Monthly Archives: January 2014

FRB Solicits Comments Regarding Activities of Financial Holding Companies Related to Physical Commodities

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The Board of Governors of the Federal Reserve System (“FRB”) requested comments regarding physical commodity activities conducted by financial holding companies, including current authorizations of these activities and the appropriateness of further restrictions.  The FRB is seeking public comment as part of a review of these activities, including the unique and significant risks that physical commodities activities may pose to financial holding companies, their insured depository institution affiliates and U.S. financial stability.

The activities under review include (i) the nature of risks that physical commodity activities could pose to the safety and soundness of financial holding companies and to financial stability more broadly, (ii) potential conflicts of interest and other adverse effects of engagement by financial holding companies in physical commodity activities, and (iii) the potential risks and benefits of imposing additional capital requirements or other restrictions on the commodity activities of financial holding companies.

Comments must be submitted by March 15, 2014.

See:  Request for Comment; Press Release.

 

Bank Capital Observations

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Considerable debate persists surrounding the extent to which banks have actually increased their capital since the financial crisis.

Diane Glossman, Robin Lumsdaine, and I seek to help by establishing measurable parameters and facts. We consider the six largest bank holding companies (BHCs) – JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley – and find that:

– Since December 31, 2007, the big four traditional BHCs (JPM, BAC, C, WFC) have increased Tier 1 capital by $306 billion or 103%. Much of this improvement is a result of the acquisitions that were made during the crisis.
– Gains in total risk based capital have been modestly less impressive as Tier 2 capital has slid by $13 billion or 9%.
– Risk-weighted assets among the four largest BHCs have declined from 66% to 61% of total assets, as institutions have reduced risk and / or adjusted their business mix to reflect changes in regulatory risk weights.
– The ratio of BHC capital to total assets has improved.
– There is substantial variation in the improvement, even across this small subset of banks.

For “Bank Capital Observations”:
http://www.centerforfinancialstability.org/research/CFS_Bank_Capital_011314.pdf

CFTC Ready to Push Interest Rate Swaps to Trading Platforms According to MFA Blog

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According to a recent blog post by the Managed Funds Association (“MFA”), the CFTC is ready to push interest rate and credit swaps onto swap execution facilities (“SEFs”).  The approval would follow a three-month review of plans to mandate that certain types of trades be conducted on SEFs.  The change, which is required under the >Dodd-Frank Act, could take place as soon as next month.  CFTC Commissioner O’Malia scheduled an agency advisory committee meeting for January 21, 2014, in order to oversee the trading decision and gather feedback from the industry. 

See:  MFA Blog Post.
Related news:  MFA Comment Letter to CFTC on SEF Trading Rules and Onboarding Documentation (January 10, 2014); CFTC Issues Further Guidance on Application of Its Rules to SEFs (November 19, 2013); CFTC Issues Staff “Guidance” on Impartial Access to SEFs (November 15, 2013).

 

Banking Agencies Release Public Sections of Resolution Plans for Banks with Less than $100 Billion in Qualifying Nonbank Assets

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The Board of Governors of the Federal Reserve (“FRB”) and the Federal Deposit Insurance Corporation (“BFIC”) made available public portions of resolution plans for 116 institutions. The 116 companies who were required to submit initial plans by December 31, 2013 were those that individually had less than $100 billion in qualifying nonbank assets.

Additionally, the FDIC released the public sections of the recently filed resolution plans of 22 insured depository institutions. The majority of these insured depository institutions are subsidiaries of bank holding companies that concurrently submitted resolution plans.

See: FRB Resolution Plan; FDIC Resolution Plan; Press Release.

 

MFA Comment Letter to CFTC on SEF Trading Rules and Onboarding Documentation

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The Managed Funds Association (“MFA”) has submitted a letter requesting that the CFTC conduct targeted compliance reviews of the rulebooks and user agreements of temporarily registered swap execution facilities (“SEFs”), and enforce the CFTC’s SEF rules and related staff guidance before the effective date of the first “made available-to-trade” (“MAT”) determination. 

In requesting such action, the MFA outlined the material issues that MFA members have encountered related to SEF rulebooks, SEF user agreements, and operational and documentation readiness for the SEF trading of bunched orders in credit default swaps that represent significant barriers to impartial access for buy-side firms to SEFs. The MFA’s letter also raised certain documentation and commercial challenges that buy-side firms have faced in negotiating access to SEFs that represent a principal impediment to funds completing the SEF onboarding process.

Lofchie Comment:  Beyond the specific comments made in it, the MFA letter also implicitly raises material procedural problems with the CFTC’s rulemaking process.  First, in its emphasis of the speed of adopting and implementing rules, the CFTC would force a tremendous volume of swaps trading onto SEFs without having conducted any review of SEFs beyond determining that SEFs had filed a complete application (without regard to the contents of that application).  The MFA’s letter specifically complains about the failure of the CFTC to review the various SEFs’ rulebooks; however, it is arguably even more troubling that the CFTC has not tested the various SEFs’ technological capabilities.  The MFA also asserts that the various SEFs have inconsistently and incompletely adhered to relevant CFTC requirements and, in doing so, point to an inconsistency in the manner in which the SEFs have implemented the CFTC’s requirement that neither party charge a breakage fee for a trade that does not clear.  However, this also implicitly raises yet another issue: whether the CFTC properly adopted its prohibition on breakage fees.

Addressing the various complaints made in the MFA letter would not be a trivial matter and would likely require a meaningful delay before the CFTC could force swap trading to take place on SEFs.

See: MFA Letter to CFTC 

 

IOSCO and FSB Publish Proposed Assessment Methodologies for Identifying Non-Bank Non-Insurer Global SIFIs

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IOSCO and the Financial Stability Board (“FSB”), each of which is an international coalition of national financial regulators, published a consultative document which proposes a high-level framework and specific methodologies for identifying non-bank non-insurer (“NBNI”) global systemically important financial institutions (“SIFIs”). 

According to the FSB and IOSCO release, SIFIs are institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to economic activity and the wider financial system.  At the Seoul G20 Summit in 2010, the FSB issued a recommended framework for reducing the risks posed by SIFIs, stating that the first step in implementing the framework requires the assessment of global SIFIs (“G-SIFIs”).

The consultative document by FSB and IOSCO proposes specific methodologies for the identification of NBNI G-SIFIs; however, the release noted that the document does not designate any specific entities as systemically important or propose any policy measures that would apply to NBNI G-SIFIs.  In a report published by FSB in September 2013 titled “Progress and Next Steps Towards Ending ‘Too-Big-to-Fail,'” the FSB explained that policy measures will be developed once the methodologies are finalized. 

Comments on the consultative document should be submitted to the Secretariat of the FSB by April 7, 2014. 

See:  FSB IOSCO Press Release; FSB IOSCO Consultative Document. 

 

 

GAO Testimony on Government Support for Large BHCs

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The Government Accountability Office (“GAO”) issued testimony that was delivered by the Director of Financial Markets and Community Investment, Lawrance Evans, before the Senate Subcommittee on Financial Institutions and Consumer Protection.  The testimony focused on a November 2013 GAO report that discussed issues related to government support for large bank holding companies. The federal government maintains programs, frequently referred to as “safety nets,” to reduce the vulnerability of depository institutions that could threaten the health of the banking system and the broader economy. Programs that are generally considered fundamental to these safety nets include the Federal Reserve System’s discount window and FDIC deposit insurance.

See:  GAO Testimony.
Related news:  GAO Report Examines Government Support for Bank Holding Companies (November 18, 2013).

 

Market Participants File Amended Complaint Challenging CFTC Cross-Border Guidance

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The ISDA, SIFMA and the Institute of International Bankers (“IIB”) (together, the “Associations”) filed an amended complaint against the CFTC asserting that the CFTC’s Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations (“Cross-Border Rule”) and related actions were issued in violation of the Administrative Procedure Act. Each of the sides also submitted procedural motions: (i) the plaintiffs, seek expedited consideration of a motion for summary judgment, and (ii) the CFTC seeks the court’s delay in ruling on this motion pending the submission of a motion to dismiss.   

The lawsuit, originally filed on December 4, 2013, alleges that the CFTC unlawfully circumvented the requirements of the Administrative Procedures Act and the CEA by portraying its cross-border regulations as “guidance.”  The amended complaint reflects the eight “comparability determinations” issued by the CFTC on December 20, 2013, that rule on the extent to which compliance with the laws of six foreign nations by dealers based in those countries satisfies the CFTC’s requirements.  According to the amended complaint, each of the comparability determinations acknowledge that the Cross-Border Rule “established a recognition program” that allows market participants to comply with foreign requirements in place of complying with CFTC “rules”; i.e., not merely CFTC “guidance.” 

The complaint further alleges that the Cross-Border Rule’s “sweeping [global] extension” of the Dodd-Frank Title VII Rules has wide-reaching effects on the Associations’ member firms, the swaps market and the public at large by imposing costly and often duplicative registration, clearing, documentation and other requirements which discourage entities from engaging in transactions with persons in the United States.  In the amended complaint, the Associations charge the CFTC with ten counts of violations of the APA and request that the court vacate the Cross-Border Rule in its entirety. 

The motion hearing is set for January 14, 2014, although the CFTC is seeking to delay the hearing date.

Lofchie Comment:  Since the day that the CFTC issued its cross-border guidance, we have stated our belief that the guidance was issued in violation of the Administrative Procedure Act. (See relevant commentary dated July 19, 2013 and July 15, 2013.)

If the CFTC loses this case, it could be forced to return to square one in establishing its regulations relating to swaps since it will be required to reconsider the costs and benefits of many of its most significant adopted rules. This seems an incredible waste, given the time and effort spent by well intentioned agency personnel and those in the industry who tried to comply with the CFTC’s rules. This is unfortunate, but it would certainly achieve a better long-term result for the domestic and global economy. If the new Chairman and the incoming Commissioners to the CFTC are able to coordinate the rulemaking of the CFTC with that of the SEC, there is every reason to believe that starting anew would be better than building on top of the marshland of agency guidance.

See:  SIFMA v. CFTC Amended Complaint; SIFMA Motion for Summary Judgment; SIFMA v. CFTC Civil Docket; CFTC Motion to Hold in Abeyance; SIFMA Motion for Expedited Consideration of Summary Judgment.
Related news:  Market Participants File Lawsuit Challenging CFTC Cross-Border Guidance for Being a Rule Adopted in Violation of the APA (December 4, 2013); CFTC Comparability Determinations for Six Jurisdictions and Related No-Action Letter (No-Action Letter 13-75) (December 20, 2013); CFTC Issues No-Action Relief for Dealers in Five Jurisdictions from Certain Entity-Level Internal Business Conduct Requirements (CFTC Letter 13-78) (December 23, 2013); CFTC Publishes Comparability Determinations (Fed. Reg.) (December 27, 2013).

 

Trade Associations Request Further Clarification Regarding Ownership Interests for Debt Securities under New Volcker Rule Regulations

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The Loan Syndications and Trading Association, SIFMA, the Structured Finance Industry Group, the American Bankers Association, and the Financial Services Roundtable (together, the “Trade Associations”) have sent an additional letter to federal regulators requesting that they clarify how certain provisions in the recently issued “Volcker Rule” regulations apply to “Ownership Interests” in debt securities of issuers of collateralized loan obligations (“CLOs”).  As in the letter submitted on December 24, 2013, the Trade Associations request that the regulators confirm that “ownership interest” does not include debt securities of CLO issuers that are covered funds where CLO debt securities have a contingent right to remove a manager “for cause” or to nominate or vote on a nominated replacement upon a manager’s removal for cause or resignation.

The Trade Associations went on to state that the confusion surrounding the ownership interests has already started to affect the CLO market, as banks currently hold $60-70 billion in CLO debt securities. The letter asked, at a minimum, that guidance be provided regarding debt securities of existing CLOs whose holders have creditor rights but do not have any of the indicia of ownership.

See:  Comment Letter.
Related news:  Trade Associations Request Clarifications Regarding Holding Debt Securities under New Volcker Rule Regulations (December 26, 2013).