Aurelia Butler

NEW YORK (Reuters) – A decade after a manipulation scandal turned global regulators and investors against the London Interbank Offered Rate (LIBOR) as the global interest rate benchmark, major clearing houses are in the final weeks of the nearly $50 trillion transition of the U.S. rate swaps market to its successor.The U.S. interest rate swaps market, with daily turnover of about $1 trillion, is in the last phase of its conversion into the risk-free rate called the Secured Overnight Financing Rate (SOFR), from dollar LIBOR, which is set to expire at the end of June. Interest rate swaps, a measure of the cost of exchanging fixed rate cash flows for floating rate ones over a specific period, give businesses a way to manage interest rate risk and are used by investors to express views on where borrowing costs will go.Since its introduction in 1986, LIBOR grew to become the dominant reference rate on loans and derivatives. Regulators, however, mandated LIBOR’s termination after fining the banks that set the rate billions of dollars for rigging it.In contrast, SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities in the repurchase (repo) market.The two main derivatives clearing houses, the CME Group (NASDAQ:CME) and LCH, have started converting cleared U.S. dollar LIBOR swaps into cleared SOFR swaps this year. LCH will finish this month and the CME by July. CME’s and LCH’s conversion followed successful transitions of Swiss franc, euro, sterling and yen LIBOR-listed derivatives in 2021.LCH, which clears more than 90% of global rate swaps, converted the first part over April 22 to 23, with an aggregate notional value of $1.5 trillion worth of contracts. The total value of contracts for conversion by LCH is $45 trillion.”What we did was a contractual conversion of a portion of LCH’s U.S. dollar LIBOR-linked cleared swaps,” said Phil Whitehurst, head of service development and rates at LCH.”We made an explicit change to those contracts, about 50,000 of them. We explicitly changed the floating rate benchmark on those contracts from U.S. dollar Libor to U.S. dollar SOFR.”LCH’s second conversion will take place on May 19.The CME, meanwhile, converted some LIBOR swaps on March 24, as well as 7.5 million contracts in Eurodollar open interest and $4 trillion in cleared U.S. LIBOR swaps to corresponding SOFR derivatives in April. It will then convert zero-coupon swaps on July 3 along with any U.S. LIBOR swaps cleared after the primary conversion. “The conversion of Eurodollar futures, options, and USD LIBOR cleared swaps was successfully completed according to fallback procedures incorporated into the products’ respective Rulebooks, and after extensive consultation across market participants,” said Agha Mirza, CME’s global head of rates and over-the-counter products.Eurodollar futures, which tracked short-term funding rate expectations over several years, was one of the most heavily-traded assets in the world. Investors hedged interest rate risk in this market.Eurodollar futures last traded on April 14, with the CME converting those contracts into SOFR units. The April, May and June 2023 eurodollar futures and options will still be available to trade until their contract’s expiration.”The conversion was well-telegraphed, but is still meaningful given the importance of eurodollars in curve construction and interest rate risk hedging,” wrote TD Securities analysts in a research note.”Trading activity has mostly transitioned across to SOFR. So 94%-95% of risk changing hands in swaps these days are being pegged to SOFR as a benchmark already,” said LCH’s Whitehurst.SOFR swaps have consistently accounted for more than 85% of daily volumes on average of interest rate risk traded in the outright swaps market since June 2022. LIBOR swaps, on the other hand, have accounted for less than about 10% of the overall volume, according to a report from the Alternative Reference Rates Committee (ARRC), a group of private-market participants convened to help with the transition from USD LIBOR to SOFR. More

A majority of EU member states are pushing for legislation to address shortages of critical drugs and to reduce dependency on imported chemicals from China and other countries.In a paper seen by the Financial Times, Belgium and 18 other countries — including Germany and France — have gone further than Brussels’ recent proposals to overhaul the bloc’s pharmaceuticals laws, calling for a “last-resort” mechanism to swap medicines between member states and the establishment of a list of critical drugs whose supply chains must be monitored.The Covid-19 pandemic and Russia’s full-scale invasion of Ukraine have thrown into sharp relief both the fragility and strategic importance of pharmaceutical supply chains.“It’s a bit like Russian gas,” said an official from one of the countries pushing the proposals. “When it’s cheap and flowing, it’s great for your industry. Until it doesn’t, and then it’s really expensive.”Since suffering severe shortages of Covid jabs at the beginning of the vaccination campaign in 2021, Europe has had to contend with problems in the supply of antibiotics, blood clot drugs and insulin, as well as fever and pain medications.“Medicines shortages have partly been caused by the increasing monopolisation in the market,” said Frank Vandenbroucke, Belgian health and social affairs minister. “Imagine what a pandemic, natural disaster, war or even a manufacturing glitch could mean for the world’s supply of medicines. Within the EU and with our partners globally we are now looking at ways to secure supply.”According to the Pharmaceutical Group of the European Union, more than three-quarters of its member countries surveyed in 2022 reported a worsening of drug shortages.The scarcity problem has been compounded by inflationary pressures that have raised costs and eaten into the margins of generic drugs makers, which typically sell at much lower prices than branded versions. Another concern is that the production of active pharmaceutical ingredients, the critical inputs of medicines, is concentrated in regions of China and India. The paper said this made supply chains potentially fragile in the event of geopolitical or macroeconomic disruption.“The EU is becoming increasingly dependent on imports from a few manufacturers and regions for its medicines supply, adding a security dimension to the question,” the paper said.“In 2019, globally more than 40 per cent of APIs were sourced from China. Furthermore, almost all API producers depend on China for intermediate inputs, even if they are located in another country.”For half of these crucial ingredients, there were only five manufacturers in the world, the paper said.

The EU already aims to tackle some of these issues with a vast overhaul of pharmaceutical legislation for the bloc, announced last week. The initiative, which needs approval from member states and the European parliament, aims to create a single market for medicines to ensure equal access to drugs, with rewards for drugmakers that supply the bloc’s 27 countries. The EU’s draft legislation also includes plans to take control of drug production in the event of a public health emergency. It includes plans for a list of critical drug ingredients, a requirement for stockholders to inform Brussels of supply levels and for manufacturers to alert Brussels if they are facing shortages. However, the 19 member states want to go further. Another proposal for a “Critical Medicines Act” would use planned EU legislation on computer chips and critical raw materials as blueprints, the paper said.The paper will be discussed at an informal meeting of health ministers this week in Stockholm. The European Commission declined to comment. More

The writer is vice-chair of Evercore ISI and a former member of the management committee of the New York FedEurope — with the exception of Switzerland — has had a good banking crisis so far, with no domestic stress. This is not an accident: the EU has done a better job of regulating and supervising its banks than the US. But it would nonetheless be wildly imprudent to assume that some variant of what happened in the US could not happen in Europe.This means that the European Central Bank — whose rate-setters meet on Thursday — must proceed carefully with its remaining rate rises and it should be a wake-up call to complete banking union.European banks, like US ones, face large unrealised losses on assets acquired during the period of ultra-low interest rates that fell in value when interest rates shot up. As in America, some losses are on government bonds, but eurozone banks also hold a lot of fixed-rate mortgages.A bank that made a 20-year fixed-rate loan at a rate of 1.5 per cent will face losses year after year if it has to pay more than half the current ECB deposit rate of 3 per cent for its own funding — even if the loan does not need to be sold and the loss crystallised up front.Europe is better prepared for this because — unlike their US counterparts who exempted midsized regional banks from certain regulations in 2019 — the EU authorities applied the full set of liquidity and capital regulation across their banking system.EU supervisors also zeroed in on interest rate risk with stress tests that involve a big rate shock applied broadly to European banks. This helps explain why the bloc has not experienced US-style stress to date.However, the likelihood that some bank somewhere in the EU ended up badly mismanaging interest rate risk in ways that were missed by its national supervisor must still be quite high.Moreover, while European supervisors stress tested banks for an interest rate shock (on the asset side of their balance sheets) they did not test for the other half of the stress that hit US regional banks — a simultaneous shock to the stickiness of bank deposits (on the liabilities side).This shock to stickiness led to deposits fleeing Silicon Valley Bank at a pace eight times the fastest run in the 2008 financial crisis, fatally wounded First Republic and, for a period, destabilised the entire US regional banking system. It was the combination of this shock to stickiness of deposits with the interest rate shock that was novel and dangerous.We do not really understand the shock to stickiness in the US, nor know how persistent it will be. But the underlying technology shock from mobile internet banking that allows customers to move deposits at the flick of a finger is present in Europe, too.Moreover, Europe is worse placed to deal with such a twin shock were it to arise. Deposit insurance at €100,000 is too low, and there is no systemic risk exemption of the kind the US authorities invoked to protect all depositors and quell runs, while Europe’s single resolution mechanism for failing banks is too rigid.And after years of gridlock and failure to complete banking union, there is still no common European deposit insurance fund, raising the risk that a bank crisis could reignite a bank-sovereign “doom loop” with bank losses threatening the solvency of weak governments and deposits fleeing weaker countries to stronger ones.The ECB is standing behind periphery debt with its new transmission protection instrument, or TPI, bond-buying tool, but this is as yet untested. The failure of European bank stocks to rebound fully is telling us that risks remain. Even without domestic stress, banks will be less profitable with higher funding costs and — as the new ECB bank lending survey shows — they will tighten credit further.With core inflation elevated, the ECB does still need to edge rates a bit higher, or risk a loss of inflation credibility and a spike in long-term interest rates that could ignite a bank crisis.But the central bank will need to proceed very carefully to avoid shocking the system. With additional credit tightening already emerging, this means no return to jumbo-sized half-point rate rises. The ECB should also consider letting banks roll over some of the funding it provides that will soon expire, and avoid reducing its quantitative-easing holdings of sovereign debt too quickly.EU governments, meanwhile, should view the US stress as cause to get serious about finishing the banking union before — not after — they too face a bank crisis. More

KARACHI, Pakistan (Reuters) -Pakistan consumer prices, driven by food, rose a record 36.4% in the year to April, the highest inflation rate in South Asia and up from March’s 35.4%, the statistics bureau said on Tuesday. Pakistan’s rural areas recorded food inflation of 40.2%, the bureau told Reuters. Food inflation for both rural and urban areas reached 48.1%, the highest since FY16 when the bureau started recording the categories separately.”The higher reading was expected over the hyperinflation in the food segment,” said Amreen Soorani, head of research at JS Capital, a Karachi based investment company. “While the trend may continue for a couple of months more, the base effect is likely to kick in from June-2023, slowing the pace.” Pakistan has been in economic turmoil for months with an acute balance of payments crisis while talks with the International Monetary Fund to secure $1.1 billion as part of a $6.5 billion bailout have not been successful. The country has taken measures to try to secure the funding, including removing caps on the exchange rate, resulting in a depreciating currency, increasing taxes, removing subsidies and raising key interest rates to a record high of 21%.Prices rose 2.4% in April from March, the bureau said in a press release.Persistently high inflation has resulted in major lifestyle and consumption changes, with a greater number of people seeking help. More

(Reuters) – Russia will keep interest rates on hold at 7.5% in 2023 as inflation ends the year above target and the economy grows marginally, a Reuters poll showed on Tuesday, with analysts split on whether the central bank’s hawkish stance is justified. The Bank of Russia kept the possibility of rate hikes on the table at its meeting last Friday, saying that any sign of a threat to its goal of returning inflation to the 4% target in 2024 would be met with monetary tightening. The average forecast of 14 analysts and economists polled in late April and early May saw the Bank of Russia’s key rate ending 2023 at 7.5% before dipping to 6.5% next year. Forecasts for 2023 ranged from 6.5% to 8.5%. “Risks of stronger inflation in the second half of the year remain high due to the budget deficit, weakening rouble and the expected activation of retail demand,” said Promsvyazbank analysts. “Given the strong pro-inflationary risks, there is no room for a key rate cut as that may hinder fulfilling the goal of anchoring inflation around the target in 2024.” Others believed rate cuts were possible. “(Central Bank Governor Elvira) Nabiullina’s verbal signals about the directionality of the board of directors’ discussions (on holding or raising the key rate on Friday) are somewhat alarming to us due to the lack of solid assumptions,” said Rosbank analysts.They forecast the key rate to end the year at 7%. MARGINAL GROWTHAnalysts have steadily improved their forecasts for Russian gross domestic product (GDP), now envisaging growth of 0.1%, up from an expected contraction of 0.9% seen a month ago. The central bank raised its forecast on Friday and the International Monetary Fund (IMF) is among those expecting growth in 2023, although it expects global isolation and lower energy revenues to dampen Russia’s economic growth prospects for years to come.Blunting the impact of sanctions are rising military production and huge state spending, allowing Moscow to plough on with what it calls its “special military operation” in Ukraine. Russia’s GDP fell 2.1% in 2022. Analysts see annual inflation, which has dropped below target against double-digit price rises in 2022, ending this year at 6.0%, the same as in the previous poll. The average of forecasts in the poll suggested the rouble will trade at 79.00 against the dollar a year from now, up from a prediction of 75.00 in late March. Saturday’s official rate was 80.51 roubles per dollar. Most of the forecasts in the Reuters poll were based on around 10 individual projections. (Reporting and polling by Alexander Marrow and Elena Fabrichnaya; Editing by Gareth Jones) More