Interesting news and articles from the last week that we haven’t gotten a chance to talk about elsewhere, including MiFID and liquidity, a suggestion that Moody’s has preferenced ratings of bonds held by its corporate owners, and securities lending CCPs. Read on.
How does MiFID define liquidity? In “Liquidity at heart of MiFID debate,” International Financing Review, author Christopher Whittall asks how liquidity will be defined in MiFID – a key concept for execution of the directive. “MiFID differs from Dodd-Frank in more than just the scope of its remit. US regulators opted for a top-down approach when designating which swaps should trade on SEFs, setting a coverage ratio of 67% of the total market. Exactly which instruments make the leap to SEFs is mainly dictated by market forces… European Securities and Markets Authority is taking a more prescriptive approach by deciding for itself which instruments should be traded on multilateral platforms. To do this, the regulator is examining a range of criteria, including average frequency and size of trades, the amount of participants trading in a product and the width of bid/offer spreads.” The upshot here is that ESMA will need to not only decide what is liquid but also track it. That’s a tough task. Maybe its best to stick to the adage that liquidity may be hard to define, but you know it when you see it.
Moody’s at fault? A potentially damaging article in Forbes Magazine, “Study Accuses Moody’s Of Ratings Bias Toward Corporate Owners,” by Daniel Fisher, says that “Moody’s gave significantly higher ratings on bonds and derivatives issued by companies in the investment portfolios of its two largest shareholders, including Warren Buffett’s Berkshire Hathaway, and took longer to downgrade them than its rival Standard & Poor’s.” This is a serious accusation and one that will not be taken lightly. Moody’s of course fired back: “Moody’s declined to comment on a copy of the paper sent to them via e-mail on Friday. The company criticized Rajgopal’s methods in an earlier study, telling Bloomberg in February that evidence of bias disappears when looking at ratings for individual issuers, instead of bonds. Issuer ratings better reflect the opinion of analysts about a company’s finances, a Moody’s spokesman said then.” This accusation may or may go anywhere but it does remind us how subjective credit ratings can ultimately be.
Securities lending CCPs as inevitable? Global Investor/ISF published “Securities lending will move to CCPs,” a discussion on whether securities lending CCPs are inevitable or not. According to the article, “The long-running debate over whether securities lending should be conducted via central clearing counterparties (CCPs) has largely been won. The weight of regulatory developments – most notably the favourable treatment of CCPs under Basel – means that they appear to have a bright future.” While we were quoted and are generally supporters of securities lending CCPs, we think that the value of this article was to take a broader perspective on the matter. The more diverse points of view heard on this topic, the better.
Shadow Banking, Regulators and Non-Bank Credit Intermediaries. A recent speech by the Bank of England’s Sir Jon Cunliffe took issue with the term Shadow Banking: “I think ‘shadow banking’, like ‘backstops’ and ‘frontstops’, is an unhelpful and misleading description. To be clear, we want to see more diversity in the way credit is provided in the economy – more players in the banking sector and more non-bank market-based finance…. And, as regards the non-bank financial sector, what some would classify as ‘shadow banking’ – I also think we are starting to see some positive momentum towards the development of diversified credit channels in the UK and the EU – though there is a great way still to go.” Did anyone else just see that big can of worms get opened? Non-bank market-based finance? Isn’t that almost the exact opposite of what regulators want, unless they can then moderate those same non-bank financial actors? That’s a good topic to keep an eye on.