News
More Changes to Come for Repo Markets
Reforms following the financial crisis have made ti-party repo far safer, finds a report published by BNY Mellon and PWC, but even greater changes lie in store. Based on a survey of market participants, the report found that the repo markets remain in a period of dramatic transition. While concluding that regulation and ongoing reform will continue to have a major effect on wholesale funding, the report also predicts that market forces and changes in the structure and profitability of the business will have major effects on repo volumes and economics over the next few years.
Fed Remains Concerned About Firesale Risks
In a January 30, 2015 address, Federal Reserve Board Governor Daniel K. Tarullo once again voiced the Fed’s concerns about the systemic risk posed by potential firesales in the asset management industry. Tarullo indicated that as regulators implement reforms under the Basel and FSB proposals and frameworks, they should take into account the “system-wide demands on liquidity during stress periods and correlated risks among asset managers that could exacerbate liquidity, redemption and fire-sale pressures.”
FSB Finalizes Standards and Processes for Global Securities Financing Data Collection and Aggregation
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
U.S. Leads the Way in Money Market Reform
In a report published earlier this week, the Board of the International Organization of Securities Commissions (IOSCO) found that, among the major jurisdictions in the money market fund (MMF) industry, the United States has made the most progress in regulatory reforms. Using the most current data available, IOSCO determined that the global MMF market is dominated by five jurisdictions: the U.S., France, Luxembourg, Ireland and China. Together, these five jurisdictions account for just under 90% of global assets under management in MMFs.
FSOC Focused on Asset Management and Reaching a Broader Audience
During their most recent meeting, the Financial Stability Oversight Council revealed that the asset management sector remains an area of concern to the super-regulator. According to minutes of the November 2, 2015 meeting, the FSOC has identified six categories of potential risk arising from the asset management sector and is conducting ongoing analyses with an eye toward more regulation.
DTCC Studies the Risks of Interconnectedness
The financial crisis made clear that interconnectedness and complexity have the potential to magnify localized shocks and amplify and transmit them to the greater financial system. Understanding the risks posed by our ever more interconnected global financial system is crucial to managing those risks.
Summer 2015 Financial Regulatory Update
The Fed, Financial Stability Board, and the Bank for International Settlements have beein quite busy this summer, and each issued rules or consultations in July furthering Basel III initiatives. On July 1, the Basel Committee issued a consultative document on its review of the credit valuation adjustment risk framework; on July 2, the FSB launched a peer review on the implementation of its policy framework for financial stability risks posed by non-bank financial entities other than money market funds (i.e., shadow banks”); and on July 20, the Fed finalized its capital surcharge rule for the eight US global systemically important banks (G-SIBs).
House Committee Faults FSOC for “Lack of Transparency” in SIFI Designations
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.”
FINRA Will Repeat Liquidity Stress Tests in 2016
In a preview of FINRA’s 2016 letter on regulatory priorities and emerging risks, FINRA’s CEO, Richard Ketchum said that FINRA’s exam focus in the upcoming year will be on three key issues: outsourcing, cyber risk and liquidity concerns. Ketcham also said that FINRA will repeat “some version” of its liquidity stress tests in 2016, further indicating that these stress tests will be an ongoing focus of FINRA.
B of E Explores Accepting Equities as Collateral
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.