PrefBlog

The OSC says it can’t enforce OBSI compensation recommendations:

The Ontario Securities Commission (OSC) says that it does not have the authority to require dealers to comply with compensation recommendations from the Ombudsman for Banking Services and Investments (OBSI).

The OSC published the final version of its statement of priorities for the current fiscal year today, defending its commitment to investor protection and promising to hold a summit this fall to examine seniors’ issues. But it also declared that it couldn’t enforce OBSI’s recommendations even if it wanted to, without first amending securities legislation.

Responding to comments it received on a draft version of the statement, the OSC notes: “Some commenters have suggested that the OSC should compel payments to investors [when OBSI rules in their favour]. The OSC does not have this authority and would need legislation to expand its powers in order to force binding decisions.”

Still, the regulator reiterates its belief in the importance of having a single dispute-resolution service for investors. And it says: “The [Canadian Securities Administrators (CSA)] has committed to continue to work with OBSI to ensure it has the capacity to effectively discharge its mandate.”

Perhaps. But the threat of an investigation into procedures is a pretty big stick, regardless of the ethics of using it. We’ll see how this plays out.

Assiduous Reader JP brings to my attention an article about Australian Solar Power entitled Slash Australians’ power bills by beheading a duck at night. It seems they have an “afternoon chasm” in grid energy demand:

Click for Big

Such a chasm is feared in California, as discussed on June 5. What I found interesting in the article – which talks mainly about reducing peak demand through battery storage in houses with solar panels and improved energy efficiency in those without – was the degree of hidden subsidies:

Indeed, the ENA – the national body representing electricity transmission and distribution businesses throughout Australia – has recently suggested that a power consumer without solar PV panels now pays about A$60 a year more to subsidise homes with solar PV panels, due to “under-recovery of network costs” during summer evening peak periods.

Even so, that A$60 a year cost is much smaller than the subsidy to users of air conditioners.

The Productivity Commission estimates that the installation of each air conditioner adds A$2500 to the capital cost of powerlines and power stations: costs that all power consumers have to cover.

Much of that extra equipment is used for only a few hours each year, mainly on hot summer evenings.

Note that the author is trying on a rhetorical trick by discussing the annual rate of the solar panel subsidy vs. the capital cost of the air conditioner subsidy. The A$60 annual subsidy to solar users is equal to A$4,140 present value if discounted at 3%, or A$1,200 if discounted at 5%, neatly bracketing the A$2,500 present value of the air conditioner subsidy in order to make arguments over discount rates more interesting.

Mind you, though, JP has a rejoinder:

Given your above analysis, the $ solar subsidy is not much different than the effective air conditioning subsidy. So if you are correct about present value, the author’s is factually incorrect when he writes: “[the] A$60 a year [solar] cost is much smaller than the subsidy to users of air conditioners”

I can’t given my limited math check your present value numbers — obviously present value of a flow of funds depends on length of flow — you fail to make explicit your estimate of a solar panel’s life expectancy / the life expectancy of the regulations guaranteeing the solar subsidy. My guess of a reasonable range is 20-40 years.

I question your >>rhetorical trick by discussing the annual rate of the solar panel subsidy vs. the capital cost of the air conditioner subsidy<< . I agree the "annual rate of a subsidy” is a very different measure than “the capital cost of a subsidy” and employing the two concepts in the same paragraph suggests either 1) lack of rigour, 2)laziness, or 3) an attempt to spin an argument. I suggest the author is guilty of 1) and 2) rather than 3). The author is not contrasting two unrelated and different subsides but I think implicitly suggesting that subsidy to solar over time increases the subsidy for air conditioners (peak power requirements as a % of total demand from big power plants increases as solar increases its penetration.) So its not “[annual] solar panel subsidy vs. the capital cost subsidy” but the combined subsidies resulting in >>the A$350 a year that households without air conditioners are being slugged to subsidise the bills of households running air conditioning at peak times.<< (I am unclear how the A$350 number is arrived at)

I was assuming the solar subsidy was to perpetuity. That may be wrong; but the life of the individual panel is not necessarily a factor in the calculation.

JP also passes along two older stories – one about negative power prices in the US:

Wind power has two advantages. Green energy laws in many states require utilities to buy wind energy under long-term contracts as part of their clean-energy goals and take that power even when they don’t need it. Wind farms also receive a federal tax credit of $22 for every megawatt-hour generated.

Thus, even when there is no demand for the power they produce, operators keep turbines spinning, sending their surplus to the grid because the tax credit assures them a profit.

On gusty days in the five states with the most wind power – – Texas, California, Iowa, Illinois and Oregon — this can flood power grids, causing prices to drop below zero during times when demand is light. Wholesale electricity during off-peak hours in Illinois has sold for an average price of $23.39 per megawatt hour since Jan. 1, after hitting a record low of -$41.08 on Oct. 11, the least since the Midwest Independent Transmission System Operator Inc. began sharing real-time pricing in 2005.

… and one about the pain in Spain:

In May [2013], the tariff deficit reached a whopping $34 billion.

What drove this deficit?

Overly generous renewable energy subsidies are at least partially to blame.

In 2007, Spain paid a premium of $556 per megawatt-hour for electricity that rooftop solar panels supplied to the electric grid, compared with an average $52 paid to competing coal- or gas-fired power plants. By 2012, a whopping $10.6 billion in subsidies were paid out to the renewable energy industry, rising by about 20% from the previous year, and covering more than one third of all electricity generated in Spain.

A recent report explained how Spain has sustained this massive deficit to date:

This debt derives from the financing of the difference between costs and revenues from regulated activities, accumulated in previous years. Most of the outstanding debt (66%) is held by FADE, the Deficit Securitization Fund for the Electricity System, the electricity firms hold 19% and third parties have 15%. The deficit was initially financed by the five largest electricity firms (Endesa, 44.16%; Iberdrola , 35.01%; Gas Natural Fenosa , 13.75%; Hidroeléctrica del Cantábrico, 6.08%; and E.On España, 1.00%), but the firms had transferred most of their deficit collection rights to FADE by the end of 2012. In 2012, FADE issued bonds for 9.9 billion euros at a cost for consumers of 5.617%.

Maybe the Spanish should declare sanctions and then enforce them:

The Federal Reserve on Monday announced a $508 million penalty against BNP Paribas, S.A., Paris, France–the largest penalty ever assessed by the agency–for violations of U.S. sanctions laws. The Federal Reserve also issued a joint cease and desist order with the Autorité de Contrôle et de Prudentiel et de Résolution (ACPR), the home country supervisor of BNP Paribas. The cease and desist order requires BNP Paribas to implement a program to ensure global compliance with U.S. sanctions laws. BNP Paribas continues to operate branches in New York, Chicago, and San Francisco, and an agency in Houston, all of which are covered by the enhanced policies and procedures required by the order.

These actions are taken in conjunction with actions by the Asset Forfeiture and Money Laundering Section of the Criminal Division of the Department of Justice, the Office of the U.S. Attorney for the Southern District of New York, the United States Department of Treasury’s Office of Foreign Assets Control (OFAC), the New York County District Attorney’s Office, and the New York Department of Financial Services for violations of U.S. sanctions laws and various New York State laws. The assessments issued by the agencies, including the Federal Reserve, total $8.9736 billion.

Holy Smokes! Government Motors is getting hammered!

GM Canada’s market share in the Greater Toronto Area plunged more than 50 per cent between 2008 and 2013, hitting just 5.6 per cent last year, according to the suit by 17 Toronto-area dealers. The list of dealers includes operators of some of the biggest GM dealerships in the country and some whose relationship with the company goes back to the 1920s.
…
Each of the Toronto area dealers reported new vehicle sales last year that were their lowest in the 2010-2013 period, and several of them are unprofitable, the statement of claim says.

The suit noted that GM Canada has more dealers in the Greater Toronto Area than any other manufacturer except Chrysler Canada Inc., and its dealers sold the smallest number of new vehicles of any of the major auto makers in the Canadian market.

GM dealers in the Toronto area sold an average of 531 vehicles last year, compared with 1,194 for the average Honda Canada Inc. dealer – a number that leads the market. Chrysler dealers sold 721 vehicles on average.

The BIS Annual Report includes a section titled Debt and the financial cycle: domestic and global:

Signals are mixed for advanced economies that did not see an outright crisis in recent years. Australia, Canada and the Nordic countries experienced large financial booms in the mid- to late 2000s. But the global and European debt crises dented these dynamics; asset prices fluctuated widely and corporate borrowing fell as global economic activity deteriorated. This pushed the medium-term financial cycle indicator on a downward trend, even though households in all these economies continued to borrow, albeit at a slower pace. But the strong increase in commodity prices in recent years prevented a lasting turn of the cycle, and over the last four quarters real property price and (total) credit growth in Australia and Canada has picked up to levels close to or in line with developments in large EMEs.
…
Credit-to-GDP gaps in many EMEs and Switzerland are well above the threshold that indicates potential trouble (Table IV.1). The historical record shows that credit-to-GDP gaps (the difference between the credit-to-GDP ratio and its long-term trend) above 10 percentage points have usually been followed by serious banking strains within three years.5 Residential property price gaps (the deviation of real residential property prices from their long-term trend) also point to risks: they tend to build up during a credit boom and fall two to three years before a crisis. Indeed, the Swiss authorities have reacted to the build-up of financial vulnerabilities by increasing countercyclical capital buffer requirements from 1% to 2% of risk-weighted positions secured by domestic residential property.

Debt service ratios send a less worrying signal. These ratios, which measure the share of income used to service debt (Box IV.B), remain low in many economies. Taken at face value, they suggest that borrowers in China are currently especially vulnerable. But rising rates would push debt service ratios in several other economies into critical territory (Table IV.1, last column). To illustrate, assume that money market rates rise by 250 basis points, in line with the 2004 tightening episode.6 At constant credit-to-GDP ratios, this would push debt service ratios in most of the booming economies above critical thresholds. Experience indicates that debt service ratios tend to remain low for long periods, only to shoot up rapidly one or two years before a crisis, typically in response to interest rate increases.7 Low values therefore do not necessarily mean that the financial system is safe.

There’s a really poorly produced table attached to the report as a JPG, which is just a blur to these old eyes. Interestingly, they also hint that regulation of asset allocation might be … convenient:

Finally, the sheer volume of assets managed by large asset management companies implies that their asset allocation decisions have significant and systemic implications for EME financial markets. For instance, a relatively small (5 percentage point) reallocation of the $70 trillion in assets managed by large asset management companies from advanced economies to EMEs would result in additional portfolio flows of $3.5 trillion. This is equivalent to 13% of the $27 trillion stock of EME bonds and equities. And the ratio could be significantly larger in smaller open economies. Actions taken by asset managers have particularly strong effects if they are correlated across funds. This could be because of top-down management of different portfolios, as is the case for some major bond funds, similar benchmarks or similar risk management systems (Chapter VI).

Can’t wait.

The Canadian preferred share market closed the quarter on a strong note, with PerpetualDiscounts winning 38bp, FixedResets up 11bp and DeemedRetractibles gaining 2bp. Volatility was above average, dominated by winners. Volume was pathetic, since those of us in the highest paid profession on earth can’t be bothered to show up for work immediately prior to a holiday; this gives us more time to sneer at the laziness of bartenders, waitresses and shop clerks.

Nothing happened today.

It was another good day for the Canadian preferred share market, with PerpetualDiscounts gaining 3bp, FixedResets up 10bp and DeemedRetractibles winning 17bp. A lengthy Performance Highlights table is comprised entirely of winners. Volume was average.

The trouble with financial crises is that they’re boring. Originally, crises with global implications all came from the UK. Then they all came from the US. Nobody else had the size of capital and global connections to transmit mistakes to other countries. However, there is some hope that the next crisis will come from China:

China’s chief auditor discovered 94.4 billion yuan ($15.2 billion) of loans backed by falsified gold transactions, adding to signs of possible fraud in commodities financing deals.

Twenty-five bullion processors made a combined profit of more than 900 million yuan by using the loans to take advantage of the difference between onshore and offshore interest rates, and the appreciation of Chinese currency, according a report on the National Audit Office’s website. China is the biggest producer and consumer of gold.

Public security authorities are also probing alleged fraud at Qingdao Port where the same stockpiles of copper and aluminum may have been pledged multiple times as collateral for loans. As much as 1,000 tons of gold may be tied up in financing deals in China, in which commodities including metals and agricultural products are used to get credit amid restrictions on lending, according to World Gold Council estimates through 2013.

A recent lawsuit illustrates the total intellectual bankruptcy of the money management industry:

Schneiderman’s case is the boldest initiative and may open fissures in the decade-old defense of U.S. equity markets that has been championed by brokerages and traders. In their version of the story, dark pools serve as havens for institutional investors tired of seeing orders to buy and sell stocks front-run on public exchanges. According to Schneiderman, institutions may not have been much safer on Barclays’ platform.

“There’s going to be a significant amount more scrutiny on routing practices at dark pools, and I think you’re going to see more oversight,” said Larry Tabb, chief executive officer of Tabb Group LLC.
…
Barclays was so bent on lifting its private trading venue to the upper ranks of Wall Street dark pools that it falsified marketing materials to hide how much high-frequency traders were buying and selling, the complaint said.

Seeking to reassure customers that their stock orders wouldn’t be picked off by predatory counterparts, Barclays touted a system designed to keep that from happening called liquidity profiling, according to the complaint. Marketing material including charts purported to show that very little of the trading within the dark pool was “aggressive” and that operating there was safe for institutions.

“The representations were false,” according to the complaint. The chart and accompanying statements obscured the trading taking place in Barclays’ dark pool. Senior Barclays personnel de-emphasized the presence of high-frequency traders and left out reference to one of the largest and most toxic participants, it said.

Um … who cares? If your order is filled, it’s filled. If it ain’t, it ain’t. Only morons care about the identity of their counterparty. “Sorry, Mr. Smith, your portfolio underperformed the benchmark by 500bp, but on the positive side, we traded only with retired Sunday School teachers.”

You don’t choose a broker on the basis of its marketing materials, for God’s sake. You make a choice based on execution. But maybe I’m just old fashioned.

Here’s a good reason to pay cash – always:

You may soon get a call from your doctor if you’ve let your gym membership lapse, made a habit of picking up candy bars at the check-out counter or begin shopping at plus-sized stores.

That’s because some hospitals are starting to use detailed consumer data to create profiles on current and potential patients to identify those most likely to get sick, so the hospitals can intervene before they do.

Information compiled by data brokers from public records and credit card transactions can reveal where a person shops, the food they buy, and whether they smoke. The largest hospital chain in the Carolinas is plugging data for 2 million people into algorithms designed to identify high-risk patients, while Pennsylvania’s biggest system uses household and demographic data. Patients and their advocates, meanwhile, say they’re concerned that big data’s expansion into medical care will hurt the doctor-patient relationship and threaten privacy.

I told you guys this was coming! I told you! But does anybody ever listen to me? No.

Could it be that Putin’s policies are creating Soviet Union Redux:

State enterprises now account for more than half of the economy, up from 30 percent when Putin came to power at the end of 1999, according to BNP Paribas SA. (BNP) As the bureaucracy swelled during that period, Russia emerged as the world’s most corrupt major economy. It ranks alongside Pakistan and Nicaragua at 127th, out of 176 nations, by Transparency International, down from 82nd in 2000.

With Russia’s $2 trillion economy stagnating, fixed investment falling and the U.S. and the EU warning of a tougher round of sanctions over the pro-Russian revolt in eastern Ukraine, Putin’s solution is a list of proposals revealed in May that involve a greater role for the state. He ordered the central bank to set up long-term financing for manufacturers and called for rules to force “systemically important” companies to move their registrations inside Russia.

On the other hand, there are sufficient interconnections to keep things interesting:

Western companies are already wrestling with the thorny problem of complying with existing curbs on dealings with a limited number of wealthy Putin allies and their businesses, many of which have murky ownership structures and bases in tax havens. Now, the U.S. Chamber of Commerce and the National Association of Manufacturers have taken out full-page ads in The New York Times, Wall Street Journal and Washington Post to decry the prospect of unilateral sanctions that would only hurt U.S. companies in foreign markets, while benefiting their competitors.
…
Indeed, 83 per cent of economists polled by Bloomberg now think Washington will steer clear of stronger sanctions, compared with 66 per cent a month earlier. And 96 per cent expect no further action from the European Union.

“There is no sense in seeking sanctions which would harm the EU as much as Russia,” Czech State Secretary for European Affairs Tomas Prouza declared.

Bullard is sounding rather like a hawk:

Federal Reserve Bank of St. Louis President James Bullard predicted the central bank will raise interest rates starting in the first quarter of 2015, sooner than most of his colleagues think, as unemployment falls and inflation quickens.

Asked about his forecast for the timing of the first interest-rate increase since 2006, he said: “I’ve left mine at the end of the first quarter of next year.”

“The Fed (FDTR) is closer to its goal than many people appreciate,” Bullard said today in an interview with Fox Business Network. “We’re really pretty close to normal.”
…
Bullard predicted the jobless rate may fall below 6 percent and inflation rise near 2 percent by the end of this year.

If his forecasts bear out, “you’re basically going to be right at target on both dimensions possibly later this year,” Bullard said. “That’s shocking, and I don’t think markets, and I’m not sure policy makers, have really digested that that’s where we are.”

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts winning 12bp, FixedResets up 8bp and DeemedRetractibles gaining 2bp. Volatility was average. Volume was above average.

The first quarter in the US was worse than we thought:

The U.S. economy contracted in the first quarter by the most since the depths of the last recession as consumer spending cooled.

Gross domestic product fell at a 2.9 percent annualized rate, more than forecast and the worst reading since the same three months in 2009, after a previously reported 1 percent drop, the Commerce Department said today in Washington. It marked the biggest downward revision from the agency’s second GDP estimate since records began in 1976. The revision reflected a slowdown in health care spending.
…
The revision reflected a drop in spending tied to health care services. The Bureau of Economic Analysis had estimated that major provisions of President Obama’s signature health care law would boost outlays. A quarterly services survey released this month showed the assumptions were too optimistic. Outlays for health spending actually slowed in the first quarter, subtracting 0.16 percentage point from GDP. The Commerce Department previously estimated those outlays added 1 percentage point to GDP.

Naturally, the US government wants Treasury debt to be unaffected by corporate-like inventory constraints:

• •The Volcker Rule bars banks from “proprietary trading” in credit.
• •But it allows proprietary trading in rates products such as Treasury and agency bonds.
• •So Citi set up a prop desk to trade agency bonds, managing over $1 billion of Citi’s money.
• •It’s run by a woman named Anna Raytcheva, who lost billions of dollars trading agency bonds during the financial crisis.

Obviously, some people are scandalized because people are scandalized by everything related to the Volcker Rule. And because the Volcker Rule is light on coherence. For instance, why does the Volcker Rule allow prop trading in rates? Well:

Lawmakers sought the flexibility to finance government spending and didn’t see the trading as particularly risky, said Barney Frank, who as a Massachusetts congressman helped draft the 2010 Dodd-Frank Act that mandated the Volcker Rule.

“To the extent the instruments being traded are completely secure, some of the rationale for the rule disappears,” Frank, a Democrat, said in a phone interview.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 9bp, FixedResets winning 12bp and DeemedRetractibles gaining 6bp. Volatility was well above average and dominated by winning FixedResets. Volume was above average, with the highlights dominated by RY issues for some reason; the top two are both extremely likely to be called in August, for what that’s worth.

Looks like we’ve entered the Even Greater Moderation:

Expectations for price swings in the dollar-yen currency pair fell to a record as signs of an uneven U.S. economic recovery fueled bets the Federal Reserve will keep borrowing costs at unprecedented lows.
…
Three-month implied volatility in dollar-yen was at 5.795 percent at 6:46 a.m. in London after declining to 5.715 percent, the lowest level since Bloomberg began compiling the data in December 1995.

The SEC has demanded a test of small-stock tick-sizes to see whether a larger tick-size improves liquidity of these stocks:

The experiment was sought by exchange operators including Nasdaq OMX Group Inc. (NDAQ) and Intercontinental Exchange Inc. (ICE), which have seen their share of trading fall as private platforms such as dark pools have taken 37 percent of total share volume, according to data compiled by Bloomberg. The test will prevent trading outside the exchanges unless a competing venue or broker offers a significantly better price or size lot to investors, according to an order posted on the SEC’s website.

Other features of the program, which will last one year, will strictly test the impact of rolling back penny pricing in stocks of smaller-cap companies. Under that experiment, the shares of companies with market values under $5 billion will only be quoted in five-cent increments.

Supporters of the test say it will encourage market makers that facilitate trading to buy and sell more shares and create conditions that would persuade more companies to go public. The SEC has been considering the experiment for more than a year as some lawmakers in Congress have pushed legislation to force a change.

Regrettably, other tests have not been announced – repealing Sarbanes-Oxley for these companies, for instance, or reducing capital requirements for market-makers who are banks, or actually increasing maker-taker exchange pricing for these issues.

Manulife Financial, proud issuer of MFC.PR.A, MFC.PR.B, MFC.PR.C, MFC.PR.E, MFC.PR.F, MFC.PR.G, MFC.PR.H, MFC.PR.I, MFC.PR.J, MFC.PR.K and MFC.PR.L, has been confirmed at Pfd-2(high) by DBRS:

DBRS has today confirmed the ratings on Manulife Financial Corporation (Manulife or the Company) and its affiliates, including The Manufacturers Life Insurance Company, its primary operating company. The rating on the Senior Unsecured Notes issued by Manulife Finance Holdings Limited has been discontinued due to repayment. All trends are Stable.

The ratings reflect the Company’s strong position in a number of geographic and product markets, including Canada and the fast-growing Asian market through the Manulife brand, and in the United States through the John Hancock brand. The Company is also well diversified by customer, distribution channel and product line. Risk management policies and procedures are rigourous, giving rise to a high-quality asset portfolio, though legacy issues associated with the Company’s policy liabilities continue to be a potential source of adverse reserve development given the macroeconomic and regulatory environments. While DBRS regards Manulife’s reduction of market-related risks over the past few years as having been critical to maintaining the Company’s high rating, it also notes that with unexceptional financial risk metrics, under DBRS’s methodology it is the Company’s franchise strength and business that provide most of the rating strength.

It was a mixed day for the Canadian preferred share market, with PerpatualDiscounts down 19bp, FixedResets up 9bp and DeemedRetractibles gaining 1bp. Volatility was a little more than usual, heavily skewed towards winning FixedResets. Volume was very low.