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.

 

SEM / ECB conference Call for Papers

The Society of Economic Measurement’s (SEM) 2019 conference will be held at Goethe University in Frankfurt with cosponsorship by the European Central Bank (ECB) on August 16-18, 2019.

The Call for Papers deadline for submissions is April 1, 2019.

Keynote Speakers:

  • Richard Blundell, University College London
  • Erwin Diewert, University of British Columbia
  • Arthur Lewbel, Boston College
  • Helmut Lütkepohl, Free University of Berlin
  • Kjetil Storesletten, University of Oslo
  • Apostolos Serletis, University of Calgary, Presidential Address

Local Organizing Committee:

  • Michael Kosfeld, Goethe University Frankfurt (Chair)
  • Ester Faia, Goethe University Frankfurt
  • Francis Gross, European Central Bank
  • Florian Hett, Johannes Gutenberg University Mainz
  • Loriana Pelizzon, Goethe University Frankfurt

Program Chairs:

  • Stephen Spear, Carnegie Mellon University
  • Apostolos Serletis, University of Calgary

Logistics:

Conference Maker is now ready to accept submissions. You can find the Conference Maker site for the Frankfurt conference here:
http://editorialexpress.com/conference/SEM2019/

The deadline for submission of invited and contributed papers is April 1 (no extension), with decisions to be announced by May 1.

Invited Sessions: If you are organizer of an invited session, the information on the four papers invited for your session must be entered into Conference Maker before the April 1 deadline. There are three ways you can do that:
(a) You can enter the information about the four speakers and their papers into Conference Maker yourself.
(b) You can have your four authors enter the information into Conference Maker themselves.
(c) You can provide the information by email to Kristin Scheyer and request her to enter it into Conference Maker for you. Kristen’s email address is: SEMconferences@outlook.com

Contributed Sessions: If you would like to submit a contributed paper, please submit to Conference Maker and choose a Contributed Session Organizer whose area of expertise is a good match for the topic of your paper.

If you have questions about the use of Conference Maker, please contact Kristin Scheyer at SEMconferences@outlook.com or Steve Spear at ss1f@andrew.cmu.edu

With best wishes to the new SEM President – Apostolos Serletis – and congratulations to William A. Barnett for his leadership in founding the SEM and serving as the Society’s first President.

SEC Proposes Greater Flexibility on Communications with Institutional Investors

The SEC proposed a new rule and related amendments that would allow issuers to communicate with certain potential investors to determine whether such investors might be interested in a “contemplated registered securities offering.” Under the proposed rule, such communications would be exempt from restrictions imposed by Securities Act Section 5.

The proposal is intended to give more flexibility to issuers regarding their communications with institutional investors. According to the SEC, the proposal would expand the “test-the-waters” accommodation to all issuers, including investment company issuers. The accommodation is currently only available to emerging growth companies. Under the proposal:

  • there would be no filing or legending obligations;
  • “test-the-water” communications must not be at odds with material information in the related registration statement; and
  • issuers that are subject to Regulation FD would be obligated to consider whether any information in a “test-the-water” communication would lead to disclosure obligations under Regulation FD.

Comments must be received by the SEC no later than 60 days after the date of publication of the proposal in the Federal Register.

CFTC Commissioners Urge Bank Regulators to Change to Leverage Ratio Treatment of Cleared Derivatives

Four Commissioners of the CFTC urged U.S. banking regulators to amend the calculation of the supplementary leverage ratio in order to recognize client-posted initial margin in cleared derivatives. The Commissioners’ comments came in response to a rule proposal by the banking regulators to update the calculation of derivative contract exposure amounts under the regulatory capital rules, previously covered here.

In a comment letter, CFTC Commissioners Dan Berkovitz, Rostin Behnam and Brian Quintenz said that the banking regulators (the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency) neglected to acknowledge the “risk-reducing impact” of client initial margin that the clearing member banking organization holds on behalf of clients. The Commissioners contended that a supplementary leverage ratio (“SLR”) calculation that permits initial margin to offset potential future exposures would eliminate an unnecessary impediment to banks offering client clearing services.

According to the Commissioners, the adoption of the standardized approach for counterparty credit risk (SA-CCR) without offset will:

  • “maintain or increase the clearing members’ SLRs by more than 30 basis points on average”;
  • continue to “disincentivize clearing members” from supplying clearing services; and
  • limit access to clearing in “contravention of G20 mandates and Dodd-Frank.”

Commissioner Dawn Stump recused herself from providing commentary on the proposed rule.

CFS Monetary Measures for January 2019

Today we release CFS monetary and financial measures for January 2019. CFS Divisia M4, which is the broadest and most important measure of money, grew by 4.4% in January 2019 on a year-over-year basis versus 4.2% in December.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Jan19.pdf

For more information about the CFS Divisia indices and the data in Excel:
http://www.centerforfinancialstability.org/amfm_data.php

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) {ALLX DIVM }
2) {ECST T DIVMM4IY}
3) {ECST} –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) {ECST S US MONEY SUPPLY} –> From source list on left, select ‘Center for Financial Stability’

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.

OCC Proposes Amending Company-Run Stress Testing Requirements

The Office of the Comptroller of the Currency (“OCC”) proposed amending the OCC’s company-run stress testing requirements for national banks and federal savings associations. The proposal is consistent with section 401 of the Economic Growth, Regulatory Relief and Consumer Protection Act. Comments on the proposal must be submitted by March 14, 2019.

The proposal would, among other things:

  • increase the minimum threshold for national banks and federal savings associations to conduct stress tests from $10 billion to $250 billion;
  • reduce the frequency with which certain banks would be obligated to conduct stress tests; and
  • cut the number of required stress testing scenarios from three to two.

SEC Commissioner Hester Peirce Describes Regulatory Challenges Posed by Cryptocurrency

In remarks at the University of Missouri School of Law, SEC Commissioner Hester Peirce described the difficulty in applying securities laws in general, and the Howey test in particular, to virtual currency and initial coin offerings. Ms. Peirce expressed concern that the SEC’s application of the Howey test will be “overly broad,” stating that token offerings do not always resemble traditional securities offerings. Some cryptocurrency projects may be unable to proceed because they cannot comply with applicable securities regulations, she said. In addition, she encouraged a “delay in drawing clear lines” for the regulation of virtual currency transactions which may provide more freedom for the technology to develop. Ms. Peirce noted that the SEC staff is working on “supplemental guidance” to “help people think through whether their crypto-fundraising efforts fall under the securities laws.”

Ms. Peirce stated that regulators tend to be unenthusiastic about innovation, given that it forces unwanted adjustments on them, as well as the possibility of negative consequences that are difficult to predict. The Commissioner said that the SEC must be open to innovation, given its potential to make our “lives easier, more enjoyable and more productive.” She raised a number of questions as to regulatory changes that might be considered in light of new technology; changing the ways in which firms communicate with their investors, for example, or revising the SEC’s recordkeeping rules.

Ms. Peirce also praised the SEC’s new office of “Small Business Capital Formation” and its first Advocate, Martha Miller.

Lofchie Comment: It’s a great thing when we have regulators who are thoughtful about the exercise of regulatory power, and are willing to weigh in a public forum the benefits and detriments of the use of that power. (I look forward, even if it requires quite a long look forward, to seeing her on late night television talk shows.)

Senator Elizabeth Warren Questions Federal Reserve Board on Bank Merger Approvals

In a letter to Federal Reserve Board (“FRB”) Chair Jerome Powell, Senator Elizabeth Warren (D-MA) raised questions about the FRB’s approval process for bank mergers and acquisitions (“M&A”). Ms. Warren first wrote to the FRB about its review of bank mergers in April 2018.

Ms. Warren voiced concern about FRB’s high rates of M&A application approvals. She also expressed concern about the FRB’s practice of allowing consultations between FRB staff and M&A applicants, which raise “questions about transparency and fairness.”

Ms. Warren’s letter was released after SunTrust Banks, Inc. and BB&T Corporation announced an agreement to merge, which would create the sixth-largest U.S. bank. Ms. Warren stated that the FRB’s record of “summarily” approving all M&A requests could have substantial impacts on consumer choice and competition.

Ms. Warren requested answers to her questions on the factors underlying increased bank M&A activity by February 21, 2019.

Lofchie Comment: Senator Warren’s concerns as to the percentage of bank merger applications that are approved totally misses the point, at least if the point is good financial regulation. If the regulators are (i) transparent as to what the standards are and (ii) consistent in the application of those standards, then it follows that a very high percentage of applications will be approved. Market participants know what the rules are. Conversely, if the regulators are opaque as to the standards, and if application of those standards is inconsistent (in other words, if the regulatory system is not working well), the percentage of applications approved may be much lower because the regulators are being more arbitrary in their exercise of power.

Senator Warren should focus on the standards by which approvals are granted and not on the percentage of applications granted.