Board of Governors of the Federal Reserve System (“FRB”) Governor Jerome H. Powell spoke at the Brookings Institution regarding the Fair and Effective Markets Review (the “Review”), as well as issues involving the fixed-income, currency and commodities (“FICC”) markets in the United States.
According to Governor Powell, the Review is designed to look carefully at markets and firms, and to investigate whether structural vulnerabilities or incentives for bad conduct exist and should be addressed. Governor Powell stated that the FRB strongly encourages the reform of compensation practices at firms to better align incentives between such firms and individuals, particularly through the enhanced deferral of incentive compensation, with delayed vesting and the possibility of more robust forfeiture in broader circumstances. Governor Powell added that U.S. Financial Regulators, including the FRB, are preparing a proposed new rule for public comment. The rule is intended to codify these initiatives.
Additionally, the Review notes that greater transparency can also curb market abuses and strengthen competition. Governor Powell stated that despite important initiatives, such as the Trade Reporting and Compliance Engine, and the requirements of Dodd-Frank, impediments still hinder the sharing of trade report data, including issues around foreign exchange benchmarks and other market-making challenges in FICC markets. In Governor Powell’s opinion, these issues can be addressed through coordinated private efforts, such as the Foreign Exchange Committee and the Treasury Market Practices Group, or further supervisory or regulatory action.
Regarding interest rate benchmark reform, Governor Powell stated that, while new surveillance and penalties and a new administrator are all in place, it is still essential to develop “one or more risk free (or near risk free) alternatives to LIBOR for use in financial contracts such as interest rate derivatives.” He explained that the FRB has convened a group of global dealers to form the Alternative Reference Rates Committee, which will work with the Financial Stability Board Official Sector Steering Group that Governor Powell co-chairs to promote U.S. dollar LIBOR alternatives.
Lofchie Comment: The imposition of controls over compensation arrangements should not be a casual conversation. Such controls serve not only to interfere with the free market for labor, but also to shift the balance of power from the individual to the employer. Additionally, “more robust forfeiture” is likely to mean “more discretionary forfeiture” even in the absence of any evidence of wrongdoing. Does anyone doubt that there would be great political pressure on the government to seek forfeiture in any “newspaper event” situation in which a decision went sideways?