In “Questions and Answers on the Bank for Reconstruction and Development,” which the U.S. Treasury prepared for distribution at the Bretton Woods conference. it is mentioned that the proposed capital for the organization now better known as the World Bank was $10 billion. The document does not offer a breakdown by country, but in the run-up to Bretton Woods, the organizers of the conference had in mind to reserve $2 billion notionally for the countries that did not participate in the Bretton Woods conference. These were a few neutral countries, such as Spain, Sweden, and Turkey, and, more important, the Axis powers. It was envisioned that after a suitable period of postwar occupation and rehabilitation, Germany, Japan, and Italy would join the World Bank as well as the International Monetary Fund. (Membership in the World Bank was only open to members of the IMF.)
As it turned out, the World Bank received pledges for $9.1 billion in capital subscriptions, $800 million more than the organizers had hoped for. The Soviet Union at the last minute pledged $1.2 billion, more than expected. It later decided not to join the IMF or the World Bank, though, so they began without Soviet participation. The influence of the United States correspondingly increased, since it had more than 40 percent of the remaining subscriptions, and still more of the truly effective capital of the bank given that many countries paid their subscriptions in national currencies that were not readily usable internationally. Italy joined the World Bank in 1947, while Germany and Japan joined in 1952.
The U.S. economy was $225 billion in 1944 dollars. The World Bank’s proposed capital was therefore 4.4 percent of the size of the U.S. economy. Today the U.S. economy is $16.7 trillion and the World Bank’s total subscribed capital is $223 billion (see Table 15 of this), or 1.3 percent of the size of the U.S. economy. The rest of the world has grown faster than the United States since 1944, so in proportion to the world economy the World Bank’s capital is smaller still, about 0.5 percent today versus 2-2.5 percent in 1944. As my previous post mentioned, postwar international finance was stronger and more dynamic than the organizers of Bretton Woods hoped, and the World Bank has had a correspondingly small role than they expected.
Six federal agencies – including the Board of Governors of the Federal Reserve System, Department of Housing and Urban Development, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Office of the Comptroller of the Currency, and the SEC – issued a notice revising a proposed rule requiring sponsors of securitization transactions to retain risk in those transactions. The new proposal revises a proposed rule which the agencies issued in 2011 to implement the risk retention requirement in Dodd-Frank. Linked below is a description of the re-proposal prepared by the Structured Finance Industry Group.
Commissioner Daniel M. Gallagher and Commissioner Michael S. Piwowar issued separate dissenting statements about their concerns regarding the re-proposed risk retention rules. Commissioner Gallagher stated that the re-proposed risk rules ensure that the vast majority of mortgages in the U.S. will be owned by the government. He explained that this introduces another “flawed government imprimatur of creditworthiness” into the markets, which creates disincentives for proper risk management and due diligence in the mortgage markets. Commissioner Gallagher also noted that the re-proposal abandons the definition of qualified residential mortgage (“QRM”), and instead adopts a “deeply flawed” definition of qualified mortgage set forth by the Consumer Financial Protection Bureau (CFPB)earlier this year.
Commissioner Piwowar stated that, although improvements were made to the original proposal in response to public comments, he did not support the re-proposal because it does not contain necessary economic analysis, nor does it adequately consider alternatives to credit risk retention requirements. Commissioner Piwowar said that regulatory agencies should make greater use of re-proposals because they offer regulators the opportunity to improve efficiency and effectiveness in the rulemaking processes, and provide the public with the regulatory transparency and accountability they deserve.
SIFMA Asset Management Group (“SIFMA AMG”) submitted comments to the CFTC requesting interpretive guidance with respect to the status of certain types of FX transactions as bona fide spot foreign exchange transactions. SIFMA further defined the term “swap,” setting forth a distinction between FX spot transactions and FX forwards that included providing guidance as to “securities conversion transactions,” which are entered into in connection with a related foreign securities transaction.
Additionally, SIFMA AMG submitted comments to the CFTC requesting relief for certain External Business Conduct Standards for certain FX Transactions. SIFMA AMG requested that the CFTC extend the date for compliance by SDs and MSPs with external business conduct requirements and other information collection rules when entering into deliverable FX transactions with a settlement cycle of no more than seven local business days after execution.
SIFMA AIMG Interpretive Guidance Letter; SIFMA AIMG Relief Request Letter.
SIFMA AMG Submits Comments to CFTC on Cross-Border Phase-in Exemptive Order and Final Interpretive Guidance (August 26, 2013).
Former Congressional staffer Hester Peirce has published an article titled, “Regulatory Complicity in Nasdaq’s Troubles.” The article discusses last week’s Nasdaq trading halt and examines how the SEC could approach the resolution of future problems in the securities market.
The article makes two important points: first, regulators feel pressured to bring a disciplinary action or make additional rule requirements whenever something profiled publicly goes wrong in the financial markets; second, it is often the case that the rule changes have negative unintended consequences.
The Futures Industry Association (“FIA”) released an empirical study on changes in the level of volatility in futures markets. The study focused on 15 futures contracts listed on four futures exchanges: CME Group, Eurex, Intercontinental Exchange and NYSE Liffe. The study found that while prices in these 15 markets moved through high and low cycles of volatility and experienced numerous spikes due to macro-economic events, volatility attributable to structural factors did not change in most of these contracts. According to the study, innovations such as algorithmic and high-frequency trading do not appear to have affected the volatility of prices.
The Asset Management Group of SIFMA provided comments to the CFTC on the recent CFTC guidance and exemptive order relating to cross-border swap activities. The SIFMA letter, among other things:
- asks for additional time to comply with the “U.S. person” definition (until December 21, 2013 for assessment and identification and March 31, 2014 for compliance);
- seeks an explicit recognition by the CFTC that asset managers have the discretion to determine in good faith, based on the facts and circumstances that they deem most relevant, whether a fund’s principal place of business is in the U.S.;
- asks for clarification that funds that are publicly offered or privately offered to only non-U.S. persons should categorically be non-U.S. persons; and
- requests substitute compliance to be available for all entities, including funds and other asset management clients.
Adoption of SIFMA’s recommendations would go a long way towards addressing the ambiguities present in the CFTC guidance – particularly as to the difficulties for determining the status of entities run by asset managers operating across borders and with investors from numerous locations.
MFA and AIMA submitted a joint letter to the CFTC in response to its “Exemptive Order Regarding Compliance with Certain Swap Regulations.” The letter asks for a delay in the reporting requirements that might otherwise apply to funds in three circumstances: (i) where a fund that will be deemed a “U.S. person” as of October 10, 2013 under the CFTC Guidance (an “October U.S. Fund”) is transacting with an entity that intends to register on December 31, 1013; (ii) where an October U.S. Fund is transacting with a non-U.S. dealer that does not intend to register with the CFTC as of the end of the year; and (iii) as to all U.S. funds, as to certain historical reporting requirements. Appendix A to the letter (page 11) provides a chart as to the specifics of each exemptive request.
In addition, the letter requests that when a non-U.S. fund becomes a U.S. person because of a change in its circumstances after October 10, 2013 (for example, it becomes majority-owned by U.S. persons), the fund would have 75 days to come into compliance with CFTC swap regulations.
The U.S. Court of Appeals in D.C. designated November 25, 2013 at 9:30 A.M. as the date and time for oral arguments, relating to the CFTC’s proposed position limits rules, in the case of ISDA and SIFMA v. CFTC.
Industry groups, including SIFMA, the FIA, and the FSR submitted a joint comment letter to the SEC regarding SEC rulemaking proposals relating to cross-border security-based swap activities, reporting of security-based swaps, and registration of SBSDs and MSBSPs. While the industry groups stated support for many elements of the SEC’s proposal, the letter highlighted two significant concerns including:
- The lack of harmonization with the CFTC’s cross-border approach; and
- SEC’s proposed “conducted within the United States” test.
On the harmonization point, the comment letter said that, while the trade associations viewed the CFTC rules and guidance as materially flawed rules, now that those rules were in place, the industry generally preferred having two sets of matching rules as opposed to two sets of rules, even if one set of rules was preferable, as a policy matter.
On the “conduct within the United States” point, the trade associations said that they preferred the CFTC approach to determining “U.S. person” (and related statuses) in that it makes a determination based on counterparty status, rather than one based on activities associated with a particular transaction.
From the standpoint of someone who hopes that the United States will develop a sensible system of financial regulation, this letter has less idealism and more realpolitik. Assuming that the SEC follows the advice of the trade associations to match its rules to that of the CFTC (and it is hard to see any practical reason why it should not), any improvement in the matched regulations will require the coordination of both regulators, (not a given even in the best of times). Instead, we are likely left with a lesser regulatory system administered by an unfortunately divided regulatory structure. (At least it’s Friday.)