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from MacroScope:

Selective transparency at the Fed

It’s something of a dissonant communications strategy: Fed officials are willing to tell us what they think will happen three years from now, but not what they discussed three years ago.

The Federal Reserve's public relations arm holds up the chairmanship of Ben Bernanke as a model of transparency. And it’s true. Press conferences and federal funds rate forecasts are major steps forward for a central bank that until the mid-1990s didn’t even tell the markets what it was doing with interest rates.

Still, the old habits of secrecy die hard. Monetary policy transparency aside, the Fed has remained adamantly opaque in other ways – to the point that it took a Bloomberg News lawsuit for it to name the recipients of emergency era loans.

Similarly, it took a Freedom of Information Act request from MSNBC and The Huffington Post to obtain a mostly blacked out version of transcripts for Fed meetings during the worst of the U.S. financial crisis. The Fed only releases full transcripts of its meetings with a five year lag, arguing that this allows policymakers to conduct their discussions more freely.

New research from economists Xavier Freixa and Christian Laux examining the nature of regulatory failures during the crisis makes an interesting distinction between mere disclosure, the raw release of data, and transparency, which is a more directed effort to communicate that information to the public.

We interpret disclosure as providing information, while transparency arises when the information is effective in reaching the market, being adequately interpreted and used.

from MuniLand:

Disclosure is the beat

Disclosure is the beat

On Tuesday at the SIFMA Muni Bond Summit in New York, much of the discussion by bond market participants related to transparency and disclosure issues. A lot of this was in response to new requirements in Dodd-Frank, but there was also an acknowledgement that many problems in the crisis of 2007-2009 came from a lack of information and data in many parts of the market. For example small municipal issuers had more trouble accessing the bond market to issue new bonds if their public reporting was deficient or out of date.

The heavy hitter of the bond summit was SEC Commissioner Elise Walter, who appeared by video link and broke news that the SEC would not ask Congress to overturn the Tower Amendment, a 1975 law that bars the SEC from interfering in the fiscal affairs of state and local governments. She discussed current legislation that would skirt the Tower Amendment and give the SEC authority to require municipal issuers to file disclosure, though it would grant no authority to review and approve those filings. From the Bond Buyer:

Walter repeated her call for Congress to increase the SEC's authority so that it could set "baseline disclosure requirements."

The Tower Amendment to the Securities Exchange Act of 1934 prohibits the SEC and the Municipal Securities Rulemaking Board from requiring muni issuers to file pre-sale disclosure documents.

A draft bill being circulated by Reps. Mike Quigley, D-Ill., and Patrick McHenry, R-N.C., however, would authorize the SEC to require issuers to disclose primary and secondary market bond documents directly or indirectly through dealers or others. It would also give the commission authority to direct the content and timing of those documents.

She also said that the SEC should more broadly examine the practices of the bond markets. The Bond Buyer reports:

"People who have not previously been tuned into what that board is doing really should pay attention," [SEC Commissioner Walter] said.

Separately, Walter said the SEC's muni hearings revealed "certain softnesses in practices."

She said state and local governments need better training in municipal disclosure and better disclosure practices. In addition, she noted there are significant conflicts of interest that affect the pricing of swaps, as well as indications many muni officials do not understand swaps.

Walter said she also wants to persuade the SEC to take a "long-term, deep-dive look" at the fixed-income market and its current structure, but added that such a study and any resulting recommendations may not be completed until after she leaves the commission.

Walter was sworn in as commissioner on July 9, 2008. Her term expires in June 2012.

I'll write more about the issues raised at the bond summit over the next few days. Although much of what was discussed was complex, the conversation helped illuminate many of the market moves that don't necessarily make sense on the surface. Many of these issues are the bedrock of a more open and stable market structure.

from Anthony De Rosa:

Friends, lovers, investors and the messy world of disclosure

Michael Arrington, the bull in the china shop that is the tech industry, recently revised his 2009 proclamation that he would divest himself from the companies he was covering and stop investing in startups to avoid a conflict of interest. In his revision, he announced he has begun investing in startups again and rationalizes it by making the investments public record. This has led to cackles from his peers, most notably from Kara Swisher who pointed out the hypocrisy of his boss Arianna Huffington to allow Arrington to be the sole exception to her policy of not allowing her employees to invest in the companies they cover.

Investments, however, are just one component of what can lead to a conflict of interest. I would submit that a far bigger conflict that goes unspoken and leads to much worse journalism are the relationships writers have with the people they cover. Friends, lovers and acquaintances muddle who gets covered and how they are treated by the people covering them. I can speak with some degree of seeing this with my own eyes when it comes to the New York tech startup beat and the founders they cover. Many of the same people writing about these startups are good friends with the principals, and the nearly flawless fawning coverage reads more like an extended arm of their public relations group than anything resembling real journalism.

On top of that you have people who hop between being journalists and working as either advisers or evangelists who participate in promotional events for products. The conflict of being an adviser or an evangelist is obvious, diluting the person's journalistic ethics and their ability to be impartial.

The participation at various events can be harmless in some cases if it's simply to cover the event and gain information about a product. Too often, though, the participants wind up becoming a shill for the very product and, in fact, in some cases, are even used in the promotional material. They also make their affinity for the product or service known through social media. These folks can no longer be taken seriously on any journalistic level.

Would disclosure help fix this problem? If there was better transparency of the investors, would the relationship the writer has with their subjects lead to a more informed reader who could take those biases into account when reading an article? In a study I was directed to by Boston.com's Courtney Humphries, the answer is that disclosure may actually make writers less ethical.

The study (PDF) found the participants felt that if journalists disclosed their conflicts they would have carte-blance to lay their biases on thick. Assistant professor of organizational behavior at the Yale School of Management Daylian Cain along with with Don Moore at the Haas School of Business at the University of California Berkeley and Professor of Economics and Psychology George Loewenstein at Carnegie Mellon University conducted the study.

In the end the only basis for our ability to weed out good information from bad, propaganda from well balanced editorial or commentary, is our own motivation to seek out alternate sources. Al Gore once changed the famous Thomas Jefferson quote: "A well informed citizenry is the only true repository of the public will" to "The well-informed citizenry is in danger of becoming the 'well-amused audience'".

from Breakingviews:

Investment banks’ trading needs better disclosure

Investment banks offer a plethora of detail on awards and league-table credits in their quarterly results. But they provide only the broadest information on their all-important trading divisions, which generate more than two-thirds of industry revenues. Shareholders should demand greater transparency.

Most bulge-bracket firms just give nebulous comments on market conditions. In its second-quarter results, Morgan Stanley alluded to the "challenging trading environment" in credit and rates (government bonds), while JPMorgan noted "lower results" from these divisions. Credit Suisse gave an indication of the relative size of its trading businesses, but didn't provide specific figures.

Some banks are more forthcoming. UBS provides quarterly revenue figures for key areas -- cash equities, derivatives and prime brokerage in equities; and credit, rates/forex and emerging markets in fixed income. The UK lenders go a little further, with HSBC and Royal Bank of Scotland separating out revenues for their rates and forex businesses.

The figures are enlightening. UBS's numbers show that its emerging market desks bore the brunt of the pain in fixed income in the second quarter: revenue tumbled 70 percent to 73 million Swiss francs ($69 million). Meanwhile, the $1.5 billion that HSBC made trading government bonds and interest-rate products in the first half was well over twice what it made in the second half of 2009.

It's hard to understand the reticence of other houses. By the time results are released, anything that can be gleaned by rivals from past trading performance is old news. Perhaps the worry is that once a firm starts disclosing a figure, it can't easily revert to giving less information. Currently, weak performance by any given trading unit can be hidden from view.

There are few other industries where there is so little transparency about such a big slice of the revenue pie. That may well be one reason why global investment banks trade at just 8.4 times next year's forecast earnings, according to Thomson Reuters. If investors had a better sense of where those earnings came from, they may be willing to pay more for them in future.

from India Insight:

Recall virus dims Maruti A-Star lustre

No. 1 Indian carmaker Maruti Suzuki's recall of its best-selling A-Star vehicles may not cost the company much financially, but sure raises questions about the procedures followed by the company for disclosing such information to investors.

The company says the recall of 100,000 cars began in November, but did not disclose the move until late February.

Maruti told Reuters it had informed European regulatory authorities about the recall -- the A-Star is popular in Europe -- but was sketchy about why it did not make the disclosure in India.

The recall comes at a time when the auto industry is grappling with quality-control concerns.

Japanese automakers Toyota and Honda are reeling under mammoth recalls, stemming from sticky accelerator pedals and faulty brakes.

The A-Star's problem is a faulty gasket that could potentially lead to fuel leaks.

Investors sent Maruti's stock -- one of the best performers in India over the past year -- down more than 3 percent on Tuesday.

from Financial Regulatory Forum:

India central bank increases securitisation disclosure requirements

MUMBAI, Feb 8 (Reuters) - The Indian central bank on Monday increased disclosure requirements for banks who sell securitised assets, to increase transparency for investors under the enhanced Basel II framework.

The Reserve Bank of India said banks needed to clearly state what role they had played in the securitisation of an asset, including whether they were an originator, investor, provider of credit enhancement or liquidity provider while securitising assets.

Following is the link to the notification: http://r.reuters.com/cuv38h

"In light of the wide range of risks arising from securitisation activities, which can be compounded by rapid innovation in securitisation techniques and instruments, minimum capital requirements calculated under Pillar 1 are often insufficient," RBI said.

The risks which needed to be addressed under securitisation include credit, market, liquidity, reputational risks, potential delinquencies and losses on underlying securitised exposures, exposures from credit lines, the central bank said.

Banks should state policies for recognising liabilities on their balance sheets for arrangements that could require them to provide financial support for securitised assets.

"Innovation has increased the complexity and potential illiquidity of structured credit products. This, in turn, can make such products more difficult to value and hedge, and may lead to inadvertent increases in overall risk," the RBI said.

from Financial Regulatory Forum:

Westlaw Business Analysis: SEC Cracks Down on Holdback of Material Schedules

Westlaw  business applies a legal lens to the SEC's latest moves By J. G. Ballard Perhaps influenced by the controversy over Bank of America’s forgotten bonus schedule from Merrill, the SEC seems to be cracking down in incomplete submission of agreements. Of over 50 such requests by the regulator since 2002, more than half have been from the past year.  As companies are now thinking through how to disclose their deals, including those with particularly sensitive commercial terms, they should keep the SEC’s newest disclosure mandate sharply in mind, in a quest to hold down comments and the time and costs they impose. In one example of the SEC’s recent action, the Commission asked Abitibi to re-file multiple agreements, this time with all schedules, annexes and exhibits attached. The agreements ranged from restructuring agreements to purchase agreement to credit agreements. Abitibi is not the only distressed issuer to receive this request from the SEC. XL Capital recently saw a request for a previously filed agreement in July. In XL’s case, the request was for a complete copy of the master commutation, release and restructuring agreement filed a year previously in relation to XL spinning off Syncora. While reviewing XL’s 10-K, the SEC noticed some irregularities in the accounting concerning the spin-off transaction; namely, where XL recorded the loss due to the completed transaction. This lead to additional staff comments and a request for the agreement in its entirety. Unlike Abitibi and XL, some issuers, such as Cenveo, Inc. a paper manufacturer, try to reason their way out of the additional disclosure. Cenveo had filed an amended credit agreement with several exhibits omitted. The SEC noticed the omission and requested that the agreement be filed in its entirety. The issuer responded to the request by notating that the missing forms were not material in and of themselves as their use was contingent on events that might not even occur. The SEC stuck to its guns and again requested the complete agreement in their reply at the end of July. While not unheard of, such requests by the SEC are also not common. This recent trend may have been triggered by the past year’s infamous Bank of America/Merrill Lynch bonus scandal. As was revealed in subsequent litigation, bonus payments were disclosed on a schedule to the merger agreement. While the merger agreement was filed, the bonus payment schedule was not. The SEC staff appears to have a renewed interest in Item 601 of Regulation S-K, judging from the increase in requests for complete agreements. What remains to be seen is if this recent trend will continue into next year.

from Breakingviews:

Opening the hedge fund kimono

Prominent in most hedge fund literature are some impressive sounding figures. Since 1990, a weighted index of hedge funds has returned around 12 percent -- about 4 percent higher than the S&P 500 -- while offering half the volatility.

The figures testify not just to the superior performance of funds but suggests that most hedge fund managers "turn out to be relatively cautious," as James Simons of Renaissance Technologies recently claimed.

The industry should not be allowed to get away with such misleading claims. This should be the starting point of any new regulation of hedge funds.

The seductive figures so assiduously promoted by the industry exaggerate returns for several reasons. The easiest to correct is that reporting results is purely voluntary.

As research by Burton Malkiel of Princeton has shown, hedge funds tend to be quite happy to report results until they start to fail. In the six months before funds ceased giving data, funds produced an average monthly return of minus 0.56 percent, compared with an average positive return of 0.65 percent during their reporting lives.

Take this into account and aggregate hedge fund returns slide right back to the level of the S&P index.

Requiring funds to report results until their demise would help correct this -- providing investors with a more realistic estimate of the risks and returns of funds overall. By allowing a delay -- say three months -- regulators could eliminate the danger of compromising the investment secrets of hedge fund managers.

from MacroScope:

Chile, Singapore among most transparent SWFs

Chile, UAE, Singapore, Azerbaijan, Ireland and Norway claim top rankings on the latest transparency index, published by SWF Institute. At the bottom of the ranking is Venezuela, Oman, Nigeria, Mauritania, Kiribati, Iran, Brunei and Algeria.

The Linaburg-Maduell index is calculated with 10 principles -- such as whether the fund provides up-to-date, independently audited annual reports, or whether it provides clear strategies and objectives. It also gives points on whether the fund gives ownership percentage of company hodlings, total market value, returns and management compensation.

Enhancing transparency is a key task for sovereign wealth funds, whose often opaque operations have come under heavy criticism by some Western politicians who suspect them of investing with political, rather than commercial, motives.

In fact in the recent meeting of the world's leading sovereign wealth funds, only Norway, Chile, New Zealand agreed in advance to speak to Reuters on the sidelines; when contacted on the ground China also spoke. Others either declined to comment at all or did not return email.

(Source: SWF Institute; www.swfinstitute.org)

from Funds Hub:

Morning line-up

Hedge fund stories from the past 24 hours from Reuters and elsewhere:

US lawmaker drafts hedge fund bill - Reuters

SEC,  FSA to coordinate data collection from hedge funds - Exec Digital

RWC Partners raises $480 million for US long short funds - Hedge Funds Review

FSA to enhance  disclosure  for significant short selling  - Hedge Funds Review

Man Group assets rise on lower outflows - Reuters