WSJ features Sandor on LIBOR Replacement…

Today, The Wall Street Journal published a wonderful article on CFS Advisory Board Member Richard Sandor and his company the American Financial Exchange (AFX). AFX developed a market-based LIBOR alternative, Ameribor. It now trades on an electronic platform and has over 700 institutional members in 49 states.

The article also nicely chronicles Richard’s prior successes as a perennial entrepreneur in the world of financial products – https://www.wsj.com/articles/futures-guru-targets-libor-replacement-11555410600.

Richard outlined thoughts on a LIBOR alternative at a CFS roundtable in 2012. He delved even more deeply and broadly at a roundtable discussion “Creation and Evolution of New Markets: The Case of Interest Rate Benchmarks” late last year – http://www.centerforfinancialstability.org/research/Sandor-11-16-18.pdf.

Hanke on Measuring Money / CFS Monetary Measures for March 2019…

In addition to the monthly CFS monetary and financial release, CFS special counselor Steve Hanke discusses the need for relevant data and benefits of broad money measurements in the latest World Economics Journal (see http://www.centerforfinancialstability.org/research/HankeOnMeasuring.pdf.)

Today we release CFS monetary and financial measures for March 2019. CFS Divisia M4, which is the broadest and most important measure of money, grew by 4.4% in March 2019 on a year-over-year basis versus 4.5% in February.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Mar19.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’

SEC Agrees that “Tokens” to Pay for Services Are Not “Securities”

Commentary / Steven Lofchie

On the one hand, it is certainly a positive that the SEC is announcing an intellectual framework for determining whether a “digital asset” (perhaps better known as an “Initial Coin Offering” or “ICO”) is within the definition of the term “security.” On the other hand, the framework definitely casts a very broad net, which no doubt was intended.

As to the question of whether digital assets involve a “common enterprise,” the SEC simply says that “[b]ased on our experiences to date, investments in digital assets have constituted investments in a common enterprise because the fortunes of digital asset purchases have been linked to each other or the success of the promoter’s efforts” (at fn. 11). There is not much analysis there. One could, for example, argue that a digital newspaper subscription constitutes a digital asset because the value of the subscription is likely dependent upon the publisher’s ability to generate other subscriptions and thereby to turn out a good digital newspaper.

On the question of whether cryptocurrencies are securities, the framework says that, to fall outside of the definition, the digital asset must “actually operate as a store of value that can be saved, retried, and exchanged for something of value at a later time.” As to digital assets generally, “any economic benefit that may derived from appreciation [must be] incidental to obtaining the right to use [the asset] for its intended functionality.”

It is fairly well accepted that certain of the major cryptocurrencies are not securities. That said, it is not at all clear that any newly issued cryptocurrency would be able to meet the SEC’s conditions so as not to be a security.

Although the SEC has cast a very wide net with this analysis, it also published a no-action letter providing at least one example as to when a digital asset would not be a security. See SEC Staff Advises Turnkey Jet Tokens Are Not Securities.


The SEC provided a “framework for analysis” to help market participants evaluate whether the federal securities laws apply to the offer, sale or resale of a specific digital asset.

The framework is based on the “Howey” case, which found that a security exists where there is “[(i)] an investment of money [(ii)] in a common enterprise [(iii)] with a reasonable exception of profits [(iv)] to be derived from the efforts of others.” As to the first two elements, the SEC states that, generally, persons pay in some way for the digital asset and “in evaluating digital assets, [the SEC] has found that a ‘common enterprise’ typically exists.”

The report focuses on the third element, whether the purchaser of the asset may reasonably expect to profit from the purchase of the assets, (i.e., by having the expectation – or at least the hope – of selling the asset to someone else at a higher price); and the fourth element, whether the purchasers of the asset depend on the efforts of others (finding that they generally do, because a third party is creating and maintaining the technology).

Former CFTC Chair Urges Congress to Strengthen Regulation for Crypto-Assets

Commentary / STEVEN LOFCHIE
While the Brookings report runs some 60 pages, plus 4 pages of footnotes, it may be summarized as follows: There is stuff that could go wrong in some way with the production, trading or ownership of crypto-assets; therefore, crypto-assets ought to be regulated in some unspecified way, which would make the bad stuff less likely to happen. (The other 59 7/8th pages, plus 4 pages of footnotes, amplify on this theme.)

To be chary of Mr. Massad’s report is not to dispute that some bad things will happen as to investments in crypto-assets. It is a safe guess that a good number of retail investors will lose money. Beyond saying that “something” should be done, Mr. Massad might have offered us something more, perhaps by starting with an explanation as to why what currently exists is insufficient and how new rules will solve the problem.

As a starting matter, Mr. Massad should better define and distinguish what he means by “crypto-assets.” Presumably, he is referring to initial coin offerings (“ICOs”). (Note, he quotes SEC Chair Clayton to the effect that all ICOs are “securities” (see fn. 54 and surrounding text)). Therefore, he should explain the deficiencies in securities regulation as applied to ICOs. Unless Mr. Massad believe that there should be one scheme of regulation for securities held through DTC and another for securities in crypto-form, all he is saying is that there should be more enforcement of the securities laws as applied to ICOs. That is reasonable; but it is not clear why any more laws or rules are required. It appears that he just wants more cops on the beat.

If by crypto-assets Mr. Massad means cryptocurrencies, he should say so, and explain how cryptocurrencies should be regulated. If he wants them prohibited, he should say that. Rather, he argues that Bitcoin mining is so “highly energy intensive” is so bad, that – by comparison – he would “long for a return of Lehman Brothers” (at 11). That statement certainly suggests that he favors prohibition. If that is the case, then recommending the imposition of a recordkeeping regulation is somewhat beside the point.

Finally, if by crypto-assets Mr. Massad means assets that give a person a “right to use . . . some sort of blockchain based application or service” (at page 29), he owes us an explanation as to what type of regulation he imagines the SEC or CFTC imposing and to what purpose, and what will be the anticipated effect on blockchain businesses.

Mr. Massad’s suggestion that the Financial Stability Oversight Council (“FSOC”) direct the production of a report for the regulation of crypto-assets, albeit in some unknown way and to an undefined end, demonstrates a potential for abuse by FSOC of its all-too-ambiguous powers. FSOC was supposed to be focused on “gaps in regulation that could pose risks to the financial stability of the United States.” There is zero evidence that crypto does that. The purpose of FSOC is not supposed to be to evade the “formal notice and comment process used for rule making.” FSOC has neither expertise with respect to crypto-assets nor any focus on most of the potential problems raised by Mr. Massad; e.g., energy usage by Bitcoin miners or suitability issues. That Mr. Massad thinks FSOC should be used as a device for rushing through regulations without “formal notice and comment process” is probably a better argument for eliminating FSOC (what exactly has it accomplished to date?) than it is for regulating crypto.

Ten years of experience with Dodd-Frank, much of which is still not implemented because it was neither practical nor useful, should offer some lessons. Throwing out a laundry list of issues, and then demanding regulation with no consideration of specifics, is unlikely to get you where you want to go. It may even take you in the wrong direction. “Too-big-to-fail” was, by way of example, supposedly a cause of the financial crisis. Yet following on Dodd-Frank, increases in regulation and resulting cost have likely only increased concentration.

To advance the discussion of the regulation of crypto-assets, Mr Massad has to define: (i) what are the assets or transactions that he wants to regulate; (ii) does he favor a single scheme of regulation that would cover all cryptocurrencies, ICOs, and assets that create a right of use; (iii) what is the specific problem he is trying to solve (is it energy usage or suitability or just the absence of governmental control); (iv) what are the requirements (whether imposed by statute or rule) for which he advocates; and (v) what does he predict is the likely effect of imposing those requirements (meaning why would it solve the problem, and at what cost)? He should address whether he is trying to regulate or trying to prohibit. It’s fair to demand such specificity of a former senior regulator.

—-

In a Brookings Institute working paper, former CFTC Chair Timothy Massad urged Congress to bolster regulation of crypto-assets.

Mr. Massad pointed out that new crypto exchanges and trading platforms are not held to the same standards required of securities and derivatives market intermediaries, resulting in weak investor protection. In part, this has allowed crypto-assets to be used to circumvent sanctions, and to facilitate payment for illegal activities.

Mr. Massad argued against deferring to state law with respect to regulating crypto-assets. He recommended that Congress:

pass legislation giving the SEC or the CFTC “authority to regulate the offering, distribution and trading of crypto-assets”;

provide more resources to the SEC and the CFTC to regulate crypto-assets;

adopt legislation around “core principles,” which address, among other things: (i) protection of customer assets, (ii) governance standards, (iii) conflicts of interest, (iv) recordkeeping and reporting, (v) trade execution and settlement, (vi) pre- and post-trade transparency obligations, (vii) anti-fraud prohibitions, (viii) disclosures to customers regarding fees, order types and execution practices, (ix) risk management, business continuity and cybersecurity, (x) capital, and (xi) AML and KYC requirements;

direct the relevant agencies to establish regulations to implement the core principles;

grant the relevant agencies authority to determine whether non-U.S. platforms that provide access to U.S. investors should be required to meet U.S. standards, comply with comparable standards or disclose that they do not meet U.S. standards; and

direct the relevant agencies to decide whether there should be alternative ways for centralized and decentralized platforms to comply with the core principles.

Mr. Massad called on the Financial Stability Oversight Council or the U.S. Treasury Department to provide a report recommending Congress to enhance regulation in the crypto-assets sector. He also encouraged the industry to continue developing its own self-regulatory standards.

CFS Monetary Measures for February 2019

Today we release CFS monetary and financial measures for February 2019. CFS Divisia M4, which is the broadest and most important measure of money, grew by 4.5% in February 2019 on a year-over-year basis versus 4.4% in January.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Feb19.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’

Senate Committee on Banking Considers Bills on Capital Formation and Corporate Governance

The U.S. Senate Committee on Banking, Housing and Urban Affairs (the “Senate Banking Committee”) considered legislative proposals on capital formation and corporate governance.

Chair Senator Mike Crapo (R-IA) stated that the Banking Committee has held three hearings in 2018 on legislative proposals – (i) the Helping Angels Lead Our Startups Act, (ii) the Fair Investment Opportunities for Professional Experts Act and (iii) the JOBS and Investors Confidence Act of 2018 – with respect to capital formation, corporate governance and the proxy process. Mr. Crapo said the purpose of the hearing is to address these bills again “in the context of identifying areas where we can find bipartisan consensus in the new Congress.” Mr. Crapo described the importance of unified legislative action, and added that it is “time to re-examine the standards of inclusion” for proposals that pursue environmental, social or political agendas.

In a separate statement, Senator Sherrod Brown (D-OH) touched on the importance of putting workers before Wall Street when considering these bills. He criticized the notion that it was a necessity for bills that facilitate capital formation, stating that time is better spent making sure that workers at companies such as Uber are receiving the wages and benefits they have earned, rather than “letting companies cut corners on their accounting controls.” Mr. Brown emphasized the importance of protecting ordinary American investors, noting that support for American companies should put employees first.

Lofchie Comment: It is disappointing that Senator Brown thinks it productive to attack the supposed “shortsighted obsession” of Wall Street. If he believes that the private sector is particularly cursed by an inability to think into the future, he should suggest a cure, rather than merely rehearse a cliché. Or is he suggesting that everything would be better if only elected officials made decisions as to capital allocation? That seems unlikely on its face, but if he believes it to be so, he should try to make the case for it. To what government – federal, state, or city – would he point as a model of long range investment planning?

New York Fed Officer Urges Firms to Prepare for LIBOR Transition

Executive Vice President and General Counsel of the Federal Reserve Bank of New York (“New York Fed”) Michael Held urged firms to prepare for the transition from LIBOR to an alternate interest rate. He cautioned that the transition from LIBOR has been identified by the Financial Stability Oversight Council as a financial stability risk. Mr. Held stated that “[t]he gross notional value of all financial products tied to U.S. dollar LIBOR is approximately $200 trillion – about 10 times U.S. GDP.” He further reported that approximately 95 percent of LIBOR exposure is in derivatives contracts.

In remarks at the SIFMA Compliance and Legal Society luncheon, Mr. Held stated that market participants with LIBOR exposure must undertake two tasks: (i) begin using the Secured Overnight Financing Rate (“SOFR”) or another robust alternative to LIBOR (or make sure that new contracts have workable fallback language) and (ii) deal with the “trillions of dollars of existing contracts that extend past 2021” which don’t currently have a sufficient fallback. According to Mr. Held, understanding the scope of an institution’s exposure to LIBOR-based products, and the contractual impact on those products when LIBOR is no longer available, is an important risk management assessment that should be completed as soon as possible.

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.