CFTC Publishes Final Text of Disruptive Trading Guidance (with Explanation from Delta Strategy Group)

The CFTC published its final guidance on Dodd-Frank Section 747, which prohibits certain disruptive trading practices.

Lofchie Comment: We have linked below to a fulsome description of the CFTC’s guidance. Unfortunately, the CFTC’s guidance is ultimately ambiguous and overbroad. To cite just one obvious example, the CFTC says that the posting of a bid or offer with an intent to withdraw it before execution may be viewed as a violation, but investors post bids and offers all the time without expecting that such bids and offers will be executed.

Further, investors are prohibited from acting with “disregard for the orderly execution” of transactions during the closing period. However, it is not clear to me what responsibility investors have for orderly execution. The CFTC says that it is basing this rule on rules that have long been applicable in the securities markets, but the securities rules to which the CFTC refers in fact apply to specialists on an exchange who have an affirmative obligation to maintain an orderly market, and the term “orderly market” has been fairly well defined to mean a market that would not move more than a specified amount up or down based on a specified amount of trading in one direction. In short, the securities law precedent on which the CFTC believes it is drawing is not very relevant — even if it happens to use the same words.

Link here to the description of the disruptive trading practice guidance provided by Delta Strategy Group.

SEC Acting Director Ramsay on SEC’s “Middle Ground” to Cross-Border Regulation

SEC Acting Director of the Division of Trading and Markets John Ramsay delivered remarks at the NYC Bar Association on the Commission’s recent set of proposals on the cross-border regulation of derivatives.

Equivalence vs. Substituted Compliance

Director Ramsay discussed the status of international regulatory efforts, both in developing their derivatives regimes and in grappling with the cross-border regulation of derivatives trading.  Two significant points that he made by way of introduction: (i) none of the other jurisdictions have proposed rules to describe how they would regulate cross-border transactions and (ii) much, and potentially most, trading in derivatives has some international component.  (It follows from this that it is not really clear how practical it is for the United States to attempt to implement its system of derivatives regulations where this implies going forward without regard to co-ordinating with other financial regulators around the world.)

The majority of the Director’s speech concerns the question of how the United States should regulate non-U.S. entities and, conversely, how non-U.S. jurisdictions might regulate U.S. entities.  As to this, he posits two potential approaches: “equivalence” and “substituted compliance.”  Under the “equivalence approach,” the United States would impose its own rule on a non-U.S. swaps entity unless the non-U.S. jurisdiction imposed an equivalent rule on that entity; further, this determination of equivalence would be made on a rule-by-rule basis.  By contrast, under a “substituted compliance” approach, the U.S. would look at four broad areas of regulation, and, so long as the non-U.S. jurisdiction imposed roughly comparable measures as to any of the four areas, then the U.S. would generally not regulate the non-U.S. entity in that area.

In his speech, Director Ramsay advocated the substituted compliance approach, which has been put forward by the SEC.  (By contrast, the CFTC in its earliest statements on cross-border regulation, indicated that it would take the equivalence approach, though the CFTC has seemingly backed away at least partially from that position.)

SEC Proposal on Cross-Border Regulation of Derivatives

Leaving aside issues of general policy, Director Ramsay also briefly described the specifics of the SEC’s recent proposal on cross-border regulation.  Among the topics that he discussed were (i) the SEC’s general territorial approach to regulation, (ii) the treatment of foreign branches and guaranteed subsidiaries, (iii) the SEC’s proposed definition of “U.S. person,” and (iv) the ways in which different types of regulations might be imposed; e.g., that trade reporting would be imposed on a broader range of transactions than would capital requirements.  

Lofchie Comment:  Notwithstanding the existence of the very different big-picture approaches initially proposed by the CFTC and the SEC, it is unimaginable that the two Commissions will not come to some understanding to adopt something fairly close to the SEC’s suggested approach.  The CFTC’s initial notion, however well-intended, that it could examine every non-U.S. rule adopted by every non-U.S. regulator for “equivalence” is simply unworkable.  Worse than being merely unworkable, it will provoke European and Asian retaliation against U.S. financial institutions.   Not much good can come of a trade war in financial services.

The saddest thing about this policy conflict is that it has nothing to do with the bigger problem:  our regulation of purely domestic swaps is the result of an ill-conceived statute hastily adopted that has imposed on the United States a more absurd regulatory system than we had before the financial crisis.

See: Cross-Border at the Crossroads: The SEC’s “Middle Ground”
For our news story on the SEC’s cross-border proposal, see: SEC Proposal on Cross-Border Security-Based Swaps (with Commissioners’ Comments) 

SEC Commissioner Gallagher Delivers Remarks on Proxy Advisory Services

SEC Commissioner David Gallagher delivered a speech before the European Corporate Governance & Company Law Conference, in which he focused on the increasing role that governments play in corporate governance as well as the increasingly prominent influence of proxy advisory firms on how companies are governed and on how shareholders vote.

In his speech, Commissioner Gallagher stated that reactive legislation (as with Dodd-Frank) and the resulting regulatory mandates are often based upon false narratives and in the end “lead to the expansion of a universal law: the law of unintended consequences.”  This threat, he believes, is especially acute in the realm of corporate governance, where “the costs of good intentions are actually borne directly by “Main Street” investors.”

Gallagher further asserted that one of the most troubling unintended consequences of stricter corporate governance rules is the rise of proxy advisory firms and the increasing willingness of investment advisers and large institutional investors to rely on such firms to meet their fiduciary duties.  He observed that given the increased questions raised about proxy advisory firms, it is important to ensure that advisers to institutional investors are not over-relying on analyses by proxy advisory firms, stating: “policy makers, regulators, fiduciaries, and market participants need to ask tough questions about the current proxy advisory regime.”

Commissioner Gallagher concluded by suggesting the following list of questions for the current proxy advisory regime:

  • Does following recommendations by proxy advisory firms increase shareholder value?
  • What research do proxy advisory firms conduct to ensure that their recommendations increase shareholder value, and how is that research documented?
  • How much transparency should proxy advisory firms provide to subscribers with respect to how such research is conducted?
  • Should proxy advisory firms be subject to proxy solicitation rules?
  • Do governments provide preferred treatment to proxy advisory firms and advisors that rely on them, and is that appropriate?
  • How can proxy advisory firms be held accountable for their recommendations?
  • How should proxy advisory firms, and subscribers which use their recommendations, address potential conflicts of interest?

Lofchie Comment:  Commissioner Gallagher’s speech raises important issues: (i) as a matter of policy for regulators to consider, (ii) as a matter of practicality for those involved in significant governance disputes to strategize, and (iii) as a matter of fiduciary obligation for investment advisers to weigh the appropriate extent of reliance on the recommendations provided by proxy advisory firms.  The impetus for Commissioner Gallagher’s speech appears to have been an academic article on the influence of corporate advisory firms published by the Mercatus Center: “How to Fix Our Broken Proxy Advisory System.” 

Click here to view speech in full (links externally to SEC website).

Commissioner O’Malia on “Reluctantly” Concurring with the Adoption of the SEF Rules

CFTC Commissioner Scott D. O’Malia delivered a statement on Swap Execution Facilities (SEFs), explaining why he was “reluctantly” concurring with the decision of the Commission to approve the final rule. In his statement, O’Malia discussed how a SEF will allow market participants to access a more transparent market and offer innovative trading opportunities. Unlike the futures exchanges which are tied to a single clearinghouse, trades executed on SEFs can be cleared at different clearinghouses, which will provide a new competitive execution space, according to O’Malia.  He also discussed what he felt were some of the problems with the SEF Rule:

  • The Rule’s requirement to send a request for quote to three market participants is not supported by law;
  • The Rule should have provided further clarity regarding voice execution; and
  • The Rule should have provided clarity regarding exchange of swaps for related position transactions.

View Speech in full here (links externally to CFTC website).

Commissioner O’Malia’s Dissenting Statement on the CFTC’s Adoption of the Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade under Section 2(h)(8) of the Commodity Exchange Act

CFTC Commissioner Scott O’Malia released a statement dissenting from the Commission’s approval of the rule establishing Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade under Section 2(h)(8) of the Commodity Exchange Act (CEA).  If a swap is “available to trade,” that means that, with very limited exceptions, all trading in that swap must take place on a regulated CFTC market. 

According to Commissioner O’Malia, problems with the CFTC’s rulemaking include:  (i) that the CFTC has not allowed itself any clear method to assess whether an “available to trade” determination has been made by a market, (ii) the criteria that a market must use to make a determination are quite vague, (iii) the CFTC’s rules are not supported by any data, and (iv) the CFTC has not provided a process to revoke an available to trade determination. 

Lofchie Comment:  Leaving aside whether one agrees with the substantive requirements of the “available to trade rule,” such as the request to request at least three quotes, the criticisms that Commissioner O’Malia makes of the procedural requirements of the rule seem serious.  It is surprising that the CFTC majority elected not to address these comments in its final rule.

See: Dissenting Statement of Commissioner Scott D. O’Malia
See also:  CFTC Adopts Rules Regarding SEFs
See also:  Remarks of the CFTC Commissioners with Regard to SEF Trade Execution Rules and Anti-Disruptive Trading Practices

CFTC Adopts Rules Regarding SEFs

The CFTC approved three final rules regarding (i) core principles and other requirements for swap execution facilities; (ii) the process for a designated contract market or swap execution facility to make a swap available to trade; and (iii) procedures to establish appropriate minimum block sizes for large notional off-facility swaps and block trades. 

Although the text of the Final Rules is not yet available, the summary below is based primarily on the fact sheets issued by the CFTC and the discussions at the CFTC Open Meeting.

SEF Final Rules

By a vote of 4-1, the CFTC approved final rules regarding core principles and other requirements for SEFs (“SEF Final Rules”).  Commissioner O’Malia voted against the SEF Final Rules.  Commissioner O’Malia also introduced an amendment to the SEF Final Rules which would require a fact-based analysis of the request-for-quote (“RFQ”) requirement.  This amendment was not approved.

SEF Registration Requirement

The SEF Final Rules implement the SEF registration requirement in CEA Section 5h(a)(1) by requiring facilities that meet the SEF definition in CEA Section 1a(50) to register as SEFs.

After the rule becomes effective, prospective SEFs can file a provisional “notice” registration, but must file a complete SEF registration application before the 120-day compliance date.  The rules include the SEF application form (“Form SEF”), and a comprehensive list of instructions and documents that must accompany applications for registration as a SEF.

SEF Execution Methods and the Trade Execution Requirement

According to the CFTC, registered SEFs must provide a “minimum trading functionality,” which it defines as an “Order Book,”  which generally will be a system in which market participants can enter or hit multiple bids and offers.

Swaps that are subject to the trade execution requirement (i.e., subject to mandatory clearing and “made available to trade”) and that are not block trades must be executed on an SEF in accordance with a prescribed execution method.

The requirements in the SEF Final Rules implement and provide guidance regarding the 15 core principles under CEA Section 5h.

With regard to the rules regarding the mandated request for a quote, the CFTC will eventually require SEF to transmit an RFQ to at least three market participants, although only two market participants are required for the first year. 

Process for Determining That a Swap Is “Made Available to Trade”

By a vote of 3-2 (Commissioners Scott O’Malia and Sommers dissenting), the CFTC approved final rules establishing a process for designated contract markets (“DCM”) and SEFs to find that a swap is “made available to trade” (the “MAT Final Rules”). 

The MAT Final Rules permit DCMs and SEFs to submit to the CFTC a determination that a swap is “available to trade” (“MAT Determination”) for purposes of CEA Section 2(h)(8), provided that:  (1) the DCM or SEF lists or offers the swap for trading; and (2) the swap is subject to a CFTC mandatory clearing determination.  MAT Determinations may be submitted either for approval pursuant to CFTC Rule 40.5 or under self-certification procedures pursuant to CFTC Rule 40.6. 

Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades

By a vote of 3-2 (Commissioners Scott O’Malia and Sommers dissenting), the CFTC approved final rules establishing minimum block sizes for large notional off-facility swaps and block trades (the “Block Trade Final Rule”).

CEA Section 2(a)(13) requires the public dissemination of certain post-trade transaction pricing data as the CFTC determines is appropriate to enhance price discovery and consistent with protecting the identities and maintaining the anonymity of business transactions and market positions of swap counterparties.  CEA Section 2(a)(13) also obligates the Commission to establish criteria to determine what constitutes a “large notional swap transaction (block trade)” for the purposes of applying time delays for disseminating transaction and pricing data for such transactions to the public.

The CFTC published final rules regarding the real-time public reporting on January 9, 2012; however, these rules did not address the minimum block sizes for large notional off-facility swaps or block trades.  The Block Trade Final Rule addresses the issues that were not finalized when the CFTC adopted the real-time public reporting rules.

Effective Date and Compliance Date

According to the CFTC, minimum block sizes will be implemented through a two-phase approach.  The initial period would last until registered SDRs have collected at least one year of reliable data for each asset class, at which point the requirements would be revised and then reviewed annually. 

Links to the CFTC’s Fact Sheets and FAQs

Fact Sheet: Final Rulemaking on Procedures to Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades; Further Measures to Protect the Identities of Parties to Swap Transactions

Questions & Answers: Procedures to Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades; Further Measures to Protect the Identities of Parties to Swap Transactions

Fact Sheet: Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade under Section 2(h)(8) of the Commodity Exchange Act

Questions and Answers: Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade and Schedule to Phase in Compliance with Section 2(h)(8) of the Commodity Exchange Act

Fact Sheet: Final Rulemaking Regarding Core Principles and Other Requirements for Swap Execution Facilities

Questions & Answers: Core Principles and Other Requirements for Swap Execution Facilities

Remarks of the CFTC Commissioners with Regard to SEF Trade Execution Rules and Anti-Disruptive Trading Practices Guidance

The CFTC held a public meeting today to consider the pre-trade transparency module that includes the swaps block rule, the swap execution facility rule and the made available to trade rule. Opening statements were made by Chairman Gary Gensler, Commissioners Jill Sommers, Bart Chilton, Scott D. O’Malia and Mark Wetjen discussing key aspects of the rules and their impact on the swaps market. The commissioners focused on both the benefits and shortcomings which they viewed as critical to the success of the reforms.

Chairman Gensler Delivers Overview of New Rules and Their Promotion of Transparency in Swaps Market

Chairman Gensler delivered remarks to open the commission meeting with a focus on the transparency and increase in competition which these reforms are designed to institutionalize in the swaps market. The swaps block rule, the swap execution facility (“SEF”) rule and the made available to trade rule will provide the public with the price and volume of every transaction in real time, allowing anyone in the market to compete and offer to buy or sell a swap and communicate that to the public. Trading on SEFs and designated contract markets (“DCMs”) will only be required between financial institutions, and the rules are flexible enough to allow companies to continue relying on customized transactions to meet their particular needs. To be a registered SEF, the trading platform will be required to provide an order book to all its market participants, allowing the public – for the first time – to gain access and compete in this market. SEFs will have the flexibility to offer trading through requests for quotes; the rule mandates that such requests must go out to a minimum of three unaffiliated market participants before a swap can be executed (an initial phase-in period will allow a minimum of two participants). With the major building blocks of swaps market reform – those of transparency, clearing and swaps dealer oversight – complete, Chairman Gensler noted that the CFTC’s priority is to finalize guidance on the cross-border application of swaps market reform as applied to U.S. affiliates operating offshore. The CFTC is also pursuing an appeal of the district court’s adverse position limits ruling, and Chairmen Gensler has directed the staff to prepare a new proposed  rule to implement the speculative position limits required by the Dodd-Frank Act.

Chairman Gensler Highlights Key Aspects of Rules in Statements of Support

Chairman Gensler supports the final block rule for swaps because it promotes transparency. The methodology for determining block sizes is appropriately tailored to asset class, product and rate. The CFTC’s phased-in approach for setting block sizes allows 50 percent of the notional amount of a particular swap category to benefit from pre- and post-trade transparency, and bases the block sizes for foreign exchange and other commodity asset classes upon the block sizes that designated contract markets have set for economically related futures contracts. Beyond this initial period, the block sizes will be determined based on data collected by swap data repositories, such that 67 percent of the notional amount of a particular swap category will benefit from the pre- and post-trade transparency. The rule also includes measures to protect the identities, market positions and business transactions of swap counterparties.

Chairman Gensler also supports the final rulemaking to implement the process for SEFs and DCMs to “make a swap available to trade” (“MAT”). The Dodd-Frank trade execution provision requires that swaps be traded on SEFs or DCMs if they are (1) subject to mandatory clearing and (2) made available to trade. The MAT rule establishes a flexible process for SEFs and DCMs to make a swap available to trade: they first determine which swaps are to be made available to be traded, and then such determinations are submitted to the CFTC either as self-certified or for approval under the Part 40 rules. For the phase-in period, market participants have 30 days after the determination is either self-certified or approved before the swaps are subject to the trade execution mandate.

Chairman Gensler also supports the rule on SEFs, which will allow a significant portion of interest rate and credit derivative index swaps to be in full view to the marketplace before transactions occur, while giving SEFs the flexibility to offer trading through requests for quotes. As long as minimum requirements of the rule and its core principles are met, the SEF can conduct business through any means of interstate commerce.

Finally, Chairman Gensler supports the Interpretive Guidance and Policy Statement regarding disruptive practices on SEFs and DCMs. The provisions implement the express Congressional prohibition of certain trading practices that were deemed disruptive of fair and equitable trading on CFTC-registered entities, in particular the practices that impede critical price discovery functions.

Commissioner Jill E. Sommers Highlights Flaws in Final Rulemaking

Commissioner Sommers delivered remarks discussing some of the shortcomings of the rules being considered. With respect to setting block sizes, Commissioner Sommers identified the difficulty of establishing appropriate minimum thresholds on markets that are not “one size fits all,” and stated that the CFTC should not be adopting the “one size fits all” approach without appropriate data. She specifically pointed to the 67% automatic adjustment after the one-year phase-in period, without regard to what the data may show, and stated that minimum block sizes should be driven by the most current objective data available, not an automatic across-the-board formula. Additionally, she found the MAT rule to be lacking because it does not provide for a list of objective standards by which the CFTC may use to determine whether a swap is “suitable” for mandatory execution requirements. She stated that the current approach allows a single SEF or DCM to bind the entire marketplace to a trade execution requirement as long as the swap must be cleared, even if the liquidity is lacking, and concluded that this approach is “overly broad [and] . . . just plain bad policy.” Commissioner Sommers also commented that the disruptive trading practices guidance could have been more helpful in some areas. Finally, with regard to the SEF rulemaking, Commissioner Sommers found that it went beyond Congressional intent by imposing requirements not called for by the statute, which would desynchronize the CFTC from the SEC and possibly foreign regulators. She emphasized the importance of basing such rules on objective data and questioned the rejection of a framework that would allow for exempt SEFs and exempt DCOs, which are included in the statute.

Commissioner Scott D. O’Malia Considers Strengths and Shortcomings of Rules

Commissioner O’Malia acknowledged that the adoption of these rules will bring the CFTC in compliance with three of the four principles agreed to by the G-20 nations that finalized the Pittsburgh Communique in September 2009. These three principles are: (1) reporting of all trades to a trade repository; (2) requiring that “all standardized OTC derivatives should be traded on exchanges or electronic trading platform, where appropriate”; and (3) “clearing through central counterparties.” The fourth principle calls for higher collateral charges for all non-cleared OTC contracts, and the CFTC has published a proposed rule to address this issue. Commissioner O’Malia then stated that “data is a foundational element” of regulatory oversight, and criticized the underuse of available data in formulating the rules. Specifically, he stated the CFTC was ignoring the available data with regard to shifting the minimum number of traders on an RFQ from two to three participants and, as a result, he provided amendments to both the SEF rule and the swap block rule requiring the CFTC to conduct a timely analysis of the liquidity on the SEF and relevant asset classes when setting block levels. The amendment would require the CFTC to collect data to identify the depth of quality of liquidity and subsequently to determine whether to change the RFQ requirements. Similarly, the swap block rule imposes an “arbitrary and automatic increase” without consideration of transaction data. Additionally, he noted that the rules fail to create flexible trading platforms for sophisticated traders, such as Eligible Contract Participants, and that the rules did not expressly permit other methods of execution, including voice, which would have promoted trading on SEFs.

Commissioner O’Malia also criticized the MAT rule as providing “illusory comfort” to the CFTC by granting a mere “rubber stamp” on an SEF or DCM’s initial determination, without any specific objective criteria. The process for removing a MAT determination also “lacks any logical or legal basis and is the exact opposite” of the requirements to make the initial MAT determination. Finally, Commissioner O’Malia commented on the Disruptive Trade Practices guidance, stating that it does not provide clear guidance on how algorithmic or automated trading should be viewed in the context of disruptive trading, among other deficiencies. He urged the CFTC to work closely with market participates to develop a better understanding of trading strategies used by algorithmic and high-frequency traders in order to identify strategies that could lead to disruptive trading, and stated that the CFTC should enhance the technological infrastructure to conduct proper market analysis in identifying disruptive trading.

Commissioner Bart Chilton Urges Further Transparency

Commissioner Chilton stated that greater transparency could have been implemented via these rules and that he believed the rules still “leave in place unregulated dark markets” which contributed to the 2008 economic crisis previously. He stated that, by not acting, the CFTC has elected to essentially encourage “the futurization of swaps to take place.”

Commissioner Mark P. Wetjen Encourages Flexibility in Regulatory Oversight

Commissioner Wetjen stated that the rules strike an acceptable balance in resolving the concerns raised in comment letters. He emphasized that the rules improve pricing for the buy-side, commercial end uses and other participants that use these markets to manage risk; the rules also allow SEFs as registered entities to establish and enforce comprehensive compliance and surveillance programs. One understated potential benefit, he added, was the improved ability for clearinghouses and their members to manage risk during times of market stress. Ultimately, these final rules allow the CFTC to oversee a transparent, risk-reducing swap market structure. However, Commissioner Wetjen emphasized the importance of being open to reassessing the policy judgments implemented in these rules as the CFTC is provided new information. He highlighted that a significant number of commenters cautioned the CFTC against imposing specific trading protocols because it might unintentionally increase hedging costs for liquidity providers, or dislocate illiquid swap markets, among others concerns. Commissioner Wetjen noted that the rules allow participants to have clear choices – choices concerning margin treatment, modes of execution, clearing venues and, in some cases, counterparties, allowing them to make those choices based upon their own economic interests. He was concerned about supporting a competitive landscape for derivatives execution and brought attention to suggestions that some of the rules may unfairly or inappropriately favor futures execution. He reiterated that the CFTC has a responsibility to revisit its approach as it receives new data.

See:

Hearing Webcast.

Testimonies:

Opening Statement of Chairman Gary Gensler;

Statement of Support of Chairman Gary Gensler
;

Opening Statement of Commissioner Jill Sommers
;

Opening Statement of Commissioner Scott O’Malia;

Opening Statement of Commissioner Bart Chilton;

Opening Statement of Commissioner Mark Wetjen
.

Additional Materials:

Fact Sheet: Final Rulemaking on Procedures to Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades; Further Measures to Protect the Identities of Parties to Swap Transactions;

Questions & Answers: Procedures to Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades; Further Measures to Protect the Identities of Parties to Swap Transactions;

Fact Sheet: Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade under Section 2(h)(8) of the Commodity Exchange Act;

Questions and Answers: Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade and Schedule to Phase In Compliance with Section 2(h)(8) of the Commodity Exchange Act
;

Fact Sheet: Final Rulemaking Regarding Core Principles and Other Requirements for Swap Execution Facilities
;

Questions & Answers: Core Principles and Other Requirements for Swap Execution Facilities;

Fact Sheet: Interpretive Guidance and Policy Statement on Disruptive Practices;

Questions & Answers: Interpretive Guidance and Policy Statement on Disruptive Practices
.

See Also:

SIFMA Statement Disagreeing with CFTC’s Final SEF Rules.

Financial Services Committee Hearings: Review of ‘Too Big to Fail’

The Oversight and Investigations Subcommittee held a hearing focusing on “Too Big to Fail.”  Oversight and Investigation Subcommittee Chairman Patrick McHenry (R-NC) said the following at the hearing: “The fact is that Dodd-Frank did not end ‘Too Big to Fail,’ but instead enshrined it.  Title II of Dodd-Frank, which created the Orderly Liquidation Authority, made government guarantees for systemically important financial institutions explicit . . . and it is this explicit guarantee that not only provides an unfair advantage to the biggest and most powerful companies and institutions, but in doing so, has the potential to seriously distort our marketplace.”

See:  Memorandum on the Hearing: “Who Is Too Big to Fail: Does Title II of the Dodd-Frank Act Enshrine Taxpayer-Funded Bailouts?”
Testimonies:  Mr. David A. Skeel (Professor of Corporate Law, University of Pennsylvania Law School), Dr. John B. Taylor (Professor of Economics, Stanford University), Mr. Joshua Rosner (Managing Director, Graham Fisher & Co.), and Mr. Michael Krimminger (Partner, Cleary Gottlieb).

Michael Gibson, Federal Reserve Director of the Division of Banking Supervision and Regulation, Testifies on Cross-Border Resolution of Large Financial Firms

Michael S. Gibson, Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System, testified before the Senate Committee on Banking, Housing and Urban Affairs regarding the cross-border resolution of large financial firms.  Gibson began by reviewing existing regulatory efforts to limit the cost to the broader financial system of a firm’s systemic financial failure, noting in particular the progress made by the FDIC in implementing the Ordinary Liquidation Authority (“OLA”).  Gibson went on to specify four remaining obstacles to making an orderly resolution of a global systemic firm more feasible:

  • Adopting effective statutory resolution regimes in other countries: Gibson noted that, although the United States has had OLA in place since 2010, most other major jurisdictions have not yet enacted analogous reforms.
  • Ensuring that systemic global banking firms have sufficient “gone concern” loss-absorption capacity:  Gibson noted that the Federal Reserve is considering a regulatory requirement that the largest U.S. banking firms maintain a minimum amount of outstanding long-term unsecured debt on top of their regulatory capital requirements.
  • Completing firm-specific cooperation agreements with foreign regulators:  Gibson stated that, because OLA can only apply to U.S.-chartered entities, foreign subsidiaries and branches of a U.S.-based systemic financial firm could be ring-fenced, or wound down separately, under the insolvency laws of their home country, which could be “disruptive.”  Gibson asserted that further progress on cross-border resolution will likely require significant bilateral and multilateral agreements among U.S. regulators and foreign central banks and supervisors.
  • Coordinating consistent treatment of cross-border financial contracts:  Gibson noted the concern that counterparties to financial contracts with the foreign subsidiaries and branches of a U.S. firm may have contractual rights and substantial economic incentives to terminate their transactions as soon as the U.S. parent enters into resolution.  In addressing these issues, Gibson lent the Federal Reserve’s support to ongoing efforts by regulators and the industry to modify contractual cross-default and netting practices.

Click here to view testimony in full (links externally to FRB website).
See also: Testimony by FDIC’s James R. Wigand, Director, Office of Complex Financial Institutions.

FDIC Chairman Gruenberg Makes Remarks to the Exchequer Club

FDIC Chairman Martin Gruenberg spoke at the Exchequer Club in Washington, DC on May 15, 2013, giving a brief overview of the current state of the banking industry and the progress made by the FDIC in its Community Banking Initiative.  He also addressed the FDIC’s efforts to implement its authority to resolve systemically important financial institutions, particularly with respect to the FDIC’s international coordination on resolution planning efforts.

View remarks in full here (links externally to FDIC website).