PrefBlog

5Banc Split Inc., proud issuer of FBS.PR.C, was confirmed at Pfd-2 by DBRS:

The Preferred Shares pay a quarterly fixed, cumulative, preferential distribution of $0.11875 per Preferred Share yielding 4.75% per annum on their initial issue price. Based on the current dividend yields on the underlying banks, the Preferred Share dividend coverage ratio is approximately 2.2 times. Holders of the Capital Shares are expected to receive all excess dividend income after the Preferred Share distributions and other expenses of the Company have been paid.

Since the rating was upgraded in April 2013, the Company’s performance has been positive, with net asset values increasing steadily. Downside protection available to holders of the Preferred Shares was 68.6% as of April 3, 2014.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 3bp, while FixedResets and DeemedRetractibles were both off 5bp. Volatility was minimal. Volume was low, but the highlights are comprised entirely of FixedResets.

Let’s all give three cheers for increased regulation:

New rules aimed at making the world safer from blowups in the $693 trillion derivatives market are poised to drive up costs so much for retirement funds and other users that bankers say they do just the opposite.

The toughened standards, hatched five years ago after derivative losses almost crashed the global economy, are meant to safeguard trades and bring more openness to a market whose secrecy and sheer size overwhelmed regulators in 2008. Where swaps had been one-on-one deals before, now they would be backstopped by third parties in clearinghouses that ensure everyone can pay, with the aim of avoiding emergency bailouts and panic.

Rules being finalized by the Basel Committee on Banking Supervision in Switzerland will require banks to set aside more money in the event the swaps go bad. And not just a little bit more — as much as 92 times, or 9,100 percent, more, according to calculations by three banks shared with Bloomberg News. The higher costs in turn may cause market participants to flee rather than take advantage of the clearinghouses, making it more difficult for those third-party guarantors.
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Since banks act as customers’ gatekeepers to the clearinghouses, the Basel committee wants them to protect themselves — and the global financial system — by matching every dollar they contribute to the default fund with a dollar of capital.

If the rules were adopted, swaps dealers say that only the wealthiest investors would be able to use clearinghouses. Fewer members would mean eroded financial support for the clearinghouses, which are the last backstop before losses are borne by taxpayers.
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Executives in a bank’s treasury department don’t allocate the firm’s money to trading desks without a guarantee that the profit on it will be about 10 percent to 15 percent a year after taxes, depending on the bank. In many cases, banks earn these returns by charging fees to clients.

In one bank’s internal model, a $100 million interest-rate swap between a dealer and its customer prior to the new Basel proposal would have meant that, before taxes, $14,750 in capital had to be set aside.

When the bank’s trading desk asks the firm’s treasury for $14,750 as part of the trade, the traders would have to earn $3,404 per year before taxes for as long as the swap was active. That’s in the old days.

The same $100 million swap would look different under the new proposal. As part of accepting that trade, the clearinghouse would require the bank to deposit $1.2 million into its default fund. Under the Basel committee proposal, the bank would have to have $1.2 million more capital.

According to the dealer bank, it would be required to generate more than $276,000 a year before taxes for that amount of capital. When charges such as the cost of funding and others are added to the trade, the tab balloons to $307,327 a year, the dealer said.

Fortunately, these new rules have been softened:

The Basel Committee on Banking Supervision’s final rule, released today, would require swaps dealers to hold less cash to protect against defaults than did a proposal published last year. The plan now applies a minimum 20 percent risk weighting to money deposited at clearinghouses, which are third parties that guarantee the transactions, down from 1,250 percent in the original proposal. The change takes effect on Jan. 1, 2017.

But central clearing is still a dumb idea.

Here’s yet another indicator that the HFT panic is a marketing gimmick:

Royal Bank has emerged as a leader against predatory high-frequency trading at a time of increasing scrutiny from both regulators and the public after the release of Lewis’s book, which claims the stock market is “rigged” against investors. The bank is described by Lewis as fostering an “RBC nice” culture with its “no asshole rule” on hiring.

High-frequency trading isn’t inherently good or bad, Mills said. The problem arises when certain market players use technology to take advantage of others.

“That’s what we need as an industry, to see regulation mature to the point where it can begin to eliminate those predatory practices, and that’s where we’ll level the playing field,” Mills said in a telephone interview yesterday.

Royal Bank, along with seven partners, owns a stake in and helped found Aequitas, a market with similar goals to IEX. The Toronto-based bank is Canada’s second-largest lender by assets.

“One thing that’s clear is that RBC is the common denominator between IEX and Aequitas,” said Jos Schmitt, chief executive officer at Toronto-based Aequitas, in an April 1 interview at the company’s headquarters in Royal Bank Plaza. “It tells you something about where they come from, what they stand for and what they seek to achieve. They translated that to being the spark in a change on Wall Street and on Bay Street.”

High-frequency trading firms have been accused of ripping off investors in the $22 trillion U.S. stock market by using tactics including paying for the right to trade in dark pools and placing their servers as close to the exchange as possible to speed up trading.

Royal Bank saw what its competitors were doing and decided to go in a different direction, Mills said.

I’ve been saying for a while that the economy’s still no good, and that while government yields are clearly unsustainable, there is not yet a clear trigger of impending doom. Looks like there’s some support for that idea:

Federal Reserve Chair Janet Yellen and her international counterparts are suffering from a case of what psychologists call confirmation bias: They keep insisting inflation will accelerate even as it continues to ebb.

That’s the diagnosis of Ethan Harris, co-head of global economics research at Bank of America Corp. in New York. He says central bankers are seeing what they want to see by blaming subpar inflation in their countries on temporary, partly home-grown forces. That risks ignoring more lasting, global influences ranging from weak worldwide demand and more emerging-market competition to cheap labor in developing nations, cooling commodity prices and technological breakthroughs.

“There is much lower-than-expected inflation showing up in too many places in the world to dismiss it as transitory,” said Allen Sinai, chief executive officer at consultant Decision Economics Inc. in New York.

Almost two-thirds of the 121 economies tracked by Bloomberg are experiencing smaller gains in consumer prices than a year ago, with many undershooting their goals. Global inflation was just 2 percent in February, the lowest since late 2009, when the world was struggling with recession, according to a tally by economists at JPMorgan Chase & Co.

Greece and Ireland were in the bond market today:

Italian bonds gained for a second day and Belgian, French and German securities also rallied. Greek bonds fell, pushing 10-year yields up from near the lowest level since February 2010, as the nation agreed to sell 3 billion euros ($4.17 billion) of five-year notes via banks. Greece received about 600 orders for a total of around 20 billion euros, a person familiar with the sale said. Ireland auctioned 1 billion euros of 10-year debt at a record-low yield.

“Bond markets have woken up on a positive note on the back of a dovish set of Fed minutes,” said Richard McGuire, a fixed-income strategist at Rabobank International in London. “This is a classic case of an improving liquidity outlook raising all boats. The strong demand for Greece’s five-year issue is symptomatic of a positive liquidity outlook trumping more fundamental concern.”

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts winning 16bp, FixedResets up 5bp and DeemedRetractibles gaining 2bp. It is interesting to note that the median YTW on DeemedRetractibles remained negative for the second straight day and the fifth time on record, joining 2012-12-28, 2013-1-4 and 2013-1-10. Volatility was negligible. Volume was below average.

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 3bp, FixedResets up 12bp and DeemedRetractibles gaining 11bp. Volatility was only technically existent. Volume was a little below average.

PerpetualDiscounts now yield 5.42%, equivalent to 7.05% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.5%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 255bp, a slight (and perhaps spurious) decline from the 260bp reported April 2)
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This could get interesting:

Expectations are building that TMX is getting close to unveiling its plans for a network. TMX has acknowledged that microwaves are a priority but so far the company has not given any specifics.

“We do know that microwaves [are] an important opportunity out there and we have to bring that to this marketplace, we’re just trying to figure out how,” TMX chief executive officer Tom Kloet said in a recent interview.
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The speed advantage of microwaves is significant. Because of that, the owner would be able to charge speed-focused traders a high price for access. That’s especially true if there are only a small number of spots on the microwave network.

A microwave link between the TMX Group’s Toronto Stock Exchange data centre in suburban Toronto and the U.S. stock market data centres in New Jersey would be as much as 5 milliseconds faster than a fibre-optic link because microwaves travel more quickly and have a more direct route through the air, ITG Canada estimated in a report earlier this year.

Trial attorney Jim Kidney of the SEC is retiring … but he gave a farewell speech:

The revolving door is a very serious problem. I have had bosses, and bosses of my bosses, whose names we all know, who made little secret that they were here to punch their ticket. They mouthed serious regard for the mission of the Commission, but their actions were tentative and fearful in many instances. You can get back to Wall Street by acting tough, by using the SEC publicity apparatus to promote yourself as tough, and maybe even on a few occasions being tough, if you pick your targets carefully. But don’t appear to fail. Don’t take risks where risk would count. That is not the intended message from the ticket punchers, of course, but it is the one I got on the occasions when I was involved in a high profile case or two. The revolving door doesn’t push the agency’s enforcement envelope very often or very far.

The attitude trickles down the ranks. Combined with the negative views of the civil service promoted by politicians and the beatings we take from the public, it is no surprise that we lose our best and brightest as they see no place to go in the agency and eventually decide they are just going to get their own ticket to a law firm or corporate job punched.
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Please don’t tell me we account for other factors in our management of cases. We think about them, of course, but we all see cases frequently to which we offer a head scratching response. Really? The SEC spent time and money on that? These cases have no significant impact and the conduct is of minimal or no harm to the investing public. But the investigation has been intense and expensive. Could no one in management exercise judgment and call the investigation to a halt? Of course not! Bringing the case is a stat!

The metric [quantity] we have now is built into the soul of the Division. It has to be removed root and branch.

Jonathan Weil of Bloomberg wants to make Jim Kidney a commissioner [link now broken? What’s up with that?]; the speech has attracted some press notice:

The SEC also sued Fabrice Tourre, who was vice president on the team that put together the deal at issue in the SEC case, known as Abacus 2007-AC1. A federal jury found Tourre liable last year, and he was ordered in March to pay $825,000 in penalties and other costs.

Kidney, who was part of the initial team that was building the Goldman Sachs case, pressed his bosses in the enforcement division to go higher up the chain. He later took himself off the team after being given a lesser role, according to people familiar with the matter.

In particular, the people said, Kidney argued that the commission should sue Tourre’s boss, Jonathan Egol. Kidney also wanted to bring a case against Paulson & Co. or some executives at the hedge fund, which helped pick the portfolio of securities that were underlying the Abacus vehicle and then bet against it.

The SEC ultimately decided not to sue Egol, the Paulson firm or any individuals from the hedge fund.
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While Kidney declined to comment on the Goldman case in particular, much of his role is laid out in a September 2010 report by the agency’s inspector general’s office, which reviewed whether the SEC succumbed to political pressure in bringing the enforcement action. Kidney’s name is blacked out in the report.

He sounds like an honourable man. It seems clear that if there was in fact anything bad about the Abacus deal – Assiduous Readers will remember that I don’t think there was – then Fabrice Tourre should have been only a minor target.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 28bp, FixedResets gaining 8bp and DeemedRetractibles up 21bp. Volatility was minimal. Volume was below average.