April 15, 2013

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.

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.

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.

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 0.2166 % 2,606.6
FixedFloater 4.05 % 3.36 % 33,044 18.67 1 1.2959 % 4,055.6
Floater 2.67 % 2.90 % 89,316 19.99 4 0.2166 % 2,814.5
OpRet 4.80 % 2.10 % 52,951 0.18 5 -0.2004 % 2,611.2
SplitShare 4.81 % 4.02 % 134,215 4.13 5 -0.1256 % 2,957.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2004 % 2,387.7
Perpetual-Premium 5.18 % 3.06 % 83,336 0.54 32 -0.1112 % 2,380.2
Perpetual-Discount 4.84 % 4.84 % 178,310 15.73 4 -0.1417 % 2,688.6
FixedReset 4.92 % 2.81 % 249,657 3.79 80 -0.1718 % 2,505.9
Deemed-Retractible 4.86 % 3.45 % 125,792 0.70 44 -0.1249 % 2,456.2
Performance Highlights
Issue Index Change Notes
BAM.PR.X FixedReset -1.85 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-04-15
Maturity Price : 23.36
Evaluated at bid price : 25.42
Bid-YTW : 3.07 %
BNS.PR.Z FixedReset 1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.00
Bid-YTW : 2.90 %
BAM.PR.G FixedFloater 1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-04-15
Maturity Price : 23.57
Evaluated at bid price : 23.45
Bid-YTW : 3.36 %
BAM.PR.C Floater 1.80 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-04-15
Maturity Price : 18.12
Evaluated at bid price : 18.12
Bid-YTW : 2.91 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.M FixedReset 155,142 Nesbitt crossed 150,000 at 24.95.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.00
Bid-YTW : 2.97 %
VNR.PR.A FixedReset 81,335 Scotia crossed 70,400 at 26.57.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 26.40
Bid-YTW : 3.03 %
BAM.PF.A FixedReset 55,505 National crossed 40,000 at 26.68.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-09-30
Maturity Price : 25.00
Evaluated at bid price : 26.64
Bid-YTW : 3.23 %
TD.PR.P Deemed-Retractible 51,490 Nesbitt bought 17,900 from RBC at 26.45, then crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-15
Maturity Price : 26.00
Evaluated at bid price : 26.31
Bid-YTW : -11.56 %
CU.PR.C FixedReset 46,450 Nesbitt crossed 37,400 at 26.75.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.51
Bid-YTW : 2.59 %
BAM.PF.B FixedReset 41,264 National crossed 28,500 at 25.85.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-04-15
Maturity Price : 23.36
Evaluated at bid price : 25.82
Bid-YTW : 3.62 %
There were 35 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
FTS.PR.J Perpetual-Premium Quote: 26.02 – 27.00
Spot Rate : 0.9800
Average : 0.5293

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-12-01
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 4.28 %

CIU.PR.B FixedReset Quote: 26.53 – 26.84
Spot Rate : 0.3100
Average : 0.2032

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.53
Bid-YTW : 1.95 %

TD.PR.A FixedReset Quote: 25.30 – 25.60
Spot Rate : 0.3000
Average : 0.2062

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : 3.13 %

BAM.PR.J OpRet Quote: 26.81 – 27.09
Spot Rate : 0.2800
Average : 0.1876

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.81
Bid-YTW : 2.10 %

BNA.PR.C SplitShare Quote: 24.90 – 25.24
Spot Rate : 0.3400
Average : 0.2537

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 24.90
Bid-YTW : 4.55 %

FTS.PR.F Perpetual-Premium Quote: 25.89 – 26.15
Spot Rate : 0.2600
Average : 0.1866

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-12-01
Maturity Price : 25.50
Evaluated at bid price : 25.89
Bid-YTW : 3.28 %

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