In the news this week

Author: John Crabb, Karry Lai, Olly Jackson | Published: 24 Aug 2018
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Americas: Setting the standards

The race to be the globally recognised replacement for the London Inter-bank Offered Rate (Libor) took another twist this week, as Swiss bank Credit Suisse issued a $100m six-month certificate of deposit on Monday, the first bank to do so. Tied to the Secured Overnight Financing Rate (Sofr), this is now the third debt issuance, all of which coming over the last month, following bonds from US government-sponsored mortgage lender Fannie Mae and the World Bank. The benchmark rate is a clear frontrunner, following scandals tied to Libor, and the issuance of corporate debt gives it a significant boost. In related news, Chicago based futures and options exchange CME announced this week that it intends to offer futures in the UK equivalent Sterling Overnight Index Average (Sonia) on October 1.

Late last week, President Donald Trump asked the Securities and Exchange Commission (SEC) to review a law in place since 1970 that requires public companies to release quarterly earnings. The request was met with a mixed response, some support it and suggest it would aid long term planning, while others are concerned it could hinder transparency. The move itself was called out, as the presidential office does not have the authority to ask the SEC to do anything.

It was a bad week in Venezuela, even by its current absurdly low standards. On the same day that the country was hit by not one but two earthquakes, Maduro’s government issued a new sovereign bolivar. The move is an effort to curb the near 3000% hyperinflation of the last month that has rocked the country and made simple food products near unaffordable for its population.

The news also surfaced from the South American problem-child that US energy company ConocoPhillips agreed a $2 billion arbitration agreement with its state owned oil and gas company PdVSA that will allow it access to its Caribbean refineries. Not only will this remove $2 billion from the eventual coffers of existing debt holders, it is likely to spur other companies in similar situations – like Canadian goldminer company Crystallex – to follow suit with arbitration cases of its own. 

Asia Pacific: Change is necessary

China’s Vice Premier Liu He said on Monday that China needs to give more support to small and medium-sized enterprises by providing more options for financing. These companies are facing increasing challenges amidst the China-US trade war and have had difficulty in accessing loans from banks, given China’s increasing efforts on deleveraging in the past 12 months. In late June, the People’s Bank of China announced that $100 billion would be provided to banks to help small businesses and finance debt-to-equity swaps which would help bailout firms facing cash troubles.

Dagong Global Credit Rating, one of China’s big four bond rating agencies, has been banned from assessing bonds for a year after it was found to have provided fake information to the regulators. The National Association of Financial Market Institutional Investors has found that the company has charged high fees to rated companies which seriously violated its independence to provide consulting services. The China Securities Regulatory Commission criticised the company for its poor internal governance and unqualified management team. Unreliable ratings have been plaguing the market, resulting in the majority of bonds being rated AA or higher. Although China has indicated that it will open up the credit rating industry to foreign players they are currently only allowed to participate via joint ventures.

EMEA: Challenging authority

The European Banking Authority (EBA) has said that the upcoming Capital Reporting Requirements (CRR2) may clarify which instruments banks can include in Common Equity Tier 1 (CET1). This follow the recent annulment of a European Central Bank (ECB) decision on six French banks that special deposits should be reclassified. Societe Generale, BNP Paribas, Credit Agricole, Credit Mutuel, La Banque and Groupe BPCE all deposited with state institution Caisse des Dépôts et Consignations (CDC) and began legal action against the ECB in 2016, after it demanded that the banks set aside money classified as CET1. The decision to annul the ECB’s decision by the General Court last month lowers the capital requirements of the six French banks by billions, but could also give encouragement to other banks to challenge ECB decisions, many of which are becoming increasingly frustrated at its ECB’s creeping mandate in recent years.

While Britain’s exit out of the EU is drawing growing attention, attention is also being drawn to Italy, following the election of euro-sceptic parties League and Five-Star Movement and ongoing concern about their financial stability. Speculation is intensifying that speculators are preparing to attack Italian financial markets in August; even undersecretary to the Prime Minister, Giancarlo Giorgetti, admitted that the market was ripe for speculator exploitation, given the thin trading volumes in the summer. This will do little to ease fears about the EU's third biggest economy.

Bafin executive director Raimund Roeseler said that Germany needs global banks to help domestic companies expand operations abroad and criticised banks lowering standards for corporate credit. The comments come amid the restructure of Germany’s biggest bank, Deutsche Bank, after appointing new chief executive Christian Sewing. The bank plans to cut personnel and said that it would focus on European clients, rather than attempting to compete with American-based banks.