February 6, 2013

Bloomberg has an the regulatory realities of ratings:

The U.S. lawsuit against Standard & Poor’s raises pressure to accelerate competition in the ratings industry while the government itself has adopted rules that left the business dominated by the same companies whose flawed grades sparked the worst financial crisis since the Great Depression.

Ann Rutledge, a structured finance specialist, has watched her application to become an NRSRO languish at the SEC for 20 months. Her company, R&R Consulting, has yet to be granted a license because some of the eight client letters don’t meet the requirements of a credit rating as defined by the 2006 law. The statute specifies that only written testimonials that are notarized from institutional buyers attesting to its ratings may be used. R&R’s clients include pension funds, hedge funds and governments.

Rapid Ratings International Inc., a New York-based firm that uses quantitative models to grade securities, hasn’t applied for the NRSRO designation, which would allow investors to buy securities rated by the company to meet regulatory requirements, because its costs would increase by 40 percent to hire compliance staff, James Gellert, chief executive officer, said in a Jan. 7 telephone interview.

Meredith Whitney Advisory Group LLC, headed by the former Citigroup Inc. analyst, made a presentation to the SEC in November 2010 seeking NRSRO status and has yet to be approved, according to the SEC website. A woman who answered the phone in the company’s New York office Feb. 4 declined to comment on its application.

Costs have also kept PF2 Securities Evaluations Inc., a New York company that values structured products, from applying for the designation, according to Gene Phillips, a director.

Danish banks are having regulatory problems:

The Basel Committee on Banking Supervision, which brings together regulators from 27 nations including the U.S and China, last month expanded the range of easily sold assets banks must have on hand to weather a month of market turmoil. While policy makers approved company debt and equities, they kept limits on covered bonds, mortgage-backed securities that fund almost all Danish home purchases, and are rated higher than the sovereign debt of Japan, Italy and Spain.

Denmark, which doesn’t have a representative on the committee, has more of the securities outstanding per capita than any other nation, with its banks holding more than half of the 3.3 trillion-krone ($600 billion) market. Unless revised, lenders will have to find alternatives to fulfill the liquidity requirements at the same time Denmark is shrinking its issuance of government debt. Interest rates for Danish homeowners, the world’s most indebted, may also climb, creating reverberations throughout the economy, said Steen Bocian, chief economist for Danske Bank A/S, the country’s largest lender.

Household debt is about three times disposable income, and most of it is in mortgages financed by covered bonds, a form of bank financing backed by mortgages, creating Europe’s second- largest residential covered bond market after Spain. Danish banks held mortgage bonds valued at 1.52 trillion kroner, or 46 percent of the 3.3 trillion kroner outstanding, in December, the central bank said Jan. 25.

Basel has categorized government debt as level 1, allowing banks to fulfill 100 percent of their liquidity requirements with the assets. Mortgage-based debt is considered level 2, so there are caps on their use as liquid assets. Covered bonds will have a 40 percent ceiling, while securitizations can’t count for more than 15 percent of a lender’s liquidity buffer.

A major objective of Basel III is to force banks to own European government debt, since otherwise it might not get sold.

There’s another smoking gun in the LIBOR rigging scandal:

A Royal Bank of Scotland Group Plc trader colluded with a counterpart at UBS AG to pay almost 211,000 pounds ($330,000) in bribes to brokers willing to help them manipulate global interest rates, regulators said.

Neil Danziger, a London-based derivatives specialist at RBS, helped Tom Hayes, the former UBS employee at the center of the global investigation into rate-rigging, to bribe at least two brokers into persuading other banks to submit rates in line with their own, according to transcripts released by regulators that didn’t identify the traders by name. Two people with direct knowledge of the talks confirmed the traders’ identities. The regulators didn’t identify the brokers involved.

“Can you do me a favor,” an unidentified broker asked Danziger on Sept. 19, 2008, according to a transcript of the conversation released yesterday by the U.S. Commodity Futures Trading Commission. “You’re not going to get paid any bro for this and we’ll send you lunch around for the whole desk.” As the broker outlined the trade, he said “Take it from UBS, give it back to UBS. He wants to pay some bro,” referring to fees.

“Yeah, yeah,” Danziger replied.

Later that day, the broker asked Danziger if he could “do another 100 yards” or 100 billion, increasing the size of the transaction. “Flat switch,” the broker said. “I know I’m pushing my luck.”

RBS then entered into a wash trade with UBS that enabled the Zurich-based lender to pay about $31,000 in fees to the broker for its help in rigging Libor, the CFTC said.

Cash Store Financial Services is fighting to retain its payday loan business:

Cash Store Financial Services Inc. says it will request a hearing before Ontario’s Licence Appeal Tribunal in response to government pressure on its lending businesses.

The company says Ontario’s registrar for payday loans wants to revoke the payday lending licences of its Cash Store Inc. and Instaloans Inc. businesses.

Cash Store Financial says Ontario’s Ministry of Consumer Affairs has attempted since September, 2011, to force it to deliver payday loans in cash, rather than the electronic methods they now use.

The company says it’s unwilling to place employees and customers at risk by having them handling cash.

I cannot for the life of me determine why the Ministry wants to force them to use cash – what business is it of the Ministry? Naturally enough, I can’t find anything on the web to answer this question, as the media does nothing but re-write press releases.

This is just another example of creeping regulation. They don’t want to pass a law forbidding X, because that would expose the politicians for what they are. Instead, they install a licensing requirement and simply refuse to issue a license to those deemed unworthy. It’s pretty sleazy.

Anyway, it resulted in a downgrade by S&P:

  • •The registrar for payday loans in Ontario issued a proposal to revoke The Cash Store Financial Services Inc.’s (CSF) payday lending licenses, and
    CSF announced that it has discontinued its payday loan product in the territory.
  • •We are lowering our ratings on CSF and its senior secured notes to ‘CCC+’ from ‘B-‘.
  • •The negative outlook reflects our view that a material portion of CSF’s business is being discontinued in Ontario and that the cash flows from its new credit product may not be able to replace those lost cash flows.

It was a fairly quiet, mixed day for the Canadian preferred share market, with PerpetualPremiums down 5bp, FixedResets gaining 1bp and DeemedRetractibles off 1bp. Volatility was low. Volume continued to be quite high.

PerpetualDiscounts now yield 4.89%, equivalent to 6.36% interest at the standard conversion rate of 1.3x. Long Corporates now yield about 4.4%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 195bp, a significant narrowing from the 210bp reported January 23.

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 0.0493 % 2,571.0
FixedFloater 4.19 % 3.51 % 26,242 18.31 1 0.0000 % 3,879.2
Floater 2.59 % 2.92 % 72,348 19.91 5 0.0493 % 2,776.0
OpRet 4.76 % 2.21 % 35,726 0.39 5 -0.1147 % 2,603.5
SplitShare 4.56 % 4.32 % 39,687 4.27 2 0.1985 % 2,922.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1147 % 2,380.7
Perpetual-Premium 5.24 % -0.49 % 87,386 0.09 29 -0.0545 % 2,355.1
Perpetual-Discount 4.85 % 4.89 % 140,384 15.64 4 0.0508 % 2,648.2
FixedReset 4.90 % 2.87 % 270,680 3.38 78 0.0109 % 2,489.0
Deemed-Retractible 4.87 % 2.12 % 141,128 0.29 45 -0.0086 % 2,434.9
Performance Highlights
Issue Index Change Notes
PWF.PR.A Floater -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-02-06
Maturity Price : 23.20
Evaluated at bid price : 23.50
Bid-YTW : 2.20 %
TRI.PR.B Floater 1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-02-06
Maturity Price : 23.60
Evaluated at bid price : 23.87
Bid-YTW : 2.18 %
Volume Highlights
Issue Index Shares
Traded
Notes
GWO.PR.J FixedReset 130,653 Nesbitt sold 21,300 to Scotia at 26.00 and crossed two blocks of 50,000 each at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.98
Bid-YTW : 2.27 %
TD.PR.G FixedReset 108,562 RBC crossed 100,000 at 26.30.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.27
Bid-YTW : 2.12 %
BNS.PR.Q FixedReset 91,997 National bought 39,500 from Nesbitt at 25.16. Scotia crossed blocks of 19,800 and 25,000 at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 3.25 %
TD.PR.E FixedReset 70,222 TD crossed 56,100 at 26.25.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.26
Bid-YTW : 2.16 %
RY.PR.X FixedReset 63,312 TD crossed 50,000 at 26.48.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.47
Bid-YTW : 2.20 %
GWO.PR.N FixedReset 55,672 National crossed 50,000 at 24.32.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.21
Bid-YTW : 3.53 %
There were 49 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 23.50 – 23.95
Spot Rate : 0.4500
Average : 0.3205

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-02-06
Maturity Price : 23.20
Evaluated at bid price : 23.50
Bid-YTW : 2.20 %

CIU.PR.C FixedReset Quote: 24.65 – 24.99
Spot Rate : 0.3400
Average : 0.2367

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-02-06
Maturity Price : 23.21
Evaluated at bid price : 24.65
Bid-YTW : 2.87 %

GWO.PR.N FixedReset Quote: 24.21 – 24.39
Spot Rate : 0.1800
Average : 0.1059

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.21
Bid-YTW : 3.53 %

HSB.PR.D Deemed-Retractible Quote: 25.85 – 26.00
Spot Rate : 0.1500
Average : 0.0955

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-03-08
Maturity Price : 25.50
Evaluated at bid price : 25.85
Bid-YTW : -5.62 %

BNS.PR.Y FixedReset Quote: 24.60 – 24.75
Spot Rate : 0.1500
Average : 0.0960

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.60
Bid-YTW : 3.05 %

POW.PR.D Perpetual-Premium Quote: 25.27 – 25.44
Spot Rate : 0.1700
Average : 0.1162

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : 4.56 %

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