Category: Market Action

It looks like the Flash Crash will be simply an excuse:

Data firm Nanex LLC has since questioned regulators’ finding, suggesting Waddell’s algorithm actually did factor in price because data show a slowdown in selling by Waddell during the market’s steepest decline.

CFTC Economist Andrei Kirilenko on Tuesday left open the possibility that the algorithm didn’t completely ignore prices.

The staff is “not aware of any specific price limit that was built into the algorithm,” he told CFTC Chairman Gary Gensler. But just because there wasn’t a price limit didn’t mean the algorithm didn’t “take into account prices and quantities,” he added.

OK – so the Flash Crash report is now highly suspect. Intellectual dishonesty is running rampant. But why would they be dishonest?

Commodity Futures Trading Commission enforcement attorney Bob Pease said the agency is eyeing the use of trading algorithms and a practice known as “quote stuffing” as possible areas that could be deemed disruptive under a provision in the Dodd-Frank financial law enacted in July.
…
Mr. Pease, the CFTC lawyer, said the agency is looking to see if automated algorithms are “inherently disruptive” and if market players should have certain responsibilities in how they execute these orders.

Well, because you’ve got two-bit Napoleons like Bob Pease anxious to lump use of trading algorithms in the same category as quote-stuffing to push a regulatory agenda in which everything is regulated.

Speaking of algorithms, the two Norwegians discussed October 5 have been convicted on charges of smart trading:

Two Norwegian day traders have been handed suspended prison sentences for market manipulation after outwitting the automated trading system of a big US broker.

The two men worked out how the computerised system would react to certain trading patterns – allowing them to influence the price of low-volume stocks.
…
Prosecutors said Mr Larsen and Mr Veiby “gave false and misleading signals about supply, demand and prices” by manipulating several Norwegian stocks through Timber Hill’s online trading platform.

Anders Brosveet, lawyer for Mr Veiby, acknowledged that his client had learnt how ­Timber Hill’s trading algorithm would behave in response to ­certain trades but denied this amounted to market manipulation. “They had an idea of how the computer would change the prices but that does not make them responsible for what the computer did,” he told the Financial Times. Both men have vowed to appeal against their convictions.

Precisely. While I suspect that this is one of those cases where the keys to the puzzle are too complex to make it into the newspaper, I cannot fathom how exploiting an idiotic algorithm – using only arm’s length trades between willing counterparties – can possibly be seen as a crime.

CFTC Chairman Gary Gensler has been criticized on PrefBlog – but there can be no doubt he is a fine regulator:

Gensler has asked Congress to increase the agency’s budget by 69 percent next year to $286 million and predicts the agency’s budgeted staff of about 650 will need to grow to more than 1,000 to meet its new demands.

There are rumours that the capital surcharge talks are in trouble:

Leaders of the world’s largest economies, divided over how to curb risk-taking by their biggest banks, will likely fail to agree on a capital surcharge.

Instead, the Financial Stability Board, which is weighing measures to prevent such institutions from causing another economic crisis, will recommend a range of options without setting a level of extra capital to be imposed globally, said members of the group who declined to be identified because the discussions are private. The FSB will meet in Seoul next week.

The fissures running through the group are similar to those that split the Basel Committee on Banking Supervision when it considered tighter capital requirements for all banks this year. Germany, France and Japan are resisting a surcharge for big lenders, as are lobbyists for those firms, while the U.K., U.S. and Switzerland advocate the approach, members say. That camp agreed to soften some of the Basel capital rules with the understanding that more would be done to restrain the largest banks through the FSB.
…
France, Japan and Germany are opposing capital surcharges for big lenders because they say their banking systems are different from those in the U.S., U.K. and Switzerland, where the largest blow-ups occurred during the crisis, members say. U.S. regulators have been skeptical of contingent and bail-in capital as alternatives to straightforward surcharges, arguing that they’re untested mechanisms that might not fulfill their intended purposes during the next crisis.

“We can’t rely on them yet,” Sheila Bair, chairman of the Federal Deposit Insurance Corp., said in a telephone interview last week. “There’s not much of a market for them. Triggering them could end up destabilizing the bank and the markets. We just got rid of TruPS because they did not provide loss absorption in the crisis. We could end up with the same problem with these new instruments.”

Low US mortgage rates are having an effect – just not the intended effect, that’s all:

Rates for 30-year fixed loans declined to 4.19 percent in the week ended today from 4.27 percent, Freddie Mac said in a statement. It is the lowest rate since the McLean, Virginia- based company began tracking the data in 1971. The average 15- year rate tumbled to 3.62 percent from 3.72 percent.

A six-month decline in mortgage rates has spurred a surge in refinancing while doing little to increase property demand as U.S. unemployment hovers near 10 percent. Sales of existing homes were the second-lowest on record in August, the National Association of Realtors in Washington said Sept. 23.

The Canadian preferred share market had another strong day on extremely heavy volume, with PerpetualDiscounts up 22bp and FixedResets gaining 6bp.

The CFTC will step up its efforts to ensure markets are a cooperative game in which everybody wins:

The top U.S. commodity regulator will review algorithmic trading and other practices such as “spoofing” and “quote stuffing” as part of the largest rewrite of Wall Street rules since the 1930s.
…
Pease said the agency’s staff is examining strategies in which traders submit and then cancel thousands of orders in milliseconds. CFTC investigators want to know whether the practice is a form of “spoofing” in which market participants try to trick other computers into making decisions that can be exploited for profit, Pease said.

The Dodd-Frank financial overhaul, named for Massachusetts Representative Barney Frank and Connecticut Senator Christopher Dodd, both Democrats, attempts to relieve the commission of the burden of proving a trader intended to manipulate prices. Instead, the CFTC will have to show the trading was “reckless.”

He wants to see a reckless trade? Well, any market order is reckless. Any stop-loss order is reckless and stupid. Any Technical Analysis is reckless, stupid and … I can’t think of a suitable epithet. Anyway, those three categorizations should be enough to get them started.

OSFI has published more boxtickingwork for banks, titled Internal Capital Adequacy Assessment Process (ICAAP) for Deposit-Taking Institutions.

A top contender for “Most Ridiculous Fund of 2010” closed today:

Connor, Clark & Lunn Capital Markets Inc. (the “Manager”) is pleased to announce the closing of the initial public offering of HBanc Capital Securities Trust (the “Fund”). The Fund raised gross proceeds of $147,572,325 from the sale of 5,797,393 Class A Units, Series 1 and 105,500 Class A Units, Series 2, respectively, at a price of $25 per Unit. These amounts include the Class A, Series 1 Units issued in respect of the over-allotment option which was exercised in full. The Fund also raised gross proceeds of U.S. $26,332,225 from the sale of 1,042,724 Class U Units, Series 1 and 10,565 Class U Units, Series 2, respectively, at a price of U.S. $25 per Unit. These amounts include 171,035 Class U Units, Series 1 and 2,165 Class U Units, Series 2 that were issued pursuant to the exchange option. The Class A Units, Series 1 are listed on the Toronto Stock Exchange under the symbol HSC.UN. Class A Units, Series 2 and Class U Units will not be listed on a stock exchange but may be converted into Class A Units, Series 1 on a weekly basis.

The Fund was established to provide investors with high levels of stable, tax-advantaged distributions through exposure to Capital Securities issued by HSBC Holdings plc, a conservatively positioned and strongly capitalized global bank.

I am often struck by how much money gets raised for products like this, while I find that selling my own fund is more like pulling teeth. I wonder if this has anything to do with it?

Nahhhh … I must be missing something.

A mixed day on heavy volume for the Canadian preferred share market with PerpetualDiscounts gaining 19bp and FixedResets losing 5bp.

PerpetualDiscounts now yield 5.42%, equivalent to 7.59% interest at the standard equivalency factor of 1.4x. Long corporates now yield about 5.2%, so the pre-tax interest-equivalent spread now stands at about 240bp, as slight (and perhaps meaningless) tightening from the 245bp reported on October 6.

In astonishing news, deficit financing is here to stay:

Canada will have endured seven years of budget deficits before it returns to a surplus position, the federal government said Tuesday in its fall fiscal update.
…
The anticipated 2015-16 surplus would mean seven years of deficit financing, beginning in the 2008-09 fiscal year when the financial crisis erupted. Prior to that, the country posted 11 consecutive annual budget surpluses.

Maybe they should cut taxes again! That will increase revenues, absolutely for sure, unless it doesn’t.

In more interesting news:

McDonald’s Corp.’s yuan bond sale, the first by a foreign company in Hong Kong, may pave the way for a new global debt market as China seeks to capitalize on its status as the engine of the world’s economic recovery.

McDonald’s, which opened its first 1,000 restaurants in China faster than any other country outside the U.S., sold 200-million yuan (US$29-million) of 3% notes due in September 2013.
…
“There are a lot of companies expressing interest in issuing yuan bonds,” said Per Nordstrom, head of EMTNs Asia at Standard Chartered Plc, who worked on the sale. “I’m expecting the renminbi offshore market to be very popular.”

I’m not sure if these things have a cool name yet, like Maple, Yankee and Samurai. You can’t have cross-border bonds without a cool name! It just isn’t done!

The Canadian preferred share market had another good day on strong volume, with PerpetualDiscounts up 14bp and FixedResets gaining 20bp.

Not much time to write, but here are a couple of quick links: Market structure is causing the IPO crisis — and more and Equity Trading in the 21st Century. That should keep you guys busy for a while!

More nonsense about the Flash Crash – this time from Barron’s:

HERE’S WHERE THE REGULATORS’ story starts to fall apart. CME Group, owner of the exchange where the E-minis trade, said the sell order was consistent with market practices. Furthermore, only half the order had been entered as the market fell. And it had been broken up into small orders—nine out of every 100 coming into the market. In any event, this one trade couldn’t have spooked investors because the market is anonymous. Traders didn’t see a single, large seller. What they saw was continuous action.

What this proves is that the writer, Jim McTague, hasn’t the slightest concept of how market-makers make money.

Yes, the traders didn’t see a single, large seller. If they had, they might have bought more, knowing that it was only one cowboy with an itchy trigger finger causing the price change. What they saw was, in fact, that their position limits had been reached and they were losing money. So they decided to eat the loss – your first loss is your best loss – and square their positions. There is nothing nefarious about that.

The brokerage firms’ behavior was particularly galling, though by no means illegal. They stopped automatic execution of customer orders, also known as internalization, which on most days accounts for nearly 100% of retail trades.
…
On May 6 when the market fell out of bed, the report says blandly, some of these players reduced executions of sell orders but continued to execute buy orders. In other words, they’d sell stock to a retail customer but wouldn’t buy stock from a retail customer. They wanted to get rid of their own inventories, not accumulate more shares. So they sent the customer sell orders onto the swamped stock exchanges.

I fail to see anything nefarious about this. It is not the job of market makers to take everything that’s thrown at them, even if it costs them billions of dollars and sinks their firms, requiring Son of TARP to repair the damage.

If Jim McTague every opens a brokerage firm, remind me not to put any money in it.

Nest time a politician or one of his robo-parrots pontificates about productivity, I’ll remember this:

The UAE has complained that its two airlines have only six flights a week to Toronto, ferrying passengers from Dubai and Abu Dhabi. And with 27,000 Canadians living in the UAE, al Ghafli has argued there is a need for greater air service between the two countries.

Air Canada, however, has protested expanding the landing rights of UAE carriers, arguing that few people fly from the UAE over to Canada. Air Canada claims that UAE carriers are taking Canadians to other places, while making stopovers in Dubai and Abu Dhabi.

Canadians are among the most productive and energetic whiners and lobbyists in the world! So much so that the Ontario Health Ministry has declared it a core competency for hospitals and demanded the function be brought in-house!

This post is very late because of (i) PrefLetter and (ii) downtime on the TMX Electric Abacus. Sorry about that!

It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 14bp and FixedResets winning 9bp. Volumer was merely OK.

BIS has released a working paper by Ben Craig and Goetz von Peter titled Interbank tiering and money center banks:

This paper provides evidence that interbank markets are tiered rather than flat, in the sense that most banks do not lend to each other directly but through money center banks acting as intermediaries. We capture the concept of tiering by developing a core-periphery model, and devise a procedure for fitting the model to real-world networks. Using Bundesbank data on bilateral interbank exposures among 1800 banks, we find strong evidence of tiering in the German banking system. Econometrically, bank-specific features, such as balance sheet size, predict how banks position themselves in the interbank market. This link provides a promising avenue for understanding the formation of financial networks.
…
The first column of Table 1 reports the simplest regression using bank size as the sole explanatory variable. The log of total bank assets is highly significant; a marginal increase in size from the average balance sheet of &eur;230 million raises the probability of belonging to the core by a sixth of a percent. Indeed, size is a fairly reliable classifier. The average size of banks in the core is 51 times that of banks in the periphery. Hence, large banks tend to be in the core, while small banks are found in the periphery of the interbank network.
…
Systemic importance is highly correlated with a bank’s network position: it is extremely unlikely that a systemically important bank would not be in the core, as indicated by the low rate of false core predictions, Prob(c|P). But the moderate fit also suggests that a bank’s position in the network is something that goes beyond its systemic importance.

The success of “Balance Sheet Size” in predicting network placement supports my contention that surcharges for systemically important banks should be based on a balance sheet variable – either gross assets or risk-weighted assets, I’m not particular – rather than upon a regulator’s determination that such-and-such bank is systemically important.

One thing I would like to see addressed is an examination of how increasing the risk-weighting of interbank assets would change the model. It is far too cheap, in terms of capital, for a bank to hold another bank’s paper; this increases the chance for contagion.

It was a day of readjusting prices on continued heavy volume today, with PerpetualDiscounts losing 8bp and FixedResets picking up 8bp.

Japan is rumoured to be considering a capital surcharge on systemically important banks, but details and confirmations are scarce:

Japan’s financial regulator is considering forcing the country’s largest banks to hold more capital than required under Basel III rules, a person with direct knowledge of the matter said.

The Financial Services Agency will start internal discussions soon on whether to apply a capital surcharge to systemically important lenders such as Mitsubishi UFJ Financial Group Inc., the person said, declining to be identified because the matter is confidential.
…
The Swiss panel said UBS AG and Credit Suisse should hold almost double the capital required under the Basel III proposals announced last month. By 2019, the lenders would need to hold at least 10 percent of capital in common equity, compared with 7 percent required under Basel.

The possibility of a global capital surcharge of around 2 percent for the world’s most important banks “cannot be ruled out,” Shinichi Ina, a Tokyo-based analyst at Credit Suisse, wrote in a report this week.

This is regulation in a nut’s hell. I support a progressive surcharge on Risk Weighted Assets. I am quite aware that RWA is, at best, an imperfect measure of a bank’s systemic importance; but I assert that singling out a group of “Top Tier” banks is worse.

Bad news for Ireland:

Ireland got an unwelcome jolt Wednesday as Fitch Ratings cut its sovereign credit rating to the lowest level of any of the major agencies, citing the heavy burden of bailing out the country’s banking sector.

Fitch cut Ireland’s long-term foreign- and local-currency ratings to A+ from AA-. Moody’s Investors Service, which warned Tuesday that it was reviewing the country for a possible downgrade, and Standard & Poor’s both rate Irish debt higher.

The move “reflects the exceptional and greater-than-expected fiscal cost associated with the government’s recapitalization of the Irish banks, especially Anglo Irish Bank,” Chris Pryce, Fitch’s director of sovereign ratings said in a statement.

The Bank of Canada has released a Working Paper by James Chapman, Jonathan Chiu, and Miguel Molico titled Central Bank Haircut Policy:

We present a model of central bank collateralized lending to study the optimal choice of the haircut policy. We show that a lending facility provides a bundle of two types of insurance: insurance against liquidity risk as well as insurance against downside risk of the collateral. Setting a haircut therefore involves balancing the trade-off between relaxing the liquidity constraints of agents on one hand, and increasing potential inflation risk and distorting the portfolio choices of agents on the other. We argue that the optimal haircut is higher when the central bank is unable to lend exclusively to agents who actually need liquidity. Finally, for an unexpected drop in the haircut, the central bank can be more aggressive than when setting a permanent level of the haircut.

The TMX has a new page showing Bond Market Data. The data from today (labelled July 19, 2010), showing $20.04-billion face nominal Canadas being traded vs. $0.01-billion face RRBs, should illustrate the points I have made at various time regarding the relative liquidity of the latter! I presume – but do not know – that they get their trading statistics from the same data set used for their prices, which are major Canadian dealers.

The Canadian preferred share market showed continued strength on continued high volume, with PerpetualDiscounts gaining 17bp and FixedResets up 10bp.

PerpetualDiscounts now yield 5.47%, equivalent to 7.66% interest at the standard conversion factor of 1.4x. Long corporates now yield 5.2% so the pre-tax interest-equivalent spread (also called the Seniority Spread) now stands at about 245bp, a sharp decline from the 260bp reported on September 30.

The European stress tests are encountering renewed criticism:

The health check, undertaken by the Committee of EuropeanBankingSupervisors (CEBS), tested sovereign debt holdings in short-term trading books but turned a blind eye to the longer-term banking books. Then it emerged that the so-called “gross disclosures” weren’t gross at all. The latest Irish bank bailout has now revealed a third flaw.

The tests were supposed to reassure global investors by showing that systemically important eurozone banks could survive what was perceived as their biggest threat — a sovereign default. But the tests skirted around the Irish situation in two ways. First, Ireland’s banks have failed due to an immense property crash, not a sovereign crisis. Second, the biggest disaster zone — Anglo Irish Bank — was not even stress-tested.

Jerome Kerviel, the SocGen trader who was in the position of a drug mule caught at customs, has been sentenced to three years in jail:

Former Societe Generale (SOGN.PA) trader Jerome Kerviel was sentenced to three years in jail by a Paris court on Tuesday for his role in a trading scandal and ordered to pay the French bank 4.9 billion euros ($6.8 billion).

The verdict came as a victory for SocGen, which always maintained Kerviel acted alone and without the sanction of his managers at the bank. It had sought payment of damages for the money it lost unwinding the trader’s risky market bets in 2008.
…
The payment to SocGen equates to 3.2 percent of France’s central government deficit for 2010, the GDP of Monaco or 16 percent of the French bank’s market value. Kerviel is currently paid 2,300 euros a month as a technology consultant.

Kerviel was last discussed on PrefBlog on May 3. There is no indication that any of those actually responsible have even been charged.

Moody’s warns on Ireland:

Moody’s Investors Service said Tuesday it may cut Ireland’s debt rating again, citing the increased cost to the government of repairing the stricken banking system, weak economic growth and rising borrowing costs.

A further downgrade could push Ireland’s borrowing costs higher and make it more difficult for the government to meet its debt repayments without seeking help from the European Union’s European Financial Stability Fund.

“Me, too!”, shouts DBRS. The EU bureaucrats will have to take decisive action, as discussed October 1.

Norwegian police are feverishly attempting to make the markets safe for the incompetent:

Two day traders have been arrested by Norwegian police for allegedly cracking an algorithm of U.S. brokerage firm Timber Hill, in order to manipulate the stock prices of three companies listed on the Oslo Stock Exchange.

The two day traders, Svend Egil Larsen and Peder Veiby, have been charged with “market manipulation” and face up to six years in jail if convicted. Timber Hill is a subsidiary of Interactive Brokers and acts as its market maker.
…
Norwegian police claim that between March 2007 and March 2008, the two traders conducted more than 2,200 purchase and sale orders which were “ not real” and jacked the price of the shares in three Norwegian companies up or down before taking a profit Bottom line: the two day traders outsmarted Timber Hill’s algorithm and made money in the process. The three Norwegian companies were Hafslund, Wilh. Wilhelmsen and Odfjell.

Veiby earned 250,000 Norwegian kroner ($40,698) in the alleged scam while Larsen earned 160,000 Norwegian kroner ($26,056). Timber Hill did not return Securities Technology Monitor’s call seeking comment by press time.
…
“In our view it is a deliberate manipulation against the computer they’ve been trading against so that the system changed the prices and they were able to earn money,” said Christian Steinberg with the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime in an interview with the Norwegian newspaper Dagens Naeringsliv.

The newpaper report said that Larsen declined to comment and Veiby denied any wrongdoing on the grounds he did “not act with the intent to commit price manipulation in the legal sense.” The alleged scam was uncovered by the Oslo Stock Exchange, which reported it to the Norwegian National Authority and Prosecution of Economic and Environmental Crime.

I don’t see that anything wrong was done at all. Willing buyer, willing seller, arm’s length … what’s the problem? Trades “not real”? I don’t see it. They owned the stock, they had the risk, there was transfer of risk … if Timber Hill can’t programme its algorithms better than that, the individuals charged have done a service to the market by taking capital away from those unable to deploy it with competence. Timber Hill’s only possible excuse is that the amounts were so small (less than $100,000 total profit for a year) that the efect was lost as a rounding error … but that’s a pretty flimsy excuse.

However, according to the Google translation of a story in Norwegian titled Klart dette er greit, the story is more complex than reported above – naturally enough:

The two exploited a weakness in the computer algorithm in the near half a year without Hill Timberlake discovered it. This week in Oslo District Court has been discussed in court if the two ran the illegal market manipulation, or whether they simply were smarter than any other market player.

– It is obvious that what they have done is okay, says Jan Erik Meidell.

Meidell was employee number three when he started in Timber Hill in 1994. He helped build the brokerage house’s position in market making in Europe, and was one of two managers for their trading in Europe. Meidell ruled the so-called share the robots, and he claims to know the Timber Hills algorithms and trading strategies in detail. Today Meidell PhD student at NHH and co-owner of the investment fund NorthSeaGem.

He believes it is “nonsense” that the two persons now sitting accused of having exploited a weakness in Timber Hills algorithms.

– Timber Hill has chosen a strategy that involves risk and acknowledge that it sometimes will lead to losses, “says Meidell to dn.no
…
– What do you think that people take advantage of the robot’s weakness when the opportunity occasionally arises?

– Sure it’s okay. Whoever is to play, must withstand the roast, “says Meidell.

The most important point is that Timber Hill is fully aware that they can not have full control over all shares always mean Meidell. It is not so important – the overall strategy is in fact profitable strategy for Timber Hill.

– They think that what they lose in one stock, it will win them back in others. Does the strategy in more than 50 percent of cases, so you earn bucks, and it’s just that Timber Hill, says Meidell.
…
Timber Hill has been absent in the trial which is now in the Oslo City Court, and they have not wanted to respond to Dagens Næringsliv inquiries.

– I think Timber Hills reaction ultimately had been “awesome, you managed to crack our algorithm. Perhaps they had even offered them jobs, “says Meidell.

So .. who knows? However, it does look a little as if the Norwegian regulator is attempting to ensure that incompetent traders are protected, and that the stock market is a nice little place where children play nicely.

Another strong day on heavy volume for the Canadian preferred share market, with PerpetualDiscounts up 30bp and FixedResets tagging along for a 9bp gain.

Yankee Bonds are surging in popularity:

Foreign borrowers are claiming the biggest share of the U.S. corporate bond market in at least a decade, taking advantage of record investor demand for dollar- denominated debt.

The overseas issuers, known as Yankee borrowers, account for 43 percent of sales this year, compared with 37 percent in 2009 and an average 23 percent from 1999 to 2009, according to data compiled by Bloomberg. Reliance Industries Ltd, India’s biggest company by market value, plans to sell at least $1 billion of bonds in its first benchmark offering in dollars.
…
U.S. bond mutual funds have taken in $181 billion this year through September, compared with $7.3 billion for European bond funds, according to EPFR Global in Cambridge, Massachusetts. In the first nine months of 2009, U.S. fund inflows were $134.8 billion compared with $2.4 billion in Europe.

More divergence in the Canadian preferred share market today, as PerpetualDiscounts gained 14bp while FixedResets were basically flat, with continued heavy volume.

Towers Watson has released a series of promotional reports:Pension Finance Watch:

Long bond yields plunged in August, pushing liability values up dramatically. Equity values also declined significantly during the month. This rather unfortunate combination of capital market events means bad news for pension plan funded ratios. The Towers Watson Pension Index declined by 7.4% for the month to 60.0. This is the lowest recorded funded ratio in our data series extending back to 1990.

P&I / TW 300 Analysis:

Research conducted by Pensions & Investments and Towers Watson has found that total assets of the world’s largest 300 pension funds grew by over 8% in 2009, to US$11.3 trillion, up by around US$1 trillion from last year’s figure.

Some cheerful news from the States: the California 2010 Debt Affordability Report:

Because debt service is considered a fixed part of a State’s budget, credit analysts compare a state’s General Fund-supported debt service to its General Fund revenues as a measure of the state’s fiscal flexibility. California’s ratio of debt service to General Fund revenues was 6.69 percent in 2009-10, based on $5.790 billion in GO, lease revenue and Proposition 1A Receivables debt service payments versus $86.521 billion in General Fund revenues. This ratio is projected to be 7.17 percent in 2010-11, based on $6.558 billion5 in debt service payments versus $91.451 billion in General Fund revenues as projected by the Department of Finance.

The EU has an interesting approach to their sovereign debt crisis: make rating sovereigns a risky business:

Ministers are “ready to discuss” fines for ratings companies who mislead investors with poor quality ratings for securities, Swedish Finance Minister Anders Borg said in Brussels, while Didier Reynders, the Belgian finance minister, said “we do need a regulation on that, it’s very clear.”
…
“Concern has been expressed on whether the ratings of sovereign debt are necessary at all given the fact that there is already a large degree of transparency in the markets as regards the situation of government finance,” according to the commission document, dated Sept. 15.

The European Union approved rules for credit-rating companies last year, requiring them to adhere to a code of conduct to reduce conflicts of interest between issuers and rating firms.

These are the guys, remember, who were willfully blind to the falsification of Greek debt data. as discussed on March 1.

The Canadian preferred share market started the quarter with another day of mixed results on heavy volume, as PerpetualDiscounts gained 24bp and FixedResets lost 9bp.

Fabulous Fab, the bond salesman scapegoated for personally causing the Panic of 2007, and useful misdirection from the SEC’s incompetence, has claimed the SEC has no jurisdiction anyway:

The Securities and Exchange Commission can’t sue Fabrice Tourre over a Goldman Sachs Group Inc. deal involving collateralized debt obligations because the transaction wasn’t in the U.S., his lawyers told a judge.

The U.S. Supreme Court ruled in June that U.S. securities laws don’t apply to claims of foreign buyers of non-U.S. securities on foreign exchanges, lawyers for the Goldman executive director said in a court filing yesterday. The collateralized debt obligations known as Abacus at issue in the SEC’s complaint weren’t listed on any exchange and the sole investor in the notes was a foreign bank that purchased them overseas, according to the filing.

Another junk fund is starting:

Brompton Advantaged Tactical Yield Fund is an investment fund established under the laws of the Province of Ontario and governed by the Declaration of Trust. See “Overview of the Legal Structure of the Fund”.

Rationale The Fund has been created to provide investors with the opportunity to gain exposure to a diversified Portfolio focused on North American High-Yield Bond and Dividend Paying Equity securities, which offer attractive yields along with upside participation in the ongoing economic recovery. The Portfolio Manager expects that the Portfolio will initially be invested as to approximately 70% in High-Yield Bonds, 20% in Dividend Paying Equity securities, and 10% in Investment Grade Bonds.

This comes after the launch of the nonsensical iShares(R) DEX HYBrid Bond Index Fund, which has nothing to do with hybrid bonds, as the term is understood by the entire world except for the TMX and Blackrock’s marketting team. They just needed a word with HY in it (for High Yield, since “junk” is considered pejoritive) and didn’t want to use “HYacinth” … or “HYundai” … or … um … er … “HYmas” (licencing fees on that one would have been astronomical).

And, of course, all the junk coming out of new preferred issues. This is going to end badly.

Mixed results in the Canadian preferred share market on continued heavy volume, as PerpetualDiscounts were almost precisely flat on the day while FixedResets continued their recent slide by losing 16bp.

PerpetualDiscounts now yield 5.53%, equivalent to 7.74% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.15%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 260bp, a meaningless apparent tightening from the 265bp reported September 29.

Long corporates have been on a tear this month:

Click for big

And that’s a wrap for another month and another quarter!