CFTC Chair J. Christopher Giancarlo will seek an extension (to March 15) of the comment period for a proposal to amend various aspects of the rules governing the trading of swaps (the “SEF Proposal”). He also intends to move forward with amendments to the CFTC cross-border framework.
In a keynote address at the ABA Business Law Section Derivative & Futures Law Committee Meeting, Mr. Giancarlo highlighted aspects of the SEF Proposal and his approach to cross-border regulation.
On cross-border matters, Mr. Giancarlo reiterated points he raised in a 2018 white paper, “Cross-Border Swaps Regulation Version 2.0.” He recommended changes to the rules to avoid the fragmentation of liquidity across borders, which, he argued, results in smaller liquidity pools with less efficient and more volatile pricing. Mr. Giancarlo said he remains open to refinements of his approach, particularly as it relates to “arranged, negotiated or executed” transactions. Mr. Giancarlo said he would direct the CFTC staff to prepare “as soon as possible . . . various new cross-border rule proposals.” He said these proposals will address a range of issues, including the registration and regulation of swap dealers, swaps central counterparties and swaps-trading venues.
On the SEF Proposal, Mr. Giancarlo said that recent deliberations with market participants showed widespread agreement that “the current framework is flawed, clunky and would benefit from substantial revision.” He noted general support for (i) replacing existing guidance and no-action letters with final rules, (ii) more flexible methods of execution, (iii) easing the burdens of swap execution facility (“SEF”) compliance and (iv) broker proficiency exams.
Mr. Giancarlo said that market participants expressed their concerns with (i) the process and timing of any new rules, (ii) proposed restrictions on pre-trade communications and (iii) “overly simplified” changes to the standard for “impartial access.”
He welcomed comments on, among other things:
- certain minimum conditions with adequate timing for connectivity and onboarding that could be imposed before swaps became subject to mandatory trading;
- the pre-trade communications rule, which, he said, was not intended to “disintermediate essential client relationships;”
- whether encouraging liquidity and price formation on SEFs is sufficiently furthered without a need to ban pre-trade communications off SEFs; and
- whether the imposition of minimum membership standards (to the extent consistent with an SEF statutory right to establish such criteria) would improve the proposed standards.
In light of the interest in the proposal, Mr. Giancarlo will seek to extend the comment period to March 15. (The comment deadline for the SEF proposal is currently February 13, 2019.)
The U.S. Treasury (“Treasury”) Department Office of Foreign Assets Control (“OFAC”) sanctioned Petróleos de Venezuela, S.A. (“PdVSA”), the Venezuelan state-owned oil and natural gas company, pursuant to Executive Order (“EO”) 13850.
The move comes less than a week after the United States recognized opposition politician Juan Guaidó as the interim leader of Venezuela. In general – and except as provided in the General Licenses described below – as of January 28, 2019, the property and interests in property of PdVSA and its majority-owned subsidiaries are blocked, and U.S. persons are prohibited from having dealings with them.
The action to designate PdVSA followed a determination made by Treasury Secretary Steven Mnuchin, in consultation with Secretary of State Michael Pompeo, that persons who operate in the oil sector of the Venezuelan economy may be subject to sanctions. While the addition of PdVSA to OFAC’s Specially Designated Nationals and Blocked Persons List (“SDN List”) imposes broad prohibitions on dealings with the Venezuelan state-owned oil company, OFAC simultaneously issued seven General Licenses that authorize certain transactions with PdVSA and its subsidiaries, including U.S.-based refiner and retailer CITGO Holding, Inc. (“CITGO”) and its corporate parent, PDV Holding, Inc. (“PDVH”).
Most importantly, General License 7 and General License 12 permit the continued importation into the United States of Venezuelan oil through April 28, 2019, provided that any payments to PdVSA or its majority-owned subsidiaries – other than CITGO and PDVH – be made into a blocked, interest-bearing account located in the United States. Because the U.S. government previously prohibited CITGO from transferring profits to PdVSA, the cumulative effect of the January 28 sanctions is to prevent Venezuelan oil profits earned in the United States from flowing back to PdVSA and, by extension, the regime of Nicolás Maduro.
Separately, President Donald J. Trump signed a new Executive Order expanding the definition of “Government of Venezuela” specifically to include PdVSA, as well as “persons that have acted, or have purported to act, on behalf of the Government of Venezuela, including members of the Maduro regime.”
SEC Chair Jay Clayton announced that the agency is back to normal staffing and operations. Mr. Clayton stated that the Divisions of Corporation Finance, Trading and Markets, Investment Management and the Office of Compliance Inspections and Examinations, “will be publishing statements in the coming days regarding their transition plans.”
The Bank of the United States was the closest the United States came to having a central bank before establishing the Federal Reserve System. What was later called the First Bank of the United States operated from 1791 until its charter lapsed in 1811. The bank established a nationwide network of branches to help the federal government, its largest customer, transfer funds across the country. It was the only U.S. bank with a nationwide branch network until the 1990s. After bad experience without a national bank during the War of 1812, the federal government chartered what was termed the Second Bank of the United States in 1816. When its charter lapsed in 1836, the bank continued as the United States Bank of Pennsylvania, which failed in 1841 following recessions and financial panics. In all of its incarnations, its headquarters was in Philadelphia and it was the largest bank in the United States.
With three former students of CFS Special Counselor Steve Hanke, I have gathered the balance sheets of the Bank of the United States into a working paper and accompanying spreadsheet file that should be useful for anyone interested in the quantitative study of the financial system during the early years of the Republic. Adil Javat gathered data for the First Bank of the United States, George Gulino gathered data for the Second Bank, and Zackary Baker gathered data for the U.S. Bank of Pennsylvania. Javat and Baker previously published their data and analysis in working papers for Hanke’s Institute for Applied Economics, Global Health, and the Study of Business Enterprise. I filled in a number of holes that remained in their data. The joint working paper is a data paper only, with no analysis. (Here is the link to the whole working paper series: Javat’s paper is no. 74, Baker’s paper is no. 101, and the joint paper is no. 132. Gulino’s paper is unpublished.)
I see two lines of follow-on research that could be worthwhile for somebody else to do, since we lack the time and interest for them. One is to examine the relationships among the far-flung branches of the Second Bank and the U.S. Bank of Pennsylvania for clues about differences in regional financial development. Our paper digitizes the overall balance sheet for the Second Bank and the U.S. Bank of Pennsylvania, but the financial statements also show many important balance sheet items for individual branches, which we did not digitize. (Javat did digitize the branch data from the First Bank, which were far less extensive hence not unreasonably time-consuming for a student term paper.)
The second line of research concerns the liquidation of the U.S. Bank of Pennsylvania after it failed in 1841. The bankruptcy was possibly the largest ever in relation to the size of the U.S. economy. It lasted 15 years, at the end of which creditors were paid in full, though shareholders received nothing. There does not seem to be even any cursory scholarly summary of the bankruptcy proceedings. If adequate records exist, it could be a fascinating case study from the legal, economic, and possibly political angles alike. Nicholas Biddle, the sometime president of the Bank of the United States, destroyed many of its internal documents, but perhaps a trawl through court archives and newspapers will uncover records from which to write an informative account.
Ranking Member of the House Financial Services Committee (“HFSC”) Patrick McHenry (R-NC) offered to cooperate with new Chair Maxine Waters on a list of priorities affecting the U.S. financial system.
According to Mr. McHenry, the list of hearing topics concern areas that are critical to ensuring the “strength and stability of the U.S. financial system and the global competitiveness of American job creators.” The list includes:
- Britain’s withdrawal from the European Union and its effects on the U.S. economy and the international financial system;
- the Export-Import Bank and “its impact on the global competitiveness of U.S. companies and U.S. job creation”;
- cybersecurity within the financial space, to evaluate the “readiness” of the financial sector and the ability of the U.S. government to protect digital consumer accounts against fraud, misuse and improper access;
- China’s “debt trap” and the implications of China’s lending decisions in relation to the IMF, the World Bank and global systemic risk;
- foreign investment and venture capital in the global economy, to assess how the U.S. Treasury Department is implementing the Foreign Investment Risk Review Modernization Act of 2018;
- scheduled reductions to the Federal Reserve’s balance sheet, specifically in relation to unwinding crisis-era asset purchases;
- the National Flood Insurance Program (“NFIP”), to examine proposed reforms that could impact the “affordability, availability and long-term solvency of the NFIP”;
- the modernization of the Bank Secrecy Act and Anti-Money Laundering regulatory regime to inspect the duplicative nature of the current rules;
- the Terrorism Risk Insurance Act, to provide oversight of the program, better comprehend the private insurance market, and build consensus before the program expires;
- the regulation of FinTech; and
- the oversight of the Financial Accounting Standards Board and its Current Expected Credit Loss Accounting Standard.
Mr. McHenry noted that the list is not exclusive, but that it gives the HFSC an opportunity to better understand the “complex legislative landscape we will face this Congress.”
Lofchie Comment: The list contains a number of important big-picture concerns. It is not a list, however, likely to generate much political or press excitement. In this environment, it is an open question whether Chair Waters will take up any of the items on Representative McHenry’s list.
The U.S. Senate Committee on Banking, Housing, and Urban Affairs Chair Mike Crapo (R-IA) and Ranking Member Sherrod Brown (D-OH) named new members to the banking subcommittees for the 116th Congress.
The banking subcommittees include (i) Housing, Transportation, and Community Development (David Perdue, GA, Chair, Robert Menendez, NJ, Ranking Democrat); (ii) Financial Institutions and Consumer Protection (Tim Scott, SC, Chair; Elizabeth Warren, MA, Ranking Democrat); (iii) Securities, Insurance, and Investment (Patrick J. Toomey, PA, Chair; Chris Van Hollen, MD, Ranking Democrat); (iv) National Security and International Trade and Finance (Ben Sasse, NE, Chair; Mark Warner, VA, Ranking Democrat); and (v) Economic Policy (Tom Cotton, AR, Chair; Catherine Cortez Masto, NV, Ranking Democrat).
Mr. Crapo and Mr. Brown will serve on all subcommittees as non-voting members.
The House Democratic Steering and Policy Committee named new members to the House Financial Services Committee in the 116th Congress. The newly chosen members are:
- Representative Alma Adams (D-NC);
- Representative Cindy Axne (D-IA);
- Representative Sean Casten (D-IL);
- Representative Madeline Dean (D-PA);
- Representative Tulsi Gabbard (D-HI);
- Representative Jesus Garcia (D-IL);
- Representative Sylvia Garcia (D-TX);
- Representative Al Lawson (D-FL);
- Representative Ben McAdams (D-UT);
- Representative Alexandria Ocasio-Cortez (D-NY);
- Representative Dean Phillips (D-MN);
- Representative Katie Porter (D-CA);
- Representative Ayanna Pressley (D-MA):
- Representative Michael San Nicolas (D-GU);
- Representative Rashida Tlaib (D-MI); and
- Representative Jennifer Wexton (D-VA).
New Chair of the House Financial Services Committee (“FSC”) Maxine Waters (D-CA) outlined Committee priorities.
In remarks delivered before the Center for American Progress, Chair Waters outlined the following FSC priorities: the Consumer Financial Protection Bureau (“CFPB”), Housing, Diversity and Inclusion, International Affairs (particularly governance at the International Monetary Fund and World Bank) and Russia sanctions. She also stated that she plans to address, on a bipartisan basis, long-term reauthorization and reform of the National Flood Insurance Program (NFIP), Terrorism Risk Insurance (TRIA), and the reauthorization of the Export-Import Bank.
Chair Waters stated that her ongoing priority is to ensure a strong CFPB and robust financial regulation that protects consumers, investors and the economy. She criticized Congressional Republicans and the Trump administration for weakening the CFPB, citing former Acting Director of the CFPB Mick Mulvaney’s decision to fire all members of the Consumer Advisory Board. Ms. Waters stated that she will introduce a bill that “reverses many of [Mick Mulvaney’s] harmful actions.”
Ms. Waters also stated that she will focus the FSC on issues related to FinTech. In particular, she said, it is critical that the FSC work to foster “responsible innovation with the appropriate safeguards in place to protect consumers and without displacing community banks and credit unions.”
In addition, Ms. Waters expressed concerns over the impact of the government shutdown on programs under the jurisdiction of the FSC. In particular, she noted the impact of the shutdown on SEC enforcement, and potential delays to initial public offerings. She also described the impact of the shutdown to key programs under FHA and HUD.
Representative Maxine Waters (D-CA) introduced a bill to require that the SEC conduct a study on the operation of Rule 10b5-1 plans and modify Exchange Act Rule 10b5-1 in accordance with the results of the study. The bill was co-sponsored by Representative Patrick McHenry (R-NC).
A Rule 10b5‐1 plan is a written plan for trading securities that is adopted by an insider to an issuer, or sometimes by an issuer, and which conforms to Rule 10b5‐1(c). Any person executing pre‐planned transactions pursuant to such a plan established in good faith at a time when that person was unaware of material non‐public information has an affirmative defense against accusations of insider trading, even if actual trades made pursuant to the plan are executed at a time when the individual may be aware of material, non‐public information.
If the bill is adopted, the SEC would be obligated to conduct a study of whether Exchange Act Rule 10b5-1 should be changed to:
- limit the ability of issuers and issuer insiders to create a plan that specifies “a time when the issuer or issuer insider is permitted to buy or sell securities during issuer-adopted trading windows”;
- restrict the ability to create multiple trading plans;
- mandate a delay between the adoption of a trading plan and the execution of the first trade;
- regulate the number of times that trading plans can be changed or canceled;
- mandate notifications to the SEC regarding any adoptions, amendments, terminations, and transactions to trading plans; and
- require boards of issuers that have adopted a trading plan to (i) devise policies covering trading plan practices, (ii) monitor trading plan transactions and (iii) ensure that “issuer policies discuss trading plan use in the context of guidelines or requirements on equity hedging, holding, and ownership.”
Upon completion of the study, the SEC would be required modify Exchange Act Rule 10b5-1 consistent with any findings of the study.
Lofchie Comment: While there is general consensus that the concept behind Rule 10b5-1 plans is very sensible (insiders should be given a means to liquidate their holdings in a controlled fashion without becoming subject to Rule 10b-5 liability), there have also long been been assertions that insiders seem to effect their trading with results that are some materially better than would result from a random walk down Wall Street. This is a material issue that has the potential to create real distrust as to the operation of the capital markets and merits the undertaking of a study as proposed by the bill. See, e.g, Letter to SEC Chair Elisse Walter from the Council of Institutional Investors (Dec. 28, 2012).
The oversight body of the Basel Committee on Banking Supervision (“BCBS”), and the Group of Central Bank Governors and Heads of Supervision (“GHOS”), approved final revisions to the market risk framework. Separately, GHOS also approved the BCBS’s strategic priorities and work program for 2019.
The revised Minimum Capital Requirements for Market Risk replaced an earlier version published in January 2016. The January 2016 market risk framework, which was intended to enhance consistency of implementation, as well as lower arbitrage opportunities between capital requirements for market risk and credit risk, outlined the scope of application for market risk capital requirements. The revised market risk framework will become effective on January 1, 2022.
The revisions to the January 2016 market risk framework include:
- a simplified standard approach to be used by banks that have smaller or non-complex trading portfolios;
- clarifications as to the scope of exposures subject to market risk capital requirements;
- improvements in the standardized approach to treatments of foreign exchange risk and index instruments;
- changes to the standardized approach risk weights applicable to general interest rate risk and foreign exchange risk, as well as specific exposures subject to credit spread risk;
- adjustments to the assessment process to determine whether a bank’s internal risk management models appropriately reflect trading risks; and
- changes to the requirements for the identification of risk factors for internal modeling.
The BCBS maintains a two-year work program that outlines strategic priorities for its policy, supervision and implementation activities. The BCBS strategic priorities and work program for 2019 will focus on four central themes: (i) finalizing policy reforms and tackling new policy initiatives, (ii) assessing and monitoring the effect of post-crisis reforms, (iii) fostering strong supervision and (iv) ensuring the “full, timely and consistent implementation of the Committee’s post-crisis reforms.”