Goodbye LIBOR

July 28, 2017

The London Interbank Offered Rate, more commonly referred to as LIBOR, is on its way out the door.  Many associate LIBOR with scandals including manipulation and false reporting.  To others, it represents the index to which over $350 trillion of financial products reference.  Technically, LIBOR is the average lending rate of banks in the London interbank market.  However, fraud and collusion have led to the loss of reliability and ultimately the demise of the popular index.

The UK Financial Conduct Authority (FCA) announced yesterday it plans to phase out this 50-year old benchmark by the end of 2021.  The FCA’s head, Andrew Bailey, believes there is no longer a market to support LIBOR.  Moreover, he believes establishing a firm schedule will aid financial institutions to manage transition.  This is part of a global reform of benchmark rates by the FCA.

So what is the impact of the FCA’s decision?  And more importantly, how will it affect your investment portfolio?  Currently, the main impact is the uncertainty this has inserted into the market.  Since no rate has been defined as a specific replacement, financial institutions and investors are left in the dark as to what will occur.  Clearly, new investments introduced to the market will no longer reference LIBOR.  However, it is widely uncertain as to what will happen with the existing products and securities that currently associate with LIBOR.  In the short term, expect increased volatility and even illiquidity in these types of products until the market has clearer direction as to what might be replacing the benchmark index.  With regard to these products, Bailey said it depends on “preparations that users of LIBOR make in either switching contracts from the current basis for LIBOR, or in ensuring that their contracts have robust fallbacks in place that allow for a smooth transition.”

Depending upon your appetite for risk, this uncertainty could create motive to take advantage of uncertainty and capitalize on mispriced products.  Alternatively, it might necessitate avoiding any new purchase of LIBOR-linked investment products until the seas have calmed.

Parkway Competes in FIS Impact Awards

Wednesday, February 22, 2017

Parkway Competes in FIS Impact Awards

Parkway is pleased to compete in the Impact Awards of FIS and showcase elements of how we are on the cutting edge of technology.  FIS will be recognizing firms who are leveraging FIS technology and services to better serve their customers, drive tangible business benefits, and empower the financial world. The key criteria are: innovation, return on investment and client service.

Parkway utilizes FIS’ iWorks Investment Management system (formerly SunGard’s iWorks Investment Management) to prepare statutory reporting data for our insurance clients. In pursuing ways to increase efficiency and allow us more time to aid and better assist our clients, we developed a proprietary tool that extracts necessary data from a major financial software provider platform for initial data set up, new security acquisitions and transactional data as well as prepares an import-ready file for the iWorks Investment Management system. Parkway developed this tool entirely with in-house staff, merging the knowledge and sophistication of our investment management team as well as the statutory reporting team. To our knowledge, seamlessly linking daily trade activity to a tool that essentially incorporates all necessary information in the iWorks Investment Management system is an unprecedented feat that no other investment advisor has accomplished. From our insurance clients’ perspective, increased efficiency has afforded our staff more time to aid clients when they need assistance as well as find ways to better assist our clients in meeting their needs. Also, this process has allowed our team to reduce turnaround time in preparing statutory schedules for our clients on a monthly basis, providing us the opportunity to delight our clients by exceeding deadlines and expectations.

FIS provides financial software and global business solutions. iWORKS is a business-driven IT product family for the insurance industry. iWORKS offers a range of products and services including front-office tools, policy administration, reinsurance, actuarial calculations, financial and investment accounting and reporting.

Parkway Advisors, L.P. is an investment advisor registered with the Securities and Exchange Commission offering investment management, consulting, and statutory reporting services. This material is for your use only and has not been independently verified and thus we do not represent that it is complete and should not be relied upon as such. The opinions expressed are our opinions only. Past performance is no guarantee of future performance and no guarantee is made.

We welcome your inquiry and can be reached by mail at Parkway Advisors, L.P., P.O. Box 5225, Abilene, Texas 79608 or by phone at (800) 692-5123 or by fax at (325) 795-8521. A copy of our Form ADV, Part II is available upon request.

For more information, please email info@parkwayadvisors.com.

“Brexit”

Friday, June 24, 2016

If you haven’t heard, Britain has been weighing the decision to leave the European Union (EU).  This has been coined “Brexit” by the media, which cleverly stands for Britain exiting the EU.

Following a very close vote on Thursday by U.K. citizens of 52% to 48%, the British parliament decided to exit the European Union.  Today, Prime Minister David Cameron resigned subsequent to the decision stating “the British people have made a very clear decision to take a different path, and as such I think the country requires fresh leadership.”  Cameron will remain in office at least a few months until a replacement is announced, which should be prior to the annual conference in October.  Brexit presents additional challenges for German Chancellor Angela Merkel after years of struggles.  The next main question to answer is who will lead Britain’s negotiations.  Merkel will likely want to take a firm stance and make an example out of Britain to send the message to other countries to remain in the EU.  Boris Johnson, a former London mayor, helped lead the “leave” campaign and considers this a victory.    Johnson is on a short list of possible replacements to succeed Cameron.  One of the larger unknowns at this point is which, if any, countries will follow suit and withdrawal from the EU.  Potential concerns as a result of Brexit are the trade implications as well as the regulatory and political volatility created.  Specifically, international companies that trade with the EU through Britain may have restricted access and investment channels and trade agreements will have to be renegotiated.  This process will likely take several years.

Upon the open of the US domestic markets, stocks fell sharply and Treasury prices soared.  Major US equity markets fell almost three percent on the open and volatility swelled.  As a flight to quality, gold rallied to over $1,300 per ounce.  The yield on the 10-year Treasury fell about thirty basis points at its lowest, trading as low as 1.4%; this represents the lowest it’s been since mid-2012.  Crude oil fell around 7% per barrel.  European stocks also fell, approximately 6% on Friday, on track for their largest decline since 2008.  The British pound has fallen over 7% and is on track for one of its worst days on record.

So, what does all of this mean for the US insurer?  Treasury rates are lower which creates larger unrealized positions.  Although trading in the bond market is extremely light today, investment of cash would occur at significantly depressed levels compared to yesterday.  As far as fundamentals, we don’t believe much has changed domestically.  This is merely a flight to quality which has resulted in driving down yields for the short term.  For bond investors, the coming days and weeks could be a great time to consider strategic swaps to remove credit concerns from the portfolio while taking advantage of larger unrealized gains that might offset potential losses.  For those with equity exposure, Friday will likely prove in hindsight to have been a great time to average into the market.  As far as the Federal Reserve and future rate decisions, implied probability of federal funds futures dropped today to a zero percent chance of any rate hikes until December.  In fact, the market is pricing in a slight chance that the Fed will cut rates.  While we don’t believe any rate cuts will occur, the likelihood of any rate hikes at this point has virtually disappeared for at least the next couple of meetings.

Parkway Advisors, L.P. is an investment advisor registered with the Securities and Exchange Commission offering investment management, consulting, and statutory reporting services. This material is for your use only and has not been independently verified and thus we do not represent that it is complete and should not be relied upon as such. The opinions expressed are our opinions only. Past performance is no guarantee of future performance and no guarantee is made.

 

For More Information

We welcome your inquiry and can be reached by mail at Parkway Advisors, L.P., P.O. Box 5225, Abilene, Texas 79608 or by phone at (800) 692-5123 or by fax at (325) 795-8521. A copy of our Form ADV, Part II is available upon request.

For more information, please email info@parkwayadvisors.com.