Regional Stock Reports

Answer: both were quoted in the keynote speech last week by U.S. Commodity Futures Trading Commission (CFTC) commissioner Scott O’Malia, at the 13th Annual Energy and Commodities Conference in Houston.

Referencing pop culture in a speech on derivatives is a little unorthodox. But what O’Malia was describing to conference attendees was even more so.

The commissioner was discussing the CFTC’s implementation of the Dodd-Frank Act. Otherwise known as the financial reform rules in the U.S.

A major thrust of Dodd-Frank has been the regulation of derivatives. Options, futures, swaps and other such instruments that are seen as being a large and potentially risky part of the financial infrastructure.

And the U.S. government and financial institutions have been working frantically since the financial crash to implement new rules to make derivatives trade safer. As O’Malia put it, “I’ve given up rolling up my sleeves and have just about torn them off.”

But much of this work is now coming to fruition. There have been a whirlwind series of meetings, speeches and seminars on proposed derivatives rules over the last several weeks in the U.S. The market is bracing for big changes.

And those changes are arriving. Today CME Group (owners of a good chunk of American trading platforms, including NYMEX and COMEX), announced that it has officially begun clearing of over-the-counter interest rate swaps.

Clearing of swaps is a priority item under the new rules. Basically this means when these derivatives are traded between two parties, the trade must be executed through a central, independent agent (much like a stock exchange does). Buyers and sellers are no longer allowed to do business directly with each other.

There are several reasons lawmakers pushed for greater clearing of derivatives. It standardizes the market. And provides some degree of insurance if trades go bad.

But one of the main stated reasons for the move is price discovery. By having one (or perhaps a few) central exchanges looking at all derivatives trades, government and regulatory bodies will be able to gather data on going prices, volumes and other metrics. In the past, such information was very hard to gather.

The result being, derivatives markets are going to get a lot more transparent.

Ultimately, this is a good thing. But the transition may be rocky. As I’ve discussed previously, price discovery can provide some unpleasant surprises.

Up until this point, there has been little data on the market value of many derivatives. Meaning that owners of such instruments probably had some leeway in reporting the value of their derivatives holdings.

That leeway is now disappearing. Clearing of derivatives will provide hard data on prices. It’s likely that holders will be forced to use such pricing for reporting purposes.

What do you want to bet that someone somewhere has been keeping derivatives on the books at inflated prices in order to beef up their financials? For any such groups, clearing and price discovery could lead to some significant write-downs. The kind that lead to the last crash, after the introduction of mark-to-market accounting rules.

This is a critical development. We’ll be keeping an eye out for any warning signs over the coming months.

Here’s to clearing things up.

Learn more about peak oil and how you can make money investing in oil futures.

You all know the story.

The race to secure natural resources is intensifying. Particularly amongst governments and nationally-sponsored corporations. And particularly in Asia.

We�ve been seeing signs the last few years that Asian nations are stepping up their drive for oil, copper, iron and natural gas. I talked last week about India jumping into the fray in a big way for coal.

A few more indicators this week worth mentioning. Korea is upping the ante.

Korea National Oil Corp (KNOC) leaked this week that it will sell between $500 million and $1 billion worth of bonds to fund its $2.6 billion hostile takeover of Africa/North Sea-focused Dana Petroleum.

The same day, the world’s second biggest smelter, LS-Nikko announced a joint venture with Korea’s top steelmaker, Posco. Under the deal, the two majors will work together on the acquisition and development of copper and iron ore projects.

These are deals of mega-proportions. So much so, the Korean government said it fears currency appreciation because of state-associated firms issuing billions in new won-denominated debt.

Not to be outdone, Japan also announced some ambitious natural resource plans this week. Tokyo Electric Power Company (Tepco) said it is aiming to take more ownership in liquefied natural gas projects around the globe.

Tepco currently sources 11% of its LNG supplies from projects in which it owns equity. Mainly Australia’s Darwin LNG facility. The company said it wants to grow this to 33% equity supply by 2020.

This is a big jump in supply. Meaning Tepco is going to have to be fairly aggressive in pursuing buy-in on new projects.

With all these plans on the books, deep-pocketed Asian governments are going to be increasingly butting heads with regular corporations as well as each other when it comes to buying resource projects. A lot of cash is being brought to bear on the sector in a great game of “chicken”, with significant implications for project valuations.

The Asian slant means projects within shipping distance of the East are going to be in demand. Pick your investment spots wisely.

Here’s to the amazing race for resources.

Get the latest information about oil stocks and the best oil futures for your investments!

A precious metals note today, in honor of gold breaking $1,300/oz (briefly) this morning.

Some of the buying that’s propelled gold lately is from investors who want to hold metal as currency. Having something tangible in your pocket provides insurance if another financial catastrophe descends on the world.

JP Morgan recognizes this demand. On Wednesday, JPM announced it will open its first precious metals storage vault in Asia.

The facility will be located in Singapore, near Changi Airport (just in case you want to grab your gold and fly). The stated goal is to provide precious metals storage for “corporate, institutional and retail” clients.

Some of the people using this facility will be investors from outside Asia, looking to geographically diversify their gold holdings. Many investors are leery of keeping all their gold in one basket, just in case governments get confiscatory.

Perhaps more interestingly, the new facility will allow local Asian investors to get more involved in owning physical metal. Recently, the Singapore Mercantile Exchange announced the launch of a physically-settled gold contract that will be delivered at the JP Morgan vault.

But will gold be the number one choice in Singapore? Asia has always been a little different when it comes to precious metals. Many Asians prefer platinum as “catastrophe insurance”.

Look at Japan. On the Tokyo Commodity Exchange (TOCOM), open interest in gold amounts to 3.5 million ounces. Or about 5% of the 60 million ounces in open interest seen on the NYMEX exchange in New York.

With platinum, Japan’s percentage of global trade is much higher. Open platinum interest on TOCOM is 840,000 ounces. This is 45% of the NYMEX open interest in platinum, which currently stands at 1.9 million ounces.

As options like the new JP Morgan Singapore vault come available to Asian investors, it will be interesting to see what metal they choose. If they follow the Japanese example, this could become an important new source of demand for both platinum and gold.

Here’s to the other precious metal.

Get the latest information about oil stocks and the best oil futures for your investments!