Monthly Archives: January 2018

FRB Announces Chair and Deputy Chair Appointments for Federal Reserve Banks

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The Board of Governors of the Federal Reserve System (“FRB”) appointed chairs and deputy chairs of all Federal Reserve Banks for 2018.

Each Reserve Bank has a nine-member board of directors, three of whom are appointed by the FRB. For each bank, one appointee is designated as the chair, and one appointee is designated as the deputy chair. The following is a list showing the chair and deputy chair for each Bank:

  • New York: Sara Horowitz (Chair), Denise Scott (Deputy Chair);
  • Boston: Gary L. Gottlieb (Chair), Phillip L. Clay (Deputy Chair);
  • Philadelphia: Brian McNeill (Chair), Phoebe Haddon (Deputy Chair);
  • Cleveland: Dawne S. Hickton (Chair), Dwight E. Smith (Deputy Chair);
  • Richmond: Margaret G. Lewis (Chair), Kathy J. Warden (Deputy Chair);
  • Atlanta: Michael J. Jackson (Chair), Myron A. Gray (Deputy Chair);
  • Chicago: Anne R. Pramaggiore (Chair), E. Scott Santi (Deputy Chair);
  • St. Louis: Kathleen M. Mazzarella (Chair), Suzanne Sitherwood (Deputy Chair);
  • Minneapolis: Kendall J. Powell (Chair), Harry D. Melander (Deputy Chair);
  • Kansas City: Rose M. Washington (Chair), Steve Maestas (Deputy Chair);
  • Dallas: Matthew K. Rose (Chair), Greg L. Armstrong (Deputy Chair); and
  • San Francisco: Alexander M. Mehran (Chair), Barry M. Meyer (Deputy Chair).

NY Fed Senior VP Describes Transition Away from LIBOR

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Federal Reserve Bank of New York (“NY Fed”) Senior Vice President Lorie Logan discussed the future of the London Interbank Offered Rate (“LIBOR”) and the NY Fed’s efforts to administer and produce more effective reference rates.

In remarks at the Annual Prime Dealer Meeting in New York, Ms. Logan explained that the uncertain future of LIBOR has caused the NY Fed and other regulatory bodies to consider alternatives and implement viable transition plans. She noted that efforts have thus far focused on interest rate derivatives, but that all LIBOR-reliant market participants must consider transition measures. Ms. Logan encouraged all firms to (i) adopt contract language capable of addressing the cessation of LIBOR, and (ii) reduce reliance on U.S. dollar LIBOR by transitioning to alternative rates.

Ms. Logan highlighted efforts to improve the effective federal funds rate (“EFFR”), develop the overnight bank funding rate (“OBFR”), and develop three new Treasury repo reference rates, and said that all of these rates are “anchored in active underlying markets” and designed to serve as reliable measures of market activity. She described various enhancements to the EFFR, explained the evolution of the OBFR, and asserted that the NY Fed will release statements detailing the compliance of NY Fed-administered and produced rates (including the planned Treasury repo rates) with the IOSCO Principles for Financial Benchmarks. Ms. Logan emphasized that the NY Fed intends to make clear what each reference rate is meant to measure in order to avoid making frequent changes to any of the reference rates. She acknowledged that certain changes may be necessary, as dictated by the evolution of underlying markets.

Ms. Logan said that the new Treasury repo rates were developed in order to improve transparency of conditions across a broad range of activity in the market. As previously covered, the following three rates will be produced:

  • Secured Overnight Financing Rate (“SOFR”) will be the “broadest measure” of overnight Treasury financing transactions. The rate includes tri-party repo data from the Bank of New York Mellon (“BNYM”), as well as cleared bilateral and General Collateral Financing (“GCF”) repo data from the Depository Trust & Clearing Corporation (“DTCC”). This rate was recently chosen by the Alternative Reference Rates Committee to be used as the alternative to U.S. dollar LIBOR.
  • Tri-Party General Collateral Rate will be based only on tri-party repo data from BNYM.
  • Broad General Collateral Rate will be based on tri-party repo data from BNYM, as well as cleared GCF repo data from DTCC.

Ms. Logan shared four key points relevant to the calculation of the three new rates:

  • they will be calculated as volume-weighted medians;
  • various measures have been put in place to ensure adequate data collection for all three rates;
  • trades from the FICC-cleared bilateral data set with rates below the 25th volume-weighted percentile will be excluded (or trimmed) from the SOFR calculation; and
  • the NY Fed is working to determine which historical data will be most useful to help the adoption process for all rates (with an emphasis on the SOFR).

The NY Fed intends to begin publishing these three rates on a daily basis starting in the second quarter of 2018.

Lofchie Comment: Notwithstanding the efforts described to improve certain existing rates and propose new repo reference rates, the question remains: transition to what? While the regulators are quite right to point out the deficiencies of LIBOR (e.g., the absence of transaction-volume to determine a genuine rate), the path forward is still unclear as it is not obvious that the new indices, based on collateralized borrowing, can serve the purpose for which LIBOR was intended.

FINRA Proposes New Liquidity Reporting Requirements

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FINRA requested comments on proposed amendments to FINRA Rule 4521 (Notifications, Questionnaires and Reports). The amendments are intended to “improve FINRA’s ability to monitor for events that signal an adverse change in the liquidity risk of the firms that would be subject to these new requirements.” The proposed amendments would require certain broker-dealers to notify FINRA within 48 hours of the occurrence of a material negative event with respect to the firm’s access to liquidity.

The amendments also include a new Supplemental Liquidity Schedule (“SLS”) that these broker-dealers would be required to file along with their FOCUS reports. Specifically, these firms would be required to report “information related to specified financing transactions and other sources or uses of liquidity” including the financing term, collateral types, and large counterparties.

The amendments would apply to carrying or clearing firms that have more than $25 million in total credits and firms with at least $1 billion aggregate amounts outstanding under repurchase agreements, securities loan contracts and bank loans. According to FINRA, approximately 110 firms would be subject to the new requirements, about half of which would be subsidiaries of bank holding companies.

Among the events that would trigger the requirement to notify FINRA of adverse liquidity events are the early termination by a counterparty of its financing agreement with a broker-dealer, a counterparty indicating that it will no longer provide financing to the broker-dealer, and a significant increase in the level of collateral required by a material counterparty.

Comments on the proposed amendments must be submitted by March 8, 2018.

Lofchie Comment: This rule will be adopted, in one form or another. Accordingly, firms planning to comment should focus on the specifics of the proposal’s requirements – most significantly, the information that they would be required to monitor. Firms should also consider whether the triggers for notification to the regulators have been set at an appropriate level.

Here are a few questions to consider: will the imposition of reporting requirements as to liquidity eventually result in the adoption by FINRA of substantive liquidity requirements? Once an information requirement is adopted, will the SEC and FINRA be satisfied with firms using their own judgment as to an acceptable level of liquidity?

Federal Register: FRB Proposes Amendment to Regulation M

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The Board of Governors of the Federal Reserve System (“FRB”) proposed amending Regulation M, which was issued to implement the Consumer Leasing Act (“CLA”). The CLA requires “meaningful disclosure of the terms of personal property leases for personal, family, or household use.”

The CLA transferred rulemaking authority from the FRB to the CFPB. However, the FRB maintains authority to issue rules for “motor vehicle dealers that are predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both, and are otherwise not subject to the [CFPB]’s regulatory authority.” The FRB proposal revises both Regulation M and accompanying Official Staff Commentary in order to reflect the change in the scope of Regulation M.

Interested parties must submit comments to the FRB by March 5, 2018.

Chair Giancarlo Outlines CFTC Approach to Virtual Currency Regulation

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CFTC Chair J. Christopher Giancarlo asserted the CFTC’s commitment to regulating virtual currency trading effectively. In a public statement, he highlighted the agency’s scrutiny of new launches of virtual currency futures markets in light of recent launches of bitcoin futures under “self-certification procedures.” He announced a meeting of the CFTC’s market risk advisory committee to consider the efficacy of the self-certification process. He reiterated the CFTC view that virtual currency is a “commodity” as that term is defined in the CEA, and thus is subject to CFTC regulation. Chair Giancarlo contended that the CFTC is delivering a regulatory response centered on “consumer education, asserting CFTC authority, surveilling trading in derivative and spot markets, prosecuting fraud, abuse, manipulation and false solicitation and active coordination with fellow regulators.”

Chair Giancarlo also highlighted an upcoming meeting of the CFTC Technology Advisory Committee to consider challenges, opportunities, and market developments of virtual currencies. He said that virtual currency and virtual currency derivatives offer potential benefits, but market participants must be vigilant, as they also present certain heightened risks.

The CFTC also published a document providing information on CFTC oversight of and approach to virtual currency futures markets. The document includes an explanation of the self-certification process as applied to virtual currency futures products.

Lofchie Comment: The SEC also recently issued a statement asserting jurisdiction over certain transactions involving blockchain products. (See SEC Chair Jay Clayton Urges Caution regarding ICOs and Cryptocurrencies.) This raises the possibility of a regulatory dispute over jurisdiction. Each agency is perfectly correct in interpreting the relevant statutes to the effect that at least some transactions involving virtual currency or other blockchain products will fall within the ambit of that agency, and perhaps within the ambit of both. What is significant in the regulatory pronouncements is not the possibility for regulatory disagreement, but rather that both regulators are seeking to exercise their consumer protection functions.

SEC Provides Guidance for Accounting Impacts of Tax Reform Bill

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The SEC published new guidance to facilitate public disclosure of the accounting impacts of the recently passed Tax Cuts and Jobs Act. According to the SEC, the new tax legislation could have a “significant impact on an entity’s domestic and international tax consequences.”

In Staff Accounting Bulletin No. 118 (the “SAB”), the SEC provided an interpretation of Accounting Standards Codification Topic 740 (Income Taxes) to assist in the application of U.S. GAAP when preparing an initial accounting of the income tax effects of the Act. The SEC noted that certain circumstances may arise from the Tax Cuts and Jobs Act that are not covered by ASC Topic 740. The guidance provides a “measurement period” in which an entity can report income tax effects on a provisional basis, to be adjusted after the entity evaluates the impact of the bill on its financial statements. The guidance includes expectations for making disclosures to investors throughout the measurement period.

The SEC also published Compliance and Disclosure Interpretations guidance on Form 8-K reporting obligations for issuers as they make use of the “measurement period.”

Senate Confirms Two SEC Nominees

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The full Senate confirmed Democrat Robert Jackson and Republican Hester Peirce as SEC Commissioners. With these confirmations, all five SEC Commissioner positions are now filled.

Mr. Jackson is a Columbia Law School Professor and Director of the Program on Corporate Law and Policy. Previously, he served as senior adviser to the U.S. Treasury Department.

Ms. Peirce is a Senior Research Fellow and Director of the Financial Markets Working Group at the Mercatus Center at George Mason University. She previously served on the Minority Staff of the Senate Committee on Banking, Housing, and Urban Affairs. Ms. Peirce was with the SEC from 2000 to 2008, first as a Staff Attorney in the Investment Management Division, and then as Counsel to former Commissioner Paul Atkins.

Lofchie Comment: Ms. Peirce is a scholar, in addition to having a background at the SEC and as a staff member in Congress. The Cabinet has published a good deal of her work, including her perspectives on Dodd-Frank.

Robert Jackson is known for his work on executive compensation and political contributions.

Ms. Peirce had been originally nominated for the Commission by President Obama in March of 2016, along with Democrat Lisa Fairfax, a professor at George Washington Law School (with Ms. Peirce being the “Republican” nominee and Ms. Fairfax the “Democrat”). However, the two nominations were derailed, primarily by Democrats who expressed concern that the nominees were not sufficiently committed to rule making on the issues of executive compensation and political contributions.