Monthly Archives: August 2013

New Bretton Woods Document Released

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I have found another previously unpublished document from the Bretton Woods conference.

“Questions and Answers on the Bank for Reconstruction and Development” discusses the institution now better known as the World Bank. The document was prepared by the U.S. Treasury Department and distributed to delegates and journalists at Bretton Woods. It has been known and cited by historians, but only a few copies seem to exist in libraries, and it has never before been widely available.

The 22 questions and answers cover a variety of issues. Many remain relevant today, such as Question 4: “What is the appropriate role of the Bank in the field of international investment? Will the Bank compete with private financial institutions?” Others are now out of date but provide insight into how the organizers of the Bretton Woods conference expected the world financial system to evolve after the worldwide depression of the 1930s and the world war that was then raging.

The transcription of the document is available here. Photographs of an original mimeograph of the document are available here These efforts are part of the CFS Bretton Woods Project. They complement the CFS’s recent release of the hardcover edition of The Bretton Woods Transcripts, edited by me and Andrew Rosenberg.

I will have some short reflections on the document in a couple of follow-up posts.

Industry Groups Submit Critical Comments on CFTC Cross-Border Guidance

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SIFMA, the Futures Industry Association (“FIA”), and the Financial Services Roundtable (“FSR”) have submitted comments to the CFTC on the Exemptive Order and the Interpretive Guidance and Policy Statement regarding the regulation of swaps having some cross-border element.

The comments address (i) the lack of an appropriate time period to comply, including certain requirements being effective immediately, making it impossible to comply, (ii) the complexity of the guidance and (iii) the lack of clarity in the guidance.

Lofchie Comment: The numerous problems pointed out by the comment letter demonstrate that the CFTC would have been better off going through the public comment process “mandated” by the Administrative Procedures Act rather than avoiding the APA on the questionable basis that the guidance does not constitute rulemaking.

See: SIFMA Press Release; SIFMA, FIA, and FSR Comments to CFTC.
See also: CFTC Approves Cross-Border Guidance and Exemptive Order (July 15, 2013).

CFTC Issues Final Rules Implementing Enhanced Risk Management for Systemically Important Derivatives Clearing Organizations

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The CFTC has approved final rules to impose enhanced risk-management standards for systemically important derivatives clearing organizations (“SIDCO”).  The rules were adopted in part pursuant to Section 807 of Dodd-Frank.  The CFTC said that the adoption of these rules is intended to provide that SIDCOs are consistent with the Principles for Financial Market Infrastructures, thereby enabling them to continue to be Qualifying Central Counterparties for purposes of international bank capital standards.

The final rules:

  • Increase financial resources requirements for SIDCOs that are involved in activities with a more complex risk profile, or that are systemically important in multiple jurisdictions;

  • Do not allow SIDCOs to include assessments in calculating their available default resources; and

  • Enhance system safeguards for SIDCOs in the areas of business continuity and disaster recovery.

See:  CFTC Release.

DTCC Releases White Paper on Systemic Risk in Global Securities Industry: “Beyond the Horizon”

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The DTCC has issued a white paper identifying a number of developing trends that would impact the industry’s ability to protect itself against unidentified threats to the worldwide financial system.

  • Cyber Security: This issue has emerged as arguably the top systemic threat facing global financial markets and associated infrastructures, including the threat of Distributed Denial of Service attacks, attacks against systems containing transaction records, and risk of disclosure of restricted, confidential or Material Non-Public Information via compromise of internal systems.
  • Impact of New Regulations: The financial industry has expressed concerns that even though the regulations are well-intentioned and necessary, there is a danger that their scope and complexity may actually be creating unintended consequences or an entirely new set of risks.
  • Counterparty Risk: There is still ongoing industry debate as to whether the “too-big-to-fail” issue has been sufficiently resolved. Today, the top U.S. banks still control the vast majority of total assets within the sector and just a few provide some of the most critical services.
  • Collateral Risk: There are growing concerns globally about potential risks associated with a future shortage of high-quality collateral, possible pro-cyclical impacts of collateral requirements, along with operational challenges related to collateral management.
  • Interconnectedness Risk: Inter-linkages among financial firms and infrastructures greatly improve the effectiveness and efficiency of clearance and settlement activities and processes. They also create a complex network of interdependent legal, credit, liquidity, and operational risks. This presents a possible source of systemic risk by increasing the potential for operational and other disruptions to spread quickly and widely through the financial system in a worst-case scenario.
  • CCPs as Single Points of Concentration: More and more business is being forced through central counterparties, including DTCC.
  • Business Continuity Risk: The problems created by Hurricane Sandy are cited as an example.
  • Market Quality: DTCC points to the numerous compliance violations being cited by regulators and increased levels of fines and other penalties, which may be significant enough to drive firms out of business.
  • High-Frequency Trading: While DTCC acknowledges the benefits of the high-frequency trading, it also says that this activity creates technology risks.

Lofchie Comment:  One primary goal of government regulation is to make the financial regulatory safer. The DTCC has identified many issues either created or exacerbated by government actions. For example, (i) the very high fixed costs of complying with Dodd-Frank derivatives rules will knock medium-sized firms out of some of the swaps business, exacerbating concentration in the financial industry, (ii) the rate of change in financial regulation is simply too great for the regulators or firms to be confident that they are not causing further problems; and (iii) the size of the transaction flow that is being pushed through a few clearing corporations and through a small number of FCMs is too large to understand the consequences. The most interesting risk in this regard is what DTCC refers to as “market quality,” or what the industry might refer to as “enforcement risk.” One can make a reasonable case that with so many federal and state regulators – all enthusiastic to bring enforcement actions – the very machinery is less significant as a means to discourage or punish misdeeds, than it is as an independent source of wildcard risk.

See: DTCC White Paper; DTCC Introductory Video.
See also: DTCC Press Release.

 

CFTC Commissioner Chilton Delivers Speech on Banks Owning Physical Commodities

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CFTC Commissioner Bart Chilton delivered a speech urging the Fed to reverse its policy of allowing banks to own physical commodities.  Chilton stated that he wrote to Chairman Ben Bernanke urging him to rewrite the Volker Rule in a “precise and surefooted fashion.”  Chilton explained he believes that banks owning physical commodities could render the Volker Rule useless by obscuring “business risk.”  Commissioner Chilton suggested that banks should get back to banking.

Lofchie Comment:  One of the problems that Dodd-Frank creates is too many regulators with confused and overlapping jurisdictions, and this is particularly true as to Volcker.  It does not seem to me that the regulatory system benefits when a regulatory authority with no historical involvement or expertise in the business of banking or in bank powers must expend its resources in areas so far removed from its area of authority.  Given all that the CFTC has on its plate, the agency would likely benefit from being permitted to stay closer to its home turf.

See:  Chilton’s full speech: “Cowboy Company.”
See also:  Craig Pirrong’s related commentary “It’s Always Something” (August 2, 2013).

Senate Confirms White, Stein, and Piwowar to SEC Posts

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The Senate has confirmed President Obama’s choices of Mary Jo White as SEC Chairman; and of Kara Marlene Stein and Michael Sean Piwowar to serve as SEC Commissioners.  White has been named the SEC Chairman, while Stein and Piwowar have been confirmed as Commisioners of the SEC.  The Senate unanimously approved the nominees.  Both SIFMA and NASAA have submitted comments commending the confirmations. 

See:  Confirmations in Senate Congressional Record; SIFMA Statement on Confirmations; NASAA Statement on Confirmations.

SIFMA Calls for Review of SRO Structure

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SIFMA sent a letter to the SEC to request a review of the regulatory structure of broker-dealers, exchanges, and the SRO model. SIFMA Executive Vice-President Randy Snook acknowledged that the current SRO structure “is widely viewed to be outdated and in need of reform.” In its letter, SIFMA suggested the following key areas it believes the SEC should consider during its review:

  • What is an exchange and why is it an SRO?;

  • Examine the competition between exchanges and the broker-dealers they regulate;

  • Competitive and regulatory disparities; and

  • Funding of self-regulation

Lofchie Comment: The debate over the role of the exchanges in the regulatory structure is a recurring one in securities regulation, typically one that is fiercest when there is controversy over the fees that exchanges charge broker-dealers (as there has been lately). Lately, there has also been added controversy over the ability of exchanges to limit their liability to broker-dealers in situations where a trading problem on the exchanges causes injury to member broker-dealers (as was the case with the Facebook offering).

The argument that regulatory power and the operation of markets should be separate functions was an important consideration in the separation of what had been the NASD into FINRA (a now purely self-regulatory authority) and NASDAQ (formerly a subsidiary of the NASD that had grown into the second largest securities market for listed stocks at the time of its separation). In effect, SIFMA seems to be advocating a self-regulatory structure where FINRA would become essentially the only self-regulatory organization, and the regulatory authority of the exchanges over broker-dealers would be materially diminished or even eliminated.

As the SIFMA letter makes clear, a change in the regulatory position of the exchanges would likely have material consequences for rules relating to market structure – most significantly, Regulation NMS.

Query: how does the SEC have the resources to take on such a big issue now, while it is dealing with Dodd-Frank and the implementation of the JOBS Act rules, as well as changes to the regulation of money market funds and increasing regulation in the municipal securities market? On the other hand, this is clearly a long-term issue, so if there is to be material change, likely the SEC would want to take a go-not-too-fast approach, which argues for starting on the issue sooner rather than later. 

See: SIFMA Press Release (which links to SIFMA Letter).