PrefBlog

The US regulatory agencies are seeking comment on Swap Margin and Capital Requirements:

The amount of margin that would be required under the proposed rule would vary based on the relative risk of the counterparty and of the swap or security-based swap. A swap entity would not be required to collect margin from a commercial end user as long as its margin exposure is below an appropriate credit exposure limit established by the swap entity. A swap entity would also not be required to collect margin from low-risk financial end users as long as its margin exposure does not exceed a specific threshold. The proposed margin requirements would apply to new, non-cleared swaps or security-based swaps entered into after the proposed rule’s effective date. The proposal also seeks comment on several alternative approaches to establishing margin requirements.

The BoC did not adjust the overnight rate:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.
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Overall, the Bank projects that the economy will expand by 2.9 per cent in 2011 and 2.6 per cent in 2012. Growth in 2013 is expected to equal that of potential output, at 2.1 per cent. The Bank expects that the economy will return to capacity in the middle of 2012, two quarters earlier than had been projected in the January MPR.

While underlying inflation is subdued, a number of temporary factors will boost total CPI inflation to around 3 per cent in the second quarter of 2011 before total CPI inflation converges to the 2 per cent target by the middle of 2012. This short-term volatility reflects the impact of recent sharp increases in energy prices and the ongoing boost from changes in provincial indirect taxes. Core inflation has fallen further in recent months, in part due to temporary factors. It is expected to rise gradually to 2 per cent by the middle of 2012 as excess supply in the economy is slowly absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.

The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts losing 9bp, FixedResets gaining 11bp and DeemedRetractibles being smacked for a lossof 28bp. Still not too much volatility, with only three entries in the Performance Highlights table. Good volume featured total domination of the highlights table by FixedResets.

Asset Management via mass-customization is attracting attention in the States:

The next thundering herd on Wall Street may be the ranks of low-cost portfolio managers such as MarketRiders and Folio Investing, which cater to self-directed investors like Cohen. Sites that sell prepackaged portfolios have attracted more than $3 billion in assets over the last three years as more investors leave their full-service brokers.

“Individual investors have started to realize they can actually do some things as self-directed investors reasonably well, if they’re given a platform that allows them to invest more intelligently,” said Steven Wallman, chief executive officer of Folio Investing, where investors can purchase predesigned and customized index portfolios for $29 a month.

Some of the firms, such as Flat Fee Portfolios, are too new to have any performance history. MarketRiders can’t track the actual performance of its customers’ accounts, since it doesn’t have custody of their assets. Covestor and Wealthfront Inc., which give users access to third-party investors, publish performance history for the managers they work with on their sites.

Of course, the big problem with mass-customization is that the decision makers won’t play golf with you:

“Who are the people that are advising me when I’m going to a faceless website?” said Chris Walters, head of wealth management for Pasadena, California-based CitizensTrust. He said investors should be concerned by the lack of performance history available from some of the firms.

But we’ll cut Mr. Walters some slack, as a reward for mentioning the word “performance”. Of course, I don’t see a prominent link to “Performance” on his website.

So much fuss over the leaders’ election debate! It’s a disgrace – the boys have a place to debate each other all the time if they want to … it’s called parliament. But I guess they’re too busy playing thumpy-thumpy on their wickle desks.

Another unpleasant day for the Canadian preferred share market, with PerpetualDiscounts down 25bp, FixedResets losing 6bp and DeemedRetractibles hit for 14bp. Volatility remained low, with only three entries on the performance highlights table. Volume was a little below average.

It looks like the Australians are just as frightened of competition as we are:

Australian Treasurer Wayne Swan rejected Singapore Exchange Ltd. (SGX)’s bid for ASX Ltd. (ASX), saying the deal was not in his nation’s interest and would have left the local bourse operator as a junior partner.

“It was a no brainer that this deal was not in Australia’s national interest,” Swan told reporters today in Canberra, three days after the nation’s Foreign Investment Review Board advised the government to reject it. “At the end of the day this takeover was more about growing Singapore’s financial sector than Australia’s. I am open to the right deal for Australia if it comes along.”
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“Let’s be clear here: this is not a merger,” Swan said today. “It’s a takeover that would see Australia’s financial sector become a subsidiary to a competitor in Asia.”

The Boston Fed has released a Public Policy Discussion Paper by Kevin Foster, Erik Meijer, Scott Schuh, and Michael A. Zabek titled The 2009 Survey of Consumer Payment Choice:

This paper presents results of the 2009 Survey of Consumer Payment Choice (SCPC), along with revised 2008 SCPC data. In 2009, the average U.S. consumer held 5.0 of the nine payment instruments available, including cash, and used 3.8 of them during a typical month. Between the 2008 and 2009 surveys, a period that includes the trough of the latest recession, consumers significantly increased their use of cash and close substitutes for cash, such as money orders and prepaid cards. At the same time, consumers reduced their use of credit cards and (to a lesser extent) debit cards, as well as payments made using a bank account number. Weaker economic conditions, new government regulations, and bank pricing of payment card services all likely contributed to the shift back toward cash. However, it is difficult to determine how much each of these factors contributed, and whether the shift is transitory or permanent, without more data and research on consumer payment choice. In 2009, one in three consumers had a prepaid card and nearly as many had a nonbank payment account online, while 3 percent made a mobile payment. By focusing on payments by consumers only, the SCPC complements the recent 2010 Federal Reserve Payment Study, which describes the entire noncash payments economy.

The New York Fed has published a defence of QE2 by Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack titled Large-Scale Asset Purchases by the Federal Reserve: Did They Work?.

Based on this evidence, we conclude that the Federal Reserve’s LSAP programs did lower longer term private borrowing rates, which should stimulate economic activity. While the effects are especially noticeable in the mortgage market, they appear to be widespread, extending, for example, to the markets for Treasury securities, corporate bonds, and interest rate swaps. That conclusion is promising, as it means that monetary policy remains potent even after the zero bound is reached. To be sure, achieving this further stimulus was not without its challenges, as it required a sizable expansion of the Federal Reserve’s balance sheet, and the purchase of such a large volume of securities in a relatively short time frame required the surmounting of operational hurdles. However, by restoring functioning to the mortgage market and lowering the term premium, the programs provided considerable benefits.

Portugal’s government fell because the opposition didn’t like the austerity plan. They may have shot themselves in the foot:

Europe’s rich countries pushed Portugal to make deeper-than-planned budget cuts in the heat of an election campaign in exchange for an emergency aid package estimated at 80 billion euros ($115 billion).

In an unprecedented intervention in national politics, euro-area finance ministers said an offer of relief would hinge on Portugal’s feuding leaders making cuts that go beyond measures that failed to pass parliament in March and triggered early elections.

But I’m sure that Portuguese politics is no different in substance from Canadian politics. The politicians don’t care if what they say makes any sense, or whether what they do actually improves things: they’ve said something popular and hope to increase their vote.

The latest joke out of the US is the JOINT STUDY ON THE FEASIBILITY OF MANDATING ALGORITHMIC DESCRIPTIONS FOR DERIVATIVES:

Section 719(b) of the Dodd-Frank Act requires the SEC and the CFTC (collectively the “Commissions”) jointly to study (the “Study”) the “the feasibility of requiring the derivatives industry to adopt standardized computer-readable algorithmic descriptions which may be used to describe complex and standardized financial derivatives,” and the extent to which such algorithmic descriptions, together with standardized legal definitions, “may serve as the binding legal definition of derivative contracts.”1 The statute also requires us to examine the “logistics of possible implementations of standardized algorithmic descriptions for derivatives contracts.” Thus, the Study presents two key questions. First, is computer technology capable of representing derivatives with sufficient precision and detail to facilitate collection, reporting, and analysis of risk exposures, including calculation of net exposures, as well as to function as part or all of a binding legal contract? Second, if the technological capability exists, in consideration of the logistics of possible implementation, should these standardized, computer-readable descriptions be required for all derivatives?

Seeing as how a large proportion of deriviatives (by number, not by traded value) are designed to allow pseudo-managers with a bond mandate to get non-bond exposure, that might be a little difficult! Anyway:

Based on the public input and its own analysis, the staff conclude, with respect to the first question, that current technology is capable of representing derivatives using a common set of computer-readable descriptions. These descriptions are precise enough to use both for the calculation of net exposures and to serve as part or all of a binding legal contract.

As to question two, the staff conclude that before mandating the use of standardized descriptions for all derivatives, the following are needed: a universal entity identifier and product or instrument identifiers, a further analysis of the costs and benefits of having all aspects of legal documents related to derivatives represented electronically, and a uniform way to represent financial terms not covered by existing definitions.

Plain vanilla! Plain vanilla for everyone!

It was a bad day for the Canadian preferred share market, with PerpetualDiscounts getting whacked for 30bp, FixedResets off 7bp and DeemedRetractibles down 17bp. For all that, there wasn’t much volatility, with only one entry in the Performance Highlights table. Volume was very light.