Fed improves ability to handle big bank failures
D.C., Washington, United States (AHN) – U.S. Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee Thursday that the Feb has improved its ability to handle big bank failures. He said the improvement the past 24 months was partly because of the Dodd-Frank Act that revamped financial regulation as an aftermath of the financial crisis of 2007-08.
As regulator, the Fed must be very aggressive and not give banks the too much room, particularly in weak areas such as risk management, Bernanke said. He admitted not all the rules of the Act had been implemented, but the Fed had started to place tighter risk standards.
Aside from Bernanke, the chairman of the other regulatory agencies over financial institutions such as the Securities and Exchange Commission, the Federal Deposit Insurance Corporation and the Commodity Futures Trading Commission, and the acting Comptroller of the Currency also appeared before the senate committee. They provided updates on how their agencies were enacting and implementing new rules and regulations mandated by the Act, signed in July 2010.
The CFTC and the SEC have a combined proposed 64 new regulations that would impact parts of the financial markets and issued eight final and four interim rules.
As part of the Fed initiative to prevent big bank failures, the agency ordered the 19 largest U.S. banks to test their capital levels against another recession with an unemployment rate above 11 percent.
The banks stress-tested their loans, securities, earnings and capital performances versus three possible economic outcomes. The banks submitted the results of their tests last month to the Fed, which will finish the review in March.
Some of the banks include those that plan to hike dividends reduced during the financial crisis. The stress test ensures that banks’ capital bases are strong enough to withstand a double-dip scenario before they begin returning capital to shareholders.
On Thursday also, the House Financial Services Committee held a hearing in which bank regulators queried about the Fed proposal to require debit card issuers to reduce by up to 90 percent the interchange fees. The same issue was tackled in the Senate hearing.
Bernanke and FDIC Chairwoman Sheila Bair opined that a two-tiered system, where smaller banks would be exempt from the interchange fee reduction, might now work because merchants may not accept debit cards from smaller institutions to whom they have to pay higher interchange fees.
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The Commodity Futures Trading Commission
Product Description
This book focuses on four energy commodities – crude oil, unleaded gasoline, natural gas, and heating oil – and Commodity Futures Trading Commission’s oversight of these commodities. Specifically, this report examines: trends and patterns of trading activity in the physical and energy derivatives markets and the effects of those trends on prices; the scope of CFTC’s authority for protecting market users from fraudulent, manipulative, and abusive practices in the tra… More >>
The Commodity Futures Trading Commission
Us Commodity Futures Trading Commission Handbook
Product Description
Ultimate handbook on the US government policy and regulations of the commodity futures trading…. More >>
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Futures Trading…Know The Market Before The Experts
You Don’t need a Crystal Ball
One might say that there has to be some kind of mystical knowledge being used, considering the price for the commodity doesn’t yet exist. Commodities are any physical, tangible goods, such as crops like corn or wheat, to oil, gold, and currency, just to name a few. The futures market has nothing to do with the use of a crystal ball, though there are many traders who wish they had one. A futures contract is a standardized contract to buy or sell a specified commodity of standardized quality at a certain date in the future, at a market determined price (the futures price). The contracts are traded on a futures exchange.
A futures contract gives the holder the obligation to make or take delivery under the terms of the contract, whereas an option grants the buyer the right, but not the obligation, to establish a position previously held by the seller of the option. Like all financial instruments, the futures market is highly regulated, but not by the SEC.
The SEC administers and enforces the federal laws that govern the sale and trading of securities, such as stocks, bonds, and mutual funds, but they do not regulate futures trading. The federal agency that does regulate futures trading is the Commodity Futures Trading Commission. With limited
exceptions, the trading of futures must be executed on the floor of a commodity exchange. Similar to broker-dealers that are members of the National Association of Securities Dealers, Inc. or some other self-regulatory organization, all firms and individuals who trade futures with the public or give advice about futures trading must be registered with the National Futures Association (NFA).
The Players In This Chess Match
Hedgers and Speculators
Commercial hedgers are corporations and sometime individuals, that seek to ensure the stability of a given commodity by taking a position in the commodities market. Take peas for example, and the hedger, a food processor who cans them. If pea prices go up the hedger ends up having to pay the farmer or pea dealer more. Because it is basically a cash commodity, to protect himself against higher pea prices, the processor can “hedge” his risk exposure by buying enough pea futures contracts to cover the amount of peas he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if the price of peas rise enough to offset cash pea losses.
Speculators are the second major group of futures players. These participants include independent floor traders and investors. A speculator is a person, or more likely an institution, that purchases or sells the commodities based on factors other than simply analysis. Whereas investors will focus, by and large, on detailed analysis.
Gambling With Your Futures
Five Reasons To Roll the Dice
Since most individual traders are speculators, here is a list of some of the advantages and disadvantages of the futures market over other investment possibilities.
1. The possibility exist that a person can make more money faster in the futures market, because the speed of prices tend to change faster than stocks. Conversely, bad judgment can cause one to suffer greater losses than traditional investments.
2. Futures are highly leveraged investments. The trader only puts up about 15-20% as a margin, yet still being able to ride the full amount of the contract. Unlike stocks where at least 50% of its value has to be put up, and the investor pays interest on the difference between the margin and the full contract value.
3. For the most part there is no inside trading. Everyone has the same insiders information on the weather, for example. This is an open outcry market, very public, which insures a fair outcome.
4. Commission charges on futures trades are small compared to other investments, and the investor pays them after the position is liquidated.
5. Most commodity markets are very broad and liquid. Transactions can be completed quickly, lowering the risk of adverse market moves between the time of the decision to trade and the trade’s execution.
I hope this has helped in your research. I don’t profess to being an expert, but I do know of some. I obviously don’t have the time to go into all the details now, but at my site Market Mentalist you will find all you need to know about investing online. I have a page devoted to futures. There is access to some of the top trading systems available including software, books, newsletters, and Forums. Whether you are an inquisitive novice or a seasoned pro Market Mentalist offers the online investment resource you just might be seeking.
At 57, I consider myself to be a Jack Of All Trades And Master Of Nothing. I was a struggling actor for 25 years. During that time I learned a little about a lot of things, and would like to pass along some of that knowledge. I live in California with my beautiful wife and a menagerie of pets.
Online Futures Trading Methods
Crystal Ball, Anyone?
One might say that there has to be some kind of mystical knowledge being used, considering the price for the commodity doesn’t yet exist. Commodities are any physical, tangible goods, such as crops like corn or wheat, to oil, gold, and currency, just to name a few. The futures market has nothing to do with the use of a crystal ball, though there are many traders who wish they had one. A futures contract is a standardized contract to buy or sell a specified commodity of standardized quality at a certain date in the future, at a market determined price (the futures price). The contracts are traded on a futures exchange.
A futures contract gives the holder the obligation to make or take delivery under the terms of the contract, whereas an option grants the buyer the right, but not the obligation, to establish a position previously held by the seller of the option. Like all financial instruments, the futures market is highly regulated, but not by the SEC.
The SEC administers and enforces the federal laws that govern the sale and trading of securities, such as stocks, bonds, and mutual funds, but they do not regulate futures trading. The federal agency that does regulate futures trading is the Commodity Futures Trading Commission. With limited
exceptions, the trading of futures must be executed on the floor of a commodity exchange. Similar to broker-dealers that are members of the National Association of Securities Dealers, Inc. or some other self-regulatory organization, all firms and individuals who trade futures with the public or give advice about futures trading must be registered with the National Futures Association (NFA).
Today, with online futures trading, we have instantaneous results which provide greater benefits for the trader. This of course results in worldwide access. Before we address possible methods, we must first recognize the players in this high stakes game of commodities.
Hedgers and Speculators
Commercial hedgers are corporations and sometime individuals, which seek to ensure the stability of a given commodity by taking a position in the commodities market. Take peas for example, and the hedger, a food processor who cans them. If pea prices go up the hedger ends up having to pay the farmer or pea dealer more. Because it is basically a cash commodity, to protect himself against higher pea prices, the processor can “hedge” his risk exposure by buying enough pea futures contracts to cover the amount of peas he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if the price of peas rises enough to offset cash pea losses.
Speculators are the second major group of futures players. These participants include independent floor traders and investors. A speculator is a person, or more likely an institution, that purchases or sells the commodities based on factors other than simply analysis. Whereas investors will focus, by and large, on detailed analysis.
Method to the Madness
Since most individual traders are speculators, here is a list of some of the advantages and disadvantages of the futures market over other investment possibilities.
1. The possibilities exist that a person can make more money faster in the futures market, because the speed of prices tends to change faster than stocks. Conversely, bad judgment can cause one to suffer greater losses than traditional investments.
2. Futures are highly leveraged investments. The trader only puts up about 15-20% as a margin, yet still being able to ride the full amount of the contract. Unlike stocks where at least 50% of its value has to be put up, and the investor pays interest on the difference between the margin and the full contract value.
3. For the most part there is no inside trading. Everyone has the same insider’s information on the weather, for example. This is an open outcry market, very public, which insures a fair outcome.
4. Commission charges on futures trades are small compared to other investments, and the investor pays them after the position is liquidated.
5. Most commodity markets are very broad and liquid. Transactions can be completed quickly, lowering the risk of adverse market moves between the time of the decision to trade and the trade’s execution.
I hope this has helped in your research. I don’t profess to being an expert, but I do know of some. I obviously don’t have the time to go into all the details now, but at my site Market Mentalist you will find all you need to know about investing online. I have a page devoted to Online Futures Trading Methods. There is access to some of the top trading systems available including software, books, newsletters, and Forums. Whether you are an inquisitive novice or a seasoned pro Market Mentalist offers the online investment resource you just might be seeking.
Now in my late 50′s, I consider myself to be a Jack Of All Trades And Master Of a few things. I was a struggling actor for 25 years. During that time I learned a little about a lot of things, and would like to pass along some of that knowledge. As an experienced trader, I can tell you that this the time to take advantage of the market and Online Futures Trading Methods
Debunking The Myth of Managed Futures
With the lackluster returns in the equity markets, many investors are looking for alternatives for their investment dollars, one of the sectors attracting a lot of interest is the futures markets or commodity markets.
Many of these new investors in the futures markets are looking for someone experienced. They are looking for someone with an established track record to handle the trading decisions of their personal account. In the world of futures, these money managers are referred to as Commodity Trading Advisors or CTAs. Many investors wrongly assume that they do not qualify to have a CTA manage their personal futures account, I will attempt to clarify some of these misconceptions.
Reasons for this common misconception include: - Investors do not know that managed futures with a documented track record exist for individual investors - Investors assume that they would not qualify because of high initial account sizes - Investors have heard the horror stories of a truck showing up at someones front door with a delivery of 5,000 bushels of Corn
Managed Futures has been an investment class that has historically been available to institutions and high net worth individuals, like everything this is changing. The track records and performance information for managed futures remains difficult to find for the average investor. While individual investors might assume that they would not meet the criteria of participating in a managed futures program, this is not always the case. Many managed futures programs have lower requirements than most would expect bringing managed futures as an asset class to the mainstream investor.
These managed futures programs have documented track records and the managers are required to be registered with both the NFA (National Futures Association) as well as the CFTC (Commodity Futures Trading Commission). All managers are required to provide potential clients with a disclosure document that covers the risks as well as the historical performance for their programs. Client accounts are established with a broker that introduces the account to the Manager.
Many investors wrongly assume that they do not qualify for a managed futures account because they assume that they need to meet high initial account balances in order to participate in these programs, this is just not true. Currently we offer a variety of managed futures programs. You might be surprised to learn that you can open a managed futures account with as little as $35,000.
The different managed futures programs that we offer are programs that have shown consistent positive returns with historically low volatility that are managed by proven Commodity Trading Advisors. While we understand that there are many investors and traders that are looking for triple digit yearly returns, experience has taught us that most investors are not looking for the flash in the pan program that shows high volatility but are more comfortable with a consistent return with lower volatility. One of the benefits of investing with a managed futures program is that the performance of the program does not depend on the direction of anyone particular market. Managed Futures have shown to have a low correlation with stock markets. These programs are not dependent on the market direction to provide returns.
Many have heard the old story of I knew someone that had to take delivery of corn and a truck showed up at his front yard with 5,000 bushels of corn this is just not true. A futures contract represents the obligation to either buy or sell a commodity of a certain class at a certain time in the future (why they are called futures), it is the duty of the Commodity Trading Advisor to remove this risk from their trading program. Traders should remember that over 90% of futures contracts never go to delivery they are offset in the market. The process of delivery usually only happens to a trader that is new and unfamiliar with the markets and is trading alone. Brokers usually help new traders by making sure that these small but very costly mistakes do not occur.
Author: Les Jones
Article Source: EzineArticles.com
Provided by: Digital Camera Times
Managed Futures and Hedge Funds
Are you in the market for an alternative investment? If you are one of the prudent investors who is seeking to allocate a portion of assets to strategies not normally employed by the investing public this article is a must read.
There are primarily two forms of alternative investment management, hedge funds and managed futures. Hedge funds are invested in a vast number of products, both exchange listed and Over-the-Counter (OTC) derivatives. Managed futures are generally only invested in exchange listed commodity futures contracts, regulated by the Commodity Futures Trading Commission (CFTC). Be careful! If the wrong investment is chosen the investor may be left with a bad experience of alternative investment products. This article will focus on the very important issues of transparency, liquidity, lock ups, returns and taxes in regards to the alternative asset class. Readers should leave with a better understanding of a few of the primary issues involving any alternative asset investment.
TRANSPARENCY
Transparency is an issue with any investment. Most investors want to know exactly what their money is doing at all times. Giving money to someone who claims to have returns of X without knowing what the manager is actually doing is generally a bad idea. Transparency is becoming more and more of an issue as the universe of investable products grows exponentially. The recent hedge fund “blow-ups” are a case in point.
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Hedge funds are alternative investment vehicles that can be invested in anything from Johnson and Johnson common stock to over the counter derivatives based in Zimbabwe. The universe of products is virtually limitless. When an investor becomes a limited partner of a hedge fund, in most cases he/she is giving it free reign over the funds they have invested. If the manager chooses to, he/she could invest in waffles and chances are the investor would never have any idea. Hedge funds are not required to tell investors exactly where capital is being deployed. To make matters worse, many of the products do not have a closing value at the end of the day, so even if the investors knew what the funds were invested in they would have no idea what their investment was actually worth on any given day. There is absolutely no transparency. All the investors get is a quarterly statement informing them of gains or losses and maybe some commentary if the manager is not too busy. In some cases investors hear that, virtually overnight, more than 50% of their funds have been lost. Long-Term Capital Management is the most infamous case of a hedge fund “blowing up,” but recently there have been quite a few more that are going down in history, such as Amaranth’s $6 billion loss in 2006, Absolute Capital Groups’ 30-40% loss and Focus Capital’s 80% loss in early 2008.
The story is much clearer if the investor is involved in a managed futures product, or with a Commodity Trading Advisor (CTA). A CTA generally has a very specific strategy that is defined in the investor’s disclosure document, which is similar to a prospectus. The CTA is required to state exactly what products the investor’s money will be invested in as well as exactly how the manager plans to invest. What’s more, once invested with a CTA investors will receive a statement every time a trade is placed. At the end of every day the products in which investor capital is deployed are marked with a closing price determined by the exchange. This allows the investor to know exactly what his/her investment is worth.
It is really up to the investor as to what makes him or her comfortable. If one person does fine not know where his assets are invested then the transparency issue may not need to be considered, but for most of us it is of the utmost importance.
LIQUIDITY
Liquidity: a business, economics or investment term that refers to an assets ability to be easily converted to cash through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. (defined by wikipedia.org)
Liquidity can be an issue with both hedge funds and managed futures, but a good manager will tend to avoid instruments that are illiquid or difficult to trade in and out of.
As stated previously, hedge fund managers can and do invest in a vast array of products. Many of these products are OTC derivatives or products that are traded between banks and the hedge funds directly. If the hedge fund buys an OTC derivative from a bank, and later decides it needs to sell that particular product back, the bank alone determines what they will buy it back for, or worse, if they can buy it back at all. In that case the hedge fund may not be able to get out of a losing position.
Liquidity is an issue that has gripped a number of hedge funds lately. Many have been forced to shut down because they were invested in highly illiquid derivatives linked to sub-prime mortgages. When the counter parties began to refuse to buy the products back the funds had no choice but to liquidate their portfolios at extremely discounted prices and shut their doors, or refuse investors’ requests to withdraw their money.
Unfortunately liquidity can be an issue for managed futures as well. Most managers only trade in highly liquid commodities; however, there are times when even the most liquid commodity can become illiquid very fast. Illiquidity can be caused by many factors, from politics to supply and demand imbalances to general investor fear and greed. A prudent manager will prevent investors from being too exposed to liquidity risks by implementing some sort of hedge, diversification or proper position sizing of the account.
When dealing in listed markets, as most managed futures products do, the counter party to any trade usually has a number of other counter parties willing to buy or sell at specified prices. This kind of open auction system generally allows for prices to be fair. To give investors even more comfort each account is guaranteed by the exchange clearing house through customer margin deposits, meaning that the chance of a counter party defaulting on any given transaction is drastically reduced. However, when dealing with obscure OTC markets, as many hedge funds do, most of the time there is only one counter party to the trade, meaning it is not guaranteed by anyone, which not only makes the chance of default higher but at the same time makes the likelihood of getting a fair price on any given trade much less.
When investing in a hedge fund or managed futures product it is important to understand how liquidity can affect the investment. If a manager is using too much leverage or is consistently involved in thinly traded OTC products that are less liquid it may be a sign that investing in that vehicle at that time is not wise.
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LOCK UP PERIOD
A lock up period is the time after the initial investment in which the investor is not allowed to withdraw funds from that particular vehicle. After the specified lock up period investors are free to withdraw funds as defined in the disclosure document of each hedge fund.
Almost all hedge funds have a lock up period. This period can range from as little as three months to longer than two years. Generally the more established the fund the longer the lock up period. A lock up period is generally good for managers and not so good for investors. If a manager has a lock up period of one year and immediately after making an investment the trading starts to go poorly, that manager has a right to continue trading that money until the lock up period is over; because the investor has previously agreed to the terms and conditions in the disclosure document he or she is not able to request redemption until the specified time period is up.
Managed futures products are different. Most managed futures products do not have lock up periods. There are a few that have lock ups ranging anywhere from three months to a year, but this is not the status quo in the industry. If an investment in a managed futures product needs to be redeemed it can generally be taken care of within a few hours. This is very beneficial if you have taxes due, college tuition that needs to be paid or any unexpected expenses that comes up.
Lock up periods will be foreign to most investors who have not invested in alternative investments before. Make sure when reading the disclosure document that the lock up and withdrawal periods are properly discussed. Also, note that in many cases the lock up period is an area that can be negotiated to the investor’s benefit.
RETURNS
Returns are returns, right? Wrong! Returns are a very deceiving form of analysis for any alternative investment. Most investors make investment decisions based on previous returns, but this is a flawed concept. The main issue is that past returns have absolutely nothing to do with future returns. This has been proven time and time again as managers that were once out-performing begin to under-perform and managers that were struggling rise to the top. Wise investors will not base their investment decisions on past returns or assumptions made about future returns.
The fact of the matter is that no manager really knows what returns will be from year to year. Managers can target a certain return but there is absolutely no guarantee that the goal will be achieved. If any manager, whether hedge fund or CTA, specifically promises a return that is a sign to seek a different manager. Likewise, if a manager touts his/her past returns it is a sign he/she does not fully understand that returns are completely unrelated to each other and have no bearing on the future.
There are numerous databases in which managers can post monthly returns and potential investors view them, but this is completely the wrong way to make any investment decision. Chasing returns leads investors down the wrong path and can have devastating effects on their capital (see “Transparency”).
What investors need to do is search through these alternative investment managers by strategy, not by returns. The investor should pick a few advisors from each category after reading about the managers’ approach to the market. Once a few are decided on, the investor should call each manager and request more information and/or a meeting. All managers will have a disclosure document and possibly some marketing material that can be given to potential investors. Meeting the manager of a hedge fund can be a difficult task unless the investor is placing a very large sum. CTAs, however, are generally much more open and willing to meet with investors, so getting a meeting with them is entirely possible.
Once the proper due diligence is done and the investor likes the manager’s strategy and approach, an investment can be made. Be careful not to invest too many assets with any one manager or specific style, as that is not proper diversification. It is wise for the investor to build a portfolio of alternative asset managers over a wide range of strategies, as this may reduce the risk of any one particular manager or style.
TAXES
Hedge funds often provide the investor with very unfavorable tax treatment because they are invested in many different products all over the world. This may have a vast array of consequences on the investor’s overall taxes. Hedge funds uniformly report investors’ gains or losses in August after each tax year, forcing an extension of filing. Additionally, the tax returns are very complex, often over 30 pages for each fund invested in. To try and explain all the possible tax consequences of a hedge fund would probably require an entire book. In the interest of time the entire spectrum of hedge fund tax accounting simply cannot be delved into at this point.
For managed futures products the tax accounting is very simple. Since most trades take place within Regulated Futures Contracts (RFC) regulated by the CFTC, contracts receive Internal Revenue Code Section 1256 treatment. In this case 60% of profits are taxed at the long-term capital gains rate and 40% are taxed at the short-term capital gains rate. For a profitable managed futures product this effective tax rate of 23% provides a 12% advantage over hedge funds that trade frequently. This can, however, be a stumbling block in the case of large losses. When a loss is recorded and 60/40 treatment has been elected the investor is only allowed to carry forward $3000 of those losses every year. If the investor’s loss is large this can be a real headache, as he/she will be carrying forward losses indefinitely. There is a bright side, and that is if the investor has created a portfolio of managed futures products and another manager has produced gains the investor can write off the loss against the gains of that other manager.
In the end calculating taxes for a managed futures product is much simpler than for a hedge fund. For some investors this may not be an issue, as their CPAs will manage everything, but it would be important to consult with the CPA prior to investing to make sure he/she fully understands the implications involved with the new investment.
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Article Source:http://www.articlesbase.com/day-trading-articles/managed-futures-and-hedge-funds-1617896.html
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