Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, had some words of interest regarding MMFs at the European Commission High Level Conference, Brussels, 27 April 2012:
Money funds do not use committed lines of credit from banks. Claims on money funds have, in effect, become monetary assets in the hands of savers. In parts of the world, especially the US, they are treated like current accounts. Given the restrictions on their asset holdings, they resemble narrow banks, in mutual-fund clothing. But for a normal mutual fund, as an open-ended investment vehicle, the value of investments in it fluctuates with the value of the vehicle’s asset portfolio. By contrast, most money funds hold themselves out as offering par under any circumstances; when they “break the buck”, they must unwind. Their investors run at that prospect; and so the funds themselves are flighty investors. Compared to most types of shadow banking, money funds do not borrow – in the usual sense. But by promising par, they are in effect incurring debt-like obligations. And they can be exposed to leverage. At least in the run up to the crisis, some invested in levered paper, some of it in what amounted to Russian Doll shadow banking – a money fund buys short-term ABCP backed by CDOs, etc.
What I suggest here is that:
- Money Market Funds should be required to choose between being
- Variable Net Asset Value (NAV) funds or Constant NAV funds
- Any remaining CNAV funds should be subject to capital requirements of some kind
- All should be subject to “gates” or other measures that can be used to delay withdrawals, to make runs less likely
That package would not completely prevent runs; regular mutual funds can suffer runs. But it would make them somewhat less brittle.
Bank loan concentration risk is becoming an issue:
The largest U.S. banks, including JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), told the Federal Reserve that a limit on their credit exposure is unnecessary and “fundamentally flawed.”
The Fed’s proposed rules on single-counterparty credit limits would have a negative impact on banks, their customers and the U.S. economy, according to a letter sent to the central bank today by five banking trade groups, including the Clearing House Association.
…
In December, the Fed proposed tougher standards to supervise the largest banks whose collapse could jeopardize the economy. The central bank set a limit of 10 percent for credit risk between a company considered systemically important and counterparty when each has more than $500 billion in total assets.
…
The 10 percent credit risk limit is more restrictive than that contained in the Dodd-Frank financial overhaul law, which allowed for a 25 percent limit.
…
The Fed did not explain why it changed the credit risk limit to 10 percent for the largest banks. The Dodd-Frank act allows the Fed to make the change if it determines it is necessary to “mitigate risks to the financial stability.” The banks argue the Fed should first try the 25 percent limit and, if it proves inadequate, adopt the 10 percent limit.
It seems to me that this would benefit from a mathematical treatment. The banking rules are calibrated to allow for the chances of insolvency of a bank based on a mathematical model of asset values that assume independence of counterparty default. With a single major counterparty, then the risk becomes a lot chunkier since the correlation of counterparty A defaulting with counterparty A defaulting is, by definition, 1.0.
Spend-Every-Penny will continue to flog a dead horse:
Finance Minister Jim Flaherty has drawn a line in the sand for the first time in his for a national securities regulator, setting a one-year deadline before he walks away.
Mr. Flaherty has long fought for a national regulator, making it one of his signature goals since became finance minister. But he suffered a setback in December when the Supreme Court of Canada ruled such a plan would be unconstitutional by infringing on provincial independence.
Mr. Flaherty vowed to continue his quest for at least some form of a regulator, even if its mandate is not as far-reaching as the first proposal. On Friday, he said there is only a finite amount of time to strike a deal.
Who knows? An opt-in system, like the HST could work. Another plan is for willing provinces to merge their securities commissions. A fully-national regulator has always been a pipe-dream – but today’s Conservatives are a rather contemptible group.
DBRS has confirmed TA at Pfd-3 Stable:
DBRS has today confirmed the ratings of TransAlta Corporation’s (TAC or the Company) Unsecured Debt/Medium-Term Notes and Preferred Shares at BBB and Pfd-3, respectively, both with Stable trends. The confirmation reflects (1) the Company’s high level of contracted output with reasonable fuel hedging positions and (2) increased geographical and fuel diversification. These strengths have lowered TAC’s business risk level to below the industry average. A well-hedged portfolio and/or contractual position are key to reducing the volatility of earnings and cash flow as power generators generally operate in competitive environments where profitability varies with commodity pricing (both output and inputs) and production volumes. TAC’s contracted output is expected to remain high, at over 65% of net generating capacity, at least until Alberta purchase power arrangements (APPA) expire in 2020.
…
TAC faces a number of other challenges, including aging coal plants in Alberta, which could continue to result in a high level of unplanned outages as evidenced by the Sundance coal-fired generation Unit 1 and Unit 2 shutdown since December 2010. The ultimate outcome of the Sundance arbitration process remains uncertain. An unfavourable resolution of this matter (i.e., accrued penalties and repair costs) could have material financial impacts. The Company has limited financial flexibility to withstand any adverse events due to its high leverage and dividend payout ratio. Any further significant increase in leverage could cause TAC’s credit risk profile to deteriorate to a level that is no longer commensurate with the current BBB rating. DBRS expects TAC to fund the majority of any unexpected material costs primarily with equity (including preferred shares and the dividend re-investment program) to maintain its current leverage level.
It was a day of modest gains for the Canadian preferred share market, with PerpetualPremiums gaining 8bp, FixedResets up 6bp and DeemedRetractibles winning 12bp. Volatility picked up, but there is no clear pattern in the Performance Highlights table, beyond a tilt to winners. Volume was very low.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.3639 % | 2,510.2 |
| FixedFloater | 4.42 % | 3.78 % | 31,944 | 17.80 | 1 | 2.3810 % | 3,567.8 |
| Floater | 2.88 % | 2.89 % | 46,502 | 19.99 | 3 | -0.3639 % | 2,710.4 |
| OpRet | 4.75 % | 2.75 % | 50,166 | 1.11 | 5 | -0.1985 % | 2,508.6 |
| SplitShare | 5.25 % | 3.35 % | 70,425 | 0.64 | 4 | -0.1977 % | 2,692.7 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1985 % | 2,293.9 |
| Perpetual-Premium | 5.47 % | 0.61 % | 76,824 | 0.10 | 23 | 0.0842 % | 2,222.5 |
| Perpetual-Discount | 5.16 % | 5.16 % | 149,318 | 15.17 | 10 | 0.4351 % | 2,416.8 |
| FixedReset | 5.02 % | 3.08 % | 190,787 | 2.23 | 67 | 0.0642 % | 2,400.5 |
| Deemed-Retractible | 4.97 % | 3.75 % | 193,283 | 2.80 | 46 | 0.1193 % | 2,313.1 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| NA.PR.O | FixedReset | -1.11 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-15 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 2.54 % |
| BAM.PR.C | Floater | -1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-04-27 Maturity Price : 18.02 Evaluated at bid price : 18.02 Bid-YTW : 2.93 % |
| BMO.PR.Q | FixedReset | 1.20 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.46 Bid-YTW : 3.06 % |
| BAM.PR.N | Perpetual-Discount | 1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-04-27 Maturity Price : 22.77 Evaluated at bid price : 23.17 Bid-YTW : 5.16 % |
| ELF.PR.G | Perpetual-Discount | 1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-04-27 Maturity Price : 21.94 Evaluated at bid price : 22.31 Bid-YTW : 5.35 % |
| BAM.PR.G | FixedFloater | 2.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-04-27 Maturity Price : 22.31 Evaluated at bid price : 21.50 Bid-YTW : 3.78 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| HSB.PR.E | FixedReset | 104,050 | Desjardins crossed 100,000 at 27.20. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-30 Maturity Price : 25.00 Evaluated at bid price : 27.12 Bid-YTW : 2.80 % |
| CM.PR.E | Perpetual-Premium | 31,312 | TD crossed 25,000 at 25.88. YTW SCENARIO Maturity Type : Call Maturity Date : 2012-05-27 Maturity Price : 25.25 Evaluated at bid price : 25.86 Bid-YTW : -22.69 % |
| BAM.PF.A | FixedReset | 29,300 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-04-27 Maturity Price : 23.20 Evaluated at bid price : 25.33 Bid-YTW : 4.37 % |
| HSB.PR.C | Deemed-Retractible | 26,320 | Desjardins crossed 26,000 at 25.70. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-06-30 Maturity Price : 25.25 Evaluated at bid price : 25.52 Bid-YTW : 4.45 % |
| MFC.PR.C | Deemed-Retractible | 23,361 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.18 Bid-YTW : 5.57 % |
| BNS.PR.L | Deemed-Retractible | 18,863 | YTW SCENARIO Maturity Type : Call Maturity Date : 2015-04-28 Maturity Price : 25.25 Evaluated at bid price : 25.81 Bid-YTW : 3.68 % |
| There were 16 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| GWO.PR.F | Deemed-Retractible | Quote: 25.72 – 26.39 Spot Rate : 0.6700 Average : 0.4299 YTW SCENARIO |
| BAM.PR.B | Floater | Quote: 18.49 – 18.99 Spot Rate : 0.5000 Average : 0.3405 YTW SCENARIO |
| BNS.PR.Q | FixedReset | Quote: 25.61 – 25.98 Spot Rate : 0.3700 Average : 0.2356 YTW SCENARIO |
| NA.PR.O | FixedReset | Quote: 26.70 – 27.06 Spot Rate : 0.3600 Average : 0.2325 YTW SCENARIO |
| BMO.PR.H | Deemed-Retractible | Quote: 25.61 – 25.96 Spot Rate : 0.3500 Average : 0.2255 YTW SCENARIO |
| TD.PR.R | Deemed-Retractible | Quote: 26.67 – 26.86 Spot Rate : 0.1900 Average : 0.1078 YTW SCENARIO |