News
Regulators Extend Comment Period for Volcker Rule Implementation
Treasury, the Fed, the FDIC, and the SEC have announced an extension of the comment period on the proposed regulations implementing the Dodd-Frank Act’s Volcker Rule provisions. Originally set to expire on January 13, 2012, the comment period has been extended a month until February 13, 2012.
ISS Issues Whitepaper on Pay for Performance Methodology
On December 20, ISS published its white paper laying out in detail the pay for performance methodology it will implement under its 2012 policy updates. The goal of the white paper is to help both institutional clients and the companies in which they invest more fully understand ISS’ pay-for-performance methodology in advance of the 2012 proxy season.
Belgian Regulator Bans Short Selling of Bank Securities
In reaction to high volatility in the financial markets, on August 11, 2011, the Belgian Financial Services and Markets Authority (FSMA) banned shorts selling on of shares of certain Euronext Brussels listed banks and financial institutions. The FSMA also banned short selling of related derivatives.
Schapiro: SEC to Focus on Proxy Advisory Firms and Beneficial Ownership Rules
In her December 15, 2011 address before the Transatlantic Corporate Governance Dialogue, SEC Chairman, Mary L. Schapiro, stated that in response to comments received on the Commission’s Proxy Plumbing concept release, the Commission is seriously considering providing guidance on how the federal securities laws should regulate the activities of proxy advisory firms. According to Schapiro, commenters on the concept release suggested that proxy advisory firms may interfere with, rather than enhance, the communication at the heart of effective engagement. The comments also reflect a level of frustration with the influence these firms have, accompanied by worries that they may not be accountable for, or even concerned with, the quality of the information on which they make voting recommendations.
Bank Board Structure and Performance
The financial crisis has put a spotlight on the corporate governance structures of financial institutions, raising questions about whether the prevailing governance structures of banks are ineffective and whether implementing independence standards imposed by the Dodd-Frank Act, the Sarbanes-Oxley Act and the major stock exchanges will improve bank governance. A recently published paper by Renee Adams, Professor of Finance at the University of New South Wales, and Hamid Mehran of the Federal Reserve Bank of New York, attempts to answer to this question by examining the relationship between board composition and size and bank performance.
Widening CDS Spreads Worry Global Financial Markets
Over the past few months, spreads for credit default swaps (CDS) have widened quite dramatically. This is true for European sovereign CDSs as well as financial institutions, including those for US banks. For example, in September, the five-year CDS spread for Bank of America widened to 228 basis points from 297, and Citigroup’s hit 221, up from 204. Goldman’s was 227, up from 206.
European Parliament Restricts Short Selling and Use of Credit Default Swaps
At the height of the financial crisis in September 2008, financial regulators in several EU Member States adopted emergency measures to restrict or ban short selling in some or all securities. These regulatory actions were prompted primarily by concerns that at a time of considerable financial instability, short selling can be highly disruptive and could aggravate the downward spiral in the prices of shares, notably in financial institutions, in a way which could ultimately threaten their viability and create systemic risks. These measures implemented by the EU member states were not coordinated as the EU does not yet have a common regulatory framework for dealing with short selling issues, resulting in divergent and fragmented sets of restrictions between the states.
SEC Chairman on the Challenges of Regulating Derivatives
In a dialog at the Managed Funds Association Outlook 2011 seminar held in October between SEC Chairman Mary Schapiro, former SEC Chairman Harvey Pitt, and Managed Fund Association head, Richard Baker, Chairman Schapiro commented on the international and domestic challenges regulators face in coordinating the regulation of derivatives.
Domestically, coordination between the SEC and CFTC in the area of derivatives is critical because the agencies have different approaches to regulation, statutory authority, and the OTC derivatives markets they are charged with overseeing are not exactly the same. In addition, while the CFTC and SEC may effectively demarcate the types of OTC derivatives the oversee, the firms using these derivatives are not similarly demarcated. Differences in regulation between the two agencies may cause these firms difficulties.
Draft Volcker Rule Prompts Buyers’ Remorse
In a strongly worded letter to Federal Reserve Chair Ben Bernanke, Rep. Maurice Hinchey (D-NY), Rep. Peter Welch (D-VT), and 15 other House members urged the Fed and other federal regulators to reject the current draft of the Volcker Rule regulations and replace them with stronger language to prohibit commercial banks from engaging in investment activities. Citing the current version of the Volcker Rule as unnecessarily complex and filled with loopholes, the letter contends that the Fed’s current draft of the rules fails to protect bank deposits from risky trading activities and falls short of what the Dodd-Frank Act intends.
Basel Committee Issues FAQ on Counterparty Credit Risk Rules
The Basel Committee on Banking Supervision has issued a Frequently Asked Questions document providing technical elaboration on its counterparty credit risk rules, published in June. This FAQ document questions and technical interpretations grouped according to the relevant paragraphs of the rules, in particular, default counterparty credit risk charge, and the credit valuation adjustment (CVA) capital charge, and asset value correlations: