Tag: federal reserve

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.

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.

Volcker Rule May See Possible Delay to Start Date

According to CNBC, the Federal Reserve may delay the Volcker rule’s start date, giving banks more time to comply. The news should come as a relief to the banks, who, thanks to set backs while writing the rule, would have less than a year to comply by the current date of July 2014.

The Volcker rule, which restricts banks from proprietary trading that would put their own capital at risk, can be delayed by the Fed in one year increments, giving banks until July 2015 to comply. An announcement on whether or not the Fed will actually move the date should come by next month.

It should be noted that the delay to the Volcker rule would not be a complete halt, as it would come with conditions. Pure proprietary trading desks would have to be eliminated by July 2014, and banks would have to take certain steps towards compliance like data collection and disclosure before the 2015 date.

The Volcker rule is considered one of the harsher regulation rules being pushed through since the passing of the Dodd-Frank Act. Banning both proprietary trading and the maintaining of equity in “covered funds,” the rule is supposed to limit risk and market manipulation. Though banks are worried that the rule may make legitimate trading like hedging more difficult, as the difference between hedging and proprietary trading is very subtle.

House Passes Bill to Weaken Dodd-Frank Act

According to Bloomberg, an amendment to the Dodd-Frank Act was passed on Wednesday that would limit the extent to which the rule would affect large banks. The bill would essentially remove the “swaps push out” aspect of the rule, which forces banks to move their derivatives activity to affiliates that don’t have access to deposit insurance or discounted borrowing.

The initial purpose of the push out provision was to help guard against some of the riskier trading done by banks and prevent a situation similar to the financial crisis of 2008. However, both banks and regulators like Federal Reserve Chairman Ben S. Bernanke have warned that if the Dodd-Frank Act isn’t amended, swaps trading may begin to shift to less regulated entities.

The amendment would allow what some are calling more basic derivatives trading to occur, while not affecting more complex and riskier trades.

While the bill has passed in the House with bipartisan support, it seems likely to be more of a token gesture, as chances of it passing through the Democrat- majority Senate are very slim. The White House has also expressed contention with the bill, stating that it’s not the time to make amendments, as the focus should be on actually finishing the implementation of the Dodd-Frank Act. For now, banks should continue to make preparations to adjust to the rule as it currently exists.

Federal Reserve to Delay Commodity Regulation until Next Year

According to Reuters, it seems unlikely that the Federal Reserve will be detailing their plans on commodity regulation until after next month’s Senate hearing over the rigging of the aluminum market. A final decision on commodity regulation should be expected early next year.

After receiving complaints from MillerCoors, the Federal Reserve is looking into a decade old rule that allows large banks to trade physical commodities. According to MillerCoors and other large aluminum manufacturers, banks trading stocks in aluminum were driving up the price through their control of warehouses.

Although they are waiting until after the hearing to move forward, the Federal Reserve will not be taking market manipulation into account, leaving the issue up to the Commodity Futures Trading Commission (CFTC) and the Federal Energy Regulatory Commission (FERC).

The review of commodity regulation rules has many banks feeling the heat. Many feel that the Federal Reserve will implement new rules that will drive up the cost of business for trading. This fear has already led some banks to sell their positions and give up on the physical commodities industry all together.

The Federal Reserve will also not be doing much to change the significant amount of scope in the industry some banks have over others. Banks who changed their status to bank holding companies allowed them to grandfather in their commodity trading activates, including the storage and transportation of commodities, saying that they may change some orders, but are unlikely to change the law as a whole.

Federal Reserve Liquidity Rules Put the Squeeze on Big Banks

According to Business Week, the Federal Reserve liquidity coverage ratio proposal was approved earlier today. The rule, which affects banks with over a quarter of a trillion dollars in assets the most, will take the approved international rules a few steps further.

Putting a quantitative liquidity requirement in place, the Federal Reserve liquidity rule will mandate that banks must set aside close to two trillion dollars in highly liquid assets by 2017, a full two years earlier than international requirements. As of now, the Federal Reserve says banks are about $200 billion short.

The plan is for these assets to be a sort of insurance against another financial crisis, requiring banks to be able to withstand another extended (30 day) credit squeeze without the aid of the federal government, who last time required hundreds of billions of dollars in assistance.

In order to meet these requirements, the Federal Reserve liquidity rule allows banks to include as much cash, Treasuries, and central-bank reserves. Banks will also be allowed to have up to 40 percent of the required assets to be slightly less liquid. Smaller banks, those ranging from 50 to 250 billion dollars in assets, will only have set aside assets for a slightly easier 21 days.

The Federal Reserve liquidity rule will be open for public comment for about three months, after which it must be approved by the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency.