httpvh://www.youtube.com/watch?v=hMFGXrSwVvk

The Independent Commission on Banking has proposed new regulatory options in the biggest shake-up of the banking sector for over a generation. The report has been long awaited and the proposals today will be the subject of much debate as the commission prepares the final report in the Autumn. The idea of the potentially costly reforms are that they will protect retail operations from riskier investment banking activities, while boosting capital levels and allowing taxpayers to be exempt from future crisis . Lloyds banking seems to be hit the hardest by the report as they may have to sell off hundreds of branches in order to increase competitiveness in the retail banking sector.  Many banks such as Barclays and HSBC threatened to take their offices out of London to New York or Hong Kong, but ministers are hoping these fears will not realised thanks to the regulations not being as stern as imagined. The large banks in Britain have already boosted their capital in preparation for the new rules, but we expect to see some lobbying from them to ensure the report is lenient.

We have heard a great deal from Nick Clegg over the past week or so, and I think it is definitely time to move on from the image of him sobbing to Magic FM. He and the other members of the coalition are hopefully distracted from the deputy prime minister’s revelations by the oncoming elections on May 5^th. The most important part of the elections will be the voters’ verdict on how Cameron and Clegg are performing after almost a year in power.  The NHS reform argument continues after a senior ally of Clegg threatened to quit unless the reform was ditched.

With the MPC minutes coming out next week the next few days are likely to be interesting for the pound, especially with the results of the EU and UK inflation data later in the week. Let’s hope sterling manages to regain some ground.

Have fun in the sun!

 Jeremy’s Trade of the Week

This week’s trade of the week is a ‘1.5 Leveraged Seagull’. This trade is a close cousin of the risk reversal in that it allows you to hedge yourself close to the market but in turn for a reduced upfront cost, it gives you 100% benefit up to a pre-determined level. We also include a liability below a certain level that allows your hedge rate to be that much closer to the market for no additional upfront cost.

The client will benefit in all upward movement up to a cap level of 1.73. If on expiry the rate is above your cap level then you must buy 1.5x the amount at that cap. Should the GBPUSD rate be below 1.6100 and above 1.5500 on expiry they are able to buy dollars at 1.6100, if it is below 1.5500 however, then for every percentage point below 1.5500 they lose the same off their strike of 1.61. If the rate is between 1.61 and 1.73 then the client’s hedge can be bought at spot.

This strategy cost the client 0.8% of the notional amount and allows a hedge with a nominal WCR of only 2.5 cents from current market price while a risk reversal without the additional liability would see the cost increase by an additional 0.4%. It is also relevant for buyers of sterling and sellers of other currencies.