Procedural Changes
And Another Thing – Longer Comment Periods, Please The Securities and Exchange Commission’s controversial securities lending disclosure proposal (Proposal) sought public input on 97 questions and received a substantial body of feedback during the initial 30-day comment period. Drawing sharp rebukes, most responses from trade associations for lenders and borrowers focused on the ambiguous scope […]
A new disclosure data model has just been proposed by the SEC for U.S. securities lenders. Adoption of the model, called 10c-1 after the revised regulation, would be “one of the most drastic adjustments in the history of the securities lending industry,” writes Sidley Austin, a leading Wall Street law firm and advisor to broker-dealers. Previously, we have explained the proposal and intended benefits. Now we begin to analyze the proposed 10c-1 disclosure system’s value proposition. Will disclosure help more than it will cost to create and manage the network that supports the new disclosure system?
The European Securities and Markets Authority (ESMA) has recommended that the market regulators in EU Member States combine trade data generated from the Securities Finance Transaction Regulation (SFTR) with local surveillance data so as to empower tax authorities to catch and indict tax abusers. To the abusers, that is like saying that the Sheriff and Posse are closing in on their SFTR trails.
(No kidding. What did they think? And if the abusers haven’t created defenses by this time, it’s already too late.)
The European Securities and Markets Authority (ESMA) has published the findings of its preliminary study of multiple withholding tax (WHT) reclaim schemes. ESMA conducted this preliminary study at the request European Parliament (EP) and has launched another more formal inquiry to gather further evidence from national competent authorities (NCAs) on the supervisory practices and experience regarding those schemes.
The study published on July 2, 2019 assesses how widespread WHT reclaim schemes are across the EU and any potential methods for preventing and detecting them. While WHT schemes are not strictly illegal and “do not necessarily imply breaches of the market abuse or short selling regimes, they may affect the integrity of securities markets and individual firms.” ESMA found that WHT reclaim transactions are being investigated in Germany, Denmark, and Austria.
On November 18, 2015, the Financial Stability Board (FSB) published its final Standards and Processes for Global Securities Financing Data Collection and Aggregation. The final standards are based on the FSB’s previous November 2014 consultation paper and define the data elements for securities lending, repo, and margin lending that national and regional authorities will be asked to report in aggregate to the FSB.
The standards build on the November 2014 consultation paper, including public comments, as well the policy recommendations from the FSB’s August 2013 report Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos, in particular its recommendations to improve transparency of securities financing markets. T
In a nearly four-hour hearing held on December 8, 2015, members of the House Financial Services Committee grilled the heads of the Financial Stability Oversight Council (FSOC), accusing the FSOC of a poor transparency and lack of responsiveness to legislators’ requests for information. Led by Representative Jeb Hensarling (R-TX), the House Financial Services Committee heard testimony from eight of the ten FSOC members, including the heads of the SEC, CFTC, FDIC, OCC and the FHFA. The Treasury Secretary and Federal Reserve Chair did not testify.
Rep. Hensarling, in both his opening remarks and in questioning, faulted the FSOC on what he termed a lack of transparency, noting that two-thirds of the FSOC’s meetings were conducted behind closed doors and disclosures about the meetings were almost devoid of details. According to Rep. Hensarling: “FSOC has earned bipartisan condemnation for its lack of transparency. Two-thirds of its proceedings are conducted in private. Minutes of those meetings are devoid of any useful substantive information on what was discussed.”
In a speech in July before at the Money Markets Liaison Committee in London, Chris Salmon, Executive Director, Markets, Bank of England hinted that the Bank of England was exploring means by which it could accept equities as collateral for its market operations, should the need arise. Although short on details, Mr. Salmon said that removing roadblcoks to accepting equities as collateral would bolster the bank’s flexibility in times of stress as well as in normal market conditions.
“At present, the Bank accepts a very broad range of collateral, including government bonds, asset backed securities and pools of ‘raw’ loans. But the Bank can further bolster its flexibility by removing any technical obstacles to accepting equities as collateral, should the need arise.”
While short on details, Mr. Salmon did indicate that the regulatory and other work necessary to facilitate the Bank’s acceptance of equities as collateral would take place through the balance of 2015 and well into 2016.
Prior to the financial crisis, regulators only had limited data available to them about securities lending and repo markets. The crisis exposed a number of vulnerabilities previously not recognized as a result of this lack of data. Right away, regulators realized that the only way to understand and effectively address these weaknesses — leverage and liquidity risks, weak market infrastructure, and fire sale risks — was to obtain more and better regulatory data about securities lending and repo volume, the types and quality of collateral being employed, and how securities lending and repo fit into firms’ risk management processes. But a recent release by the Office of Financial Research says these data collection efforts are not enough. According to the OFR, despite the efforts of regulators, significant gaps remain, and “the risk of set fire sales before or after a counterpart default remains largely unaddressed.”
In a recent address before the Center for the Study of Financial Regulation at the University of Notre Dame’s Mendoza College of Business, SEC Commissioner Michael S. Piwowar urged academics to engage more actively in policy debates over securities regulation. Commissioner Piwowar is particularly interested in “data-driven” input from academics in connection with potential reforms to the structure of the U.S. securities markets. The Commission recently finalized the composition of a Market Structure Advisory Committee that will focus on the structure and operations of the U.S. equities markets and will function as a forum and resource for reviewing specific, clearly articulated initiatives or rule proposals. Piwowar sees the Committee’s work as a prime opportunity for academics studying the securities markets to provide real input and make their voices heard.
With the conclusion of their November 15 and 16 meeting in Brisbane, the G20 has published their official communiqué outlining the group’s progress, plans, and areas of focus. Financial regulatory reform remains the central focus of G20 activities. However, with the slow global recovery and disappointing job growth, the G20 announced that they expect to emphasize expanding the financial sector’s role in building a stronger and more sustainable global economy. The overall thrust of the G20’s Brisbane communiqué is that critical work remains to build a stronger, more resilient financial system. Over the next year, the group intends to continue to finalize the various elements of its policy framework that remain open, fully implement financial regulatory reforms already agreed upon, and be vigilant for new risks and unexpected consequences.