PrefBlog

The war on traders is having one predictable effect:

Junior bankers in the United Arab Emirates are reaping almost 36 percent more salary than their counterparts in London, with bonuses almost double those paid in the U.K. capital, compensation data provider Emolument said.

Fixed salaries at the analyst level in the U.A.E. average $91,000, compared with $73,000 in London, the group said in an e-mailed statement. Bonuses in the U.A.E., which consists of sheikhdoms including Dubai and Abu Dhabi, averaged $27,000 compared with $14,000. For associates, fixed pay in the U.A.E. was $107,000, compared with $108,000 in London, while bonuses of $40,000 in the U.K. were about 29 percent higher.

The SEC is hoping to destroy the remnants of the public bond market:

The U.S. Securities and Exchange Commission is examining how electronic bond-trading platforms allow dealers to give clients different prices on the same securities in the $40 trillion market, potentially hurting smaller investors.

SEC regulators want to understand why brokers sometimes block their rivals and clients from seeing some of their prices for municipal, corporate and other bonds, according to a person with direct knowledge of the examination. They’re concerned that being able to turn quotes on and off may allow market manipulation, and that smaller buyers may not get the best prices, the person said.
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Banks have increasingly turned to electronic systems to sell bonds on behalf of their clients as a way of aggregating a greater number of bids. That’s become more appealing as it’s become more expensive for dealers to use their own money to make markets because of higher regulatory capital requirements.

U.S. investment firms predict that 30 percent of corporate-bond trading will occur electronically by 2015, up from 14 percent of investment-grade notes in 2012, according to an August 2013 report by Greenwich Associates and McKinsey & Co. As much as 50 percent of municipal trades already may occur electronically, according to a TMC Bonds comment letter to the SEC last year.

Today was something of a non-event for the Canadian preferred share market, with PerpetualDiscounts and FixedResets both flat, while DeemedRetractibles were off 3bp. Volatility was minimal. Volume was above average.

Jonathan Weil of Bloomberg decries regulatory extortion:

New York Attorney General Eric Schneiderman is out again with another reminder that he doesn’t like the way high-frequency traders operate. He believes they have unfair advantages, and that it’s a bad idea for stock exchanges to sell them special services that cater to their wants. For that matter, so do I. So on that we can agree.

But Schneiderman also says there’s something about these arrangements that might be illegal, without saying what it is. If that’s true, he ought to spell it out. Instead, he’s back to his old ways of threatening to investigate companies and maybe sue them for fraud unless they change their practices in a way that he deems acceptable. No matter how noble his intentions, this isn’t how a law-enforcement officer should operate.

Sadly, extortion works:

Marketwired, a company that publishes and distributes corporate earnings and other market-moving news releases, said on Wednesday that it will no longer sell directly to high-frequency trading companies.

The action comes amid a wide-ranging probe by New York Attorney General Eric Schneiderman to end early access to information by technologically sophisticated traders, and follows a similar decision last month by Berkshire Hathaway’s Business Wire.

Marketwired said it would no longer provide its distribution service to high-frequency trading firms to “eliminate any perceived advantages gained through technology by certain customers,” according to a statement.

Naturally, there is a little reaction:

Mark Gorton knows what will happen on the day high-frequency traders’ computers get kicked out of the New York Stock Exchange.

“All you’re going to do is have a data center that’s across the street,” said Gorton, founder of the Lime Wire LLC music-sharing service and managing director of Tower Research Capital LLC, one of the most prolific equity traders in America. “Everyone’s going to want to put their computers there.”
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During a panel discussion yesterday following Schneiderman’s speech, Chad Johnson, chief of the New York Investor Protection Bureau in the attorney general’s office, said his boss doesn’t “pine for the days before electronic trading,” and recognizes there were issues in the past.

“The focus of our initiative is on the abusive practices, the latency arbitrage and the like,” Johnson said yesterday. “The strategies are ultimately extracting from the capital markets enormous sums of money and not providing benefit that makes that worthwhile,” he added. “You don’t necessarily have to get rid of the bad and toss the good — if there is good — at the same time.”

At issue is a model that regulators have permitted for years. Firms pay to place their systems in the same data centers as the exchanges, letting them directly plug in their companies’ servers and trade thousandths or even millionths of a second faster. They also purchase proprietary data feeds, which are faster and more detailed than the stock-trading information available on the public ticker.

The fact is that the market structure rewards speed. So there’s going to be competition for speed. I don’t see that there’s any way around that, even supposing that a rational person would want to get around that. The best that the regulators can do – assuming they are stupid enough to do it – is create a forest of totally arbitrary rules, which people will then devote vast resources to getting around. Sheer craziness. But Gorton’s last point is best:

“It’s true that grandma is not putting a computer in the data center to execute her orders,” Gorton said. “But when she routes her orders through a brokerage firm, that firm has an order and now actually the computer at the brokerage firm and the computer of the professional traders are on an exact level playing field.”

Exactly. It’s called competition. Why is Schneiderman so eager to protect the incompetent?

The article referenced a paper by Eric Budish†, Peter Cramton and John Shim titled The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response:

We argue that the continuous limit order book is a flawed market design and propose that financial exchanges instead use frequent batch auctions: uniform-price sealed-bid double auctions conducted at frequent but discrete time intervals, e.g., every 1 second. Our argument has four parts. First, we use millisecond-level direct-feed data from exchanges to show that the continuous limit order book market design does not really “work” in continuous time: market correlations completely break down at high-frequency time horizons. Second, we show that this correlation breakdown creates frequent technical arbitrage opportunities, available to whomever is fastest, which in turn creates an arms race to exploit such opportunities. Third, we develop a simple new theory model motivated by these empirical facts. The model shows that the arms race is not only socially wasteful – a prisoner’s dilemma built directly into the market design – but moreover that its cost is ultimately borne by investors via wider spreads and thinner markets. Last, we show that frequent batch auctions eliminate the arms race, both because they reduce the value of tiny speed advantages and because they transform competition on speed into competition on price. Consequently, frequent batch auctions lead to narrower spreads, deeper markets, and increased social welfare.

The FOMC announced more tapering:

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

Mexico is issuing long bonds:

When a French utility completed its sale of 100-year bonds denominated in pounds in January, Mexico took note.

Four years after becoming just the second country to sell dollar debt due in 100 years, Mexico last week issued 1 billion pounds ($1.66 billion) of securities that mature in 2114, becoming the only nation with two century bonds. U.K. investors accounted for 84 percent of buyers in the March 12 offering, said Alejandro Diaz de Leon, Mexico’s public debt chief. The sale by Electricite de France SA in January underscored the pent-up demand for longer-dated debt in pounds, according to Barclays Plc, which helped underwrite both deals.

“Mexico historically has distinguished themselves from other sovereigns in terms of always looking at creative ways of getting more efficiency in terms of their debt management strategy,” Raul Martinez-Ostos, head of Mexican operations at Barclays, said by phone from Mexico City. “Here it was really driven by real-money institutional accounts in the U.K.”

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 6bp, FixedResets up 10bp and DeemedRetractibles gaining 5bp. Volatility was low. Volume was low.

PerpetualDiscounts now yield 5.54%, equivalent to 7.20% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.45%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 275bp, a significant widening from the 265bp reported March 12.

Bloomberg’s Matt Levine writes a nice piece on Lloyds bank and regulatory par calls. Looks like a bit more of OSFI-style capital-markets-as-a-cooperative-game legitimate-expectations-of-security-holders garbage:

So Lloyds’s ECNs, like most capital securities, had an explicit regulatory par call, which provided that Lloyds could redeem them at par upon a “Capital Disqualification Event,” which would occur if they didn’t count as tier 2 capital or if they “cease to be taken into account ” by the U.K.’s Prudential Regulation Authority “for the purposes of any ‘stress test’ applied by the PRA in respect of the Consolidated Core Tier 1 Ratio.” And, earlier this year, that happened. (Maybe!)6

So Lloyds can just call them at par. Or, not quite; regulators would probably get mad if Lloyds just got rid of even not-so-good old-timey capital, and anyway that wouldn’t do anything to improve Lloyds’s capital position. Lloyds would have to sell new capital things — 7-percent trigger cocos, most efficiently, or I guess common stock but hahaha who issues common stock? — and use the proceeds to pay off the old ECNs at par.

Alternately Lloyds can buy the old ECNs for their current trading levels, which seem not to take into account the fact that they’re callable at par, which boggles me but is sort of par for the course.[Footnote]

[Footnote reads] Here is Tracy Alloway at FT Alphaville on Credit Suisse’s similarly callable, similarly above-par “Claudius” capital instruments. The link in the text is me making fun of the people buying Claudiuseses at above par, and judging by the reader e-mails I got from that linkwrap I suspect I’m not the only one who’s boggled.

I’ve sent Mr. Levine an eMail alerting him to the Canadian version of the mind-boggler.

The Parakeet has assured us that the lousy economy is not his boss’ fault – it’s those darn boomers again. Who would have thought they’d ever get old?:

We continue to believe that the world economy is healing, and that Canada will benefit in the form of stronger exports. From there, we expect to see more investment and new firm creation. This will permit the emergence of a natural, sustained growth trajectory for Canada, and a return of inflation to our 2 per cent target.

But the demographic forces that are in play suggest that the growth trajectory that we converge on after the recovery period will be slower than our historical trend, and it will also be associated with lower equilibrium rates of interest than we are used to. Fortunately, global policy-makers have the ability to redefine the limits to growth by removing growth impediments, but as business people and investors, we must keep those efforts in perspective.

The dollar dived, since boomers in the US remain youthful:

The loonie, as Canada’s dollar coin is known, was at 90.5 cents when the Bank of Canada posted the governor’s speech on its website, noted chief currency strategist Camilla Sutton of Bank of Nova Scotia.

Within a few minutes, it slipped to 90.2 cents. And by the time he had finished a question-and-answer session, during which he said he couldn’t rule out the possibility of an interest rate cut, the loonie was down to 89.75 cents.

It weakened further from there later in the day.

Spend-every-Penny is approaching his reward:

Yesterday, I informed the Prime Minister that I am resigning from Cabinet. This was a decision I made with my family earlier this year, as I will be returning to the private sector.

I suppose “private sector” means cushy job at a bank.

The touted replacement is probably too old to run for Conservative leadership:

Natural Resources Minister Joe Oliver will become the federal government’s new finance minister, replacing Jim Flaherty who announced his resignation earlier on Tuesday, CBC News has learned.

Oliver will be named finance minister on Wednesday in Ottawa.

Joe Oliver does not yet have an official PrefBlog nickname; he is best known from his days at the IDA, for giving money that should be regarded as public funds to a buddy’s start-up business; that money is all gone now, but what the hell – there’s more where that came from. The buddy was an ex-Executive Director of the OSC – by an amazing coincidence Oliver is also an ex-Executive director of the OSC.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 5bp, FixedResets gaining 13bp and DeemedRetractibles off 2bp. Volatility was average, but uniformly positive. Volume was average.

The wonderful thing about trade is that it’s very difficult to go half-way:

The Ukrainian crisis is putting a strain on Russia’s $2 trillion economy, which grew 1.3 percent in 2013 after expanding 3.4 percent previous year.
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Morgan Stanley (MS) economists Jacob Nell and Alina Slyusarchuk cut their forecast for 2014 growth to 0.8 percent from 2.5 percent according to a note to clients yesterday.

“We see Russia close to recession in the first half of 2014 as a result of the Ukrainian security crisis driving higher rates and risk premia, leading to weaker consumptions and contracting investment,” they wrote.

Capital outflow from Russia may reach $70 billion in the first quarter and there is “a real risk that this could push Russia into recession,” London-based Capital Economics said in a report published yesterday.

There hasn’t been any effect on China … yet. But it will come. Mind you, I don’t expect any road to Damascus conversion by Putin – but the consequences will have an effect on his choices.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 17bp, FixedResets up 5bp and DeemedRetractibles gaining 3bp. Volatility was minimal. Volume was extremely low … all the players were reading PrefLetter!

Some little kids want Mommy to make everything nice:

For nearly a year, a group of major bond investors has been looking for answers to a seemingly simple question — who among Canada’s many regulators is in charge of Cdor [Canadian Dealer Offered Rate], a benchmark rate affecting some $6-trillion bonds, corporate loans, derivatives and other securities held by investors across the country. They have yet to get an answer.

“It’s kind of exasperating,” said Joe Morin, chair of the Canadian Bond Investors Association, which represents some 30 fixed income funds with more than $300-billion of assets. “Nobody has stepped up to take responsibility.”
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On Aug 20, nearly five months [after whimpering to Mommy], they received a reply from the OSC, referring the group to a “review” of Cdor published by another regulator, the Investment Industry Regulatory Organization of Canada, made public in Jan 2013. The review found that the Cdor rate setting process had the “potential” for manipulation. It also found that none of this country’s regulators had proper jurisdiction over the rate.

In January of this year the Office of the Superintendent of Financial Institutions appeared to clear away the regulatory cobwebs, announcing it would “assume a role” in the oversight of Cdor, which was interpreted by many as a declaration that it was taking responsibility for the rate.

But it turned out that was not the case.

“We would like to clarify that OSFI is not the regulator of Cdor,” a spokesman for the regulator said in an email to the Financial Post on Feb 20.

Assiduous Readers will recognize that these are the same box-tickers who want bond covenants standardized in order to reduce the chance they might have to read a term sheet and, even worse, have to take a view on the value difference between slightly different covenants, as discussed on March 10.

Capital Power Corporation, proud issuer of CPX.PR.A, CPX.PR.C and CPX.PR.E, has been confirmed at Pfd-3(low) [Stable] by DBRS:

CPC’s preferred shares rating is based on the credit quality of its subsidiary, Capital Power L.P. (CPLP; rated BBB). The one-notch differential in the ratings of CPC and CPLP reflects structural subordination at CPC.
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CPC has no bonds/debentures issued at the parent level and is not expected to issue any debt in the foreseeable future. CPC currently has $464 million of preferred shares outstanding, of which $73 million is treated as debt by DBRS in CPC’s adjusted debt-to-capital calculation (adjusted debt-to-capital ratio was approximately 3% in 2013). In the adjusted debt-to-capital calculation, the amount of preferred shares over the 20% preferred shares-to-equity threshold (defined as the percentage of preferred shares outstanding divided by total equity, excluding preferreds and minority interest) is treated as debt. CPC’s adjusted debt-to-capital ratio remains in line with its rating category. In addition, the pro forma unconsolidated fixed charge coverage ratio is expected to remain high, at around four times.

It was a mildly negative day for the Canadian preferred share market, with PerpetualDiscounts down 3bp, FixedResets off 1bp and DeemedRetractibles flat. Volatility was not just minimal, it just reversed yesterday’s. Volume was below average.