All - Center for the Study of Financial Market Evolution (CSFME)

Treasury Secretary on the State of the Global Financial System

by David Schwartz J.D. CPA | Sunday, February 19, 2017 | All, Change Overview and Rationale, Formal Regulatory Remedies

On July 27, 2017, Treasury Secretary Steven Mnuchin delivered the Department of the Treasury’s annual report on the state of the international financial system. Mnuchin’s testimony covered many topics ranging from the Volcker Rule to tax reform and China equity caps. The hearing was sometimes contentious, with Rep. Maxine Waters (D-CA) sparring with Secretary Mnuchin over his apparent failure to respond to letters of inquiry from Waters. Despite the fireworks, Mnuchin laid out some of his thoughts on the state of domestic and global financial markets as well as the Treasury’s plans for recalibration of Dodd-Frank regulatory reforms.

FSB Takes a New Approach to Collateral Re-use and Re-hypothecation

by David Schwartz J.D. CPA | Sunday, February 19, 2017 | All, Change Overview and Rationale, Formal Regulatory Remedies

In dual releases published on January 25, 2017, the Financial Stability Board (FSB) expressed concern that reuse of collateral and rehypothecation of client assets may pose financial stability issues. The financial crisis demonstrated that collateral re-use and re-hypothecation can transmit and amplify shocks to financial markets. While regulators have responded and prime brokers and clients have improved their risk management and practices since the crisis, the FSB has formulated recommendations to address residual financial stability risks associated with collateral re-use. In these releases, the FSB finalizes its data collection plans, and also explores whether uniform implementation of its recommendations is truly necessary, or whether a more flexible principles-base approach might be more effective.

ADRs Find Themselves in an Unwelcome Spotlight

by David Schwartz J.D. CPA | Wednesday, January 25, 2017 | All

American Depositary Receipts are back in the news. The Wall Street Journal reported on November 8, 2016 that the Securities and Exchange Commission has issued subpoenas to four large banks with expansive ADR businesses seeking information about trading of ADRs. Citing unnamed sources “close to the investigation,” the Wall Street Journal article said that the focus of the SEC probe seems to be the “pre-release” of ADRs, where a bank may issue depositary receipts without actually having custody of the underlying shares.

Treasury Nominee Wants Regulation with Limits, Not Repeal

by David Schwartz J.D. CPA | Sunday, January 22, 2017 | All, Change Overview and Rationale, Formal Regulatory Remedies

For the most part, Treasury Nominee Steven Mnuchin’s five-hour confirmation hearing on January 19, 2017 focused on responding probing questions about his past associations and financial reporting oversights. Amid the sparring, however, Mnuchin was able to reveal a bit about his plans for Dodd-Frank, the Volcker Rule, and his thoughts on the future of financial regulation. Most notably, the wholesale repeal of Dodd-Frank promised during the election campaign does not appear to be on his agenda. While he believes some aspects of Dodd-Frank regulations have gone too far and are stifling growth, Mr. Mnuchin said that rather than rolling back regulations, he favored placing limits on the existing framework to make it fairer, particularly to smaller financial firms.

Financial CHOICE Act to Take Center Stage

by David Schwartz J.D. CPA | Wednesday, January 18, 2017 | All, Formal Regulatory Remedies

Republican control of Congress and the White House has put financial regulatory reform back on the legislative agenda. As an indication of Republicans’ preliminary plans, the Financial CHOICE Act (H.R. 5983), proposes a regulatory capital “off-ramp” for banks which restrain their leverage and self-insure against losses.[1] The centerpiece of the Financial CHOICE Act is the optional exemption from many Dodd-Frank regulations in exchange for higher capital reserves. The bill achieves this by creating a single leverage limit.

Fed Report Finds Regulation Harming Repo Markets and Liquidity

by David Schwartz J.D. CPA | Friday, January 13, 2017 | All

As we reported in our January 3, 2017 post, a Fed staff report published in December 2016 found that the Volcker Rule was harming bond liquidity. Not a month later, a new Fed staff working paper[1] published this week found that regulations limiting banks’ balance sheets like the Supplementary Leverage Ratio have made repurchase agreements (repos) more expensive for dealers, and this in turn has had negative affects on on liquidity in the cash Treasury market.

SEC Chief Plans a Defiant Departure

by David Schwartz J.D. CPA | Wednesday, December 28, 2016 | All, Formal Regulatory Remedies

SEC Chair Mary Jo White is not sticking around at the SEC after the inauguration next month. But she does not plan to be idle in her remaining time at the Commission. In a pointed response to an earlier request by GOP senators to stop issuing new rules called for by Dodd-Frank, White has vowed to push ahead with a list of open regulatory matters. Chairman White’s letter strikes a defiant tone and asserts the necessary and statutory independence of the SEC from political meddling.

Is Blockchain the Future of Securities Lending?

by David Schwartz J.D. CPA | Tuesday, December 27, 2016 | All, Change Overview and Rationale

By now, all but the most strident luddite has heard of Bitcoin, the notorious stateless crypto-currency. Naturally, financial firms and regulators have started to take notice of Bitcoin. But it is not necessarily the currency they are interested in. Rather, they are exploring the technology that makes the virtual currency possible.

Industry Leaders Want Dodd-Frank Fixed Not Scrapped

by David Schwartz J.D. CPA | Thursday, December 22, 2016 | All, Formal Regulatory Remedies

As we mentioned last week it is premature to write the obituary for Dodd-Frank. Regulators have publicly recommitted themselves to seeing Dodd-Frank implemented fully. But regulators are not the only ones who would like to hold on to at least some aspects of the new regulatory landscape. Recently in speeches and congressional testimony, rather than calling for wholesale repeal, leaders of several of the largest banks and trade groups in the U.S. financial industry have advocated revision and refinement of the regulations under the Act, preserving what works while changing what does not.

Should Size Matter When it Comes to Financial Regulation?

by David Schwartz J.D. CPA | Monday, December 19, 2016 | All, Change Overview and Rationale, Formal Regulatory Remedies

In a June 8, 2016 address in Berlin, Dr. Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, spoke about potentially easing the burden on smaller financial institutions by calibrating financial regulation based on banking entities’ size and complexity. Dr. Dombret began his remarks by warning that the burdens of regulatory reform may be overwhelming smaller institutions. And with only larger banks able to cope, increased regulation may have the unintended effect of driving more consolidation, resulting in less diversity, more concentration of risk, and perpetuation of the too big to fail phenomenon.

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