The Bank of Canada has announced that the Bank of Canada Review: Autumn 2009 is now available, with the following articles:
The second article is sufficiently important (by which I mean “important to me”) that it will be reviewed in its own post.
Pegged Orders were first discussed on PrefBlog in a review of Jeffrey MacIntosh’s essay in the Financial Post. A discussion paper published by IIROC, Dark Pools, Dark Orders, and other Developments in Market Structure in Canada requests commentary on potential regulation of this order type; and the order type was also discussed in the November 2009 edition of PrefLetter.
David P. Brown of the University of Wisconsin and Craig W. Holden of Indiana University wrote a paper in 2005 titled Pegged Limit Orders that is of great interest:
Limit orders face mispricing risk – the risk of executing at a stale limit price after an innovation in public valuation, because limit-order traders generally do not continuously monitor market conditions. We analyze the impact of pegged limit orders that automatically adjust the limit price in a hybrid market. We find the direct effect is to increase limit-order profits, reduce dealer profits, and increase market-order losses. However, the indirect effect is to increase the quantity of limit orders submitted. A numerical calibration finds that when dealers supply relatively little liquidity, there is a net benefit to market orders as well.
Well, relatively little liqudity supply from the dealers is a major attribute of the preferred share market, so let’s look at this a little more. They define two types of risk assumed when entering a limit order:
There are two kinds of risk facing limit orders. 1 One is execution risk – the limit order quantity executed is random. A second is mispricing risk – a limit order may execute after an innovation in public valuation (e.g. a public news item) at a mispriced limit price, because limit-order traders generally are off the exchange and do not monitor market conditions continuously. We analyze whether mispricing risk can be reduced by creating pegged limit orders that automatically adjust the limit price, even in the absence of direct intervention by the limit-order trader.
Mispricing risk is especially important during market crashes.
They design a model, play with it, and find:
Initially, we analyze the direct effect of a design change from Regular LOs to Market-PLOs, and then to Quote-PLOs (holding limit-order quantities fixed). We find:
- • an increase in limit-order trader profits (Quote-PLOs > Market-PLOs > Regular LOs), because updating limit prices avoids states in which limit orders execute at a loss following a public value innovation,
- • a reduction in dealer profits (Quote-PLOs < Market-PLOs < Regular LOs), because dealers suffer in two ways: (1) dealers cannot profit by picking off mispriced limit orders and (2) updated limit orders are more effective in competing with the dealers for the incoming flow of market orders,
- • a reduction of market-order trader profits (or equivalently an increase in their losses) (Quote-PLOs < Market-PLOs < Regular LOs), because market orders lose the opportunity to pick off mispriced limit orders.
Which sounds very reasonable. A Market-PLO is linked to a market index, whereas a Quote-PLO is linked to the quote on a particular security.
Next, we analyze the indirect effect of a design change, allowing limit-order traders to choose the optimal quantities to submit. We find an increase in the quantity of limit orders submitted (Quote-PLOs > Market-PLOs > Regular LOs), because designs which avoid mispricing are more profitable. For marketorder traders, we find that the indirect effect is opposite the direct effect and increases market-order trader profits (Quote-PLOs > Market-PLOs > Regular LOs). This is because a greater quantity of limit orders reduces the probability of exhausting the total depth supplied by limit orders and dealers at the inside spread, and trading at prices outside the spread. Finally, we perform a numerical calibration exercise to analyze the combined impact of the direct and indirect effects on market-order trader profits. We find that under conditions when dealers endogenously choose to supply relatively little liquidity, then the indirect effect dominates and market-order traders benefit. Conversely, under conditions when dealers endogenously choose to supply a relatively large amount of liquidity, then the direct effect dominates and market-order traders lose. Empirically testable predictions of the model are that the introduction of pegged limit orders should cause a jump in limit order use, the cost of trading using market orders should decline in stocks where dealers supply relatively little liquidity, and overall volume should increase.
A Bloomberg story just appeared Moody’s May Downgrade Up to $450 Billion of Bank Debt:
Moody’s Investors Service is reviewing about $450 billion of bank hybrid and subordinated notes for possible downgrade after changing the assumptions underlying its ratings of the debt.
Some 775 securities issued by 170 “bank families” in 36 countries are affected, the New York-based risk assessor said in an e-mailed statement. Half the hybrids may have their ratings lowered by three to four grades, 40 percent may be cut by one or two grades and the remainder may be lowered by five steps or more, it said.
…
Moody’s reviews come after it stopped assuming holders of hybrids, which mingle characteristics of debt and equity, would benefit from government support for troubled lenders after the global financial crisis proved that wasn’t the case. The new system expects regulators to treat them more like equity, and takes into account the risk that banks might be forced to suspend coupon payments on their lower-ranked debt.
There does not appear to be a press release or notice on the Moody’s website yet … all I found was a July 28 press release saying that they expected to finalized the methodology in September, which was part of the same story reported on PrefBlog in June.
But then I had a look at their ratings list for Bank of Montreal and hey, looky-looky! All the prefs have “Possible Downgrade, 18 NOV 2009” under “Watch Status”. It the same thing for BNS, by the way, so the notation is not related to the extant Moody’s Watch on BMO.
Stay tuned.
A very nice day for the Canadian preferred share market, with PerpetualDiscounts up 29bp and FixedResets gaining 4bp, on continued moderate volume. There were no losers in the Performance hightlights!
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 1.0355 % | 1,513.3 |
| FixedFloater | 5.98 % | 4.10 % | 43,618 | 18.69 | 1 | 0.7194 % | 2,607.4 |
| Floater | 2.58 % | 2.98 % | 93,344 | 19.73 | 3 | 1.0355 % | 1,890.6 |
| OpRet | 4.80 % | -4.39 % | 121,636 | 0.09 | 14 | 0.1420 % | 2,307.7 |
| SplitShare | 6.36 % | -11.09 % | 340,826 | 0.08 | 2 | 1.3449 % | 2,113.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1420 % | 2,110.2 |
| Perpetual-Premium | 5.91 % | 5.55 % | 124,763 | 2.41 | 4 | 0.2294 % | 1,860.7 |
| Perpetual-Discount | 5.86 % | 5.94 % | 182,839 | 13.99 | 70 | 0.2854 % | 1,769.8 |
| FixedReset | 5.47 % | 3.97 % | 384,413 | 3.94 | 41 | 0.0370 % | 2,135.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.L | Perpetual-Discount | 1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-18 Maturity Price : 21.55 Evaluated at bid price : 21.55 Bid-YTW : 5.98 % |
| POW.PR.A | Perpetual-Discount | 1.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-18 Maturity Price : 23.06 Evaluated at bid price : 23.32 Bid-YTW : 6.07 % |
| HSB.PR.D | Perpetual-Discount | 1.34 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-18 Maturity Price : 21.53 Evaluated at bid price : 21.86 Bid-YTW : 5.79 % |
| MFC.PR.B | Perpetual-Discount | 1.40 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-18 Maturity Price : 19.61 Evaluated at bid price : 19.61 Bid-YTW : 5.94 % |
| BMO.PR.J | Perpetual-Discount | 1.46 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-18 Maturity Price : 20.20 Evaluated at bid price : 20.20 Bid-YTW : 5.60 % |
| RY.PR.C | Perpetual-Discount | 1.72 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-18 Maturity Price : 20.75 Evaluated at bid price : 20.75 Bid-YTW : 5.57 % |
| BNA.PR.D | SplitShare | 1.72 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2009-12-18 Maturity Price : 26.00 Evaluated at bid price : 26.30 Bid-YTW : -11.09 % |
| BAM.PR.B | Floater | 1.76 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-18 Maturity Price : 13.31 Evaluated at bid price : 13.31 Bid-YTW : 2.98 % |
| BAM.PR.K | Floater | 1.86 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-18 Maturity Price : 13.15 Evaluated at bid price : 13.15 Bid-YTW : 3.02 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| CM.PR.D | Perpetual-Discount | 89,700 | RBC crossed blocks of 60,000 and 20,000 shares, both at 24.30. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-18 Maturity Price : 23.91 Evaluated at bid price : 24.24 Bid-YTW : 5.98 % |
| GWO.PR.X | OpRet | 79,529 | Desjardins crossed 75,000 at 26.15. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-10-30 Maturity Price : 25.67 Evaluated at bid price : 26.13 Bid-YTW : 3.44 % |
| TRP.PR.A | FixedReset | 56,797 | YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.71 Bid-YTW : 4.14 % |
| PWF.PR.J | OpRet | 50,858 | Nesbitt crossed 50,000 at 26.10. YTW SCENARIO Maturity Type : Call Maturity Date : 2009-12-18 Maturity Price : 25.75 Evaluated at bid price : 26.11 Bid-YTW : -9.40 % |
| BMO.PR.J | Perpetual-Discount | 43,500 | CIBC bought 10,300 from TD at 20.24. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-18 Maturity Price : 20.20 Evaluated at bid price : 20.20 Bid-YTW : 5.60 % |
| BNS.PR.J | Perpetual-Discount | 33,600 | RBC crossed 25,000 at 23.21. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-18 Maturity Price : 22.42 Evaluated at bid price : 23.15 Bid-YTW : 5.69 % |
| There were 33 other index-included issues trading in excess of 10,000 shares. | |||
Nothing on their website yet, but IIROC halted MFC at 4:31pm today while they announced a $2.5-billion common share deal:
Manulife Financial launched a $2.5-billion stock sale late Wednesday as the life insurer moves to build what it’s chief executive officer described as ‘fortress levels of capital.”
A syndicate of underwriters being led by Scotia Capital and RBC Dominion Securities agreed to buy $2.5-billion in Manulife (MFC-T20.180.180.90%)common shares at a price of $19 each.
They had 1,623-million shares outstanding at the end of the third quarter, so this issue of 130-million-odd shares represents a dilution of about 8%.
It is not clear just what will be done with the money – delevering the holdco would be nice – but presumably this will cause a reappraisal of credit: S&P put them on Watch-Negative on November 6.
MFC has the following preferred shares outstanding: MFC.PR.A (OpRet), MFC.PR.B & MFC.PR.C (PerpetualDiscount), MFC.PR.D & MFC.PR.E (FixedReset). All are tracked by HIMIPref™.
Update: Press Release:
The Company has granted the underwriters an over-allotment option, exercisable in whole or in part at any time up to 30 days after closing, to purchase up to an additional $375,060,000 in common shares at the same offering price. Should the over-allotment option be exercised in full, the total gross proceeds of the offering would be $2,875,460,000.
The estimated net proceeds from the offering will be approximately $2.413 billion, after deducting the underwriting fee and before the estimated offering expenses payable by the Company. The Company expects to use the net proceeds from this offering for general corporate purposes, which may include contributions of capital to its insurance and other subsidiaries, potential acquisitions or other growth initiatives. The Company has not yet made a determination as to how much of the proceeds will be invested in MLI and how much will be used for other corporate purposes. Following the offering, the Company also intends to retire the approximately $1 billion outstanding indebtedness under its Credit Facility with Canadian chartered banks using other cash resources of the Company.
Update, 2009-11-19:DBRS comments:
DBRS notes that on November 18, 2009, Manulife Financial Corporation (Manulife or the Company) announced a $2.5 billion equity issue which will significantly increase the amount of available capital to its primary operating life insurance subsidiary. Manulife also intends to retire the approximately $1 billion outstanding indebtedness under its Credit Facility with banks. At the end of September 2009, there was over $1 billion in cash held at the holding company. There are no rating implications stemming from these actions.
The equity issuance is consistent with the Company’s desire to have “Fortress Capital” to support its longer term financial strength and market franchise. This capital is a cushion against potential earnings volatility associated with heightened equity and credit market exposures, which can also be deployed for growth opportunities. Adjusting for the equity issue and the retirement of the bank debt, the net new capital improves the Company’s consolidated debt ratio (including preferred shares) to 25% from a relatively high 29% at the end of September 2009, and the adjusted debt ratio is 17.2% (down from 20.7%). DBRS anticipates that growth in retained earnings at normalized levels will reduce the total debt ratio to below 25%, which is the Company’s target
The YPG Holdings treasury department has been working overtime; there were two announcements of interest today.
First, they are redeeming the 4.65% of 2011:
Yellow Pages Group announced today that YPG Holdings Inc. (the “Company”) intends to exercise its right to redeem all of its outstanding $150 million 4.65% Medium Term Notes, Series 6, due February 28, 2011 (CUSIP No. 98424ZAF14) (the “Series 6 Notes”) on the following terms:
Redemption Date: January 15, 2010;
Redemption Price: $1,041.681 per $1,000 principal amount;
Accrued and Unpaid Interest: $17.836 per $1,000 principal amount; and
Total Redemption Price and Accrued and Unpaid Interest: $1,059.517 per $1,000 principal amount.The redemption price has been determined in accordance with the terms of the Series 6 Notes and the provisions of the trust indenture dated April 21, 2004 governing the Series 6 Notes. Interest accrued on the Series 6 Notes up to, but excluding, the redemption date will be paid on the redemption date. The Company plans to finance the redemption through its existing commercial paper program.
That’s a very fat price for a one-year, The Pricing Supplement for the Series 6 is on SEDAR dated 2006-2-22:
YPG Holdings shall be entitled, at its option, to redeem the Series 5 Notes and/or Series 6 Notes in whole at any time or in part from time to time, by giving prior notice of not less than 30 days and not more than 60 days to the holders thereof, at the greater of the “Canada Yield Price” (as defined herein) and par, together in each case with accrued and unpaid interest to but excluding the date fixed for redemption. “Canada Yield Price” shall mean a price equal to the price of the Series 5 Notes or Series 6 Notes, as the case may be, calculated on the banking day preceding the day on which the redemption is authorized by YPG Holdings to provide a yield from the date fixed for redemption to the maturity date of the Series 5 Notes or Series 6 Notes to be redeemed, as the case may be, equal to the “Government of Canada Yield” plus 0.50% in the case of the Series 5 Notes or the “Government of Canada Yield” plus 0.16% in the case of the Series 6 Notes.
Of particular interest to YPG.PR.B holders is news of their issue of 10-year bonds at 7.75%:
YPG Holdings sold C$300 million ($286 million) of 10-year medium term notes, according to a term sheet seen by Reuters on Wednesday.
The 7.75 percent notes, due March 2, 2010, were priced at C$100.00 to yield 7.753 percent, or 432.5 basis points over the Canadian government benchmark, the term sheet said.
The bookrunners of the sale were investment dealer arms of Royal Bank of Canada, Bank of Nova Scotia and Bank of Montreal.
The reported due date of 2010-3-2 is a typographical error. I am advised it’s really 2020-3-2.
I noted in July that a ten-year issue would increase confidence and now they’ve done it!
YPG.PR.B closed last night at 17.56-60 to yield 11.09-05%; it is retractible 2017-6-30 at 25.00, so it has a term of about 7.5 years. There may be some who argue that the seniority difference justifies a 335bp spread to bonds, but I’m not one of them!
YPG is tracked by HIMIPref™ but is relegated to the “Scraps” index on credit concerns. The MAPF Performance Report for October 2009 disclosed a position in YPG.PR.B.
Update, 2009-11-21: I should have linked to the post about the YPG.PR.A & YPG.PR.B Issuer Bid and its reality.
Julie Dickson, Superintendent of Financial Institutions, has made a speach at the Women in Capital Markets Distinguished Speakers Luncheon in which she made some very sensible remarks about a new micromanagement policy implemented by the UK’s Financial Services Authority:
A recent announcement by the UK’s FSA illustrates the importance of this issue and the divergent approaches internationally. The FSA has announced4 that it will be interviewing all proposed new employees for senior positions that will be performing Significant Influence Functions (SIF) at financial institutions in the UK.
The key purpose of the interview is to assess the candidate’s fitness and propriety, including their competence and capability to perform the role in question. The interview takes place at the FSA’s offices and normally lasts about 90 minutes.
The FSA has said that it is important for institutions to ensure that the person to be interviewed is well prepared and has an adequate understanding of its business model and the sector in which it operates so the FSA can more easily determine whether the person is fit and proper. The institution needs to engage the FSA early (when there is a short list, not when a preferred candidate has been identified), and should include supporting recruitment documentation when an application is made (e.g., a “head-hunter’s” report). In the past year, the FSA has conducted 172 interviews and rejected 18 people.
Incredible. The footnote (well done!) provides the link to the notice of the new FSA policy.
Ms. Dickson quite properly expresses grave reservations about the policy:
But, in considering the new FSA approach, we have asked ourselves whether, in the ordinary course, it is appropriate for the regulator to be involved in the actual selection of the people who hold senior positions in financial institutions, or whether such action clearly resides with the institution, and whether a requirement for regulatory “approval” crosses a line.
We also worry about the potential for unintended consequences in this approach. Will the regulator have qualms about intervening if approved candidates perform poorly?
Indeed. I suggest that the most important management issue related to bank regulation is the potential for regulatory capture – in which regulators and regulatees form a nice cozy little group-think club – which can at worst lead to revolving door regulation with good little regulators getting very nice jobs from the regulatees after they’ve finished putting in their time.
The FSA’s policy tilts the balance of probability up near the top on the regulatory capture scale.
I don’t think there’s a right answer for that. “Gardening Leave” after leaving the regulator might help a little, as might higher pay and increased prestiege for regulatory positions (to encourage the idea that regulation is what you to cap an illustrious career, rather than start or assist one), but ultimately it all depends on the character of the group at the top of the pyramid – and you can’t legislate character.
On a related note, a paper by former OSFI boss John Palmer (also footnoted in the text of Ms. Dickson’s speech – brava!) Reforming Financial Regulation and Supervision: Going Back to Basics notes:
Another observation from interactions with a variety of regulatory agencies over many years is that the senior people in such agencies often have a weak understanding of financial institutions, what drives their behaviours and the way they respond to regulatory and supervisory initiatives. This has often led to insufficient scepticism of financial sector activities and their underlying motivations. Factors contributing to this have included:
- • Executives and staff within supervisory agencies who have little or no direct financial sector experience, including a growing number of lawyers in some agencies;
- • Under-resourcing of supervisory agencies, making it difficult to recruit/retain experienced qualified staff and to maintain robust on-site examination cycles;
- • Insufficient numbers of product and risk specialists in supervisory agencies and/or ineffective use of such specialists by the senior management of such agencies.
It’s a problem, and is a problem for any regulator. Too many people with industry background increases the chance of capture; too few and you don’t know what you’re doing.
All I can suggest is that Canada seek to emulate some of the US approach: there are a lot of academics at various universities who, although not usually directly employed by the industry, have privileged access throughout their careers and build up quite an impressive body of knowledge. There’s not much of that in Canada, although I have previously referenced an essay by Jeffrey MacIntosh of the UofT Faculty of Law (and a director of Pure Trading) on Pegged Orders. Canadian regulation could be improved by the endowment of professorships at the universities who would provide a critique of regulation and – if they build up a respectable name for themselves – supply a pool of qualified high level personnel.
And, of course, sunshine is the best disinfectant. OSFI must publish more of its internal – and, ideally, external commissioned – research so that investors can decide for themselves where the regulatory flaws might be. That is an integral support of the third pillar.
Paul Tucker, Deputy Governor, Financial Stability at the Bank of England, has delivered a speech to the SUERF, CEPS & Belgian Financial Forum Conference: Crisis Management at the Cross‐Road, Brussels containing a rather surprising rationale for investment in Contingent Capital:
Almost no amount of capital is enough if things are bad enough. Which is why contingent capital might potentially be an important element in banks’ recovery plans, as the Governor set out recently in Edinburgh.
This would not be the kind of hybrid capital that mushroomed in the decade or so leading up to the crisis. The familiar types of subordinated debt can absorb losses only if a bank is put into liquidation, and so really has no place in regulatory capital requirements as we cannot rely on liquidation as the only resolution tool. It has been a faultline in the design of the financial system as a whole that banks issued securities that counted as capital for regulatory purposes, and on which they could therefore leverage up, but with institutional investors treating them as very low risk investments backing household pension and annuity savings.
By contrast, contingent capital would be debt that converted into common, loss-absorbing equity if a bank hit turbulence. It is, in effect, a form of catastrophe insurance provided by the private sector.
Why should long-term savings institutions and asset managers be prepared to provide such insurance? One possible reason is that if enough of them were to do so for enough banks, it might well help to protect the value of their investment portfolios more generally. If ever it needed to be demonstrated,the current crisis has surely put it beyond doubt – not only for our generation but for the next one too – that serious distress in the banking system deepens an economic downturn and so impairs pretty well all asset values. By taking a hit in one part of their portfolio by providing equity protection to banks, institutions might well be able to support the value of their investments more widely. And the trigger for conversion from debt into equity could be at a margin of comfort away from true catastrophe; say, a percentage point or so above the minimum regulatory capital ratio.
Of course, this would entail a structural shift over time in investment portfolios. But the system might be able to manage that adjustment. After all, it managed the all together less desirable adjustment to the development of the existing hybrid capital markets. But demand for contingent capital is, inevitably, uncertain at this stage. As are the terms on which it will be provided. We welcome the growing private sector focus on this.
That has to be the craziest rationale I’ve seen yet for investment.
Contingent Capital will succeed only if it designed so that its risk/reward profile makes it sufficently attractive that investors include it in their portfolio in order to make money – some investors, some of the time, for some purposes.
To suggest that it be held in order to make the bond allocation of the portfolio be more bond-like – which is what I think he’s saying – is ludicrous.
Assiduous Readers will by now be sick of hearing this, but I thoroughly dislike the idea of making the trigger dependent upon regulatory capital ratios; this makes the investor – and, to some extent, the bank – hostage to future unknown changes in regulation. It may also make the regulator hostage to the market, if they want to make a change but have to consider the effect on triggering conversion. Making the trigger dependent upon the price of the common – if the common declines by 50% from its price on the contingent capital’s issue date, for instance – will provide a market-based conversion trigger that can be hedged or synthesized on the options market in a familiar and reproducible manner.
Patric Edspar is now running the investment banking unit of Citadel Investment Group; there are two reasons that the Bloomberg story is instructive. The first is the mere existence of an investment banking unit at a hedge fund; this is good for the financial system and bad for the regulators. The second is his nickname “Juggernaut” and its origins:
People who know Edsparr describe him as outspoken, with a forceful personality. He earned the nickname “juggernaut” during his first job at Lehman Brothers Holdings Inc., where one of his tasks in the research unit was to collect daily price data from senior traders, one of the people said. Most of his predecessors failed because they were too intimidated to interrupt the traders, who would shout at them. Edsparr would stand behind them, often for up to two hours, until they gave him the data.
This is indicative of horrible management practices that are endemic in the industry. Anyone with a brain doesn’t hire a guy with three degrees to stand behind a trader for two hours begging for information. A well run firm will decide whether or not information transfer needs to take place and if it does, transfer it. As well, a well run firm does not permit any of its employees to treat other employees like that – as I recall, that was one of the major reasons why RT Capital blew up.
William C Dudley of FRBNY made a speech at the Center for Economic Policy Studies (CEPS) Symposium. Nothing particularly new, but I was very pleased to see him note that all these wonderful stabilizing ideas have a cost:
Higher capital requirements work to reduce the risk of liquidity runs, but potentially at the cost of making the process of financial intermediation much more expensive. In particular, a requirement that firms must hold more capital increases intermediation costs. Moreover, banks may respond to higher capital requirements by taking on greater risk. If an increase in risk-taking were to occur, the movement of the probability distribution to the right in Figure 2 might be offset by an increase in the degree of dispersion. Thus, higher capital requirements might not necessarily be sufficient to push all of the probability distribution above zero.
Second, regulators could require greater liquidity buffers. These buffers would help protect the firm against having to liquidate assets under duress, and would therefore help prevent the probability distribution from sliding left toward the zero line in Figure 2. But there is a cost to the firm from holding greater liquidity buffers in terms of lower returns on capital. So, requiring greater liquidity buffers would also tend to drive up intermediation costs. And, just as in the case of higher capital requirements, banks could respond by taking greater risks.
It doesn’t happen very often, but occasionally there’s a glimmer of sense in the world:
The U.K. government will oppose a European Union plan to impose the same pay restrictions on hedge-fund managers and private-equity firms that it proposed for bankers, the Treasury said.
The EU last week added the pay rules to alternative investment fund legislation that under review in the European Council and European Parliament. It suggests that senior managers defer a minimum of 40 percent of bonuses for at least three years and a “substantial amount” is paid in shares.
A spokesman for the Treasury said the last-minute addition to the rules failed to properly distinguish between funds and banks. He said regulation should be proportionate to the risk funds pose to the financial system. Hedge funds don’t take retail deposits and haven’t required bailouts despite a number of failures, the Treasury said.
Still no word on the results of the DFN / DFN.PR.A Rights Issue. The unit value was 18.98 on November 13, compared with the exercise price of 19.75, so success seems a little dubious … but there’s a twist: DFN closed at 12.51 on the announcement date, October 16, and stayed above $10 for the next two weeks, trading about 350,000 shares in the interim. One strategy might have been to short the hell out of the capital units (which were well above NAV at the time), aiming to replace with either a subscription to the rights or taking the chance. Still, I’ll bet a nickel that exercise was negligible.
A good solid day for preferreds, with PerpetualDiscounts up 15bp and FixedResets gaining 13bp. Volume continued to be relatively light, without much volatility.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0661 % | 1,497.8 |
| FixedFloater | 6.02 % | 4.13 % | 43,603 | 18.64 | 1 | -0.7688 % | 2,588.8 |
| Floater | 2.60 % | 3.03 % | 93,584 | 19.60 | 3 | -0.0661 % | 1,871.2 |
| OpRet | 4.81 % | -5.08 % | 119,351 | 0.09 | 14 | -0.0137 % | 2,304.5 |
| SplitShare | 6.34 % | 6.35 % | 335,257 | 3.88 | 2 | -0.0219 % | 2,085.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0137 % | 2,107.2 |
| Perpetual-Premium | 5.92 % | 5.57 % | 125,266 | 2.41 | 4 | -0.3478 % | 1,856.5 |
| Perpetual-Discount | 5.88 % | 5.97 % | 184,386 | 13.96 | 70 | 0.1485 % | 1,764.7 |
| FixedReset | 5.47 % | 3.95 % | 387,638 | 3.94 | 41 | 0.1300 % | 2,134.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| MFC.PR.B | Perpetual-Discount | -1.63 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-17 Maturity Price : 19.34 Evaluated at bid price : 19.34 Bid-YTW : 6.02 % |
| ENB.PR.A | Perpetual-Premium | -1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-17 Maturity Price : 24.49 Evaluated at bid price : 24.72 Bid-YTW : 5.57 % |
| TRI.PR.B | Floater | -1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-17 Maturity Price : 19.40 Evaluated at bid price : 19.40 Bid-YTW : 2.04 % |
| PWF.PR.E | Perpetual-Discount | 1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-17 Maturity Price : 22.44 Evaluated at bid price : 23.05 Bid-YTW : 6.00 % |
| BAM.PR.O | OpRet | 1.05 % | YTW SCENARIO Maturity Type : Option Certainty Maturity Date : 2013-06-30 Maturity Price : 25.00 Evaluated at bid price : 26.02 Bid-YTW : 4.00 % |
| RY.PR.W | Perpetual-Discount | 1.45 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-17 Maturity Price : 22.25 Evaluated at bid price : 22.40 Bid-YTW : 5.49 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| GWO.PR.X | OpRet | 464,383 | Desjardins crossed 388,400 at 26.15. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-10-30 Maturity Price : 25.67 Evaluated at bid price : 26.12 Bid-YTW : 3.47 % |
| PWF.PR.O | Perpetual-Discount | 120,730 | Nesbitt crossed 120,000 at 25.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-17 Maturity Price : 24.59 Evaluated at bid price : 24.80 Bid-YTW : 5.92 % |
| TRP.PR.A | FixedReset | 73,415 | RBC crossed 50,000 at 25.75. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.63 Bid-YTW : 4.20 % |
| GWO.PR.H | Perpetual-Discount | 64,143 | Nesbitt crossed 42,100 at 20.25. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-17 Maturity Price : 20.21 Evaluated at bid price : 20.21 Bid-YTW : 6.10 % |
| PWF.PR.M | FixedReset | 48,170 | Nesbitt crossed blocks of 30,000 and 15,000, both at 27.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-02 Maturity Price : 25.00 Evaluated at bid price : 27.06 Bid-YTW : 3.97 % |
| BAM.PR.N | Perpetual-Discount | 43,170 | RBC crossed 15,000 at 17.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-17 Maturity Price : 17.54 Evaluated at bid price : 17.54 Bid-YTW : 6.90 % |
| There were 31 other index-included issues trading in excess of 10,000 shares. | |||
DFN.PR.A: Rights Offering 47% Subscribed
Wednesday, November 18th, 2009Dividend 15 Split Corp. has announced:
It was only yesterday that I predicted negligible take-up! So much for predictions! There were 10,037,713 units outstanding on May 31, so issue size has increased by a little over 11% (barring interim retractions).
DFN.PR.A was last mentioned on PrefBlog when the rights offering was announced. DFN.PR.A is tracked by HIMIPref™, but is relegated to the Scraps subindex on credit concerns.
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