PrefBlog

No commentary today because … er … because … um … because it’s a full moon! That’s it, full moon tonight, therefore no commentary.

A good day on the Canadian preferred share market, with PerpetualDiscounts up 13bp, FixedResets down 1bp, and DeemedRetractibles gaining 4bp. Volatility continued to be very low, with only one entry in the Performance Highlights table; volume subsided to average levels.

There’s an interesting claim of regime switching in stock-bond correlations:

Based on his analysis of data over the past 20 years, the tipping point is a yield of about 4 per cent.

When the 10-year government bond yield is below that threshold, bond yields and the S&P/TSX composite index tend to move together, with a positive correlation of 0.49, strategist with UBS Securities Canada] Mr. [George] Vasic found. That’s to be expected, because very low bond yields are usually associated with sluggish or recessionary conditions, and when the economy starts to improve, yields and stocks both rise.

However, when bond yields are between 4 per cent and 6 per cent, stocks and bond yields tend to move in opposite directions, with a correlation of negative 0.56. In other words, when yields are already high and climbing, the stock market starts to feel the brunt of rising interest rates. (A correlation of 1 represents a perfect positive relationship, while negative 1 indicates a perfect inverse relationship.)

One thing that is well known is that correlation signs reverse in times of financial stress; it’s unclear whether this is anything new.

Prices slid somewhat in the Canadian preferred share market today, with PerpetualDiscounts down 7bp, FixedResets losing 6bp and DeemedRetractibles off 8bp. Volatility was low, with only one issue in the Performance highlights. Volume was heavy.

The Boston Fed has released its 2H10 Research Review:

• Public Policy Discussion Papers
  • Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations, Scott Schuh, Oz Shy, and Joanna Stavins
  • $1.25 Trillion Is Still Real Money: Some Facts about the Effects of the Federal Reserve’s Mortgage Market Investments, Andreas Fuster and Paul S. Willen
  • Reasonable People Did Disagree: Optimism and Pessimism about the U.S. Housing Market Before the Crash Kristopher S. Gerardi, Christopher L. Foote, and Paul S. Willen (discussed on PrefBlog)
  • A Profile of the Mortgage Crisis in a Low-and-Moderate-Income Community, Lynn M. Fisher, Lauren Lambie-Hanson, and Paul S. Willen
• Working Papers
  • In Search of Real Rigidities, Gita Gopinath and Oleg Itskhoki
  • Strategic Choice of Preferences: The Persona Model, David H. Wolpert, Julian C. Jamison, David Newth, and Michael Harre
  • Some Evidence on the Importance of Sticky Wages, Alessandro Barattieri, Susanto Basu, and Peter Gottschalk
  • Imputing Household Spending in the Panel Study of Income Dynamics:
    A Comparison of Approaches, Daniel H. Cooper

  • The Distress Premium Puzzle, Ali K. Ozdagli
  • Characterizing the Amount and Speed of Discounting Procedures, Dean T. Jamison and Julian C. Jamison
  • Internal Sources of Finance and the Great Recession, Michelle L. Barnes and N. Aaron Pancost
  • Affective Decision Making: A Theory of Optimism Bias, Anat Bracha and Donald J. Brown
  • The Financial Structure of Startup Firms: The Role of Asset, Information, and Entrepreneur Characteristics, Paroma Sanyal and Catherine L. Mann
• Public Policy Briefs
  • Evidence of a Credit Crunch? Results from the 2010 Survey of First District Community Banks, Jihye Jeon, Judit Montoriol-Garriga, Robert K. Triest, and J. Christina Wang
• Multimedia
  • The Great Recession (video), Christopher L. Foote

My discussion with Assiduous Reader Drew (in the comments to February 11) got me thinking about the propriety of allowing Exchanges to determine who gets listed. For instance, it is possible that this made sense long ago, when (I’m speculating) listing fees were a lower proportion of Exchnge revenue than they were now? Is it possible that the rationale behind the regulatory contracting-out of this gatekeeper function is now obsolete?

I went looking for a chart showing proportions of Exchange revenue over time.

I counldn’t find one, but it turns out – naturally enough – that this has not only been thought of before, but has been a big issue. Jonathan Macey and Maureen O’Hara (who has been mocked on PrefBlog) wrote paper titled From Markets to Venues: Securities Regulation in an Evolving World:

Few issues better reflect this divergence of interests than the listing and delisting of securities. Exchanges have traditionally used listing standards to support their “signaling role” of attesting to the quality of firms trading on the exchange. In return for this endorsement, listing firms paid both initial listing fees and continuing listing fees. These fees have been an important source of revenue for stock markets, particularly in the U.S where listing fees have often been upwards of 30% of the NYSE’s overall revenues.

When it was the case that where firms listed determined where shares traded, these fees could be justified as paying for the ongoing regulation of trading. As we have argued earlier, however, the listing-trading connection has broken down, and trading currently takes place on whichever venue provides the greatest liquidity. There is increased competition for listings. Listing fees now represent almost a fee for access to the US markets, a monopoly rent as it were to the few exchanges and venues empowered to list firms. From a purely economics perspective, since exchanges can list firms whose stocks they may not actually end up trading, the incentives are surely to list more firms than would be optimal if listing and trading were linked. Concerns over such perverse incentives were recently raised in Hong Kong, where a government appointed commission pushed for the transfer of the listing function to the regulator from the exchange arguing that “As a listed company motivated by profitability, the HKEx has a clear interest in listing as many companies as possible since listing fees represent a significant portion of revenues (18% in 2002) and there is a disincentive to allocate revenues to enforcement with is costly and produces no revenues.”

Which is my point exactly. A potential criticism of the TMX-LSE deal is that the TMX has regulatory functions and we might not want those to be under foreign control. But assuming that the functions need to be performed at all, should they be performed by the TMX in the first place? Would it be reasonable, for instance, to say … “OK, go ahead and merge …. on the condition that the Listing Authority gets spun out as a stand-alone company.” … ?

For the security market as a whole, however, listing and delisting standards play an important role by delineating the quality of firms allowed to access a country’s capital markets. Restricting access or denying trading privileges is thus a public good in that it enhances the overall quality of the market. Entrusting this decision to self-regulating exchanges is suboptimal because as with any public good, the social costs exceed the private costs. As we have argued above, self-regulation cannot succeed when this is the case.

Vehemently disagree. This has the implicit view that capital markets are stupid and it is wise regulators who should decide who gets to take advantage of the suckers.

It was another mixed day on the Canadian preferred share market,with PerpetualDiscounts losing 6bp while FixedRestes gained 3bp and DeemedRetractibles were up 6bp. Volatility remained low. but volume picked up and can be described as heavy.

PerpetualDiscounts now yield 5.62%, equivalent to 7.87% interest at the standard equivalency factor of 1.4x. Long corporates continue to yield 5.6%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 225bp, This marks a significant decline from the 240bp recorded February 9; it should be remembered that while the two figures mentioned are compable (with the caveate that there aren’t too many issuers in that index any more), they are less comparable – and a good comparison would require explicit assumptions of spreads between issuers, etc. – with all earlier data.

Daniel K Tarullo, Member of the Board of Governors of the Federal Reserve System, testified before the Committee on Financial Services, US House of Representatives, Washington DC, 15 February 2011, in an effort titled Assessing the regulatory, economic, and market implications of the Dodd-Frank derivatives title. Very non-committal and not much meat, but there was one interesting admission that I believe has been downplayed in the debate so far:

Title VIII of the act complements the role of central clearing in Title VII through heightened supervisory oversight of systemically important financial market utilities, including systemically important facilities that clear swaps. This heightened oversight is important because financial market utilities such as central counterparties concentrate risk and thus have the potential to transmit shocks throughout the financial markets. As part of Title VIII, the Board also was given new authority to provide emergency collateralized liquidity in unusual and exigent circumstances to systemically important financial market utilities. We are carefully considering ways to implement this provision in a manner that protects taxpayers and limits any rise in moral hazard.

Additionally, he floated an idea for discretionary exemptions; seeking these exemptions will create jobs for lobbyists and other smiley-boys:

Within these statutory constraints, the Board and the other prudential regulators are working to implement the margin provisions in a way that takes appropriate account of the relatively low systemic risk posed by most end users. For example, we are considering if it would be appropriate to allow a banking organization that is a dealer or major participant to establish a threshold with respect to an end-user counterparty, based on a credit exposure limit that is approved and monitored as part of the credit approval process, below which the end user would not have to post margin. The Board appreciates that posting margin would impose costs on end users, possibly inhibiting their ability to manage their risks. The Board also believes that the margin regime should be applied only to contracts entered into after the new requirement becomes effective.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts losing 1bp, FixedResets down 7bp while DeemedRetractibles gained 15bp. Not much volatility, volume was average, and the “Last” spread on FTS.PR.G was rather wide. SLF blocks were the volume highlight.