Capital Markets Assignment

Capital Markets Assignment

Group Assignment (15%)

Near-zero interest rates, quantitative easing, stricter bank regulation and shadow banking are remarkable issues in today’s markets. Answer the below questions which are designed to explore these interesting issues.

Question 1(1/4 page): What is the risk weight on banks’ margin lending in the Basel 3 accord? Clearly state your answer and assumptions and use references.

Question 2(1 page): Find the margin loan lending rate in AUD granted by Interactive Brokers (IBKR) and each of the 5 Australian banks ANZ, CBA, NAB, WBC and MQG. Present your data in a table with the dates that you observed the rates. Explain why IBKR might be cheaper than the Australian banks.

Question 3(1 page): Take a screen shot of IBKR’s balance sheet and point out the specific account where the margin loans they have lent are with a red arrow. Do the same for just one of the Australian banks.

Read Manmohan Singh’s IMF working paper titled ‘Collateral Reuse and Balance Sheet Space’ from 2017, wp17113.

Question 4 (1 page): In Singh’s 2017 paper he states “…deposits within their banking system will increase as ECB and Bank of Japan continue to print money.”

Do the ECB and BoJ literally print money in quantitative easing (QE)? Compare this with the actions of theReserve Bank of Zimbabwe under Robert Mugabe’s government. Use references.

Question5(1/4 page): In Singh’s 2017 paper he states “…thus any unwind of the Fed balance sheet will need to ensure that secured and unsecured rates remain aligned.”

Is the Federal funds rate secured or unsecured? Is the Interactive Brokers margin lending rate secured or unsecured?

What does it mean that the secured and unsecured rates must be aligned? To be aligned, the spread should be what?

Question 6(1/2 page): In Singh’s 2017 paper he states: “…forthcoming regulations like the leverage ratio—that effectively requires banks to hold capital against deposits…”

Explain the ‘leverage ratio’ regulation being referred to here. Use references.

Question 7(1/4 page): In Singh’s 2017 paper he states: ”The asset-management complex, which includes pension, insurers, and official sector accounts such as sovereign wealth funds and central banks, is a rich source of collateral deposits. The securities they hold are continuously reinvested (via sec-lending) to maximize returns over their maturity tenor.”

Why is there demand for securities lending?

Question 8(1/4 page): Why would people and countries in the "Gulf region or some Asian countries" have large holdings of good collateral such as US Treasuries?

Read Manmohan Singh’s IMF working paper titled ‘Velocity of Pledged Collateral Analysis and Implications’ from 2011, wp11256.

Question 9(1/2 page): What’s the difference between a bilateral and triparty repo? Draw diagrams of each.

Question 10(1/4 page): A 10 percent haircut on a repo is equivalent to what initial LVR on a margin loan?

Question 11(1/4 page): In Singh’s 2011 paper in Figure 2 “Representative Leverage Levels in some HF strategies”, what is the leverage ratio depicted? A debt-to-equity or debt-to-assets ratio? State your reasons.

Question 12(1/4 page): In Singh’s 2011 paper in Figure 2 “Representative Leverage Levels in some HF strategies”, why might hedge funds use so much leverage for arbitrage compared to other strategies?

Question 13(1/4 page): In Singh’s 2011 paper in Figure 2 “Representative Leverage Levels in some HF strategies”, how exactly can hedge funds ‘long credit’ using leverage? Be specific.

Question 14(1/4 page): Download the RBA Statistical Table D3 Monetary Aggregates spreadsheet and make a table of the components and total of M3in July 2017. Calculate the proportion of M3 that’s created by commercial banks as at July 2017.

Question 15(1/4 page): Search the US Federal Reserve ‘Money Stock and Debt Measures - H.6 Release’ and make a table of the components and total of M2 in July 2017. Use the non-seasonally adjusted data. Calculate the proportion of M2 that’s created by commercial banks as at July 2017.

Question 16(1/4 page): Search the ECB for data on the Euro area’s measure of M2 and make a table of the components and total for July 2017. Use the non-seasonally adjusted data. Calculate the proportion of M2 that’s created by commercial banks as at July 2017.

Question 17(1/4 page): Search the Bank of England for data on their measure of M4 and make a table of the components and total for July 2017. Use the non-seasonally adjusted data. Calculate the proportion of M4 that’s created by commercial banks as at July 2017.

Question 18(1/8 page): Calculate the USD money supply as measured by the 4 central banks above by converting to USD then totaling their money supply measures (whether its M2, M3 or M4).

Question 19(1/8 page): What is the size of the global rehypothecation ‘shadow banking’ money supply discussed by Manmohan Singh in either of his articles? Use the most up-to-date figure.

Question 20(1/2 page): What would be the effect of longer rehypothecation chains on money market interest rates? Use references.

Administrative Requirements:

• Write an eight-page assignment (excluding references) with sub-headings for each question. The pages in the brackets next to each question are just suggestions, you can go above or below the suggestion. But the total page limit must be adhered to.

• Write all students’ names and ID numbers on the front page of your assignment. This is very important to properly identify the members of each group. Assignments without this will not be marked.

• Submit a soft copy of your assignment to the Turnitin link on ilearn by 5pm Friday 27 October 2017. There is no need to submit a hard copy to your teacher. For every 24hr period after 5pm Friday that your assignment is late, you will be penalized by 20%.

• This assignment is worth 15% of the final mark.

• You should form a group of 3-4 members in the first four weeks and elect a group leader.

• Groups may consist of members from different lecture streams.

• It is important for each group member to contribute substantially to the final submitted work. The responsibility of the group leader is to upload the assignment on behalf of the group to Turnitin on ilearn. Only the group leader should upload the assignment.

• The leader is expected to maintain a weekly journal, registering the contribution of each team member during the week. A copy of the Journal must be submitted with the assignment. It’s not included in the page limit.

• Extra evidence such as tables and graphs are highly desirable. They must be placed in the text. The figures or tables should be placed directly above or wrapped in the paragraph that they are discussed in. Do not put figures in the appendix; they will not be marked.

• The main body of your assignment should not exceed the page limit, typed with 12-point Arial font, 1.5 spaced with default margins. This page is formatted in this way. Exceeding the page count will incur a one mark penalty for each half page. The bibliography or reference list is not included in the word count, but any appendices will be. Please refrain from including an

appendix since you should not require it, all tables and graphs should be included in-text next to where they are discussed.

• A good assignment shows research and clarity of argument.

• Assignments that are not proof-read will be marked down. Grammar and sentence structure is important.

• Answer the questions in the order that they are asked. Be sure to include subheadings that contain the question number.

• There's no need for an introduction or conclusion. This assignment is a collection of short answer questions.

• There's no need to write the whole question in your assignment if you're struggling to fit everything into the page limit. You may write the question number as a subtitle to show where each question begins. For example:

Question 1: Write answer here.