Formal Regulatory Remedies
High frequency trading is once again in the sights of Congress. The use of sophisticated computer algorithms to trade securities on a rapid basis at speeds far beyond the capabilities of human beings garnered much attention in the wake of the 2010 Flash Crash, as well as the more recent BATS IPO and Knight Capital fiascos.
“The government has acted swiftly and is implementing Martin Wheatley’s recommendations as quickly as possible, introducing legislation that brings Libor within the scope of regulation and creating new criminal sanctions for attempted manipulation of Libor. Recent events have illustrated that Libor might not be the only benchmark subject to attempted manipulation. We are consulting on whether further benchmarks should be brought with the scope of regulation.” — Financial Secretary to the Treasury Greg Clark
Repo is very much in the news lately, even coming up on the radar screen of the New York Times’ Gretchen Morgenson. Morgenson penned an article in the Times’ September 14, 2013 issue, After a Financial Flood, Pipes Are Still Broken, in which she worries that despite new rules on derivatives, the repo market remains largely unregulated.
The Bank of England and the US FDIC have issued a joint white paper, “Resolving Globally Active, Systemically Important, Financial Institutions,” focusing on “top-down” resolution strategies that involve a single resolution authority applying its powers to the top of a globally active and systematically important financial group, that is, at the parent company level. The December 10, 2012 paper discusses how such a top-down strategy could be implemented for a U.S. or a U.K. financial group in a cross-border context.
On December 19, 2012, the European Commission adopted technical standards on the European Markets Infrastructure Regulation (EMIR) as well as a Delegated Regulation supplementing the Directive on Alternative Investment Fund Managers (AIFMD) (called “Level 2 measures”). These two measures have been under formulation and consideration since 2010, and the technical standards adopted on December 19 meet important preconditions to implementing EMIR and AIFMD throughout all EU member countries.
“Securities lending is a potentially pro-cyclical source of funding, raising the possibility that participants will have to dump securities during times of financial stress. It can lead to unexpected connections among disparate market players, such as insurance companies and hedge funds. As a result, securities lending may contribute to the opacity of the financial system and erode the willingness of participants to take on counterparty risk. In addition, it is a source of contagion, with the distress of one firm ramifying throughout the financial system in unpredictable ways.”
“The outflow of money fund assets to an unregulated market is a significant systemic risk concern, and can result in harm to our market and investors.”
On December 18, 2012, the CFTC issued an interim final rule extending the compliance date for the new Dodd-Frank business conduct standards and documentation requirements for swap dealers and major swap participants. The rule extends the deadline for the business conduct standards and certain documentation requirements to May 1, 2013.
In a letter to Senate Banking Committee Chairman Tim Johnson (D-SD), Senator Bob Corker (R-TN), a key member of the Committee, has called for immediate investigation into the details of the JPMorgan Chase & Co. trading losses. Senator Corker wants the committee to examine if the trades in question were bona fide hedging transactions or poorly managed proprietary trades, and wants to explore whether US taxpayers are fully protected from losses at major financial institutions.
“We have consistently questioned the necessity and efficacy of the Volcker Rule and believe that its full repeal is the only way to avoid the harm that it would do to the economy, bank customers, and the banking industry.”