This content is from: Portfolio

May 2010: This Month In Finance

Finance industry news briefs track the latest developments on Wall Street, including the large-trader reporting system; spinning off swaps; and combining securitization and green investing.

Wall Street

• The Securities and Exchange Commission has unanimously decided to create a so-called large-trader reporting system, which would allow the regulator to collect information on large traders’ activities and analyze it. Traders who engage in substantial levels would be required to identify themselves to the SEC by filing a form with the commission. A large trader would be defined as a person or firm whose transactions in exchange-listed securities equal or exceed 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. SEC chairman Mary Schapiro said the regulator plans to monitor these entities because “large traders, including high-frequency traders, appear to be playing an increasingly prominent role in the securities market.”

— Wall Street Letter

• Brazil and Japan are best prepared for an explosion in high-frequency trading, compared to other countries in Latin America and Asia, say experts. Vinode Ramgopal, CEO of Marco Polo Network, says Latin America has rich potential for high-frequency players, because several issues traded in the region are cross-listed in local and international markets. Index offerings set up Brazil nicely for high-frequency traders of multiple asset classes, he adds, noting that the country is also well positioned due to its direct-market access availability, sponsored access laws and co-location facilities.

— Wall Street Letter

Credit and Derivatives

• Derivatives officials say the idea of spinning off swaps desks at the major banks isn’t feasible and conflicts with other expected reforms under consideration by the forthcoming Senate Agriculture Committee bill. Kevin McPartland, senior analyst at the TABB Group in New York, says its workability depends on how the rules are written. “If they force [dealers] to completely spin them off, that just won’t work,” he notes. The suggestion is also incompatible with the requirement for over-the-counter trades to be centrally cleared, since users are required to put up a significant amount of capital to clearinghouses — whereas cutting the entity off from the commercial bank would reduce their access to capital. “Would the individual swaps desks have enough capital to be members of the clearinghouses?” he asks.

— Total Securitization and Credit Investment

• Five-year credit default swap spreads on major investment banks gapped out dramatically after the SEC accused Goldman Sachs of securities fraud, alleging the firm misled investors when marketing a synthetic collateralized debt obligation as the housing market was showing signs of distress. CDS on Goldman widened to 133 basis points from 90 basis points during the week after the complaint was filed, according to financial data tracker Markit. Bank of America, Citigroup, JPMorgan and Morgan Stanley all experienced the same trend.

— Wall Street Letter

Green Investing

• A handful of solar power securitization transactions are rumored to be in the works. Interest in combining securitization and green energy project finance is growing as a result of U.S. President Barack Obama’s focus on clean energy, the waning of the distressed debt market and the gradual recovery of the securitization market. “In the past four or five months, people have been waking up from the malaise and thinking about where else they can get involved,” says one market participant. The exact form of the solar deals and what cash flows would be securitized has not yet been determined.

— Total Securitization and Credit Investment

Real Estate

• The Appraisal Institute is lobbying federal regulators to mandate more robust standards for appraisals of commercial real estate properties. The Chicago-based not-for-profit trade organization has met with representatives of the Federal Reserve Bank of Atlanta, the Congressional Oversight Committee, as well as Tennessee Republican Bob Corker and other members of the Senate Banking Committee. Their goal is to get changes incorporated into the banking reform bill that is being put together by Connecticut Democratic Senator Christopher Dodd, says Leslie Sellers, the institute’s president.

Lenders use appraisals to establish size and pricing when originating mortgages, as well as to determine the current value of mortgages they are holding on their balance sheets. Appraisals also determine whether a borrower is eligible for a modification or extension on loans. Faulty or deficient appraisals are linked to an increase in troubled loans on banks’ balance sheets, Sellers says.

— Real Estate Finance and Investment

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