Wednesday, October 23, 2013

In With the New: Federal Reserve and OCC Issue Final Risk-Based and Leverage Capital Rules

Author: David Schwartz J.D. CPA

The Office of the Comptroller of the Currency (OCC) and Board of Governors of the Federal Reserve System (Fed), published final rules in the Federal Register on October 11, 2013 revising risk-based and leverage capital requirements for banking organizations and replacing existing interim rules. The final rules consolidate three separate notices of proposed rulemaking that the OCC, Board, and FDIC published in the Federal Register on August 30, 2012, with selected changes. The rules establish a new regulatory capital framework that incorporates Basel III standards and other elements. The rule applicable to all national banks and federal savings associations "strengthens the definition of regulatory capital, increases risk-based capital requirements, and amends the methodologies for determining risk-weighted assets." Pursuant to a schedule of transition periods, the rule is effective for advanced approaches banks on January 1, 2014, and for all other banks on January 1, 2015.

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Tuesday, October 15, 2013

Do Credit Derivatives Make the Concept of Insider Trading Meaningless?

Author: David Schwartz J.D. CPA
Though scholarly debates continue, the impact of credit derivatives on the law and policy of insider trading is still unexplored. This Article fills this gap to demonstrate that the emergence of credit derivatives marks a profound development for the prohibition against insider trading. It argues that the growth of credit derivatives problematizes traditional insider trading jurisprudence like never before. With the feasibility of current rules subject to question, this Article advocates for a radical rethinking of the present regulatory framework for one better suited to modern markets.

In his paper published August 28, 2013, Yesha Yadav of Vanderbilt Law School posits that the rise of derivatives like credit default swaps (CDS) has made the concept of insider trading inoperable in markets where these derivatives trade.  Yadav's paper, "Insider Trading in the Derivatives Market (and What it Means for Everyone Else)," asserts that the credit derivatives markets actually may be more efficient by factoring in insider knowledge and transmitting this information more freely.
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Tuesday, October 1, 2013

Repo is Far from "Unregulated"

Author: David Schwartz J.D. CPA
Repo is very much in the news lately, even coming up on the radar screen of the New York Times' Gretchen Morgenson. Morgenson penned an article in the Times' September 14, 2013 issue, After a Financial Flood, Pipes Are Still Broken, in which she worries that despite new rules on derivatives, the repo market remains largely unregulated.

And yet, for all the new regulations governing derivatives, mortgages and bank holding companies, a crucial vulnerability remains. It’s found in our vast and opaque securities financing system, known as the repurchase obligation or repo market. Now $4.6 trillion in size, it is where almost every financial crisis since the 1980s has begun. Little has been done, however, to reduce its risks. Morgenson indulges in some journalistic hyperbole to make her point, but she is not the only one concerned about the risks associated with the wholesale funding market.

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Tuesday, September 24, 2013

Fed Begins Testing of Full-Allotment Overnight Reverse Repo Facility

Author: David Schwartz J.D. CPA
The purpose of the [full-allotment overnight reverse repo] facility is to establish a floor on money market rates and to improve the implementation of monetary policy even when the balance sheet is large. Even if our balance sheet increases significantly further and stays very large for many years, it will be useful to have this facility available to improve monetary policy control.

After a quiet announcement on September 25 via their July 30-31 meeting minutes, the Federal Open Market Committee has implemented a test of a full-allotment overnight reverse repo facility. This facility is intended to exert more control over the money the Fed has been injecting into the financial system, and give them better influence over interest rates.
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Friday, September 13, 2013

FSB Issues its Final Policy Framework on Sec Lending and Repo

Author: David Schwartz J.D. CPA
On August 29, 2013, the Financial Stability Board (FSB) issued its finalized policy framework for its securities lending and repo workstream. As part of a larger examination of shadow banking, the FSB focused on five specific areas in which policies are needed to mitigate the potential systemic risks associated with shadow banking, with one of these five areas being securities lending and repo. Following up on their November 2012 consultation paper, the FSB has issued its final Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos. This document sets out recommendations for addressing financial stability risks in this area, including enhanced transparency, regulation of securities financing, and improvements to market structure. It also includes consultative proposals on minimum standards for methodologies to calculate haircuts on noncentrally cleared securities financing transactions and a framework of numerical haircut floors.
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