"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Friday, February 10, 2012

ECB, FRBNY, and CME Inventory Update

Europe's bailout rumor mill is running again and the level of monies involved are growing each week.  For those who are unfamiliar with Central Bank measures or for those who have stumbled upon us through a search and are unaware of our obsession with these accounts, there is a strong demand overseas for the USD and the United States is giving it up like a drunk prom date.  Surprisingly, the one thing that seems to be maintaining value for the USD is the fact that the US has a sovereign bank.  In Europe, each country has its own sovereign bank but the big dog is a separately incorporated bank, the European Central Bank.  Sovereign nations have been deterred from drawing from the FRBNY and we suspect this is because their risk of default is so serious that FRBNY figures it doesn't need any more problems. 

Under US law, if a sovereign bank draws on the FRBNY liquidity program, they are immune from repercussions if the sovereign nation itself defaults and we have Jake Tate to thank for this (see page 1065, middle paragraph).  Given the US has its own problems, the last thing the FRBNY will want is to grant immunity to a competing nation for defaulting on its bonds.  This has happened before when Argentina's central bank waived its immunity to make its debt certificates more appealing and defaulted, leaving 2 US hedgefunds holding the bag.  Though the HF won judgement, they were restricted from attaching Argentina's central bank's reserves held at the FRBNY because the courts concluded those funds didn't actually belong to the Central Bank of Argentina.

Expect more of this "litigation arbitrage" to take place and increase in complexity as Europe dupes the globe into thinking they've "solved" the debt problems.  We can be relieved though because Chairman Bernanke told us he wouldn't bailout Europe.  Truth be told, it's obvious he lied.

Outstanding Federal Reserve Bank of New York Foreign Exchange Liquidity Swaps at ECB:

The Bank of Japan has backed off from its highest level but the ECB feigned the USD swaps. 
Outstanding FRBNY FX Liquidity Swaps by participating Bank:

And it makes sense.  The ECB needs money and is basically pledging its member nations arteries as collateral at the Swiss National Bank in order to have access to their currency.  This run on Swiss Francs led to the massive appreciation which caused the SNB to fix its exchange rate back in August 2011 (embedded at the end of this post is a speech from SNB Governing Board Chairman Tom Jordan which explains this exchange fixing).  The ECB was the main culprit of this.  CC went through the collateral being pledged at SNB and broke it all down by currency and discovered the Euro was by far the currency that was pledged the most.
Eligible Collateral For SNB Swaps By Currency

ECB Open Market Operations 
Note: the negative on the first line is for liquidity absorbing operations for those unaware.

On the chart below you can see in December, when the ECB started using the FRBNY facility, that the amount deposited stabilized above 400 million Euros.
The ECB Deposit Facility Levels:

Also, since 2012 began, the CME has been increasing its inventory.  Zerohedge reported today that the CME has lowered its margin requirements and it makes sense that they ramped up inventory ahead of this.  Considering that the economy is still fragile, it would be safe to guess that clearing houses and central banks are preparing for market participants to demand alternative assets. 
2012 CME Silver/Gold Inventories

Swiss Monetary Policy in Uncertain Times