Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

© Prof. Jayanth R. Varma
jrvarma@iima.ac.in

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Sun, 27 Sep 2015

US corporate disclosure delays

Corporate disclosures rules in the US still permit long delays more appropriate to a bygone age before technology speeded up everything from stock trading to instant messaging. Cohen, Jackson and Mitts wrote a paper earlier this month arguing that substantial insider trading occurs during the four business day window available to companies to disclose material events. The paper studied over forty thousand trades by insiders that occurred on or after the event date and before the filing date; the analysis demonstrates that these trades (which may be quite legal) were highly profitable.

Cohen, Jackson and Mitts also document that companies do usually disclose information much earlier than the legal deadline: about half of the disclosures are made on the same day; and large firms are even more prompt in their filing. But nearly 15% of all filings use the full four day delay that is available. In the early 2000s, after the Enron scandal, the US SEC tried to reduce the window to two days, but gave up in the face of intense opposition. I think the SEC should require each company to monitor the median delay between the event and the filing, and provide an explanation if this median delay exceeds one day. Since there are on average about four filings per company per year, it should be feasible to monitor the timeliness over a rolling three year period.

Another troubling thing about the US system is the use of press releases as the primary means of disclosure. Last month, the SEC filed a complaint against a group of traders and hackers who stole corporate press releases from the web site of the newswire agencies before their public release. What I found most disturbing about this case was that the SEC went out of its way to emphasize that the newswire agencies were not at fault; in fact, the SEC redacted the names of the agencies (though it was not at all hard for the media to identify them). Companies disclose material events to a newswire several hours before the scheduled time of public release of this information by the newswire; the newswire agencies are not regulated by the SEC; they are not required to encrypt market sensitive data during this interregnum; there are no standards on the computer security measures that the newswires are required to take during this period; a group of relatively unsophisticated hackers had no difficulty hacking the newswire websites repeatedly over a period of five years. And the SEC thinks that no changes are required in this anachronistic system.

Posted at 16:07 on Sun, 27 Sep 2015     View/Post Comments (0)     permanent link


Wed, 09 Sep 2015

Could payments banks eat the private banks' CASA lunch?

The Reserve Bank of India (RBI) has granted “in principle” approval to eleven new payment banks and has also promised to license more in future. Many of the licensees could prove to be fierce competitors because of their deep pockets and strong distribution networks. For the incumbent banks, the most intense competition from the new entrants will probably be for the highly profitable Current and Savings Accounts (CASA) deposits which are primarily meant for payments. And it is here that the complacency of incumbents banks could provide an opening to the new payment banks.

In the late 1990s and early 2000s, new generation private banks innovated on technology and customer service and gained significant market share from the public sector banks. However, in recent years, some complacency seems to have set in; customer service has arguably deteriorated even as fees have escalated. Public sector banks have caught up with them on ATM and online channels; and in any case these channels are rapidly being overtaken by mobile and other platforms. In fact, India may not need any more ATMs at all.

In this competitive landscape, payment banks could gain significant market share if they are sufficiently innovative and provide better customer service than the incumbents. Unlike mainstream banks which have to worry about investments and advances and lots of other things, payment banks can be totally focused on serving retail customers. Since their survival would depend on this sharp focus, there is every likelihood that they would turn out to be more nimble and innovative in this segment.

The ₹100,000 limit on balances at the payment banks means that initially it would be the rural CASA that would be at risk. But if payment banks do a good job, the limit may be raised to a much larger level (maybe ₹500,000) over a few years. At that point, urban CASA will also be at risk of migration. It will be easy for RBI to raise the limit because the balances have to be invested in Government Securities and so customer money is subject only to operational risk.

eWallets could prove to be another competitive weapon in attacking the urban CASA segment. Large segments of the Indian population are uncomfortable with online credit card usage and with netbanking. A few years ago, eCommerce firms in India used Cash on Delivery (COD) to gain acceptance. However, COD is not scalable and it is breaking down for various reasons. In the last year or so, eWallets have begun to replace COD, and these too could pose a threat to traditional payment services. All banks are trying to launch eWallets and mobile banking apps, but I am not sure that traditional banks have a competitive advantage here. In fact, a customer who is worried about online security might well prefer to have an eWallet with a small balance for online transactions instead of exposing his or her main bank account to the internet. In this context, the payment banks may find that the ₹100,000 limit does not pose a competitive disadvantage at all.

All this is of course good news for the customer.

Posted at 18:56 on Wed, 09 Sep 2015     View/Post Comments (2)     permanent link


Sun, 06 Sep 2015

Amtek Auto and Mutual Funds: Use Side Pockets, not Gates

JPMorgan Mutual Fund has gated (restricted redemptions from) two of its debt funds which have large exposure to Amtek Auto which is in distress. A gate is better than nothing, but it is inferior to a side pocket. I would like to quote from a proposal that I made in a blog post that I wrote in October 2008 when the NAVs of many debt oriented mutual funds were not very credible:

At the very least what is required today is a partial redemption freeze to ensure that nobody is able to redeem units of mutual funds at above the true NAV of the fund. Anybody who wants to redeem should be paid 70% or 80% of the published NAV under the assumption that the true NAV would not be below this. The balance should be paid only after the true NAV is credibly determined through asset sales.

Unlike the generalized distress of 2008, what JPMorgan funds are facing today is distress limited to a single large exposure. According the July portfolio statement, Amtek Auto was about 15% of the NAV of the Short Term Income Fund. Even if this is valued at zero, the fund can pay out 85% of the NAV to everybody. (For the India Treasury Fund, Amtek is only 5% of NAV, so the fund can pay out 95%). Essentially, my proposal is what is known in the hedge fund world as a side pocket: the holding in Amtek Auto should go into a separate side pocket until it is liquidated and the value is realized. The rest of the money would remain in the normal mutual fund which would be open for unrestricted redemption (as well as for fresh investment).

The gate has two big disadvantages:

  1. The gate is not total: redemptions are not stopped, they are only restricted to 1%. This means that some redemptions are taking place at a wrong value. The money that is being paid out to this 1% is money that is partly money stolen from the remaining investors.

  2. The gate rewards the mutual fund for its own incompetence. A fund which has made a bad investment choice would be punished in the market place by a wave of redemptions. That is the competitive dynamic that encourages mutual funds to perform due diligence for their investment. A gate stops the redemption and shields the fund from this punishment.

It is possible that the mutual fund offer document might not contain a provision for a side pocket. But the Securities and Exchange Board of India (SEBI) as the regulator certainly has the power to issue directions to the fund to use this method. Let us see whether it acts and acts quickly.

Posted at 21:59 on Sun, 06 Sep 2015     View/Post Comments (2)     permanent link


Sat, 05 Sep 2015

In the sister blog and on Twitter during August 2015

The following posts appeared on the sister blog (on Computing) last month.

Tweets during the last month (other than blog post tweets):

Posted at 12:35 on Sat, 05 Sep 2015     View/Post Comments (0)     permanent link