North Korea: From Hyperinflation to Dollarization?

Steve H. Hanke of Johns Hopkins University recently wrote about North Korea and hyperinflation. Though he titled the article “North Korea: From Hyperinflation to Dollarization,” he could have titled it “North Korea: From Hyperinflation to Yuan-ization.” As Hanke points out, there are some solid reasons for yuan-ization. North Korean markets along the Chinese border now conduct approximately 80% of their transactions in Chinese yuan and China accounts for more than half of North Korea’s foreign trade and the lion’s share of its foreign direct investment.

North Korea stands to benefit from such a policy. “Yuan-ization would put an end to North Korea’s inflation woes, at least creating the potential for domestic economic growth. It would also facilitate increased trade with China and perhaps other countries, as well.”

To read the report click here.

CFS Monetary Data are Revealing Regarding the Future

Today we release CFS monetary and financial measures for May 2013.
CFS Divisia M4, which is the broadest and most important measure of
money, grew by 4.9% in May 2013 on a year-over-year basis.

CFS monetary data provide particular insights regarding the Federal
Reserve’s supersized balance sheet, policy options, and the future.
For special analysis, please contact LeAnn Yee at

For Monetary and Financial Data Release:

CFTC Commissioner Bart Chilton Delivers Speech on the Hedge Fund Industry: “Rock’n the Trouble”

CFTC Commissioner Bart Chilton delivered a speech in Chicago using the board game Trouble to illustrate some points that he indicated he intended to make as to “key policy issues addressing hedge funds and the broader financial sector.”

Lofchie Comment:  Here is a link to Wikipedia’s description of the game Trouble.  On the right-hand side of the Wikipedia article, there is an illustration of the Pop-O-Matic that made the clicking sound remembered by Commissioner Chilton.

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

House Subcomimittee Raises Oversight and Accountability Concerns as to CFPB

The House of Representatives’ Oversight and Investigations Subcommittee highlighted the CFPB’s “radical” structure at a hearing where members expressed concern that the agency operates without basic oversight and accountability.  Subcommittee Chairman Patrick McHenry suggested that the CFPB director has little accountability to the Obama Administration and even less to Congress.

Areas of concern are: 

  • Money set aside for renovating CFPB headquarters;
  • CFPB money spent on travel by its employees;
  • CFPB exemption from OMB guidelines, rules, and regulations;
  • CFPB’s refusal to participate in the OPM employee viewpoint survey; and
  • The lack of accountability to both Congress and the administration for an agency run by a single director.

See: House Financial Services Committee Press ReleaseWebcast of Hearing; Committee Memorandum; Testimony by Stephen Agostini – Chief Financial Officer, Consumer Financial Protection Bureau.

Chairman Gensler on International Swaps Market Reform

Chairman Gary Gensler released a paper, previously published in a French financial journal in April, that focuses on cross-border regulation of the swaps market.  According to his paper, as the financial system failed in 2008, the swaps market, which was basically not regulated in the United States, Europe, Canada or Asia, failed to meet their objectives, causing a great financial crisis.

Chairman Gensler’s paper is divided into the following areas of focus:

  • New International Consensus to Reform the Swaps Market
  • Transparency – Lowering Cost and Increasing Liquidity, Efficiency, and Competition
  • Clearing – Lowering Risk and Democratizing the Market
  • Swap Dealer Oversight – Promoting Market Integrity and Lowering Risk
  • International Coordination on Swaps Market Reform

Lofchie Comment:  If Chairman Gensler was trying to persuade the Europeans, who have been very blunt in their criticism of the CFTC’s go-it-alone regulation, that the CFTC has done everything possible to work with them, he failed.  Their response has been negative; see, e.g., European Commissioner’s ”Invitation” to CFTC Chairman to Extend the CFTC Exemptive Order on Cross-Border Swaps Regulation.

If Chairman Gensler was trying to persuade an American political audience of the CFTC’s efforts at cross-border cooperation, he seems not to have succeeded. Yesterday, the House of Representatives by a very substantial majority adopted a bill that would require the CFTC to provide a fuller explanation of its cross-border policies and to cooperate more closely with both the SEC and European regulators.  Even assuming that the relevant bill (the Swap Jurisdiction Certainty Act) has no chance of being adopted into law by the Senate, the fact that it was adopted by a vote of 301-124 shows that a large majority of the House is actively opposed to the Chairman.

Whatever the merits of the CFTC’s rulemaking may be, those who are subject to its rules are going to be skeptical of a paper that describes them as “common-sense rules of the road.”  A set of rules that requires a 200-page discussion of just the defined term “swap,” followed by numerous no-action letters on the same topic, may someday be regarded as brilliant, but they are not going to be thought of as “common-sense” rules.

Soon, Chairman Gensler will face a crucial decision as to whether to extend the CFTC’s existing cross-border relief or let it lapse without any rule to take its place. See, e.g.,  Commissioner O’Malia Speaks on Cross-Border, ”Made Available to Trade” and Data Management.  Most believe it would be the right and prudent course to extend the relief.  That said, I think that most non-U.S. regulators and firms might prefer the chaos which might come without a rule over the hasty adoption of a bad cross-border rule.

See: International Swaps Market Reform: Promoting Transparency and Lowering Risk.

Commissioner Chilton Speech on the Balancing Act: Requisite Regulation vs. Regulatory Overreach

CFTC Commissioner Bart Chilton gave a speech to the Institute of International Bankers (“IIB”) using popular movies to illustrate the benefits of government regulation in industries such as food, energy and pharmaceutical. However, Commissioner Chilton also acknowledged that government regulations are sometimes overbroad and unnecessary. He concluded by discussing how, as in life, regulations require a balance approached. To that end, he asserted the virtues of the Volcker Rule and the Cross-Border Guidance and how both proposals strike the proper balanced approach to regulation.

Lofchie Comment: In a quick scan of Commissioner Chilton’s speech, I counted references to 38 movies, including remakes and sequels.

See:Cinema of Uncertainty.”

Commissioner O’Malia Speaks on Cross-Border, “Made Available to Trade” and Data Management

CFTC Commissioner Scott D. O’Malia gave the keynote address before the OpRisk European Conference. He focused on three topics.

As might be expected, given the European audience, the first topic was cross-border regulatory issues and his reasoning for seeking an extension of the July 12, 2013 deadline for the implementation of cross-border application.

The second was the CFTC’s adoption of rules governing swap execution facilities (“SEFs”) and related trade execution rules, particularly the oddly-named “Made Available to Trade Rule.”  “Made Available to Trade” really means “must be traded on a SEF.”  Commissioner O’Malia argued that the CFTC standard for when a cleared swap is required to be traded on a SEF is too low, and is allowed to be decided by an entity that is subject to a substantial conflict of interest.

Third, the Commissioner observed that, while the CFTC is collecting a good amount of data, in its haste to require the transmission of data, it has failed to adopt rules and procedures that will allow it to make use of that data.

Lofchie Comment:  As stated in a previous comment, CFTC Chairman Gensler is now in the difficult position where the most responsible course of action as to cross-border regulation is to take an action that he has previously opposed: extending the current cross-border guidance and conceding that no final rule on cross-border regulation will be reached during his term as Chairman.  See, e.g., Trade Associations Request a Six-Month Extension of the CFTC’s Cross-Border Exemptive Guidance.

As to “made available to trade,” the Commissioner points out what are significant flaws in the CFTC’s rulemaking. As discussed in the news item, CFTC Publishes Text of SEF Rules, once a swap is subject to clearing, a SEF is able, by issuing an analysis that the CFTC estimates will cost $938.40 (in other words, for a very cursory analysis), to force the entire market to trade that swap on a SEF and not in the OTC market.  Given that there is no experience with how SEFs will function, that seems an imprudently low standard of analysis. Indeed, why bother with an analysis at all, given how cursory the standard seems to be?  One might as well allow any SEF to mandate an end to OTC trading of any swap that is subject to mandatory clearing.

Commissioner O’Malia’s third comment is one that may be made as to other regulators and other rules:  the government mandates the collection of information, at great expense to market participants, that it has no means to use.

The common theme that runs through Commissioner O’Malia’s remarks is that the CFTC, in attempting to implement Dodd-Frank quickly, has acted in too-great haste.  It is now in a position where it can continue racing ahead, but it seems inevitable that if the Commission does not take a break and reevaluate the rules it has already adopted, it will soon be forced to do so in response to market disruptions that those rules have created. 

See: Taking the Time to Get It Right: The Cross-Border Regulatory Framework.

Summary of “Made Available to Trade” Rule by Delta Strategy Group

Delta Strategy Group released a very useful summary of the finalized “Made Available to Trade Rule.”  As previously explained, this is the process by which a swap execution facility (“SEF”) may require that any swap that is subject to mandatory clearing also be traded only on a regulated market.

Click here to see a summary of the “made available to trade” rule and process from Delta Strategy Group.

Greece and the IMF Program

The IMF recently released an internal self-critical report on how it constructed the adjustment program for Greece, thus sparking a debate on why the original, 110 billion euro, May 2010, adjustment program with the IMF, the European Commission, and the ECB — the “troika” — went off-track.

The Fund now says that it should have restructured Greece’s debt from the start, but that the ECB was opposed to that idea. As a result, the restructuring was delayed until March 2012. The IMF also says that its assumptions about the depth of the contraction were overly optimistic. Between 2008 and the end of last year, real GDP contracted by about 20 per cent; it will likely contract somewhat further this year.

My own assessment is as follows:

1. The May 2010 adjustment program had 4 main pillars — fiscal consolidation, structural reforms, privatization, and improved tax collection.

2. Only the first pillar was implemented, and that was implemented the wrong way — it placed extensive emphasis on tax increases and not enough emphasis on expenditure cuts. For the first 2 years of the program, essentially nothing was done to fulfill Greece’s agreements with the troika on privatization, tax collection, and structural reforms, except for an overhaul of the pension system.

3. For the first 6 months or so after the May 2010 agreement, fiscal consolidation, based on revenue hikes, took place. At the same time, the Greek Parliament passed a number of measures relating to structural reforms. The financial markets liked what they saw. As a result, 10-year sovereign spreads relative to Germany dropped from 1,000 basis points in May 2010 to 500 basis points in October.

4. But the markets noticed that while Greece was good at passing reform legislation, it was very poor at implementing. Spreads began to rise. Greek banks, which held large amounts of Greek sovereigns, suffered huge losses. What started out as a sovereign crisis, spread to the banking system, creating a second crisis area — the banking system.

5. The depth of the contraction was exacerbated, because the troika underestimated the size of the fiscal multiplier. The troika has recently admitted that it had underestimated the size of the fiscal multiplier in Greece. In January 2012, the Bank of Greece Governor published an article in The Financial Times, in which he stated that the fiscal multiplier had been underestimated.

6. All of this was compounded by politicians who failed to tell people why Greece found itself in a crisis to begin with, and what would be needed to get out of the crisis. Instead, politicians fought amongst themselves. They gave the impression that painful measures were being imposed on Greece by unsympathetic foreigners.

6. To date, there has been very little done in Greece in terms of structural reforms, improving tax collection, and privatization. Recent fiscal consolidation, however, places emphasis on expenditure cuts.

7. The bottom line: the adjustment program went off track because Greece failed to implement. What Greece needs to do is implement its commitments. It appears that the present 3-party coalition is determined to implement its agreements. Consumer confidence in Greece is at a 5-year high.

Trade Associations Request a Six-Month Extension of the CFTC’s Cross-Border Exemptive Guidance

SIFMA, along with the ABA, ABA Securities Association, FIA, IIB, and ISDA submitted comments to the CFTC requesting a six-month extension of the Commission’s Final Exemptive Order Regarding Compliance with Certain Swap RegulationsThe associations believe an extension would be helpful for the following reasons:

  • First, an extension would provide sufficient time for swap market participants and the CFTC to consider the potential implications of recent SEC proposals relating to its regulation of cross-border security-based swap activities.
  • Second, failing to extend the Exemptive Order without final cross-border guidance could increase uncertainty for international market participants.
  • Third, as described by the European Commission Letter, expiration of the Exemptive Order, or the premature replacement of the Exemptive Order with final cross-border guidance, might jeopardize the productive and cooperative efforts underway to meet G20 commitments on an international basis.

Lofchie Comment:  The fundamental issue is set out in CFTC Commissioner O’Malia’s speech which is linked to the following news article:  “CFTC Commissioner O’Malia on Ensuring a Backup Plan on Cross-Border Guidance to Give Markets Certainty.”

CFTC Chairman Gensler now faces a difficult choice: he must either (i) try to force through a final rule, for which he does not have a majority currently, against criticism from regulators around the globe, as well as market participants and, implicitly, the SEC, which has taken the approach of working with global regulators, (ii) concede to an extension, which means that a final rule will likely not be adopted until after his term as Chairman is finished or (iii) simply allow the existing exemptive order to expire, which Commissioner O’Malia describes as the “nuclear option” in light of the confusion that it would cause to global financial markets.

Click here to view letter in full (links externally to SIFMA website).
See also:  “SIFMA President Bentsen Takes a Side on Cross-Border Conflict“.