Monthly Archives: July 2013

Senate Banking Hearing: ”Mitigating Systemic Risk through Wall Street Reforms” (with Delta Strategy Group Hearing Summary)

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The Senate Banking Committee held a hearing on systemic risk and Wall Street reforms.The following witnesses testified:

  • The Honorable Mary Miller, Under Secretary for Domestic Finance, U.S. Department of the Treasury (prepared statement);
  • The Honorable Daniel Tarullo, Governor, Board of Governors of the Federal Reserve System (prepared statement);
  • The Honorable Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation (prepared statement); and
  • The Honorable Tom Curry, Comptroller, Office of the Comptroller of the Currency (prepared statement).

Delta Strategy Group released the a summary of the hearing which is linked to below.

Click here to see a summary of the nominations hearing from Delta Strategy Group.

See also: Hearing Webcast.

The Bretton Woods Transcripts now in hardcover

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The Bretton Woods Transcripts has just been released in a hardcover edition. Readers who prefer paper to electrons can find it here for $33.68, a bargain price for a 700-page book.

The main content is the same as that of the e-book released in October, but the appendices have some differences. To keep the size and cost of the hardcover manageable, it omits Appendix F, which contains previously published documents that comprise half the length of the e-book. On the other hand, the hardcover contains tables in Appendix E showing the evolution of the IMF and World Bank Articles of Agreement, which had to be omitted from the e-book because e-books do not handle tables well.

This is the first hardcover book published by the Center for Financial Stability. More are planned.

Richard Sandor Awarded the French Legion of Honor

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Dr. Richard Sandor – renowned financial innovator, entrepreneur, and
CFS advisory board member – was named Chevalier dans l´ordre de la
Légion d´Honneur (Knight in the French National Order of the Legion of
Honor).

The award is the highest decoration granted by the French government,
and acknowledges his accomplishments in the field of environmental
finance and carbon trading as well as his personal commitment and
contribution to the promotion of French-American friendship.

This award was conferred upon Dr. Sandor by decree of the President of France.

For more information:
http://envifi.com/richard-sandor-awarded-the-french-legion-of-honor

The CFTC and the European Commission on Common “Path Forward” for Regulating Derivatives

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The CFTC has issued a press release stating that CFTC Chairman Gensler and EC Commissioner Barnier have reached agreement on a ”Path Forward” as to how to regulate cross-border derivatives.

The Path Forward is intended to cover matters such as the regulation of clearing corporations, swap execution facilities, trade reporting, trade execution requirements and the definition of ”US person.” In this regard, the Path Forward indicates that (i) offshore guaranteed affiliates of U.S. persons could be regarded as U.S. persons, but trades with them would be subject only to substituted compliance, (ii) that foreign branches of U.S. banks could satisfy U.S. requirements by means of substituted compliance and (iii) offshore funds that are majority-owned by U.S. persons or that have their principal place of business in the United States would be treated as U.S. person (and presumably substituted compliance would not be available).

While the Path Forward provides some milestone dates, they are not phrased as ”deadlines.”

Lofchie Comment:  The Path Forward appears to reflect recognition by the CFTC that EC regulated swap dealers are subject to comparable regulation, and thus that the CFTC will generally defer to EC regulators. Accordingly, the agreement by the CFTC with EC seems, at least as a general matter, to be a concession by the CFTC that it can not go its own way in international financial regulation; further, the CFTC’s agreement seems to bring the CFTC back into line with the SEC in terms of working out an approach for cross-border co-operation.

It is a tremendous positive that the CFTC has moved off its go-it-alone approach to work with European regulators, and hopefully with the SEC and with other non-U.S. regulators.  That said, the “Path Forward” is a brief statement, not a detailed rulemaking.  All of the details are left open.  It seems now appropriate for the CFTC to follow the lead of the SEC and to publish a proposed rule that would be subject to comment by market participants in the United States.  The implications of the proposal for cross-border competition are quite significant.  A rule that is not well considered could further disadvantage U.S-based institutions or could motivate U.S. clients to move their business away from the United States.  Please note that the Path Forward only deals with Europe; it does not make mention of Canada or various Asian jurisdictions. 

See:  CFTC Press Release.

FSOC Designates AIG and GE Capital as Systemically Significant

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In accordance with its authority under Title I of the Dodd-Frank Act, the Financial Stability Oversight Council (“FSOC”) designated two nonbank financial companies for consolidated supervision and enhanced prudential standards by the Federal Reserve Board of Governors.  The companies are:

  • American International Group, Inc. (“AIG”); and
  • General Electric Capital Corporation, Inc. (“GECC”).

Lofchie Comment:  It had been widely reported that Prudential also would be named as systemically significant, but that Prudential (unlike AIG and GE) intended to resist such a designation.

See:  American International Group, Inc. Designation; General Electric Capital Corporation, Inc. Designation.
See also:  FSOC Press Release.

Financial Services Committee Hearing: “Examining Constitutional Deficiencies and Legal Uncertainties in the Dodd-Frank Act”

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The Financial Services Committee held a hearing concerning potential legal uncertainties in the Dodd-Frank Act.  Congressman Patrick McHenry (R-NC), Chairman of the U.S. House Subcommittee on Oversight and Investigations, opened the hearing by expounding his view that the Dodd-Frank Act did not end “Too Big to Fail” and that Title I (“Financial Stability”) and Title II (“Orderly Liquidation of Authority”) raise several constitutional and legal uncertainties.  Following that statement, a panel of constitutional scholars testified at the subcommittee hearing, two of whom expressed constitutional concerns about Dodd-Frank:

  • The Honorable C. Boyden Gray testified that Dodd-Frank has entrenched “Too Big to Fail” and violates the separation of powers by giving effective open-ended power to regulators;
  • Professor Thomas Merrill testified on the constitutional issues raised by the powers bestowed upon the Orderly Liquidation Authority in Title II of Dodd-Frank; and
  • Mr. Timothy McTaggart testified on the possible constitutional issues raised by Dodd-Frank, but stated that the bill did not violate the separation of powers or due process of law.

See:  Hearing Memorandum; Webcast of Hearing.

FRB, FDIC and OCC Issue Notice of Proposed Rulemaking on the Supplementary Leverage Ratio for G-SIBs

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The Federal Reserve Board, the FDIC and the OCC proposed a rule to strengthen the leverage ratio standards for the eight largest, most systematically significant U.S. banking organizations. Under the proposed rule:

  • Bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody (“covered BHCs”) would be required to maintain a tier 1 capital leverage buffer of at least 2 percent above the minimum supplementary leverage ratio requirement of 3 percent, for a total of 5 percent, the failure of which would subject covered BHCs to restrictions on discretionary bonus payments and capital distributions; and 
  • Insured depository institutions of covered BHCs would be required to meet a 6 percent supplementary leverage ratio to be considered “well capitalized” for prompt corrective action purposes.

See:  Complete Rulemaking.
See also:  Federal Reserve Board Press Release and NYT article by Peter Eavis which explains the difference between a risk-weighted asset ratio (current Basel standard) versus the proposed leverage ratio.

FDIC and OCC Adopt Rules Regarding the Implementation of Basel III Capital Requirements

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The FDIC approved an interim final rule and the OCC approved a final rule regarding implementation of Basel III capital requirements. The FDIC and OCC rules are substantially identical to the final rules issued by the Federal Reserve Board on July 2, 2013. 

See:  FDIC Interim Final Rule; OCC Final Rule.
See also:  FDIC Press Release; OCC Press Release; Delta Strategy Group: Summary of New Basel Capital Proposals.

The House Financial Services Committee Passes Two Bills

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The House Financial Services Committee passed two bills intended to reduce what the Chairman of the Committee described as certain unforeseen consequences of the Dodd-Frank Act.

  • H.R. 1564, the Audit Integrity and Job Protection Act prohibits the PCAOB from mandating the automatic rotation of a public company’s independent external auditor.
  • H.R. 1341, the Financial Competitiveness Act of 2013 requires the Financial Stability Oversight Council to examine how differences in the international implementation of Basel III derivatives-related capital rules will affect the U.S. financial system and require U.S. regulators to report to Congress with recommendations on developing greater uniformity in the standards and on how to minimize any adverse impact on U.S. financial institutions and the end users of derivatives.

See:  House Financial Services Committee Press Release.