Monthly Archives: December 2014

OFR Issues 2014 Annual Report

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The Office of Financial Research (“OFR”) issued its 2014 annual report which assesses threats to U.S. financial stability, outlines OFR research supporting the assessment and evaluates policy initiatives for promoting financial stability.

According to the report, the OFR and financial regulators made “significant progress” since the last annual report in assessing the buildup of vulnerabilities in the financial system, including improvements in the scope of financial data and the implementation of new policy tools.

The report notes the following threats:

  • “excessive risk-taking” during the extended period of low interest rates and low volatility;
  • the possibility of “more brittle” markets due to less available liquidity, the risk of asset fire sales and runs in short-term wholesale funding markets; and
  • concerns that financial activity is migrating toward areas where threats are more difficult to assess due to a lack of information.

In addition, the report describes, among other things, tools available to (i) help policymakers and market participants assess vulnerabilities and threats to financial stability, and (ii) analyze the “macroprudential policy toolkit” that regulators are developing.

Lofchie Comment:  The risks highlighted in the OFR report are largely government-inflicted: (i) the government pursues a zero-rate policy driving those seeking income to take more risk; (ii) the government imposes very high charges on market making activities, thereby crushing liquidity; and (iii) the government imposes high costs on regulated entities, thereby driving financial activities out of regulated firms and out of the United States. Regulation is not an area where more is inherently better (or worse for that matter). There are trade-offs with all regulation. It is time for regulators to take a deeper look at the costs and consequences of their efforts.

A fair evaluation should reveal both success and failure. OFR’s lack of any real commentary about Form PF (the informational form that private funds are required to file with the SEC) suggests an unwillingness to make self-critical assessment. Objectively, this form is badly designed and contains questions regarding various types of financing activities that are so poorly written as to be nonsensical. Yet the OFR report says not a word about this beyond “Every new data collection initiative has growing pains, and Form PF is no exception” (at page 114). Several hundred million dollars down the drain in order to provide useless information due to badly drafted questions demands more scrutiny.

See: OFR 2014 Annual Report.

 

CFTC Reopens Comment Period for Proposed Position Limits Rule

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The CFTC reopened the public comment period for its proposed position limits rule.

According to the CFTC, the reopening of the comment period is in anticipation of questions and comments that may arise from the CFTC’s Agricultural Advisory Committee meeting scheduled for December 9, 2014.

CFTC Commissioner Sharon Bowen released a statement to express her support of the comment period reopening. She urged the CFTC to not allow the rule to “linger indefinitely” on the CFTC docket, stating that she believes a final rule should be released by spring 2015.

The comment period will be open for 45 days after the notice is published in the Federal Register, which is expected on December 3, 2014.

Lofchie Comment: By reopening comment on the issue of position limits, Chairman Massad is taking on an important issue of substance; one that matters both for the economy and for the reputation of the CFTC as an agency.

Before Chairman Massad took over, the CFTC had been inclined to adopt very burdensome position limit rules, despite the costs of compliance and even in the absence of substantive evidence that such rules would benefit the economy. The steadily rising price of energy provided popular support for the view that the government should “do something” to “get the speculators” even if that “something” would be ineffectual or damaging. Now that energy prices have crashed, it seems obvious that energy prices are largely determined by macro-economic and political factors, not by speculators. (Are there really speculators out there who can affect energy prices on the scale of OPEC?)

A new round of comments on the position limits proposal combined with the CFTC’s fresh look at both those comments and at the substantial amount of economic literature that exists on the subject should result in a new rule, or perhaps a new rule proposal. A process that includes deep analysis of market data, presented to it by market participants that will likely have conflicting views and interests, will bring credit to the CFTC as a regulatory authority possessed of genuine economic expertise.

See: Text of Comment Period Reopening; CFTC Press Release; Commissioner Bowen’s Statement.