Swaps Accounting: FVA as a Flawed Convention

Leif Anderson, co-head of the global quant group at Bank of America Merrill Lynch, and two co-authors have prepared a draft of a paper that appears to identify an important error in the conventions for adjustments that derivatives dealers make to the disclosed valuations of their swap books.  It sounds like a very wonky sort of subject, but the paper does raise the broader question of corporate governance in investment banks.  Anderson and his co-authors (Darrell Duffie and Yang Song) describe some of these adjustments as functioning as a wealth transfer from the shareholders of an entity to its creditors/counter-parties.

It seems unlikely that such a practice will halt unless shareholders make an effort to halt it. And this in turn would seem an ideal cause for alpha-seeking shareholder activists, who may even now be crunching the numbers to confirm for themselves that Anderson et al are correct, and to figure out the angles in this for themselves.

Anderson, who holds a PhD in finance from Aarhus Business School, Denmark, is co-author of Interest Rate Modeling, with Vladimir Piterbarg, a classic work in the quant world.

The new paper, available online, although described by its authors as an “extremely preliminary draft,” makes categorical claims.

From the Beginning

Let’s begin with the beginning: the key accounting device at issue is called a “funding value adjustment” or FVA.   What it is on its face, as the phrase suggests, is an adjustment to the market value of derivatives that acknowledges the costs of the cash used to enter or maintain the unsecured derivatives position.  In other words, the swaps desk borrows money from its company Treasury, and charges the cost of that action against the value of its swaps position.

The authors compare FVA unfavorably to other adjustments, such as the credit valuation adjustment and the debt valuation adjustment, both of which are an established part of banks’ financial statements and are provided for in the generally accepted principles of fair-value accounting.  FVA came about because derivative desks don’t have access to funding at secured financing rates. They borrow from their firms’ treasuries and they are charged for that access as unsecured lenders. So (on the usual account of the significance of the adjustment) they modify the recorded equity value of their derivatives positions to reflect the present value of that charge.

The modifications can be quite considerable in total. In the Q4 2014 the Bank of America Merrill Lynch disclosed a FVA of $497 million.

There seem to be significant variations in how FVA gets done. The Office of the Comptroller of the Currency has announced the creation of a working group to look into the matter.

It’s a Bad Idea

But Anderson et al, in arguing that the use of an FVA against the derivative position is itself a bad idea, are making a broader point than the Comptroller’s concern that it isn’t always done in the same way. These authors are making a point based on the fundamental accounting idea of symmetry as applied to the swap itself.  In the absence of frictional default distress costs, the value to one dealer of entering the swap must be equal and opposite to the value of the same swap to the counterparty. After all, the total of cash flows on a swap for both dealers will add up to zero.

Further, the violation of this principle has marketplace consequences. The paper suggests inefficiencies it may motivate, and efficient transactions the practice may impede.

What Do Mamp;Ms have to do with this?

The practice also violates what is known to finance economists as the Modigliani-Miller theorem, first formulated in the academic literature in 1958. The MM theorem has become one of the foundations of thought about capital structure in the decades since.  It holds that in the absence of transaction costs, and in a context in which individuals and corporations borrow at the same rate, a change in the debt-to-equity ratio of a firm will not change the firm’s valuation.

The author’s say that the MM theorem does not “precisely” apply to the accounting issue, but regard it nonetheless as a valuable “informal argument” against FVA as currently practiced.

Though the reasoning gets intricate, the authors’ proposal is common sensual: that the costs of the cash borrowed intra-firm for swaps ought to be worked into what the trading desks of the counter-parties charge each other, rather than being charged (asymmetrically) against the value of the position each holds.

The issue, and variations it suggests, is likely to get more pressing over time, as regulators impose margin requirements on derivatives dealers and as more types of value adjustments are added to the already complicated mix of accounting practices.

The 9 Simple Money Secrets That Transformed This Mom’s Life

Get involved

Michele doesnt enjoy dealing with money, so she leaves it to her husband. Hes amazing at it, while I just want to cover my eyes, she says. Blayney believes Micheles uncertain grasp of the familys situation adds to her anxiety: I think a lot of her worry is really that this is all so unknown. If she had a better sense of her finances, she might feel more secure. Blayney recommended that Michele meet weekly to discuss money with Michael. Even if he is the spreadsheet king, Michele might participate by, say, helping to set short-term budget goals and prioritizing them, or reviewing bills for accuracy.

Debt Help:Michele will be visiting the How to Repay Your Loans tab atStudentAid.ed.govto see if shes eligible for student loan relief. If you have a federal loan and have been paying it off while working full-time in public service or at a tax-exempt nonprofit, you may qualify.

Chinese consumers register 3m cards to Apple Pay in 48 hours

Chinese shoppers activated 3m bank cards with Apple Pay within two days of the mobile payment service’s launch, according to China Merchants Bank. “China Merchants Bank says its customers connected 1m bank cards with Apple Pay in the first two days of the launch, representing 35% of cards connected,” Internet Retailer reports. “China UnionPay reported that Apple Pay users spent 101 yuan (US$15.5) on average on the first day of the service and about 47% of purchases were above 10 yuan ($1.5).”

Women outscore men in creditworthiness

o Women have more cards – but less debt.

The average woman has 23.5 percent more open credit cards, Experian found. That equates to an average of 3.7 open cards for women and 3 for men. Women have both more bank cards and store retail cards (which come with those tempting discounts for opening them) than men, but the gap between the sexes is greater in the number of store cards. While women may have more credit cards, they carry, on average, 3.7 percent less debt than men. That adds up to a still-significant $26,610, to mens $27,627.

o Men have bigger mortgage loans and higher delinquencies.

The average mortgage origination amount for men is $231,089; for women, its $212,912. That lower balance could make it easier for women to meet their payments. Just 0.79 percent of women have a mortgage payment 60 days delinquent, compared to 0.86 percent of men. This might seem a small difference at first glance, but the gap between delinquency rates is more than 8 percent.

o Across states, men and women in Montana have the fewest instances of late mortgage payments. The opposite holds for men in New Jersey and women in Rhode Island.

o Minnesotans win the state credit-score derby.

The highest average credit scores for both sexes are found in Minnesota, where men score 703 and women score 710, out of Experians Vantage range of 300 to 850. And drilling into US metro area figures reveals that Minneapolis is home to the men with the highest average scores, at 705. Women in Green Bay, Wisc., do even better, with an average score of 709.

o Nevada has the dubious distinction of having the lowest average credit score for men, at 645. For women, the lowest scores hail from Mississippi, with an average of 640. The biggest gap between the sexes in credit scores was in Oregon, where the average for men is 677 vs. 689 for women.

Only quality rates your concern

Hong Kong shares finished 0.2 percent lower at 20,257 yesterday but the Shanghai Composite Index rose 0.2 percent to 2,870 as Premier Li Keqiang admitted the economy was facing difficulties but said there was no danger of a hard landing.

China further tightened restrictions on purchases of Hong Kong insurance products by mainland investors to avoid further capital outflows.

Many had already suspended online payments using Chinas UnionPay bank cards.

A month ago, China placed transaction limits on the use of UnionPay cards to buy Hong Kong insurance products but people can still use multiple transactions daily in a way that makes capital flight possible.

Total restriction is the only way to stop outflows. Foreign insurance companies will certainly face some pressure. AIA (1299) fell 0.5 percent. But the new curbs did not help mainland insurance companies much. China Life (2628) fell 0.5 percent to HK$18.30 after Moodys Investors Service cut Chinas insurance sectors outlook from stable to negative.

This was another move by the rating agency to make negative comments on the mainland and Hong Kong.

As a small investor, you can choose to trust Li or believe Moodys. But Dr Check would prefer not to be too bullish or bearish. I prefer to choose quality shares and buy if they fall to an attractive level.

Valuations of China Travel (0308) and Guangdong Investment (0270) are not expensive. Dr Check and/or The Standard bear no responsibility for any investment decision made based on this column.

Heartless thieves steal £5000 from great-gran

DOORSTEP thieves stole £5,000 from a great-grandmother after distracting her and taking her bank cards.

Hazel Ainsworth’s debit and credit cards were stolen from her purse outside her Hampshire home while she was giving directions to a couple claiming to be trying to get to Winchester.

The pair went on a “spending spree” with cash taken from her account in shops and cash points across the south.

It wasn’t until days later that Hazel, from Romsey, was told that the cash had been stolen.

Christchurch scammer Henry Halliday admits targeting elderly women living alone

A member of a ring of scammers has admitted cleaning $20,000 out of the bank account of a 94-year-old woman after getting her bank card.

Henry Edward Halliday, also known as Henry Edward Taylor-Halliday and Samuel Edward Taylor, 26, has admitted three charges of dishonestly using bank cards.

Christchurch District Court Judge David Saunders remanded him in custody for sentencing on May 27. He asked for a pre-sentence report, an assessment of his suitability for home detention, and a report on his ability to pay back the money.

Although he has been remanded in custody, Halliday has a hearing to consider his release on electronically monitored bail scheduled for April 7.

* Three alleged scammers held in custody    
* Con artists target elderly people in Canterbury
* Con artists who stole 94-year-olds savings also targeted retirement village 
* Police missed a golden opportunity to catch Canterbury scammers

Halliday – allegedly accompanied by a co-offender – took $20,000 from the 94-year-old womans account in 60 transactions from January 31 to February 1, and $14,000 from another womans account a few days earlier.

He also admitted getting more than $2000 through eftpos transactions and cash machine withdrawals using the bank card of an 80-year-old Christchurch woman.

He said he had obtained the bank cards from an associate.

The 94-year-old woman, who lives alone, told the police she was disgusted with herself for not realising what was going on. The scammers had taken all of her savings and she did not know if she would get any of it back. It would also impact on her family.

Ill be a lot more wary of anyone coming to my door from now on and I definitely wont let them in, she said.

Massachusetts Coalition For The Homeless Legislative Action Day 2016, The Great Hall, Massachusetts State House

Legislative Action Day 2016: Advocates demand better funding for low-income families and homelessness prevention programs.

Last Thursday morning March 3, around 200 advocates, providers, and homeless people gathered at the State House’s Great Hall for the Massachusetts Coalition for the Homeless’ Legislative Action Day 2016( http://mahomeless.org/advocacy/item/2015-2016-legislative-session-bill-p…). The six hour event consisted of three hours of testimonies, legislative remarks, advice for lobbying legislators, and a call to declare the homelessness situation a State emergency, with the rest of the day reserved for attendants to meet with their representatives and senators.

The Day of Action aims to amend the upcoming FY2017 state budget to better fund low-income households, to expand the coverage of state aid programs, and to secure rights for the homeless.

One top priority was family homelessness, and recommendations included adjusting the language found within regulations of family emergency shelter services. Currently, the language states that families must spend 24 documented hours in an environment “unsuitable for human habitation” before qualifying for shelter. Advocates argue that families should receive better homelessness prevention measures and that no family should be denied shelter, no matter how recently they just lost their home. In FY2015, EA approved 494 families with children for services after spending one night in environments like a car, emergency room, or transit station. The first half of FY2016 saw another 273 families.

“We’re on track to having the highest number of homeless families since this policy was implemented in 2012,” said Kelly Turley of the Mass. Coalition for the Homeless. “We want to make sure the safety of children is not on the cutting room floor this year.” Governor Charlie Baker had previously tried to restrict access to EA services, but the legislature shot down his recommendations.

Rep. Marjorie Decker also noted that Gov. Baker plans to drastically reduce cash assistance grants benefits for families receiving SSI (Supplemental Security Income). While Rep. Decker says that much of the money saved from reducing those grants would be reinvested in those families by funding helpful services like transportation for childcare, she would’ve preferred Gov. Baker tried to secure the extra money first. “Can you promise me the day those families lose cash assistance that they wont endure greater suffering?” she asked. “No, they can’t promise that.”

Advocates also hope to expand access to the Residential Assistance for Families in Transition Program (RAFT) to allow more adults and adults without children apply for homelessness prevention resources, and increase the funding from $12.5 million to $18.5 million.

Another program to expand would be the Emergency Aid to the Elderly, Disabled, and Children Program (EAEDC). As Spare Change News previously reported, the EAEDC has never seen an increase in funds since its establishment in the 1980s. Currently, the EAEDC only gives out $303.70 per month–and that’s lowered to $92.80 if you’re homeless). Advocates hope to expand this grant and remove the penalty for homelessness. The bill (HB529) would increase the grant to $428 per month. HB529 is currently in the House Ways and Means Committee.

Advocates also support the Homeless Bill of Rights (HB1129), which is now before the House Ways and Means Committee. The bill would protect their right to freely move about the city, ensure equal rights and treatment from the police and employers, and secure the right to medical care, among other rights. Other concerns, like more funding for homeless youth issues and various low-income aid programs, were explained.

Attendants also heard testimonies from individuals who struggled with homelessness or near homelessness, many of whom managed to secure housing thanks to these types of programs. Nikia Ramsey, for example, was pregnant when she was forced to leave her apartment due to a broken water pipe and moved in with her mom. HomeBASE managed to subsidize a new apartment for a few months, but it wasn’t enough to get her out of debt. Help from friends, families, and eventually securing extra aid managed to get her to a more comfortable and stable point.

“I don’t think I’d ever been so depressed or had so much anxiety,” she said. “I’m finally getting out of this predicament thanks to HomeBASE and the MRVP [Mass. Rental Voucher Program].”

Thomas Holland told the crowd that state funded halfway and three-quarter-way houses helped him beat his heroin addiction and get out of homelessness. While in recovery, he managed to land a job at a local restaurant, and formed a partnership there that eventually resulted in his own business in the North Shore. He’s even a father now. He owes it all to state funded treatment, he says. However, “my understanding is that it’s not quite as easy anymore… Ending homelessness is not just about getting housing, it’s about mental health services, it’s about addiction services, it’s about teaching us how to live.”

The Coalition also celebrated the work of the Advocacy Network to End Family Homeless, handing a commemorative plaque to its convener, Frank Austin.

Many politicians were also in attendance. Representative James O’Day, the official host for the day and a sponsor or co-sponsor for many of the bills discussed, thanked the crowd for their turnout. He also discussed the $2 million budget for homeless youth turnout, and told the crowd the next goal was “to put it to use” and fight for more funding down the road.

While advancements in helping homeless youth were celebrated, there was a consistent current of frustration for many speakers, and from some audience members. Monique Schersinger interrupted Senator Linda Doreen Forry’s speech to voice her issues with the system. She recently lost her housing after her husband died, and said Sen. Forry’s office ignored her call for assistance. Sen Forry promised to connect Schersinger with a lawyer, and agreed that “there is something wrong with this system.”

“We need to hold our agencies accountable,” said Sen. Forry.
For more information, visit this page.

SOURCE: http://sparechangenews.net/2016/03/legislative-day-of-action-2016;


Victory Nickel Completes Equity and Unsecured Debt Private Placement

TORONTO, March 7, 2016 (GLOBE NEWSWIRE) — Victory Nickel Inc. (Victory Nickel or the Company) (CSE: NI, www.victorynickel.ca) today announced that it has completed the next step to strengthen the Companys balance sheet by restructuring a portion of its debt through the first tranche of a private placement of common shares and unsecured promissory convertible notes in settlement of approximately $5,179,000 of current indebtedness to certain of its unsecured lenders (the Promissory Convertible Note Holders) and trade creditors (the Trade Creditors) (collectively the Unsecured Debt Restructuring). The Unsecured Debt Restructuring included issuing 23,247,600 common shares of the Company at $0.05 per share and $0.25 per share, for a weighted average price of $0.12 per common share and issuing $2,443,000 of New Promissory Convertible Notes, as defined below.

Completion of the Unsecured Debt Restructuring represents approximately 50% of the value owed to the Promissory Convertible Note Holders and Trade Creditors that were presented with the terms of the Unsecured Debt Restructuring. The Company will offer those unsecured Promissory Convertible Note Holders and Trade Creditors who have not yet chosen to participate in the Unsecured Debt Restructuring the opportunity to participate in a second and final closing that will occur in the near future. A condition of the Companys secured debt restructuring (see news release dated March 3, 2016) was that unsecured debt held by those unsecured Promissory Convertible Note Holders and Trade Creditors who choose not to participate in the Unsecured Debt Restructuring cannot be paid before the secured debt is repaid in full without prior approval from the secured lender.

We would like to thank our Promissory Convertible Note Holders and Trade Creditors for recognizing the potential for the Companys frac sand and nickel businesses to generate significant cash and lead to a revaluation of the Companys share price under different oil and gas and metal industry circumstances, said Ren Galipeau, CEO. This transaction, combined with the secured debt restructuring will improve the Companys working capital by approximately $12,512,000. We sincerely hope that Victory Nickels equity will generate significant returns for all shareholders in the near future.

Promissory Convertible Note Holders

Approximately $3,932,000 of the debt held by unsecured Promissory Convertible Note Holders was repaid under the following terms:

1) 50% of unsecured promissory convertible notes issued between November 2013 and July 7, 2014 with an interest rate of 14.8% per annum (the Promissory Convertible Notes) were converted to common shares of Victory Nickel based on a price of $0.25 per share.
2) The remaining 50% of the Promissory Convertible Notes were replaced with new promissory convertible notes (the New Promissory Convertible Notes) having the following terms:

  • A maturity date of July 31, 2018.
  • An interest rate of 7% per annum, payable annually or at any time in cash or in shares valued at market at the option of the Company
  • Convertible at $0.25 per share.
  • On conversion of the New Promissory Convertible Notes, holders will also receive warrants, with an exercise price of $0.50 per share exercisable for a five-year period from the date of conversion, to acquire one additional common share of Victory Nickel for each four Victory Nickel common shares acquired.

Outstanding interest amounting to approximately $291,000 on the unsecured promissory convertible notes for the second and third quarters of 2015 was settled in Victory Nickel shares based on $0.05 per share.

Trade Creditors

1) Approximately $477,000 of debt to trade creditors was paid in shares at a price of $0.05 per share.
2) The remaining $477,000 of $954,000 debt to Trade Creditors was paid with New Promissory Convertible Notes with the same terms as outlined above.

As a result of these transactions, the Companys current debt will be reduced by $5,179,000 and $2,443,000 will be reclassified to long-term debt. The current market price for the Companys common shares is $0.02 per share resulting in equity increasing by US$461,000 for the shares issued and a non-cash gain of $2,275,000 being realized.

All dollar amounts in this news release are Canadian dollars. Any dollar amounts in United States currency have been converted to Canadian dollars at an exchange rate of 0.75:1.

About Victory Nickel

Victory Nickel Inc. is a Canadian company with four sulphide nickel deposits containing significant NI 43-101-compliant nickel resources and a significant frac sand resource at its Minago project. Victory Nickel is focused on becoming a mid-tier nickel producer by developing its existing properties, Minago, Mel and Lynn Lake (currently under option to Corazon Mining Ltd.) in Manitoba, and Lac Rocher in northwestern Qubec. Through a wholly-owned subsidiary, Victory Silica Ltd., Victory Nickel at its 7P Plant frac sand processing facility in Seven Persons Alberta, has established itself in the frac sand business prior to commencing frac sand production and sales from Minago.

Victory Nickel Inc.
Ren Galipeau or Sean Stokes
Phone: 416.363.8527
Fax: 416.626.0890
Email: admin@victorynickel.ca

Forward-Looking Information: This news release contains certain forward-looking information. All information, other than information regarding historic fact that addresses activities, events or developments that the Company believes, expects or anticipates will or may occur in the future is forward-looking information. The forward-looking information contained in this news release, including information related to the completion and outcome of any debt restructuring activities reflects the current expectations, assumptions and/or beliefs of the Company based on information currently available to the Company. The forward-looking information contained in this news release is subject to a number of risks and uncertainties that may cause actual results or events to differ materially from current expectations. Any forward-looking information speaks only as of the date on which it is made and, except as may be required by applicable law, the Company disclaims any obligation to update or modify such forward-looking information, either because of new information, future events or for any other reason. Although the Company believes that the assumptions inherent in the forward-looking information are reasonable, forward-looking information is not a guarantee of future performance and accordingly undue reliance should not be put on such information due to the inherent uncertainty therein.