The Iranian Euro Bourse

Totally_Baffled · Post by **Totally_Baffled** » 01 Nov 2005, 09:19

Mr Bill from PO.com wrote this very interesting post. It makes a lot sense.

Who on earth would want to be involved in a bourse in Iran when the President is advocating hanging speculators, doesnt believe in interest rates and is sounding off about "wiping Israel from the map"?

What do you all think?

If memory serves me correct there are approximately 500.000 traders making their living in the financial markets in London, which is the largest financial center in the world. Aside from London you have New York, Chicago, Frankfurt, Munich and Tokyo as major regional financial centers. Then you have lesser regional trading centers like Paris, Singapore, Dubai and others. It is a pretty robust system because each of these financial centers compete with one another for business. You could say literally that there are millions of professional traders spread around the world looking to make money by properly pricing risk.

London gained prominence when the USA started to tax capital. The business left NYC for the 'eurodollar' market in London back in the 1970's. NYC has never been able to recapture the lead since. The most successful financial centers have strong regulatory & supervisory environments, strong contract law as dispute mechanisms, liquidity and a deep pool of investors that are ready and willing to take risk, transparency and governments that do not interfer in the markets.

Tehran fulfills none of these criteria. The Iranian President wants to hang speculators which are the life blood of any freely traded market. He does not believe in interest rates which is the mechanism by which financial markets assign risk and allocate capital. Not only will financial traders not go to Iran to live & to work, but any that did would demand million dollar salaries and guaranteed bonuses for the hardship and personal risk. Not only that but they would insist on being housed in compounds for their own safety and convenience at great expense. Not to mention private flights in and out of Iran. These are huge barriers to starting up a new Bourse much less successfully competing with the established markets which are already functioning very well.

And, even if an Iranian backed oil bourse was set-up in Paris using the euro as its clearing currency the IPE & NYMEX sensing competition to their dominance in oil & gas futures & options trading would soon also introduce a euro oil contract as well. And, if they didn't offer it, then you might expect the EUREX or the CME to offer one. That is how markets react to competition. This is healthy. It will not result in a reshuffling of the world order.

Given recent comments by the Iranian President and his crushing of any dissenters within in his own government about Isreal, nuclear weapons and hanging speculators the prospect of an Iranian oil bourse is a dead issue. It is not going to happen.

S. Arabia, Dubai, Canada, Norway, the UK, Mexico and other OPEC and non-OPEC producers have no incentive to switch from pricing oil in dollars to pricing oil in euros. They certainly do not look to Iran or Venezuela for leadership on this issue. The present system of price discovery on the IPE & NYMEX is perfectly adequate for this purpose. If commercial contracts are made in euros then this will have no effect on price discovery per se. That is just a function of the euro/dollar exchange rate and physical logistics of transport. Oil is in any case produced and refined in many local currencies around the world.

So I hope that clarifies this particular issue for you? An Iranian oil bourse in 2006 will not change the world landscape one iota.

MacG · Post by **MacG** » 01 Nov 2005, 09:26

Totally_Baffled wrote:Mr Bill from PO.com wrote this very interesting post. It makes a lot sense.

Absolutely.

DamianB · Post by **DamianB** » 20 Nov 2005, 22:57

If memory serves me correct there are approximately 500.000 traders making their living in the financial markets in London, which is the largest financial center in the world. Aside from London you have New York, Chicago, Frankfurt, Munich and Tokyo as major regional financial centers. Then you have lesser regional trading centers like Paris, Singapore, Dubai and others. It is a pretty robust system because each of these financial centers compete with one another for business. You could say literally that there are millions of professional traders spread around the world looking to make money by properly pricing risk.

These numbers are way over the top - I'd guess there are 25,000 in London and maybe 250,000 worldwide but only a fraction of these trade oil and oil products.

London gained prominence when the USA started to tax capital. The business left NYC for the 'eurodollar' market in London back in the 1970's. NYC has never been able to recapture the lead since. The most successful financial centers have strong regulatory & supervisory environments, strong contract law as dispute mechanisms, liquidity and a deep pool of investors that are ready and willing to take risk, transparency and governments that do not interfer in the markets.

London's prominence has as much to do with it's timezone and 1980s deregulation as anything else. Anyway, don't govts. set up the regulatory and supervisory framework?

Tehran fulfills none of these criteria. The Iranian President wants to hang speculators which are the life blood of any freely traded market. He does not believe in interest rates which is the mechanism by which financial markets assign risk and allocate capital.

Usury - the charging of interest is forbidden by Islam, not just the Iranian president and (relative) interest rates are the manifestation of perceived risk not the other way around.

Not only will financial traders not go to Iran to live & to work, but any that did would demand million dollar salaries and guaranteed bonuses for the hardship and personal risk. Not only that but they would insist on being housed in compounds for their own safety and convenience at great expense. Not to mention private flights in and out of Iran.

Nonsense - electronic markets mean that you can trade from the bath in Wigan or a wine bar in Manhattan.

And, even if an Iranian backed oil bourse was set-up in Paris using the euro as its clearing currency the IPE & NYMEX sensing competition to their dominance in oil & gas futures & options trading would soon also introduce a euro oil contract as well. And, if they didn't offer it, then you might expect the EUREX or the CME to offer one. That is how markets react to competition. This is healthy. It will not result in a reshuffling of the world order.

So what's the problem then?

Given recent comments by the Iranian President and his crushing of any dissenters within in his own government about Isreal, nuclear weapons and hanging speculators the prospect of an Iranian oil bourse is a dead issue. It is not going to happen.

Non sequiteur.

S. Arabia, Dubai, Canada, Norway, the UK, Mexico and other OPEC and non-OPEC producers have no incentive to switch from pricing oil in dollars to pricing oil in euros.

Some have political reasons (Chavez is unwinding his dollar positions, Putin?), others have transaction cost incentives, many have sound financial reasons to diversify out of the dollar (BOJ and China), there's the US's balance of payments deficit, housing bubble and negative savings rate to name a few.

They certainly do not look to Iran or Venezuela for leadership on this issue. The present system of price discovery on the IPE & NYMEX is perfectly adequate for this purpose.

Many would disagree with this - what about the hedge funds? PPT?

If commercial contracts are made in euros then this will have no effect on price discovery per se. That is just a function of the euro/dollar exchange rate and physical logistics of transport. Oil is in any case produced and refined in many local currencies around the world.

Again, what's the problem then?

So I hope that clarifies this particular issue for you? An Iranian oil bourse in 2006 will not change the world landscape one iota.

It may not, after all there are many short, medium and long term deals struck without the aid of the futures markets, and if it doesn't, it'll won't be for any of the reasons Mr.Bill states.

Totally_Baffled · Post by **Totally_Baffled** » 21 Nov 2005, 14:08

Hi Damian

I raised your points with Mr Bill on PO.com.

I should just get him to post here really rather than be go between!!

Hello PB,

well, it is quite easy to pick apart an argument without offering any alternative suggestions. My estimates of the numbers of traders in London or NY is certainly not over the top if you look at FX, MM, fixed income, equities, derivatives and commodities. There are hundreds of banks in London, plus buyside fund & portfolio managers, hedge funds, etc. The IPE/ICE/LME/LSA alone have literally thousands of traders.

Yes, you can trade from a wine bar, but you cannot do it well. I am forced to trade on the NYMEX from Cyprus and I feel the timezone difference. I am away from the flow. But, if in fact this is true, then what competitive advantage would there be to have an electronic exchange in Tehran? The clearing house would in any case be in Iran and for reasons I have already outlined this is unacceptable from a risk management perspective.

Please find me any electronic exchange anywhere in the world which is not staffed by a small army of technicans and other professionals for everything from processing backoffice trades to risk management. Yes, you have electronic price discovery, but you still need an infrastructure to process millions of trades accurately each day. Money is fleeing the stock exchange in Tehran now, not flocking to it.

Basically, I have laid out my objections to an IOB. No one has yet to prove me wrong about my basic points, so I don't really care if people disagree with me. I am not going to change my mind just because I have been unable to convince them. On March 21st, 2006, I am going to listen to their sad, sorry excuses of why there is no IOB. They will say it is because Washington & Isreal threatened them or some other weak arguments. I am just going to laugh at them because they are stupid little people with small minds.

By the way, this past week in The Economist there was quite a lot written about Iran. None of it good. There was also quite a bit written about Shias, Sunnis, Shi'ites, Arabs and Muslims and how the different groups really do not get along very well. Some of the proponents of the IOB have naively assumed that where Iran leads Saudi Arabia is likely to follow. But not very likely in reality.

In any case, thanks for the email and have a nice week.

Cheers,

Bill.

I think he is right. I dont think the IOB will happen.

Apologies if the response is a little "blunt", I must of caught him in a bad mood!

DamianB · Post by **DamianB** » 21 Nov 2005, 17:08

Hi TB

I have no strong view on whether or not Iran will have a Euro-denominated futures contract next March - what I was trying to point out was that a seemingly authoritative post was actually full of holes.

If the Iranians believe that a euro-denominated contract will help them achieve their geo-political aims, they will set one up with sufficient attention to detail to attract western trading interest.

I do have a strong view that the US$ is toast - whether it slowly curls up in the sun or its instantly vapourised in the after-burners of a MiG jet - and if the Iranians set up their exchange as planned, it will turn up the heat and I for one will be breaking out the caviar

fishertrop · Post by **fishertrop** » 21 Nov 2005, 21:01

First off, I don't want to get into a slanging match with Mr Bill, and there is good reason I don't post much on PO.com....

I don't know if there will or won't be a an IOB.

I don't nesseccarily rebuff much of the facts as Mr Bill states them either.

What I do not see tho is a persuasive argument why the IOB could not go ahead and why it could not be (at least a limited) success.

Do I think it WILL happen? No.

Do I think it will cause worldwide TEC? No.

I think it could happen and that it's long term impacts could be great.

For me, I see two clear reasons in support of an IOB:
1) Anti-american feeling
2) The need to obtain dollars if you want to buy oil

For many country, corporations and individuals, if you can get what you need more or less the same but can do it via a channel that either hurts or does not help the US then I think there is big pent up demand for such avenues.

In order to buy oil on any significant oil market today you need dollars, these come from either flat currency exchanges or from sales to the US that pay in dollars (this is not an exhaustive list...)

If your country (or business) does a lot of trade in non-dollars or just a lot in (say) euros, then you don't have to exchange into dollars if you can buy oil (or indeed anything currently priced worldwide in dollars) in euros.

I would guess there is money to be made buying in one or the other at various times....

Demand for dollars gives the dollar some of it's value - less demand devalues the dollar (to some extent).

Any country/business buying oil in euro's is devaluing the dollar in a small way.

For sure the current world exchanges could offer euro contracts also - and this would achieve the same effect as an IOB - tho my guess is that would have a political dimension...

At least some of the time, I would guess that european countries would like to buy oil in euros and I also feel that there is a big slice of the world that would like to use euros just to knock the dollars value (even if it cost them a little bit more to do it).

Many current western traders may have no interest in trading in euros nor may they like the risks associated with Tehran - whilst these might be the biggest slice of world trade I do not think they are all of world trade. I bet you could find a lot of non-western countries much more relaxed about trading with and in Tehran.

This is the thin end of the wedge tho - for oil producing companies that buy equipment and pay salaries in euros, the value of their oil-sales in euro's has added value. When the euro starts to be used throughout the production cycle (and then maybe pushes into other arears) it starts to look more like the dollar does today.

MacG · Post by **MacG** » 21 Nov 2005, 21:31

I dont know what it's like today, but in the 70's, there was only a couple of percent of the oil consumption which was traded on the spot markets. +90% was traded on long term contracts negotiated in other places than the trading pits. When those long contracts were renegotiated, the spot price was of certain guidance but not the major pricing mechanism.

The main case against the Euro is that there are far fewer of them around than USD. It takes time to inflate a currency to the sheer volume of the USD, and the Euro just dont have had the time to reach those humongous volumes.

And yes, the forums on PO.com is full of... of... all those kinds [it is said] it takes to run this world...

fishertrop · Post by **fishertrop** » 30 Dec 2005, 10:22

WHAT'S THE FED UP TO WITH THE MONEY SUPPLY?
by Robert McHugh, Ph.D.
December 26, 2005
http://www.financialsense.com/fsu/edito ... /1226.html

The date when M-3 will start being hidden also happens to be the exact month that Iran will declare economic war against the U.S. Dollar by trading its oil in Petro-Euros on its new bourse. But there is more. The Federal Reserve currently has three vacancies within the 19 top Regional Bank and Board of Governor spots. Why? Part of ongoing wholesale resignations.

DamianB · Post by **DamianB** » 30 Dec 2005, 11:04

MacG wrote:The main case against the Euro is that there are far fewer of them around than USD. It takes time to inflate a currency to the sheer volume of the USD, and the Euro just dont have had the time to reach those humongous volumes.

Complete bollocks.

If the Euro was as acceptable to the RoW as the USD and there was only 1/10th the amount created/available, the FX rate would be USD10:EUR1

DamianB · Post by **DamianB** » 30 Dec 2005, 11:18

There's a focus on March too in this analysis by James Petras, also posted on the other Iran & Nukes thread:

All top Israeli officials have pronounced the end of March, 2006, as the deadline for launching a military assault on Iran. The thinking behind this date is to heighten the pressure on the US to force the sanctions issue in the Security Council. The tactic is to blackmail Washington with the "war or else" threat, into pressuring Europe (namely Great Britain, France, Germany and Russia) into approving sanctions. Israel knows that its acts of war will endanger thousands of American soldiers in Iraq, and it knows that Washington (and Europe) cannot afford a third war at this time.

The end of March date also coincides with the IAEA report to the UN on Iran's nuclear energy program. Israeli policymakers believe that their threats may influence the report, or at least force the kind of ambiguities, which can be exploited by its overseas supporters to promote Security Council sanctions or justify Israeli military action.

A March date also focusses the political activities of the pro-Israel organizations in the United States. The major pro-Israel lobbies have lined up a majority in the US Congress and Senate to push for the UN Security Council to implement economic sanctions against Iran or, failing that, endorse Israeli "defensive" action.

http://www.counterpunch.org/petras12242005.html

jev · Post by **jev** » 30 Dec 2005, 11:21

I'd advise everyone to read the article 'Fishertrop' links to above. Financial sense online is a good website, but I generally find it is trying to advocate the purchase of precious metals to it's readers. If what is being said is true (the M3 figures are to be hidden from public view, many top fed staff have left their jobs (maybe because of disagreement with the monetary policy being pursued), the money supply is being grown at a ridiculous rate) then one conclusion I would draw is that the Fed has started a process off that should lead to inflation, in effect it is imposing a tax on Dollar holders by inflating the Dollar money supply - reducing the value of money held by people. It would not be a suprise if they decided to follow this policy as this would inflate away a large proportion of the US national debt and make the overseas holders of a lot of these Dollars (China, Saudi's etc) generally worse off. For the US government this is win, win. For the bulk of the US population however this shows how much the Fed value normal people as it is quite prepared to inflate away their wealth and possibly seriously destabilise the world economy, no doubt with some future 'miracle' monetary policy rescue plan in hand - that will no doubt involve us all indebting our selves and our nations even more to the rich - to be 'saved'! This article should worry the hell out of people! If, however, you are thinking of buying Gold (not really an option for the majority of us) to try and retain the value of your earnings in an era of inflation, I would urge you to remember that even Golds price isn't set in a truly free market but by 'money changers' (http://goldinfo.net/londongoldfix.html). No doubt any inflation will be blamed on the oil price, not the real reason - the printing press!

Totally_Baffled · Post by **Totally_Baffled** » 30 Dec 2005, 11:25

Interesting (if not a little scary) stuff.

Surely Israel will do as they are told by the US?

Without US funding , Israel couldn't exist (let alone all the military hardware etc)

What do you think guys?

If the US doesn't want Israel to strike Iran , surely they will put them back in their box?

Joe · Post by **Joe** » 30 Dec 2005, 12:16

Totally_Baffled wrote:Surely Israel will do as they are told by the US?

I don't subscribe to the view that Israel is entirely subservient with respect to the US. The Knesset are keenly aware of how influential the American Jewish vote is and have demonstrated time and time again that they aren't afraid to stand up to Washington - especially over issues that tug the heartstrings of those American Jews who are sympathetic to the Zionist project.

fishertrop · Post by **fishertrop** » 30 Dec 2005, 20:51

Totally_Baffled wrote: Surely Israel will do as they are told by the US?

I thought it was the other way around ??

Totally_Baffled · Post by **Totally_Baffled** » 30 Dec 2005, 21:26

fishertrop wrote:
Totally_Baffled wrote: Surely Israel will do as they are told by the US?
I thought it was the other way around ??

I admit , it appears that was sometimes!!

However, I think if Israel had a free hand I think they would of bombed the Iranian nuclear facilities yonks ago !