News
The Long Reach of the SEC
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.
SIFMA Issues 2016 Repo Market Fact Sheet
On July 21, 2016, the Securities Industry and Financial Markets Association (SIFMA) issued its latest annual update and overview of the U.S. repo market. SIFMA measured the daily turnover of the US repo market from June 2015 to June 2016 at $2.2 trillion. During that same period, the triparty repo market, which makes up a major portion of the U.S. repo market, was dominated by US government securities.
The Cost of Everything and The Benefit of Nothing
With the fundamental elements of post-crisis global financial regulatory reform in place, financial markets and market participants are beginning to experience more fully just how heightened capital requirements and leverage and liquidity restrictions are affecting their operations, business models, and products. While global financial markets are safer and global banks are more stable as a result of these reforms, it is becoming clear that the benefits of these regulatory solutions are not without significant costs. Some of the more obvious costs of bank capital reform were fairly easy to anticipate; and the cost-benefit models employed by the Bank for International Settlements (BIS), Financial Stability Board (FSB), IOSCO, and their teams of academics and economists astutely captured and factored those costs into their considerations.
Bank Holding Companies’ Diminishing Return
Over the past thirty years, U.S. banks have largely opted into the bank holding company (BHC) structure. Indeed, BHC structure brings with it a number of advantages from legal, regulatory, and business perspectives. But in recent years with significant increases in regulation of BHCs and the associated restrictions on activities and higher compliance costs, BHC structure may not now be the optimal structure for every bank.
Libor Spiked by Money Fund Rules
A recent uptick in the three-month US dollar Libor appears to be an unintended consequence of soon to be effective SEC money market fund regulations. Approved in 2014, the regulations intended to make structural and operational reforms to address risks of investor runs in money market funds provided for a two-year implementation period. With that period drawing to a close in October of 2016, prime money funds and their investors have been making strategic moves and investment decisions that are having knock-on effects on Libor.
FSB Chair Reports to the G20
In a July 19, 2016 letter to the G20 Finance Ministers and Central Bank Governors ahead of their meeting July 23-24 meeting in Chengdu, Financial Stability Board Chair and Governor of the Bank of England Mark Carney updated the G20 leaders on the FSB’s progress made and priorities going forward. While touting successes, he also said that there was work yet to be done and urged global regulators and standard-setters to finish the job of implementing post-crisis reforms.
Basel Consults on Overhaul of Operational Risk Management
On March 4, 2016, the Basel Committee issued a consultation paper on the standardised measurement approach for operational risk. The newly proposed framework, dubbed the “single measurement approach” (SMA) for risk assessment, addresses weaknesses BIS has identified in the existing framework, which the consultation document describes as “unduly complex.”
Basel Committee Consults on Softening Leverage Ratio
On March 6, 2016, the Basel Committee on Banking Supervision (BIS) published a consultation paper proposing to amend or “calibrate” the Basel III non-risk-based leverage ratio. Banks have been lobbying the Committee quite aggressively to make changes to the way the leverage ratio leverage ratio is calculated to alter the ratio’s overly rigid approach, which they say ignores or fails to take into account the way banks handle transactions in derivatives in practice. This consultation proposes some softening of the rules by which banks that trade large numbers of financial derivatives calculate their leverage ratios. In addition, the consultation seeks comment on potentially raising the leverage ratio limit above 3% for certain global systemically important banks (G-SIBS) like Goldman Sachs, Societe Generale, Morgan Stanley and HSBC, while leaving it the same for other banks.
EU Urges a New Look at Basel Reforms
In his final address on July 12, 2016 as the EU’s Commissioner for Financial Stability, Jonathan Hill announced that the European Commission would push the Bank for International Settlements (BIS) to rethink some of its Basel III reforms in light of their affects on capital, trade finance, market liquidity, and access to clearing. While applauding the regulatory work done to ensure financial stability, Hill worries that global regulators have become too risk averse, missing the big picture and trading growth for stability.
FSB Publishes Policy Framework for “Vulnerable” Asset Management Activities
On June 22, 2016, the Financial Stability Board (FSB) published a consultation paper proposing a framework to address four areas it sees as structural vulnerabilities from asset management activities that could potentially present financial stability risks. The consultation, Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities, proposes 14 policy recommendations to address four categories of structural vulnerabilities: 1. liquidity mismatch between fund investments and redemption terms and conditions for fund units;
2. leverage within investment funds; 3. operational risk and challenges in transferring investment mandates in stressed conditions; and 4. securities lending activities of asset managers and funds.