The Data the NYSE Didn’t Want People to See, 1914

Professor William Silber of New York University has allowed Historical Financial Statistics to publish his stock market data (Excel file; you may have to click on your Excel icon to see it) on the often neglected U.S. financial crisis of 1914.

This year will be the 100th anniversary of the start of World War I. What is less well known is that the start of the war occasioned a financial crisis in Europe and the United States. In the United States the crisis came at a critical juncture because the Federal Reserve System had been established by law in December 1913 but would not become operational until November.

The Austrian archduke Franz Ferdinand was assassinated in Sarajevo on June 28, 1914 by a Bosnian Serb. After several weeks of mounting tensions, Austria-Hungary declared war on Serbia on July 28. Stock exchanges across Europe closed. The New York Stock Exchange followed suit, deciding to shut down just minutes before the beginning of the July 31 session at the urging of the Secretary of the Treasury.

The exchange remained closed until December, but within two weeks, traders began unofficial trading in stocks in New Street, in back of the stock exchange. The Wall Street establishment successfully discouraged trades from being reported in the financial press. In an engaging piece of historical detective work, Professor Silber found that trades had however been reported in the little-remembered New York Morning Telegraph. The Morning Telegraph specialized in racetrack and entertainment reporting, so it was not beholden to the Wall Street establishment for scoops, readers, or advertising. However, it too eventually gave in to pressure not to publish trades, ceasing after late October.

Professor Silber found that data were available on many stocks, including those of the Dow Jones Industrial Index and the Dow Jones Transportation Index. He first published his work in academic journals, but believing that the story would be of wider interest, later wrote a book for a general audience, When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy (hardcover 2007, paperback 2008). The book explains how policy makers and participants in financial markets addressed the challenges raised by the war in Europe in a largely successful way that helped the United States become the world’s great safe haven for foreign investment, a position it has enjoyed ever since.

Later this year we hope to follow up with other data from the New York financial market of a century ago, and perhaps from other financial markets.

CFTC Releases Joint Statement with EC and Two No-Action Letters for European Exchanges (CFTC Letters 14-15 and 14-16)

CFTC Acting Chairman Mark Wetjen and Commissioner Michel Barnier of the European Commission (“EC”) announced at the Global Markets Advisory Committee meeting that there has been “significant progress” toward harmonizing the regulatory framework for CFTC-regulated swap execution facilities (“SEFs”) and EU-regulated multilateral trading facilities (“EU MTFs”).  The CFTC staff subsequently released two related no-action letters intended to implement the “Path Forward” statement issued by the regulators in July 2013, under which the regulators had agreed to work together. 

CFTC Letter 14-15 provides time-limited no-action relief for EU MTFs overseen by “competent authorities” from the U.S. SEF registration requirement set out in CEA Section 5h(a)(1) (“Swap Execution Facilities”) and CFTC Rule 37.3(a)(1) (“Requirements and Procedures for Registration”).  Additionally, the letter provides relief to parties executing swap transactions on MTFs from the trade execution mandate set out in CEA Section 2(h)(8) (“Jurisdiction of Commission; Liability of Principal for Act of Agent; Commodity Futures Trading Commission; Transaction in Interstate Commerce”).  The letter specified that the relief will commence upon the letter’s issuance and will expire for any particular MTF upon the earlier of: (i) the DMO’s issuance of a letter acknowledging the receipt of, and granting, an MTF’s relief request pursuant to CFTC Letter No. 14-16, or (ii) 11:59 p.m. on March 24, 2014.

CFTC Letter 14-16, issued jointly by the Division of Market Oversight (“DMO”) and the Division of Intermediary Oversight (“DSIO”), provides no-action relief for:

  • qualifying EU MTFs overseen by competent authorities designated by European Union Member States (“Qualifying MTFs”) from the SEF registration requirement set out in CEA Section 5h(a)(1) and CFTC Rule 37.3(a)(1);
  • parties executing swap transactions on Qualifying MTFs from the trade execution mandate set out in CEA Section 2(h) and their obligations to report such transactions in the method and manner prescribed in applicable CFTC Rule 43 (“Real-Time Public Reporting”) and CFTC Rule 45 (“Swap Data Recordkeeping and Reporting Requirements”); and 
  • swap dealers (“SDs”) and major swap participants (“MSPs”) executing swap transactions on Qualifying MTFs from (i) certain business conduct requirements under CFTC Rule 23, Subpart H (“Business Conduct Standards for Swap Dealers and Major Swap Participants Dealing with Counterparties, Including Special Entities”), which sets forth business conduct standards for SDs and MSPs in their dealings with counterparties (the “External BCS”); (ii) the confirmation requirement under CFTC Rule 23.501 (“Swap Confirmation”); and (iii) the swap trading relationship documentation requirements under CFTC Rule 23.504 (“Swap Trading Relationship Documentation”).

Letter 14-16 specified that its relief will expire upon the effective date of any final rules implementing the CFTC’s authority, under CEA Section 5h(g), to exempt facilities that are “subject to comparable, comprehensive supervision and regulation on a consolidated basis by . . . the appropriate governmental authorities in the home country of the facility” from the SEF registration requirement of CEA Section 5h(a)(1) and CFTC Rule 37.3(a)(1).  Also, Footnote 44 sounds a note of caution by providing that (i) the CFTC may withdraw the relief if it determines that the level of U.S. MTF participation and trading volume reaches a “significant” (albeit undefined) level and (ii) requires EU MTS to keep track of their U.S. vs. non-U.S. participation.  

Lofchie Comment:  These are further modest yet meaningful steps by Acting Chairman Wetjen to repair the CFTC’s relationship with its colleague regulators in Europe, and to establish a cross border regulatory framework that does not entirely separate the financial markets of the United States and Europe.  There is a lot of cleanup work still to be done.

See: CFTC No-Action Letter 14-15; CFTC No-Action Letter 14-16; CFTC Press Release; Summary of Proposed No-Action Letter Regarding Qualifying Multilateral Trading Facilities; Commissioner O’Malia’s Opening Statement of the Global Markets Advisory Meeting.
Related news: The CFTC and the European Commission on Common ”Path Forward” for Regulating Derivatives (July 11, 2013); CFTC Staff Issues Four No-Action Letters on Cross-Border Swaps Issues (Letters 13-43, 13-44, 13-45, 13-46) (July 13, 2013).


NIST Issues ”Framework for Improving Critical Infrastructure Cybersecurity”; SIFMA Event to Follow

The National Institute of Standards and Technology (“NIST”) issued its “Framework for Improving Critical Infrastructure Cybersecurity,” which provides a structure for organizations, regulators and customers to use to create, guide, assess or improve comprehensive cybersecurity programs. 

In February 2013, President Barack Obama issued Executive Order 13636, which called for the development of a voluntary, risk-based cybersecurity framework. The resulting framework document issued by NIST is listed as “Version 1.0” and described as a “living” document that will need to be updated to keep pace with changes in technology, threats and other factors, as well as incorporate the lessons learned from its use.

The three main elements described in the NIST document are the framework core, tiers, and profiles.  The core presents five functions:  to identify, protect, detect, respond, and recover.  The tiers describe the degree to which an organization’s cybersecurity risk management meets goals set out in the framework, and the profiles help organizations reach a target improved state of cybersecurity. 

NIST also released a “Roadmap” document to accompany the framework, which lays out a path toward future framework versions and ways to identify and address key areas for cybersecurity development, alignment and collaboration. 

SIFMA CEO and President Kenneth Bentsen commented on the Cybersecurity Framework release, stating that SIFMA appreciates NIST’s “open and inclusive process in developing its framework.”  Bentsen said that SIFMA will work with members to promote a greater understanding of the NIST framework and its implementation, and noted that SIFMA will hold an educational event, “Cybersecurity Standards:  Exploring the NIST Framework,” on March 18, 2014. 

See: NIST Framework for Improving Critical Infrastructure Cybersecurity; NIST Roadmap for Improving Cybersecurity; NIST Press Release
See also: SIFMA Statement on the Framework


ICI Submits Comments on Proposed Aggregation of Positions Rule

The Investment Company Institute (“ICI”) submitted comments to the CFTC regarding the proposal to modify the aggregation provisions of CFTC Rules Part 150 (“Limits on Positions”). 

According to the ICI, as investors in the futures and swaps markets, investment companies that are registered under the Investment Company Act of 1940 support the objectives of preventing market manipulation and price shocks in commodity markets.  However, the ICI stated, the proper application of the aggregation provisions, including the proposed Independent Account Controller (“IAC”) exemption from the aggregation requirement, is critical to ensuring a reasonable imposition of positions limits.

The ICI proposed certain changes and requested clarifications regarding the proposal.  Specifically, the ICI stated, it believes that an investment adviser to registered funds should not be required to aggregate the positions of such funds for purposes of the position limits rule.  Additionally, the ICI requests modification of the proposed IAC exemption to reflect increased diversity in the types of market participants that may act as IACs.  The ICI also recommended that the CFTC not adopt the proposed requirement to aggregate positions in accounts of pools with “substantially identical trading strategies” to ensure that the exemptions from aggregation remain available to registered funds.

See: ICI Comment Letter.


CFTC Publishes Guidance, No-Action Letter and Interim Final Rule to Promote Trading on SEFs and Support an Orderly Transition to Mandatory Trading (CFTC Letter 14-12)

The CFTC announced measures to promote trading on swap execution facilities (“SEFs”) and support an orderly transition to the mandatory trading of swaps, which begins for certain interest rate swaps on February 15, 2014.

The CFTC stated that, in connection with the commencement of the trading mandate, the CFTC Division of Market Oversight (“DMO”) took the following measures:

  1. In order to protect the identities of counterparties trading on SEFs and incentivize anonymous trading on regulated platforms, the CFTC issued an interim final rule to clarify the scope of “permissible access” by market participants to swap data and information maintained by a registered swap data repository (“SDR”).  The interim final rule is consistent with the requirements of Section 21(c)(6) (“Swap Data Repositories”), which prohibit a party to an anonymous trade executed on a SEF or designated contract market (“DCM”) from accessing information in swap data repositories in order to obtain the identity of its counterparty.
  2. The DMO issued a time-limited no-action letter providing relief until May 15, 2014 from mandatory trading of certain swaps executed as part of a “package transaction.” The DMO reminded SEFs that they may facilitate the trading of swaps subject to the trade mandate, if executed as part of such a “package transaction,” only if (i) the methods for executing such swaps comply with the trading protocols applicable to Required Transactions in CFTC Rule 37.9 (“Methods of Execution for Required and Permitted Transactions”) and (ii) such SEFs have rules in effect that permit the trading of package transactions under the terms of the relief.  Accordingly, DMO staff announced a public meeting on February 12, 2014 to discuss potential challenges surrounding the execution of package transactions through SEFs or DCMs.
  3. The DMO published guidance which clarifies that, while CFTC Rule 37.202(b) (“Access Requirements”) requires that market participants trading on a SEF consent to its jurisdiction, it is a reasonable interpretation that such consent does not need to be obtained through an affirmative writing. The DMO stated that an SEF may comply with the rule by providing in its rulebook that any person initiating or executing a transaction on or subject to the rules of the SEF directly or through an intermediary, and any person for whose benefit such a transaction has been initiated or executed, consent to the jurisdiction of the SEF.
  4. The DMO announced that it published a centralized list of swaps subject to the mandate on the CFTC website.  The webpage is intended to provide notice to market participants of the swaps subject to the mandate and includes specific terms defining each such swap.

See:  (1) Interim Final Rule and Comment Request; (2) CFTC Staff No-Action Letter 14-12; (3) DMO Guidance on Swap Execution Facility Jurisdiction; (4) Swaps Made Available-to-Trade charts.
Related news:  CFTC Holds TAC Focusing on SEF Issues (February 11, 2014).
See also:  Commissioner O’Malia’s Statement of Support for the Measures to Promote Trading on SEFs and an Orderly Transition to Mandatory Trading.


CFTC Holds TAC Meeting Focusing on SEF Issues

The CFTC held its 11th Technology Advisory Committee (“TAC”) meeting on February 10, 2014.  On three separate panels, the TAC, along with subcommittees on Automated and High-Frequency Trading and Data Standards, focused on various issues related to swap execution facility (“SEF”) regulation. The agenda of the panels was as follows:

Panel I – Data: Where Does the Commission Stand and How Do We Fix What’s Broken?
Panel II – Concept Release on Automated Trading
Panel III – Made Available-to-Trade (“MAT”) Determination

In his opening statement, Commissioner O’Malia expressed his appreciation that Acting Chairman Wetjen has shown an increased interest in technology issues and a willingness to “ensure that the data we are collecting will be used in a thorough and automated manner.”  O’Malia applauded the CFTC’s recent announcement regarding the formation of a cross-divisional data team that will focus on identifying problems faced by each division and developing solutions to resolve problems with the CFTC’s regulatory data.  The data team, O’Malia noted, will also solicit comments from market participants on recommended rule changes to the CFTC’s data rules, which will provide the basis of written recommendations that the data team will make for a corrective path forward.  Moreover, enhancing the CFTC’s swaps reporting rules, O’Malia noted further, will “improve data quality, minimize confusion regarding reporting workflows, and increase standardization.”

The first panel – which consisted of a number of CFTC division directors with critical market oversight responsibilities, the entire staff of the CFTC’s Office of Data and Technology and the CFTC’s new Chief Economist – discussed the following key issues:

  • where the CFTC has been successful in utilizing swap data repository data;
  • areas where the CFTC has fallen short; and
  • changes that must be made.

On this matter, Commissioner O’Malia observed that the CFTC has a long way to go on the other fundamental data objectives.

The second panel focused primarily on the following question: What is the appropriate level of pre-trade functionality deployed by traders, futures commission merchants and exchanges to protect market integrity against rogue trades which can cause market disruption?  Participants discussed the Concept Release on Risk Controls and Systems Safeguards for Automated Trading Environments, which has an extended comment period until February 14, 2014.

The third panel addressed SEFs and the recent MAT determinations.

The Division of Market Oversight (“DMO”) has deemed certified several MAT submissions for standard interest rate benchmark swaps and credit default swaps.  Commissioner O’Malia suggested that the appropriate research and consideration has not yet been given to “package transactions” tied to benchmark contracts.  Panel III’s discussion on “package transactions” and the CFTC staff will hold a separate roundtable on February 12.

Commissioner O’Malia noted that, while he is “frustrated that we are conducting the analysis on package transactions after making the MAT determinations,” he was pleased that this meeting would initiate the process of resolving the issue.

Lofchie Comment:  Under the new Acting Chairman, the CFTC is taking observable steps to clean up the mess caused by years of careless rulemaking.  But trying to get things remotely right will take a lot of backtracking on a lot of fronts.  The Treasury is being helpful by opening negotiations with the European Union, ideally laying the groundwork for the CFTC to disavow the Interpretative Guidance on cross-border regulation and replace it with an actual rulemaking that could be coordinated with the SEC.

See Commissioner O’Malia’s Opening Statement.


IOSCO Publishes Report on Code of Conduct Fundamentals for Credit Rating Agencies

IOSCO published a consultation report titled Code of Conduct Fundamentals for Credit Rating Agencies, which proposed significant revisions and updates to the current IOSCO code of conduct for credit rating agencies (“IOSCO CRA Code”). 

The IOSCO CRA Code was first published in 2004, when few jurisdictions had laws governing the activities of CRAs.  It was later revised in 2008, after the outbreak of the global financial crisis, to include significant disclosure provisions.  According to the report, the IOSCO CRA Code is intended to offer a set of “robust, practical measures” as a guide to and framework for CRAs with respect to “protecting the integrity of the rating process, ensuring that issuers and users of credit ratings, including investors, are treated fairly, and safeguarding confidential material information provided them by issuers.”

The revisions proposed in this report are designed to strengthen the IOSCO CRA Code by:

  • enhancing provisions regarding the protection of the integrity of the credit rating process;
  • managing conflicts of interest, providing transparency and safeguarding nonpublic information;
  • adding measures regarding governance, training and risk management; and
  • seeking to improve the clarity of the IOSCO CRA Code.

IOSCO’s revisions to the IOSCO CRA Code take into account the fact that CRAs are now supervised by regional and national authorities.  The goal is to create an updated IOSCO CRA Code that works in harmony with the CRA registration and oversight programs that many IOSCO members have implemented in recent years.

Comments Due:  March 28, 2014.  Send comments to, with the subject, “Code of Conduct Fundamentals for Credit Rating Agencies.”

See:  IOSCO Report.


SEC Commissioner Stein Speaks on Equity Markets and Self-Regulation

SEC Commissioner Kara M. Stein spoke at the Trader Forum 2014 Equity Trading Summit regarding the evolving capital markets and subsequent challenges. 

Commissioner Stein stated that over the years, pleas for fairer competition and safer trading spaces for institutional and other investors led the SEC to adopt Regulation NMS.  She explained that there are currently 16 registered securities exchanges and dozens of “dark pools,” which may account for over a third of a day’s trading volume.  As exchanges evolved, traders and their strategies involving advancing technology evolved as well, reducing the time of a trade to milliseconds.   Stein notes that this evolution led to challenges such as technology glitches and “mini flash crashes,” which should be viewed as “pieces of a puzzle; symptoms of something larger.”  In order to safeguard capital markets, Stein encouraged market participants, regulators, and stakeholders to coordinate best practices and available data.  She suggested that firms with direct access to the markets and execution venues should be required to have detailed procedures for testing systems to ensure that they don’t cause market failures.  Additionally, Stein stated that firewalls and trading limits should be clearly defined and coordinated across markets.

Commissioner Stein went on to discuss making capital markets more efficient.  She noted that one reason market efficiency is a difficult issue is because there is a lack of available comprehensive data, and stated that the Consolidated Audit Trail (“CAT”) is intended to address this problem.  She explained that “all market participants should be involved in helping develop the CAT,” and that “it is not, nor should it be, the exclusive province of the Commission or SROs.”  Commissioner Stein stated that she firmly believes that the SEC should develop policy from the facts, by gathering as much data as possible, and if an alternative approach deserves consideration, it should be tested and evaluated.

Additionally, Commissioner Stein discussed the role of self-regulatory organizations (“SROs”).  According to Stein, “in a world where trading occurs in hundreds of places, which are for-profit enterprises, the exchange-based SRO model warrants significant reconsideration.”  She questioned whether it makes sense for firms to bear the bulk of the costs to oversee a market that is much larger than their respective portions, and who should be determining and enforcing listing standards.  She stated that FINRA has come to run many critical market surveillance functions, such as monitoring for insider trading and looking for cross-market manipulations, and the SEC must attempt to “better understand and clarify” FINRA’s role as a private regulator.

Lofchie Comment:  Commissioner Stein’s comments on examining the role of self-regulation come at an important time given FINRA’s announcement that it had been outsourced with “self-regulatory” oversight of essentially 100% of the U.S. equities markets.  See FINRA and BATS Sign Regulatory Service Agreement; FINRA to Conduct Surveillance for Nearly 100 Percent of U.S. Equities Trading (February 6, 2014).  Commissioner Stein rightly questions whether the concept of “self-regulation,” in the sense of a group of private entities that adopt and enforce performance norms of a group, should survive in it current form.

Commissioner Stein displays an open attitude towards reviewing the operation of the National Market System. Considering how complex the rules have become, her remarks are welcome.  One could take issue with her choice of words in one respect.   She described adoption of Regulation NMS as the “impetus” to the change in market structure – which she indicates was the reason for ending the domination of the NYSE and Nasdaq.  It would be fairer to say that Regulation NMS (and even more significantly, the forced repeal of NYSE Rule 390 that essentially required NYSE member firms to exclusively trade on the NYSE) lessened the SEC’s ability to impede changes in market structure.   Had market forces, rather than regulations, determined the structure of the market, the domination of equities trading by NYSE floor traders would likely have ended much sooner.

See:  Commissioner Stein’s Remarks.


Financial Services Full Committee Hearing: ”The Impact of the Volcker Rule on Job Creators, Part II”

The House Financial Services Committee held a full committee hearing to examine the impact of the Volcker Rule. 

Committee Members discussed topics such as how regulators will resolve potential conflicts in interpreting compliance with the Volcker Rule, as well as why collateralized loan obligations (“CLOs”) have not been exempted from the Volcker Rule’s prohibitions along with the Agencies’ interim final regulation that permits ownership of collateralized debt obligations (“CDOs”) backed by trust-preferred securities (“TruPS”).

See:  Archived Webcast of the Hearing; Committee Memorandum; FRB Release on Governor Tarullo’s Statement; OCC Release on Currency Comptroller Curry’s Statement; FDIC Release on Chairman Gruenberg’s Statement; CFTC Release on Acting Chairman Wetjen’s Statement.
Related news:  House Committee on Financial Services Hearing: Impact of the Volcker Rule on Job Creators, Part I (January 16, 2014); Federal Agencies Temporarily Approve TruPS-Backed CDOs for Small Banks, Notwithstanding Volcker (Fed. Reg. Version) (February 3, 2014).


Cybersecurity risks…Kevin Brock to appear…

Kevin Brock recently provided an outstanding analysis of “Cybersecurity and Threats to the Financial System” as part of a recent CFS vulnerabilities working group roundtable.

Kevin will appear on Federal News Radio 1500AM WFED this Friday, February 7 between 4 and 5 pm. The broadcast should also be accessible via the Internet. Topics will range from cybersecurity to the Sochi Olympics.

Kevin Brock is a retired senior executive of the Federal Bureau of Investigation (FBI) who continues to advance strategies and solutions targeting the nation’s most vexing law enforcement and intelligence challenges. He presently holds a senior executive position at Agilex Technologies.