BOXX etf any thoughts

[engineering]

Justy opinion...

I'll argue otherwise on the credit risk. OCC is a private company and apparently there is no insurance.

Some of the articles point to the OCC credit rating being similar to that of the US govt but I consider that a pretty disingenuous argument. These are the same credit agencies that were rating sub prime bonds as AAA remember.

Consider a scenario where 12 banks fail next year as a result of the ongoing CRE debacle and there is a 50% flash crash in the market. Is OCC going to be just as well capitalized and is the market going to blindly trust that is the case? Or is the value of BOX going to flash crash at the same time?

Meanwhile you can pretty much trust that you us treasuries will maintain their value... Which is what you want because you can sell them off to go bargain hunting.

Yes BOX would probably recover, presuming OCC isn't holding any large unhedged bets, but I would expect that by the time it does, the flash crash is over and you bargain hunting opportunity is gone.

 

[ajacobson]

OCC is owned by its clearing members so it's, in many ways the lowest risk on the street. Like any clearing firm, the first line of defense is the clearing fund itself - the second line is the drawing ability of the balance sheet of its clearing member firms and this gets sticky as many of OCC's member firms are clearing subs set up to minimize this portion of the liability. Ask your firm for their agreement. OCC clearing members are also SIPC members for their nonOCC failures.
Since OCC is holding all of the collateral the clearing fund, like that of CME and the Clearing Corporation is the risk. In my tenure, I have only seen one payout in 1987 for about $8,000,000. A Europen box value would not have a net change no matter what the S&P failure. The interest rate assumption could change and there would be a repricing of the box.

 

[newwurldmn]

OCC is owned by its clearing members so it's, in many ways the lowest risk on the street. Like any clearing firm, the first line of defense is the clearing fund itself - the second line is the drawing ability of the balance sheet of its clearing member firms and this gets sticky as many of OCC's member firms are clearing subs set up to minimize this portion of the liability. Ask your firm for their agreement. OCC clearing members are also SIPC members for their nonOCC failures.
Since OCC is holding all of the collateral the clearing fund, like that of CME and the Clearing Corporation is the risk. In my tenure, I have only seen one payout in 1987 for about $8,000,000. A Europen box value would not have a net change no matter what the S&P failure. The interest rate assumption could change and there would be a repricing of the box.

the 8,000,000 was because a counterparty failed and so the OCC had to fill the gap?

 

[newwurldmn]

Justy opinion...

I'll argue otherwise on the credit risk. OCC is a private company and apparently there is no insurance.

Some of the articles point to the OCC credit rating being similar to that of the US govt but I consider that a pretty disingenuous argument. These are the same credit agencies that were rating sub prime bonds as AAA remember.

Consider a scenario where 12 banks fail next year as a result of the ongoing CRE debacle and there is a 50% flash crash in the market. Is OCC going to be just as well capitalized and is the market going to blindly trust that is the case? Or is the value of BOX going to flash crash at the same time?

Meanwhile you can pretty much trust that you us treasuries will maintain their value... Which is what you want because you can sell them off to go bargain hunting.

Yes BOX would probably recover, presuming OCC isn't holding any large unhedged bets, but I would expect that by the time it does, the flash crash is over and you bargain hunting opportunity is gone.

in your scenario, treasuries will collapse too. Not because of credit risk but because of massive deleveraging in the market and failures to deliver.

in that scenario, I’m driving to des’s house because I don’t know anyone with more guns than him.

 

[engineering]

in your scenario, treasuries will collapse too. Not because of credit risk but because of massive deleveraging in the market and failures to deliver.

Maybe financial products based on treasuries will. But if you've got an actual t-bill in your name I don't see how.

I'm not talking some end of the world catastrophic event. I'm talking you basic once every 20 years market crash. Not even a 100 year crash.

In the scenario I'm talking about, I would expect t-bills to actually be more desirable than deposits at a bank that may or may not be solvent.

 

[newwurldmn]

Maybe financial products based on treasuries will. But if you've got an actual t-bill in your name I don't see how.

I'm not talking some end of the world catastrophic event. I'm talking you basic once every 20 years market crash. Not even a 100 year crash.

In the scenario I'm talking about, I would expect t-bills to actually be more desirable than deposits at a bank that may or may not be solvent.

as Alan Jacobson has said the OCC Fund has only paid out once and it was only 8mm. So an event that takes down the OCC would be a catastrophic financial event that would take out most of the member firms. (I’m not even sure a nuclear event would do that).

the deleveraging would be massive. All assets would be done, except physical assets like bullets, butter, and jewelry.

 

[ajacobson]

Treasuries are held in book.

Unless you're buying something like E bonds - birthday presents.

 

[engineering]

So an event that takes down the OCC would be a catastrophic financial event that would take out most of the member firms.

Actually, he specifically pointed out that wouldn't happen

"many of OCC's member firms are clearing subs set up to minimize this portion of the liability. "

As in, there's a sub corporation specifically to limit their exposure to OCC.

 

[engineering]

Treasuries are held in book.

Unless you're buying something like E bonds - birthday presents.

Sure, but it's not fractional reserve.
It's more of a depository like DTCC.

 

[newwurldmn]

Actually, he specifically pointed out that wouldn't happen

"many of OCC's member firms are clearing subs set up to minimize this portion of the liability. "

As in, there's a sub corporation specifically to limit their exposure to OCC.

Look at my math. If the tax arb doesn’t compensate you for this risk, then this product isn’t for you.