Category: Market Action

So how much of what we think we know is actually a silly error?

In the world of economic luminaries, it doesn’t get much bigger than Reinhart and Rogoff, whose work has had enormous influence in one of the biggest economic policy debates of the age.
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Reinhart and Rogoff have admitted to a “coding error” in the spreadsheet that meant some countries were omitted from their calculations. But the economists denied they selectively omitted data or that they used a questionable methodology.
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“It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful,” they said in a joint statement. “We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work.”

Certainly, false advertising should not be condoned. But banning somebody from the industry for life seems a little extreme:

According to the SEC’s order instituting settled administrative proceedings against Tandon, he represented to CalPERS in May 2008 that Simran met explicit AUM requirements and managed at least $200 million as of Dec. 31, 2007. In fact, Simran managed approximately $80 million at that time. Evidence indicates that Tandon was aware that Simran did not meet the CalPERS requirements for AUM.
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According to the SEC’s order, Tandon violated Sections 206(1), 206(2), and 207 of the Investment Advisers Act of 1940. Tandon neither admitted nor denied the findings, and agreed to be barred from the securities industry and pay disgorgement of $20,018, prejudgment interest of $1,680, and a penalty of $100,000.

Well, at least another SEC lawyer got another notch in his belt.

DGS.PR.A was confirmed by DBRS at Pfd-3:

The net asset value (NAV) of the Company dropped shortly after the last rating confirmation in May 2012, but has been increasing since June. As of April 11, 2013, the downside protection available to the Preferred Shares is approximately 42.5% and the dividend coverage ratio is approximately 1.0 times. The Pfd-3 rating of the Preferred Shares is based primarily on the downside protection available and the additional protection provided by an asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.

It was a modestly down day for the Canadian preferred share market, with PerpetualPremiums down 7bp, FixedResets off 3bp and DeemedRetractibles losing 8bp. Volatility was modest. Volume was high.

The Bank of Canada conveyed no surprises in its rate announcement:

On a quarterly basis, growth in Canada is expected to pick up to about 2.5 per cent in the second half of this year. Despite this expected pickup, with the weak growth in the second half of 2012, annual average growth is now projected to be 1.5 per cent in 2013. The economy is then projected to grow by 2.8 per cent in 2014 and 2.7 per cent in 2015, reaching full capacity in mid-2015 – later than anticipated in the January MPR.

Total CPI and core inflation have remained low in recent months, broadly in line with expectations in the January MPR. Muted core inflation reflects material excess supply in the economy, heightened competitive pressures in the retail sector, and some special factors such as slower increases in regulated prices and the pass-through of previous declines in agricultural prices to consumer prices. Total CPI inflation has been restrained by low core inflation and declining mortgage interest costs, with some offset from higher gasoline prices.

Both total and core inflation are expected to remain subdued in coming quarters before gradually rising to 2 per cent by mid-2015 as the economy returns to full capacity, the special factors that are weighing on core inflation subside, and inflation expectations remain well-anchored.

The Canadian preferred share market got hit today, with PerpetualPremiums off 8bp, FixedResets down 18bp and DeemedRetractibles losing 21bp. Volatility was minimal. Volume was very high.

PerpetualDiscounts now yield 4.82%, equivalent to 6.27% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a little under 4.1%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 220bp, a significant widening from the 210bp reported April 3.

Regulatory extortion is still being pondered:

SAC Capital Advisors LP’s record $602 million insider trading settlement with the U.S. Securities and Exchange Commission was approved by a federal judge, who conditioned his ruling on a future appeals court decision in an SEC settlement with Citigroup Inc. (C)

U.S. District Judge Victor Marrero in Manhattan approved the settlement, while saying it remains subject to a ruling by the U.S Court of Appeals in New York in the Citigroup case on whether defendants in SEC cases may be permitted to neither admit nor deny fault in such agreements. Marrero expressed concern about such a provision in the SAC settlement in a hearing on March 28. Marrero’s ruling, which was made public today, is dated yesterday.

In the Citigroup case, U.S. District Judge Jed Rakoff in Manhattan criticized the SEC’s policy of allowing defendants to resolve the agency’s allegations without admitting wrongdoing, ruling that Citigroup’s $285 million SEC settlement couldn’t go forward because the deal wasn’t in the public interest. The appeals court heard arguments in the case in February. The court hasn’t said when it will rule.

SEC Commissioner Luis A. Aguilar is one of the supporters of extra-judicial sentencing:

I must also say that I am disappointed in the Commission’s apparent lack of urgency in implementing the Dodd-Frank Act’s mandate to prevent crooks and so-called “bad actors” from utilizing Rule 506 (the “Bad Actor Rule”). It does not seem controversial for the Commission to prevent felons and other law-breakers from pitching private investment deals to investors. However, it has been almost two years since the Commission’s proposal to disqualify “bad actors” from 506 offerings, and the Commission has yet to adopt the Bad Actor Rule. I agree with U.S. House Financial Services Ranking Democrat Maxine Waters when she said:

[t]he Commission should work swiftly to impose the “bad actor” disqualification before expanding the availability of general solicitation and advertising, particularly since Congress directed the Commission to institute this disqualification provision nearly two years before the JOBS Act.

The adoption of a disqualification provision would provide much needed investor protection and would not be detrimental to legitimate issuers. The continuing delay only hurts investors.

If it is the intent of Congress to include lifetime prohibitions from certain activities as part of criminal sentencing, discretion to do so should be in the hands of the judge at trial – not of Aguilar’s beloved bureaucrats.

Talisman, proud issuer of TLM.PR.A, was confirmed at Pfd-3(high) by DBRS:

The Company’s operating cash flow for the year was affected by its exposure to weak natural gas pricing, along with a reduction in liquids production due to maintenance activities in the North Sea. This resulted in a free cash flow deficit, despite decreased capital spending (capex) of $3.7 billion in 2012 versus $4.3 billion in 2011. The Company used proceeds of asset sales (including the sale of 49% of its U.K. business to Sinopec International Petroleum Exploration and Production Co. (Sinopec); refer to Transactions on page 11) to fund the deficit, along with reducing short-term debt, which resulted in adjusted leverage lowering to 35.6% in 2012 (from 40.2% in 2011). DBRS anticipates future free-cash flow deficits to be funded with proceeds of asset sales/joint ventures.
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Talisman has indicated that its key priorities are (1) to live within its means through reducing capex to levels within internally generated cash flow, (2) to focus capex on higher-value projects that can come onstream more quickly, (3) to focus on building and strengthening two core regions (the Americas and Southeast Asia) and (4) improving operational performance and reduce cost structure. DBRS notes that successful implementation of these priorities will support the rating of Talisman, however it remains to be seen if the Company will be able to realize the benefits of this shift in strategic focus. An inability to successfully implement its strategic plans could result in further pressure on its financial profile. DBRS would view adjusted leverage approaching 40% to be aggressive for the current rating category, which could result in negative rating action.

Emera, proud issuer of EMA.PR.A and EMA.PR.C, was confirmed by DBRS at Pfd-3(high):

The Company’s business risk profile is viewed as good, as Emera’s earnings and cash flow are largely generated by its relatively low-risk regulated subsidiaries (regulated subsidiaries accounted for over 90% of consolidated net income in 2012). Over the medium to long term, Emera’s regulated earnings and cash flow are expected to grow significantly once the Maritime Link is completed (pending approval from the Nova Scotia Utility and Review Board).
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Emera is currently on track to deleverage its non-consolidated balance sheet as reflected by (1) a $250 million preferred shares offering in June 2012 and (2) an equity offering of approximately $200 million in December 2012. The Company’s non-consolidated debt-to-capital ratio was 34.2% as of December 31, 2012, versus its peak of 41.5% in Q2 2012. Going forward, DBRS expects Emera to fund significant unforeseen costs or cash shortfalls (including potential cost overruns associated with the Maritime Link) with equity (including preferred shares and dividend re-investment proceeds) and to continue to deleverage its non-consolidated balance sheet to a level that is commensurate with the current BBB (high) rating.

It was a fine day for the Canadian preferred share market, with PerpetualPremiums winning 13bp, FixedResets up 9bp and DeemedRetractibles gaining 8bp. There was no volatility. None. Volume was quite low.

S&P is nonchalant regarding recent banking regulatory announcements:

In the past month, there have been two significant announcements relating to domestic regulation of Canadian banks.

• •On March 21, the federal government’s budget announced its plan to introduce a “bail-in” policy framework that would provide a mechanism to recapitalize a nonviable bank through conversion of certain bank liabilities into capital instruments.
• •On March 26, the Office of the Superintendent of Financial Institutions issued an advisory that imposed a 1% capital surcharge for banks it has designated as domestic systemically important banks (D-SIBs). These banks include Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion Bank. This advisory follows the Bank for International Settlements (BIS) publication of “A Framework For Dealing With Domestic Systemically Important Banks” in October 2012 and its recommendation that national banks identified as D-SIBs by their national authorities comply with the principles in line with the phase-in arrangements for the globally systemically important bank (G-SIB) framework, starting in January 2016. The BIS has not identified any Canadian bank as a G-SIB.

In a report released today, Standard & Poor’s Ratings Services said both announcements were in line with its expectations for the sector. “These developments reinforce our perception that Canadian regulators are emphasizing prudential standards, active bank supervision, and the avoidance of a future taxpayer funded bailout of a failing financial institution,” said Standard & Poor’s credit analyst Tom Connell in the report, entitled “Regulatory Initiatives Might Contribute To The Evolution Of Canada’s Banking Industry.”

TIPS are having a rough time of it:

History is repeating itself in the bond market as investors capitulate on bets that the Federal Reserve’s money-printing efforts will spark faster inflation.

Firms from U.S. Bancorp to Federated Investments that had been buying government securities that protect against rising consumer prices during the Fed’s recent efforts to inject cash into the economy are now selling. For the first time since the depths of the financial crisis in 2008, mutual funds that target Treasury Inflation-Protected Securities have seen outflows for three straight months, according to Morningstar Inc.

Even after the Fed injected more than $2.3 trillion into the financial system since 2008, inflation is under control, bolstering the appeal of bonds while providing the central bank with more scope to provide stimulus as needed to foster the economic recovery. Commodity prices are down and wages have grown just 1.9 percent on average since 2009, below the 3.1 percent in the prior three years, government data show.
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Returns on TIPS have topped non-indexed Treasuries since 2009, gaining an average of 9.4 percent in each of the past four years, versus 3.41 percent for nominal U.S. government debt, according to Bank of America Merrill Lynch indexes. This year, nominals are beating TIPS, 1.93 percent versus 1.27 percent.

PrefBlog’s “Golly, It Was Hard To See This One Coming” department is working overtime!

Banks are leaving the panel that sets ISDAFix, the benchmark for the $379 trillion swaps market, as regulators probe suspected manipulation of the rate.

HSBC Holdings Plc (HSBA), Europe’s largest bank by assets, and Japan’s Mizuho Financial Group (8411) stopped contributing to the ISDAFix dollar rate between November and January, and haven’t been replaced, documents on the International Swaps and Derivatives Association’s website show. The industry group didn’t give any reason for the lenders’ departure.

Firms are pulling out of rates such as the London interbank offered rate, Euribor and ISDAFix on growing concern that they may face lawsuits, fines and criminal penalties if found to have engaged in wrongdoing. Without data from a large number of firms, benchmarks risk becoming unrepresentative and losing the confidence of the market, said Owen Watkins, a former regulator at the U.K.’s Financial Services Authority.
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Martin Wheatley, the U.K. regulator charged with overhauling Libor, said in a September report it might be necessary to force firms to contribute to financial benchmarks “if submitting banks were to explore leaving.” Michel Barnier, the European Union’s internal market and services commissioner, said in February he was considering forcing lenders to participate in benchmarks including Euribor.

The report is formally known as The Wheatley Review:

5.27 At this stage, the Wheatley Review does not consider it necessary to recommend that the FSA compel particular banks to be members of LIBOR panels. However, the Wheatley Review recognises that, if submitting banks were to explore leaving the LIBOR panels, or if panel sizes did not increase, this might be necessary. For example, there could be a state of affairs whereby banks that have expertise in certain inter-bank markets, including those not currently involved in LIBOR, might be required to participate in LIBOR panels as a condition of their activity in those markets. This could possibly be achieved by making rules requiring such firms to contribute, on a continuing basis, to LIBOR.

5.28 While the FSA’s current powers would allow it to impose such an obligation on a temporary basis, for example to avoid the threat of financial stability or a loss of market integrity, they would not allow the imposition of a long term continuing obligation on banks to submit to LIBOR. This suggests there is a potential gap in the regulatory toolkit. The Wheatley Review therefore recommends that the Government legislate to provide the FSA with an express “reserve” power to compel LIBOR submissions, to be used only if the FSA should consider it to be necessary in the future.

Remember the Rochdale Securities case, last mentioned on December 4? That’s the one where the trader input an erroneous buy order for 1.625-million shares of Apple, which promptly fell, causing great consternation. It looks like we have reached the denouement:

David Miller, an institutional sales trader who lives in Rockville Centre, N.Y., has agreed to a partial settlement of the SEC’s charges. He also pleaded guilty today in a parallel criminal case.

The SEC alleges that Miller misrepresented to Rochdale Securities LLC that a customer had authorized the Apple orders and assumed the risk of loss on any resulting trades. The customer order was to purchase just 1,625 shares of Apple stock, but Miller instead entered a series of orders totaling 1.625 million shares at a cost of almost $1 billion. Miller planned to share in the customer’s profit if Apple’s stock profited, and if the stock decreased he would claim that he erred on the size of the order. The stock wound up decreasing after an earnings announcement later that day, and Rochdale was forced to cease operations in the wake of covering the losses suffered from the rogue trades.

In market timing news:

Hedge-fund manager John Paulson’s wager on gold wiped out almost $1 billion of his personal wealth in the last two trading days as the precious metal plummeted 13 percent.

Amidst all the gloom and whining, it’s good to know that Canadian teens are world-beaters at something:

Teenagers in Canada use cannabis more than any other developed country, according to a new study released by Unicef.

It was a rough day for the Canadian preferred share market – although equities got really whacked – with PerpetualPremiums off 11bp, FixedResets losing 17bp and DeemedRetractibles down 12bp. Volatility was average. Volume was average.

Nothing happened today.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets down 9bp and DeemedRetractibles flat. Volatility was low. Volume was average, with the highlights comprised entirely of FixedResets.

There has been a lot of yammering about income inequality in the past few years, as I mentioned on March 15. I’ve found some more source data:

In the next calculation, the world Gini index is recalculated by weighting countries by their population size. This means that countries with large populations have a larger impact on the Gini index than do countries with smaller populations. The population-weighted Gini index was calculated by Branko Milanovic and published in his book Worlds Apart: Measuring International and Global Inequality.13 The chart below compares the population-weighted Gini index (red line) with the unweighted Gini index shown in the previous chart (black line).

This weighted world Gini index declines almost consistently from 1962 onward. This is mainly due to the phenomenal economic growth in China and India relative to richer countries. Because China and India together account for over one-third of the world’s population, these two countries have a very strong impact on the population-weighted Gini results. But if China and India are removed from the calculation, the population-weighted Gini index trends upward after 1982 (as does the unweighted Gini index), meaning that overall income inequality is increasing in the rest of the world.

There’s a great graph, but it’s Flash (Wow! Way cool!), so go look for yourself. I like the last sentence from the quoted verbiage – ‘if we remove enough data, we can prove our point!’

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 15bp, FixedResets down 9bp and DeemedRetractibles gaining 8bp. Volatility was average. Volume was low.

Hurray for Rick Waugh!

“I understand why the finance minister is concerned about the Canadian economy, but I just philosophically don’t think” government should be setting product pricing, Waugh said yesterday in an interview in Halifax, Nova Scotia, where the bank held its annual shareholders meeting. “Despite the difficulties of central banks to use interest rates, the alternative of trying to manage specific products or prices, to me, is fraught with difficulty.”

The article did not address Mr. Waugh’s views on auctioning off CMHC mortgage insurance, rather than allocating it from an enormous supply at a cheap price.

Toron Investment Management has hooked up with AMI Partners:

Toron Investment Management and AMI Partners have agreed to combine to create a pre-eminent, privately-owned Canadian investment management firm with unique expertise and top-tier track records in global and domestic investing. The firm, once unified, will serve clients who have entrusted more than $3.5 billion of assets in Canadian and global mandates.

The combined firm will operate as Toron Asset Management International (Toron AMI), will be based in Toronto, and will continue to serve clients in Canada and abroad. Toron AMI’s professionals will be shareholders and the firm will operate as a partnership.

Founded more than 50 years ago, AMI specializes in Canadian equity, fixed-income and balanced mandates for institutional clients. Toron Investment Management began operating 25 years ago as a risk management consultancy; for the past 15 years it has focused on global investment management, serving a growing client base of private clients and select institutions.

Today’s report will be delayed. Why? I’ll tell you why! Later.

Update, 2013-4-12

Nothing happened today.

It was a mixed day on the Canadian preferred share market, with PerpetualPremiums gaining 7bp, FixedResets off 2bp and DeemedRetractibles up 13bp. Volatility was minimal. Volume was average.

The times, they are a changin’:

Primary dealers, the select group of banks and brokers that have held a seat at the center of the U.S. government debt market since 1960, are losing influence.

More than 20 percent of the $538 billion of Treasury notes auctioned this year have been awarded to bidders who bypassed the dealers by using a website to place their orders, according to U.S. Treasury Department data compiled by Bloomberg. That’s almost double the 2011 level and up from 5.6 percent in 2009.

In the same way technology eroded the middleman role once played by travel agents and stock-market specialists, increased use of the direct-bidding system threatens government-bond traders at firms ranging from Bank of America Corp. to UBS AG. (UBSN). It also has eaten into profits from a business that’s among the least affected by the regulatory changes and new capital requirements reshaping the industry.
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Traders at primary dealers have complained to the Treasury and the Federal Reserve Bank of New York about direct bidding, which they say is reducing their profitability, according to seven government-bond traders who requested anonymity because they weren’t authorized to comment publicly. Their job is becoming more frustrating, and sometimes money-losing, now that they’re competing in auctions against anonymous investors who can show up at any time and at any price, the traders said.

I’m sure we’ll all shed a tear for the poor traders who are finding that being the guy who answers a particular telephone isn’t as good a job as it used to be.

Here in Canada, the bond business is pretty good:

Royal Bank of Canada (RY), the top underwriter of Canadian corporate bonds for the past decade, is predicting record issuance this year led by a surge in high- yield debt.

Bond sales in Canadian dollars will reach C$95 billion ($94 billion) this year, on pace to shatter 2006’s record C$93 billion, said Altaf Nanji, senior credit-research analyst at RBC Capital Markets in Toronto. Issuance in the first quarter, typically the busiest of the year, was C$30 billion, according to RBC data. The firm’s forecast in December was for C$92 billion, including about C$5 billion of junk sales.

“The revised forecast puts issuance on pace to surpass our 2006 record year, based on the health of the high-yield sector, an increase in mortgage securitization and a more-active-than- expected first quarter for Maple issuance,” Nanji said in a phone interview.

Investors are snapping up the riskiest debt to meet annual return targets as central banks hold down borrowing costs to stave off recession. Sun Life Financial Inc. (SLF) altered its investment mandate to add high-yield bonds to the C$115 billion of assets it oversees to offset falling interest rates.

Issuance of high-yield bonds climbed 32 percent to C$1.14 billion in the first quarter, compared with an increase of 11 percent to $109 billion in the U.S. speculative market, according to data compiled by Bloomberg. RBC expects the junk market to grow to C$35 billion of bonds outstanding by 2016, up from C$11 billion currently.

The Bank of Canada has released a paper by Carlos de Resende, Ali Dib, René Lalonde and Nikita Perevalov titled Countercyclical Bank Capital Requirement and Optimized Monetary Policy Rules:

Using BoC-GEM-Fin, a large-scale DSGE model with real, nominal and financial frictions featuring a banking sector, we explore the macroeconomic implications of various types of countercyclical bank capital regulations. Results suggest that countercyclical capital requirements have a significant stabilizing effect on key macroeconomic variables, but mostly after financial shocks. Moreover, the bank capital regulatory policy and monetary policy interact, and this interaction is contingent on the type of shocks that drive the economic cycle.

Finally, we analyze loss functions based on macroeconomic and financial variables to arrive at an optimal countercyclical regulatory policy in a class of simple implementable Taylor-type rules. Compared to bank capital regulatory policy, monetary policy is able to stabilize the economy more efficiently after real shocks. On the other hand, financial shocks require the regulator to be more aggressive in loosening/tightening capital requirements for banks, even as monetary policy works to counter the deviations of inflation from the target.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 14bp, FixedResets down 14bp and DeemedRetractibles off 4bp. Volatility was muted. Volume was very low.

The US jobs number was disappointing:

Payrolls grew by 88,000 workers last month, the smallest in nine months, after a revised 268,000 gain in February that was higher than first estimated, Labor Department figures showed today in Washington. The median forecast of 87 economists surveyed by Bloomberg projected an advance of 190,000. The jobless rate fell to 7.6 percent from 7.7 percent.

The US is looking serious on Too-Big-To-Fail:

The largest U.S. banks, including JPMorgan Chase & Co. (JPM) and Bank of America Corp., would have to hold capital in excess of Basel III standards under a proposal being drafted by Senate Democrats and Republicans to curb the size of too-big-to-fail banks.

The current draft of the legislation would require U.S. regulators to replace Basel III requirements with a higher capital standard: 10 percent for all banks and an additional surcharge of 5 percent for institutions with more than $400 billion in assets. Senators Sherrod Brown, a Democrat from Ohio, and David Vitter, a Republican from Louisiana, have said they intend to introduce the bill this month.

Some US politicians are trying to ban hedging:

State Senator Mike Folmer, a Republican, in February introduced a bill that would bar publicly funded entities from engaging in the derivatives, which can be used to protect against swings in interest rates. The ban would deny Philadelphia, which had entered into $3.5 billion of swaps, access to a useful tool, said Rob Dubow, finance director of the fifth-most populous U.S. city.
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The Pennsylvania State Association of Boroughs supports a ban on swaps, said Christopher Cap, executive vice president. Elam Herr, assistant executive director of Pennsylvania State Association of Township Supervisors, said it may back Folmer’s bill.

The best known example is Oakland’s attempt to effectively default on what was effectively a loan:

Between debating the location of a proposed dog park and discussing taxi permit fees one night last month, the city council in Oakland, California, turned to severing ties with Goldman Sachs Group Inc. (GS)

The vote for the city administrator to begin the process of firing the fifth-biggest U.S. bank by assets came during an eight-hour meeting Dec. 18. It culminated months of efforts by the city to exit a 1998 interest-rate swap without paying a $14.8 million termination fee. Goldman, which underwrote $83 million of Oakland debt last year, has denied the request.
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Oakland entered into a so-called synthetic fixed-rate swap with the bank in 1998. It issued bonds to help finance pension obligations and used variable-rate instead of fixed-rate securities, according to reports filed with the city council.

The city was lured by the prospect of upfront cash, said Zennie Abraham, economic adviser to then-Mayor Elihu Harris. California voters had just approved Proposition 218, which limited cities’ ability to raise taxes, said Abraham.

“A lot of the city staff got enamored with the city getting a huge check,” Abraham said. “That was dangled in our face.”

The city realized a $15 million windfall from entering the contract. Oakland agreed to pay a fixed 5.6775 percent until 2021, while the bank was on the hook for a variable rate equal to the Bond Markets Association Index — 3.09 percent at the time the bonds were issued in 1998.

Nothing wrong with swaps or any other derivatives. But when they’re used to cover up borrowing, a la Greece … well, somebody should get fired.

The feds are continuing to explain bail-in bonds:

While the term “bail-in” has been used in both cases, Canadian officials are now scrambling to distance their plan from any that would use consumer deposits for capital. Amid questions about the plan, a spokeswoman for Finance Minister Jim Flaherty said in a statement that no consumer bank deposits – of any kind – would be drawn upon in the Canadian bail-in scenario.

“The ‘bail-in’ scenario described in the budget has nothing to do with consumer deposits and they are not part of the ‘bail-in’ regime,” Department of Finance spokeswoman Kathleen Perchaluk said.
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Sources familiar with the plans say the Canadian bail-in scenario will rely on a specific class of new investments: subordinate bonds and deposit notes. The latter acts similar to bonds, where a large depositor such as an institutional investor or corporate customer with several hundred thousand dollars or more to deposit, buys a deposit note in order to get a slightly better return. It is similar to a contractual arrangement.

Analysts, however, say it would take extreme circumstances for the concept of a bail-in to ever come into play.

These deposit notes and bonds are not financial products available to the average investor or depositor, and do not include funds held in consumer deposits.

This may turn out very well for the preferred share market; it is impossible for the bar to be set any lower for deposit notes and bonds than it is for preferred shares, so what’s the difference? I mean really? An announcement of intention from OSFI that it will seek to convert preferred shares first in the event of non-viability?

This simply shows up the moronic nature of OSFI’s decision to go for a “low trigger” on preferred share contingent capital conversion … if they were high trigger, then the bonds could be low trigger (preferably lower trigger, rather than non-viability trigger) and then the bonds would be clearly senior and there would be a clear hierarchy. However, this would lower the importance of OSFI’s discretion when the next crisis occurs, and hence lower the importance of OSFI officialdom.

I have long argued, for instance, that all contingent capital should convert upon the common stock price breaching a certain level (taken as a VWAP over a period of time). For instance, let us assume RY’s common share price is $50. Then preferred shares should convert when the common trades below $25, at a conversion price of $25. The bonds could convert with a trigger price = conversion price = $10-15. This would be a much better system than the current mess.

With excellent timing, DBRS Requests Comments on Rating Subordinated, Hybrids and Preferred Bank Capital Securities:

DBRS is requesting comments on a proposed methodology released today that would be used in the rating of capital securities issued by banks that are either subordinated or that have unique convertibility terms (including contingent capital features). Market participants are asked to submit comments on the proposal to DBRS_Bank_Methodology_Comments@DBRS.com on or before May 10, 2013. Following the review and evaluation of all submissions, DBRS will publish a final version of this methodology.

Note that the proposed criteria as titled represents a merger of three outstanding DBRS banking criteria: (i) Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments; (ii) Rating Bank Subordinated Debt & Hybrid Instruments with Contingent Risks; and (iii) Rating Bank Preferred Shares & Equivalent Hybrids.

While we are open to any comments, we draw attention to three major areas, two of which are written as changes in the proposed document and one consideration for change, which has not been included in the document at this time:

(1) Present criteria dictate that bank preferred shares are typically rated three to five notches below the issuer’s intrinsic assessment. Based on further assessing the impact of notching versus POD (“probability of default”) levels, the request for comment document changes this to a standard three notches. We are also asking for comments on whether DBRS should retain the flexibility to have certain bank preferred ratings notched up by one notch versus the standard notching where there are unique positive characteristics for individual banks, or if this ability should be removed. The wording in the proposed criteria as released still provides this ability.

(2) A second change relates to the notching process that DBRS would use for contingent capital instruments. The proposed criteria within this April 5th, 2013 document provide more detail relative to the current DBRS criteria.

(3) As is the case with the present criteria, the request for comment document continues to present that normal subordinate debt instruments issued by banks that are defined by DBRS as systemically important would generally receive the identical notching benefit of typically a one-notch uplift due to external / government support that is given to deposits and senior unsecured debt. In recent times, there appears to be growing skepticism regarding governments’ willingness to support subordinated debt when dealing with systemically important banks. Our final decision on this issue could maintain the status quo; or it could result in all subordinate debt being notched from the intrinsic assessment level; or there could be a combination of the above based on the relevant legal framework, resolution schemes, and government policies for each country and banks involved.

BBO.PR.A was placed on Review-Negative by DBRS last September; the rating has now been affirmed at Pfd-2(low) and the Review removed:

DBRS has today confirmed the rating of the Class A, Preferred Shares (the Preferred Shares) issued by Big Bank Big Oil Split Corp. (the Company) at Pfd-2 (low) and has removed the rating from Under Review with Negative Implications.
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On September 6, 2012, DBRS placed the rating of the Preferred Shares Under Review with Negative Implications, primarily due to the drop in downside protection below required levels in the prior months. However, since then, downside protection has recovered and stabilized, fluctuating between 49% and 51%, and the dividend coverage ratio has improved. As a result, the Preferred Shares have been confirmed at Pfd-2 (low) and removed from Under Review with Negative Implications.

Complicating matters is the fact that BBO reports its NAV per Capital Share, rather than per Unit, which is made clear by their January Fact Sheet.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 3bp, FixedResets down 9bp and DeemedRetractibles gaining 2bp. Volatility was minimal. Volume was above average.