August 28, 2013

The SEC and five other agencies in the US alphabet soup have release a securitization risk-retention rule for comment:

The original proposal generally measured compliance with the risk retention requirements based on the par value of securities issued in a securitization transaction and included a so-called premium capture provision. The agencies are now proposing that risk retention generally be based on fair value measurements without a premium capture provision.

As required by the Dodd-Frank Act, the proposal would define “qualified residential mortgage” (QRM) and exempt securitizations of QRMs from risk retention. The new proposal would define QRMs to have the same meaning as the term qualified mortgages as defined by the Consumer Financial Protection Bureau. The new proposal also requests comment on an alternative definition of QRM that would include certain underwriting standards in addition to the qualified mortgage criteria.

Similar to the original proposal, under the new proposal, securitizations of commercial loans, commercial mortgages, or automobile loans of low credit risk would not be subject to risk retention. Further, the rule would recognize the full guarantee on payments of principal and interest provided by Fannie Mae and Freddie Mac for their residential mortgage-backed securities as meeting the risk retention requirements while Fannie Mae and Freddie Mac are in conservatorship or receivership and have capital support from the U.S. government. This provision also is unchanged from the original proposal.

The agencies are requesting comment on the revised proposed rule by Oct. 30, 2013.

Some of us might observe that it was risk-retention that caused the problem in the first place, but logic never stopped Congress and regulators from doing anything.

What makes this interesting, however, is the dissenting statement from SEC Commissioner Michael S. Piwowar:

As a general principle, I believe that regulatory agencies should make greater use of reproposals. Reproposals offer regulators the opportunity to improve the efficiency and effectiveness of their rulemaking processes and provide the public the regulatory transparency and accountability they deserve. Such a measure of discipline is critically important in connection with Dodd-Frank, which requires regulators to promulgate hundreds of new, complex, and interrelated rules that affect every American by impacting capital formation, job creation, and economic growth. I am pleased that the agencies approving today’s release saw fit to repropose the rule to take into account public comment. However, because of my concerns about two serious deficiencies in this particular reproposal, I cannot support it and I respectfully dissent.

The Agencies Issuing The Reproposal Did Not Perform Necessary Economic Analyses

The FSOC Report concludes that the macroeconomic implications of credit risk retention requirements are complex and cautions that “[I]f overly restrictive, risk retention could constrain the formation of credit, which could adversely impact economic growth. The challenge is to design a risk retention framework that maximizes benefits while minimizing its costs.”[7] Notably, the reproposal does not contain any analysis of the macroeconomic implications identified in the FSOC Report.

The failure by the Rulemaking Agencies to articulate necessary economic analyses to support the reproposal is a significant omission and fundamental flaw that cannot be overlooked.

The Reproposal Does Not Adequately Consider Alternatives to Credit Risk Retention Requirements

In my view, the reproposal should have included disclosure requirements that, contingent on the availability of information regarding secondary market transactions,[14] could facilitate better, more informed decisions by both regulators and investors. Mandatory disclosure also would have the potential to directly reduce informational asymmetries and moral hazard problems. The Rulemaking Agencies could have, for example, proposed and sought comment on enhanced disclosures of loan level characteristics along with mandatory disclosures of the amount, type, and duration of the credit risk that the originators and securitizers voluntarily retained in each ABS.

The reproposal also should have given further consideration to subordinated performance fees that have components dependent on the performance of the overall pool or on junior tranches. Such fees could potentially mitigate concerns about misaligned incentives between originators, securitizers, and investors.

There’s also a dissenting statement from SEC Commissioner Daniel M.Gallagher.

Isn’t the US system great? They actually recognize that intelligent people can disagree, and that dissent is a sign of strength, not weakness. How unlike the pablum we get fed here in Canada.

It was another modestly good day for the Canadian preferred share market, with PerpetualDiscounts gaining 9bp, FixedResets up 18bp and DeemedRetractibles winning 19bp. Today’s Performance Highlights table is quite lengthy by normal standards, but is much shorter than we have been used to lately. Volume was quite high.

PerpetualDiscounts now yield 5.81%, equivalent to 7.55% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.8% (maybe a little under), so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 275bp, a slight (and perhaps spurious) decline from the 280bp reported August 21.

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 0.2058 % 2,619.7
FixedFloater 4.25 % 3.55 % 34,910 18.23 1 0.0448 % 3,904.9
Floater 2.57 % 2.91 % 71,500 19.89 5 0.2058 % 2,828.6
OpRet 4.66 % 3.73 % 72,181 0.79 3 0.0000 % 2,610.5
SplitShare 4.74 % 4.74 % 55,114 3.85 6 0.0870 % 2,955.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,387.0
Perpetual-Premium 5.78 % 5.84 % 114,460 14.04 12 0.2247 % 2,240.8
Perpetual-Discount 5.65 % 5.81 % 154,032 14.16 25 0.0866 % 2,285.9
FixedReset 4.95 % 3.87 % 243,173 3.87 85 0.1845 % 2,446.8
Deemed-Retractible 5.24 % 5.23 % 201,340 6.96 43 0.1909 % 2,323.0
Performance Highlights
Issue Index Change Notes
TRP.PR.B FixedReset -1.58 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 21.43
Evaluated at bid price : 21.76
Bid-YTW : 3.78 %
MFC.PR.K FixedReset -1.11 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.05
Bid-YTW : 4.39 %
MFC.PR.C Deemed-Retractible -1.05 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.73
Bid-YTW : 6.66 %
IAG.PR.A Deemed-Retractible -1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.59
Bid-YTW : 6.28 %
RY.PR.D Deemed-Retractible 1.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.50
Bid-YTW : 4.82 %
RY.PR.A Deemed-Retractible 1.07 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.46
Bid-YTW : 4.80 %
ENB.PR.P FixedReset 1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 22.87
Evaluated at bid price : 24.29
Bid-YTW : 4.34 %
RY.PR.G Deemed-Retractible 1.24 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.50
Bid-YTW : 4.82 %
FTS.PR.J Perpetual-Discount 1.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 21.51
Evaluated at bid price : 21.80
Bid-YTW : 5.46 %
BAM.PF.B FixedReset 1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 22.54
Evaluated at bid price : 23.55
Bid-YTW : 4.71 %
BAM.PR.N Perpetual-Discount 1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 20.50
Evaluated at bid price : 20.50
Bid-YTW : 5.90 %
FTS.PR.H FixedReset 1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 21.35
Evaluated at bid price : 21.65
Bid-YTW : 3.96 %
HSB.PR.D Deemed-Retractible 1.38 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.90
Bid-YTW : 5.21 %
PWF.PR.O Perpetual-Premium 1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 24.48
Evaluated at bid price : 24.95
Bid-YTW : 5.86 %
SLF.PR.G FixedReset 2.20 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.66
Bid-YTW : 4.07 %
CIU.PR.C FixedReset 2.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 22.86
Evaluated at bid price : 23.70
Bid-YTW : 3.47 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.K Deemed-Retractible 52,901 Desjardins crossed 41,000 at 24.95.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.83
Bid-YTW : 4.98 %
PWF.PR.H Perpetual-Premium 46,624 Nesbitt crossed 40,000 at 24.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 24.21
Evaluated at bid price : 24.50
Bid-YTW : 5.93 %
ENB.PR.Y FixedReset 42,390 Nesbitt crossed 18,600 at 23.75.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 22.64
Evaluated at bid price : 23.81
Bid-YTW : 4.35 %
PWF.PR.G Perpetual-Premium 42,120 Nesbitt crossed 40,000 at 24.90.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 24.60
Evaluated at bid price : 24.86
Bid-YTW : 6.00 %
TRP.PR.D FixedReset 41,128 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 23.02
Evaluated at bid price : 24.70
Bid-YTW : 4.18 %
BAM.PF.A FixedReset 39,740 Scotia crossed 25,000 at 25.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 4.64 %
There were 54 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
CU.PR.C FixedReset Quote: 25.10 – 25.60
Spot Rate : 0.5000
Average : 0.3346

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.10
Bid-YTW : 3.90 %

RY.PR.W Perpetual-Discount Quote: 24.36 – 24.73
Spot Rate : 0.3700
Average : 0.2190

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 24.10
Evaluated at bid price : 24.36
Bid-YTW : 5.05 %

MFC.PR.H FixedReset Quote: 25.46 – 25.85
Spot Rate : 0.3900
Average : 0.2445

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.46
Bid-YTW : 3.98 %

BAM.PR.M Perpetual-Discount Quote: 20.36 – 20.74
Spot Rate : 0.3800
Average : 0.2513

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 20.36
Evaluated at bid price : 20.36
Bid-YTW : 5.94 %

BAM.PF.B FixedReset Quote: 23.55 – 24.00
Spot Rate : 0.4500
Average : 0.3327

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-28
Maturity Price : 22.54
Evaluated at bid price : 23.55
Bid-YTW : 4.71 %

GWO.PR.J FixedReset Quote: 25.20 – 25.60
Spot Rate : 0.4000
Average : 0.2911

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 2.08 %

One Response to “August 28, 2013”

  1. […] PerpetualDiscounts now yield 5.78%, equivalent to 7.51% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.8%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 270bp, a slight (and perhaps spurious) decline from the 275bp reported August 28. […]

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