On October 14, 2016, London’s High Court of Justice handed down a ruling in favor of the UK subsidiary of Goldman Sachs, ending a three-year challenge by the US$60 billion Libyan Investment Authority (LIA). The decision comes after a judge rejected claims by the sovereign wealth fund that the bank’s nine synthetic derivatives, crafted in 2007 and 2008, were intended to be so complex as to exploit its staff’s limited financial know-how.
In an October 12, 2016 address before the European Parliament’s Committee on Economic and Monetary Affairs, William Coen, Secretary General of the Basel Committee (BIS) provided some insights into what BIS plans to do to finalize Basel III post-crisis reforms. Notably, Coen indicated that there may be some reexamination of certain aspects of the framework that may have missed their mark initially.
In a 65-page comment letter responding to the Financial Stability Board’s (“FSB”) June 22, 2016 consultation paper, “Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities,” SIFMA vigorously championed securities lending, and by extension, the asset management industry. While supportive of the FSB’s recommendations, the lengthy comment letter explains in detail how the concerns expressed in the consultation, particularly with respect to securities lending, are already addressed by market practices, structures, and existing regulation.
On August 10, 2016, the Global Financial Markets Association (GFMA) released a comprehensive analysis of the potential costs of the new Basel standards on lending and capital markets. The report was conducted by Oliver Wyman, a leading global management consulting firm, on behalf of GFMA and represents a comprehensive review of the existing literature on the effects of the Basel III standards on capital markets and banking activities. Given the volume and rapidity of regulatory changes in response to the financial crisis and the complexity of the global financial system, GMFA felt it was necessary to have a better understanding of the costs of reforms, both intentional and unintentional.
The response to the financial crisis was a raft of new regulation aimed at reducing the risks posed by financial institutions. But now with strict new liquidity and leverage ratios, increased capital requirements, and restrictions on banking activities versus investing activities, are banks safer than they were prior to the crisis? In a paper published for the September 15 and 16, 2016 BPEA conference, Harvard’s Natasha Sarin and Larry Summers try to answer that very question.
In a June 28, 2016 address in London, Andrew J. Donohue, Chief of Staff at the U.S. Securities and Exchange Commission, gave his perspective on the expanding intersection between U.S. securities regulation and the global securities community. The past few decades have seen a significant increase in foreign entities subject to SEC regulations as well as increases in cross-border holdings, resulting in a need for greater cooperation among regulators of different countries. Given the SEC’s greater cooperation and coordination with its foreign counterparts, Mr. Donohue took the opportunity to discuss the the SEC’s global reach within the securities industry, the importance of international cooperation on the major issues facing in today’s markets, as well as providing an overview of the significant work the Commission and its staff have done to address the globalization of the securities markets.
On July 21, 2016, the Securities Industry and Financial Markets Association (SIFMA) issued its latest annual update and overview of the U.S. repo market. SIFMA measured the daily turnover of the US repo market from June 2015 to June 2016 at $2.2 trillion. During that same period, the triparty repo market, which makes up a major portion of the U.S. repo market, was dominated by US government securities.
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.
Over the past thirty years, U.S. banks have largely opted into the bank holding company (BHC) structure. Indeed, BHC structure brings with it a number of advantages from legal, regulatory, and business perspectives. But in recent years with significant increases in regulation of BHCs and the associated restrictions on activities and higher compliance costs, BHC structure may not now be the optimal structure for every bank.
A recent uptick in the three-month US dollar Libor appears to be an unintended consequence of soon to be effective SEC money market fund regulations. Approved in 2014, the regulations intended to make structural and operational reforms to address risks of investor runs in money market funds provided for a two-year implementation period. With that period drawing to a close in October of 2016, prime money funds and their investors have been making strategic moves and investment decisions that are having knock-on effects on Libor.