PrefBlog

Regulatory extortion is still being pondered:

SAC Capital Advisors LP’s record $602 million insider trading settlement with the U.S. Securities and Exchange Commission was approved by a federal judge, who conditioned his ruling on a future appeals court decision in an SEC settlement with Citigroup Inc. (C)

U.S. District Judge Victor Marrero in Manhattan approved the settlement, while saying it remains subject to a ruling by the U.S Court of Appeals in New York in the Citigroup case on whether defendants in SEC cases may be permitted to neither admit nor deny fault in such agreements. Marrero expressed concern about such a provision in the SAC settlement in a hearing on March 28. Marrero’s ruling, which was made public today, is dated yesterday.

In the Citigroup case, U.S. District Judge Jed Rakoff in Manhattan criticized the SEC’s policy of allowing defendants to resolve the agency’s allegations without admitting wrongdoing, ruling that Citigroup’s $285 million SEC settlement couldn’t go forward because the deal wasn’t in the public interest. The appeals court heard arguments in the case in February. The court hasn’t said when it will rule.

SEC Commissioner Luis A. Aguilar is one of the supporters of extra-judicial sentencing:

I must also say that I am disappointed in the Commission’s apparent lack of urgency in implementing the Dodd-Frank Act’s mandate to prevent crooks and so-called “bad actors” from utilizing Rule 506 (the “Bad Actor Rule”). It does not seem controversial for the Commission to prevent felons and other law-breakers from pitching private investment deals to investors. However, it has been almost two years since the Commission’s proposal to disqualify “bad actors” from 506 offerings, and the Commission has yet to adopt the Bad Actor Rule. I agree with U.S. House Financial Services Ranking Democrat Maxine Waters when she said:

[t]he Commission should work swiftly to impose the “bad actor” disqualification before expanding the availability of general solicitation and advertising, particularly since Congress directed the Commission to institute this disqualification provision nearly two years before the JOBS Act.

The adoption of a disqualification provision would provide much needed investor protection and would not be detrimental to legitimate issuers. The continuing delay only hurts investors.

If it is the intent of Congress to include lifetime prohibitions from certain activities as part of criminal sentencing, discretion to do so should be in the hands of the judge at trial – not of Aguilar’s beloved bureaucrats.

Talisman, proud issuer of TLM.PR.A, was confirmed at Pfd-3(high) by DBRS:

The Company’s operating cash flow for the year was affected by its exposure to weak natural gas pricing, along with a reduction in liquids production due to maintenance activities in the North Sea. This resulted in a free cash flow deficit, despite decreased capital spending (capex) of $3.7 billion in 2012 versus $4.3 billion in 2011. The Company used proceeds of asset sales (including the sale of 49% of its U.K. business to Sinopec International Petroleum Exploration and Production Co. (Sinopec); refer to Transactions on page 11) to fund the deficit, along with reducing short-term debt, which resulted in adjusted leverage lowering to 35.6% in 2012 (from 40.2% in 2011). DBRS anticipates future free-cash flow deficits to be funded with proceeds of asset sales/joint ventures.
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Talisman has indicated that its key priorities are (1) to live within its means through reducing capex to levels within internally generated cash flow, (2) to focus capex on higher-value projects that can come onstream more quickly, (3) to focus on building and strengthening two core regions (the Americas and Southeast Asia) and (4) improving operational performance and reduce cost structure. DBRS notes that successful implementation of these priorities will support the rating of Talisman, however it remains to be seen if the Company will be able to realize the benefits of this shift in strategic focus. An inability to successfully implement its strategic plans could result in further pressure on its financial profile. DBRS would view adjusted leverage approaching 40% to be aggressive for the current rating category, which could result in negative rating action.

Emera, proud issuer of EMA.PR.A and EMA.PR.C, was confirmed by DBRS at Pfd-3(high):

The Company’s business risk profile is viewed as good, as Emera’s earnings and cash flow are largely generated by its relatively low-risk regulated subsidiaries (regulated subsidiaries accounted for over 90% of consolidated net income in 2012). Over the medium to long term, Emera’s regulated earnings and cash flow are expected to grow significantly once the Maritime Link is completed (pending approval from the Nova Scotia Utility and Review Board).
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Emera is currently on track to deleverage its non-consolidated balance sheet as reflected by (1) a $250 million preferred shares offering in June 2012 and (2) an equity offering of approximately $200 million in December 2012. The Company’s non-consolidated debt-to-capital ratio was 34.2% as of December 31, 2012, versus its peak of 41.5% in Q2 2012. Going forward, DBRS expects Emera to fund significant unforeseen costs or cash shortfalls (including potential cost overruns associated with the Maritime Link) with equity (including preferred shares and dividend re-investment proceeds) and to continue to deleverage its non-consolidated balance sheet to a level that is commensurate with the current BBB (high) rating.

It was a fine day for the Canadian preferred share market, with PerpetualPremiums winning 13bp, FixedResets up 9bp and DeemedRetractibles gaining 8bp. There was no volatility. None. Volume was quite low.

S&P is nonchalant regarding recent banking regulatory announcements:

In the past month, there have been two significant announcements relating to domestic regulation of Canadian banks.

• •On March 21, the federal government’s budget announced its plan to introduce a “bail-in” policy framework that would provide a mechanism to recapitalize a nonviable bank through conversion of certain bank liabilities into capital instruments.
• •On March 26, the Office of the Superintendent of Financial Institutions issued an advisory that imposed a 1% capital surcharge for banks it has designated as domestic systemically important banks (D-SIBs). These banks include Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion Bank. This advisory follows the Bank for International Settlements (BIS) publication of “A Framework For Dealing With Domestic Systemically Important Banks” in October 2012 and its recommendation that national banks identified as D-SIBs by their national authorities comply with the principles in line with the phase-in arrangements for the globally systemically important bank (G-SIB) framework, starting in January 2016. The BIS has not identified any Canadian bank as a G-SIB.

In a report released today, Standard & Poor’s Ratings Services said both announcements were in line with its expectations for the sector. “These developments reinforce our perception that Canadian regulators are emphasizing prudential standards, active bank supervision, and the avoidance of a future taxpayer funded bailout of a failing financial institution,” said Standard & Poor’s credit analyst Tom Connell in the report, entitled “Regulatory Initiatives Might Contribute To The Evolution Of Canada’s Banking Industry.”

TIPS are having a rough time of it:

History is repeating itself in the bond market as investors capitulate on bets that the Federal Reserve’s money-printing efforts will spark faster inflation.

Firms from U.S. Bancorp to Federated Investments that had been buying government securities that protect against rising consumer prices during the Fed’s recent efforts to inject cash into the economy are now selling. For the first time since the depths of the financial crisis in 2008, mutual funds that target Treasury Inflation-Protected Securities have seen outflows for three straight months, according to Morningstar Inc.

Even after the Fed injected more than $2.3 trillion into the financial system since 2008, inflation is under control, bolstering the appeal of bonds while providing the central bank with more scope to provide stimulus as needed to foster the economic recovery. Commodity prices are down and wages have grown just 1.9 percent on average since 2009, below the 3.1 percent in the prior three years, government data show.
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Returns on TIPS have topped non-indexed Treasuries since 2009, gaining an average of 9.4 percent in each of the past four years, versus 3.41 percent for nominal U.S. government debt, according to Bank of America Merrill Lynch indexes. This year, nominals are beating TIPS, 1.93 percent versus 1.27 percent.

PrefBlog’s “Golly, It Was Hard To See This One Coming” department is working overtime!

Banks are leaving the panel that sets ISDAFix, the benchmark for the $379 trillion swaps market, as regulators probe suspected manipulation of the rate.

HSBC Holdings Plc (HSBA), Europe’s largest bank by assets, and Japan’s Mizuho Financial Group (8411) stopped contributing to the ISDAFix dollar rate between November and January, and haven’t been replaced, documents on the International Swaps and Derivatives Association’s website show. The industry group didn’t give any reason for the lenders’ departure.

Firms are pulling out of rates such as the London interbank offered rate, Euribor and ISDAFix on growing concern that they may face lawsuits, fines and criminal penalties if found to have engaged in wrongdoing. Without data from a large number of firms, benchmarks risk becoming unrepresentative and losing the confidence of the market, said Owen Watkins, a former regulator at the U.K.’s Financial Services Authority.
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Martin Wheatley, the U.K. regulator charged with overhauling Libor, said in a September report it might be necessary to force firms to contribute to financial benchmarks “if submitting banks were to explore leaving.” Michel Barnier, the European Union’s internal market and services commissioner, said in February he was considering forcing lenders to participate in benchmarks including Euribor.

The report is formally known as The Wheatley Review:

5.27 At this stage, the Wheatley Review does not consider it necessary to recommend that the FSA compel particular banks to be members of LIBOR panels. However, the Wheatley Review recognises that, if submitting banks were to explore leaving the LIBOR panels, or if panel sizes did not increase, this might be necessary. For example, there could be a state of affairs whereby banks that have expertise in certain inter-bank markets, including those not currently involved in LIBOR, might be required to participate in LIBOR panels as a condition of their activity in those markets. This could possibly be achieved by making rules requiring such firms to contribute, on a continuing basis, to LIBOR.

5.28 While the FSA’s current powers would allow it to impose such an obligation on a temporary basis, for example to avoid the threat of financial stability or a loss of market integrity, they would not allow the imposition of a long term continuing obligation on banks to submit to LIBOR. This suggests there is a potential gap in the regulatory toolkit. The Wheatley Review therefore recommends that the Government legislate to provide the FSA with an express “reserve” power to compel LIBOR submissions, to be used only if the FSA should consider it to be necessary in the future.

Remember the Rochdale Securities case, last mentioned on December 4? That’s the one where the trader input an erroneous buy order for 1.625-million shares of Apple, which promptly fell, causing great consternation. It looks like we have reached the denouement:

David Miller, an institutional sales trader who lives in Rockville Centre, N.Y., has agreed to a partial settlement of the SEC’s charges. He also pleaded guilty today in a parallel criminal case.

The SEC alleges that Miller misrepresented to Rochdale Securities LLC that a customer had authorized the Apple orders and assumed the risk of loss on any resulting trades. The customer order was to purchase just 1,625 shares of Apple stock, but Miller instead entered a series of orders totaling 1.625 million shares at a cost of almost $1 billion. Miller planned to share in the customer’s profit if Apple’s stock profited, and if the stock decreased he would claim that he erred on the size of the order. The stock wound up decreasing after an earnings announcement later that day, and Rochdale was forced to cease operations in the wake of covering the losses suffered from the rogue trades.

In market timing news:

Hedge-fund manager John Paulson’s wager on gold wiped out almost $1 billion of his personal wealth in the last two trading days as the precious metal plummeted 13 percent.

Amidst all the gloom and whining, it’s good to know that Canadian teens are world-beaters at something:

Teenagers in Canada use cannabis more than any other developed country, according to a new study released by Unicef.

It was a rough day for the Canadian preferred share market – although equities got really whacked – with PerpetualPremiums off 11bp, FixedResets losing 17bp and DeemedRetractibles down 12bp. Volatility was average. Volume was average.

Nothing happened today.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets down 9bp and DeemedRetractibles flat. Volatility was low. Volume was average, with the highlights comprised entirely of FixedResets.