Greg Feldberg posted a thoughtful piece on the Office of Financial Research (OFR) – “Don’t dismantle the post-crisis early warning system.” The OFR is a National treasure…and should be treated as such.
Greg covers much ground and is well informed as a former Senior Associate Director for Research at the OFR, Director of Research at the Financial Crisis Inquiry Commission (FCIC), and current Yale research scholar.
The perspective is well articulated. I have a few remaining questions for Greg – such as his perspective on the relationship between FSOC and the OFR as well as the prior study on investment management. Investment managers differ dramatically from banks.
I highly recommend the read – https://www.brookings.edu/research/dont-dismantle-the-post-crisis-early-warning-system/
I discuss crisis detection and prevention based on experiences chairing an inter-agency crisis prevention group (while at the U.S. Treasury), working as a strategist on Wall Street, and advising a global macro hedge fund. The paper was published as a chapter in “The 10 Years After” the financial crisis volume published by the Reinventing Bretton Woods Committee.
My views differ from many recently offered.
I conclude with eight actionable ideas to improve crisis detection for investors and officials.
For full remarks:
CFTC Commissioner Brian Quintenz described the role of derivatives in supporting economic growth, the advantages of the “principles-based” regulatory model of the U.S. derivatives markets and concrete steps China has taken to liberalize its financial markets.
In remarks at the 14th Annual China International Derivatives Forum, Mr. Quintenz disagreed with the label that derivatives are “risky,” stating that the derivatives present tools to manage and efficiently transfer risk to market participants who have the ability to bear it. He described derivatives as being vital to the “health and growth of a country’s real economy” and said that, as China’s derivatives markets grow, it should adopt an approach to futures market regulation akin to that taken by the CFTC.
He stated that participant diversity, customer protection, and market integrity promoted by principles-based regulation are three characteristics of the U.S. futures market that have contributed to “resiliency, vitality, and efficiency.” In particular, Mr. Quintenz added that:
- the policy of open participation helped increase liquidity, which enables companies to engage with the market even during times of instability;
- the legal regime supporting the U.S. futures markets leads to strong customer protections (i.e., the CFTC and exchanges “police the markets for fraud, abuse and manipulation”); and
- a “principles-based approach” has numerous advantages over a “prescriptive approach” (i.e., principles-based regulation enables market participants to be “individually responsive to market dynamics”).
Mr. Quintenz explained that the growth of China’s futures markets has been critical to its economic rise. In particular, he cited recent incremental steps that have lowered barriers on the ability of non-Chinese entities to access Chinese financial markets.
Federal banking agencies urged banks to pursue innovative approaches to meeting Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) compliance obligations.
In a joint statement, the Federal Reserve Board, the FDIC, FinCEN, the National Credit Union Administration and the Office of the Comptroller of the Currency (the “agencies”) stated that innovation – including the use of artificial intelligence, digital identity technologies and internal financial intelligence units – has the potential to augment banks’ programs for risk identification, transaction monitoring, and suspicious activity reporting.
The agencies encouraged banks to test innovative programs, stating that a pilot program that fails, or a program that identifies suspicious activity that otherwise would have been overlooked, should not subject the bank to supervisory action, as long as the bank’s existing BSA/AML processes are adequate. According to the statement, FinCEN will consider requests for exceptive relief from BSA/AML regulations in order to facilitate the testing and potential use of new technologies and other innovations.
The agencies added that the implementation of innovative approaches to BSA/AML compliance will not result in additional regulatory expectations.
Lofchie Comment: The regulators’ joint statement may reflect an acknowledgment of the enormous expenses to which financial institutions have been put in complying with AML obligations and the fines that have been imposed for even unwitting failures to fulfill those obligations.
CFTC Commissioner Brian Quintenz expressed support for an approach toward substituted compliance determinations that distinguishes between the rules designed to address systemic risk reforms and those designed to address market activities. The approach is consistent with an alternative cross-border swaps framework espoused by CFTC Chair J. Christopher Giancarlo in a recent white paper.
In remarks at FIA Asia 2018, Mr. Quintenz disagreed with recent criticism of the white paper by CFTC Commissioner Rostin Behnam. Mr. Behnam argued that Mr. Giancarlo should have expressed his views through formal, statutory procedures, as opposed to a white paper. Mr. Quintenz stated that the majority of CFTC Commissioners will “find a consensus on restructuring the agency’s cross-border approach in the coming months.”
Among other things, Mr. Quintenz supports:
- an approach toward substituted compliance determinations that distinguishes between the rules designed to address systemic risk reforms and those designed to address market activities;
- expanding the use of exemptive authority for non-U.S. central counterparties (“CCPs”) that do not pose risks to the U.S. financial system, while CCPs posing a risk to the U.S. financial system should continue to be registered with the CFTC;
- the proposition that swaps trading venues subject to comparable regulation abroad should be exempt from swap execution facility (“SEF”) registration with the CFTC;
- the proposition that U.S. persons should be permitted to access non-U.S. platforms in non-comparable jurisdictions without SEF registration “subject to materiality threshold”; and
- Mr. Giancarlo’s approach to which transactions count for purposes of the swap dealer thresholds, noting in particular that “foreign consolidated subsidiaries” need only count their dealing activity with U.S. and U.S.-guaranteed persons (rather than all transactions).
Mr. Quintenz also considered “arranged, negotiated and executed” (“ANE”) transactions. Mr. Quintenz said that it is a “credible proposition” that involvement of U.S. personnel in a trade should implicate some U.S.-based regulations. He urged the CFTC to consider whether its supervisory interest in a trade outweighs that of a non-U.S. regulator who has oversight of the counterparties. Mr. Quintenz advocated an ANE standard that focuses on client-facing sales and trading activity, rather than “incidental activity by U.S. personnel.” He also said that any ANE standard must provide market participants with clarity with respect to which regulations will apply to swap transactions from the outset.
Lofchie Comment: While it would be a wonderful thing if the SEC and the CFTC could reach full agreement on a (sensible) cross-border regulatory approach, there are a few issues on which such agreement is particularly important to decreasing regulatory complexity: the definition of U.S. (non-U.S.) person; the situations in which the involvement of a U.S. agent in ANE for a foreign dealer results in the imposition of U.S. legal requirements; and just what U.S. legal requirements are imposed as a result of the U.S. agent’s involvement.
CFTC Chair J. Christopher Giancarlo recommended (i) reducing the number of obstacles to swaps clearing and (ii) transitioning away from LIBOR to alternative risk-free rates.
In remarks before the 2018 Financial Stability Conference in Washington, Mr. Giancarlo discussed two aspects of the CFTC approach to G-20 reforms: swap trading and clearing. He highlighted the CFTC’s recent proposal to amend its swap trading rules, saying that the changes would have the rules “encompass a wider scope of trading activity while enabling greater transactional flexibility.” In addition, Mr. Giancarlo discussed efforts to remove impediments to clearing. He cited the findings of a recent study sponsored by the Financial Stability Board on incentives to clearing (noting the CFTC co-chaired the study), and indicated that the CFTC will continue working with banking regulators to “educate them about the regulatory framework in place for cleared derivatives.” In particular, Mr. Giancarlo noted U.S. legal impediments preventing the use of client clearing margin.
As to benchmark reform, Mr. Giancarlo stressed the complexity of the process and warned that it “cannot be done through heavy-handed regulatory rulemaking.” He highlighted the work of the Alternate Reference Rates Committee (“ARRC”) and the importance of the public-private partnership driving that process. Regarding next steps, Mr. Giancarlo noted the actions taken by the ARRC, ISDA and others, and also urged market participants to consider the use of SOFR-linked derivatives, given both the impact of LIBOR going away and the potential benefits of what Mr. Giancarlo referred to as the “quite successful” clearing of SOFR swaps on LCH and CME.