The European Society for the History of Economic Thought has awarded The Bretton Woods Transcripts the ESHET 2014 Best Scholarly Edition Award. Congratulations to the editors – Kurt Schuler and Andrew Rosenberg – who will be invited to organize a Bretton Woods Transcripts session at the next ESHET conference.
For more on the book and links to the Bretton Woods Project and historic documents and memorabilia:
http://www.centerforfinancialstability.org/brettonwoods.php
IOSCO met in Madrid to discuss its work on market-based finance and key initiatives to support the G20-FSB’s efforts to restore stability in the global financial system.
The initiatives discussed included:
IOSCO also discussed audit quality and initiatives to build investor confidence in global securities markets, as well as policy measures aimed at building capacity in emerging markets, and the results of the IOSCO research department’s latest survey on market demands, which will be published on June 16, 2014.
See: IOSCO Press Release.
See also: FSOC Public Conference on Asset Management (May 21, 2014).
In a speech before the Peterson Institute of International Economics, SEC Commissioner Kara M. Stein discussed several key areas where the SEC must play a critical role in addressing systemic risks.
Commissioner Stein acknowledged the seriousness of the fact that many substantive Dodd-Frank reforms have yet to be implemented, and that advancements on the systemic risk front have been generally mixed at best so far. However, she went on to point out what she saw as some successes: the FSOC is meeting regularly, the OFR is operational and has over 200 staffers monitoring and assessing threats to financial stability, the Volcker Rule is finalized, and the largest banks are submitting resolution plans.
Commissioner Stein remarked that the SEC must do better to identify and mitigate the buildup and transmission of risks that can “take down our entire financial system,” and offered the following suggestions for the SEC:
As to her first recommendation, Commissioner Stein stated that the FSOC should be a starting point. She noted that the point of the FSOC was for regulators with expertise in particular areas to identify potential risks, and then enlist the help of the entire council to address them. The common purpose is to “make sure the foundation of our financial markets is strong so it can support a strong and thriving economy.” Commissioner Stein remarked that she fears the FSOC’s individual members are become bogged down in regulatory turf wars.
Regarding short-term funding markets, Commissioner Stein noted that the SEC is working hard on rules to prevent runs on money market funds, and that there have been a lot of discussions about capital, insurance, floating net asset values, redemption fees, gates, and restricting sponsor support. Commissioner Stein mentioned the SEC’s efforts to soon finish a money market fund rule, but cautioned the rule would only address part of the issues and some of the lenders. She further suggested that in order to create stability the regulators need to address the borrowers and the intermediaries.
On the subject of capital, leverage, and liquidity, Commissioner Stein urged the SEC to revisit and enhance some of its rules. The SEC, she noted, has historically had broad powers to regulate the financial responsibility of broker-dealers, but it has always viewed the regulation from the standpoint of investor or customer protection, not systemic risk. She further remarked that the goal of the SEC’s capital regime generally has been “somewhat agnostic as to the failure of the firm itself, focusing instead on ensuring the return of assets to the firm’s customers.” Given the systemic risks posed by some of the firms regulated by the SEC, Commissioner Stein urged the agency to revise its reasoning for imposing capital requirements to reflect not only its historical objective to protect a firm’s customers, but also reduce the risk to the entire financial system of a large broker-dealer’s collapse. She further encouraged the SEC to (i) reconsider what constitutes capital, (ii) require some meaningful minimum haircuts for all types of securities lending and repos, and (iii) recognize the importance of liquidity, among other things.
Commissioner Stein concluded by stating that all of these efforts “should not attempt to wring risk out of the capital markets, but [should] instead be focused on strengthening the fabric of our entire financial system.”
Lofchie Comment: In this speech, Commissioner Stein establishes a position as the most vocal proponent of Dodd-Frank and, thereby, of imposing further substantial regulatory burdens on broker-dealers.
Commissioner Stein comes to the defense of the Financial Stability Oversight Council (“FSOC”), an agency that has been roundly criticized by Commissioners of both parties for overstepping its expertise. Commissioner Stein lends significant support to the notion that the FSOC might mandate capital regulation of private investment funds, saying: “We must also keep a close eye on other market participants that can cause . . . systemic shocks. In particular, we should closely monitor investment funds, such as large hedge funds, that may be highly levered and interconnected to other players in our financial markets.”
As to broker-dealers, Commissioner Stein expresses conservative views as to the way in which regulatory capital should be computed. She challenges the notion that “subordinated debt” should be considered “good” capital for regulatory purposes, describing it as “supposedly ‘sticky’ funding”. She also criticizes the SEC’s 2004 net capital rule changes that reduced capital haircuts for certain positions held by broker-dealers, and then goes on to say that these reduced “regulatory costs [were] ultimately accomplished at great cost to broker-dealers, investors, our economy, and American taxpayers.” This is an interesting conclusion, as there is no obvious link between the 2004 rule changes and the financial crisis, and the Commissioner does not draw one. If the goal of regulators is to force securities derivatives out of banks, then the 2004 capital changes (and more like them) are absolutely essential. Without them, it would be impossible to book derivatives into broker-dealers as well as into banks (essentially forcing U.S. financial institutions out of the business of being dealers). Lastly, Commissioner Stein advocates higher capital charges on broker-dealer financing businesses, such as margin lending, repurchase agreements, and securities lending.
The types of changes advocated by Commissioner Stein would significantly impede the ability of U.S. broker-dealers to act as intermediaries in credit and financing transactions, or would at least materially raise the costs imposed on broker-dealers engaged in such transactions.
If the Commissioner’s comments reflect the direction of future SEC regulation, financial market customers will face an altered landscape. Financial market customers, looking to the long term, will be forced to consider whether the securities financing markets can even continue in their current form or whether some substitution will be necessary, perhaps in the form of customer-to-customer financing or accessing overseas credit markets.
See: Commissioner Stein’s Remarks.
Representative Maxine Waters (D-CA) wrote a letter to CFTC Chairman Timothy Massad, urging the CFTC to “thoroughly investigate” recent reports that large U.S. banks are attempting to avoid U.S. swap regulations by changing the swaps agreements of their foreign affiliates to remove explicit references to any guarantee by the U.S. bank.
According to Rep. Waters, swaps transactions of foreign guaranteed affiliates transfer risk back to the United States to the same degree as if the transaction were entered directly by the U.S. bank, regardless of the form of the guarantee.
Therefore, Rep. Waters requested that the CFTC investigate any removal of U.S. guarantees, “focusing on the substance, rather than form, of the arrangements between the U.S. banks and their foreign affiliates.” In particular, she requested the CFTC consider the presence of other non-traditional guarantees and arrangements that, viewed at the entity-level, support the creditworthiness of foreign affiliates.
Lofchie Comment: It is perfectly appropriate for U.S. regulators to discourage U.S. banks from the restructuring of credit arrangements in form, and not substance. It is reasonable to expect that the Dodd-Frank regulations, and the general regulatory climate, will motivate a significant amount of financial business to move in substance, and not merely in form, outside of the United States. U.S. regulators could arguably discourage U.S. financial institutions from doing business outside of the United States, but that would likely result in the loss of business to non-U.S.competitors.
The Office of the Comptroller of the Currency (“OCC”) issued interim procedures for examiners to assess banks’ progress in developing a framework to comply with the requirements of Dodd-Frank Section 619 (“Prohibitions on proprietary trading and certain relationships with hedge funds and private equity funds”), or the Volcker Rule, and the implementing regulations adopted by the OCC with the other rule-writing agencies.
According to the OCC, these interim examination procedures were developed to help examiners understand and focus on the Rule’s key aspects, as well as to work with banks during the conformance period to measure progress toward achieving compliance by July 21, 2015. The procedures (i) identify activities subject to the Volcker Rule, (ii) assess banks’ progress toward establishing compliance programs, (iii) evaluate banks’ plans for conforming covered fund securitization, asset management, and sponsorship activities, and (iv) examine banks’ progress in being able to report quantitative metrics.
See: Volcker Rule Interim Examination Procedures; OCC Press Release.
Related news: Regulators Issue FAQs Regarding the Volcker Rule (June 11, 2014).
The Board of Governors of the Federal Reserve System (“FRB”) invited comment on a proposal to modify the regulations for capital planning and stress testing.
The proposed rule would shift the start date of the capital plan and stress test cycles from October 1 of a calendar year to January 1 of the following calendar year. A bank holding company with total consolidated assets of $50 billion or more would be required to submit its capital plan and stress test results to the FRB by April 5, 2014, three months later than under current rulemakings. Additionally, a bank holding company with total consolidated assets of more than $10 billion and less than $50 billion would be required to submit its stress test results to the FRB by July 31. Savings and loan holding companies and state member banks who are subject to the stress tests under Dodd-Frank would also be required to submit their results several months later than under the current rules.
The proposed rule further includes a number of other measures to alter the capital planning and stress test procedures. Comments on the proposed rule must be submitted by August 11, 2014.
See: Notice of the Proposed Rule; FRB Press Release.
The Office of the Comptroller of the Currency (“OCC”) invited comment on proposed amendments to the OCC’s Annual Stress Test rule that would shift back the timing of the annual stress test cycle by approximately 90 days. Additionally, the amendments would clarify that institutions covered by the Annual Stress Test rule will not have to calculate their regulatory capital ratios using the Basel III advanced approaches until the stress testing cycle beginning January 1, 2016.
Comments are due 60 days after publication of the proposed rule in the Federal Register, which is expected shortly.
See: Filing of the Proposed Rule; OCC Press Release.
The House Financial Services Committee met in open session to vote on legislation considered in a markup of twelve bills dealing with the Consumer Financial Protection Bureau (“CFPB”) and other bills that would amend Securities Act requirements.
The bills voted on included:
See: House Committee Memorandum; House Committee Webcast of the Meeting.
New and ongoing members were sworn in by Board of Governors of the Federal Reserve System (“FRB”) Chair Janet Yellen to serve on the FRB.
The members are as follows:
Members of the FRB serve for a term of 14 years. Fischer, Brainard and Powell join Daniel K. Tarullo, whose term expires in 2022, and Chair Janet Yellen, whose four-year term as Chair runs until 2018 and whose term on the FRB runs until 2024.
See: Press Release.
The CFTC provided a series of staff questions for the upcoming June 19, 2014 roundtable discussion on position limits for physical commodity derivatives. The meeting will consist of four sessions, each addressing a different concern based on comments received in response to proposed position limit rules. The sessions will be based on the following topics:
See: Staff Questions; Roundtable Agenda; Roundtable Panel List.