Congrats Randal Quarles on Fed Appointment…


Congratulations to Randy Quarles for his appointment and confirmation to serve as the Vice Chairman of the Federal Reserve Board.

CFS is thankful for Randy’s early and constant support of our organization. As an Advisory Board Member and Trustee, he has been a source of wisdom on a wide range of topics. In particular, his involvement in “Bretton Woods: The Founders and Future” was especially productive and meaningful. The inspiration and encouragement from Randy will continue to guide CFS especially as we plan to honor the 75th anniversary of the birth of the international financial system and think strategically about the future.

See “Summary and Next Steps  – Bretton Woods: The Founders and Future.”

Randy is uniquely experienced, remarkably learned, and thoughtful on virtually any monetary, regulatory, or related legal topic. Likewise, few to none are more honorable in character.

We wish him the best at the Fed.

SEC Advisory Committee Considers Bond Market Liquidity

At its inaugural meeting, the SEC’s Fixed Income Market Structure Advisory Committee (“FIMSAC”) discussed bond market liquidity. FIMSAC was established in order “to provide a formal mechanism through which the Commission can receive advice and recommendations on fixed income market structure issues.”

In opening remarks, SEC Chair Jay Clayton explained that there is significant growth in the corporate bond and municipal bond markets and emphasized that fixed income markets have direct and indirect impacts on other markets. As a result, he said, these markets demand substantial attention from the SEC.

Commissioner Kara Stein highlighted the importance of growing fixed income markets and the transition of these markets from voice-based to electronic trading. She pointed to the impacts of the shifting markets: “spreads are tighter, trade sizes are smaller, and liquidity is increasingly concentrated in certain bonds.” Commissioner Michael Piwowar added that bond market liquidity is an important area of focus, as “fears of possible liquidity shocks persist.” He encouraged further analysis to inform the next steps that might be taken by regulators.

The meeting included perspectives from industry members on bond market liquidity.

The SEC also announced that it will not renew the charter for the Equity Market Structure Advisory Committee, which recently expired. Instead, the SEC will “organize targeted roundtables on discrete equity market structure issues, which will feature experts on each topic representative of a broad diversity of viewpoints.”

Lofchie Comment: Under the prior Administration, regulators simply refused to acknowledge that there were problems in the fixed income markets, perhaps because it would have meant acknowledging that there had been negative consequences to Dodd-Frank. The fact that spreads in certain securities declined, as Commissioner Stein noted, is not evidence of improved liquidity if the size of the orders as to which those spreads relate has declined substantially, or if those orders relate to a materially lesser number of securities. Leadership at the SEC seems to be returning to the regulatory basics: trying to figure out how the market works and how it can be improved.

CFS Monetary Measures for December 2017

Today we release CFS monetary and financial measures for December 2017. CFS Divisia M4, which is the broadest and most important measure of money, grew by 5.2% in December 2017 on a year-over-year basis versus 4.9% in November.

For Monetary and Financial Data Release Report:

For more information about the CFS Divisia indices and the data in Excel:

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

3) {ECST} –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) {ECST S US MONEY SUPPLY} –> From source list on left, select ‘Center for Financial Stability’

SEC Requests Comments on Form PF

The SEC is requesting comment on the collection of information on Form PF (“Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors”). All private fund advisers with at least $150 million in private assets under management are required to complete Form PF. The form is intended to aid the Financial Stability Oversight Council in monitoring systemic risk, and in allocating its regulatory tools for nonbank financial companies.

The SEC is requesting comments on (i) the necessity of information collection, (ii) the accuracy of the SEC’s reporting burden estimates, (iii) how to enhance the quality, utility and clarity of information requested, and (iv) how to minimize the burden of information collection.

Comments must be submitted by March 11, 2017.

Lofchie Comment: Form PF is fundamentally useless. (See, OFR Researchers Question the Utility of SEC Form PF as a Risk Management Tool.) The financial industry spent hundreds of millions of dollars developing systems to answer questions that were poorly considered and written. Anyone familiar with the relevant area of law could see that the questions posed on the form could not possibly generate useful or consistent results. Leaving aside the time and money wasted, if one believes that the information properly collected might have been useful to the regulators, then the waste was even greater, because an opportunity to acquire useful information was squandered. The real question for regulators now is how can they improve their procedures so as not to make a similar mistake or squander additional resources.

FRB Announces Chair and Deputy Chair Appointments for Federal Reserve Banks

The Board of Governors of the Federal Reserve System (“FRB”) appointed chairs and deputy chairs of all Federal Reserve Banks for 2018.

Each Reserve Bank has a nine-member board of directors, three of whom are appointed by the FRB. For each bank, one appointee is designated as the chair, and one appointee is designated as the deputy chair. The following is a list showing the chair and deputy chair for each Bank:

  • New York: Sara Horowitz (Chair), Denise Scott (Deputy Chair);
  • Boston: Gary L. Gottlieb (Chair), Phillip L. Clay (Deputy Chair);
  • Philadelphia: Brian McNeill (Chair), Phoebe Haddon (Deputy Chair);
  • Cleveland: Dawne S. Hickton (Chair), Dwight E. Smith (Deputy Chair);
  • Richmond: Margaret G. Lewis (Chair), Kathy J. Warden (Deputy Chair);
  • Atlanta: Michael J. Jackson (Chair), Myron A. Gray (Deputy Chair);
  • Chicago: Anne R. Pramaggiore (Chair), E. Scott Santi (Deputy Chair);
  • St. Louis: Kathleen M. Mazzarella (Chair), Suzanne Sitherwood (Deputy Chair);
  • Minneapolis: Kendall J. Powell (Chair), Harry D. Melander (Deputy Chair);
  • Kansas City: Rose M. Washington (Chair), Steve Maestas (Deputy Chair);
  • Dallas: Matthew K. Rose (Chair), Greg L. Armstrong (Deputy Chair); and
  • San Francisco: Alexander M. Mehran (Chair), Barry M. Meyer (Deputy Chair).

NY Fed Senior VP Describes Transition Away from LIBOR

Federal Reserve Bank of New York (“NY Fed”) Senior Vice President Lorie Logan discussed the future of the London Interbank Offered Rate (“LIBOR”) and the NY Fed’s efforts to administer and produce more effective reference rates.

In remarks at the Annual Prime Dealer Meeting in New York, Ms. Logan explained that the uncertain future of LIBOR has caused the NY Fed and other regulatory bodies to consider alternatives and implement viable transition plans. She noted that efforts have thus far focused on interest rate derivatives, but that all LIBOR-reliant market participants must consider transition measures. Ms. Logan encouraged all firms to (i) adopt contract language capable of addressing the cessation of LIBOR, and (ii) reduce reliance on U.S. dollar LIBOR by transitioning to alternative rates.

Ms. Logan highlighted efforts to improve the effective federal funds rate (“EFFR”), develop the overnight bank funding rate (“OBFR”), and develop three new Treasury repo reference rates, and said that all of these rates are “anchored in active underlying markets” and designed to serve as reliable measures of market activity. She described various enhancements to the EFFR, explained the evolution of the OBFR, and asserted that the NY Fed will release statements detailing the compliance of NY Fed-administered and produced rates (including the planned Treasury repo rates) with the IOSCO Principles for Financial Benchmarks. Ms. Logan emphasized that the NY Fed intends to make clear what each reference rate is meant to measure in order to avoid making frequent changes to any of the reference rates. She acknowledged that certain changes may be necessary, as dictated by the evolution of underlying markets.

Ms. Logan said that the new Treasury repo rates were developed in order to improve transparency of conditions across a broad range of activity in the market. As previously covered, the following three rates will be produced:

  • Secured Overnight Financing Rate (“SOFR”) will be the “broadest measure” of overnight Treasury financing transactions. The rate includes tri-party repo data from the Bank of New York Mellon (“BNYM”), as well as cleared bilateral and General Collateral Financing (“GCF”) repo data from the Depository Trust & Clearing Corporation (“DTCC”). This rate was recently chosen by the Alternative Reference Rates Committee to be used as the alternative to U.S. dollar LIBOR.
  • Tri-Party General Collateral Rate will be based only on tri-party repo data from BNYM.
  • Broad General Collateral Rate will be based on tri-party repo data from BNYM, as well as cleared GCF repo data from DTCC.

Ms. Logan shared four key points relevant to the calculation of the three new rates:

  • they will be calculated as volume-weighted medians;
  • various measures have been put in place to ensure adequate data collection for all three rates;
  • trades from the FICC-cleared bilateral data set with rates below the 25th volume-weighted percentile will be excluded (or trimmed) from the SOFR calculation; and
  • the NY Fed is working to determine which historical data will be most useful to help the adoption process for all rates (with an emphasis on the SOFR).

The NY Fed intends to begin publishing these three rates on a daily basis starting in the second quarter of 2018.

Lofchie Comment: Notwithstanding the efforts described to improve certain existing rates and propose new repo reference rates, the question remains: transition to what? While the regulators are quite right to point out the deficiencies of LIBOR (e.g., the absence of transaction-volume to determine a genuine rate), the path forward is still unclear as it is not obvious that the new indices, based on collateralized borrowing, can serve the purpose for which LIBOR was intended.

FINRA Proposes New Liquidity Reporting Requirements

FINRA requested comments on proposed amendments to FINRA Rule 4521 (Notifications, Questionnaires and Reports). The amendments are intended to “improve FINRA’s ability to monitor for events that signal an adverse change in the liquidity risk of the firms that would be subject to these new requirements.” The proposed amendments would require certain broker-dealers to notify FINRA within 48 hours of the occurrence of a material negative event with respect to the firm’s access to liquidity.

The amendments also include a new Supplemental Liquidity Schedule (“SLS”) that these broker-dealers would be required to file along with their FOCUS reports. Specifically, these firms would be required to report “information related to specified financing transactions and other sources or uses of liquidity” including the financing term, collateral types, and large counterparties.

The amendments would apply to carrying or clearing firms that have more than $25 million in total credits and firms with at least $1 billion aggregate amounts outstanding under repurchase agreements, securities loan contracts and bank loans. According to FINRA, approximately 110 firms would be subject to the new requirements, about half of which would be subsidiaries of bank holding companies.

Among the events that would trigger the requirement to notify FINRA of adverse liquidity events are the early termination by a counterparty of its financing agreement with a broker-dealer, a counterparty indicating that it will no longer provide financing to the broker-dealer, and a significant increase in the level of collateral required by a material counterparty.

Comments on the proposed amendments must be submitted by March 8, 2018.

Lofchie Comment: This rule will be adopted, in one form or another. Accordingly, firms planning to comment should focus on the specifics of the proposal’s requirements – most significantly, the information that they would be required to monitor. Firms should also consider whether the triggers for notification to the regulators have been set at an appropriate level.

Here are a few questions to consider: will the imposition of reporting requirements as to liquidity eventually result in the adoption by FINRA of substantive liquidity requirements? Once an information requirement is adopted, will the SEC and FINRA be satisfied with firms using their own judgment as to an acceptable level of liquidity?

Federal Register: FRB Proposes Amendment to Regulation M

The Board of Governors of the Federal Reserve System (“FRB”) proposed amending Regulation M, which was issued to implement the Consumer Leasing Act (“CLA”). The CLA requires “meaningful disclosure of the terms of personal property leases for personal, family, or household use.”

The CLA transferred rulemaking authority from the FRB to the CFPB. However, the FRB maintains authority to issue rules for “motor vehicle dealers that are predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both, and are otherwise not subject to the [CFPB]’s regulatory authority.” The FRB proposal revises both Regulation M and accompanying Official Staff Commentary in order to reflect the change in the scope of Regulation M.

Interested parties must submit comments to the FRB by March 5, 2018.

Chair Giancarlo Outlines CFTC Approach to Virtual Currency Regulation

CFTC Chair J. Christopher Giancarlo asserted the CFTC’s commitment to regulating virtual currency trading effectively. In a public statement, he highlighted the agency’s scrutiny of new launches of virtual currency futures markets in light of recent launches of bitcoin futures under “self-certification procedures.” He announced a meeting of the CFTC’s market risk advisory committee to consider the efficacy of the self-certification process. He reiterated the CFTC view that virtual currency is a “commodity” as that term is defined in the CEA, and thus is subject to CFTC regulation. Chair Giancarlo contended that the CFTC is delivering a regulatory response centered on “consumer education, asserting CFTC authority, surveilling trading in derivative and spot markets, prosecuting fraud, abuse, manipulation and false solicitation and active coordination with fellow regulators.”

Chair Giancarlo also highlighted an upcoming meeting of the CFTC Technology Advisory Committee to consider challenges, opportunities, and market developments of virtual currencies. He said that virtual currency and virtual currency derivatives offer potential benefits, but market participants must be vigilant, as they also present certain heightened risks.

The CFTC also published a document providing information on CFTC oversight of and approach to virtual currency futures markets. The document includes an explanation of the self-certification process as applied to virtual currency futures products.

Lofchie Comment: The SEC also recently issued a statement asserting jurisdiction over certain transactions involving blockchain products. (See SEC Chair Jay Clayton Urges Caution regarding ICOs and Cryptocurrencies.) This raises the possibility of a regulatory dispute over jurisdiction. Each agency is perfectly correct in interpreting the relevant statutes to the effect that at least some transactions involving virtual currency or other blockchain products will fall within the ambit of that agency, and perhaps within the ambit of both. What is significant in the regulatory pronouncements is not the possibility for regulatory disagreement, but rather that both regulators are seeking to exercise their consumer protection functions.

SEC Provides Guidance for Accounting Impacts of Tax Reform Bill

The SEC published new guidance to facilitate public disclosure of the accounting impacts of the recently passed Tax Cuts and Jobs Act. According to the SEC, the new tax legislation could have a “significant impact on an entity’s domestic and international tax consequences.”

In Staff Accounting Bulletin No. 118 (the “SAB”), the SEC provided an interpretation of Accounting Standards Codification Topic 740 (Income Taxes) to assist in the application of U.S. GAAP when preparing an initial accounting of the income tax effects of the Act. The SEC noted that certain circumstances may arise from the Tax Cuts and Jobs Act that are not covered by ASC Topic 740. The guidance provides a “measurement period” in which an entity can report income tax effects on a provisional basis, to be adjusted after the entity evaluates the impact of the bill on its financial statements. The guidance includes expectations for making disclosures to investors throughout the measurement period.

The SEC also published Compliance and Disclosure Interpretations guidance on Form 8-K reporting obligations for issuers as they make use of the “measurement period.”