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J.P.Morgan Recommend Short EDZ1


J.P.Morgan note that "recent DFAST results suggest that leverage is the binding constraint for many GSISBs in stress testing. Thus, even if not explicitly a binding constraint now, SLR is likely playing a role in medium- to long-term capital planning. The RRP and eventual stability in the TGA will likely provide some relief, but with the start of Fed taper still several months away at a minimum, risk management around regulatory requirements will likely make leverage an increasingly important consideration as the year progresses."

  • "That is, unless the Fed, OCC and others make methodological change or recalibrate in such a way as to reduce the impact on QE and other forms of non-traditional monetary policy on bank capital requirements."
  • "One such approach would be to allow for carve outs for reserves and potentially Treasuries as well, but to reset the requirements such that there is no net reduction in minimum headline levels. This would have the benefit of eliminating the connection between leverage capital rules and Fed balance sheet policy on the one hand while preserving the current level of capital backstops on the other…That said, it is worth bearing in mind that without a concrete proposal in hand the potential for any significant changes to be implemented this calendar year (or even next year) is rather limited."
  • "This all points to the risk of incremental stress over a medium-term horizon… Among the various front-end rates, Libor has been disproportionately affected by the overhang of cash in the system. That has been priced into most of the pre-cessation IMM dates, with even year-end trading well through levels seen in prior funding cheapening episodes. Further, though still early, the set-up for year-end 2021 is likely more challenging than the prior cycle leverage closer to binding, another jump in GSIB surcharge less palatable, and the likelihood of increased intermediation demands as the Fed starts to talk about and ultimately begin tapering their purchases. To be clear, we do not expect a funding shock, and there is still quite a bit of time to go before the key statement dates come into firm view. But more risk premium strikes us as reasonable."
  • As such, they recommend selling 4000 contracts of EDZ1 at 99.81.
MNI London Bureau | +44 0203-865-3809 |
MNI London Bureau | +44 0203-865-3809 |

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