Formal Regulatory Remedies
In a July 12, 2016 address at the Center for American Progress and Americans for Financial Reform Conference, Washington, DC, Federal Reserve Board Governor Daniel K. Tarullo provided some insights in to the Fed and FSOC’s current thinking on regulation of shadow banking.
Listening to the pundits, the press, and the political class, one gets the impression that the repeal of the Dodd-Frank Act and its new regulatory landscape is imminent and certain. But to paraphrase Mark Twain, the rumors of Dodd-Frank’s death have been greatly exaggerated. Lately, regulators at the Fed, CFTC, and OCC have been giving full-throated rhetorical support to the post-crisis financial reforms already in place, and have both tacitly and explicitly been signaling their commitment to completing what they believe is the unfinished work of the new financial regulatory regime. While the electoral triumph of those long opposed to Dodd-Frank almost certainly will introduce a strong deregulatory assault against the legislation, it does not necessarily mean the death of every aspect of Dodd-Frank Act.
At its November 17, 2016 plenary session in London, the Financial Stability Board (FSB) met to discuss current vulnerabilities and agree on priorities for 2017. While noting that the global financial system is more resilient as a result of the regulatory reforms introduced following the 2008 financial crisis, the FSB is keeping a close eye on areas of concern like high sovereign and corporate debt, asset quality and profitability issues faced by banks, and unfinished balance sheet repair in some parts of the financial system. With these and other potential vulnerabilities in mind, the FSB has assembled a list of the areas upon which they plan to focus their attention in the upcoming year.
Modern financial markets are a finely woven tapestry of market makers, investment products and vehicles, and investors with diverse expectations and risk appetites. Holding the whole thing together is a structure of rules and regulations. Altering this intricate weaving is always fraught with risk, and tugging on one thread may unravel another. The Securities and Exchange Commission’s recent liquidity and derivatives rule proposals for mutual funds and ETFs may have set the stage for a major unraveling. The combination of these two proposals, if implemented as currently written, may unintentionally create conditions that would drive investors from ETFs toward riskier and less well-regulated exchange traded notes (ETNs).
The fast pace and broad scope of new regulation are driving participants in the complex derivatives markets to adapt quickly. Layers of old infrastructure and practices built up over time need to be overhauled to keep up with new regulation, technological change, and overall structural changes in derivatives markets. In a September 15, 2016 white paper, the International Swaps and Derivatives Association, Inc. (ISDA) has called for greater standardization and automation of derivatives trade processes in order to improve efficiency, reduce complexity, and lower costs for market participants. According to ISDA’s chief executive Scott O’Malia, “More recently, the sheer pace of regulatory change has meant firms have been under pressure to tackle the next pressing deadline. The result is a derivatives infrastructure that is duplicative and based on incompatible operating standards, and this isn’t sustainable.”
In an October 12, 2016 address before the European Parliament’s Committee on Economic and Monetary Affairs, William Coen, Secretary General of the Basel Committee (BIS) provided some insights into what BIS plans to do to finalize Basel III post-crisis reforms. Notably, Coen indicated that there may be some reexamination of certain aspects of the framework that may have missed their mark initially.
In a 65-page comment letter responding to the Financial Stability Board’s (“FSB”) June 22, 2016 consultation paper, “Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities,” SIFMA vigorously championed securities lending, and by extension, the asset management industry. While supportive of the FSB’s recommendations, the lengthy comment letter explains in detail how the concerns expressed in the consultation, particularly with respect to securities lending, are already addressed by market practices, structures, and existing regulation.
On August 10, 2016, the Global Financial Markets Association (GFMA) released a comprehensive analysis of the potential costs of the new Basel standards on lending and capital markets. The report was conducted by Oliver Wyman, a leading global management consulting firm, on behalf of GFMA and represents a comprehensive review of the existing literature on the effects of the Basel III standards on capital markets and banking activities. Given the volume and rapidity of regulatory changes in response to the financial crisis and the complexity of the global financial system, GMFA felt it was necessary to have a better understanding of the costs of reforms, both intentional and unintentional.
The response to the financial crisis was a raft of new regulation aimed at reducing the risks posed by financial institutions. But now with strict new liquidity and leverage ratios, increased capital requirements, and restrictions on banking activities versus investing activities, are banks safer than they were prior to the crisis? In a paper published for the September 15 and 16, 2016 BPEA conference, Harvard’s Natasha Sarin and Larry Summers try to answer that very question.
In a June 28, 2016 address in London, Andrew J. Donohue, Chief of Staff at the U.S. Securities and Exchange Commission, gave his perspective on the expanding intersection between U.S. securities regulation and the global securities community. The past few decades have seen a significant increase in foreign entities subject to SEC regulations as well as increases in cross-border holdings, resulting in a need for greater cooperation among regulators of different countries. Given the SEC’s greater cooperation and coordination with its foreign counterparts, Mr. Donohue took the opportunity to discuss the the SEC’s global reach within the securities industry, the importance of international cooperation on the major issues facing in today’s markets, as well as providing an overview of the significant work the Commission and its staff have done to address the globalization of the securities markets.