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There is No Room for Complacency

In a July 12, 2017 address before the Paris Europlace International Financial Forum, François Villeroy de Galhau, Governor of the Banque de France, outlined what he sees is necessary to complete the work of financial regulatory reform. Noting that resilience of the global financial system has significantly improved in eight years as a result of sweeping regulatory changes, de Galhau urged regulators and central bankers not to be complacent.

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Regulatory Actions Drive Lasting Change

In his first address as Chairman of the Securities and Exchange Commission, Jay Clayton reaffirmed his dedication to the Commission’s guiding principles and historic approach to regulation. At the same time, however, Chairman Clayton said he sees areas where the SEC’s regulations need to evolve to “reflect the realities of our capital markets.” One of these realities is that implementing regulatory change has costs, and over time cumulative regulation and the associated costs can drive behavior that has dramatic effects on the market. One example of such a driver of behavior, according to Chairman Clayton, is public company disclosure. This ever-expanding body of regulation brings a robust transparency to the markets. Clayton fears, though, that some of these disclosure requirements have strayed from their core purpose.

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Securities Finance Faces ‘Fickle’ Future

In a June 21, 2017 address before the 26th Annual Securities Finance and Collateral Management Conference in Berlin, Deutsche Bundesbank Board Member Professor Joachim Wuermeling warned that the securities finance sector faces some unique liquidity and collateral challenges. In particular, he noted that the extraordinary measures taken by central banks to shore up liquidity in the years since the financial crisis may be distorting liquidity and affecting collateral quality in securities lending and repo markets.

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Deglobalizing or Reglobalizing?

On June 30, 2017, the Bank For International Settlements (BIS) published the results of a study examining trends in bank deglobalization since the financial crisis. Prompted by data indicating a decline in cross-border activity by banks, the BIS launched a study to determine whether the data support the hypothesis that the largest global banks have truly scaled back their cross-border activity since 2007, or whether it might be an indicator of some other trend.

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Fed urges Recalibration, Not Repeal, of Dodd-Frank Reforms

In Congressional testimony on June 22, 2017, Federal Reserve Governor Jerome H. Powell highlighted the progress that has been made since the financial crisis in improving the resiliency and resolvability of the U.S. banking industry. Having achieved the primary goals of re-regulation, however, Powell believes that the time is ripe “for us to look for ways to reduce unnecessary burden.”

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Does LIBOR Have a Future?

The London Interbank Offered Rate (LIBOR) has been the primary short-term reference interest rate for nearly fifty years. Following a scandal wherein employees of rate-setting banks were implicated in manipulating LIBOR, U.S., European, and other regulators embarked on efforts to reform or replace the benchmark rate. At its height, LIBOR was the global benchmark interest rate for an estimated $300 trillion in derivatives, loans, and mortgages.

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Beefing Up Public Company Audit Reports

On June 1, 2017, the Public Company Accounting Oversight Board (PCAOB) voted to adopt new standards for public company audit reports. The new auditing standard, AS 3101, is the result of nearly eight years of work by the PCAOB with members of the public accounting profession, regulators, academics, and investor groups. If approved by the Securities and Exchange Commission, this new standard will change the scope of the current auditor’s report. AS 3101 retains the unqualified versus qualified (pass versus fail) opinion of the existing auditor’s report, but makes significant changes to the auditor’s report by adding a new section highlighting what the PCAOB calls “critical audit matters” (CAM). Adding CAM to audit opinions is intended to better highlight key areas of risk information to reduce the information asymmetry between users of a company’s financial statement and the company’s management.

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Four Disruptive Elements Drive Regulatory Activity

In her keynote address at the 2017 Brodsky Family Northwestern JD-MBA Lecture Series, CFTC Commissioner Sharon Y. Bowen described her thinking on the key trends driving regulatory activity. Commissioner Bowen identified “four disruptive elements” she believes are substantially responsible for changes that have been seen recently in financial markets. In turn, these disruptive elements are prompting questions about what they mean for markets and society, and what actions we should ask from regulators.

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BIS Postpones Final Act of Basel III

In a sparsely worded press release on January 3, 2017, the Bank for International Settlements announced that the January 8 meeting of the group of central bank governors and heads of supervision (GHOS) has been postponed. At this meeting, the GHOS were to finalize long awaited rules that will determine how much capital lenders have to set aside against loans and other assets. Citing unfinished work necessary to calibrate banks’ risk-weighted capital ratios, BIS chose to move finalization off for the present.

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Treasury Dept. Issues Regulatory Core Principles

In response to Executive Order 13772, on June 14, 2017 Treasury Secretary Steven Mnuchin published a report identifying recommendations for changes to the regulation of the U.S. financial system in a manner consistent with the Executive Order’s “core principles.” Some of the “core principles” laid out in the executive order are addressed in bills currently being debated in Congress. The report takes up some of these same issues, but with slightly different approaches than those proposed by legislators.

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