ISDA and Markit Publish Cross-Border Swaps Representations on ISDA Amend

ISDA and Markit launched the ISDA Cross-Border Swap Representation Letter on ISDA Amend.  The Cross-Border Letter allows market participants to provide counterparties with representations for U.S. persons status to determine whether compliance with various swap regulations is required by the CFTC’s Interpretive Guidance.  ISDA and Markit made the representations found in the Cross-Border Swaps Representation Letter available via ISDA Amend. The substantive representations on ISDA Amend are identical to ISDA’s letter.

See: ISDA Press Release
Related NewsCFTC Posts “Cross-Border Guidance” and “Cross-Border Exemptive Order” (July 16, 2013); CFTC Approves Cross-Border Guidance and Exemptive Order (July 15, 2013). 

Trade Associations Say “No SEFs Tonight, Please”

The Asset Management Group “AMG” and SIFMA submitted a request to the CFTC regarding swap execution facility (“SEF”) final rules and the made-available-to-trade (“MAT”) process, most significantly asking for a delay in the date by which SEFs will have to register.

The AMG and SIFMA made three primary requests to the CFTC.  First, they requested that the CFTC provide an extension to the deadline for registration and compliance with the new SEF final rules which would delay the deadline until at least April 1, 2014.  Secondly, they requested that the CFTC change the MAT process so that a cleared swap will not be mandated to trade on a SEF until at least 90 days after the MAT determination submission for such a swap has been approved.  Finally, the AMG and SIFMA also requested that the CFTC provide guidance and clarification on the CFTC’s swap trade execution rules. 

In support of their complaints that the SEF process is being hastily implemented, the trade associations cited the remarks of CFTC Chairman Gensler (at footnote 18 of the trade asociations’ letter).

Among the problems cited by the trade associations are the following:

  • There is no understanding among either SEFs or market participants as to how trades are to be affirmed or executions allocated.
  • The market was taken by surprise by the CFTC’s statement that trading platforms may be required to register as SEFs even if they only execute swaps that are not required to be traded on an SEF.
  • Users have not had sufficient time to review the rules published by SEFs to which they will be required to subject themselves.

Lofchie Comment:  And so it goes, and goes, and goes – a huge amount of money spent, and time wasted, by firms trying to comply with rules that are hastily adopted, ambiguous in their requirements and not fully developed.  And to what end?   Is there anyone who’s knowledgeable on the topic and believes that the economy will be safer because interest rate swaps trade on SEFs?

See: AMG and SIFMA Compliance Letter.
See also: CFTC Technology Advisory Committee Meeting (with Delta Strategy Group Summary) (September 16, 2013)Core Principles and Other Requirements for Swap Execution Facilities (Final Rule; Fed. Reg. Version) (June 4, 2013); CFTC Publishes Text of SEF Rules (May 21, 2013)

FSOC Announces Designation of Prudential as a Systemically Significant Non-Bank Financial Company

The Financial Stability Oversight Council (“FSOC”) announced that it voted to designate Prudential as a systemically important non-bank financial company.  The FSOC used its authority under Section 113 of the Dodd-Frank Act to subject Prudential Financial, Inc. to consolidated supervision and enhanced prudential standards.  The FSOC asserted that material financial distress at Prudential could pose a threat to U.S. financial stability.

Lofchie Comment:  In its last 10-K, Prudential had cautioned of the possibility that it might be designated as systemically important and that this could impose additional expenses and burdens on the company.  To wit, Prudential had said:

                                          *               *               *

If so designated [as systemically important], we would become subject to stricter prudential standards, including stricter requirements and limitations relating to risk-based capital, leverage, liquidity and credit exposure, and a requirement to maintain a plan for rapid and orderly dissolution in the event of severe financial distress.  Failure to meet defined measures of financial condition could result in substantial restrictions on our business and capital distributions.  We would also become subject to stress tests to be promulgated by the [Federal Reserve Board (“FRB”)] which could cause us to alter our business practices or affect the perceptions of regulators, rating agencies, customers, counterparties or investors of our financial strength.

If designated, we could also be subject, pursuant to future FRB rulemaking, to additional capital requirements for, and quantitative limits on, proprietary trading and sponsorship of, and investment in, hedge, private equity and other covered funds.

[FSOC] could recommend new or heightened standards and safeguards for activities or practices we and other financial services companies engage in.  We cannot predict whether any such recommendations will be made or their effect on our business, results of operations, cash flows or financial condition.

                                          *               *               *

According to FSOC’s press release, Prudential resisted the determination, which is not surprising given that the determination is likely to impose additional costs on the firm.  It will be interesting to see whether Prudential appeals FSOC’s decision (Prudential’s press release indicates that the company is considering how to proceed).  The problem with attempting any such appeal is that the relevant standards are not really legal standards, except insofar as they may mandate a process for the decision, and thus the basis for an appeal is not clear, unless such an appeal were to be based on the absence of legal standards in Section 11.

See:  FSOC Press Release.  To see the actual designation of Prudential, link to the FSOC designation page, and the explanation of FSOC’s position is under the heading “Nonbank Financial Company Designations.” 
See also:  the Prudential 10-K and the Prudential Press Release, each of which is linked above.
See also:  You Mean That Much To Me (youtube link)

FINRA Issues Public Statement Regarding FINRA’s Approach to Economic Impact Assessment for Proposed Rulemaking

FINRA issued a public statement, authored by the Office of the Chief Economist, to provide a framework to help ensure FINRA’s rules are better designed to protect the investing public and maintain market integrity while minimizing unnecessary burdens. The framework outlined in the statement applies to the prospective analysis of rules and rule changes, and describes how FINRA will evaluate significant new rule proposals and amendments to existing rules. The public statement highlights three “core principles” regarding economic assessment impact for rulemaking:

  • consult with key stakeholders in the development of rules;
  • provide clarity about the objectives and potential impacts of rule proposals and alternatives considered; and
  • obtain supporting evidence where practicable.

Lofchie Comment: There should be specific measurements by which one can evaluate the performance of a rule. Those rules that fail in their objective or that prove too expensive – should be repealed. It would be great if all of the regulatory agencies would perform cost-benefit analyses of their rules. Unfortunately, the objective is often stated in such a broad or ambiguous fashion that it is impossible to assess whether the rule has succeeded or failed. If the purpose of a rule is to “protect” the public, for example, it will be impossible to assess the rule’s performance or subject it to any relevant measure.

See: FINRA Public Statement: “Framework Regarding FINRA’s Approach to Economic Impact Assessment for Proposed Rulemaking”; FINRA Press Release.

Revised Estimated Timeline for Implementation of Various CFTC Rules (prepared by Delta Strategy Group)

This is an updated version of the Delta Strategy Group’s estimated implementation timeline for the various CFTC rules, including the “Made Available to Trade” Rule.

Click here for the updated Implementation Timeline from Delta Strategy Group.
See also: Trading Timeline; Core Principles and Other Requirements for Swap Execution Facilities (Final Rule; Fed. Reg. Version) (June 4, 2013);

SIFMA Study: ”The Role of Banks in Physical Commodities”

SIFMA released a study conducted by IHS Global (which was founded by Daniel Yergin, author of The Prize: The Epic Quest for Oil, Money and Power), which is intended to describe and support the role of banks in the physical commodities market. SIFMA stated that the study aims to explain and illustrate the important business role that banks play in the commodity sectors of the U.S. economy. Additionally, according to SIFMA, the study demonstrates how the role of banks and other financial intermediaries in physical commodities is beneficial in providing business access to capital and related risk management services.

Lofchie Comment: Several days ago, following Congressional questions concerning the role of banks in the commodities markets, CFTC Commissioner Chilton delivered remarks in which he criticized (implicitly, at least) the role of banks and asserted that the CFTC should have more authority over banks trading commodities. For a criticism of Commissioner Chilton’s remarks, see the blog of Professor Pirrong on the topic of bank involvement in physicals, “Attack of the Commodity Market Critic Zombies.” This SIMFA Study is essentially a further response to, and criticism of, Commissioner Chilton’s remarks, albeit delivered in gentler tones than those of Professor Pirrong.

See: SIFMA Study: “The Role of Banks in Physical Commodities“.


Hearing on Money Market Funds (with Summary of the Hearing by Delta Strategy Group)

The House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises held a hearing titled, “Examining the SEC’s Money Market Fund Rule Proposal.” The hearing focused on the Securities and Exchange Commission’s (“SEC”) June 5, 2013, rule proposal to reform the regulation of money market mutual funds (“MMMFs”). The proposal focuses on three options: a floating net asset value (“NAV”) for institutional prime funds, the adoption of a “fees and gates” alternative, or a combination of the two.

The following witnesses testified:

  • The Honorable Steven N. McCoy, Treasurer, State of Georgia, on behalf of the National Association of State Treasurers
  • The Honorable Sheila Bair, Chair, Pew Charitable Trusts, Systemic Risk Council
  • Ms. Marie Chandoha, President and Chief Executive Officer, Charles Schwab Investment Management Inc.
  • Mr. James Gilligan, Assistant Treasurer, Great Plains Energy, on behalf of the U.S. Chamber of Commerce
  • Mr. Paul Schott Stevens, President & CEO, Investment Company Institute

See:  Summary of hearing by Delta Strategy Group.
See also: Webcast of hearing; SIFMA Comments on SEC MMF Proposal (September 19, 2013); Investment Company Institute Comments to SEC Regarding Money Market Funds (September 19, 2013); Committee on Financial Services to Examine SEC’s Money Market Fund Rule Proposal (September 17, 2013); SEC Proposes in the Federal Register Money Market Fund Reform and Amendments to Form PF; Comments Due September 17th (June 20, 2013); SEC Proposes Money Market Fund Reforms (June 7, 2013); SEC Open Meeting: Money Market Fund Reform (with link to Delta Strategy Description of SEC Meeting) (June 6, 2013).

Investment Company Institute Comments to SEC Regarding Money Market Funds

The Investment Company Institute (“ICI”) submitted comments regarding the SEC-proposed amendments to the rules and related requirements that govern money market funds (“MMFs”), most notably Investment Company Act Rule 2a-7 (“Money Market Funds”).  The ICI commented on number of topics within the SEC MMF proposals, generally including:

  • agreeing with the SEC that structural reforms to government and tax-exempt MMFs should not be applied;
  • recommending that the SEC expand the circumstances under which a board may impose a liquidity fee or temporarily suspend redemptions to cover situations in which heavy redemptions are already underway or foreseeable;
  • disagreeing with the proposal to require prime and tax-exempt institutional MMFs to let net asset value (“NAV”) float;
  • disagreeing with the proposal to combine floating NAV and liquidity fee/temporary gate proposals;
  • disagreeing with the proposal to eliminate the amortized cost method of valuing securities for all funds;
  • agreeing with the proposal to enhance public disclosure and the reporting of MMF portfolio information and risks, unless the SEC requires MMF NAVs to float; 
  • making multiple suggestions regarding more stringent diversification requirements;
  • disagreeing with the proposal to revise current stress-testing requirements; and
  • making suggestions on the proposed amendments to Form PF reporting requirements.

See: ICI Comment Letter.
See also: Committee on Financial Services to Examine SEC’s Money Market Fund Rule Proposal (September 17, 2013); SEC Proposes in the Federal Register Money Market Fund Reform and Amendments to Form PF; Comments Due September 17th (June 20, 2013); SEC Proposes Money Market Fund Reforms (June 7, 2013); SEC Open Meeting: Money Market Fund Reform (with link to Delta Strategy Description of SEC Meeting) (June 6, 2013).

IOSCO Met to Discuss Global Regulatory Reform for Securities Regulation

IOSCO held its Annual Conference in Luxembourg to discuss how to advance work on global regulatory reform and the identification of emerging risks in securities markets.  The meetings covered topics including:

  • how to move forward with work requested by the G20 on issues for securities market, including OTC derivatives, financial benchmarks, credit rating agencies, and shadow banking;
  • how to proactively identify emerging risks;
  • how to promote the finance of long-term investment through capital markets in areas such as corporate bond markets, securitization, SME finance, Islamic Finance, and crowd funding; and
  • the need to improve audit quality

Members also considered proposals to strengthen cross-border cooperation among regulators, and approved new measures to ensure compliance with the IOSCO Multilateral Memorandum of Understanding on cooperation and exchange of information.

See: IOSCO News Release.

SEC Proposes Rule for Pay Ratio Disclosure

The SEC voted (3-2) to propose a rule that would require public companies to disclose the ratio of the compensation of its CEO to the median compensation of all of its employees around the world, including employees at subsidiaries, and temporary, seasonal and part-time workers. The disclosure is required pursuant to Dodd-Frank Section 953(b) (“Executive Compensation Disclosures”). The proposed rule would not prescribe a specific methodology for companies to use in calculating the a pay ratio; rather, companies themselves would determine the median annual total compensation of its employees appropriate to the size and structure of their businesses.

SEC Commissioner Luis A. Aguilar issued a statement to provide context for the proposed rule, stating that it is an “important step to comply with the Dodd-Frank Act’s requirements for better disclosure and accountability regarding executive compensation decisions at public companies,” though also noting flaws in the rule. Commissioner Kara M. Stein also issued a statement regarding the rule, stating that, while pay ratio disclosure is an important issue, the proposed rule may not necessarily be the right approach.

Commissioner Daniel M. Gallagher submitted a dissenting statement to the rule, voicing his opinion that it is “yet another Dodd-Frank mandate having nothing to do with the SEC’s mission and everything to do with the politics of not letting a serious crisis go to waste.”

Lofchie Comment: I recommend reading the dissenting statements by Commissioners Gallagher and Piwowar (linked below). Even by the standards of someone who has been reading new derivatives rules for the past three years, this rule proposal  (while mandated by statute) seems utterly wasteful and potentially destructive. The proponents of the statute seem to believe that the market will favor companies that report a low ratio of CEO pay to the pay of the median employee; I don’t know why that would be the case. If it were, then I would worry that companies might seek to reduce the number of their lesser-paid employees, either by outsourcing work to non-affiliates outside the United States, or by mechanizing work even when it might not be cost-efficient to do so. And what happens if companies that have a high CEO-to-average employee pay ratio outperform their peers? Would that indicate that pay inequality should be increased? (Logically, I would expect companies with a high ratio of CEO pay to outperform their peers because the CEO will be better paid for outperformance. Obviously, that means the high ratio is the result, rather than the cause, of the outperformance, but it also means that the numbers may demonstrate the exact opposite of what the proponents of this rule would like to see.)

See: SEC Proposed Rule; SEC Press Release.
See also: SEC Commissioner Aguilar’s Statement; Commissioner Stein’s Statement; Commissioner Gallagher’s Statement; Commissioner Piwowar’s Statement.