It’s not a bug, it’s a feature!
The Securities and Exchange Commission today charged three AXA Rosenberg entities with securities fraud for concealing a significant error in the computer code of the quantitative investment model that they use to manage client assets. The error caused $217 million in investor losses.
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The SEC’s order instituting administrative proceedings against the firms found that senior management at BRRC and ARG learned in June 2009 of a material error in the model’s code that disabled one of the key components for managing risk. Instead of disclosing and fixing the error immediately, a senior ARG and BRRC official directed others to keep quiet about the error and declined to fix the error at that time.
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The SEC’s order further found that ARG, BRRC, and ARIM made material misrepresentations and omissions about the error to ARIM’s clients. The firms failed to disclose the error and its impact on client performance, attributed the model’s underperformance to market volatility rather than the error, and misrepresented the model’s ability to control risks. BRRC did not have reasonable compliance procedures in place to ensure that the model would assess certain risk factors as intended.
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“Quant managers must be fully forthcoming about the risks of their model-driven strategies, especially when errors occur and the models don’t work as predicted,” said Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC’s Division of Enforcement.
The Bank of Canada has released a working paper by Jason Allen, Robert Clark and Jean-François Houde titled Discounting in Mortgage Markets:
This paper studies discounting in mortgage markets. Using transaction-level data on Canadian mortgages, we document that over time there’s been an increase in the average discount, along with substantial dispersion. The standard explanation for dispersion in credit markets is that lenders engage in risk-based pricing. Our setting is unique since contracts are guaranteed by government-backed insurance, meaning risk cannot be the main driver of dispersion. We find that mortgage rates depend on individual, contractual, and shopping market characteristics. There is also an important amount of unobserved heterogeneity in rates, which could be attributed to search costs.
An Assiduous Reader directs me to a blog post titled The Absurdity of Making Brokers Into Fiduciaries:
The job of a broker is to sell product, that’s it. Somewhere along the way the public came to think that the broker’s job was to make them money. No, it never was. The job of a broker is to choose investments suitable for a client based on their risk tolerance, other security holdings, financial situation, including income and net worth, financial needs and investment objectives. That’s it. Nowhere does it say that the broker must act in the best interest of the client. And there’s a great reason for that.
As I said, it is not the broker’s job to make money for the client, his job is to give the client information on the asset and allow the client to make the decision. In my mind the suitability stuff shouldn’t even exist, brokers should be able to sell anything to anyone, because all they are is salesman. If you think your broker is anything but a salesman, think again. His job is to collect a commission. Now, if he gets you to stick around, trade more, and spend more on commissions by picking the right stocks at the right times, good for him. But to say that is his job, to say he should be held liable for acting in your interest, would be asinine.
Fortunately investors have the option of being serviced by portfolio managers – but most PMs are just jumped up stockbrokes anyway, so it doesn’t make as much difference as I thought it did ten years ago.
It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts up 28bp and FixedResets losing 2bp. The Performance Highlights table is all positive, all PerpetualDiscounts and all insurers, which is kind of interesting. Volume was on the light side.
The decision by OSFI to eliminate, rather than grandfathering, extant Tier 1 Capital means Monday will be chaotic. Brace yerselfs!
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1547 % | 2,399.9 |
| FixedFloater | 4.79 % | 3.49 % | 23,247 | 19.10 | 1 | -0.4386 % | 3,553.1 |
| Floater | 2.50 % | 2.28 % | 47,054 | 21.55 | 4 | 0.1547 % | 2,591.3 |
| OpRet | 4.82 % | 3.66 % | 65,563 | 2.25 | 8 | -0.0579 % | 2,385.6 |
| SplitShare | 5.30 % | 2.01 % | 324,257 | 0.84 | 4 | -0.1496 % | 2,467.6 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0579 % | 2,181.4 |
| Perpetual-Premium | 5.63 % | 5.22 % | 147,619 | 5.13 | 26 | -0.1232 % | 2,038.0 |
| Perpetual-Discount | 5.23 % | 5.21 % | 279,202 | 15.08 | 51 | 0.2810 % | 2,102.2 |
| FixedReset | 5.26 % | 3.55 % | 280,989 | 3.01 | 52 | -0.0239 % | 2,270.0 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| GWO.PR.H | Perpetual-Discount | 1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-02-04 Maturity Price : 23.16 Evaluated at bid price : 23.40 Bid-YTW : 5.23 % |
| SLF.PR.B | Perpetual-Discount | 1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-02-04 Maturity Price : 23.04 Evaluated at bid price : 23.27 Bid-YTW : 5.21 % |
| SLF.PR.C | Perpetual-Discount | 1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-02-04 Maturity Price : 21.64 Evaluated at bid price : 21.64 Bid-YTW : 5.21 % |
| MFC.PR.C | Perpetual-Discount | 1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-02-04 Maturity Price : 22.11 Evaluated at bid price : 22.25 Bid-YTW : 5.12 % |
| SLF.PR.A | Perpetual-Discount | 1.32 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-02-04 Maturity Price : 22.82 Evaluated at bid price : 23.05 Bid-YTW : 5.20 % |
| MFC.PR.B | Perpetual-Discount | 1.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-02-04 Maturity Price : 22.57 Evaluated at bid price : 22.77 Bid-YTW : 5.17 % |
| GWO.PR.I | Perpetual-Discount | 1.83 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-02-04 Maturity Price : 22.08 Evaluated at bid price : 22.22 Bid-YTW : 5.12 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.L | FixedReset | 167,357 | RBC crossed three blocks: 50,000 shares, 42,000 and 58,000, all at 26.55. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.42 Bid-YTW : 3.56 % |
| CM.PR.G | Perpetual-Discount | 111,518 | Desjardins crossed blocks of 82,200 and 10,000, both at 25.05. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-02-04 Maturity Price : 24.69 Evaluated at bid price : 24.97 Bid-YTW : 5.43 % |
| MFC.PR.C | Perpetual-Discount | 59,668 | TD crossed 45,000 at 22.05. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-02-04 Maturity Price : 22.11 Evaluated at bid price : 22.25 Bid-YTW : 5.12 % |
| SLF.PR.C | Perpetual-Discount | 54,803 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-02-04 Maturity Price : 21.64 Evaluated at bid price : 21.64 Bid-YTW : 5.21 % |
| SLF.PR.D | Perpetual-Discount | 42,535 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-02-04 Maturity Price : 21.52 Evaluated at bid price : 21.52 Bid-YTW : 5.24 % |
| SLF.PR.E | Perpetual-Discount | 38,606 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-02-04 Maturity Price : 21.49 Evaluated at bid price : 21.81 Bid-YTW : 5.20 % |
| There were 28 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| FTS.PR.E | OpRet | Quote: 26.57 – 27.14 Spot Rate : 0.5700 Average : 0.3724 |
| SLF.PR.G | FixedReset | Quote: 25.55 – 26.50 Spot Rate : 0.9500 Average : 0.8168 |
| ELF.PR.G | Perpetual-Discount | Quote: 20.06 – 20.49 Spot Rate : 0.4300 Average : 0.3203 |
| BAM.PR.O | OpRet | Quote: 26.12 – 26.48 Spot Rate : 0.3600 Average : 0.2630 |
| SLF.PR.D | Perpetual-Discount | Quote: 21.52 – 21.76 Spot Rate : 0.2400 Average : 0.1502 |
| FTS.PR.H | FixedReset | Quote: 25.55 – 25.95 Spot Rate : 0.4000 Average : 0.3350 |