by Alexis Flynn Dow Jones Newswires Wednesday, January 04, 2012
LONDON (Dow Jones Newswires), Jan. 4, 2012
“We continuously review potential business opportunities around the world. We would like to better understand the current security, political and business environment in South Sudan, and how this has been impacted by the secession,” a Shell spokesman said in a statement.
Ethiopian newspaper The Reporter on Saturday said Shell is planning to construct an oil pipeline from South Sudan to Ethiopia. Citing “reliable sources,” the paper said a Shell delegation had visited South Sudan in November.
When asked whether Shell had met with local officials and discussed a potential pipeline project, a Shell spokesman declined to elaborate beyond the company’s statement that it wasn’t pursuing business opportunities in South Sudan “at the moment.” The company doesn’t have a presence in Sudan.
Although South Sudan retained most of the country’s output and is now producing around 350,000 barrels of oil a day, the landlocked country still depends on Khartoum for refineries, ports and export pipelines.
Similar challenges also exist elsewhere in East Africa, a burgeoning oil province following recent major discoveries in Uganda‘s Albertine basin but without the necessary infrastructure to bring its crude to market. French major Total, U.K. explorer Tullow Oil and China’s CNOOC are expected to invest at least $10 billion developing Uganda’s oil assets, which will include the building of a 1,300-kilometer pipeline to the Kenyan port of Mombasa.
However, analysts cast some doubt on whether Shell would be prepared to make a significant investment into a relatively unstable part of the world.
Relations between the two Sudans have worsened in recent weeks, with the office of South Sudan President Salva Kiir late Monday accusing Sudan of stealing its oil by diverting as much as 1.2 million barrels of crude oil.
Royal Bank of Canada analyst Peter Hutton said a move into South Sudan would have little obvious operational synergy for Shell, which have been exiting Africa in the downstream, adding that their experience in Nigeria has probably made the firm’s management more risk averse. “It all looks a bit of a stretch–not the direction investors will want Shell to go in,” said Hutton.
I think there is sufficient evidence today to conclude that Re-Hypothecation is at the root of the customer losses at MFG. This Reuters story started the discussion on re-hypothecation. There have been several additional articles on this at Zero Hedge, (link, link) and FTAlphaville (link, link). Let me add one additional bit of info.
The Canadian customers of MFG got their money back within 10 days of the MFG bankruptcy. The accounts that have lost money are either USA or UK based. In Canada, re-hypothecation is not permitted. I got these comments from a Canadian MFG account holder:
The trustee where segregated MF Global Canada customers’ funds were held was RBC Dominion Securities. I don’t think any of these funds ever left the trustee in Canada. Likelihood is if they left, the Canadian government would have made the parent Royal Bank of Canada eat up the losses and make full restitution.
We shall see in the coming weeks if, in fact, re-hypothecation is the cause of the problems. I’m convinced it is.
The rules on broker’s ability to A) Hypothecate and B) Re-hypothecate in the USA are spelled out in Reg T. This set of rules has been established by our good friends at the Federal Reserve Bank. Let me provide some telling words on this re Reg. T rule 15c3-3:
- Except as otherwise agreed in writing by the OTC derivatives dealer and the counterparty, the dealer may repledge or otherwise use the collateral in its business;
- In the event of the OTC derivatives dealer’s failure, the counterparty will likely be considered an unsecured creditor of the dealer as to that collateral;
- The Securities Investor Protection Act of 1970 (15 U.S.C. 78aaa et seq.) does not protect the counterparty.
Well there you have it. Reg. T does permit the broker to “repledge” (AKA re-hypothecate). In the event of default by the broker, the counterparty will be considered an unsecured creditor. (AKA customers lose money). And SIPC provides zero protection to account holders in the event of a broker default.
For me, there is sufficient information to conclude that Reg. T is flawed and must be changed. I have to believe there is any army of lawyers over at the Federal Reserve looking into this as I write and they are struggling with what they can do to “fix” the problem.
For sure a fix is required. MFG has not, as yet, morphed into a systemic problem. But we are getting closer by the day. The Fed is aware of this. The risk is that customers start to withdraw funds and assets from other brokers. The deleveraging this would cause would be catastrophic. A significant chunk of the shadow banking system (about $10 trillion) is dependent on the liquidity that is created by hypothecation. (The situation is bigger and more problematic in the UK)
A month ago Fed governor James Bullard stated on CNBC that the issues with MFG did not constitute a systemic problem. I wrote about this at the time Bullard made those comments. I made a public bet with Bullard (a six pack of beer) that he would be forced to eat his words. I never did hear from him.
I’m re-doubling the bet this AM. If Reg. T is confirmed to be the source of customer losses at MFG then Reg. T will have to be gutted. The changes will have to take place fairly quickly. The consequences across all markets of these changes could prove to be a devastating blow.
The nice folks at the FRB are having a big meeting this week. Reg. T and MFG will almost certainly be on the agenda. I have to believe all those smart folks at the Fed have figured out that we have a problem. We may well get some announcement on this topic by Friday.
Any changes to Reg. T will have profound effects on global markets. Not only the exchanges/asset prices will be affected, this has the potential to derail the global economy. We are already in a very dangerous liquidity situation. If the Fed is forced to change margin rules, liquidity will dry up for an extended period of time. Forced changes in Reg. T will prove to be a Black Swan event.
Should we get a confirmation of the foregoing discussion and the Fed is forced to react and make regulatory changes, there will be significant long term implications for the Fed. The Fed will have to shoulder the blame for the flaws in Reg. T. They will also have to take responsibility for the broader economic consequences that will surely follow those changes.
The possibility exits for the Fed to lose any credibility they may still have in the US and abroad. The completely unregulated Federal Reserve may lose its independence as a result. There are big downsides to significant revisions to margin rules. The upside is that the Fed’s supreme power over the global economy would be finally checked.
Source – Business Insider
- MF Global’s US And UK Customers Got Screwed By A Little Thing Called Regulation T (businessinsider.com)
- Why The UK Trail Of The MF Global Collapse May Have “Apocalyptic” Consequences For The Eurozone, Canadian Banks, Jefferies And Everyone Else (zerohedge.com)
- MF Global and the great Wall St re-hypothecation scandal (paul.kedrosky.com)
- MF Global Looted Customer Accounts (mb50.wordpress.com)
- MF Global looting can continue! Missing funds and fees likely to go higher: Guest Post by MFGFacts.com (zerohedge.com)
- The Gold “Rehypothecation” Unwind Begins: HSBC Sues MF Global Over Disputed Ownership Of Physical Gold (zerohedge.com)
- MF Global aftershocks (ftalphaville.ft.com)