Carbon Fraud hit by carousel fraud

Carousel fraud has found its way to the carbon market. The particularly European type of fraud entails setting up complicated import and export schemes between EU member countries, charging buyers for value-added tax in the country of destination, and then absconding with the tax rather than handing it over to the governments.

In 2006 the UK and German governments embarked on a series of raids in 2006, and the UK introduced ‘reverse charging’ for VAT on certain items prone to carousel fraud. At the time carousel fraud was mainly seen as confined to small electronic goods such as mobile phones and computer chips.

FiNETIK recommends:

• UK Treasury acts on carbon-credit fraud fears, 30.07.2009
  
• Carbon trading increases in first half of 2009…however, 08.07.2009
  
• World’s Biggest Carbon Offset Exchange Comes One Step Closer To Reality As NYSE’s BlueNext And China-Beijing Environmental Exchange Sign China Partnership, 19.06.2009
  
• A New Growth Industry: Carbon Fraud, 08.05.2009
  

A year later it was it was observed that fraudsters were simply moving away from those goods towards others that hadn’t yet been targeted by authorities. But it wasn’t until high volumes of trade were observed on France’s BlueNext carbon exchange this year that carousel fraud became an issue in the carbon markets.

France last month decided to exempt carbon permits from VAT without seeking the required approval from the EU, and the UK government yesterday applied a zero VAT rate to carbon credits, again without seeking EU approval. The Netherlands meanwhile has introduced rules so that the carbon permit buyer, rather than the seller, is responsible for paying tax. And Spain is reportedly considering what to do about the issue.

Could there be a problem, however, with so many different approaches being taken?

Source: FT, 31.07.2009, by Kate Mackenzie

Go with wind: China to dramatically boost its wind power capacity, again

China keeps revising its renewable energy target for 2020–so frequently and dramatically that just when you feel you finally managed to track all the target numbers and to put them on paper, the numbers become history. China first announced its 2020 target for renewable energy in 2007, and then revised the numbers in May 2009. With the stimulus package injected into renewable energy investment, China is now reported to be revising the 2020 target plan again, which is even more ambitious (as shown below). It should be noted that China interchangeably uses the terms “alternative energy” and “renewable energy”; its portfolio includes large amounts of hydropower and nuclear power.

.	Installed Capacity by the end of 2008	The 2020 Target set in 2007	The 2020 Target revised in May 2009	Proposed plan to revise the 2020 Target
Wind	12.17 gW	30 gW	100 gW	150 gW
Solar	140 mW	1.8 gW	10 gW+	20 gW
Nuclear	9.1 gW	40 gW	60~75 gW	86 gW
Total power supply	793 gW	1000 gW		1400~1500 gW

In the newly proposed 2020 renewable energy plan, wind power would become dominant, accounting for 10 percent of the total power supply and increasing from an initial 30 gigawatts (gW), which was less than nuclear power (40 gW), to 150 gW. This would be double the nuclear power target of 86 gW. Solar energy capacity would also be significantly increased, from the original 1.8 gW, to 20 gW, 142 times the installed capacity at the end of 2008.

To show it’s not just a numbers game with the renewable energy target, a couple of weeks ago, China began construction on its first 10 gW wind power station in Jiuquan, Gansu province. The installed capacity will be increased to 20 gW by 2020 and eventually reach 40 gW, which would almost double the installed capacity of the gigantic Three Gorges Dam-the world’s largest hydro-electric power station, with a potential total installed capacity at 22.4 gW. Gansu is now boasting “Three Gorges of Wind Farms,” with a total investment predicted to be more than 120 billion yuan ($17.6 billion); the newly estimated total investment in Three Gorges Dam is about 180 billion yuan.

Of the 150 gW target by 2020, 30 gW will come from offshore wind farms. The largest offshore wind power project so far is the Donghai Bridge Wind Farm in Shanghai–the most fascinating wind farm, in my opinion. The Donghai Bridge is about 32.5 kilometers long, the longest in China. Wind turbines are being installed on both sides of the bridge. The total installed power capacity will reach 100 mW.

A Chinese research team has re-evaluated China’s potential wind power resources and significantly increased its onshore wind power potential to 700~1,200 gW from the original forecast of 280 gW, which means wind power resources alone can meet the entire country’s electricity demands. Xinjiang Uygur autonomous region and Inner Mongolia both boast more than 100 gW of wind energy resources. But there remains one big issue, similar to the one confronted by coal and natural gas industries: all the wind power resource–rich areas are thousands of kilometers away from high electricity demand areas. High voltage power lines are needed. In an effort to build a so-called Strong Smart Grid, China invested more in grids than in power generation last year.

China’s total power capacity will be more than 900 gW in 2009, and will soon be close to what the U.S. has now–1,000 gW.

Source: Greenlaw, 29.07.2009

Coming Doom vs. Coming Recovery

While unemployment, bankruptcy and defaults are growing and retail consumption is falling, financial institutions which just a few months ago where on the brink of collapse are claiming profits and the media, analysts and government start claiming to have found the road to recovery. Too good to be true? Here are a few alternative view:

• On the Destruction of Capital, Dialectics of Finance 13.07.2009
  
• The Top Trends of 2009, Trend Research Journal, 2009
  
• Fund Managers can become Farmers: Jim Roger, 20.06.2009
  
• What Are The People Who Predicted the Financial Crisis Predicting Now?, January 2009
  
• Celente Predicts Revolution, Food Riots, Tax Rebellions By 2012, InfoWars 13.08.2008

Carbon Politics and Climat National Securities Risks

Trading Places: IPCC Boss Slams U.S. Plan for Carbon Tariffs, 23.07.2009
The debate over cap-and-trade is turning out to be a debate over trade. The head of the Intergovernmental Panel on Climate Change, Rajendra Pachauri, is the latest to take aim at U.S. “carbon tariffs” that would be slapped on imports from countries that don’t take steps to reduce emissions. He said carbon tariffs undermine the chances of a global deal on climate change by angering developing countries (like China and India).

US officials mull national security risks of climate change, 23.07.2009
Committees in the US Congress that deal with national security and intelligence issues should play a role in crafting bills to cap greenhouse gas emissions from American power plants, oil refineries and other industries, a former Republican lawmaker and ex-military official said Tuesday.

John Warner, who represented Virginia in the US Senate for 30 years and who previously served as secretary of the US Navy, maintains that climate change is a national security issue because it could spawn global conflicts that could require a US military response.

Rapid loan growth puts Chinese banks at Risk

Aggressive loan growth could significantly stretch the banks' newly developed risk management systems, and the quality of new loans is expected to be inferior to the quality of those written a year ago, S&P analysts say.

Loan growth among Chinese banks hit more than Rmb7.76 trillion ($1.13 trillion) in the first half of 2009, a record high. As a result, asset quality is likely to slip further in 2009, but should remain highly manageable. It could deteriorate sharply in the next two to three years, however, if the economic slowdown is protracted in China.

Chinese banks seem to be lending so aggressively despite the economic slowdown for three key reasons.

First, the strong growth suggests that the banks' corporate governance is still relatively weak and that the government continues to exert strong influence over banking practices as a dominant shareholder.

Second, the banks appear willing to extend additional funding to borrowers facing cash-flow difficulties on the premise that such difficulties are short-term in nature and should correct themselves when China's growth recovers.

And third, they may be looking to compensate for the negative effects on earnings from the squeeze in net interest margins.

We expect the quality of new loans to be on average inferior to the banks' loan book a year ago. That's because the banks are either expanding into an enlarged but inferior client base or making incremental loans to existing clients with deteriorated financial metrics. Some new borrowers had no or limited access to bank credit in the past because they didn't meet previous underwriting standards. But banks are likely to have eased their underwriting standards for projects related to the government's stimulus package, as the government relaxed the capital leverage requirement for many types of projects. Loan quality should, however, be adequate for infrastructure projects that the central government or affluent provincial governments have backed; but these loans perhaps represent only a fraction of total new lending.

While further slippage in bad loans in 2009 and 2010 is likely in our view, it should be at a manageable pace. This is due to the very supportive liquidity environment for corporations as a result of strong loan growth, the limited exposure of major banks to severely hit small businesses in the export sector, and signs of economic recovery, particularly at home. A jump in the non-performing loan ratio is still very likely, as the dilutive effect gradually wanes and banks eventually stop renewing loans.

Barring a protracted slowdown in the Chinese economy, we anticipate the system will on average be able absorb incremental credit costs, given still healthy official interest spreads and banks' improving capacity to generate fee-based income. For banks that are aggressively increasing their exposure in concentrated segments or regions, we expect potential credit losses to significantly weigh down their already below-average earnings profile. This is likely to lead to further divergence in credit profiles across the sector.

The aggressive loan growth in the first six months of this year could significantly stretch Chinese banks' newly developed risk management systems and undermine their underdeveloped risk culture. Inflationary pressure may be the single-largest macroeconomic risk that the banks face. Historically in China, inflation often followed when loan growth ran above 20% (it was about 30% year-over-year at the end of June 2009). We'll have to wait to see if this time will be an exception as the global economic slowdown continues to weigh on overall pricing levels. If the inflation pressure becomes so acute that the government resorts to a policy u-turn and increases lending restrictions, the heightened policy risks could exacerbate the difficulties for borrowers and banks.

The government's role and commitment to reforms

The government remains highly influential with regard to lending policy at the banks, in our view. It has encouraged banks to make loans to prevent the economy from making a hard landing. But some government agencies, particularly the China Banking Regulatory Commission, have continually warned against excessive lending. Recently, the government seems to be fine-tuning its policy to favour a greater check on bank loan growth. The central government appears to have a delicate balancing act. It's trying to use bank credit as a lever to maintain economic growth while preserving the banking system's fundamental strengths. This reflects an inherent conflict between the government's different roles as the country's policymaker, banking regulator and major shareholder.

There are still strong incentives for the government to press ahead with banking reforms. The aggressive response to the government's call for greater lending indicates that the banks do not yet have a sound risk culture and effective corporate governance in place. Given the experience in some markets, Chinese policymakers are likely to take a cautious approach to deregulating relatively risky activities and products. They're also likely to slow down some reforms, such as those regarding compensation schemes. Some recent initiatives, such as those related to the development of the debt market and renminbi convertibility, indicate the government's intention to proceed with market-oriented banking reforms.

Ratings impact on Chinese banks

We believe the major rated banks have sufficient financial strength to weather the economic slowdown. Although we see growing pressure from credit risks, policy risks and other risks for the banking sector, these are still within our expectation. We have long factored the significant volatility in Chinese banks' financial metrics into the ratings on banks. If we are convinced that any bank has been performing better than we originally expected due to its own structural strengths, we would acknowledge these strengths against the context of a less-supportive operating environment.

Ratings On Chinese Banks
Banks	Issuer Credit Rating
Industrial and Commercial Bank of China Ltd.	A-/Positive/A-2
China Construction Bank Corp.	A-/Stable/A-2
Bank of China Ltd.	A-/Stable/A-2
Bank of Communications Co. Ltd.	BBB+/Stable/
China Merchants Bank Co. Ltd.	BBB-/Stable/A-3
CITIC Group	BBB-/Watch Pos/A-3
Agricultural Development Bank of China	A+/Stable/A-1+
China Development Bank	A+/Stable/A-1+
Export-Import Bank of China	A+/Stable/A-1+
Note: Ratings as of July 20, 2009.

The authors of this article, Qiang Liao and Ryan Tsang, are senior analysts in the financial institutions ratings team at Standard & Poor's Ratings Services.

Source:FinanceAsia.com, 23.07.2009

Mexico Central Bank Will Prohibit Some Lender/Credit Fees

July 21 (Bloomberg) -- Mexico’s central bank said it will prohibit commercial banks from applying some fees in a bid to make charges more transparent and bolster competition.

Starting Aug. 21, banks won’t be able to charge fees for depositing checks that are returned, for exceeding debit card limits or for canceling deposit accounts, credit cards, debit cards or online banking services, the central bank said today in an e-mailed statement.

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• Is Mexico’s New Banking Bill a sign of worse things to come in International Banking Regulations?, 26.04.2009
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The measures may force Mexican banks to issue more loans to compensate for revenue they currently get from fees, which may open up credit channels that seized up amid the global financial crisis, said Gabriel Casillas at UBS AG in Mexico City. Fees and commissions accounted for 20 percent of the Mexican banking industry’s operating revenue in 2008, Standard & Poor’s says.

“This is an important blow to one of the biggest sources of revenue for Mexican banks,” said Casillas, who is chief economist for Mexico and Chile. “This should give them an incentive to increase credit and obtain revenue from there.”

Banco Bilbao Vizcaya Argentaria SA, which controls Mexico’s largest lender BBVA Bancomer SA, fell 1.4 percent to 9.675 euros at 12:15 p.m. New York time from 9.81 euros at 10 a.m., when the measures were announced.

Banks will also be unable to charge customers for opening or managing accounts that were opened in order to receive a loan, the bank said.

Antitrust Chief

Mexican antitrust chief Eduardo Perez Motta said in a July 17 interview that authorities needed to make it easier for customers to switch banks so they could more easily shop for low-cost services, which would in turn boost competition.

“When you tell your bank you want to leave, they make your life difficult,” Perez Motta said.

Still, Angelica Bala, an S&P credit and banking analyst in Mexico City, said increased regulations won’t improve competition or transparency.

“The central bank is doing this because there has been a big political push against banks charging so much for fees and commissions,” Bala said in a telephone interview. “But putting a cap on fees and commissions is not a good thing. It has to be driven by competition.”

Source: Bloomberg, 21.07.2009 by : Jens Erik Gould in Mexico City at jgould9@bloomberg.net.

Brazil’s Antitrust Chief says ‘Irrational’ Rate cuts may hurt Brazilian banks

July 21 (Bloomberg) -- Brazilian antitrust agency chief Arthur Badin said a move by state-owned banks to cut interest rates in a bid to force others to match lower borrowing costs threatens to hurt the banking industry.

“Public banks fulfill an important role in helping the economy recover,” Badin said in an interview in Brasilia. “It’s also important that, under the pretext of increasing competition, you don’t achieve the opposite in the long term, with irrational pricing of interest rates when there exists the possibility for effective competition.”

Brazilian officials, including President Luiz Inacio Lula da Silva, have urged banks to increase lending and cut borrowing costs after the credit crunch last year. Banco do Brasil SA, the nation’s largest federally controlled bank, Caixa Economica Federal and state development bank BNDES have all slashed borrowing costs over the past year.

“Decisions by public banks to lower rates were mainly political and don’t solve structural problems, such as default rates and future rate expectations,” Andre Perfeito, an economist at brokerage Gradual CCTVM Ltda, said in a telephone interview from Sao Paulo. “It may produce results in the short term, but in the long term it will cost more and won’t be very effective.”

Aldemir Bendine, who was made Banco do Brasil’s president in April, on May 25 announced he expanded credit to individuals by 13 billion reais ($6.8 billion), reduced rates on consumer loans and mortgages and extended the maturity of car loans in a bid to revive consumer spending. The boost to personal loans benefited 10 million clients, about a third of the bank’s total.

Brazil also cut its Long Term Interest Rate, used by state development bank BNDES, to a record 6 percent last month.

The share of outstanding credit from public banks rose to 37.8 percent in June from 34.2 percent in September last year, according to central bank figures.

Source: Bloomberg, 21.07.2009 by Iuri Dantas in Brasilia at idantas@bloomberg.net

Framework Approach to Governance, Risk Management and Compliance

The landscape of governance, risk management, and compliance initiatives is broad and littered with a variety of specific standards and frameworks. Each of these specific frameworks may be good at what they focus on – but they fail to link GRC together and put everything in context with each other. Risk management, security, corporate governance, control, security, compliance, audit, quality, EH&S, sustainability – all have their respective islands of standards. This makes putting a GRC strategy in place that bridges these silos difficult as the language, implementations, and approaches are quite different. In fact – organizations trying to get an enterprise view of risk and compliance desperately search for a GRC “Rosetta Stone.”

There is only one framework that I see that brings this universe of GRC into a common language, process, and architecture – that is the OCEG Red Book (v2) and its GRC Capability Model™. Although various standards and guidance frameworks exist to address discrete portions of governance, risk management and compliance issues, the OCEG GRC Capability Model™ is the only one that provides comprehensive and detailed practices for an integrated and collaborative approach to GRC. These practices address the many elements that make up a complete GRC business architecture. Applying the elements of the GRC Capability Model™ and the practices within them enable an organization to:

Achieve business objectives
Enhance organizational culture
Increase stakeholder confidence
Prepare and protect the organization
Prevent, detect and reduce adversity
Motivate and inspire desired conduct
Improve responsiveness and efficiency
Optimize economic and social value

The GRC Capability Model™ describes key elements of an effective GRC architecture that integrate the principles of good corporate governance, risk management, compliance, ethics and internal control. It provides a comprehensive guide for anyone implementing and managing a GRC system or some aspect of that system. The OCEG GRC Capability Model™ is broken into eight components:

CULTURE & CONTEXT. Understand the current culture and the internal and external business contexts in which the organization operates, so that the GRC system can address current realities – and identify opportunities to affect the context to be more congruent with desired organizational outcomes.
ORGANIZE & OVERSEE. Organize and oversee the GRC system so that it is integrated with and when appropriate modifies, the existing operating model of the business and assign to management specific responsibility, decision-making authority, and accountability to achieve system goals.
ASSESS & ALIGN. Asses risks and optimize the organizational risk profile with a portfolio of initiatives, tactics, and activities.
PREVENT & PROMOTE. Promote and motivate desirable conduct, and prevent undesirable events and activities, using a mix of controls and incentives.
DETECT & DISCERN. Detect actual and potential undesirable conduct, events, GRC system weaknesses, and stakeholder concerns using a broad network of information gathering and analysis techniques.
RESPOND & RESOLVE. Respond to and recover from noncompliance and unethical conduct events, or GRC system failures, so that the organization resolves each immediate issue and prevent or resolve similar issues more effectively and efficiently in the future.
MONITOR & MEASURE. Monitor, measure and modify the GRC system on a periodic and ongoing basis to ensure it contributes to business objectives while being effective, efficient and responsive to the changing environment.
INFORM & INTEGRATE. Capture, document and manage GRC information so that it efficiently and accurately flows up, down and across the extended enterprise, and to external stakeholders.

OCEG’s GRC Capability Model™ is, in my opinion, the best umbrella framework to bring a holistic enterprise view of GRC together that works from the board of directors down into the management and process of an organization. Its goal is not to replace other frameworks and standards but to give them a common language and context to operate within and thus provide enterprise collaboration and communication across governance, risk, and compliance.

Source: Michel Rassmusen, 22.07.2009

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Shanghai Stock Exchange Vice President Liu Xiaodong: ETFs Enjoys A Big Boom

"The development of ETF has been beyond our imagination and it is now making good time." Vice President Liu Xiaodong of the Shanghai Stock Exchange (SSE) said at the ICBC Credit Suisse SSE Central State-owned Enterprises ETF release conference yesterday that the SSE would drive the development of ETF further to enrich the variety of the ETF products and gradually build it into one of the major SSE products.

According to Liu, ETF is a kind of open-ended index fund listed and traded in the exchange, which tracks a basket of stocks with the characteristics of low cost, diversified investment, high transparency and high fluidity. Since the birth of the first ETF in 1993, ETF products have flourished rapidly worldwide. As of the end of April 2009, over 3,000 ETF products had been listed on 42 exchanges worldwide, with the asset scale up to US$706.9 billion in total. An increasing number of companies have engaged in the development of ETF products, with the amount of existing ETF administrators more than 90 and a number of fund management companies specializing in ETF products. Meanwhile, the variety of ETF products have been diversified from the single stock ETF to bond ETF and commodity ETF, from the ETF in single market to the ETF across markets and from the passively managed ETF to the actively managed ETF. It is noticeable that ETF products have become one of the most successful products worldwide at the moment as they realized large sums of net capital inflow even under the international financial crisis in 2008 when the global asset depreciated seriously.

Liu pointed out that the ETF market in China is still growing, and the SSE has always attached importance to the promotion of product innovation. The introduction of ETF products was the important measure taken by the SSE in recent years to develop the fund industry, perfect the product variety and drive the innovation. On the one hand, ETF products enrich the investment variety and provide investors with a cost-efficient asset allocation tool which tracks index income. On the other hand, ETF product, like the index, is unlikely to be manipulated. With high fluidity, it is one of the major targets of derivatives as well as the cornerstone of product innovation. Through the efforts of all market participants, the SSE introduced the first ETF product to the domestic market in early 2005 and won several international awards. After 4-year development, there are 5 ETF products in the domestic market, with the asset scale of over RMB30 billion and the daily trading volume of approximately RMB2 billion. In terms of the asset scale, the domestic ETF market is the 3rd largest ETF market in Asia following Japan and Hong Kong. With regard to the trading scale, the domestic ETF market is ranked first in Asia and placed among the top 10 globally. As a whole, the development of ETF in the past was successful. The SSE Central State-owned Enterprises ETF introduced by ICBC Credit Suisse Asset Management Co., Ltd. this time is the first ETF product introduced by the domestic market in the last two years. SSE Central State-owned Enterprises Index comprises 50 listed companies with large scale and high liquidity controlled by central state-owned enterprises. These companies are also leading enterprises in 10 to-be-revitalized industries that the RMB4000 billion national investment is planned for. The timely introduction of SSE Central State-owned Enterprises ETF provides investors with an opportunity to share the income of the high quality large-cap stocks in a more easy and transparent way.

Liu also stated that with the diversification of the index, the establishment of the supporting mechanisms including the margin trading and securities lending and the stock index futures fuelled the development of ETF. In the days to come, the SSE will vigorously support the development of ETF and facilitate its expansion in terms of industry and type so as to meet the need of investors. There will be a lot of ETF products awaiting the approval for listing in the future. The SSE will actively impel the development of ETF in China and build it into a major SSE product. Liu added that there are still large space for the promotion and marketing of ETF. He appealed to the dealers to support the sale of relevant ETF index funds and work together to drive the development of ETF in China.

Source: SSE, 20.07.2009

Is Carbon Trading the Next Big Thing?

The U.S. carbon credit trading business could take off if the Senate passes the Waxman-Markey climate change bill. Current environmental market players such as Citi, the CME, the Chicago Climate Exchange and BlueNext are preparing to capitalize on the expected surge.

The fledgling U.S. carbon credit market, currently a $100 million-plus business, is poised to skyrocket if The American Clean Energy and Security Act of 2009, which recently was passed by the House, makes it through the Senate. The bill would limit, or "cap," the amount of carbon emissions that companies can produce each year.

Under the bill, sponsored by Representatives Henry Waxman (D-CA) and Edward Markey (D-MA), firms that produce more greenhouse gases than they're allowed would be able to buy credits from companies that have produced fewer emissions than they're allotted, creating a large market for carbon credits. President Obama has estimated that more than a half-trillion dollars' worth of carbon credits will be auctioned in the first seven years after the bill is enacted.

The United States was the first country to introduce a cap-and-trade scheme. The 1990 Clean Air Act Amendments established an emissions trading system to reduce emissions of sulfur dioxide (SO2) from fossil fuel-burning power plants. According to Randy Warsager, director of green products at CME Group, the SO2 market was challenged last year by an unfavorable court decision, but it has been rebuilding slowly.

A voluntary market currently exists for carbon credit trading, primarily through regional initiatives such as the Regional Greenhouse Gas Initiative (RGGI), which covers Maine, New Hampshire, Vermont, Connecticut, New York, New Jersey, Delaware, Massachusetts, Maryland and Rhode Island. In the RGGI's latest auction in June, 30.8 million allowances were sold for $3.23 each, which raised more than $104 million for the 10 Northeastern states to invest in energy-efficiency and renewable energy programs. (Each allowance represents a ton of carbon that electric plants can release.)

Profiting From the Environment

Citi is among the investment banks that have been moving forward in the environmental products space. Garth Edward, the firm's director of environmental markets, began trading environmental products with the introduction of the EPA's NOx Budget Trading Program, a cap-and-trade program that the EPA created in 2003 to reduce emissions of nitrogen oxides (NOx) from power plants and other large combustion sources. For the past few years Citi has focused primarily on CO2 trading, which has been driven by the European Union's emissions trading system. "This is where the bulk of liquidity is, most of the capital flow that drives emission reduction projects around the world," Edward notes.

Growth in market activity and the capital deployed in environmental products has been strong, primarily because of cap-and-trade legislation, according to Edward. "Where you have a step forward in legislation such as the EU emissions trading system, the voluntary agreements in Japan and the Waxman-Markey legislation, that's the kind of process that starts creating compliance requirements on end users and incentivizes service and technology providers to provide solutions," he says.

Despite the projected growth in environmental markets, Credit Suisse recently cut back its New York-based carbon trading team; Carbon Finance, a newsletter dedicated to the global markets in greenhouse gas emissions, reported that half the team will depart early next year as part of a de-emphasizing of the business. According to the Carbon Finance report, going forward Credit Suisse will focus on environmental trading on behalf of its clients, which are mostly European. (Credit Suisse did not respond to Carbon Finance's nor to Wall Street & Technology's requests for an interview.)

Meanwhile the primary U.S. exchanges involved in carbon trading are the Chicago Climate Exchange (CCX) and the Chicago Mercantile Exchange (CME). The CCX trades allowance and offset contracts that each represent 100 metric tons of CO2 equivalent. The Chicago Climate Futures Exchange, a subsidiary of the CCX, trades RGGI futures and options contracts. The CCFE reported record trading volume for June 2009 -- it traded 133,175 contracts versus its previous record of 132,319 in April.

The CME -- along with partners Evolution Markets, Morgan Stanley, Credit Suisse, Goldman Sachs, J.P. Morgan, Merrill Lynch, Tudor Investment, Constellation Energy, Vitol, RNK Capital, ICAP and TFS Energy -- has applied for CFTC approval for a Green Exchange, on which it will trade all the environmental products it already trades on its commodities exchange. (For more on the CME's carbon credit trading efforts, see "CME Revs Up for Surge in Carbon Credit Trading".)

Europe's BlueNext, an environmental exchange that's 60 percent owned by NYSE Euronext, plans to open an office in New York "very shortly," according to Keiron Allen, the exchange's marketing and communications director. It plans to start trading contracts within the RGGI market by the end of the year, Allen reports, adding that the exchange intends to compete with the U.S. environmental exchanges. "It will be a race to see who gains critical mass first," he says.

The European Experience

In Europe, cap-and-trade rules similar to those outlined in the Waxman-Markey bill have been in effect since 2005; carbon credits are traded on the European Climate Exchange (ECX), BlueNext, Nord Pool (the Nordic Power Exchange) and the European Energy Exchange (EEX).

BlueNext trades European Union Allowances, the carbon emission allowances used in the European Union Emissions Trading Scheme, and Certified Emission Reductions, which are carbon credits issued under the rules of the Kyoto Protocol, which is part of the United Nations Framework Convention on Climate Change, an international environmental treaty with the goal of reducing greenhouse gas concentrations in the atmosphere. BlueNext trades an average of 5 million tons' worth of carbon emissions a day. Its 100 members (buyers and sellers on the exchange) are carbon-emitting companies, financial firms with their own trading desks and carbon credit aggregators that act as brokers.

BlueNext's model is different than most other carbon exchanges, Allen says, because it uses a delivery-versus-payment system rather than a clearing system. "In a delivery-versus-payment system, there's zero counterparty risk," he contends. "If you sell contracts, you've got to put them into your account on the exchange first. And if you want to buy something, you have to put money in your exchange account first. Each party knows the other's got the right amount of money or contracts." Allen adds that in BlueNext, trades are physically settled within 10 or 15 minutes, versus the more typical T+1, T+2 or T+3 for commodities settlement.

The European carbon market has been growing quickly; the U.S. market still is in its infancy. Trading activity in the European Emissions Trading Scheme grew by 54 percent in the first quarter of 2009 compared to Q4 2008, reaching $28 billion, according to Carbon Finance. This represented 84 percent of the world's carbon market in terms of value and 78 percent of its volume. Carbon trading in the U.S., on the other hand, made up only 3.7 percent of the trading volume and 1 percent of the value of the global carbon market. According to CME's Warsager, though, "We're hoping to build some market share [in the U.S.] as we move forward with the Green Exchange."

The CME isn't the only institution hoping to capitalize on carbon credit trading in the U.S. But what are the barriers to entry to this new market? At Evolution Markets, a White Plains, N.Y.-based voice brokerage for environment and energy products, the trading floor is as noisy and chaotic as any commodities trading room. According to firm spokesman Evan A. Ard, the technology required for carbon credit trading is no different from the technology required to trade other commodities.

Jubin Pejman, VP, Americas, for Trayport, whose energy commodities trading and order matching software is used by 13,000 traders and many investment banks and utilities in Europe and the U.S., agrees that carbon futures trade like any other type of futures contract. "You have hedge funds speculating, you have industrials buying them, you have brokers," he says. "At any futures exchange around the world, it's the same type of breakup. From a technology standpoint, there's a matching engine, there's risk management, there's margin management, there are counterparties, there's clearing. BlueNext, for example, looks very much like other futures exchanges."

BlueNext's Allen, however, points out one big difference between carbon emissions contracts and other commodities: "If you've got a spot market for oil or grain, you physically deliver that oil or grain to the buyer," he explains. "You don't roll up in a giant truck and deliver 15,000 tons of carbon dioxide."

Regional carbon futures contracts in the U.S. tend to be processed manually or through voice trading. "Europe is about 10 years ahead of the curve as far as technology for energy emissions trading," Trayport's Pejman says. He explains that large European financial firms have their own carbon trading platforms; smaller entities turn to third-party solutions such as Trayport's platform.

But, Citi's Edward says, in terms of technology and compliance, carbon trading should not be difficult for many U.S. firms because emissions trading in the U.S. has been around for more than a decade. The same IT processes, management systems, accounting systems, and even risk management and hedging systems will work under the new carbon credit trading scheme, he points out. "We're not introducing something that's conceptually dramatically new and untried in the U.S.," Edward notes.

BlueNext's Allen says the exchange will publish a how-to book by the fourth quarter to help small and medium-size firms get involved in carbon trading. (Hearing this, Trayport's Pejman jokes that the book will be made out of Styrofoam.)

The Future of U.S. Carbon Trading

Even as firms build out their carbon credit trading capabilities, the market is expected to reach significant levels fairly quickly. President Obama has predicted that about $646 billion worth of carbon credits will be auctioned in the first seven years of the mandatory cap-and-trade system in the U.S.; others have suggested the number could be two or three times that. To the novice onlooker, this would suggest a healthy rate of carbon credit market growth.

But Citi's Edward demurs. "The actual volume of allowances issued is not necessarily what drives liquidity and price," he says. "It is the ambition of the target that drives activity."

According to Edward, the U.S. experience may mirror the EU's emissions trading system, which, he says, is similar in size in terms of covered installations and required emission reductions. "The EU turns over close to a half-billion dollars' worth of allowance transactions a day, so that may be a reasonable expectation for the U.S.," Edward comments.

The Waxman-Markey bill currently would take effect in 2012; the Senate may postpone this start time to 2013. Still, "We'd expect trading to take place far in advance of that first compliance year," Edward says. "That's the normal case with environmental trading systems -- companies that dispatch power generation or refineries need to hedge in advance their emissions exposure; they need to lock in the margins around running their plant, and that requires them to buy the allowances in advance." If the first compliance year is 2013, Edward says, he would expect early trading to begin in 2010.

Trayport's Pejman notes that once the legislation is passed, there will be a race to the market. "Whoever is already in production will have a tremendous advantage over those that are scrambling to get ready," he asserts.

But what if the Senate doesn't pass this bill? "That would change everybody's plans," BlueNext's Allen concedes. "I like the Woody Allen joke: 'How do you make God laugh? Write down your plans.' "

Source: Wallstreet & Technology, 19.07.2009 By Penny Crosman

Fund Managers can become farmers: Jim Rogers

At one stage we were inundated with gloomy forecasts, which were further reinforced by the IMF and World Bank. And then suddenly stocks surged — something most were not prepared for. How risky is the market today?

Central banks all over the world have printed huge amounts of money, and the real economy is not strong enough for all this money to be absorbed... so, it's going into stocks and real assets such as commodities. It's a mistake what they are doing. It's giving short-term pleasure, but there's long-term pain as we are going to have much higher inflation, much higher interest rates and a worse economy down the road.

The American bond market is already beginning to go down dramatically as people realise that the American government has to sell huge amount of bonds, and secondly, there is going to be inflation, serious inflation, as it was always in the past when you had governments printing huge amounts of money.

Stocks are rising even as fiscal deficit is widening. Somewhere it has to snap...

It's going to snap. Later this year, next year, we are going to have currency problems, maybe even a currency crisis. I don't know with which currency — maybe with the pound sterling, maybe with the US dollar, who knows. It maybe with something none of us have at the moment. When you have a currency crisis, stocks will be affected, many things will be affected. It is not sound, what's happening out there in the world.

In the 1930s, we had a huge stock market bubble which popped. And then politicians started making many mistakes. They became protectionist. They made solvent banks take over insolvent banks and then both banks failed in the end.

They are doing many of the same mistakes now. What's different this time is that we are printing huge amounts of money which they did not print at that time. So, we are going to have inflation this time.

What do you do? No politically-elected government can afford so much pain, unemployment and hardships...

America could have. America just had an election. The guy was elected in November and he could have come in the beginning of a four-year term and said the guys before me were hopeless idiots. They ruined things. We have to solve this problem. We have to take some pains now. But don't worry, we will get through this pain, and in two to three years or four years, things would be fine. And he could have been re-elected.

If the pain comes in 2010, 2011 or 2012, there will be nobody he can blame. Especially, if things go bad later, the opposition will say, wait a minute, 2009 looked good. The next guy is going to say you did it... But you are right. It's very difficult for an elected government. You have a newly-elected government in India. Whenever you have a new government they can take some of the pain.

You recently said that you would invest in China and Sri Lanka but not in India. Aren’t you betting on the new government in India?

I was trying to make a point that if anyone wants to invest in this particular part of the world, the best place would be Sri Lanka. Because it looks like the 30-year war is coming to an end.

Throughout history, if you go to a place after the war ends you usually find everything as very cheap, everyone is demoralised, people are just depressed and there are enormous opportunities if you have energy.

In my view, investing in Sri Lanka in May 2009 is probably a better bet than Pakistan, Bangladesh, India or some of the other countries nearby. Let's hope the new Indian government does something. I have heard wonderful things from Indian politicians for 40 years.

And rarely do they produce. It's not the first time that the Congress party has been in the power. If they mean it, India's going to be one of the greatest development stories in the next 20 years. But I don’t know if they mean it.

What kind of reforms?

Why isn't the currency convertible, why isn't foreign capital encouraged, why isn't foreign expertise encouraged, why is it so protectionist? Why are farmers only allowed to own five hectares? India should be the greatest farming nation in the world. You have the soil, the weather, you have everything and yet an Indian farmer can own only five hectares.

How can an Indian farmer compete with a guy in Ireland who can own 1,000 hectares or a guy in Brazil who can own 5,000 hectares? Smart people don't become farmers. Because what's the future? Whenever prices start going up, Indian politicians ban futures trading, as if futures trading makes prices go up. It's the craziest and the most absurd thing in the whole world. Prices go up because there is a reason for prices to go up.

Last year you were buying only Chinese stocks. Why?

The market collapsed in October-November. That's when I bought more Chinese shares. I have not bought any Chinese shares since then. I have not bought shares anywhere in the world since then. My way of participating in what's going on now is to buy commodities.

In my view, commodities are the only place where fundamentals are improving. Farmers can't get loans for fertilisers now, even though inventories of food are the lowest in decades. Nobody can get a loan to open a mine. So, you will have supplies of everything continuing to decline.

What else are you looking at while investing?

There are some industries in India that would do exceedingly well in the next few years, one of which is water. You have a horrible water problem. China also has a horrible water problem. So, I bought water companies in China. There are some great opportunities if America falls off the face of the earth. China is spending hundreds of billions of dollars to solve the agricultural problem.

So, I am buying agricultural stocks and water stocks in China. There are other industries in India which have a great future. I am very bullish on Indian tourism. Wherever I go for speeches around the world I tell people, if you have to go to one country in your lifetime, you should go to India.

Your government is going to re-build the military, they say. So, there's going to be great opportunities here. Also, they may build the infrastructure. So, I see many opportunities in India.

The possibility of a sovereign default in the developed world could further depress sentiments. You think it’s possible?

In 1918, the UK was the richest and the most powerful country in the world. Within one generation it was in shambles, within two-and-a-half generations it defaulted. The UK defaulted in 1970s and had to be bailed out by the IMF. Many of the countries in the developed world are in serious trouble right now.

Iceland has already defaulted. I think there could be a currency crisis because of sovereign debt problems later this year, next year or 2011. Developed nations have defaulted before. Remember the Asian crisis. It was a default of one kind or the other. It has happened before and it will happen again.

Are you worried about any particular market or region?

I am glad that I have no investments in the UK. Neither long, nor short. I am convinced that it’s in trouble. I am worried about the US. I have sold nearly all of my US dollars. I always had some as I am an American citizen. But I see serious problems developing there. Those two of the big developed countries are the ones that I see with the most likely problems.

But the problem is that it never works that way. Everybody is sitting here watching the UK and US and it may happen in say Portugal or some place we haven’t thought of and it will come suddenly to surprise us all.

If US unemployment touches the 10%-mark, it would further impact retail sales. How bad could this be for Asia?

Let's pick on China for a minute. If you sell to Wal-Mart in the US and if you are a Chinese supplier you know there is a problem. And you are going to be suffering. Any company that deals with the West is going to have problems. On the other hand, companies that are in the water-treatment business in Asia will care less if the West disappears. They are too busy making money, too busy going to work everyday.

What kind of commodities will smart money chase? Can money be made in crude?

I own gold but think silver is better right now. Natural gas is cheaper than oil right now, but I own them all. If you want to buy crude, you should probably buy cotton. Because all farmers in the US are planting corn to turn into energy. That means they are not going to plant any cotton. The best way to play crude oil is to buy cotton.

Right now, there are huge subsidies around the world for farmers to plant corn, maize, for instance, so that they can be converted into energy. If energy prices go higher, there will be even more of that.

If everybody plants his fields with soya, corn or palm oil to turn it into oil or energy then no one is going to plant cotton.

And you can make a lot more money in cotton than oil. Between oil and gold, buy cotton. Between oil and gold buy silver. The other way to invest in oil is to buy sugar as everybody is converting a lot of sugar into energy.
Silver is so much cheaper on a historic basis. And gold is near its all-time high. Silver is 75% below its all-time high. So, I would suspect that silver and cotton are going to do better than gold and oil.

Global population is close to its peak and genetically-modified crops will increase productivity. What makes you so bullish on agriculture?

It doesn't matter. The world has been consuming more than it produced. Food inventories are at a multi-decade low. And we haven't had any bad weather. We had isolated cases of droughts and things. That may never happen again. But if it does, the prices of food would go through the roof.

If there is climate change taking place, the best way to participate is through agriculture or through agriculture products. There are many positive things happening. Right now, there is a shortage of everything in agriculture — seeds, fertilisers, tractors, tractor tyres. We have a shortage of farmers because farming has been a horrible business for the past 30 years.

What kind of a market are you witnessing now?

It's a bear market rally. I was going to say I don't think S&P 500 will see new highs. But I have to quickly temper that by saying against the dollar because the S&P 500 could triple from here if they print enough money and the value of the US dollar collapses, then S&P could go to 50,000, Dow Jones can go to 1,00,000.

Which is one reason why I am not shorting stocks right now. Because there is a possibility of this sort of a thing. There is a possibility that stocks could go through unheard of levels, but would be in worthless currency.

That naturally brings us to the debate on a new international reserve currency

Several countries have raised the issue once again. The US dollar is terribly flawed right now. Something has to be done to the US dollar and something will be done just as something was done about the pound sterling. After World War II, people stopped using the pound sterling and converted to the dollar for many reasons. Something's going to be done about the dollar.

We are much closer to be doing something about it or will be forced to do something about it. India was forced to change in 1991 and the world will be forced to change the currency situation in the foreseeable future.

There is already an underlying fear that this mountain of cash will chase assets and eventually force central banks to mop up liquidity. How do you think this would play out?

I know they all say, 'Don't worry, we will reverse gears and take the excess liquidity out in time.' I don't believe them for a minute. No one has ever done it that way. When central bankers started trying to, it caused so much pain that they quickly reversed or have got rid of that central banker and put somebody else in.

I just don't think they could do it. That's why I am worried about the bond market and the inflation. If all central banks do it together, that's going to lead to higher unemployment, riots in the streets, civil unrests.

Your track record as an investor has been more than impressive. But in todays market can you replicate your performance of the past 20 years?

One can. I probably cannot as I am not spending enough time at it. But it can be done. There are going to be people who we will read about in 20 years having made legendary fortunes starting now. In the 1930s, there were people who built huge fortunes and laid the foundations like Templeton.

He started in the 1930s. He saw opportunities and took advantage. These are people who saw great advantages and opportunities in the 1930s, acted and became fantastic successes. There may be somebody out there now. I don’t know who she is. Maybe she is in Brazil, China or India.

What will you tell a confused fund manager who seeks your advice?

Become a farmer. The world has tens of thousands of hotshot fund managers right now. If I am correct, the financial community is not going to be a great place to be in for the next 30 years. We have many periods in history when financial people were in charge, we had many periods when people who produced real goods were in charge — miners, farmers, etc.

The world, in my view, is changing and is shifting away from the financial types to producers of real goods, and this is going to last for several decades as it always has. This may sound strange but it always happens this way. Ten years from now, it may be farmers who will drive the Lamborghinis and the stock brokers will drive tractors or taxis at best.

Source: Economic Times, 04.06.2009

Brazil- The Sleeping Giant - Webinar July 15th at 2pm CDT

Missed the event on the 15th July? No problem just follow please follow this link http://www.rtsgroup.net/news-media/rts-webinars_328.html

FiNETIK, 16.07.2009

Join us for an interesting webinar to learn more about why BM&FBOVESPA is to become more than simply the largest exchange in Latin America.

Seats are limited Reserve your Webinar seat here

As technology has improved access to markets in Brazil and the regulator increasingly facilitate foreign participation, interests from international markets continues to grow.
Learn why Brazil has been so successful in the past and how market participants are ramping up their offering to fully profit from Direct Market Access opportunities. Also, speakers will touch on initiatives as sponsored access, co-location and incentive programs for traders.
Key learning points include:
• Why Trade Brazil?
• Market Structure & Market Participants
• International Access: What is really needed to trade Brazil out of the US?
• The cost of trading: technology and infrastructure challenges
• Is Brazil ready for Algorithmic Trading?
Panelists:
• Cicero Augusto Vieira Neto, COO, BM&FBOVESPA
• Charles Farra, Director, Intl. Products & Services, CME Group
• Achilles Couto, CME Group, Sao Paulo
• Alex Lamb, Executive Board Member, RTS Realtime Systems
Seats are limited Reserve your Webinar seat here or e-mail at events@rtsgroup.net for more information
Event Details
Title: Brazil- The Sleeping Giant
Date: Wednesday, July 15, 2009
Time: 2:00 PM - 3:00 PM CDT
Organized by: RTS Real Time Systems

Delhi Stock Exchange Teams Up with IBM to Re-start its Operations

IBM (NYSE: IBM) today announced that it has signed a 10-year information technology (IT) services agreement with Delhi Stock Exchange (DSE), one of the leading stock exchanges in India. As part of this Rs 11 crore agreement, IBM will provide business continuity and disaster recovery services to DSE as well as remotely host and manage its IT infrastructure. This will help the exchange meet the stringent business continuity guidelines as laid out by Securities and Exchange Board of India (SEBI) before it could resume its operations after a hiatus of six years. By engaging with IBM in a complete operational expenditure (pay-as-you-go) model, DSE will also save 100 percent capital expenditure on IT.

Signed in June 2009, this agreement demonstrates IBM’s focus to help clients ‘Do more with Less’ by engaging in an increasingly popular operational expense (opex) model. It also leverages IBM’s global experience of over 40 years to provide business continuity and resiliency services to help clients minimize the costs and time-frames associated with recovering business operations in the event of a disaster.

DSE was one of country’s largest stock exchanges – almost at par with Bombay Stock Exchange in the 90’s, and has been in existence for over 60 years. In 2002, however, the exchange became inactive due to negligible trading volumes. Seven years later, the exchange is now looking at resurrecting itself to its former glory—one where it used to be bustling with over 2,800 companies listed. IBM will play a key role in helping DSE go live for trading by providing a highly secure environment and a robust resiliency solution with the goal of zero data loss once the exchange becomes operational later this year.

“As DSE looks to claim back its position as one of country’s leading stock exchanges, the agreement with IBM couldn’t have happened at a better time,” said Mr HS Sidhu, Executive Director and CEO, Delhi Stock Exchange. “As the world’s leading IT services company, IBM will bring immense value to the exchange by providing time-tested and world-class managed services—that would help DSE become operational and successful once again.”

Mr Vijay Gupta, Chairman – Business Development Committee, Delhi Stock Exchange remarked, “DSE will play a key role in the stock trading landscape of India, once re-launched. IBM’s commitment to helping DSE achieve that goal is commendable. IBM’s strong value proposition of providing managed services in an opex model was also one of the key reasons why DSE decided to choose IBM for this strategic relationship.”

Under this agreement, IBM will build, host and manage the entire disaster recovery infrastructure for DSE from its data center. IBM will also provide 24×7 monitoring services for hardware and networking devices from its command center.

Said Mr Neeraj Sharma, Director, Integrated Technology Services, IBM India/South Asia, “Companies today want to do more with less in these economically challenging times. DSE’s trust in IBM is a testament to IBM’s value proposition and world-class capabilities to help its clients improve the operational efficiency and cost effectiveness as well as accelerate time-to-market for services.”

Source: A-TEAM Electronic Trading, 15.07.2009

Shenzhen exchange proposes more trading ties with HK exchange with cross-listing shares

HONG KONG: Shenzhen stock exchange SZSE is proposing to increase financial ties with Hong Kong, including cross listings, connecting trading networks and allowing Hong Kong-listed red-chips to list in Shenzhen on a trial basis, Caijing magazine reported yesterday, citing Li Lin, director of Shenzhen Financial Services Office.

The market, however, is uncertain about the feasibility of the proposal. According to the plan, Hong Kong H shares will be allowed to list on the Shenzhen Stock Exchange while B shares listed in Shenzhen will be allowed to list on the Hong Kong Stock Exchange.

H shares are Hong Kong-listed mainland companies while Shenzhen’s B shares are denominated in Hong Kong dollars.

The proposal also outlines a trading network connection between Shenzhen Stock Exchange and Hong Kong Stock Exchange, which gives mainland investors direct access to overseas securities markets.

The proposal, which is now awaiting central government approval, will also allow Hong Kong’s exchange traded funds (ETF) and China depository receipt (CDR) to be traded on the Shenzhen Stock Exchange on a trial basis.

Hong Kong Monetary Authority chief executive Joseph Yam said yesterday during a visit to Beijing that, despite differences between the mainland and Hong Kong financial systems, a large number of the financial products are identical and therefore the two sides could cooperate by starting from a trial basis.

A Hong Kong Stock Exchange spokesman said yesterday that some technical problems, including the convertibility of the yuan, needed to be resolved by both sides before cross listing.

Analysts in Hong Kong, however, are uncertain about the feasibility of cross listings.

“Allowing Hong Kong’s H shares to be listed in Shenzhen is theoretically viable but practically with limitations,” said Castor Pang, chief strategist at Sun Hung Kai Financial, adding that “there will be some requirements for the eligible investors, for example, the investor will need to hold a certain amount of Hong Kong dollars.”

“Whether the H shares’ listing will influence the market in Hong Kong depends on the scale of investors,” Pang said.

The analyst also noted that the cross listing may involve some regulation changes.

Source: China Daily, 15.05.2009