Week InReview

Things that make you say 'Hmm....' 
If I can't read the annual report, should I invest?  A cautionary tale reminiscent of "i f you have to ask you probably can't afford it."

"We find that less readable annual reports are associated with less favorable credit ratings from S&P and Moody's and more frequent and larger magnitude disagreements between S&P and Moody's about the initial rating of a new bond. We also find evidence that less readable annual reports are associated with higher costs of debt financing. In terms of magnitude, we find that if a company improved its readability from the 75th to 50th percentile in our sample, then it would save approximately $440,000 annually in interest for a bond with a face value of $430 million, the average in our sample."

An excerpt from Does Readability of Financial Disclosures Affect the Bond Market? in The CLS Blue Sky Blog
Friday, December 9, 2016
Let's recap
In case you missed it . . .
Amending much of the Obama Administration's policies will be difficult, but a law known as the Congressional Review Act (CRA) will allow Congress to bypass the filibuster and rescind any rule issued during the last six months of President Obama's term (Dec 8)

Through a FOIA request, Bloomberg obtained documents that provide a behind-the-scenes look at some of the private forecasts and deliberations of Fed staff members (Dec 7)

At less regulated firms, 'scarlet letter' matters less; fintech startups, small brokerages among beneficiaries (Dec 7)

The Commodity Futures Trading Commission revised its proposed rules for limiting positions that traders can hold in the commodity markets, dashing expectations that it would finalize the rules by year-end (Dec 5)

Rules laid out by SEC Chair Mary Jo White face uncertain future;  President-elect's financial regulation advisers favor deregulatory approach; most of White's initiatives aren't required by law (Dec 5)
'The Impact of Regulations on Short-Term Financing'
Takeaways from House Financial Services panel hearing
(Oct 7) The House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises (GSE)  held a  hearing on "The Impact of Regulations on Short-Term Financing." Here are some highlights:

Shadow banking is an "absolutely accurate" name as it refers to institutions that lie outside a formal banking entity, said Mike Konczal, fellow at Roosevelt Institute.  "It gives you a sense of how it has emerged in a way that creates systemic risk, that creates contagion risks."

"We want to understand regulations as overlapping in a good way because they were designed to do that," said Mike Konczal, fellow at Roosevelt Institute.  Risk-weighting assets is "pro-cyclical," level of importance depends on where economy is in the credit cycle; works opposite to the leverage ratio.

FSOC, SEC aren't "devoting enough resources to a cumulative impact study," said Thomas Deas Jr., chairman of National Association of Corporate Treasurers. "There's an interaction and they haven't studied that."

" I don't think anyone, including the SEC, imagined $1.2 trillion was going to leave prime funds. That exceeded everyone's worst-case scenario," according to Anthony Carfang, managing director at Treasury Strategies. Regarding slowing prime fund outflows as stable is like "falling off a cliff and saying you survived. Surviving is not what I'd call stable."

"When we get into more strained conditions, we'll see the effects of money market reforms," said Thomas Deas Jr., chairman of the National  Association of Corporate Treasurers, said during hearing.  "When money flows out of prime money market funds, they increase the cost of financing for our businesses."

"Gates and fees, as well as floating NAVs, are all problems," said Anthony Carfang , managing director at Treasury Strategies.  Floating NAV is the "threshold issue," gates and fees are a "longer-run problem."

"We already know what money market stress looks like in a fixed NAV market," said Mike Konczal, fellow at Roosevelt Institute.

"Regulations that target the same risk with overlapping rules may weigh on vital market functions," said Robert Toomey, managing director and associate general counsel at SIFMA.  "Significant regulations that have been proposed have direct impact on short-term funding markets."  SLR, LCR, NSFR may impact short-term funding in "different ways but the overall interaction of the rules is unclear."  Creates concerns "conflicts may become evident during stressed situations."

Since the SEC passed money market regulation in July 2014, " prime funds have been crushed, decimated," Anthony Carfang, managing director at Treasury Strategies, said during testimony.   SEC reforms were intended to improve transparency of money funds, while being "successful in providing safety and soundness without impairing funds."  The three biggest regulations - Basel, Dodd-Frank and money fund reform - are 'bold experiments.' All experiments went into the test tube at the same time and we're now seeing the uncontrolled reaction of that."

To read witness testimony:
  • Anthony J. Carfang, Managing Director, Treasury Strategies, a division of Novantas, Inc.
  • Robert Toomey, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association
Freddie and Fannie
Moving closer to backing common MBS
(Dec 8) The Federal Housing Finance Agency said Freddie Mac  has started using the "common securitization platform" to help issue mortgage-backed securities, one step in the development of a common mortgage-backed security backed by bonds from both Freddie Mac and Fannie Mae.  The FHFA also said it plans to issue a timeline for the implementation of the next release of the platform, which includes Fannie Mae, in the first quarter.  The single security is expected to enter the market in 2018, which the agency says could help to improve MBS liquidity.
Automated trading strategies
'Traditional' futures users worried: Massad
(Dec 6) Automated trading strategies are making "traditional users" of futures markets question whether to stay in the marketplace, CFTC Chair Timothy Massad said. Automated traders, who now make up 50 to 60 percent of volume in many contracts, typically seek to close out their positions and be "flat" at the end of the day, Massad told the Economic Club of New York.  Such a strategy works against farmers, ranchers and other users of futures contracts who want to transfer business risk to other market participants acting as liquidity providers, he said. And their concerns, "which I hear frequently, deserve attention." Massad also noted that "clearing is no panacea" and we "should not require clearing of all swaps."
Binge reading disorder
Hand-curated, chosen with love
The Oscars of paper currency
Yes, there's an award for best bank note. No, the U.S. never wins. (Dec 1)

Regulation without borders comes under fire in Washington
As a matter of law, there is no reason domestic banking supervisors must put into effect the recommendations of the Financial Stability Board and other international regulatory efforts, but the consequences of noncompliance are high

Mansions don't produce much alpha
Beware of claims that real estate, much less luxury housing, is a great investment. Stocks are almost always better.

A cheat sheet on the deglobalization of the financial world
From banking credit, bond-market flows to emerging-market capital trends, we present a bevy of charts to sketch the landscape for financial globalization

Trump fans seeing Reagan economic redux forget lessons of 1980s
President-elect's policies may not pack same punch as Reagan's; rising budget, trade deficits under Reagan a warning for Trump