The Bank for International Settlements has announced standardized guidelines for debt market statistics:
The Handbook is the first publication of its kind dealing exclusively with the conceptual framework for the compilation and presentation of securities statistics. As such, it directly addresses a recommendation of one of the Group of Twenty (G20) working groups concerning the need to fill data gaps and strengthen data collection. The aim of the Handbook is to assist national and international agencies in the production of relevant, coherent, and internationally comparable securities statistics for use in financial stability analysis and monetary policy formulation.
The Handbook is available from the IMF. It is not clear whether Canada will be producing and publishing statistics in accordance with the guidelines; both the Bank of Canada and Statistics Canada participated in the development of the guidelines.
Judicial Watch has released documents regarding the inauguration of TARP. Paulson made the first injection of TARP money an offer they couldn’t refuse:
This is a combined program (bank liability guarantee and capital purchase). Your firms need to agree to both.
- We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed.
- If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstances
…
And, we want each of you to contact your Boards of Directors and confirm your participation this evening
Further to the Exchange Traded CDS idea the SEC is musing about a TRACE-like system:
U.S. regulators may impose the same price reporting and transparency requirements on over-the- counter derivatives that reduced bank profits by almost half in the corporate bond market when the Trace system was adopted seven years ago.
“I think it’s something we’ll look at very closely as a potential model,” Securities and Exchange Chairwoman Mary Schapiro said yesterday at a news conference in Washington, in which regulators laid out potential structural changes to improve policing of the $684 trillion OTC derivatives market.
Trace, the bond-price reporting system of the Financial Industry Regulatory Authority, gives anyone with an Internet connection access to trading data for corporate bonds. The system, in full operation since February 2005, reduced the difference in prices that banks charge to buy and sell bonds by almost half.
The BoC has published a working paper by Fuchun Li titled Testing for Financial Contagion with Applications to the Canadian Banking System:
The author’s new test is applied to investigate contagion from a variety of recent financial crises to the Canadian banking system. Three empirical results are obtained. First, compared to recent financial crises, including the 1987 U.S. stock market crash, 1994 Mexican peso crisis, and 1997 East Asian crisis, the ongoing 2007 subprime crisis has been having more persistent and stronger contagion impacts on the Canadian banking system. Second, the October 1997 East Asian crisis induced contagion in Asian countries, and it quickly spread to Latin American and G-7 countries. The contagion from the East Asian crisis to the Canadian banking system was not as strong or as persistent as that of the ongoing subprime crisis. However, it had a stronger impact on emerging markets. Third, there is no evidence of contagion from the 1994 Mexican peso crisis to the Canadian banking system. Contagion from that crisis occurred in Argentina, Brazil, and Chile, but the contagion effects of that crisis were limited to the Latin American region.
…
The stock returns of Canadian banks are used to measure the banks’s vulnerability to a financial crisis.As in Forbes (2001), and Hartmann, Straetmans, and de Vries (2005), a stock return is chosen as an indicator to investigate whether there exists contagion for several reasons. First, since stock returns are measured at a much high frequency, they can more accurately pinpoint the effects of a specific crisis and are available for a large sample of countries. Second, since stock returns incorporate the immediate impact of a crisis as well as its expected longer-term effects, stock returns should capture the total impact of a crisis on a particular country. Third, the choice of bank stock prices for measuring banking system risk is also motivated by Merton’s (1974) option theoretic framework toward default. This approach has played an important role in risk analysis.
I question the utility of stock market prices in demonstrating anything other than stock price contagion. Evidence of contagion of effects impacting the real economy would be much more useful – not that I disagree that such is the case now, mind you, but stock market hiccups are not, in and of themselves, really all that important.
Financial Webring brings to my attention an essay by Keith Ambachtsheer & Rob Bower, Losing Ground (published in the Spring, 2007, Canadian Investment Review), that makes the claim:
The measured Canadian mutual fund average return
shortfall (before sales charges) of 3.8% per annum relative to similar mandates executed by Canadian pension funds suggests the average Canadian mutual fund has not been producing fair value for its customers.
Well, all I can say is … substituting “the benchmark” for “similar mandates executed by Canadian pension funds”, that’s not the experience of my fund, MAPF, which, somewhat to my chagrin, is still accepting new clients. Why do Canadians typically get lousy performance on their managed investment? Because that’s what they want.
A regulatory initiative that would help would be the regulatorially mandated disclosure of performance for all funds under management vs. appropriate benchmarks, for all time (i.e., a composite compliant with CFA Institute Standards) for all advisors. I should be able to click on “Joe Broker” and determine whether or not his claims of stock market acuity are backed up by actual dollar-and-cents returns. And that goes double for somebody with discretionary power over client assets.
I have previously written of the soon-to-be Exchange-Traded CDS market and debt decoupling (the idea that bankruptcy rules are based on actual creditors having a vote and using it in the best interests of holders of the debt; an assumption that is not necessarily true if they are hedged or – particularly – over-hedged). There are some new twists on this process with respect to Elliott Management and Clear Channel:
Elliott Management Corp., the hedge fund that almost pushed the government of Peru into default in 2000, is now seeking to profit from the failure of distressed companies.
About 11 percent of Elliott’s $13 billion of assets were in so-called basis trades at the end of the first quarter, meaning it bought bonds and credit-default swaps that protect against losses on the debt, according to a report dated April 29 sent to investors and obtained by Bloomberg News.
…
“Investors will hold out if they would benefit more if there’s a default than a successful distressed debt exchange,” said Kingman Penniman, president of high-yield research firm KDP Investment Advisors in Montpelier, Vermont. “It’s an easy decision to say ‘No’ and put the company into bankruptcy.”
…
CreditSights Inc. and Barclays Capital analysts have cited the rise in basis trades for restructuring attempts that floundered. Residential Capital LLC faced bondholder resistance to its debt-exchange proposal in December partly because the investors also held derivatives, Bradley Rogoff, an analyst at Barclays in New York, said in a report that month. Minneapolis- based mortgage lender ResCap was later bailed out by taxpayers.
…
In some cases, the wide basis has helped companies refinance because it boosts demand from investors who can buy the new debt while also purchasing relatively cheap insurance against default, Barclays’ Rogoff said in an interview in March.
…
In mid-November, investors could buy both Clear Channel’s 5.5 percent bonds due in 2014 and protection against a default for five years for about 80 cents on the dollar, according to CMA DataVision and Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.As default concerns increased, the combined cost jumped to 94 cents on the dollar. Investors can sell the bonds and unwind the credit-swap trade to cash in on that profit. Or, if they think a default remains likely, they could hold out for par.
Volume continued to be elevated today and the market continued its previously schedule ascent. PerpetualDiscounts now yield 6.51%, equivalent to 9.11% interest at the standard equivalency factor of 1.4x. Long corporates, however, are on fire, now yielding 7.0% (with a 4.13% Month-to-Date return), so the Pre-Tax Interest-Equivalent spread is now about 211bp.
| 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 | 0.0897 % | 1,067.6 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0897 % | 1,726.5 |
| Floater | 3.53 % | 4.41 % | 81,249 | 16.56 | 3 | 0.0897 % | 1,333.7 |
| OpRet | 5.06 % | 4.17 % | 132,634 | 1.86 | 15 | 0.1464 % | 2,149.0 |
| SplitShare | 5.96 % | 7.19 % | 52,580 | 4.26 | 3 | 0.6446 % | 1,803.1 |
| Interest-Bearing | 5.97 % | 5.75 % | 29,090 | 0.08 | 1 | 0.3996 % | 1,997.2 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2662 % | 1,691.6 |
| Perpetual-Discount | 6.46 % | 6.51 % | 158,403 | 13.19 | 71 | 0.2662 % | 1,557.9 |
| FixedReset | 5.74 % | 4.88 % | 500,205 | 4.49 | 36 | 0.0687 % | 1,973.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BMO.PR.J | Perpetual-Discount | -1.45 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 18.31 Evaluated at bid price : 18.31 Bid-YTW : 6.18 % |
| IAG.PR.A | Perpetual-Discount | -1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 16.65 Evaluated at bid price : 16.65 Bid-YTW : 7.03 % |
| ELF.PR.G | Perpetual-Discount | -1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 15.86 Evaluated at bid price : 15.86 Bid-YTW : 7.61 % |
| PWF.PR.L | Perpetual-Discount | -1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 18.71 Evaluated at bid price : 18.71 Bid-YTW : 6.89 % |
| CM.PR.I | Perpetual-Discount | 1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 17.55 Evaluated at bid price : 17.55 Bid-YTW : 6.77 % |
| W.PR.H | Perpetual-Discount | 1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 20.56 Evaluated at bid price : 20.56 Bid-YTW : 6.79 % |
| BAM.PR.M | Perpetual-Discount | 1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 14.60 Evaluated at bid price : 14.60 Bid-YTW : 8.30 % |
| ELF.PR.F | Perpetual-Discount | 1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 18.00 Evaluated at bid price : 18.00 Bid-YTW : 7.48 % |
| PWF.PR.G | Perpetual-Discount | 1.51 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 22.00 Evaluated at bid price : 22.23 Bid-YTW : 6.70 % |
| PWF.PR.K | Perpetual-Discount | 2.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 18.85 Evaluated at bid price : 18.85 Bid-YTW : 6.64 % |
| NA.PR.L | Perpetual-Discount | 2.48 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 19.01 Evaluated at bid price : 19.01 Bid-YTW : 6.43 % |
| PWF.PR.E | Perpetual-Discount | 2.94 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 21.36 Evaluated at bid price : 21.36 Bid-YTW : 6.51 % |
| MFC.PR.B | Perpetual-Discount | 3.64 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 18.77 Evaluated at bid price : 18.77 Bid-YTW : 6.31 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| GWO.PR.X | OpRet | 125,685 | RBC crossed 114,800 at 25.30. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2013-09-29 Maturity Price : 25.00 Evaluated at bid price : 25.40 Bid-YTW : 4.56 % |
| BNS.PR.T | FixedReset | 85,174 | Scotia crossed 50,000 at 26.45, then another 15,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-25 Maturity Price : 25.00 Evaluated at bid price : 26.40 Bid-YTW : 5.07 % |
| BAM.PR.H | OpRet | 60,429 | RBC crossed 18,200 at 24.40, then bought 11,800 from Nesbitt at the same price. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2012-03-30 Maturity Price : 25.00 Evaluated at bid price : 24.30 Bid-YTW : 7.16 % |
| GWO.PR.I | Perpetual-Discount | 48,521 | Scotia crossed 36,700 at 16.70. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 16.71 Evaluated at bid price : 16.71 Bid-YTW : 6.85 % |
| CGI.PR.B | SplitShare | 46,300 | Scotia crossed 15,000 at 24.49, then another 17,000 at 24.50. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2014-03-14 Maturity Price : 25.00 Evaluated at bid price : 24.52 Bid-YTW : 5.31 % |
| RY.PR.A | Perpetual-Discount | 39,955 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-05-14 Maturity Price : 18.08 Evaluated at bid price : 18.08 Bid-YTW : 6.19 % |
| There were 39 other index-included issues trading in excess of 10,000 shares. | |||
“U.S. regulators may impose the same price reporting and transparency requirements on over-the- counter derivatives that reduced bank profits by almost half in the corporate bond market when the Trace system was adopted seven years ago.”
This is an interesting statement. From the text it seems that Trace caused corporate bond bid-ask spreads to fall by 50%. For that to translate into a halving of bank profits requires that (a) banks only traded at bid-ask and (b) volume did not change when spreads narrowed.
Insofar as spreads are like comissions, I would have thought a narrowing of the bid-ask spread might increase bond trading volume over time and therefore banks might conceivably make more profit (in total $, not per transaction). It is even possible that banks found Trace gave them useful information allowing them to reduce spreads.
Anyway, even if intermediary profits fell, it is in society’s interest to have low frictional costs and transparency — even patent monopolies come to an end eventually.
One need only look at exchange traded futures and options volumes to see that transparency brings lower costs and better liquidity for all the players.
[…] mention increased regulatory bullying, with Hank Paulson as the primary enforcer, as mentioned on May 14 – has achieved its objective: Bank of America Corp., facing the biggest projected losses among […]