Tag: Insurance

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 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.

Banks and Regulators Call on ISDA to Alter Derivatives Market Operations

According to Reuters, U.S. Federal Deposit Insurance Corporation Chairman Martin Gruenberg and Bank of England Governor Mark Carney are calling on the International Swaps and Derivatives Association (ISDA) to change some of the rules behind derivative trading. This is in hopes of creating a safer market place. Specifically, the two are looking to add what they are calling a “short delay” in closing contracts for failing banks.

The call for change to the ISDA comes in the wake of the collapse of Lehman Brothers and the ensuing 2008 financial crisis. The delay will allow regulators and failing banks to sell off contracts in a more orderly fashion, reducing volatility in the market.

It was originally thought that the timely closing of contracts was best, as it maintained clarity within the market. However, regulators now feel that giving banks time to sell off their contracts may help to turn some of their debt into capital in emergencies, maximizing potential for survival and minimizing disruption to the market.

While Gruenberg and Carney are calling for the ISDA to change the rule fairly quickly, it seems unlikely that market participants will be willing to give up rights to rapid closing of contracts without a legal precedent. Given the current minimal state of necessary legal language within the proposal, and with the courts’ history on passing laws like this, seeing any sort of progress may still be a ways off.

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 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.

Basel Committee Reform Capital Rules of Derivatives Trading

On June 28th, The Basel Committee came out with two papers that recommend strengthening the regulatory oversight of counterparty credit swaps to decrease the alleged risk of derivative transactions.

The first paper improves upon the interim credit assessment suggestions that the Basel Committee made with the Current Exposure Method (CEM) and the Standardised Method. The new credit risk assessment of counterparties in derivative trading fine-tune upon the CEM and the Standardised Method by creating separate risk exposure plans for margined and unmargined trades.

The second paper focuses on the capital risk of banks when working with central counterparties (CCPs). As is, CCPs are utilized to create stability in the markets by clearing and settling trades through risk and obligation assessment as well as supervising the final swap. The new proposal from the Basel Committee includes a recommendation that all trades are sufficiently well capitalized, as well as suggestions to conserve positive incentives for banks to utilize central clearinghouses.

The Basel Committee was established in 1974 by a group of nations concerned about regulatory inconsistencies between countries. Many of the regulatory policies that it wanted to recommend since the financial crisis of 2008 were supposed to be finalized in 2o12, but have been delayed due to complications.

The two papers published are currently open for public comment until the end of September, 2013.


Banks Receive Extension on Risky Swaps Rule

The Wall Street Journal reports that seven banks have received extensions on complying with the rule that would require them to “move risky swap activities into separate affiliates.”

The Office of the Comptroller of the Currency granted the two year extensions to Bank of America Corp., J.P. Morgan Chase & Co., Citigroup Inc., Wells Fargo & Co., HSBC Holdings PLC, Morgan Stanley and U.S. Bancorp.

The rule, which required banks to move their risky swaps trades to affiliates that were not covered under the “federal deposit insurance and the Fed’s discount window,” was devised by Blanche Lincoln, the previous Senate Agriculture Chairman.

The extension has faced criticism from some proponents of the Dodd-Frank Act. Senator Sherrod Brown (D-OH) stated, “Three years ago, the Congress made a decision that Wall Street should not gamble with taxpayer money…  We shouldn’t have to wait for another financial crisis for regulators to finish the job.”

Representatives from the industry have said that the extensions would allow other regulators to finalize their Dodd-Frank rules regarding swaps. These banks’ confusion on rules would have made the task of creating or moving swaps into new entities difficult.

CFTC Approves SEF Rules and Swaps Block Rule

On Thursday the CFTC approved the Swaps Block Rule, the Made Available to Trade Rule, the SEF rules, and the Interpretive Guidance and Policy Statement on Disruptive Practices.
The Swaps Block Rule and the Made Available to trade rule were passed 3-2, the SEF rules were passed 4-1 and the Interpretive Guidance and Policy Statement on Disruptive Practices passed unanimously.

Commissioner Gensler has pushed for these rules for months in order to shift the information advantage away from the Wall Street Banks. After the successful vote, the chairman spoke to the significance of the new rules: “This rule significantly benefits mid-market America, mid-market pension funds, mid-market insurance companies, community banks, small corporates.”

After the CFTC vote, Commissioner Sommers, who cast the lone dissenting vote against the SEF rules, elaborated on the issue she had with the SEF rules. “Nothing in the statute mandates these minimum trade functionalities. We made them up,” Commissioner Sommers told Businessweek. “I believe we will regret this restrictive approach because it may cause the U.S. to lose this business to foreign jurisdictions that do not stifle illiquid contracts in this way.”

Under the SEF rules, the request for quote (RFQ) minimum is now three price quotes. There will be a yearlong phase-in period where the RFQ minimum will be two. Additionally, according to Businessweek, the SEF rules allow for companies that execute trades over the phone or any form of technology to operate as SEFs.

The CFTC rulings also determined the rules for blocks. A CFTC official told Businessweek, “Under the rule, a trade would be considered a block if it is larger than the 50th percentile for notional value in a given category of swaps. Starting in April, the threshold would rise to the 67th percentile. About 14 percent of interest-rate and credit swaps might be traded as blocks until the higher threshold takes effect. Businessweek and Chicago Business also mentioned that there will be a phase-in process with blocks.