Wednesday, October 25, 2023

New Money Fund Reforms: Safer and More Resilient Cash Collateral Pools?

More liquidity, transparency, and safety for institutional investors?

Author: David Schwartz J.D. CPA

The Securities and Exchange Commission (SEC) recently adopted final rules on money market (2a-7) fund reforms. These reforms are designed to make money market funds more resilient and liquid, potentially making them safer and more attractive vehicles for mutual funds to use as collateral pools for their securities lending programs.

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Monday, July 10, 2017

Fed Reports Post-Crisis Regulation Affecting Bond Market Liquidity

Affects are real, but do not not point to any substantial impairment in liquidity.

Author: David Schwartz J.D. CPA

In its semi-annual Monetary Policy Report submitted to Congress on July 7, 2017, the Federal Reserve Board indicated that regulatory reforms since the global financial crisis "have likely altered financial institutions' incentives to provide liquidity.”  The Fed found that In recent years, market participants have been particularly concerned with liquidity conditions in the corporate bond market. This concern stems from the tendency for bonds to be traded less frequently and more reliance on dealer intermediation for liquidity provision than in many other markets. Despite these concerns, however, the metrics available to the Fed do "not point to any substantial impairment in liquidity in major financial markets.”

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Tuesday, January 3, 2017

Fed Finds Serious Liquidity Flaw in the Volcker Rule

Author: David Schwartz J.D. CPA

Industry experts and regulators have debated for some time now about the effects regulation may or may not be having on liquidity. Critics of tough new bank regulations claim that the increased regulatory requirements, such as the higher capital requirements and new liquidity standards have reduced liquidity and banks' market-making capacity. Regulators, on the other hand, have been skeptical and have called for evidence showing regulations negatively affecting liquidity. In a study published on December 22, 2106, the Fed itself has produced just such evidence.

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Tuesday, November 15, 2016

Sovereign Wealth Funds Could Boost Global Liquidity

Author: David Schwartz J.D. CPA

Prior to Basel III and Dodd-Frank, broker-dealers were the world’s main supply of high quality liquid assets (HQLA).  New regulations have forced broker-dealers to reduce drastically their inventories of these high quality collateral assets at a time when a flight to quality and safety has placed these assets in extremely high demand. This unintended consequence of regulatory reform has restricted supply, driven up the price of HQLA, and reduced global liquidity overall. Sovereign wealth funds, on the other hand, have been investing heavily in HQLA since the 1980s and 1990s, becoming one of the largest owners of these desirable assets, particularly G7 government bonds. The prolonged low interest rate environment has prompted many sovereign wealth funds to explore new ways to enhance yield. Among these yield enhancement methods is securities lending. Given their ample inventories of HQLA, securities lending by sovereign wealth funds has the potential to ease, if not cure, the world’s liquidity woes.  

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Wednesday, August 17, 2016

The Cost of Everything and The Benefit of Nothing

The Emerging Unaticipated Costs of Re-regulation

Author: David Schwartz J.D. CPA

With the fundamental elements of post-crisis global financial regulatory reform in place, financial markets and market participants are beginning to experience more fully just how heightened capital requirements and leverage and liquidity restrictions are affecting their operations, business models, and products.  While global financial markets are safer and global banks are more stable as a result of these reforms, it is becoming clear that the benefits of these regulatory solutions are not without significant costs. Some of the more obvious costs of bank capital reform were fairly easy to anticipate; and the cost-benefit models employed by the Bank for International Settlements (BIS), Financial Stability Board (FSB), IOSCO, and their teams of academics and economists astutely captured and factored those costs into their considerations. We are now beginning to see, however, that by employing a one-size-fits-all and overly macro approach to their cost-benefit modeling, these experts may have been too focused on the forest and missed the trees. In an article in the forthcoming September issue of the RMA Journal, CSFME’s Executive Director Ed Blount examines how regulators’ reliance on models that failed to account for the complexity of global finance may have unleashed forces more damaging than those their regulatory reforms were targeted to prevent.

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