Risk Retention in Collateralized Loan Obligations
(Sep 2013)
Last week we covered the SEC's proposed risk retention rules for securitized assets such as collateralized debt obligations (CDOs) and mortgage backed securities (MBS). One of the reasons why these types of structured deals are so complex is because they are divided into many different securities, called 'tranches,' with different levels of risk. We explained tranching in our post, What is a CDO, Anyway?
The new proposed rules require sponsors of securitizations to keep at least 5% of each...
Why Do Volatility ETPs Reverse Split?
(Sep 2013)
We still get a lot of questions about VXX, TVIX, and all of the other VIX-related exchange-traded products(ETPs). We've talked before about the persistent loss of value due to negative roll yield, as well as issues surrounding TVIX's suspension of share creations. We've also talked about some of the newer volatility products that attempt to mitigate some of the issues with the older generation of products. We've also analyzed whether VIX-based ETFs could serve as a hedge to equity...
Cat Bonds and Contamination Risk
(Aug 2013)
Many pension funds have struggled to achieve sufficient return on their investments in the current low interest rate environment. Some have begun investing in insurance-linked securities, particularly catastrophe ('cat') bonds. You can find our primer on insurance-linked securities on our blog post, "The Basics of Insurance Linked Securities"; essentially, insurance companies issue cat bonds to transfer the risk of catastrophic losses to investors, meaning cat bond investors suffer losses in...
Morgan Stanley's Excessive Municipal Bond Markups
(Aug 2013)
Yesterday, FINRA fined Morgan Stanley for best execution and for charging excessive markups or markdowns. We have been covering markups extensively, and we have taken the Morgan Stanley municipal bond transactions identified by the FINRA action and applied our markup calculation methodology to calculate the distribution of markups charged by Morgan Stanley.
Let's start with an example. FINRA flagged a customer purchase of $145,000 in a West Virginia municipal bond (CUSIP: 95639RBW8) on...
Do Leveraged ETFs Increase Stock Market Volatility?
(Aug 2013)
Leveraged exchange-traded funds (LETFs) are controversial investments. Because they can be leveraged as much as 3x, and can be linked to highly volatile underlying assets, their daily price movement is typically very dramatic. Also, LETFs tend to lose value over time if their underlying assets are relatively volatile due to rebalancing effects, something we've covered in our blog post "Leveraged ETFs", as well as in our research papers, "Leveraged ETFs, Holding Periods
and Investment...
Structured CD with an Exotic Embedded Option
(Aug 2013)
In the past few months, we have constructed a database of thousands of structured certificates of deposit (CDs). We have analyzed and evaluated hundreds of these CDs and have compiled these results into a recently completed study . Our results indicate that structured CDs are usually issued at significant discounts to face-value (comparable to structured products), offer little if any market exposure and are often less valuable than contemporaneously issued fixed rate CDs.
We've recently come...
Municipal Bonds Trading in ETFs
(Aug 2013)
About a month ago, we spent a full week highlighting research conducted at our firm that shows the degree to which investors are harmed by excessive markups in municipal bond trading. In the paper, our colleagues argue that low-cost improvements in disclosure requirements could largely eliminate these transfers of wealth from taxpayers and investors to the brokerage industry.
After the research was completed, we began thinking about other ways investors gain exposure to municipal bonds. For...
Calculating Retirement Income and Fees from a 401(k) Account
(Jul 2013)
Saving for retirement means asking a lot of questions.
What monthly income will you need? Forbes claims this is the fundamental question that is often overlooked by 401(k) account holders.
"The lump sum in your 401(k) may seem like a lot, but when you translate it into a monthly income stream over 20 or 30 years, it may not be as much as you think," [Jeanne Thompson of Fidelity] says. "Breaking it down into how much the money will provide will give you a much better picture of how much you'll...
The Basics of Insurance Linked Securities
(Jul 2013)
Financial innovation is typically associated with banks, but lately we've seen a number of new financial products developed and sold by insurance companies. Some of the most interesting products are known as insurance-linked securities, or ILS.
In the broadest sense, ILS transfer risk from insurance companies to investors. The largest segment of the ILS market is in catastrophe bonds (or 'cat bonds' for short), whose interest and principal payments depend on a specifically defined natural...
Similar Structured Product Premia in US and Europe
(Jul 2013)
One point we've made again and again in our research is that structured products -- debt securities with market-contingent payoffs -- tend to be priced at a premium to face value. We have documented premia in reverse convertibles, autocallables, absolute return barrier notes, principal-protected notes, dual directionals, and over 17,000 individual products freely available in our searchable structured product database.
Recently, the SEC has required structured product issuers to disclose an...
