PrefBlog

Who says Canada’s big financial institutions aren’t responsive and socially forward-looking? They have demonstrated yet again their concern about the financial comfort of the mentally deficient:

A group including Royal Bank of Canada and five other large investment firms is launching a competitor to the Toronto Stock Exchange, which handles the most trading in Canada.

The new market is designed to attract investors who are upset with what they see as unfair competition from high-frequency traders, who use ultrafast computers to exploit market quirks or to try to get ahead of other investors. The success of the new exchange may hinge on how much discontent there is with high-frequency trading (HFT) activity.
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The plan is the product of months of work by RBC and a group of supporters including mutual fund giants IGM Financial Inc. and CI Financial Corp., Canadian pension fund PSP Investments and international brokerages ITG and Barclays.

‘Boo-hoo-hoo!’ cry the traders, “Our lunch is being eaten by a mob of parvenu geeks who understand these complicated computer thingamajigs! Save us, save us!’

‘Certainly!’ answer the bosses. ‘We’ll open up a new exchange that makes competition illegal! That will boost profits and cover up our incompetence!’

‘Great idea!’ enthuse the regulators. ‘Just give us a little cut of the take and we’ll make the Competition Act … go away.’

Aequitas, naturally enough, claims its major purpose is to enable double-dipping on transaction fees paid by clients:

Our stakeholders are professional money managers, pension funds, institutional and retail brokers and Canadian issuers, who believe there should be a level playing field for all market participants. A new and different exchange that strikes the right balance between liquidity, price discovery and cost efficiency, and enhances markets for the long-term investor.

It was another day of impressive bounce-back for the Canadian preferred share market, with PerpetualPremiums winning 66bp, FixedResets gaining 26bp and DeemedRetractibles up 65bp. The Performance Highlights table is suitably lengthy. Volume was very high.

PerpetualDiscounts now yield 5.65%, equivalent to 7.34% interest at the standard equivalency factor of 1.3x. Long Corporates now yield 4.65%, so the pre-tax interest-equivalent spread is now about 270bp, hugely elevated from post-Crunch norms and from the 235bp reported June 12.

In today’s news, a politician announced that insurance companies have lots of money so people should be encouraged to build on floodplains:

Insurance companies are between a rock and a hard place. The potential cost of overland flood insurance is enormous but, at the same time, Feltmate said companies are aware there are repercussions for the industry’s already dismal image in continuing to allow victims of devastating floods to “go apoplectic” when they discover they’re not covered.

Moreover, if the industry doesn’t deal with the issue itself, he said the government could impose a solution that is less palatable.

Immigration Minister Jason Kenney, the minister responsible for southern Alberta, strongly encouraged insurance companies on Monday to pay the claims of people whose homes were damaged by both backed up water and overland flooding, without being overly nit-picky about the exact cause of the damage.

Or, to put it another way:

The map of flood plain for 70-yr flood is shown in next page. Much of Downtown, Sunnyside, Bowness, and other residential areas are under water. This size of flood has not occurred since 1932, but it could occur anytime.

The City proposed management plans, but met with great disfavor by community group, who were worried that property values would decline if hazard zones were officially declared.

I grumbled about the closing quote on GWO.PR.I yesterday …. it turns out that most of the problem was the ridiculous TMX Close != Last issue. Some very expensive data purchased from the TMX has revealed that the closing quote was 21.75-21, 5×5 … a pretty wide spread, but not as nonsencical as the 21.01-22.21 last quote which, in their infinite wisdom, the TMX has decided to sell exclusively and is usually reported as the “closing” quote.

The imminent end of the world forecast by the Canadian preferred share market was postponed today, with PerpetualPremiums up 50bp, FixedResets gaining 34bp and DeemedRetractibles winning 101bp. These rather attractive index numbers masked a fair bit of chopping and changing, with there being a fair number of losers on the Performance Highlights list.

Nice quote from Richard Fisher of the Dallas Fed:

Investors shouldn’t overreact to the central bank’s plans to reduce the pace of asset purchases, Fisher said in an interview with the Financial Times published today on its web site. Investors behaved like “feral hogs” after the June 19 comments by Bernanke, he said, according to the newspaper.

Nothing moves as quickly as retail:

According to TrimTabs Investment Research, investors are selling bond-related investments at a record pace, with $47.2-billion (U.S.) flowing out of U.S. bond mutual funds and exchange-traded funds so far in June, easily exceeding the record of $41.8-billion set in October, 2008, during the financial panic.

Meanwhile, at the Canadian preferred share investor convention:

The Canadian preferred share market was left a shambles after a day of slaughter, with PerpetualPremiums losing 158bp, FixedResets off 78bp and DeemedRetractibles down 123bp. The Performance Highlights table is suitably ridiculous with … um … LOTS! That’s right, LOTS of entries … and a solitary winner. Volume was gargantuan.

I noted on June 19 that James Bullard of the St. Louis Fed had dissented against the latest decision. He has taken the unusual – but certainly not unknown – step of explaining why:

Federal Reserve Bank of St. Louis President James Bullard dissented with the Federal Open Market Committee decision announced on June 19, 2013. In his view, the Committee should have more strongly signaled its willingness to defend its inflation target of 2 percent in light of recent low inflation readings. Inflation in the U.S. has surprised on the downside during 2013. Measured as the percent change from one year earlier, the personal consumption expenditures (PCE) headline inflation rate is running below 1 percent, and the PCE core inflation rate is close to 1 percent. President Bullard believes that to maintain credibility, the Committee must defend its inflation target when inflation is below target as well as when it is above target.

President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed. The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store. President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.

In addition, President Bullard felt that the Committee’s decision to authorize the Chairman to make an announcement of an approximate timeline for reducing the pace of asset purchases to zero was a step away from state-contingent monetary policy. President Bullard feels strongly that state-contingent monetary policy is best central bank practice, with clear support both from academic theory and from central bank experience over the last several decades. Policy actions should be undertaken to meet policy objectives, not calendar objectives.

While President Bullard found much to disagree with in this decision, he does feel that the Committee can conduct an appropriate and effective monetary policy going forward, and he looks forward to working with his colleagues to achieve this outcome.

Sun Life Financial’s sale of its US annuities book met a small positive response from the Credit Rating Agencies. Now, SLF has announced:

On December 17, 2012, Sun Life Financial Inc. (TSX: SLF) (NYSE: SLF) entered into a definitive stock purchase agreement to sell its U.S. annuities business and certain of its U.S. life insurance businesses to Delaware Life Holdings, LLC, which was expected to close before the end of the second quarter of 2013, subject to regulatory approvals and other closing conditions. Approvals for the transaction have since been obtained from a number of regulators, including the Delaware Department of Insurance and the Financial Industry Regulatory Authority (FINRA). The approval process is also underway with the New York Department of Financial Services. The Department has recently undertaken a review of private investor groups as owners of annuity businesses, and we anticipate that the review will delay the close of the transaction beyond the end of the second quarter of 2013. We are continuing to work with Delaware Life Holdings, LLC, to obtain approval from the New York Department of Financial Services for the transaction and to close the transaction as soon as possible. Both parties have made substantial progress in preparing for the close and for the transition of employees and operations to support the business going forward.

The NY Dept. of Financial Services has made waves before:

The regulator, led by Superintendent Benjamin Lawsky, has expressed concern over whether the firms will be sufficiently careful with investments that back long-term obligations to retirement savers. Guggenheim, Apollo and Harbinger have announced deals to buy units that sell fixed annuities, which provide streams of payments to retirees and other customers.

“The risk that we’re concerned about at DFS is whether these private-equity firms are more short-term focused, when this is a business that’s all about the long haul,” Lawsky said in an April 18 speech. “Their short-term focus may result in an incentive to increase investment risk and leverage in order to boost short-term returns.”
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Lawsky is seeking e-mails, pitchbooks, memos, and information about investment allocations and return assumptions, the person said. Bloomberg reported last month that Wall Street firms have been acquiring life insurance companies and adding investments such as mortgage-backed securities that have drawn attention from regulators accustomed to simpler portfolios.

The regulator wants to understand the risks the companies are taking on and how they’re presenting the deals to investors, and the information may be used to craft new regulations, the person said. The Wall Street Journal reported on the subpoenas earlier today.

US regulators are considering a DSIB rule that actually means something:

U.S. regulators last year proposed implementing the 3 percent international requirement for what’s known as the simple leverage ratio. Now the Federal Reserve and Federal Deposit Insurance Corp., under pressure from lawmakers, are weighing increasing that figure for some of the biggest banks, according to the people, who asked not to be identified because the discussions are private.

“The 3 percent was clearly inadequate, nothing really,” said Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. “Going up to five or six will make the rule be worth something. Having a lot of capital is crucial for banks to be sound. The leverage ratio is a good safety tool because risk-weighting can be gamed by banks so easily.”
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By going above the figure adopted in 2010 by the Basel Committee on Banking Supervision, the U.S. also could put pressure on Europe to affirm its commitment to the standard, which is seen as a tool to rein in risk in the financial system. Regulators in the U.K. and Switzerland told banks yesterday to increase their ratios of capital to total assets.

U.S. banks have had to comply with a simple leverage requirement of 4 percent for two decades. The new version, proposed last June, expands the definition of what counts as assets in calculating the ratio, incorporating some commitments such as lines of credit kept off balance sheets under current accounting rules. The draft is an attempt to bridge U.S. and international accounting standards.
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FDIC Vice Chairman Thomas Hoenig has called for scrapping risk-based rules entirely in favor of a 10 percent leverage ratio, calculated to include even more off-balance-sheet assets than allowed under Basel and define capital more narrowly. To reach Hoenig’s requirements, the three largest U.S. banks — JPMorgan, Bank of America and Citigroup (C) — would have to stop distributing dividends for about five years, according to FDIC data and analysts’ earnings expectations compiled by Bloomberg.

The Systemic Risk Council, an advisory group led by former FDIC Chairman Sheila Bair, has called for 8 percent. Bair fought for a global leverage ratio in Basel committee meetings when she led the U.S. agency.

A bipartisan Senate bill introduced in April by David Vitter, a Louisiana Republican, and Ohio Democrat Sherrod Brown would set the leverage ratio at 15 percent. Banks have assailed the proposal. It “would limit an institution’s ability to lend to businesses, hampering economic growth and job creation,” the Securities Industry & Financial Markets Association, a Washington-based lobbying group, said at the time.

A modest upward move in the overall index (TXPR up 10bp) masked a great deal of internal movement for the Canadian preferred share market today, with PerpetualPremiums down 19bp (a lot of these are actually ‘PendingPerpetualDiscounts’ at this time, of course), FixedResets gaining 4bp (despite poor performance from the new issue, which was just a catch-up) and DeemedRetractibles winning 43bp. There is another very lengthy Performance Highlights table as the market readjusts to new levels; there’s no readily discernable pattern in these returns. Volume remained very high, but well off yesterday’s peak.