October 19, 2010

The BoC left the overnight rate unchanged:

The economic outlook for Canada has changed. The Bank expects the economic recovery to be more gradual than it had projected in its July Monetary Policy Report, with growth of 3.0 per cent in 2010, 2.3 per cent in 2011, and 2.6 per cent in 2012. This more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending. With housing activity declining markedly as anticipated and household debt considerations becoming more important, the Bank expects household expenditures to decelerate to a pace closer to the rate of income growth over the projection horizon.

The recent moderation in core inflation is consistent with the persistence of significant excess supply and a deceleration in the growth of unit labour costs. The Bank judges that the output gap is slightly larger and that the economy will return to full capacity by the end of 2012 rather than the beginning of that year, as had been anticipated in July.

At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered.

The Basel Committee has released its The Basel Committee’s response to the financial crisis: report to the G20:

Several of the capital requirements introduced by the Committee to mitigate the risks arising from firm-level exposures among global financial institutions will also help to address systemic risk and interconnectedness. These include:

  • capital incentives for banks to use central counterparties for over-the-counter derivatives;
  • higher capital requirements for trading and derivative activities, as well as complex securitisations and off-balance sheet exposures (eg structured investment vehicles);
  • higher capital requirements for inter-financial sector exposures; and
  • the introduction of liquidity requirements that penalise excessive reliance on short term, interbank funding to support longer dated assets.

For the third point, I believe they mean intra- rather than inter-, but never mind. While such a step is long overdue, I’m not sure what the specifics of this point has been; I don’t think there has been any change in the absurd risk-weighting of bank paper according to the sovereign.

The use of “gone concern” contingent capital would increase the contribution of the private sector to resolving future banking crises and thereby reduce moral hazard. The Committee recently published a proposal that would require the contractual terms of capital instruments to include a clause that will allow them – at the discretion of the relevant authority – to be written off or converted to common shares if the bank is judged to be non-viable by the relevant authority or if it received a public sector capital injection (or equivalent support) without which it would have become non-viable.

The Committee also is reviewing the potential role of “going concern” contingent capital and bail-in debt as a further way to strengthen the loss absorbency of systemic banks. The objective here is to decrease the probability of banks reaching the point of non-viability and, if they do reach that point, to help ensure that there are additional resources that would be available to manage the resolution or restructuring of banking institutions.

Note that the minimal conditions for BIS-compliant contingent capital will do nothing to avert a crisis – at best, they will merely mitigate a crisis once it has arisen. Additionally, the emphasis on regulatory triggers will probably make it harder, not easier, for a troubled bank to raise capital, while the “bail-in debt” (which I take to mean senior debt that will be written down on the regulators’ say-so) simply represents bureaucratic ursurpation of the role of bankruptcy courts.

Bloomberg picked up on the story that introduction of the bank liquidity rules will not be as stringent as previously thought:

Banks will have until 2015 to fully implement rules on how much cash and liquid securities they must hold to gird against a funding shortage in a crisis, the Basel Committee on Banking Supervision said.

The rules are part an overhaul of bank capital requirements the Basel Committee is working on to prevent another financial crisis. Banks rallied in European trading after the committee, the global financial standard setter, also said it would review the rules to make sure they aren’t too onerous.

“The committee is confirming that it’s backing away from implementing a stringent liquidity rule in the foreseeable future,” said Carlos Egea, a banking analyst at Morgan Stanley in London. “If the initial proposals had been adopted, it would have been very difficult for many European banks to sustain the size of their balance sheets and therefore their current business models.”

The issue of repo financing is back on the front burner:

A Standard & Poor’s plan to change the way it rates the credit risk of counterparties in repurchase agreements will boost costs for broker-dealers who draw cash through the arrangements and shrink the pool of liquid assets for money funds, according to industry participants.

Today is the final day in a one-month public comment period on S&P’s proposal to view unrated broker-dealers serving as counterparties in repos to rated money funds as having “high credit risk.” S&P now assigns to an unrated counterparty that’s at least half-owned by a rated entity the parent company’s risk level.

“There are a lot of issues that go on if something goes wrong with the counterparty,” said Peter Rizzo, senior director of fund services at S&P in New York, in an interview. “That is not a risk we want to see in our rated funds. While we are not ignorant to the fact that our criteria may change behavior, we need to apply and develop criteria that we feel is best suited for AAA standard.”

There is certainly a lot of sloppiness in the repo market. The Task Force on Tri‐Party Repo Infrastructure, part of the New York Fed’s Payments Risk Committee, reported in May:

In many cases, Cash Investors were unprepared to cope with the consequences of a Dealer default, in particular the potential need to manage and liquidate collateral securing a defaulted repo position. In some cases, Cash Investors financed assets that they would not normally hold outright.

… which shows a degree of dumbness breathtaking in its implications.

CIBC had done an AUD Covered Bonds.

Westcoast Energy (W.PR.H, W.PR.J) was confirmed at Pfd-2(low) by DBRS.

Barry Critchley of the Post writes a column on Canadian mortgage bonds:

The latest example plays out on Friday when Royal Bank of Canada closes its inaugural $600-million issue, the sale of National Housing Act mortgage-backed securities to institutional buyer.

On this deal, the coupon was 2.17%, the yield to maturity was 2.29% and the spread was 51 basis points above comparable Canada bonds.

But the securities sold in the six issues so far differ from Canada Mortgage Bonds in one major way: They amortize over the term of the issue. Accordingly, investors receive a combination of principal and interest on a monthly basis. (The exact mix of principal and interest is not known ahead of time.)

And because of the amortizing nature of the securities, and in a low interest-rate world, holders need a higher yield as a compensation. (The reason: The yield to maturity calculation assumes the interest payments are reinvested at the original yield.)

“Investors need a higher spread because of the prepayment risk and the pain factor [of not being able to reinvest at the original yield],” said one participant.

The explanation of the need for higher yield doesn’t make a whole lot of sense, but never mind.

The Canadian Civil Liberties Association has urged PC Adam Josephs to withdraw his childish lawsuit, fearing libel chill. Frankly, I don’t think the lawsuit stands a chance in court; it’s simply needless aggravation, just like so many of the G-20 arrests. The next time the press or the Toronto Police Service wants to bleat about the public’s lack of cooperation with, and distrust of, the police – I suggest the writer look at the video of Officer Bubbles’ conduct during the G-20 protests linked yesterday.

There are, of course, the usual chorus of ignorant opinions regarding privacy rights – sorry, Bubbly-poo has every right to find out who posted the comments. That is the first step, but by no means a guarantee, to collecting on a defamation suit. You post – you’re liable. If you don’t want to be liable, don’t say it, because freedom of speech does not mean freedom to defame. If I should tell my girlfriend that XYZ is a pederast … that’s fine, if we’re in private. If I shout it to her across a crowded restaurant … guess what? I’m liable. What makes this so interesting is the privacy commissioner running amok:

Google Inc. violated Canadian privacy law by collecting personal information from unsecured wireless networks across the country for its Street View service, Canada’s Privacy Commissioner said Tuesday.

For the life of me, I don’t understand how this can be construed as an invasion of privacy. They were BROADCASTING the damn stuff! Over unsecured networks! They could have chosen to secure their networks, they could have chosen not to use an unsecured network … but they didn’t. They chose to broadcast their eMails, etc., over an unsecured network. Does the privacy commissioner’s stance mean that I can shout across a crowded restaurant that XYZ is a pederast, free from all liability provided I claim that I was having a private conversation? It’s going to take a while for the laws to become clear on this.

The Canadian preferred share market was dealt a setback today on exploding volume, with PerpetualDiscounts down 16bp and FixedResets losing 6bp.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.2910 % 2,176.6
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.2910 % 3,297.3
Floater 2.87 % 3.20 % 83,545 19.24 3 -0.2910 % 2,350.2
OpRet 4.93 % 4.11 % 83,462 0.76 9 0.0173 % 2,362.3
SplitShare 5.87 % -27.67 % 64,541 0.09 2 0.2027 % 2,399.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0173 % 2,160.1
Perpetual-Premium 5.71 % 5.13 % 144,384 5.36 19 -0.2678 % 2,008.0
Perpetual-Discount 5.44 % 5.46 % 237,282 14.70 58 -0.1551 % 2,004.0
FixedReset 5.27 % 3.08 % 343,358 3.26 47 -0.0602 % 2,271.4
Performance Highlights
Issue Index Change Notes
BAM.PR.R FixedReset -2.62 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 23.32
Evaluated at bid price : 25.66
Bid-YTW : 4.30 %
HSB.PR.C Perpetual-Discount -2.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 23.27
Evaluated at bid price : 23.51
Bid-YTW : 5.47 %
MFC.PR.C Perpetual-Discount -1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 19.51
Evaluated at bid price : 19.51
Bid-YTW : 5.84 %
PWF.PR.K Perpetual-Discount -1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 22.51
Evaluated at bid price : 22.69
Bid-YTW : 5.47 %
MFC.PR.D FixedReset -1.04 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.53
Bid-YTW : 3.86 %
Maturity Type : Call
Maturity Date : 2011-07-30
Maturity Price : 25.25
Evaluated at bid price : 25.55
Bid-YTW : 4.30 %
Volume Highlights
Issue Index Shares
BMO.PR.J Perpetual-Discount 141,238 Scotia crossed 29,400 at 22.34; Nesbitt crossed blocks of 30,000 and 50,000 at the same price.
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 22.21
Evaluated at bid price : 22.35
Bid-YTW : 5.11 %
RY.PR.E Perpetual-Discount 76,725 Nesbitt crossed 50,000 at 22.00.
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 21.88
Evaluated at bid price : 21.99
Bid-YTW : 5.19 %
CM.PR.I Perpetual-Discount 59,929 TD crossed blocks of 14,700 and 11,100 at 22.30.
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 22.09
Evaluated at bid price : 22.22
Bid-YTW : 5.30 %
BNS.PR.P FixedReset 59,026 Nesbitt crossed 45,000 at 26.50.
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.48
Bid-YTW : 2.50 %
RY.PR.A Perpetual-Discount 55,655 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 21.65
Evaluated at bid price : 22.00
Bid-YTW : 5.12 %
TD.PR.M OpRet 52,842 Desjardins crosse 49,500 at 25.90.
Maturity Type : Call
Maturity Date : 2010-11-18
Maturity Price : 25.75
Evaluated at bid price : 25.88
Bid-YTW : -3.37 %
There were 78 other index-included issues trading in excess of 10,000 shares.

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