PrefBlog

There are tentative advances in exchange trading for corporate bonds:

Goldman Sachs Group Inc. (GS) will start an electronic trading system for corporate bonds this month as the fifth-biggest U.S. bank adapts to regulatory changes and competition, according to a person familiar with the plans.

The platform, called GSessions, has been under development for a year, said the person, who declined to be identified because the New York-based firm isn’t making details public yet. The Wall Street Journal reported the initiative late yesterday on its website.

The move comes three weeks after BlackRock Inc. (BLK), the world’s largest money manager, said it was planning its own bond-trading platform called Aladdin Trading Network that would allow clients to bypass Wall Street firms such as Goldman Sachs.
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The profitability of Wall Street firms is being challenged by regulations requiring that they hold more capital as a buffer against potential losses from assets such as corporate debt. A U.S. law that seeks to prohibit federally insured banks from making bets with their own money may also hinder lenders’ ability to commit money to buy securities from clients, according to analysts including Brad Hintz at Sanford C. Bernstein & Co.
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GSessions will start by offering two five-minute trading sessions a day, one in an investment-grade bond and another in a high-yield, high-risk security, the person said. Speculative- grade, or junk, bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.

At the start of each session, Goldman Sachs will post a bid and offer price and notify clients of the maximum amount of liquidity the firm is willing to provide to fill orders, according to the person.

Rather than matching trades between clients, Goldman Sachs will act as the counterparty to all trades and collect the spread, or difference, between the bid and offer prices, the person said. That gap will be lower than what Goldman Sachs earns on non-computerized trades, the person said.

As I have said many, many times on this blog, exchange trading for corporate bonds will lead to tighter, more brittle markets and be bad for capital formation – to the extent that instruments are listed. In the States, especially, the action has moved into the private-placement and CDS markets, to avoid regulatory bullshit and get on with the job. However, the regulator who cares about the actual purpose of capital markets has not yet been born.

I have often criticized the entire concept of a B.Comm. degree (a guy with a B.Comm. is a guy who wanted to learn about business, so he went to school. Strike one.). Seems that others share my disdain:

Yahoo! Inc. (YHOO) is under pressure from Third Point LLC, one of its largest investors, to dismiss Chief Executive Officer Scott Thompson after his academic computer science credentials were misrepresented.
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Martin McGovern, a spokesman for Stonehill in Easton, Massachusetts, said that Thompson received a bachelor’s of science in business administration, with a major in accounting on May 20, 1979. He declined to comment further.
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Loeb said that Patti Hart, a Yahoo board member who chairs the search committee, inflated her degree too. Hart, who also serves as CEO of International Game Technology (IGT), is listed in filings as holding a “bachelor’s degree in marketing and economics” from Illinois State University, Loeb said. “However, we understand that Ms. Hart’s degree is in business administration. She received a degree in neither marketing nor economics.”

Today’s PrefBlog Precious Little Do-Gooder Zinger is about donating eye-glasses:

In a paper published in March in the journal Optometry and Vision Science, four researchers compare the full costs of delivering used glasses to the costs of instead delivering ready-made glasses in standard powers (like my drugstore readers, but for myopia as well). The authors find that recycled glasses cost nearly twice as much per usable pair.

Rob Carrick has a piece up titled Preferred shares: How to navigate rising rates, but I’m not quoted.

There was a slight pullback in the Canadian preferred share market today, with PerpetualDiscounts off 1bp, FixedResets down 7bp and DeemedRetractibles losing 8bp. Volatility was minimal. Volume was extremely low.

What a great solution for the TMX / Maple deal! More rules!

The Ontario Securities Commission will impose share ownership restrictions and require an independent board of directors as conditions of its approval of the takeover of the Toronto Stock Exchange.
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Among its proposed conditions for approving the bid, the OSC rules would prohibit any person or company from owning more than 10 per cent of the voting shares of Maple Group without OSC prior approval.

The original shareholders of Maple Group are also required to certify annually to the OSC that they are not acting “jointly or in concert with any other investor” in respect to Maple’s voting shares.

The rules also require Maple’s board to have at least 50 per cent of its directors unrelated to the original Maple shareholders and unrelated to management of the company. One director must represent an independent, non-bank owned investment dealer, and the chairman of the board must be both independent and unrelated to the original Maple shareholders.

Maple’s shareholders are a group of 13 major Canadian financial institutions and pension funds.

Why would the banks bother to act in concert? Their interests are identical anyway. There is some oohing and ahhing over the cost recovery model:

Even if Maple succeeds in buying TMX and CDS, it will still be forced to continue paying rebates. What’s more, Maple will have to share some of the synergies it expects to get from the transaction with market users, according to the pricing model, which is now being made public for the first time by the OSC.

Starting on Nov. 1, a Maple-owned CDS will split any annual revenue gains on the current suite of CDS clearing services 50-50 with users. That continues indefinitely.

On top of that, the so-called “integration rebate” to market users starts at $2.75-million and rises to $4-million by 2016. The fee will be capped at that level after 2016, but it will continue in future years.

It’s supposed to reflect the cost-savings Maple extracts. But interestingly, it’s not conditional on Maple actually saving money. So CDS users get paid no matter whether Maple manages to find synergies or not.

All of this means Maple will have to really deliver on its original promise — to make money from CDS not by raising fees for existing services but by creating new services that it can charge for. Those new services won’t be subject to the revenue sharing. However, even there, regulators are not making it easy on Maple.

Buddy, what it probably means is that fees will be charged so that fixed costs for participants are higher and marginal costs are lower. This will enlarge the moat that protects the oligopoly.

I often feel like Cassandra when worrying about the risks of the Canadian financial system, so it’s nice to know that somebody shares my views:

Canada’s biggest banks likely are “too big to fail,” and therefore pose a risk to the country’s financial system, says Malcolm Knight, a former No. 2 at the Bank of Canada.
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Canada’s five biggest banks hold combined assets worth $2.8-trillion, twice the size of the country’s gross domestic product.

That outsized economic weight makes them a threat to financial stability because the collapse of any of them would take a toll on hundreds of thousands of customers, on competition in financial services, and on the country’s reputation as a safe place to invest, Mr. Knight says.

Canada’s strict regulatory system makes the banks “less likely to fail,” but failure isn’t impossible, no matter how well the country weathered the financial crisis.

“Canada’s strict regulatory system”. We’re always hearing about that. The main thing is that OSFI simply sticks a little extra onto regulatory capital requirements – there’s nothing clever about that. What would be clever is is there was ever any accounting made for the costs of this – and I don’t mean picayune things like the service fees that help pay for all that capital. There’s things like mortgage spreads, the preponderance of short term mortgages, subsidies of tail risk by the CMHC, the stultifying effect of the oligopoly … there are many costs, none of which are ever examined.

I sent an eMail recently:

Sirs,

The Toronto Star recently published an article titled “Pediatricians in Canada discharging unvaccinated children” (April 25, on-line at http://www.thestar.com/living/article/1167428–pediatricians-in-canada-discharging-unvaccinated-children)

In this article it is alleged that the behaviour highlighted by the headline is indulged in by Dr. Fatima Kamalia and condoned by Dr. Hirotaka Yamashiro, who holds a position with the Ontario Medical Association. The CPSO is stated to take the position that “Doctors have the right to end a relationship with a patient when there is a ‘breakdown of trust and respect'”.

The arrogance shown by these medical personnel shows that they have confused the award of a medical diploma with ascension to divinity. Their interpretation of CPSO policies in a manner that equates the right to refuse medical treatment with a ‘breakdown of trust and respect’ is breathtaking; it makes a mockery of CPSO Policy #4-05 “Consent to Medical Treatment”.

Additionally, the attitude of these so-called professionals that they are infallible on pediatric care may well be misplaced, although the consensus is currently in their favour. As one who was born in England in June, 1961, I am keenly aware that consensus can be incorrect even with respect to something so straightforward as morning sickness; I remain grateful that my mother ignored doctor’s advice regarding remediation for the condition. I am pleased to pursue an occupation and lifestyle that, astonishingly, does not increase my risk of contracting peptic ulcer disease.

The desire of Drs. Kamalia & Yamashiro to restrict their practice to include only those individuals who show proper reverence for their pronouncements ex cathedra is understandable; if they wish to pick and choose their clientele, I suggest they make a living in a competitive environment – not in Ontario, where rationing effectively provides them with a very nice job for life on the taxpayers’ nickel.

I strongly urge the CPSO to initiate an investigation of the abuse of privilege endorsed or indulged in by these doctors, to condemn in the strongest possible manner the bizarre interpretation of the ‘breakdown in trust and respect’ guideline and to uphold the right to refuse treatment.

Sincerely,

I also see that there is an unsigned opinion piece in The Star:

While the College of Physicians and Surgeons of Ontario has no specific policy on the immunization issue, it does have one on severing ties. “In general, a physician should not end the physician-patient relationship because the patient chooses not to follow the physician’s advice,” it says. That’s the patient’s right.
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The American Academy of Pediatrics and its bioethics committee have developed guidelines on dealing with these vexing cases.

“In general, pediatricians should avoid discharging patients from their practices solely because a parent refuses to immunize his or her child,” the guideline states.

“Families with doubts about immunization should still have access to good medical care, and maintaining the relationship in the face of disagreement conveys respect and at the same time allows the child access to medical care. Furthermore, a continuing relationship allows additional opportunity to discuss the issue of immunization over time.”

Veresen, proud issuer of VSN.PR.A, was confirmed at Pfd-3(high) / Stable by DBRS:

DBRS has today confirmed the Senior Unsecured Notes and the Preferred Shares of Veresen Inc. (Veresen or the Company) at BBB (high) and Pfd-3 (high), respectively, both with Stable trends. The confirmation reflects (1) relatively stable cash flow from the Company’s regulated pipeline businesses, which accounted for approximately 56% of Veresen’s 2011 cash distributions received from its subsidiaries; (2) diversification benefits from its midstream (35% of cash distributions) and power generation businesses (9% of cash distributions), supported by long-term contracts with mostly investment-grade counterparts; and (3) solid non-consolidated cash flow ratios – albeit high non-consolidated leverage – at the parent level following the closing of the $920 million acquisition of the Hythe/Steeprock complex (the Acquisition) from Encana Corporation (Encana) in February 2012, which DBRS viewed as a credit neutral event for Veresen.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 6bp, FixedResets down 6bp and DeemedRetractibles up 2bp. Volatility was non-existent. Volume was quite low.

Nothing happened today.

There were solid gains in the Canadian preferred share market today, with both PerpetualPremiums and FixedResets up 10bp and DeemedRetractibles winning 21bp. Volatility, as reported by the Performance Highlights table, was virtually non-existent. Volume was comfortably above average.

There’s some sabre rattling from the Fed:

Federal Reserve Bank of Richmond President Jeffrey Lacker said the central bank needs to be ready to raise interest rates even if joblessness exceeds 7 percent.

Speaking in an interview today at the Bloomberg Washington Summit hosted by Bloomberg Link, he said the Fed will probably have to raise rates in mid-2013. Adding more monetary stimulus now would raise inflation risks without doing much to boost growth, he said.

Unemployment “could well be above 7 percent, and I think we have to prepare for that,” Lacker said. “I think it’s a misconception to think we have to get unemployment all the way down to five or some number like that before we raise rates.”

Lacker has cast the only dissenting vote at each of the Federal Open Market Committee’s policy meetings this year. He has opposed the Fed’s statement that economic conditions will probably warrant “exceptionally low” levels of the federal funds rate at least through late-2014.

It was a strong day for the Canadian preferred share market, with PerpetualPremiums up 23bp, FixedResets gaining 8bp and DeemedRetractibles winning 39bp. The Performance Highlights table is comprised entirely of winners, with a preponderance of insurance DeemedRetractibles. Volume was high.