Campaign to Fix the Debt Letter

The Campaign to Fix the Debt has worked with former presidential
advisors and more than 150 economists and thought leaders to pen a bipartisan letter urging that Congress and the President enact a plan now that strengthens our economy, phases in gradual but necessary reforms, and puts our national debt on a downward path relative to the size of our economy.

As friends of the CFS know, we have enthusiastically promoted the idea of debt and deficit reform in the United States.

The Campaign’s letter can be viewed here.

For CFS work on specifics:
The Financial State of the Union, September 20, 2012
Demand for U.S. Debt Is Not Limitless, WSJ, March 28, 2012
Budget Solutions: Then and Now, July 19, 2011
Treasury Maturities: The Other Fiscal Problem, March 10, 2011
Hidden Risks from Expanding Governments, May 11, 2010

MFA Submits Comments on Basel-IOSCO Second Consultative Document on Margin Requirements for Uncleared Derivatives

The MFA submitted a comment letter to the IOSCO and the Basel Working Group on Margining Requirements (“WGMR”) on margin requirements for non-centrally cleared derivatives in response to a consultative document published by the groups.  The comment letter specifically addresses the four areas below:

  • Physically-settled FX forwards and swaps: The MFA supported the bilateral exchange of variation margin with respect to these derivatives, but did not support them from being exempt from initial margin requirements (although it did suggest that initial margin on certain of such transactions might be set at a low level in light of the products’ liquidity).
  • Re-hypothecation: The MFA supported the segregation of initial margin, unless a customer made a deliberate decision to waive the protection. In such a case, it supported allowing re-hypothecation of initial margin by a customer’s counterparty without restriction.
  • Phase-in arrangements: The MFA strongly supported the WGMR’s proposed single effective date for systemically important non-financial entities to comply with the requirement to exchange variation margin.
  • Quantitative impact study results: Finally, while the MFA had no specific concerns with the WGMR’s study, it noted that the study highlighted the need for initial margin models to be sufficiently replicable and transparent to enhance their utility to both parties to an uncleared derivative.

View letter in full here (links externally to MFA website).
Related News Item: Basel Committee and IOSCO Issue Near-Final Proposal on Margin Requirements for Non-Centrally Cleared Derivatives.

OCC Proposes Reporting Requirements for Annual Stress Test for Covered Institutions with Consolidated Assets of $10 Billion to $50 Billion

The OCC published a proposed rulemaking regarding the annual company-run stress test reporting requirements, pursuant to section 165(i)(2) of the Dodd-Frank Act, applicable to certain financial companies with total consolidated assets between $10 and $50 billion. The proposal describes the scope of reporting and the proposed reporting requirements.

Comments Due: May 10, 2013.

See: 78 FR 15403.
See also: Annual Stress Test; Final Rule (OCC – 77 FR 61238).

GAO Finds FSOC and OFR to Be Well-Intentioned

In a new report, the GAO found that both the Financial Stability Oversight Council (“FSOC”) and the Office of Financial Research (“OFR”) serve purposes that may be useful, but that “collaboration among FSOC members can be challenging”: the organizations “should develop a systematic approach” to dealing with their responsibilities, should “improve transparency” and “develop strategic planning.”  (See page 2 of the report.)  Further, FSOC and OFR “have not defined their roles and responsibilities.”  (See page 17 of the report.)

This report was conducted pursuant to Dodd-Frank Sections I (“Financial Stability”) and VII (“Wall Street Transparency and Accountability”) in order to determine the agencies’ progress on their implementation of the ten recommendations previously suggested by GAO in September 2012.  The GAO concluded in this report that, among others, the following prior recommendations have yet to be met: The need to (i) develop a more systematic approach to identify potential threats to financial stability, (ii) implement more forward-thinking processes for identifying emerging threats, and (iii) improve transparency by keeping more detailed records.

The report further concluded that the OFR should implement a strategic framework that links to strategic goals and performance measurement systems, and that FSOC should implement monitoring systems, policies governing collaboration, and a framework to assess the impact of its designation decisions.

Lofchie Comment 1:  The report is very gentle in its tone, but the underlying substance is critical. One primary reason that FSOC is having problems is that the structure of the organization is fundamentally flawed. Its primary mission is to manage systemic risk in the economy, yet its members are a group of diverse governmental agencies each of which has missions that are different from, and not necessarily closely related to, that of FSOC. It’s as if you wanted to field a dream team in basketball, so you picked the best players you could find, but in a variety of sports, including horse racing, sumo wrestling and synchronized swimming. (See page 3 of the report.)    

According to the report, the combining of various government agencies into FSOC has been so problematic that FSOC has not even made much progress on its website. In this regard, the report compares FSOC unfavorably with the CFPB, which apparently has a very nice website. (See page 12 of the report.)

Lofchie Comment 2:  One of the primary missions of the FSOC is to identify non-banks that are causes of systemic risk to the economy and to subject those non-banks to bank-like regulation. According to the report (on page 16), FSOC has not yet designated any such companies.  The report then goes on to lay out a number of problems with the designation process. Most of these problems are really not problems with FSOC, but with the provisions of Dodd-Frank that require such designation. I think one may fairly read the GAO report to suggest very strongly that these provisions of Dodd-Frank were not well considered. Any organization eventually designated as “systemically important” by FSOC should find in the GAO’s report some useful material to assist in challenging the fairness of any designation of systemic importance that may be made ultimately by FSOC.

Click here to view the study in full (links externally to GAO website).
Related News:FSOC and OFR Should Strengthen the Accountability and Transparency of Their Decisions (GAO Report)” (September 14, 2013).

Chairman Gensler’s Testimony on Dodd-Frank Title VII

CFTC Chairman Gary Gensler testified before the U.S. House Committee on Agriculture on the status of Dodd-Frank Title VII implementation. Chairman Gensler described the CFTC’s continuing efforts in the swaps rule-making area as follows:

  • Transparency: The CFTC is working to finish the pre-trade transparency rules for swap execution facilities (“SEFs”), as well as the block rule for swaps;
  • Clearing: Chairman Gensler expects that the CFTC will soon complete a rule to exempt swaps between certain affiliated entities within a corporate group from the clearing requirements, and will be considering possible clearing determinations for other commodity swaps, including energy swaps;
  • Swap Dealer Oversight: The CFTC is working on a global approach to margin requirements for uncleared swaps. Chairman Gensler anticipates that the CFTC, in consultation with European regulators, will adopt final margin rules, as well as related rules on capital, in the second half of 2013. The CFTC is also working with other domestic financial regulators to complete the Volcker Rule;
  • International Coordination on Swaps Market Reform: The CFTC has proposed a guidance interpreting Dodd-Frank Section 722(d) (“Jurisdiction – Applicability”), including “substituted compliance.” The CFTC has also granted a time-limited relief for non-U.S. swap dealers which will expire in July, at which time various Dodd-Frank Act requirements will begin to apply to non-U.S. swap dealers;
  • Customer Protection: The CFTC has proposed rules that would strengthen the controls around customer funds at FCMs. The CFTC also intends to finalize a rule this year on segregation for uncleared swaps;
  • Benchmark Interest Rates: Chairman Gensler stated that continuing to refer to LIBOR, Euribor and similar rates diminishes market integrity and is unsustainable in the long run. The CFTC and the FSA are co-chairing the IOSCO Task Force on Financial Market Benchmarks to discuss the transition.

Lofchie Comment:  Non-U.S. firms should note Chairman Gensler’s remarks that the CFTC’s guidance on jurisdiction will expire in July and that various Dodd-Frank requirements will begin to apply to many non-U.S. firms.  Since many of the rule requirements are still unclear to market participants, notwithstanding the rules’ adoptions, and since no one knows what the CFTC’s view is of its post-July jurisdiction, firms should prepare as best they can for surprises.  Previous surprises have included substantial expansions in the CFTC’s assertion of the scope of its jurisdiction, on the one hand, and virtual campaigns of last-minute no-action letters on the other.  Hopefully, the CFTC will promptly issue a statement as to its view of its post-July jurisdiction.

Click here to view written testimony in full (links externally to House Committee on Agriculture website).
See also: Information Regarding the Hearing: “Examining Legislative Improvements to Title VII of the Dodd-Frank Act.”

SIFMA AMG Submits Comments to the CFTC on Proposed Rules for Enhancing Customer Protections

SIFMA’s Asset Management Group (“SIFMA AMG”) published the comments it submitted to the CFTC on proposed rulemaking which would enhance protections afforded customers and customer funds held by FCMs and DCOs. 

SIFMA AMG strongly endorsed the CFTC’s proposal to better protect clients’ collateral and improve transparency regarding the FCMs with which they trade.  Specifically, SIFMA AMG believes that:

  • “FCMs should maintain sufficient margin to cover all margin deficits and maintain segregation between customer accounts – an FCM should not be able to look to one customer’s excess margin to cover another’s shortfall.
  • “The proposed public disclosure requirements will greatly assist our members in choosing FCMs to handle their customers’ funds and in holding FCMs accountable to their customers.  In particular, SIFMA AMG supports the proposed requirement for FCMs to make publicly available on their websites daily margin segregation calculations together with disclosure documents that would be material to a customer’s decision to do business with an FCM.  Some relatively small additional measures could be taken to make more information available to the public in a straightforward and easy manner.”

Click here to view letter in full (links externally to SIFMA website).

SIFMA AMG Submits Comments to the SEC on Capital, Margin and Segregation Requirements for SBS Dealers and MSBSPs

SIFMA’s Asset Management Group (“SIFMA AMG”) published the comments submitted to the SEC on proposed capital, margin and segregation requirements for security-based swap dealers (“SBS Dealers”) and major security-based swap participants (“MSBSPs”).

SIFMA AMG’s recommendations include:

  1. “SBS collateral requirements should be bilateral at the election of the non-SBS Entity counterparty.  To the extent that the SEC requires SBS Dealers to collect collateral, the SEC should also require SBS Dealers to post collateral to a counterparty upon the election of such counterparty. 
  2. The amount of collateral that an SBS Dealer is required to collect from financial end user counterparties to protect against potential future exposure should vary based on the potential future exposure risk posed by the financial end user and the type of end user.    
  3. The margin amount calculation methodology in the Proposal should be substantially revised.
  4. The SEC should permit the use of margin models to the greatest extent possible, including allowing all SBS counterparties to use models and permitting the use of models for both debt and equity SBS. 
  5. Models used to calculate margin requirements should be required to include liquidation time horizons for non-cleared SBS at a 99% confidence interval over a horizon of less than ten days.
  6. The SEC should require that financial end users be able to independently verify the calculation of margin amounts.
  7. A counterparty’s decision to exercise its right to third-party segregation should not result in an increased capital charge to the SBS Dealer. 
  8. The SEC should ensure that all counterparty collateral held by an SBS dealer through the proposed “omnibus segregation” model be protected from the risk of default of other counterparties of the SBS dealer.”

Click here to view letter in full (links externally to SIFMA website).
Related News and Commentary: SIFMA Letter to SEC on Proposed Capital, Margin, and Segregation Rules (February 22, 2013) and MFA Letter to SEC on Proposed Capital, Margin, and Segregation Rules (February 22, 2013).

ISDA Publishes Paper Examining Non-Cleared OTC Derivatives and Their Importance to the Global Economy

ISDA announced the publication of a new study, “Non-Cleared OTC Derivatives: Their Importance to the Global Economy.”
The study outlines how the non-cleared segment of the over-the-counter (“OTC”) derivatives market includes products that are significant to the economy in the following ways:

  • They enable industrial companies and governments to effectively finance and manage risk in their operations and activities, and help pension funds meet their obligations to retirees;
  • They help support economic growth by enabling banks to lend to corporate and individual customers; and
  • They play a vital role in virtually every industry – from financial services to international trade to home mortgages.

In the study, ISDA suggests that current regulatory proposals regarding margin requirements for non-cleared OTC derivatives “pose significant threats to the continued functioning of this vital market segment.” The study states that such proposals fail to fully consider the lessons learned regarding margin practices during the recent financial crisis.

More generally, the study outlines ISDA’s views on (i) the evolution of clearing in the OTC derivatives markets, (ii) why only some OTC derivatives will be cleared, (iii) the types and benefits of non-cleared OTC derivatives, and (iv) the impact of the regulatory proposals in this area

Click here to view study in full (links externally to ISDA PDF).

Swiss Derivatives Review: Bretton Woods Transcripts

Jacques de Larosière and Steve H. Hanke’s preface to The Bretton Woods Transcripts was recently published in the Swiss Derivatives Review.

The authors attribute the success of the Bretton Woods Conference to a set of ideas that attracted a consensus; a group of prepared and capable participants; and a leader, namely the United States, who was prepared to lead.

Mr. de Larosière was Managing Director of the International Monetary Fund from 1978 to 1987.  He was also formerly Undersecretary of Monetary Affairs in the French Treasury (1974–1978), Governor of the Banque de France (1987–1993), and President of the European Bank for Reconstruction and Development (1993–1998).  He is currently Chairman of Eurofi.

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Special Counselor at the Center for Financial Stability in New York.

The Bretton Woods Transcripts, edited by CFS Senior Fellow Kurt Schuler and CFS Research Associate Andrew Rosenberg, offer a front row seat at the conference that has shaped the international monetary system for nearly 70 years.

The de Larosière and Hanke preface in the Swiss Derivatives Review.

Senate Committee on Banking, Housing, and Urban Affairs’ Testimonies of SEC Chair and CFPB Director Nominees

Mary Jo White, nominee for the SEC Chairman, and Richard Cordray, nominee for CFPB Director, each delivered testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs.

In her testimony, Ms. White discussed the current and future objectives of the SEC.  According to Ms. White,  the SEC should perform a rigorous analysis with respect to rulemaking. She stated she believes that the SEC should assess, from the outset, the economic impacts of contemplated rulemaking in connection with its rules but should do so in a manner that does not undermine the SEC’s ability to carry out its mandate to protect investors and the capital markets. Second, White stated her belief that there should be more aggressive enforcement.   White also expressed her view that the SEC should have increasing expertise on today’s high-speed, high-tech and dispersed marketplace. According to Ms. White, high-frequency trading, complex trading algorithms, dark pools and intricate new order types raise various concerns. Among other areas of intended regulatory focus Ms White cited: money market funds, private fund advisers, credit rating and clearing agencies, and appropriate regulations governing the conduct of broker-dealers and investment advisers with retail investors.

Mr. Cordray’s testimony emphasized the CFPB’s enforcement mission.  He asserted that law enforcement that is evenhanded, fair, and reasonable not only protects consumers, but also supports what he calls the honest businesses. According to Cordray, these rules protect people who are shopping for a loan from being saddled with something they cannot afford. The rules also protect existing homeowners from  their mortgage servicers. Among other topics he discussed: the changes Congress made in the CARD Act and the Financial Aid Shopping Sheet.

See: Mary Jo White’s testimony; Richard Cordray’s testimony.
See also: Video of the Hearing (links to Senate Banking website).