Tag: Fed

O’Malia Urges Regulators to “Do No Harm”

In a keynote address last week at the Federal Reserve Bank of New York, CFTC Commissioner Scott O’Malia issued a stern warning to financial regulators in the United States and abroad that market fragmentation could have grave consequences on the world financial system. Borrowing a line from the principles that guide medical ethics, O’Malia urged regulators to “Do no harm” in enacting regulations. “Where our rules have proven unworkable” he continued, “it is incumbent upon us to fix them.”

Taking the medical analogy further, O’Malia expressed concern that financial regulations must be harmonized through substituted compliance and mutual recognition of other jurisdictions. “If systemic risk is a cancer of the global financial system,” he warned, “then the whole body must be treated to prevent its spread.” O’Malia, who has announced that that he will be resigning on August 8, pointed to legal, technological, and market abuse protection regimes that must be harmonized among the US and European Union financial systems in order to foster a strong global financial system. O’Malia recognized that such collaboration would require “serious technology investments,” but insisted that uncoordinated regulation of markets would yield an increase in systemic risk.

Congresswoman Urges Review of Bank Guarantees of Offshore Affiliates

Maxine Waters, ranking member of the House Financial Services Committee, urged the CFTC this week to begin investigating the offshore actions of Wall Street banks in avoiding certain mandates set forth in the Dodd-Frank Act. In a letter to Timothy Massad, the CFTC’s recently-confirmed chairman, Representative Waters criticized the removal by banks of parent guarantees from overseas affiliates, which allows banks to trade in the interdealer market while skirting Dodd-Frank restrictions aimed at increasing price competition and transparency. By cutting off these guarantees, banks are able to trade in the United States through swap execution facilities established under Dodd-Frank, while their non-guaranteed subsidiaries are subject only to local laws of foreign jurisdictions.

Rep. Waters also sent letters to the Federal Reserve, Office of the Comptroller of the Currency, Securities and Exchange Commission, and Federal Deposit Insurance Corporation. In these correspondences, Rep. Waters reiterated that the CFTC should take a more aggressive stance in reviewing changes to the guarantees.

CFTC Criticized Over Suspending Outside Research By Internal Regulator

The Commodity Futures Trading Commission’s internal regulator has determined that the CFTC may have been in violation of a federal law that requires the Commission to maintain a research program after suspending outside research from being published.

The claim comes from the CFTC’s reaction to a complaint filed by CME Group back in December 2012. According to CME Group, the Commission was illegally allowing outside researchers access to proprietary market data.

In its claim, CME Group pointed to a paper published by former CFTC chief economist Andrei Kirilenko and two outside researchers in regards to High Frequency Trading. According to CME Group, this and other papers published by the CFTC used non-public information to reach conclusions.

In response to this complaint, the CFTC suspended the publication of outside research and had its inspector general’s office look into whether or not the Commission had in fact broken any laws while allowing outside researchers access to sensitive market data.

Interestingly, while the inspector general’s office found CME Group’s claims to be unsubstantiated, saying that the CFTC broke no laws through its outside research program, it claimed that the CFTC may have very well violated a law by suspending the publication of outside research.

Furthermore, the inspector general went on to criticize the CFTC’s handling of data, saying that the Commission has been taking entirely too long to review academic papers before being published, to the point that it may be violating free speech rights.

The CFTC issued a strongly worded letter along with the report last week, disagreeing with the inspector general’s office’s findings, going as far as to deny that the research program is even shut down. The CFTC said that full time economists still have access to data. The commission also stated that it maintains a research and information program through news releases, staff advisories, and publicly aggregated data.

Judge OK’s DTCC CFTC Lawsuit

A US federal judge has ruled that part of a lawsuit filed by Depository Trust & Clearing Corp (DTCC) against the Commodity Futures Trading Commission (CFTC) will be allowed to proceed.

The DTCC CFTC lawsuit was filed by the DTCC over the how the CFTC allowed CME Group Inc and IntercontinentalExchange to gather market data.

The DTCC had actually filed 4 claims against the CFTC in the lawsuit. However, US District Judge Amy Jackson dismissed three of them, citing that the court could not review claims that did not involve a final action by the CFTC. Two of the claims involved actions approved via the CFTC’s “self-certification” process, with a third being about changes made the frequently asks questions section on the CFTC’s website.

The Dodd-Frank Act requires all trade data for over-the-counter derivatives  to be stored in swap data warehouses for easy monitoring. The DTCC is suing the CFTC for allowing CME Group Inc and IntercontinentalExchange to use their own proprietary data warehouses. The DTCC, which operates its own rival data warehouse, has claimed this to be anticompetitive.

With this being the main purpose behind the DTCC CFTC lawsuit, it seems the DTCC is happy to be able to move forward, even without the other aspects of the suit. A member of the DTCC tell Reuters, “We are pleased that the judge has given the green light to the core of our case. We continue to believe that CME Rule 1001 is anticompetitive and undermines the core pro-competitive principles of the Dodd-Frank Act.”

CFTC and FERC Reach Data Sharing Agreement Through MOU

The Commodity Futures Trading Commission and the Federal Energy Regulatory Commission have released a “Memorandum of Understanding” (MOU) detailing their agreement to share market data between one another.

The MOU was put in place in early January, and the CFTC and FERC began more freely transmitting market data to one another just last week.

As it turns out, getting the two regulators to share market data has been a long time coming, with the need for an agreement being first discussed over three years ago.

The MOU will ensure that market data needed by either regulator will be quickly and easily shared between them. Previously, requests for market data had be placed and reviewed on a case-specific basis.

The announcement of a more free flowing form of data sharing between the regulators was announced on March 5th, along with an Interagency Surveillance and Data Analytics Working Group that will coordinate the sharing of data and help focus on, among other things, data security and data sharing infrastructure.

The sharing of data between the CFTC and the FERC marks progress, and should certainly help to create a safer and more transparent market.

Federal Agencies Allow Interim Collateralized Debt Obligations With Interim Rule

According to CFTC.gov, five federal agencies have approved an interim rule that will allow banks to keep certain securities, namely collateralized debt obligations, which are backed by trust preferred securities (TruPS CDOs). The temporary rule has been put in effect to lighten the impact of the Volcker rule, which put strict limits on banks’ proprietary trading abilities in an attempt to lower the risk associated with these trades after being linked to exacerbating the financial crisis of 2008.

This new rule will allow banks to retain collateralized debt obligations, as they are considered to be of minimal risk. The agencies involved in passing the vote were the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission, and the Securities and Exchange Commission.

The qualifications that need to be met in order to retain these collateralized debt obligations are described by cftc.gov as:

  • the TruPS CDO was established, and the interest was issued, before May 19, 2010;
  • the banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in Qualifying TruPS Collateral; and
  • the banking entity’s interest in the TruPS CDO was acquired on or before December 10, 2013, the date the agencies issued final rules implementing section 619 of the Dodd-Frank Act.

CFTC.gov also defines collateral for TRuPS CDOs as “any trust preferred security or subordinated debt instrument that was:

  • issued prior to May 19, 2010, by a depository institution holding company that as of the end of any reporting period within 12 months immediately preceding the issuance of such trust preferred security or subordinated debt instrument had total consolidated assets of less than $15 billion; or
  • issued prior to May 19, 2010, by a mutual holding company.”

The agencies will be accepting comments on the rule for thirty days, following its being added to the federal register.

Federal Reserve to Discuss New Physical Commodity Rules

According to Reuters, the Federal Reserve is setting up to take public comments on new physical commodity rules that will limit banks’ ability to trade certain commodities this week.

This marks the Federal Reserve’s first steps in what will most likely be a long road ahead for reforming physical commodity rules. The driving force behind this reform comes from public and political complaints over the risk involved with having banks trade physical commodities like crude oil and aluminum.

During a Senate hearing last July, people involved in the industry spoke out about the banks’ ownership of the storage facilities that are required for physical commodities, and how this allowed them to inflate prices. Hundreds of millions were paid out in fines by big banks for manipulating energy markets in 2013 alone, producing a strong argument for reforming physical commodity rules.

Those taking part in the hearing as witnesses will include Norman Bay of the Federal Energy Regulatory Commission (FERC), market oversight chief Vince McGonagle of the Commodity Futures Trading Commission (CFTC), and Michael Gibson, the Federal Reserve’s director of banking supervision and regulation.

The Federal Reserve has not disclosed how it plans to reform physical commodity rules, but members of the industry will have 60 to 90 days to submit letters to be used in the forming of these new rules after the hearing.

Federal Reserve Completes Swaps Push out Rule

According to Bloomberg, the Federal Reserve has completed a new rule based on a Dodd-Frank Act requirement known as the push out rule, which will force banks to fence off foreign derivatives trades from US branches.

The push out rule, which hasn’t been changed since its initial drafting in back in June, will go into effect on January 31st. For the time being, uninsured foreign branches of US banks will be treated as though they have government backing—including deposit insurance.

Though the rule is supposed to go into effect on the 31st, many banks have already asked for and received grace periods of up to two years to comply.

In an attempt to make the market safer after derivative trading was linked to the financial crises of 2008, the push out rule has been designed to alleviate pressure from the US government in the event of another crisis by forcing foreign bank branches to separate certain equity, some commodity, and non-cleared credit derivatives from US branches.

With the push out rule coming into effect at the end of next month, banks will now have to either stop the affected swaps trading or move it to properly capitalized affiliates.

Volcker Rule Approved by Regulators

According to the Wall Street Journal, the Federal Deposit Insurance Corp., Federal Reserve Board, Securities and Exchange Commission, and Commodity Futures Trading Commission have all voted to approve the infamous Volcker Rule.

While the vote for Volcker Rule approval was unanimous for the FDIC and the Federal Reserve, the CFTC approved it by 3-1, while the SEC approved it by a slightly narrower 3-2.

The Volcker Rule, which was proposed as a part of the Dodd-Frank Act, will implement strict rules on the banks’ ability to buy and sell securities on behalf of clients and limit compensation arraignments thought to increase risky trades.

The long contested Volcker Rule will not affect most “community banks,” smaller banks with less than $10 billion in assets. And while many considered the rule to be too harsh, it seems many of the larger banks are already in compliance with the rule, with some banks having stopped proprietary trading as far back as two years ago.

It seems investors have been largely unfazed by the passing of the Volcker Rule as well, with banks’ stocks fairing well in the market—even those considered to be heavily affected by the rule.

Any bank that is not yet fully in compliance with the Volcker Rule will have until July 2015 to comply, though they will be expected to begin making visible “good faith” efforts to comply before then.

CFTC Charges Principal Trading Organization for “Banging the Close” and “Spoofing”

According to CFTC.gov, the Commodity Futures Trading Commission has filed a civil enforcement action against principal trading organization for both ”banging the close” and “spoofing” the IDEX USD Three-Month Interest Rate Swap Futures Contract.

In order to manipulate the value of the three month contract, the CFTC claims that the principal trading organization “banged the close” during the fifteen minute settlement period of the contract.

The CFTC defines “banging the close” as: a manipulative or disruptive trading practice whereby a trader buys or sells a large number of futures contracts during the closing period of a futures contract (that is, the period during which the futures settlement price is determined) in order to benefit an even larger position in an option, swap, or other derivative that is cash settled based on the futures settlement price on that day.

The organization repeatedly placed bids during the settlement period, placing 60 percent of overall bids on the three month contract and actually placing all of the bids on 13 days between January and August of 2011.

The CFTC has determined that the organization had also “spoofed” those bids, defining “spoofing” as: bidding or offering with the intent to cancel the bid or offer before execution.

According to the CFTC, “none of [the principal trading organization] electronic bids were accepted or “hit” to consummate an actual transaction.”