In a July 12, 2016 address at the Center for American Progress and Americans for Financial Reform Conference, Washington, DC, Federal Reserve Board Governor Daniel K. Tarullo provided some insights in to the Fed and FSOC’s current thinking on regulation of shadow banking.
Angry investor Clyde Calvin Grady II has had his day in court. In a November 2015 ruling, the U.S. Court of Claims dismissed Grady’s suit against Congress and the Securities and Exchange Commission alleging that, by failing to prevent the 2010 “Flash Crash,” the SEC had breached an implied contract with investors.
Listening to the pundits, the press, and the political class, one gets the impression that the repeal of the Dodd-Frank Act and its new regulatory landscape is imminent and certain. But to paraphrase Mark Twain, the rumors of Dodd-Frank’s death have been greatly exaggerated. Lately, regulators at the Fed, CFTC, and OCC have been giving full-throated rhetorical support to the post-crisis financial reforms already in place, and have both tacitly and explicitly been signaling their commitment to completing what they believe is the unfinished work of the new financial regulatory regime. While the electoral triumph of those long opposed to Dodd-Frank almost certainly will introduce a strong deregulatory assault against the legislation, it does not necessarily mean the death of every aspect of Dodd-Frank Act.
Since passage of the Dodd-Frank Act in 2010, the financial industry has been dealing with an almost unstoppable wave of regulatory reforms. Most, if not all have been designed to prevent a repetition of the problems that followed the failure of AIG and Lehman Brothers in 2008. Now, after the U.S. election of a conservative majority in two (and soon to be all three) branches of the U.S. federal government, many bankers feel that a huge regulatory weight is about to be lifted.
At its November 17, 2016 plenary session in London, the Financial Stability Board (FSB) met to discuss current vulnerabilities and agree on priorities for 2017. While noting that the global financial system is more resilient as a result of the regulatory reforms introduced following the 2008 financial crisis, the FSB is keeping a close eye on areas of concern like high sovereign and corporate debt, asset quality and profitability issues faced by banks, and unfinished balance sheet repair in some parts of the financial system. With these and other potential vulnerabilities in mind, the FSB has assembled a list of the areas upon which they plan to focus their attention in the upcoming year.
Modern financial markets are a finely woven tapestry of market makers, investment products and vehicles, and investors with diverse expectations and risk appetites. Holding the whole thing together is a structure of rules and regulations. Altering this intricate weaving is always fraught with risk, and tugging on one thread may unravel another. The Securities and Exchange Commission’s recent liquidity and derivatives rule proposals for mutual funds and ETFs may have set the stage for a major unraveling. The combination of these two proposals, if implemented as currently written, may unintentionally create conditions that would drive investors from ETFs toward riskier and less well-regulated exchange traded notes (ETNs).
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.
The fast pace and broad scope of new regulation are driving participants in the complex derivatives markets to adapt quickly. Layers of old infrastructure and practices built up over time need to be overhauled to keep up with new regulation, technological change, and overall structural changes in derivatives markets. In a September 15, 2016 white paper, the International Swaps and Derivatives Association, Inc. (ISDA) has called for greater standardization and automation of derivatives trade processes in order to improve efficiency, reduce complexity, and lower costs for market participants. According to ISDA’s chief executive Scott O’Malia, “More recently, the sheer pace of regulatory change has meant firms have been under pressure to tackle the next pressing deadline. The result is a derivatives infrastructure that is duplicative and based on incompatible operating standards, and this isn’t sustainable.”
In its 2016 annual report published in July, the Financial Stability Oversight Council (FSOC) said that more and better data was needed to assess the potential systemic risks associated with securities lending and repo. The super-regulator called for more transparency and better data collection from both lenders and borrowers in securities lending and repo markets.
Is it true that customers always get a better price for their trades when executions take place on a regulated exchange? That seems to be the premise underlying a putative class action suit filed in federal court last November in the Southern District of New York. Next week, on July 19th, the court and litigants will be developing the pretrial schedule, including discovery and deadlines for naming experts, in what may well be a landmark case for competition in financial services.