FRB Issues Final Rule to Modify for Capital Planning and Stress Testing Regulations

The Board of Governors of the Federal Reserve System (“FRB”) issued a final rule to modify capital planning and stress testing regulations, and released instructions for the 2015 capital planning cycle.

The final rule adjusts the due date for bank holding companies (“BHCs”) with total consolidated assets of $50 billion or more to submit their capital plans and stress test results. For the 2015 capital plan cycle, such BHCs are required to submit capital plans on or before January 5, 2015, unchanged from prior years. For subsequent cycles, beginning in 2016, participating BHCs will be required to submit their capital plans and stress testing results to the Federal Reserve on or before April 5.

The final rule is largely identical to the proposed rule, with a few key adjustments made in response to public comments. In particular, the final rule adopts the existing limitation on a BHC’s ability to make capital distributions to the extent that the BHC’s actual capital issuances are less than the amount indicated in its capital plan.

See: FRB Final Amendments to Capital Plan and Stress Test Rules; FRB Summary Instructions and Guidance for 2015 Capital Planning and Stress Testing Cycle; FRB Press Release.


SEC Releases Staff Analysis on Reporting and Dissemination of Security-Based Swap Information

The SEC made available analyses of data on the reporting and dissemination of security-based swap transaction information through two memorandum.

The memos, which are available on the SEC’s website, examine the effect of the CFTC-mandated post-trade transparency in the index credit default swaps (“CDS”) market on total credit exposure, trading volume, and trade size in the index CDS market. They also discuss if and how dealers may hedge any large notional exposures that result from executing trades with their customers.

The first memo, titled “Analysis of Post-Trade Transparency under the CFTC Regime,” found that there is little empirical evidence that the introduction of post-trade transparency in the index CDS market resulted in reduced trading activity, liquidity, or risk exposure.

The second memo, titled “Inventory Risk Management by Dealers in the Single-Name Credit Default Swap Market,” provides some description of the manner in which dealers may hedge CDS transactions.

Lofchie Comment: It would be helpful if the data underlying the SEC’s economic analysis would be made available to third parties who could also analyze it. That said, the SEC’s report on trade transparency did not find any appreciable damage done by increased transparency nor did it address the question of whether the transparency actually provided a material benefit. Of course, a rule should be justified by the good it will do, rather than by the likelihood it will avoid damage.

See: Analysis of Post-Trade Transparency under the CFTC Regime; Inventory Risk Management by Dealers in the Single-Name Credit Default Swap Market; SEC Press Release.


CFS Monetary Measures for September 2014

Today we release CFS monetary and financial measures for September 2014. CFS Divisia M4, which is the broadest and most important measure of money, grew by 2.0% in September 2014 on a year-over-year basis versus 2.5% in August.

For Monetary and Financial Data Release:

For more on Divisia methodology and past releases for the United States:

Congressman Garrett Issues Statement Questioning Need for FINRA CARDS Proposal

Congressman Scott Garrett (R-NJ), Chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, issued a statement questioning the FINRA-proposed rule to implement the Comprehensive Automated Risk Data System (“CARDS”).

Representative Garrett stated that he remains “far from convinced” that a new “burdensome” proposal is needed, and questions whether the purported benefits justify the costs.

See: Press Release.


FSB Publishes Regulatory Framework for Haircuts on Securities Financing Transactions

The Financial Stability Board (“FSB”) published a Regulatory Framework for Haircuts on Non-Centrally Cleared Securities Financing Transactions (the “Framework”). The Framework comprises a fundamental part of the FSB’s policy recommendations to address shadow banking risks in relation to securities financing transactions, and takes into account comments received on the consultative proposals issued on August 29, 2013, as well as the results of a two-stage quantitative impact study.

According to the FSB, the Framework aims to limit the buildup of excessive leverage outside the banking system and reduce the procyclical aspects of that leverage. It consists of: (i) qualitative standards for methodologies used by market participants that provide securities financing to calculate haircuts on the collateral received; and (ii) numerical haircut floors that will apply to non-centrally cleared securities financing transactions in which financing against collateral other than government securities is provided to entities other than banks and broker-dealers.

In revising the Framework, the FSB explained, it decided to propose raising the levels of numerical haircut floors and applying the numerical haircut floors to non-bank-to-non-bank transactions. Comments on the proposal should be submitted by December 15, 2014.

The FSB stated that it will complete its work on the application of numerical haircut floors to non-bank-to-non-bank transactions, and will set out the details of the implementation by the second quarter of 2015. FSB member authorities will implement the Framework, including the numerical haircut floors, by the end of 2017.

In addition to the Framework, the FSB published a background document, titled “Procyclicality of Haircuts: Evidence from the QIS1,” which examines the procyclicality of haircuts on non-centrally cleared securities financing transactions and their role during the financial crisis.

Lofchie Comment: The intent of the revised Framework appears to be to (i) drive financing transactions out of non-banks and (ii) significantly motivate the use of government securities collateral over other types of collateral. These are decisions that have such significance for the economy and the structure of the financial markets that they warrant a broad discussion about their aims, the reasoning behind them and the process by which they are made. Some of the issues that should be addressed include: whether the Framework is intended to drive investors to finance the government rather than the private sector, whether it is appropriate to discourage lending by non-banks, and which regulators or elected officials should be involved in making decisions of the type contemplated by the document.

See: FSB Press Release; Regulatory Framework for Haircuts on Non-Centrally Cleared Securities Financing Transactions; Procyclicality of Haircuts: Evidence from the QIS1.


SEC Commissioner Piwowar Discusses SEC Enforcement Initiatives

At the Securities Enforcement Forum, SEC Commissioner Michael Piwowar discussed his perspective on the ways in which the SEC handles enforcement matters.

According to Commissioner Piwowar, persons should be “on notice” as to what acts, or failures to act, constitute violations of the law, and what potential sanctions and liabilities will result from those violations.

In administering securities laws, Commissioner Piwowar asserted, the SEC faces the issue of increasingly complex laws and rules that govern the markets. He noted, however, that more regulations do not necessarily result in better “outcomes,” stating that this “broken window” approach may not achieve the desired results, and adding that “if every rule is a priority, then no rule is a priority.”

Commissioner Piwowar explained that metrics tied to numbers, such as the total of enforcement actions and that of monetary sanctions, are “flawed metrics” when used to describe the success of enforcement. He stated that it would be a “mistake to put too much emphasis on aggregate dollars as the primary measure of investor harm” instead of on the overall percentage of one’s investment portfolio.

Commissioner Piwowar went on to discuss the analytical framework for corporate penalties and encouraged a retrospective review of the 2006 penalty statement to ensure that the SEC’s rules and policies are achieving their intended objectives.

Lastly, Commissioner Piwowar discussed the implementation of the Office of the Ombudsman, which functions as a liaison in resolving problems between retail investors and the SEC or SROs, and makes recommendations regarding policies and procedures to encourage persons to present questions to the Investor Advocate regarding compliance with securities laws. Commissioner Piwowar questioned whether or not the SEC should create an ombudsman with other types of responsibilities in order to provide a less formal means to address concerns regarding various offices within the SEC.

Lofchie Comment: The Commissioner challenges the popular notion that financial regulators exist to bring enforcement actions and levy fines, the regulatory success of which is judged by ever-higher numbers of both. This popular measure ignores what should be the greater (and more difficult) purpose of the national financial regulators: to establish a regulatory system that works well for issuers and investors and so allow the development of a strong economy. The SEC is but one of the numerous agencies that are able to bring cases the Department of Justice and various state regulators are able to bring cases, too – but other agencies cannot assume the role of the SEC in creating a sound market system; accordingly that is the primary task on which the SEC should be focused and on the achievement of which it should be judged.

See: SEC Commissioner Piwowar’s Speech.


G-18 Banks Agree to Sign ISDA Resolution Stay Protocol

ISDA announced that 18 major global banks (“G-18 banks”) agreed to sign a new ISDA resolution. The Stay Protocol (“the Protocol”) will impose a stay on cross-default and early termination rights within standard ISDA derivatives contracts between G-18 banks in the event that one of them is subject to resolution action in its jurisdiction.  According to ISDA, the stay is intended to give regulators time to facilitate an orderly resolution of a troubled bank.

The Protocol is intended to enable adhering counterparties to opt into certain overseas resolution regimes via a change to their derivatives contracts.  While certain existing national resolution frameworks impose stays on early termination rights following the start of resolution proceedings, these stays might only apply to domestic counterparties trading under domestic law agreements and so not capture cross-border trades.

The Protocol was developed in coordination with the Financial Stability Board to “support cross-border resolution and reduce systemic risk.”

The Protocol will take effect on January 1, 2015 and will govern both new and existing trades between the 18 adhering institutions and certain of their subsidiaries. 

See:  ISDA Press Release; Resolution Stay Protocol – Background.
See also:  FRB Press Release; FDIC Press Release; SIFMA Statement


U.S. and UK Officials Meet to Discuss Components for Resolution of a Global Systemically Important Bank

The FDIC held a meeting and an exercise in which financial regulatory officials from the United States and the United Kingdom explored resolution strategies in the event of the failure of a global systemically important bank (“G-SIB”). 

The event consisted of discussions of principles regarding G-SIB resolution strategies under U.S. and UK resolution regimes, aspects of those strategies requiring coordination between U.S. and UK authorities, and key challenges to the successful resolution of U.S. and UK G-SIBs. It built on prior bilateral work between U.S. and UK authorities, which included the publication of a joint paper on G-SIB resolution, as well as detailed simulation exercises and other joint G-SIB resolution planning efforts.

Along with FDIC Chair Martin Gruenberg and other members of the FDIC, participants from the United States included leaders from the U.S. Treasury Department, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the SEC and the CFTC. 

Participants from the United Kingdom included the Chancellor of the Exchequer and officials from the Bank of England and the Financial Conduct Authority.

See: FDIC Press Release; Bank of England Press Release


IOSCO Issues Correction Regarding Securities Markets Risk Outlook 2014-15

IOSCO issued a correction involving two charts published in its Securities Markets Risk Outlook 2014-15 (“Risk Outlook“).  According to IOSCO, market participants have raised concerns regarding the accuracy of the underlying data on which the charts are based.  In light of this, IOSCO has removed charts 82 and 83 on page 68 of the Risk Outlook.

See: Amended Securities Markets Risk Outlook 2014-15.
Related news: IOSCO Launches Securities Markets Risk Outlook (October 3, 2014).


Representatives Garrett and McHenry Submit Letter to FRB Regarding Reverse Repo Facility

House Financial Services Subcommittee on Oversight and Investigations Chairman Patrick McHenry (R-NC) and Subcommittee on Capital Markets and Government Sponsored Enterprises Chairman Scott Garrett (R-NJ) submitted a letter to Board of Governors of the Federal Reserve System (“FRB”) Chair Janet Yellen, urging the FRB to discontinue its temporary overnight reverse repurchase facility (“RRP”) by the end of the year. 

According to Chairman Garrett and Chairman McHenry (collectively, “Chairmen”), there is concern that the use of the RRP could have a “significant negative impact on the U.S. economy,” a view which they stated is shared by several financial regulators. The Chairmen explained that the overall “lack of transparency” in the establishment of the RRP and the “potential for it to create financial instability if expanded” could inject needless uncertainty and volatility into financial markets. 

The Chairmen applauded the FRB’s recent decision to cap the use of the RRP at $300 billion per day, as well as its commitment to use the program only to the extent necessary. Nevertheless, the Chairmen asked that the FRB respond to their questions regarding the program no later than October 23, 2014. 

See: Chairmen Letter to FRB