BIS Report on ABX and Pricing Subprime Mortgage Risk
The Bank for International Settlements has issued its Quarterly Review this month which includes a report entitled, "The ABX: How do the Markets Price Subprime Mortgage Risk?" The report provides an introduction to the ABX market and discusses pricing basics and mechanics and what drives these prices. The report also discusses housing and other mortgage market fundamentals. The report concludes that the use of ABX prices are "unlikely to be good predictors of future default-related cash flow shortfalls on outstanding subprime ABS" and that "declining risk appetite and rising concerns about market liquidity have provided a sizable contribution to the observed collapse in ABX prices since the summer of 2007."
Click here to read full BIS Report, "The ABX: How do the Markets Price Subprime Mortgage Risk?"
South Dakota Ballot Initiative Banning All Short Sales
On November 4, South Dakota citizens will be voting on "South Dakota Small Investors Protection Act," a referendum known as Initiative #9, that would make it a civil offense to engage in any type of short sales. While Initiative #9 has been characterized as targeting illegal "naked short sales" it actually prohibits a registered securities dealer or investment advisor from selling securities they do not own, or failing to deliver securities within three days of a sale. In so doing, Initiative #9 prohibits outright any and all types of "short selling." It also targets the failure to settle a securities transaction within three days.
Initiative #9 is not limited to South Dakota-related transactions. It applies to transactions anywhere by any company that is registered to do business in South Dakota, which includes virtually all major national broker-dealers. No nexus to a South Dakotan investor, issuer, or registered representative is necessary to violate the law. Initiative #9 applies to broker-dealers registered in South Dakota.
Credit Corner:
A Special Section of the Weekly Report on News and Policy Developments relating to Today's Markets and What Every Asset Manager Should Know.
SIFMA Supports Retaining References to Credit Ratings in Regulations: Recommends SEC Focus on Improving Ratings Process
In a comment letter filed today with the SEC, SIFMA cautions against proposals to remove references to credit ratings in regulations, which the SEC issued with the intention of avoiding overreliance on credit ratings and promoting independent analysis.
SIFMA's Credit Rating Agency Task Force does not believe the possibility of undue reliance on credit ratings supports the deletion of references to and use of credit ratings in regulations. Moreover, the Task Force finds that the incorporation of credit ratings in regulations in many cases provides an appropriate independent minimum threshold, and is an important data point that should be retained as part of an investor's overall credit analysis. Removing these references may increase apprehension among market participants faced with the challenge of complying with new, vague standards, increase uncertainty among investors who rely on the protection and transparency the ratings provide and increase confusion among market participants subject to competing regulatory frameworks.
The letter also notes that determining the appropriate degree of reliance on credit ratings is less of a regulatory issue and more of a best practices one. Finally, the Task Force stresses that credit ratings and the ratings process itself will be more transparent once the SEC implements Part 1 of its recent credit rating agency reform proposals and recommends that the SEC focus its efforts on ensuring that the proposed rule amendments in Part 1 achieve their stated objective.
The SEC proposal would amend portions of the Investment Company Act, the Investment Advisers Act and the Securities Exchange Act. In several instances, the proposals would remove an objective, ratings-based component of specific rules under these Acts and replace it with subjective standards. In its letter, SIFMA notes the potential for uncertainty, decreased transparency and market disruption caused by the new discretionary standards.
For example, Rule 2a-7 of the Investment Company Act limits a money market fund's portfolio investments to those securities that have received a short-term rating in one of the two highest categories from "the Requisite NRSROs" (or have been determined to be of comparable credit quality to such securities) and have been determined by the fund's board of directors (or its delegate) to present minimal credit risks. Among other changes, the proposal would eliminate the first requirement and rely solely on a fund's board of directors (or its delegate) to make minimal credit risk determinations. SIFMA strongly opposes this proposal.
The SEC proposal would also amend Rule 15c3-1, commonly known as the net capital rule, under the Securities Exchange Act, by substituting two new subjective standards for the rating-based standards currently used to determine the haircut on commercial paper and non-convertible debt securities or preferred stock. A commercial paper instrument would have to be subject to a minimal amount of credit risk and have sufficient liquidity such that it can be sold at or near its carrying value almost immediately. For non-convertible debt securities or preferred stock, the instrument would have to be subject to no greater than moderate credit risk and have sufficient liquidity such that it can be sold at or near its carrying value within a reasonably short period of time. Brokers would be required to explain how the securities they use for net capital purposes meet the new subjective standards. SIFMA notes that broker-dealers have dependably relied on credit ratings under the existing rule and finds no substantial added benefit to the amendments, but does caution that the removal of a transparent and predictable standard creates uncertainty.
Click here to read SIFMA Comment Letter to SEC
About the SIFMA Credit Rating Agency Task Force:
The Task Force is a global, investor-led industry member task force formed to examine key issues related to credit rating agencies. It is comprised of 37 individuals from the US, Europe, and Asia, and includes asset managers, underwriters, and issuers who are experts in structured finance, corporate debt, municipal debt, and equity securities. The Task Force has been designated by the President's Working Group on Financial Markets (the "PWG") as the private-sector group to provide the PWG with industry recommendations on credit rating matters. More information on the Task Force, including a roster of Task Force members, click here.
Updated SIFMA's AMG Best Execution Guidelines for Fixed-Income Securities
This week, SIFMA's Asset Management Group made updates to it Best Execution Guidelines for Fixed-Income Securities White Paper (issued January 2008). The White Paper further explains the concept of "soft dollars" in connection with research and fixed-income securities.
Lunch and Learn on New Collateral Management Issues: September 11
The Asset Managers Forum will host a Lunch and Learn on New Collateral Management Issues on September 11, 2008 from 11:30 a.m. to 1:30 p.m. at SIFMA's New York offices at 360 Madison Avenue, 17th Floor (entrance at 45th Street). This event will offer an inside track review on major industry recommendations and compelling real-life examples of the challenges of collateral management today. Join the discussion of what asset managers believe should be done on an industry-wide basis to enhance collateral management practices.
Click here for the full agenda
As always, space is limited, so please register today to ensure your spot!
Training Class: Lifecycle of a Trade for Operations: September 19
The Asset Managers Forum will host a GFMI training class on September 19 that will introduce registered attendees to the trade lifecycle and its related infrastructure. This training class will cover both the U.S. and international markets. Participants will follow the sequential flow of functions that begins with a trade as a result of investment decision-making by a portfolio manager through the settlement of contractual obligations. As a result of this class, attendees will be able to:
1) Identify the critical functional areas related to the lifecycle of a trade from the inception of the customer's order through the settlement, as well as the follow-up required for the effective management of failed trades.
2) Distinguish the roles and responsibilities of the portfolio manager, buyside trading desk, broker/dealer, custodian, prime broker and fund administrators as they relate to the lifecycle of a trade.
3) Analyze operational risk related to the lifecycle of a trade.
Click here to register for the 9/19/08 Training Class: Lifecycle of a Trade for Operations
SIFMA's eTechnology Conference & Exhibit: September 16
On September 16, 2008, SIFMA will host its Annual eTechnology Conference and Exhibit in New York City which will focus on trading and risk strategies and systems in the fixed-income and equity markets.
Important topics to be explored for both the fixed income and equities markets include:
1) Trading platform advances related to execution, risk monitoring, valuation, collateral management and operational risks.
2) Best execution, transparency - new challenges driving continued improvements to platforms and venues in these areas.
3) Technology convergence for options, derivatives, futures, commodities, FX and equities?
4) Algorithmic trading, smart order routers, crossing engines, dark pools - technology becoming too sophisticated? Or, is it keeping up with the demand and global challenges?
5) Implications of technology on global convergence in the markets for risk management and operations integration.
Click here for more information and to register
eTechnology 2008 is designed by industry insiders who focus on the above issues in their day-to-day responsibilities, and thus are in the forefront of developing the latest in trading/risk strategies and systems to meet those challenges. The one-day program will enable participants to learn from these individuals about the latest trends in electronic trading and risk assessment. Don't miss this year's top event for the eTechnology community.
Important Publications:
SIFMA SmartBrief (past five issues)
SIFMA Regulatory Update
SIFMA Washington Weekly