Formal Regulatory Remedies
The Office of the Comptroller of the Currency (OCC) and Board of Governors of the Federal Reserve System (Fed) published final rules in the Federal Register on October 11, 2013 revising risk-based and leverage capital requirements for banking organizations and replacing existing interim rules.
The Bank for International Settlements (BIS) and the International Organization of Securities Commissions (IOSCO) have published their final framework for margin requirements for non-centrally cleared derivatives. The document sets forth globally agreed standards for all financial firms and systemically important non-financial entities that engage in non-centrally cleared derivatives.
“The purpose of the [full-allotment overnight reverse repo] facility is to establish a floor on money market rates and to improve the implementation of monetary policy even when the balance sheet is large. Even if our balance sheet increases significantly further and stays very large for many years, it will be useful to have this facility available to improve monetary policy control.”
On December 21, 2012, the CFTC issued a final exemptive order providing temporary relief from compliance with certain swap regulations and further proposed guidance relating to the application of certain swap-related provisions of the U.S. Commodity Exchange Act to swap activities outside the United States. The December 21 exemptive order adopts a number of provisions proposed by the CFTC in a July 2012 release, and addresses many of the topics covered in the CFTC’s proposed cross-border guidance (“Proposed Cross-Border Guidance”) also issued in July 2012.
On August 29, 2013, the Financial Stability Board (FSB) issued its finalized policy framework for its securities lending and repo workstream. As part of a larger examination of shadow banking, the FSB focused on five specific areas in which policies are needed to mitigate the potential systemic risks associated with shadow banking, with one of these five areas being securities lending and repo. Following up on their November 2012 consultation paper, the FSB has issued its final Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos. This document sets out recommendations for addressing financial stability risks in this area, including enhanced transparency, regulation of securities financing, and improvements to market structure. It also includes consultative proposals on minimum standards for methodologies to calculate haircuts on noncentrally cleared securities financing transactions and a framework of numerical haircut floors.
In an effort to combat the pro-cyclicality caused by changes in repo and securities lending haircuts during a crisis, the Financial Stability Board has proposed to introduce minimum standards for the calculation of haircuts. In the belief that higher haircuts would curb the procyclical effect of risky assets and curtail the build-up of excessive leverage, they are also considering putting a floor under haircut calculations.
The Federal Reserve Board has approved rules making it clearer which non-banks can be swept into the Board’s regulatory ambit and under what circumstances they may be “systematically important.” The March 29, 2013 release lays out the Fed’s requirements for determining when a company is “predominantly engaged in financial activities,” and defines the terms, “significant nonbank financial company” and “significant bank holding company.”
The European Securities and Markets Authority (ESMA) has approve cooperation agreements with seven global counterparts in five jurisdictions. These agreements with regulators in the Bahamas, Japan, Malaysia, Mexico and the United States formalize details of cooperations in the supervision of alternative investment funds, including hedge funds, private equity and real estate funds.
Given their strict regulatory regime, the use of commodities has long been a sticky subject for mutual funds. At the same time, however, the competitive environment for returns amongst mutual funds has made use of derivatives and commodity interests by registered investment companies much more common, with even funds that previously eschewed these instruments finding them useful and necessary.
As they depart for the August recess, Congress has left some financial regulatory issues open to occupy their time upon their return next month. Bills addressing high frequency trading, exempting banks as municipal advisers, and relief for brokers engaging in private mergers and acquisition transactions remain open items for the new session. In addition, Congress is still waiting for answers from the SEC and CFTC regarding new cross-border derivatives regulations.