Wednesday 1st June 2016
NEWS TICKER: TUESDAY, May 31st: The 90+ day delinquencies of the French prime RMBS slightly increased to 0.42% in March 2016 from 0.38% in December 2015, according to the latest indices published by Moody's. The cumulative defaults increased to 0.50% in March 2016 from 0.45% in December 2015. Moody's annualised total redemption rate decreased to 15.97% in March 2016 from 19.04% in December 2015. As of March 2016, the 7 Moody's-rated French prime RMBS transactions had an outstanding pool balance of €69.32bn, compared with €63.17bn in August last year, constituting an increase of 9.73% following the issuance of a new transaction FCT CREDIT AGRICOLE HABITAT 2015 since the last index publication. The European Central Bank's (ECB) interest-rate cuts have forced down the cost of mortgage loans in France and borrowers are taking full advantage of the conditions by renegotiating their loans - First Names Group has confirmed it has agreed terms to acquire independent trust and corporate services provider Nautilus Trust Company (Nautilus). The acquisition (which remains subject to regulatory approval) will significantly expand the Group’s presence in Jersey, Hong Kong and London. Nautilus was originally founded in 1999 as Beachside Trust Company by shareholders of BBA Chartered Accountants; the company rebranded to Nautilus Trust Company in 2000. The deal will considerably strengthen First Names Group’s existing international presence and service offering particularly in Jersey, increasing its headcount to over 300 ‘First Names’ in the island. It will also add to the Group’s existing private client offering in Hong Kong and London. Following the completion of the transaction, the trust and corporate services business will be integrated into First Names Group’s Private Client and Corporate Service Lines – The human rights subcommittee of the European Commission has been hearing evidence of widespread violence and violence and subjugation against Christians, Yazidis and other religious minorities in Iraq. It appears that mass killings by ISIS and mass movement of refugees is putting the existence of some of these groups at risk of extinction in Iraq. Minority representatives from the region shared their first-hand observations with the committee, though it is not yet known what the European Union can achieve in the short term or the extent of aid and support that it can provide to these groups. Archimandrite Emanuel Youkhana, leader of the Assyrian Christians noted: I thank the Parliament for this discussion but Iraq's minorities are tired of hearing statements of solidarity. We need immediate action. People are being removed from their homes, women and girls are being taken as slaves and churches are bombed and looted. 120,000 Christians were driven out of their towns and villages in the Nineveh plains and Mosul and for the first time in 2,000 years there are no Christmas services in the biblical city of Nineveh. The existence of an indigenous community that is 2,000 years old and predates Islam is now seriously endangered. There were over one million Christians in Iraq in 2003, now the most optimistic estimates are of 250,000. The richness of the Middle East comes from its diversity yet from primary school right through to university an Iraqi child will never learn a word about non-Muslim minorities like the Jews, Mandaeans, Yazidis and Christians. Daesh is uprooting us physically but we have already been uprooted from the national consciousness”. - Moody's has today affirmed the Baa2 long-term issuer rating of SES (SES), the (P)Baa2 rating on the backed senior unsecured MTN program of SES and SES Global Americas Holdings GP (SES Global), the Baa2 rating on the backed senior unsecured notes issued by SES and SES Global and the P-2 rating on the commercial paper program of SES and SES Global. Moody's also assigned a Ba1 long-term rating to the proposed perpetual deeply subordinated fixed rate resettable securities (hybrid bonds) to be issued by SES with a guarantee from SES Global. The affirmed and new hybrid bond ratings follow SES's announcement on May 26th last week that it intends to increase its fully diluted ownership of O3b Networks (O3b, unrated) from a 50.5% controlling stake (as announced on 29 April 2016) to 100.0%. The transaction is expected to close in H2 2016 and is subject to the receipt of regulatory approvals. The rating outlook remains stable. SES intends to increase its stake in O3b by exercising a call option it has, under a previously arranged shareholder purchase agreement, to acquire the remaining 49.5% of O3b shares for a consideration of $710m. As a result, the Board of O3b will no longer evaluate an IPO process and there will be no changes to the management of O3b as a result of the transaction. "The stable outlook recognizes the transaction's sound strategic fit as well as the announcement of SES's balanced funding plan for this transaction," says Alejandro Núnez, a Moody's vice president -- senior analyst. Moody’s says the rating affirmation reflects: (1) the strategic fit and revenue contribution from O3b's satellite constellation to SES's geostationary satellite fleet; the cautious approach SES has taken with respect to increasing its stake in O3b, in line with its return requirements for infrastructure investments; and the financing plans announced by SES to fund its own peaking capex program and the acquisition of O3b's minorities in a manner consistent with SES's financial policies and within our credit metric expectations - Independent investment banking firm Freitag & Co is expanding its advisory board: From tomorrow (June 1st), Robert Steven Miller, Dr Stefan Schmittmann and Matthias Wissmann will join the board. Miller is known for restructuring AIG, Bethlehem Steel, Chrysler Corporation (Vice Chairman), Delphi, Federal Mogul, Hawker Beechcraft, United Airlines (Director). Currently, he is CEO of IAC, Luxembourg, a director of AIG, Dow Chemical, Symantec, and MidOcean Partners (Chairman). Meanwhile Schmittmann has extensive experience in risk management and banking leadership. He was chief executive of Vereins- und Westbank as well as member of the executive boards of Bayerische Hypo- und Vereinsbank and Commerzbank. Currently, he is chairman of the supervisory board of Commerz Real AG and member of the supervisory board of Schaltbau Holding. Matthias Wissmann was German Federal Secretary of Transportation. He is president of the German Association of the Automotive Industry (VDA) and Vice President of the Association of the German Industry (BDI and a member of the supervisory board of Lufthansa - Eastmain Resources has appointed Joe Fazzini as chief financial officer & vice president corporate development based in Toronto, effective today. In addition to his duties as CFO, Fazzini will also oversee corporate development activities including company strategy, project analysis and financial modelling. Most recently he worked at Dundee Capital Markets where he served as vice president, senior mining analyst covering Precious Metals Equities. While at Dundee, he modelled, analysed and advised global institutional investors as well as mining companies ranging from junior gold explorers to intermediate producers. Claude Lemasson, Eastmain's president and chief executive officer says, "Over the past decade, Fazzini has been extensively involved in the mining industry as a trusted advisor to colleagues and institutional investors. His enthusiasm and expertise in all facets of finance and strategy will be an asset to our team, ensuring the company is well-supported and well-funded as we increase the scope of work on our Triangle of Success in the James Bay gold district.” – Axioma says that HedgeMark International, LLC has completed the implementation of Axioma Risk. HedgeMark, a BNY Mellon company, provides hedge fund dedicated managed account and risk analytic services. Axioma Risk is a multi-asset class risk management platform that allows clients to support their risk reporting across diverse and innovative investment strategies more seamlessly and with increased efficiency. “Existing risk management solutions rely on legacy systems and technology that cannot meet the demands of modern multi-asset class investing,” explains Sebastian Ceria, CEO of Axioma. “As our clients increasingly look for customization options for their hedge fund investments, it’s critical that we employ flexible technology that can accommodate the layer of complexity this adds to managing risk,” adds Andrew Lapkin, CEO of HedgeMark. “Axioma’s modular cloud-based platform was clearly the best solution for us to deliver detailed risk analysis on global multi-asset class portfolios for our clients.” - Russia’s National Settlement Depository (NSD) is stepping up its role in the sovereign debt market, in the process picking up business that is traditionally the preserve of either Clearstream or Euroclear (or both). The Russian finance ministry appointed the NSD as the clearing system for last week’s $1.75bn eurobond without involving the world's largest clearing banks, Euroclear and Clearstream; which apparently took investors by surprise but which did not stop them utilising the Russian depository, having bought $1.2bn of the Russian finance ministry’s $1.75bn issue. The sovereign is expected to issue a further $1.25bn/$1.5bn this year and will focus on using the country’s own market infrastructure to clear and settle the transaction. The issue, the first in three years, will help the government, battered by an economic slowdown and still in play western sanctions, to fill gaps in its budget. Sanctions do not forbid anyone from investing in or handing Russian sovereign debt. Demand for the issue was over US$7bn. The final yield was set at 4.75%, in the middle of an initial range of 4.65%–4.90% in a transaction brought to market by VTB Bank. In the event it raised $7bn in commitments. Russia last issued a eurobond back in 2013. "The NSD has fiduciary accounts with most of the largest global custodian banks," NSD chair Eddie Astanin told Reuters in a written statement "So foreign investors may buy into a new Eurobond issue also via (the banks') Moscow units,” he explained. The NSD also has fiduciary accounts with both Euroclear and Clearstream, and vice versa, making it easy for investors to access other markets, Astanin added. In an interview with Russia's Tass news agency yesterday, Astanin also said the depository was gearing up to handle further sovereign Eurobond issues and was seeking to widen its base of investors - Chinese property development firm China Resources Land has come to market with a RMB5bn ($760m approximately) panda bond in the mainland debt capital markets. The issue is in two tranches: an RMB2bn three-year note priced at 3.2% and an RMB3bn five-year note priced at 3.6%. The issue was oversubscribed by a factor of two. Panda bonds, or yuan-denominated bonds sold by foreigners on the mainland, have been growing steadily in volume since when the World Bank subsidiary the International Finance Corporation (IFC) opened the market with an RMB1.13bn issue back in 2005. However, the pace of growth, while steady has been slow, as each issue needs approval from market authorities. However, the market has picked up some pace in recent months, as HSBC, British Columbia and Hungary have tapped the market - Morningstar has placed the Neptune US Opportunities fund Under Review. The fund previously held a Morningstar Analyst Rating™ of Bronze. Fatima Khizou, manager research analyst at Morningstar, comments: “James Hackam, who joined Neptune in 2012 and currently runs the US Equity Income fund, has been appointed lead manager on the fund and head of US equities concomitantly. The Compound Edge investment philosophy, which uses a proprietary quality composite score screening tool that Hackam helped develop, will now be used across the whole range, including this fund. We will be meeting with the new management team to discuss this approach in further detail.” - Over the long weekend, India’s ONGC Videsh Ltd (OVL), the overseas arm of state-run explorer Oil and Natural Gas Corporation (ONGC), today announced it has signed a Memorandum of Understanding (MoU) with SOCAR Trading SA, the trading arm of Azerbaijan's government-owned energy firm SOCAR, for foraying into oil trading business. The agreement covers joint marketing of OVL's crude oil portfolio by leveraging SOCAR Trading's experience in oil trading, OVL says in a statement. "Initially, both the parties agreed to initiate discussion on joint marketing agreement in respect of OVL's equity crude from ACG, Azerbaijan,” the firm says.the Azeri-Chirag-Guneshli (ACG) field is located off the coast of Baku and is the largest oilfield in the Azerbaijani sector of the Caspian basin. OVL owns a 2.7% stake in the field, which it acquired from US-based Hess for $1bn - According to the provisional data published yesterday by ELSTAT real GDP growth in Greece contracted by 1.4% year on year in Q1 on the back of lower private consumption, gross fixed capital investments and exports - Statistics Canada will provide its latest read on how the economy is performing later today when it releases gross domestic product results for the first three months of the year. The consensus view is that the economy grew at an annual pace of 2.9% for the quarter, though the prediction is for a small contraction in March. Worrying for the Bank of Canada is that the Q1 figures will not take into account the damage done by the recent wildfires in Alberta - Telia Company AB (formerly TeliaSonera AB says it is inviting holders of its outstanding £400,000,000 4.375 per cent notes due 5 December 2042 (XS0861990173) to tender any and all of their securities for cash in an offer memorandum released today. The firm says the offer will help it optimise its liability structure and that it will use some of the money (alongside revenue from the sale of Ncell) to reduce its overall debt exposure. To tender securities for purchase eligible securities holders should deliver the securities either via Euroclear or Clearstream. Details of the final principal amount of securities up for purchase and the tender price will be distributed at or around noon GMT on June 8th -

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The Knotty Question of Regulation

Tuesday, 01 July 2008
The Knotty Question of Regulation First came the collapse of its hedge funds; then the mammoth losses tied to mortgage-portfolio write downs. In March, dark clouds circling over Bear Stearns’ Manhattan headquarters suddenly collapsed into a vortex that reduced the former investment giant to a near-worthless pile of debris. Were it not for the sudden resourcefulness of the New York Federal Reserve, things may have turned out even worse. Now a chorus of finger-pointing regulators insist that investment banks be held accountable--before another Bear is let loose. From Boston, Dave Simons reports. http://www.ftseglobalmarkets.com/
First came the collapse of its hedge funds; then the mammoth losses tied to mortgage-portfolio write downs. In March, dark clouds circling over Bear Stearns’ Manhattan headquarters suddenly collapsed into a vortex that reduced the former investment giant to a near-worthless pile of debris. Were it not for the sudden resourcefulness of the New York Federal Reserve, things may have turned out even worse. Now a chorus of finger-pointing regulators insist that investment banks be held accountable--before another Bear is let loose. From Boston, Dave Simons reports.
On the weekend of March 14th , the New York Federal Reserve gave its blessing (in the form of a $30bn no-risk financing agreement) to JP Morgan Chase & Co to acquire the remains of the 84-year-old Bear Stearns for a mere $2 per share, later sweetened to $10. The takeover bid was officially approved by shareholders in late May. Speaking shortly after the crisis was resolved, US Treasury Secretary Henry Paulson noted that the Bear Stearns episode “raises significant policy considerations that need to be addressed.” The collapse, said Paulson at the time, underscores the rapidly changing role of non-bank financial institutions as well as the interconnectedness among all financial establishments. These changes “require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability,” he added.

Just as last summer’s illiquidity-fueled downdraft prompted calls for universal limits on leveraging, the Bear Stearns experience has critics taking aim at current regulatory standards. These they argue are in need of a substantial overhaul. An important question arising from this development is: how best to carry out these measures? Another is: if those measure are a good idea, why have they not been addressed sooner?



US Federal Reserve Bank chairman Ben Bernanke vigorously defends the Bear bailout, noting that “recent events have demonstrated the importance of generous capital cushions for protecting against adverse conditions in financial and credit markets”. Detractors offer a much less sanguine assessment. One notable hand-wringer is former St. Louis Fed president William Poole, who thinks that, “It is appalling where we are right now … we’ve become a backstop [sic] for the entire financial system.”

Indeed, by all accounts the Fed checkbook may be in for more plundering in the coming weeks and months. In May, Congress put in an emergency call, imploring the Fed to swap Treasury notes for bonds backed by student loans. And with the peak of the credit crisis still months (or perhaps even years off according to some experts) the Fed may have to contend with many more foundering companies arriving in the dead of night, cap in hand. Was the Fed correct in intervening on Bear’s behalf? John Halsey, a former senior managing director at Bear Stearns, says that, given the circumstances, the Fed had to take action. Had Bear failed, says Halsey, “Our financial system would have failed as well. The dollar, already weakened, would have plummeted, and it would have hastened the inevitability of the dollar’s demise as the world’s reserve currency. Stocks would have dropped, markets would have crashed and stopped trading. In effect, Bear shareholders were sacrificed for the good of the system. That said, I do not think it will have much effect on decision making or risk taking.”

The Fed’s willingness to get behind one near disaster after another fails to address some key underlying issues: namely lack of transparency, as well as the enormous complexity of modern financial products, that has rendered normal pricing metrics obsolete. JPMorgan’s valuation gyration over Bear Stearns’ share price is the latest evidence that all is not right. “Free markets can only function in a system where a company’s creditworthiness can be assessed independent of a letter grade supplied by a rating agency,” remarks Jacki Zehner, founding partner of Circle Financial Group, a New York-based private wealth management operation. In reality, says Zehner, this is simply no longer the case. “Before one can declare that this financial crisis is over, the markets have to be able to make this kind of assessment. Unfortunately, we are not there yet.”

Though the Fed may have had little choice but to step in on Bear’s behalf given the magnitude of the counterparty risk, other companies in a similar predicament but with a slower bleed rate may not be as fortunate. Says Erik Sirri, director of the Securities and Exchange Commission’s (SEC’s) trading and markets division, “I think when one of these firms gets into trouble rapidly, liquidity support is needed.” Should that unraveling occur more slowly, however, “that liquidity support may not be needed.”

“Others will fail, though it is not clear what will happen when they do,” says Zehner. “I believe the Fed can and will prevent any sort of systemic collapse which they may have witnessed had they not come to the rescue of Bear. But there will be more problems. Exactly how and where is a difficult bet indeed.”

In the aftermath of Bear, slower client activity, below-normal principal and proprietary trading results and losses from the tightening of structured credit liabilities are just a few of the factors weighing on the investment-banking industry, notes analyst William F Tanona in a recent research paper. Some have been more generous than others. In contrast to Oppenheimer & Co. analyst Meredith Whitney’s assessment of Citigroup’s “antiquated and disparate systems and technology,” Ladenburg Thalmann’s financial institutions analyst Richard Bove sees a much brighter future for the bank. Bove notes that Citi’s turnaround potential is “so significant, it could carry the stock to multiples of its current price.”

While the longer-term picture may be positive--particularly given the prospect of further Fed interventions nonetheless, US banks are in all likelihood looking at a prolonged period of belt tightening and super-scrutiny. “It is truly amazing to see how slow analysts have been in bringing down earnings estimates for the investment banks,” says Halsey. “Of course, at some point soon the bulls will probably be able to point to some very favourable year-over-year comparisons. But the fact remains that the entire sector is going to have to learn to live with much less leverage--and that many of their biggest earning sectors will never recover.”

Is reform needed?

It was the late economist Hyman Minsky who suggested over 20 years ago that “in a world of businessmen and financial intermediaries who aggressively seek profit, innovators will always outpace regulators.” While it may be impossible to prevent changes in the structure of portfolios from occurring, said Minsky, “if the authorities constrain banks and are aware of the activities of fringe banks and other financial institutions, they are in a better position to attenuate the disruptive expansionary tendencies of our economy.”

Speaking at a conference held in Minsky’s honour, Paul McCulley, managing director of fixed-income specialist PIMCO, said that recent events demonstrate how little attention has been paid to Minsky’s words over the last two decades. While initiatives such as Basel I and most recently Basel II may be a step in the right direction, “neither of those arrangements fundamentally addresses the explosive growth of the shadow banking system,” thinks McCulley, referencing the radically leveraged, off-balance sheet vehicles that were so successful in helping institutions sidestep imposed limitations.

To make matters worse, regulators have consistently turned a blind eye to the goings-on within the investment-banking sector, even as the crisis in liquidity was growing more palpable. Their inaction prior to last summer’s meltdown left the banking system vulnerable to the catastrophic run on liquidity that set the stage for innumerable hedge-fund collapses, and ultimately the fall of Bear Stearns, say observers.

In an effort to deflect further criticism, the SEC has wasted little time getting on the case, and has already made clear its intentions to increase the transparency of liquidity and capital positions held by the likes of Morgan Stanley, Lehman Brothers and Merrill Lynch through its consolidated supervised entities (CSE) program. SEC chairman Christopher Cox said the commission wants the changes to take affect prior to the implementation of the new internationally accepted standards for capital and liquidity as set forth in Basel II. Cox has admitted that insufficient regulatory standards in all likelihood helped foster the conditions that led to the Bear crisis. “It’s difficult for anyone to say the system worked or that the regulatory gap that exists in statute lacks any consequence,” said Cox.

Halsey, however, calls the commission’s sudden interest “laughable.” “Where were they when these problems were developing?” he asks. As it relates to the current real estate crisis, “the SEC, banking regulators and especially the Fed were absolutely facilitators to the mess. Alan Greenspan’s legacy has been destroyed.”

To begin to remedy the situation, all institutions that are given access to the Fed’s discount window “must at the same time have pari passu regulatory oversight,” argues McCulley. While banks will undoubtedly balk at such an arrangement, they may have little choice but to play ball. After all, offers McCulley, “if you have access to the Fed’s discount window, the Fed should (and will, I strongly believe) have the power to supervise and regulate your business.” Such increased oversight could take the form of raising core capital requirements, while increasing risk and liquidity management, he adds.

Although regulators appear anxious to expand their legal authority over the investment banking sector, it’s up to lawmakers to ensure that it happens. Speaking before a Senate panel in May, former Clinton administration SEC chairman Arthur Levitt said that “Congress must face these conflicts of interest issues head on, or at least empower the SEC with the proper oversight and disciplinary powers that will enable them to do the job.” As for the near-term direction of the investment banking sector as a whole, Halsey believes that a fundamental shift has already occurred, one that favours the likes of JPMorgan over Goldman Sachs and Morgan Stanley. While product innovation will once again take place and attract new talent and capital, “it will take years for that to happen. In the meantime, the likes of CDOs, CDSs and all mortgage-related trading will deliver a fraction of the profits that stoked Wall Street for so long.” Accordingly, Halsey sees the prospect for a significant brain drain from the various institutions as return on capital founders. “Bright, hungry guys will continue to leave to pursue innovation and profits at hedge funds. That will hurt banks and investment banks alike.”

Can increased regulation be truly effective so long as institutions are allowed to stay one step ahead through the creation of the kind of product embellishments that helped precipitate the crisis in the first place? Absolutely not, says Halsey. Wall Street can afford to hire the best and the brightest and spend more on financial innovation than regulatory bodies can budget for, says Halsey, and as a result, no individual or group can effectively anticipate innovation. Hence, the need for broad, highly flexible guidelines that can compensate for these future product developments.

“As a young guy at Bear, I remember thinking how creative the people who structured collateralised mortgage obligations (CMOs) must have been to come up the concept of interest only strips (IOs) and principal only strips (POs),” recalls Halsey. “By the time they had become commonplace, we were already onto trading inverse floaters. It quickly became apparent that if you could imagine a cash flow of any kind--backed by any kind of credit; then you could create a bond that mimicked such a cash flow. In short, the possibilities of creating new products with unknowable risks when applied to the financial system are endless.”

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