Monthly Archives: October 2013

Soft Spot for Financial Institutions and Economy: CFS Money Supply Statistics

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CFS monetary and financial data suggest that the US economy is losing momentum.

The economy appears less responsive to injections of money in 2013 and to QE3.

The swell of reserves into the banking system represents a future risk to asset values.

A breakdown of the financial system into traditional and shadow banking reveals stress in each.

For Monetary Notes and Views:
http://www.CenterforFinancialStability.org/amfm/AMFM_101613.pdf

For Monetary and Financial Data Release:
http://www.centerforfinancialstability.org/amfm/Divisia_Sep13.pdf

CPSS and IOSCO Issue Advisory Document on Quantitative Disclosure by Central Counterparties

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The Committee on Payment and Settlement Systems (“CPSS”) and IOSCO published for public comment a consultative document titled “Public Quantitative Disclosure Standards for Central Counterparties” (“CCP”).  The consultative paper complements a previous paper by the CPSS and IOSCO from 2012 which provided guidance on what should be disclosed by central counterparties and other financial market infrastructures.  The proposed disclosures in this document are intended to provide a means for enabling stakeholders, authorities, participants, and the public to:

  • compare CCP risk controls;
  • have a clear, accurate and full understanding of the risks associated with a CCP;
  • understand and assess a CCP’s systematic importance and its impact on systemic risk; and
  • understand and assess the risks of participating in CCPs.

Comments are due by December 13, 2013.

Lofchie Comment:  In promoting the central clearing of derivatives, the CFTC has promoted the safety of clearing.  While there are arguments to be made for clearing, it also has real risks, as pointed out in the attached publication.  There is little that market participants can actually do with the information.  Given that swaps are required to be cleared, and there are very few choices as to where any individual swap can be cleared, worrying about the risk posed by a particular clearing agency may be fruitless.  Simply, the risk of using a clearing house is imposed on the market by the government.

See:  IOSCO and CPSS’s Joint Publication: Public Quantitative Disclosure Standards for Central Counterparties; IOSCO Announcement; IOSCO Press Release.

SEC Chair White Delivers Speech on Disclosure Requirements

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SEC Chair Mary Jo White spoke at the National Association of Corporate Directors Leadership Conference, focusing on the importance of disclosure and the need to update the disclosure system to better fit today’s securities markets. 

According to Chair White, the core purpose of disclosure is to provide investors with the information they need to make informed investment and voting decisions.  Chair White discussed information that companies are required to disclose, such as how their businesses are operated, how much money they’ve made over the past few years, and specific details about large shareholders.  She went on to say, however, that current disclosure requirements may be too lengthy and could lead to an “information overload” that made finding the most relevant information difficult for an investor.

Additionally, Chair White stated that many disclosure requirements become outdated due to technological advances, legislative mandates, and things such as “investor demand or a company’s decision to take a defensive posture and disclose more information rather than less to reduce the risk of litigation claims that there was insufficient disclosure.”  Chair White also said that companies have complained about repetitive disclosure mandates which required them to disclose the same information in separate filings.

To move forward with making improvements to the disclosure system, Chair White said that the SEC must first understand what information is demanded from companies and why, referencing JOBS Act Section 108 (“Review of Regulation S-K”) as a mandate which provided an opportunity for the SEC to analyze the rules that form the disclosure system.  The Division of Corporation Finance is scheduled to release a report on the disclosure system soon pursuant to this mandate, according to White.  In addition, White said the SEC must consider whether investors would benefit from disclosures that were more tailored to the particular industries in which they operated, and whether the current EDGAR electronic disclosure system and current timeframes for disclosure requirements were still appropriate given the increasing use of technology. 

Lofchie Comment:  In discussing the issue of “information overload,” Chairman White reported that various interest groups had sought disclosure on “over 100 topics – a bewildering array of special causes” (presumably having little to do with whether the company would make a good investment). Later in the speech, she singled out “executive compensation” as an area where companies are required to make excessive disclosures that “can amount to more than 40 detailed pages.”

This is the second recent speech in which Chairman White has questioned the use of SEC disclosure requirements as a tool that serves a goal other than protecting investors. (See the link below as to her speech on the independence of the SEC.) The Chairman’s speech raises the question as to whether or not she intends to support the SEC’s newly proposed rule on the ratio of executive pay to the pay of the average employee (a proposal that we consider ill-conceived).

See:  SEC Chair White, Speech, “The Path Forward on Disclosure”.
Related news:  SEC Chairperson Mary Jo White Speaks at Fordham Law School on the Importance of Independence (October 7, 2013).

OCC and FRB Publish Final Rules Regarding Regulatory Capital Rules (Fed. Reg.)

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The Office of the Comptroller of the Currency (“OCC”) and the Board of Governors of the Federal Reserve System (“FRB”) published a final rule in the Federal Register that revises their risk-based and leverage capital requirements for banking organizations. The final rule implements a revised definition of regulatory capital, a new common equity tier 1 minimum capital requirement, a higher minimum tier 1 capital requirement, and, for banking organizations subject to the advanced approaches risk-based capital rule, a supplementary leverage ratio that incorporates a broader set of exposures in the denominator. 

See: 78 FR 62018.
Related news: FRB Issues Two Interim Final Rules Regarding Basel III Regulatory Capital Reforms Incorporation (September 25, 2013).

FDIC Chairman Gruenberg Speaks to Volcker Alliance Program

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Federal Deposit Insurance Corporation (“FDIC”) Chairman Martin J. Gruenberg gave a speech before the Volcker Alliance Program in Washington, DC, to discuss the FDIC’s strategy under the Dodd-Frank Act for the resolution of systemically important financial institutions.  Chairman Gruenberg reviewed the FDIC’s progress in overseeing the filing of “living wills” by covered companies pursuant to Title I of the Dodd-Frank Act, as well as the FDIC’s development of its capability to carry out a resolution under Title II. He added that the FDIC has plans to release a description of its proposed resolution process later this year for public comment. Chairman Gruenberg also discussed international regulatory efforts, noting in particular the collaboration between domestic regulators and those of the United Kingdom, Switzerland and Germany.

See: Chairman Gruenberg’s Full Speech.

CFS Congratulates Dr. Bill Barnett, Recipient of the Higuchi-KU Endowment Research Achievement Award

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The Higuchi-KU Endowment Research Awards recognize the exceptional long-term research accomplishments of faculty at Kansas Board of Regents universities. CFS Director William A. Barnett was one of four recipients to be awarded the state’s most prestigious recognition for scholarly excellence.

This year’s recipients of Higuchi-KU Endowment Research Achievement Awards:

Balfour Jeffrey Award in Humanities and Social Sciences

William Barnett is the world’s leading figure in the study of methods for the accurate measurement of monetary and financial aggregates, an essential component of monetary policy by the world’s central banks. Barnett came to KU in 2002 from Washington University in St. Louis, and he was previously the Stuart Professor of Economics at the University of Texas at Austin. His academic background includes a Bachelor of Science from M.I.T., an MBA from the University of California, Berkeley, and a Master of Arts and doctorate from Carnegie Mellon University.

Dolph Simons Award in Biomedical Sciences

William Groutas is internationally known for his work combating such diseases as West Nile virus, Dengue virus, norovirus and chronic obstructive pulmonary disease. He came to Wichita State as an assistant professor in 1980 from the University of Wisconsin-Eau Claire. Groutas became a professor in 1987 and was named a distinguished professor in 1991. His academic background includes a Bachelor of Science and diploma in education from the American University of Beirut in Lebanon and a doctorate from the University of Kentucky. He served as a postdoctoral fellow at Cornell University.

Olin Petefish Award in Basic Science

Siyuan Han is one of the world’s leading researchers in quantum computing, especially the development of superconducting devices. Practical quantum computing based on qubits (quantum bits) is in its infancy but will increase computing speed tremendously, enabling scientists to solve certain extremely hard problems. Han came to KU as an associate professor in 1997 from Stony Brook University and became a professor in 2003. His academic background includes a Bachelor of Science degree from the University of Science and Technology of China and a doctorate from Iowa State University.

Irvin Youngberg Award for Applied Sciences

Mary Beth Kirkham is an international authority on the plant-water relations of winter wheat and the uptake of heavy metals by crops grown on polluted soil. She was the first to document the effects of elevated levels of carbon dioxide on crops grown under semi-arid conditions. Kirkham came to Kansas State in 1980 following faculty appointments at Oklahoma State University and the University of Massachusetts Amherst. Her academic background includes a Bachelor of Arts from Wellesley College and master’s and doctoral degrees from the University of Wisconsin-Madison.

The full announcement can be found here.

SIFMA Submits Comment Letter Regarding Swaps Push out Bill to House Congressional Leadership

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SIFMA submitted a comment letter to Speaker Boehner (R-OH) and Congresswoman Pelosi (D-CA) expressing strong support for H.R. 992.  The House Bill relates to Dodd-Frank Section 716 (“Prohibition against Federal Government Bailouts of Swaps Entities”) (also known as “Lincoln” or “push out”), which requires commercial banks to push out or remove certain swaps activities from the bank and establish and capitalize a separate affiliate.  As a result of this section, SIFMA’s position is that financial institutions could no longer be eligible for netting and other efficiencies, and SIFMA clients will migrate their swaps contracts to other entities that are not subject to prudential regulation by federal regulators.  The comment letter supported the idea that H.R. 992 modifies Section 716 by subjecting only structured finance swaps based on asset-backed securities to be pushed out of banks and by not applying to equity or commodity swaps.

Lofchie Comment:  Section 716 may be the most ill-advised provision in all of Dodd-Frank. Dealing in swaps is largely a credit intermediation business which logically belongs in banks, which are in the business of intermediating credit. If the provision were allowed to come into force, U.S. nonbanks would likely find it an uphill battle to compete in the credit intermediation business against non-U.S. banks. 

As a practical matter, it would take years to move the swaps business out of banks and into other financial institutions, given the necessary amount of redocumentation as well as the shifting of personnel and technology. The immense cost and time requirements of this effort are likely to prove a real drain on the financial system.

See: SIFMA Comment Letter.

SEC Launches Market Structure Data and Analysis Website

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The SEC launched a new website to provide investors and others with the ability to interactively explore a range of new market metrics, and access empirical research and analyses that inform the broader public debate on market structure. 

The new website will serve as a central location for the SEC to publicly share data, research and analysis as the agency continues its review of the equity of market structure.  The information on the website includes data from the internal Market Information Data Analytics System (“MIDAS”), which the SEC launched earlier this year.  The new website allows users to explore key market metrics and trends based on aggregate analyses of MIDAS records, including:

  • ratios related to the number and volume of orders that are canceled instead of traded;
  • percentages of on-exchange trades and volume that are not disseminated on the public tape (“odd-lot trades”);
  • percentages of on-exchange trades and volume that are the result of hidden orders; and
  • quarterly distributions analyzing the lifetime of quotes ranging from one millionth of a second to one day. 

See: SEC Market Structure Website; SEC Press Release.
Related News: SEC Chair White Delivers Speech on Equity Market Structure (October 3, 2013); SEC Associate Director Gregg E. Berman Delivers Speech on Transformational Technologies, Market Structure and the SEC (June 20, 2013).

SEC Chair White Delivers Speech Promoting the SEC’s Enforcement Program

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SEC Chair Mary Jo White delivered a speech at the Securities Enforcement Forum which focused on the SEC’s efforts to enhance its enforcement program’s presence in the marketplace by pursuing both big and small violations of federal securities laws. 

Chair White touted the so-called “broken window” theory of regulation, stating that it is important for the SEC to pursue minor legal violations, as they can feed into larger ones, and highlighting that even violations such as control failures, negligence-based offenses, and violations of prophylactic rules with no intent requirement must be pursued.  Chair White said that the SEC is enhancing its presence in the marketplace by taking steps to leverage the strength of its exam program, incentivize whistleblowers with significant monetary rewards, collaborate with other regulatory agencies, and utilize technology to make it easier to spot fraud through programs such as the Advance Bluesheet Analysis Program. 

Additionally, Chair White noted that the SEC is focusing more on those who play the role of gatekeepers in the financial system, such as investment company boards and auditors, through programs like Operation Broken Gate, an initiative to identify auditors who neglect their duties.  The SEC has also enhanced its presence in the microcap community, according to Chair White, using resources such as the Microcap Fraud Task Force. 

Chair White made sure to emphasize that the SEC will still prioritize bigger cases, noting the newly created Financial Reporting and Audit Task Force, which brings together a group of attorneys and accountants to develop techniques for identifying and uncovering accounting fraud. 

Chair White concluded by saying that, while she realizes the SEC cannot literally be everywhere in the marketplace, the aim is “to create an environment where you think we are everywhere.”

Lofchie Comment:  To take a somewhat contrary view, I feel that the SEC should not emphasize its role as an enforcement agency over its role as a regulatory agency.  Enforcement actions are necessary as a deterrent and to give meaning to prohibitions.  On the other hand, at least equal significance should be given to making sure that rules are clear, are achievable and serve a public policy purpose.

A good deal of the decision to bring enforcement actions necessarily involves judgement; e.g., in the case of what the Chairman calls “negligence-based offenses,” where the accused did not intend any violation but is charged with exercising insufficient care.  There the danger is that any mistake made by an entity or a person – and people inevitably make mistakes and systems inevitably work imperfectly – can become the basis for an enforcement action.  Perhaps the enforcement system should be subject to a check which would make it impermissible for a regulator to bring an enforcement action where a business acted with a level of care equivalent to that which is ordinarily exercised by the relevant government agency.

See: Chair White’s Full Speech.