Change Overview and Rationale - Center for the Study of Financial Market Evolution (CSFME)

Office of Financial Research Seeks Better Securities Lending and Repo Data

by David Schwartz J.D. CPA | Monday, April 27, 2015 | All, Change Overview and Rationale, Procedural Changes

Prior to the financial crisis, regulators only had limited data available to them about securities lending and repo markets. The crisis exposed a number of vulnerabilities previously not recognized as a result of this lack of data. Right away, regulators realized that the only way to understand and effectively address these weaknesses — leverage and liquidity risks, weak market infrastructure, and fire sale risks — was to obtain more and better regulatory data about securities lending and repo volume, the types and quality of collateral being employed, and how securities lending and repo fit into firms’ risk management processes. But a recent release by the Office of Financial Research says these data collection efforts are not enough. According to the OFR, despite the efforts of regulators, significant gaps remain, and “the risk of set fire sales before or after a counterpart default remains largely unaddressed.”

Basel Tightens the Reins on Internal Risk Modeling by Banks

by David Schwartz J.D. CPA | Sunday, April 19, 2015 | All, Change Overview and Rationale, Formal Regulatory Remedies

In a November 2, 2015 speech in Madrid, Stefan Ingves, Chairman of the Basel Committee and Governor of Sveriges Riksbank, announced that the Basel Committee on Banking Supervision will revisit internal risk modeling by banks. According to Mr. Ingves, “ample evidence has accumulated to suggest that the current role of internal models in the regulatory framework does not strike the right balance between simplicity, comparability and risk sensitivity.” While “the use of internally modelled approaches was a defining feature of Basel II,” the Basel Committee expects to revisit this reliance on internal modeling and, perhaps, broadly eliminate it for some risk categories.

A Revised Fiduciary Standard Proposal from the DOL

by David Schwartz J.D. CPA | Monday, April 13, 2015 | All, Change Overview and Rationale, Formal Regulatory Remedies

The Department of Labor has issued its long awaited reproposal of fiduciary standards for advisors of ERISA retirement plans. These new rules propose to expand the scope of the the definition of fiduciary under ERISA in order to capture more of the current services of 401(k) and IRA providers.

Revised Fiduciary Standards Slowed but Not Stopped

by David Schwartz J.D. CPA | Thursday, March 19, 2015 | All, Change Overview and Rationale, Formal Regulatory Remedies

Pursuant to a mandate in the Dodd-Frank act, both the Department of Labor and the Securities and Exchange Commission have been working to develop uniform fiduciary standards for investment advisers and broker-dealers. The efforts of the DOL and SEC have unfolded over the past five years with both floating proposals that have been met with stiff opposition from industry and in Congress. Each effort has hit its own respective roadblocks over the past year. However, despite eleventh-hour efforts by members of the investment industry and some on Capitol Hill, both the DOL and SEC appear to be moving ahead with their respective uniform fiduciary standards.

Basel Banking Supervision Committee Priorities for 2015-2016

by David Schwartz J.D. CPA | Tuesday, February 24, 2015 | All, Change Overview and Rationale, Formal Regulatory Remedies

The Basel Committee on Banking Supervision has announced its planned areas of focus for 2015 and 2016 as it continues to propose and finalize the remaining elements of its Basel III regulatory reform agenda. The Committee will continue to pursue its post-crisis reform agenda, but will now look toward restoring confidence in capital ratios, ensuring consistency across the regulatory framework, monitoring and assessing the implementation of the framework, and improving the overall effectiveness of supervision.

A Hard Push Against the FSOC’s Non-Bank SIFI Designation

by David Schwartz J.D. CPA | Thursday, February 19, 2015 | All, Change Overview and Rationale, Formal Regulatory Remedies

Over the objections many, including asset managers, insurance companies, and even legislators and other regulators, the Financial Stability Oversight Council (FSOC) has pushed ahead with its mandate to identify risks to financial stability that could arise from the material financial distress or failure, or ongoing activities, of nonbank financial companies (Non-bank SIFIs).

SEC Announces February 19 Proxy Roundtable

by David Schwartz J.D. CPA | Monday, January 26, 2015 | All, Change Overview and Rationale, Formal Regulatory Remedies

Today, the Securities and Exchange Commission announced that it will hold a February 19 public roundtable discussion on improving the proxy voting process. The roundtable, which will be held at the SEC’s Washington, DC headquarters, will focus on universal proxy ballots and retail participation in the proxy process.

Jumping into Dark Pools and Heading off Disruptive Trading

by David Schwartz J.D. CPA | Monday, January 19, 2015 | All, Change Overview and Rationale, Disclosure Regimes, Formal Regulatory Remedies

Wednesday, November 18, 2015, was a busy day for the Securities and Exchange Commission. That morning the Commission convened to propose new rules to enhance the transparency of alternative trading systems, including “dark pools.” Later that day, Chairman Mary Jo White testified before Congress about the Commission’s plans to combat disruptive trading, to require registration “of certain active proprietary traders and improvements of firms’ risk management of trading algorithms,” as well as plans for rules addressing pre-trade pricing transparency in fixed income markets. The very next Wednesday, in what appears to be a coordinated approach to the SEC’s, the CFTC proposed its own set of rules designed to take on automated trading and disruptions that can be caused by rapid algorithmic trading.

A Cloud of Doubts About the Net Stable Funding Ratio

by David Schwartz J.D. CPA | Monday, December 29, 2014 | All, Change Overview and Rationale, Formal Regulatory Remedies

In October 2014, the Bank for International Settlements (BIS) adopted final standards for the “net stable funding ratio” (NSFR), the last plank in the Basel III banking reforms. The NSFR was first proposed in 2009, and elicited much concern from the industry regarding its potential effects on financial market functioning and the economy; so much so that BIS reproposed a new version in January 2014. The final NSFR retains the structure of the January 2014 consultative proposal, but with changes giving national regulators more scope to exempt particular assets from the general funding requirement if that asset is linked to a particular funding source, and including rules for funding short-term interbank loans, derivatives trades, and assets posted as initial margin on derivatives contracts.

Will Securities Lending Indemnification Be Regulated Into Oblivion?

by David Schwartz J.D. CPA | Saturday, December 20, 2014 | All, Change Overview and Rationale, Cross-Post, Formal Regulatory Remedies

Borrower default indemnification, sometimes referred to as a “securities replacement guarantee,” is fairly common in the securities lending industry. Under the typical arrangement, should a borrower of a security fail to return it at the end of the loan, the lending agent agrees to purchase a replacement security for the lender using the proceeds of the collateral posted by the borrower for the loan. The indemnity is applicable if the price of the replacement security exceeds the value of the collateral. In such a case, the lending agent agrees to make up the difference.

For many years, banks have provided borrower default indemnification as part of their securities lending services, which has given beneficial owners additional assurance as to the safety of their lending programs, and has allowed pension funds and others for whom such indemnity is legally required to participate in the securities lending market as well.

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Change Overview and Rationale