Formal Regulatory Remedies
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have issued a request for comments on supervisory expectations for stress tests conducted by medium-sized financial companies. The agencies define “medium-sized” to be financial companies with total consolidated assets between $10 billion and $50 billion.
“As the market subject to these regulations is international, it is acknowledged that, notwithstanding the high degree of similarity that already exists between the respective requirements, without coordination, subjecting the global market to the simultaneous application of each other’s requirements could lead to conflicts of law, inconsistencies, and legal uncertainty.”
On July 2, 2013, the Board of Governors of the Fed issued final capital rules for banks implementing both the Basel III Capital Framework and certain additional requirements imposed by the Dodd-Frank Act. On July 17, 2013, the EU’s Capital Requirements Directive IV (CRD IV), which transposes Basel III into the EU legal framework, entered into force.
In an October 14, 2013 address, William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, expressed some lingering concerns he and the Fed have about the tri-party repo market. Despite the reform efforts of both regulators and the tri-party repo industry, Mr. Dudley worries that tri-party repo still remains an area of significant systematic risk.
The Risk Management Association’s Committee on Securities Lending has filed a 40-page response to the Financial Stability Board’s recent whitepaper on shadow banking, focusing on its recommendations regarding securities lending and repo. The January 14, 2013 comment letter represents the views of the RMA and major participants in the agency securities lending markets like BNY Mellon, BlackRock, Citigroup, Northern Trust, State Street, and others.
The Court of Justice of the EU (CJEU) has announced that it will hear a challenge to EU short selling regulations on June 11, 2013. Britain’s finance ministry filed the legal challenge in June of 2012 against the European Union in an effort to limit the European financial regulators’ power to ban short-selling. Britain’s lawsuit seeks to clarify the powers granted to the European Securities and Markets Authority to halt or limit short selling across the 27-member EU nations in the event of a crisis.
Treasury Secretary J. Lew still sees money market funds and tri-party repo as unfinished business in the nation’s quest to control risks to financial stability. In May 21, 2013 testimony before the Senate Committee on Banking, Housing, and Urban Affairs, Lew delivered the Financial Stability Oversight Council’s (FSOC) annual report to Congress.
Newly proposed cross-border regulations issued by the US Commodity Futures Trading Commission have made waves across the globe, with nine overseas finance officials urging US Treasury Secretary Jacob J. Lew to limit the cross-border reach of Dodd-Frank Act swaps rules. In an April 18, letter, finance officials from Brazil, France, Germany, Italy, Japan, Russia, South Africa, Switzerland, the UK, and Michel Barnier, the European Commissioner for Internal Market and Services, said that new US swaps regulations are fragmenting the $639 trillion global market.
Today Treasury Secretary Jack Lew delivered a broad policy address to an audience at the Pew Charitable Trust. For the most part, Lew spoke about progress the Treasury and Administration have made thus far ending too-big-to-fail and reigning in many of the perceived excesses of Wall Street firms. The truly interesting part of Lew’s address, however, was when he took Congress for to task for passing Dodd-Frank but then failing to properly fund the agencies and departments charged with enforcing the law. Absent real funding, he said, “the best rules will fall short without effective supervision and enforcement.”
Over the past few decades, US and other financial regulators have had to think more and more about their regulations not just from a domestic standpoint, but from a global perspective as well. One prime example is the US Securities and Exchange Commission, whose regulatory mandate has been broadened by the Dodd-Frank Act to include regulation of certain kinds of over the counter (OTC) derivatives.