Brad and Twofish are correct – Brad on the data, and Twofish on the way the market works.

Bottom line is that London is the optimal point for China’s settlement of its US cash position, due to the combination of established market liquidity and time zone continuity. China wants liquidity and competitive offerings, which means active dealer competition as established in London.

As pointed out, the Carribean is a bit of a joke to consider in this sense, meaning that its a tax shelter domcile for buy siders – not a trading post for sell siders.

There is enough overlap to do business.

Webb: Two even if this made any kind of sense by and large the Carib Banking Centers are in the same time zone as NYC. Why not execute the trade there?

There’s very little real trading that goes on in the Carribean. For the most part, Carribean islands are just legal shells, and most of the hedge funds that are legally domiciled in the Carribean don’t do any real business there.

Webb: Three, the idea that the Chinese would direct billions in trading to overseas institutions because they didn’t have Desk Support staff for a corrupted Excel file is just silly.

It’s a major consideration. You really need people on call while doing trading because things do break. Yes if you pay enough money, you can have a Excel desktop support team on call late at night, but it’s probably much more expensive than to just do the trade in London.

There are other reasons. If you can get the transactions settled by 5 p.m., you can start running overnight reports. A lot of these reports are extremely time intensive and a few extra hours to do reports makes a big difference. Also if something goes wrong while you are running reports, you have time to fix things before everyone goes home.

There is also operational security, you just don’t want one person or a small number of people doing multi-billion dollar trades. You want lots and lots of people in the office, each looking over everyone else’s shoulder, to make sure that no one makes a mistake or does something odd.

Finally, there are things like “Herstatt risk” (google for it). Anytime there is a gap between the time you place an order and the time the order gets settled, lots of weird things can happen (in 1974, German regulators closed a bank before NYC could open, and this caused huge amounts of problems as you had half open transactions.)

Just to give a hypothetical of the type of thing that people worry about.

Suppose at 5 p.m. orders are given to buy or sell $X billion in treasuries when NYC markets open. Then at 7:30 a dirty bomb goes off in the Saudi oil fields or there is a terrorist bomb in London or a megabank collapses somewhere in the world. If you’ve just left a low level trader handling the situation that does not have the authority to figure out what to do then you are hosed.

If you can settle the order immediately, and something weird happens while you are executing (whether it is Al-qaeda blowing up a dirty bomb or Excel just not working), you can get everyone in Europe on phone, and scream across the trading floor for your people and fix the problem then and there. If you need a senior manager to make a decision, you can be sure that someone with authority is in the building and probably on the floor, and you can walk over to their desk and pull them over.

If it happens after hours, then just getting everyone together is going to be painful.

I’ll post graphs soon that i think make this crystal clear. the downward revisions in the combined uk + china holdings are actually fairly small and declining — as one would expect if china accounts for most purchases thru the uk.

Moreover, London is working at 5 pm beijing time when SAFE gets the cash the PBoC bought during the day. New York isn’t. When Beijing wakes up in the morning, New York has already closed (i know this b/c scheduling interviews with contacts in china is pain — but less so b/c i can to the interview from home at night)

I am not convinced re the Carrib.

If China truely wanted to hide its holdings it could — it just would need to make greater use of private custodians/ private fund managers.

as it is, china buys treasuries and agencies in london trading hours and then hands them over to the fed for custodial safe keeping, and thus is the main reason why the fed’s custodial holdings often rise by more than total offical purchases. look at the explainer on the tic web site. it leaves out the country names but describes the process.

I’ll look at the revisions in relation to the overall numbers of direct purchases. But as yet I don’t find the case compelling.

If you doubt my interpretation, look at the historical data series on treasury holdings — not the current data. it is just below the data on current holdings on the TIC web site. That table shows the scale of the revisions that come when the data from the survey is made available. The UK goes down and China goes up. Also look at the Treasury’s explanation (on the TIC site) for why the Fed’s custodial holdings sometimes rise by a sum larger than implied by the official purchases in the TIC data.

Or talk to a Treasury trader in london ….

Webb: But I have to wonder if time zones really explain the commission involved. I assume the British/Carib Banks are not operating for free.

London is a very liquid market so the prices you get for Treasuries via London aren’t that different from the one’s you get in NYC. The London financial services industry is dominated by American banks.

Webb: Like I said I am a naif in these matters but it would not seem hard to find some trader willing to execute orders from some high rise in Shanghai even if it was a little late in Chinese time.

Trading is a very communal activity so things are suboptimal if you don’t have a group of people up and active. Just to point out something silly, what do you do if you are in the office at night, and you double click on Excel and nothing happens.

Webb: Why are they throwing even a fraction of a percent of expected yield towards these second or third parties?

London is a primary market for Treasuries so the yields you get in trading from London aren’t different from trading in New York. If the prices are even slightly different, then a lot of automated computer trading kicks in to wipe out the difference.

People aren’t buying and selling Treasuries in London to resell in NYC. They are buying and selling Treasuries for their own accounts.

Also this is the reason why the trades go through London and not Hong Kong.

One possible answer which might sound silly is time zone. London and Beijing have overlapping business hours, whereas New York City and Beijing do not.

But I have to wonder if time zones really explain the commission involved. I assume the British/Carib Banks are not operating for free. Which is to say the various Chinese governmental and other entities are buying Treasuries for yields that are hovering right from zero then down. That they are then paying some additional premium to these off shore entities just to avoid having some official banking branch presence in the Cayman Islands or the Isle of Man still seems odd to me.

Like I said I am a naif in these matters but it would not seem hard to find some trader willing to execute orders from some high rise in Shanghai even if it was a little late in Chinese time. Why are they throwing even a fraction of a percent of expected yield towards these second or third parties?

And yes there is a certain amount of snark here. But I am not quite getting it and Brenda Rosser (a Tasmanian contributer to EconoSpeak and a much more serious person/commentator than me) is not quite getting it. And as we see commenter Albion is only kind of getting it. Which suggests to me that lots of other people are scratching their heads. Under your formulation the Chinese central banking entities (and I don’t pretend to understand the difference between SAFE from TPG from CIC) in investing in US Treasuries through UK and perhaps Carib Banking Centers are paying real money for perceived value in doing so. I just have a hard time seeing that value considering current yields.