UK and U.S. Swaps Regulators Agree to Maintain Existing Arrangements Post-Brexit

In a Joint Statement, the Bank of England (“BoE”), the Financial Conduct Authority (“FCA”) and the CFTC said that the United Kingdom’s withdrawal from the European Union would not serve to disrupt existing agreements as to the regulation, or exemptions from regulation, of firms engaged in the trading or clearing of derivatives.

The parties said that:

  • by the end of March 2019, the BoE, FCA and CFTC will put in place “information-sharing and cooperative arrangements to support the effective cross-border oversight of derivatives markets and participants and to promote market orderliness, confidence and financial stability”;
  • post-Brexit, U.S. trading venues, firms and central counterparties may continue to operate in the United Kingdom on the same basis that they do today; and
  • post-Brexit, the CFTC intends to issue new no-action letters and orders to permit UK firms to continue to operate in the United States on the same basis that they do today.

The notes to the document provide a “non-exhaustive list” of existing cooperation documents among the BoE, FCA and CFTC that will require amendment or reaffirmation post-Brexit.

 

OFAC Imposes Additional Venezuelan Sanctions

The U.S. Treasury (“Treasury”) Department Office of Foreign Assets Control (“OFAC”) designated five officials affiliated with “illegitimate former” Venezuelan President Nicolas Maduro, pursuant to Executive Order 13692. According to OFAC, these five individuals “continue to repress democracy and democratic actors in Venezuela and engage in significant corruption and fraud against the people of Venezuela.” The individuals include Manuel Salvador Quevedo Fernandez, the “illegitimate President” of Venezuela’s state-owned oil company, Petróleos de Venezuela, S.A.

Treasury stated that it may continue to sanction officials “who have helped the illegitimate Maduro regime repress the Venezuelan people.” As a result of OFAC’s action, all property and interests in property of the designated individuals subject to U.S. jurisdiction are now blocked, and U.S. persons generally are prohibited from engaging in any dealings with them.

New Papers on Lessons for the Future from the Global Financial Crisis

The Center for Financial Stability (CFS) was delighted to co-host a conference with the Central Bank of Iceland and the University of Iceland.

Leaders in academia, government, and finance from around the world joined together to present and discuss notable and pointed papers.  Held on the tenth anniversary of the Global Financial Crisis, discussions delved into crisis causes, the regulatory response, and lessons for the future.

Agenda and working papers can be found here
http://centerforfinancialstability.org/iceland.php

A conference volume published by Palgrave Macmillan will be forthcoming.

UK and EU Securities Regulators Agree to Cooperate in Event of No-Deal Brexit

The Financial Conduct Authority (“FCA”), the European Securities and Markets Authority (“ESMA”) and other EU securities regulators agreed to two Memoranda of Understanding (“MoUs”) regarding the activities of credit rating agencies, trade repositories and asset managers. These MoUs would be effective only if UK and EU authorities fail to reach an agreement over Brexit.

The multilateral MoU with the FCA, the EU and European Economic Area (“EEA”) National Competent Authorities (i) includes “supervisory cooperation, enforcement and information exchange” and (ii) allows the regulators to access information on, “amongst others, market surveillance, investment services and asset management activities.” The MoU allows certain activities, such as fund manager outsourcing and delegation, to continue to be carried out by UK-based entities on behalf of counterparties based in the EEA. For the funds industry, the MoU provides certainty to firms that delegate fund management to UK asset managers.

The MoU, with the FCA and ESMA, concerns information regarding the supervision of credit rating agencies and trade repositories. The MoU paves the way to allow EU counterparties to continue using those trade repositories.

CFTC Chair Giancarlo Seeks to Extend SEF Comment Period, Move Forward on Cross-Border Framework

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.)

OFAC Designates Venezuelan Oil Sector Company for Sanctions

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.”

Basel Committee Oversight Body Approves Final Version of Market Risk Framework

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.”

CFIUS and Silicon Valley: We’re Still Trying to Find a Cure!

CFS senior advisor Charlie Schott writes on new twists to the Committee on Foreign Investment in the United States (CFIUS).  While in government, Charlie’s group oversaw the Treasury-chaired inter-agency Committee.

CFIUS is the place where the United State’s commitment to an Open Investment Policy meets our most important national security concerns.

Early last August Congress passed the Foreign Investment Risk Review Modernization Act (FIRRMA), making significant changes to CFIUS.  The following article covers (1) what changes have been made by the new law and (2) what to expect with CFIUS going forward.

Who should be interested in these changes?  The short answer is Silicon Valley and financial market participants!

For the paper
http://centerforfinancialstability.org/research/CFS_Schott_1_10_19.pdf

“Clean” Holding Company Requirements Now Fully Effective

The Federal Reserve Board’s (“FRB”) “clean holding company” requirements – which apply to the eight U.S. globally systemically important banks and the U.S. intermediate holding companies of the largest foreign banks operating in the United States – became effective on January 1, 2019. The requirements are applicable only to the legal entity that is the top-tier U.S. holding company and do not apply to its affiliates or subsidiaries.

According to the final rule adopted by the FRB, covered holding companies generally are barred from:

  • issuing guarantees of a subsidiary’s liabilities with cross-default rights regarding the covered holding company’s insolvency/resolution;
  • entering into qualified financial contracts with a third party;
  • providing short-term debt instruments to a third party; and
  • participating in upstream guarantees.

The prohibitions are applicable only to instruments or arrangements issued or entered into on or after January 1, 2019.

CFTC Commissioner Quintenz Encourages China to Adopt U.S. Approach to Derivatives Markets

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.