisis is over, a report from Moody's Economy.com said on Thursday.

A Lurid Aftermath to a Hedge Fund Manager's Life

A life of private jets and black-tie balls ended with Seth Tobias, a wealthy investment manager and a familiar presence on CNBC, floating face down in the swimming pool of his mansion here.

HOME IS WHERE YOU PUT YOUR STUFF

Dollar in Peril

Subject: this just in: oil dollar really in peril

Date: 12/3/2007 12:37:18 P.M. Pacific Standard Time

http://www.bitsofnews.com/content/view/6352/

and

http://www.marketoracle.co.uk/Article2849.html


Kent:

My [anon] works for a petroleum group of companies.
The orders for D2 and M100 that are due within the next
3 weeks have been halted. Price quotes are based on
confirmation of funds called a POF. With that you get
a POP.  But no POP's can be issued within the next 10-14 days.
This was announced as the Summit now in session in the Middle
East is conferring the new system for a basket of currencies or the
Euro to take over as the new petro-dollar.
If this really does happen before xmas, it will wipe out huge
investments over-night.

Hence the companies that are buying right now, have to wait and wait
for this to be reconciled. It is also the end of the year and GAZPROM
group is preparing allocations for the next year , allowing the
refineries to take a breather.

Many of the brokers' around have called her company for immediate assistance.

I would prepare for more difficult conditions.

http://www.cyberspaceorbit.com/petrodollar.htm

The dollar's perfect storm worsens

Europe's inflation is likely to prompt its central bank to raise interest rates -- five days before the Fed is expected to lower them here. That's bad news for the buck.... http://articles.moneycentral.msn.com/Investing/JubaksJournal/TheDollarsPerfectStormWorsens.aspx

secret banking system

We have a secret banking system built on derivatives and untouched by regulation, says Pimco's Bill Gross.... http://money.cnn.com/2007/11/27/news/newsmakers/gross_banking.fortune/index.htm?postversion=2007112810

Morning Strategist Summary: Wieseman, Caron, Peters & Chakrabortti

Subject: Morning Strategist Summary: Wieseman, Caron, Peters & Chakrabortti

Ted Wieseman

• LIBOR spreads over Fed Funds are high and have been rising
  

·         The blowout in the spread of LIBOR over Fed Funds has partially short-circuited the transmission of the Fed's lowering of the fed funds rate into a positive impact on the economy

·         The pressure in the interbank lending market is a key symptom of the biggest challenge facing the economy at this point: the forced reintermediation of the banking system that is pressuring bank balance sheets and reducing the availability/raising the cost of credit

·         With significant, rising, and unpredictable demands on their capital, banks have preferred to stay liquid and demanded a significant premium to lend term in the interbankmarket

·         Problems have recently been exacerbated by balance sheet pressures tied to the year-end for a number of key firms

·         The Fed announced steps to attempt to tackle this problem directly by offering regular term repos bridging the year-end

·         If targeted and unconventional measures fail and the Fed is determined to get LIBOR down, the only alternative would be the blunt measure of overcoming the widening in LIBOR/fed funds spreads through more aggressive fed funds rate cuts

o       Even if spreads of LIBOR over fed funds stay wide or widen further, enough fed funds rate cuts could at least get the absolute level of LIBOR down substantially

·         Expects Kohn to signal a change in Fed stance in his speech tomorrow: the market  is fully expecting a rate cut and has been for some time now

 
 

Jim Caron

·          "Renormalization thesis" - liquidity was cheap and it was easy to attain leverage, which fueled asset inflation

·         Now we're finding the exact opposite, as liquidity has become more costly

·         This will have the greatest impact on the assets with the highest dependency on liquidity and leverage - especially Financials

·         Key with the Fed is to figure out how to address increased liquidity costs without cutting rates so much that it spills over into the broader economy

·         Market of Many trade: re-pricing of risky assets with high dependence on liquidity and leverage = breakdown of correlation across different asset classes

·         Fed is doing 45 day RP's to get us over the year-end hump, after which liquidity typically becomes more available

·         Fed is trying to keep liquidity up over the next 4-6 weeks until we get past this rough patch

·         The problem is that this seems to be a recurring theme and it doesn't seem to be just a rough patch

·         The Fed is trying to allow the re-pricing to happen, but wants to slow the pace of it

·         Jim thinks the yield curve will steepen quite a bit, out to 150-200 bps by the end of 2008

·         If LIBOR/Fed spread continues to widen further, he'd expect a 50bps cut in December - thinks the fed would have no choice but to cut funds much more aggressively

·         If your view is that the Fed will need to cut aggressively, he recommends putting on his "curve steepener" trade

 
 

Greg Peters

• Expects a short-covering rally but is still negative
  
• Policy makers and central banks do seem to have moved into an "action phase"- which is a good start but we have a long way to go
  
• What's important about the Citigroup news is that it separates big fish from little fish - for the contrast, look at ABK continuing to weaken
  
• Knock-on effects on economy should continue to play out
  
• Started with homebuilders, then into financials, then consumer discretionary, and the next leg will likely be cyclicals
  
• Recommending long position in AAA ABX - dealers and banks still have onerous positions which they've hedged out with ABX, which has depressed values beyond where they should be
  

 
 

Abhijit Chakrabortti

• Behavior of the yield curve is important to Financials; we've seen LIBOR rates go up and treasury rates falling
  
• In mid-89, fed started cutting rates and the YC was inverted-fed cut from 9.5% to 7% in a slow, sedate manner and the yield curve didn't move much (from 100 bps inverted to flat), while S&P financials fell 45%
  
• Only after the Fed finally started to cut aggressively did the rally take place
  
• Since the fed has cut this year, by 75 bps, Libor rates have come down by less than the Fed (65 bps) and the yield curve is virtually unchanged
  
• So he thinks this provisioning cycle will be far worse than 1990
  
• The unchanged YC will be devastating for NIM and overall earnings for Financials
  
• For a sustained rally to be mounted in financials, the curve has to steepen with treasury yield going UP and MM/Libor rates falling, telling us that liquidity concerns have eased
  
• Magic words the market is seeking is not that the balance is "roughly equal," but that the balance of risks has shifted decisively toward growth and that they will aggressively cut as much as is necessary to address the problem
  
• In the July sell-off, MO and CL went flat, but this time they have rallied - this is a sign that the focus should be on - the market internals
  
• Fed needs to shift from the denial phase at least to the recognition phase (not even the action phase)
  
• Everyone keeps telling him the bearish view of Financials is such a consensus position - but everyone at Palmetto was bullish on Financials
  
• Who thinks Financials could fall another 20%?  That is the real contrarian view
  
  • Finding out what is non-consensus is just as important as being contrarian
    

.5 Quadrillion in Derivatives

Global Derivatives Market Expands to $516 Trillion (Update1)

By Kabir Chibber

Nov. 22 (Bloomberg) -- The market for derivatives grew at the fastest pace in at least nine years to $516 trillion in the first half of 2007, the Bank for International Settlements said.

Credit-default swaps, contracts designed to protect investors against default and used to speculate on credit quality, led the increase, expanding 49 percent to cover a notional $43 trillion of debt in the six months ended June 30, the BIS said in a report published late yesterday.

Derivatives of debt, currencies, commodities, stocks and interest rates rose 25 percent from the previous six months, the biggest jump since the Basel, Switzerland-based bank began compiling the data. Investors have been turning to credit derivatives as a way to speculate on a growing risk of defaults amid record U.S. mortgage foreclosures.

``The pace of increase in the credit segment outstripped the rises in other risk categories,'' Christian Upper, a BIS analyst in Basel, wrote in the report. Credit-default swaps are ``the dominant instrument,'' accounting for 88 percent of credit derivatives, the BIS said.

The money at risk through credit-default swaps increased 145 percent from last year to $721 billion, the report said. The amount at stake in the entire derivatives market is $11.1 trillion, according to the BIS, which was formed in 1930 to monitor financial markets and regulate banks.

Interest Rates

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in interest rates or the weather. The report is based on contracts traded outside of exchanges in over-the- counter market.

Increased trading pushed ICAP Plc to a record this week as the world's largest broker of transactions between banks reported a 34 percent increase in net income to 80.1 million pounds ($164.4 million). The London-based company, which profits when prices fluctuate, handled a record amount of transactions as financial institutions bet on or hedged against losses linked to home loans.

The Markit CDX North American Index of credit-default swaps on 125 investment-grade rated companies has almost tripled since February to 90 basis points from 33.

Buyers of credit-default swaps receive the face value of underlying debt in the event of nonpayment, in return for the defaulted securities or cash equivalent. A basis point increase in the cost of a contract covering $10 million of debt is equivalent to $1,000 a year.

Interest Rates

Interest-rate derivatives remained the largest part of the market, gaining 19 percent to $347 trillion outstanding by June, the report said. Single currency interest-rate swaps made up 79 percent of the market.

Foreign exchange derivatives grew by 21 percent to $49 trillion as the dollar declined 2.5 percent against the euro in the first half. Contracts on the Swiss franc increased 32 percent, trailed by 27 percent increases in both the U.K. pound and the Canadian dollar contracts, the BIS said.

Equity market derivatives grew by 23 percent in the first half to $9 trillion. Growth was highest in Latin America equity derivatives at 43 percent and lowest in Japan at 6 percent. Japan's Nikkei 225 index rose 4.8 percent during the period while the MSCI Latin America index increased 25 percent.

Last Updated: November 22, 2007 07:53 EST

http://www.bloomberg.com/apps/news?pid=20601087&sid=a58EF32GpHeg&refer=home