Formal Regulatory Remedies
In a preview of FINRA’s 2016 letter on regulatory priorities and emerging risks, FINRA’s CEO, Richard Ketchum said that FINRA’s exam focus in the upcoming year will be on three key issues: outsourcing, cyber risk and liquidity concerns. Ketcham also said that FINRA will repeat “some version” of its liquidity stress tests in 2016, further indicating that these stress tests will be an ongoing focus of FINRA.
In a nearly four-hour hearing held on December 8, 2015, members of the House Financial Services Committee grilled the heads of the Financial Stability Oversight Council (FSOC), accusing the FSOC of a poor transparency and lack of responsiveness to legislators’ requests for information. Led by Representative Jeb Hensarling (R-TX), the House Financial Services Committee heard testimony from eight of the ten FSOC members, including the heads of the SEC, CFTC, FDIC, OCC and the FHFA. The Treasury Secretary and Federal Reserve Chair did not testify.
Rep. Hensarling, in both his opening remarks and in questioning, faulted the FSOC on what he termed a lack of transparency, noting that two-thirds of the FSOC’s meetings were conducted behind closed doors and disclosures about the meetings were almost devoid of details. According to Rep. Hensarling: “FSOC has earned bipartisan condemnation for its lack of transparency. Two-thirds of its proceedings are conducted in private. Minutes of those meetings are devoid of any useful substantive information on what was discussed.”
In a speech in July before at the Money Markets Liaison Committee in London, Chris Salmon, Executive Director, Markets, Bank of England hinted that the Bank of England was exploring means by which it could accept equities as collateral for its market operations, should the need arise. Although short on details, Mr. Salmon said that removing roadblcoks to accepting equities as collateral would bolster the bank’s flexibility in times of stress as well as in normal market conditions.
“At present, the Bank accepts a very broad range of collateral, including government bonds, asset backed securities and pools of ‘raw’ loans. But the Bank can further bolster its flexibility by removing any technical obstacles to accepting equities as collateral, should the need arise.”
While short on details, Mr. Salmon did indicate that the regulatory and other work necessary to facilitate the Bank’s acceptance of equities as collateral would take place through the balance of 2015 and well into 2016.
Since the liquidity freeze during the financial crisis, liquidity risk management has been a concern to regulators thorughout the financial industry. Last week, the the SEC proposed new rules addressing liquidity management in open end funds and the Financial Industry Regulatory Authority issued guidance regarding effective liquidity management at broker-dealers.
On October 7, 2015, the Office of Financial Research (OFR) published a paper highlighting the difficulties in interpreting the Liquidity Coverage Ratio (LCR), a new standard set by bank regulators after the financial crisis to help ensure banks maintain sufficient liquid assets during times of market stress. The OFR’s analysis of the LCR is part of its ongoing work monitoring the effects of changes in U.S. bank capital and liquidity regulations.
The Securities and Exchange Commission has announced that it will hold hearings on December 11 to “consider whether to propose a new rule and amendments to certain proposed forms related to the use of derivatives by registered investment companies and business development companies.” This move is not unexpected as the SEC has long been concerned with how funds’ use of derivatives might affect compliance with leverage restrictions, and raise issues with fund portfolio diversification, concentration, and valuation. In 2011, the SEC issued a concept release seeking input on these very issues.
On July 21, 2015, following a long five-year proposal and comment period, the collection of restrictions imposed by Section 619 of the Dodd-Frank Act and the regulations thereunder (commonly referred to as the “Volcker Rule”) finally went into effect. The aim of the rule is to stop US banks and their global affiliates from engaging in unecessarily risky speculation and head off myriad conflicts of interest arising from proprietary trading and from investment relationships with hedge funds and private equity funds. While this may sound simple enough, even after the lengthy consideration of the rule, it is almost entirely unclear how the Volcker Rule will be enforced and by whom. Adding to the uncertaintly, because the final text of the Volcker Rule leaves so many interpretive questions remaining, it is almost impossible for banks to know if they are completely in compliance with the rule.
On July 3, 2015, the European Banking Authority (EBA) published its seventh semi-annual report assessing the risks and vulnerabilities in the European banking sector. The July report summarizes the primary developments and trends that have affected the EU banking sector since mid-2014 until June 12, 2015 as well as the EBA’s view of the key micro-prudential risks in the near future.
The Federal Reserve Bank of New York’s Tri-Party Repo Infrastructure Reform Task Force issued a progress report on June 24, 2015. The report touts some impressive progress since the task force’s last update in 2014, including the implementation of the task force’s new settlement regime by the major tri-party clearing player, Bank of New York Mellon.
The global regulatory calendar for the first quarter of 2015 includes comment deadlines for a number of consultation papers and rule proposals. We have compiled a list of the closing dates of many, if not all, of the major comment periods.