The Economist USA 03.21.2020

64 Finance & economics The EconomistMarch 21st 2020

Exchange-tradedfundamentals

UnitedStates,exchange-tradedfunds,premium/discount

tonetassetvalueatMarch17th2020,%offunds

Source:Bloomberg

<-5%

-2.5%to-5%

0%to-2.5%

2.5%to0%

5%to2.5%

>5%

0 5 10 15 20 25 30 35 40 45

Mixed

Commodities

Bonds

Equities

Jeremiads have long argued that if some ofthe$6trn-oddofassetsunderpinning

exchange-traded funds (etfs) are illiquid, thenthefundsmustbetoo,posinga bigriskto

their investors. But so far there are signs ofstrainbutnotpanic.Duringthecurrent

turmoil, some etfs are trading at a discounttotheirnetassetvalue,oftenthosethat

have invested in debt. But that may be becausetheyareeasytotrade,makingthema

better gauge of reality than the last recordedpriceoftheunderlyingsecurities.

Two versions of reality

had$13trn-worthofdollarliabilities,ac-

cordingtocalculationsbyIñakiAldasoro

andTorstenEhlersoftheBankforInterna-

tionalSettlements.Only22%ofthistotal

wasbookedwithbranchesorsubsidiaries

inAmerica.TherestwasoutoftheFed’s

immediatereach.

TheFedcan,however,reachouttoits

fellowcentralbanks.Andthey,inturn,can

helpcommercialbankswithintheirown

bailiwicks.OnMarch15ththeFedeasedthe

termsofitsswaplineswithcentralbanks

intheeuroarea,Japan,Britain,Switzer-

landandCanada.Twodayslater,theBank

of Japan offered over$30bn in12-week

loans, the largest amount since the

2007-09globalfinancialcrisis.TheEuro-

peanCentralBankfollowedupwith$112bn.

That narrowedthe“basis”thatmustbe

paidtoobtaindollarsthroughforeign-ex-

changeswaps.

Fed-watchersimmediatelybeganwon-

deringifitwouldexpanditsswaplinesto

include prominent emerging markets.

Thereisprecedent.TheFed’sfirstswapline

to Mexico dates back to 1967. And in Octo-

ber 2008 it also offered lines to Singapore

(which even then was overqualified for the

role of emerging market), South Korea and

Brazil (the “dodgiest of the lot”, according

to Richard Fisher, then president of the

Dallas Fed). But Fed officials back then

were, and still are today, reluctant to serve

as central bank to the world. Transcripts of

the October 2008 meeting indicate that

several other emerging markets (their

identities remain redacted) had already in-

quired about joining the Fed’s magic circle.

“We have done everything we possibly can

to discourage” such approaches, said one

Fed economist. “We’re not advertising.” 7

I

nsofarasstockexchangesusedtowor-

ryaboutviruses,it wasofthetypethatin-

fectthecomputersthroughwhichvirtually

alltradingisdone.ButonMarch18ththe

NewYorkStockExchange(nyse) became

thelatestvenuetoannouncethatitstrad-

ingfloorswouldcloseinresponsetothe

covid-19disease,and thattrading would

becomefullyelectronicfromMarch23rd.

Suchclosures,amidextrememarketvola-

tility,mayaddtocallsthatallsecurities

dealingsshouldbesuspendedinresponse

tothepandemic.ButStaceyCunningham,

presidentofthenyse, wasnotalonewhen

sheinsistedthatmarketsshouldstayopen.

With the world scrambling for cash, it

would be the height of foolishness to shut

off access to the capital markets.

Some markets have come perilously

close to a prolonged shut down. On March

17th the Manila stock exchange was sus-

pended as part of a lockdown on the main

Luzon island. But amid fears of a backlash

from investors, stock trading has resumed.

In America Steven Mnuchin, the trea-

sury secretary, has mulled over the pos-

sibility of shortening trading hours,

though he insists markets should stay

open so savers can access their stockmark-

et holdings. Terry Duffy, the boss of cme

group, a derivatives exchange, said cutting

backtradingtime “makes no sense ... espe-

cially during this unprecedented crisis

when news, information and events are

changing at such a rapid pace.”

When markets have closed in the past, it

has usually been because of some physical

limitation on their ability to operate—for

example after terrorist attacks in Septem-

ber 2001, or in the wake of storms. Big ex-

changes stayed open during the financial

crisis of 2007-09. When Greece closed its

stock exchange in 2015 for five weeks dur-

ing capital controls, bank shares fell by

30% on the first day that trading resumed

and the overall market dropped 16%.

Closing venues for health reasons is less

serious than it used to be because so much

trading is done electronically. Banks have

been rushing out business continuity

plans to ensure markets can continue de-

spite potential lockdowns. Traders are in

theory able to work from home. Yet having

lots of them operating remotely will pose

challenges of its own, says one banker. The

biggest is the plethora of rules to prevent

market abuse by people on bank trading

floors. Regulators are being informally

asked to relax some restrictions temporar-

ily, such as the need for all conversations

by traders to be recorded.

The most tangible trading restrictions

so far are on “short-selling”, which allows

investors to profit if prices drop. Several

European countries including France, Italy

and Spain have limited the practice. Hedge

funds worry that credit-default swaps, a

sort of insurance policy which pays out if a

company goes bust, may become difficult

to collect because of political pressure. But

the end result of such meddling is that in-

vestors who might have hedged their exist-

ing positions—so protecting themselves

against further losses—are likelier to sim-

ply sell what they own and stay away.^7

Tradingwilladapttonew

conditions—ifpoliticiansletit

Closingstockexchanges

Thepits

At the close

2