Formal Regulatory Remedies
On December 14, 2012, the Board of Governors of the Federal Reserve System (Fed) issued for public comment a rule proposal that, if adopted, could drastically alter the structure and operations of foreign banking organizations (FBOs) in the U.S. The Fed’s proposal drastically limits the flexibility FBOs have historically had in structuring their U.S. banking and financial operations.
On January 15, 2013, the Financial Accounting Standards Board (FASB) proposed changes to accounting standards for repos intended to improve financial reporting disclosures and more properly reflect a company’s obligations and risks. They also will clarify guidance for distinguishing between transactions that are essentially sales that can be moved off the balance sheet and on-balance sheet secured borrowings.
“These loopholes are bad policy even in the best of circumstances, but it would be unconscionable to allow them to continue if we can use revenue from closing them to avoid the devastating effect sequestration would have on national security, homeland defense, law enforcement, public safety, education and other important priorities”
“Rather than responding appropriately to the crisis, which would include developing a modern regulatory system with the flexibility to adapt to changes in the global financial system, we instead have been saddled with an increasingly prescriptive and inflexible regulatory environment that is characterized far more by more regulation than by smart regulation.” –SEC Commissioner Daniel M. Gallagher
CFTC Commissioner Mark Wetjen has signaled that the CFTC may extend the July effective date for its cross-border derivatives rules. Speaking at a Futures Industry Association conference on March 12, 2013, Wetjen said the European Securities and Markets Authority’s announcement that they would delay their implementation timeline into 2014 creates problems for the CFTC’s own schedule.
It seems that Congress’s preoccupation with the nation’s financial situation has not proved to be a distraction from financial regulatory reform. Judging from committee announcements and recently introduced legislation, both the House and Senate have fairly aggressive agendas in mind for the 113th Congress. Legislation tweaking swaps regulation, ending too-big-to-fail, and changing SEC rulemaking powers have all been introduced, and the House Financial Services Committee has announced a full schedule of legislative priorities and hearings on a wide range of topics.
The first in a series of dates implementing mandatory swaps clearing finally arrived last week. March 11, 2013 marked the date by which swap dealers, major swap participants, and private funds active in the swaps market were required to begin clearing swaps. The March 11 deadline applies to certain index credit default swaps, or CDS, and interest rate swaps that were entered into on or after March 11, 2013.
“[M]ore than anywhere else in the world, the United States remains a place where a visionary can risk everything on a dream or an idea and have a fair chance of fighting for it. And he or she can do so in an environment where the investors who underwrite that dream are protected.” -SEC Chairman, Elisse Walter
The Commodities Futures Trading Commission may have chosen April Fools’ Day to approve an important exemption for inter-affiliate swaps transactions, but exemption is no joke. It provides some much needed relief from a perceived flaw in the new swaps regime under Dodd-Frank. The Dodd-Frank legislation amended the Commodity Exchange Act to require clearing of any and all swaps the CFTC determined should be subject to mandatory clearing, but provided no exemption for transactions between affiliates.
The Senate Banking Committee spent the best part of its Valentine’s Day grilling Fed officials and agency heads about the regulatory implementation of Dodd-Frank. Despite holding the hearings on a day dedicated to romance and love, the Senators certainly did not woo their witnesses with bonbons and soft questioning.