Tag: Bonds


Remarks at the 4th Annual Fixed Income Conference

Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s recent remarks at the University of South Carolina and UNC-Charlotte 4th Annual Fixed Income Conference, available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

This conference is one stop on a bit of a tour I have been on lately, speaking with academics around the country. In each of those conferences, meetings, and other events I have been encouraging increased dialogue between academic researchers and the SEC. Just last month, I spoke to a group of equity market microstructure researchers at the University of Notre Dame, with a message similar to what I intend to share with you today [April 21, 2015]. [1] That message is simple: your work is vital to helping the SEC accomplish its core mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

Given the talent and collective focus of the people in this room, I do not need to recite statistics about the size of the fixed income markets, the degree to which issuers rely on bonds for debt financing, or the pervasiveness of fixed income products from the largest institutional investor portfolios to the smallest retail investor accounts. Suffice it to say that well-functioning fixed income markets are a concern of nearly all participants in our securities markets.

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More Corporate Actions, More Insider Trading?

The following post comes to us from Patrick Augustin of the Finance Area at McGill University; Jianfeng Hu of the Finance Area at Singapore Management University; and Menachem Brenner and Marti Subrahmanyam, both of the Finance Department at New York University.

According to Preet Bharara, the U.S. Attorney of the Southern District of New York, insider trading is “rampant” in U.S. securities markets, and his actions in the past few years indicate concrete action by his office to combat such activity. In a similar vein, the Securities and Exchange Commission (SEC) has stepped up efforts to chase down high profile insider traders, and has made it its key priority in pursuing errant behavior. Academic studies, including our own, have previously documented empirical evidence of informed trading ahead of major corporate events such as earnings announcements, mergers and acquisitions (M&A) and corporate bankruptcies.

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Making the Municipal Securities Market More Transparent, Liquid, and Fair

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

It is difficult to overstate the importance of the municipal securities market. There is perhaps no other market that so profoundly influences the quality of our daily lives. Municipal securities provide financing to build and maintain schools, hospitals, and utilities, as well as the roads and other basic infrastructure that enable our economy to flourish. Municipal bonds’ tax-free status also makes them an important investment vehicle for individual investors, particularly retirees. Ensuring the existence of a vibrant and efficient municipal bond market is essential, particularly at a time when state and local government budgets remain stretched.

Unfortunately, despite its size and importance, the municipal securities market has been subjected to a far lesser degree of regulation and transparency than other segments of the U.S. capital markets. In fact, investors in municipal securities are afforded “second-class treatment” under current law in many ways. This has allowed market participants to cling to outdated notions about how the municipal securities market should operate. The result is a market that, in the view of many, is excessively opaque, illiquid, and decentralized.

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Impact of the Dodd-Frank Act on Credit Ratings

The following post comes to us from Valentin Dimitrov and Leo Tang, both of the Department of Accounting & Information Systems at Rutgers University; and Darius Palia, Professor of Finance at Rutgers University.

In response to the Global Financial Crisis of 2008-2009, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in July 2010. Among its various provisions, Dodd-Frank outlines a series of broad reforms to the Credit Rating Agencies (CRA) market. Many observers believe that CRAs’ inflated ratings of structured finance products were partly to blame for the rapid growth and subsequent collapse of the shadow banking system. In response, Dodd-Frank’s CRA provisions significantly increase CRAs’ liability for issuing inaccurate ratings, and make it easier for the SEC to impose sanctions and bring claims against CRAs for material misstatements and fraud.

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Banks, Government Bonds, and Default

The following post comes to us from Nicola Gennaioli, Professor of Finance at Bocconi University; Alberto Martin, Research Fellow at the International Monetary Fund; and Stefano Rossi of the Finance Area at Purdue University.

Recent events in Europe have illustrated how government defaults can jeopardize domestic bank stability. Growing concerns of public insolvency since 2010 caused great stress in the European banking sector, which was loaded with Euro-area debt (Andritzky (2012)). Problems were particularly severe for banks in troubled countries, which entered the crisis holding a sizable share of their assets in their governments’ bonds: roughly 5% in Portugal and Spain, 7% in Italy and 16% in Greece (2010 EU Stress Test). As sovereign spreads rose, moreover, these banks greatly increased their exposure to the bonds of their financially distressed governments (2011 EU Stress Test), leading to even greater fragility. As The Economist put it, “Europe’s troubled banks and broke governments are in a dangerous embrace.” These events are not unique to Europe: a similar relationship between sovereign defaults and the banking system has been at play also in earlier sovereign crises (IMF (2002)).

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Volcker Rule and Covered Bonds

he following post comes to us from Jerry Marlatt, Senior Of Counsel at Morrison & Foerster LLP, and is based on a Morrison & Foerster publication by Mr. Marlatt.

The subtler aspects of the Volcker Rule [1] continue to emerge. One of the subtleties is the extraterritorial reach of the Rule in connection with underwriting, investments in, and market making for covered bonds by foreign banks.

Foreign banks that underwrite, invest in, or conduct market making for covered bonds need to review their activity under the Volcker Rule.

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The Effects of Mandatory Transparency in Financial Market Design

The following post comes to us from Paul Asquith, Professor of Finance at Massachusetts Institute of Technology (MIT); Thomas Covert of the Economics Area at the University of Chicago; and Parag Pathak of the Department of Economics at Massachusetts Institute of Technology (MIT).

Many financial markets have recently become subject to new regulations requiring transparency. In our recent NBER working paper, The Effects of Mandatory Transparency in Financial Market Design: Evidence from the Corporate Bond Market, we study how mandatory transparency affects trading in the corporate bond market. In July 2002, the Trade Reporting and Compliance Engine (TRACE) program began requiring the public dissemination of post-trade price and volume information for corporate bonds. Dissemination took place in four phases over a three-and-a-half year period, with actively traded, investment grade bonds becoming transparent before thinly traded, high-yield bonds.

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Do the Securities Laws Matter?

The following post comes to us from Elisabeth de Fontenay of Duke University School of Law.

Since the Great Depression, U.S. securities regulation has been centered on mandatory disclosure: the various rules requiring issuers of securities to make publicly available certain information that regulators deem material to investors. But do the mandatory disclosure rules actually work? The stakes raised by this question are enormous, yet there is precious little consensus in answering it. After more than eighty years of intensive federal securities regulation, empirical testing of its effectiveness has failed to yield a definitive result.

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Who Knew that CLOs were Hedge Funds?

Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. The following post is based on a Davis Polk client memorandum.

U.S. financial regulators found themselves on the receiving end of an outpouring of concern from law makers last Wednesday about the risks to the banking sector and debt markets from the treatment of collateralized loan obligations (“CLOs”) in the Volcker Rule final regulations. Regulators and others have come to realize that treating CLOs as if they were hedge funds is a problem and we now understand from Governor Tarullo’s testimony that the treatment of CLOs is at the top of the list for the new interagency Volcker task force. But what, if any, solutions regulators will offer—and whether they will be enough to allow the banking sector to continue to hold CLOs and reduce the risks facing debt markets—remains to be seen.

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Acquisition Financing 2014: the Year Behind and the Year Ahead

The following post comes to us from Eric M. Rosof, partner focusing on financing for corporate transactions at Wachtell, Lipton, Rosen & Katz, and is based on a Wachtell Lipton memorandum by Mr. Rosof, Joshua A. Feltman, and Gregory E. Pessin.

Following a robust 2012, the financing markets in 2013 continued their hot streak. Syndicated loan issuances topped $2.1 trillion, a new record in the United States. However, as in 2012, financing transactions in the early part of 2013 were devoted mostly to refinancings and debt maturity extensions rather than acquisitions. In fact, new money debt issuances were at record lows during the first half of 2013. The second half of 2013, though, saw an increase in M&A activity generally, and acquisition financing in the fourth quarter and early 2014 increased as a result.

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