In the News: Auction Rate Securities
(Dec 2010)
Forbes' blogger Bill Singer narrates the story of Grand Circle LLC.
Grand Circle had brokerage accounts at the Royal Bank of Canada (RBC) and Wachovia. Through the recommendation of representatives at RBC and Wachovia, Grand Circle purchased auction rate securities (ARS). For business-related reasons, Grand Circle opened another brokerage account at CCO Investments Services Corp (CCO). Grand Circle's Investment Policy stated that it wanted safe, liquid and AAA rated securities and that...
FINRA Press Release: Reverse Convertibles
(Oct 2010)
FINRA Orders Ferris, Baker Watts to Pay Nearly $700,000 for Inappropriate Sales of Reverse Convertible Notes
The Financial Industry Regulatory Authority (FINRA) issued a press release today announcing that
it has fined the former Ferris, Baker Watts LLC, acquired by RBC Wealth Management, $500,000 for inadequate supervision of sales of reverse convertible notes to retail customers as well as unsuitable sales of reverse convertibles to 57 accounts held by elderly customers who were at...
SLCG Research: Leveraged Municipal Bond Arbitrage
(Oct 2010)
SLCG released today 'Leveraged Municipal Bond Arbitrage: What Went Wrong?'. Leveraged municipal bond arbitrage is a strategy employed by fixed income hedge funds. This strategy buys long term municipal bonds and sells or shorts long term Treasury bonds while hedging with interest rate swaps. The strategy would seek to profit from the difference in the rates it receives from the municipal bonds and the rates it pays on the Treasury bonds and interest rate swaps.
Brokers marketed hedge...
SLCG Research: Auction Rate Securities
(Oct 2010)
SLCG released today 'Auction Rate Securities'.
Auction rate securities were first issued in the mid-1980s by corporations. Over the next two decades ARS were issued widely by institutions ranging from closed-end mutual funds, municipalities to student loan trusts. ARS were long-term floating rate securities whose coupon payments were determined at auctions that were typically held every 7 to 35 days. ARS were long-term securities with short-term floating rates.
Broker dealers marketed...
SLCG Research: Leveraged ETFs
(Aug 2010)
SLCG released today 'Leveraged ETFs, Holding Periods and Investment Shortfalls'.
Exchange-Traded Funds is an investment fund that holds stocks, bonds, or commodities and typically tracks specific indices of such asset classes. Leveraged and inverse leveraged ETFs were first introduced to the market in June 2006 by ProFunds, which promiseds to return a multiple of the underlying index return by rebalancing their portfolios at the end of each day. The total market value of leveraged and...
SLCG Research: Reverse Convertibles
(Jun 2010)
SLCG released today 'What TiVo and J.P. Morgan teach us about Reverse Convertibles'.
Structured products are debt securities that often have unconventional and complex payoff structures. Their payoffs are often linked to a security or index, such as the S&P 500 or the Russell 2000, with asset classes ranging from equity, commodities, currencies to debt. A reverse convertible note is an equity-linked structured product. It is a short-term note that pays a relatively high coupon rate...
FINRA Press Release: Auction Rate Securities
(May 2010)
FINRA Fines Nuveen $3 Million for Use of Misleading Marketing Materials Concerning Auction Rate Securities
The Financial Industry Regulatory Authority (FINRA) issued a press release this week announcing that
"it has fined Nuveen Investments, LLC, of Chicago, $3 million for creating misleading marketing materials used in sales of auction rate preferred securities (ARPS). The Nuveen Funds' ARPS were a form of auction rate securities, which are long-term securities with interest rates or...
Reverse Convertibles tied to TiVo Stock
(May 2010)
J. P. Morgan's 64% Note Tied to TiVo Stock Shows Risks of Reverse Convertibles
Bloomberg issued a news release reporting on the reverse convertible, a structured product, on TiVo.
A reverse convertible note is a type of structured product that is linked to an equity security or an index. It is a short-term note that pays a relatively high coupon rate compared to traditional notes. The returns of the note at maturity depends on whether the equity, called 'reference asset', falls below a...
FINRA Press Release: HSBC Securities
(Apr 2010)
FINRA Fines HSBC Securities (USA) $1.5 million, US Bancorp $275,000 for Auction Rate Securities Violations
The Financial Industry Regulatory Authority (FINRA) issued a press release today announcing that
"it has settled charges with two additional firms relating to the sale of auction rate securities (ARS) that became illiquid when auctions froze in February 2008 - HSBC Securities (USA) and US Bancorp Investments, Inc."
The settlement is detailed in the FINRA AWC No. 20080130571...
SLCG Research: Mutual Fund's Term
(Apr 2010)
SLCG released today 'What Does a Mutual Fund's Term Tell Investors?'
Bond mutual funds are classified by Morningstar as ultra short, short, intermediate or long-term. Bond mutual funds have found a way to hold long-term bonds while being classified as ultra-short or short.
In this paper, we demonstrate how the losses suffered by these funds in 2008 can be explained by the increasing credit risks of holding long-term bonds. Furthermore, we find that the classification of these funds as...
