Tag: risk

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.

CFTC Seeks Clarity in Swaps-Data Reporting

The Commodity Futures Trading Commission (CFTC) is looking to over-haul the way in which swaps-data reporting is done in an attempt to better make use of the information it receives.

The CFTC has released a request for comment on around 70 questions regarding swaps-data reporting and how to use the data it collects from companies like Depository Trust & Clearing Corp. and CME Group Inc.

Both the CFTC and the SEC were made responsible for collecting swaps-data after the financial crisis of 2008 in order to bring more transparency to the market and point out risks in the system before they lead to another crisis.

Currently, regulators are finding it very difficult to make sense of the information they are receiving on the almost $700 trillion dollar swaps market in a timely manner, which is raising concerns among market officials.

It seems the swaps-data reporting overhaul has been a long time coming. CFTC Commissioner Scott O’Malia had mentioned issues with reporting last year, saying that the data they were collecting was not helping the regulator detect the issues it’s working to protect against.

Other than what to do with the data it collects, the agency will be looking for advice on just how to go about collecting the data. It’s currently defending itself in a lawsuit with the DTCC over its current methods, with the DTCC saying that the CFTC allowing CME Group Inc. to report data on its own databases is anticompetitive and counterproductive to reducing transparency.

Commissioners Unhappy With CFTC No-Action Letters

Several commissioners have spoken out over the CFTC’s no-action letters, claiming that many of them were instituted hastily, leaving little time to review or edit them.

The Commodity Futures Trading Commission has put in place almost 70 rules since the 2010 regulatory reform law was put into place. Of these rules, 36 were related to Dodd-Frank. However, within these 36 rules, over 200 no-action letters or other forms of guidance have had to be issued after the rules were instituted.

Some commissioners have defended the CFTC no-action letters, saying that their use was inevitable, as overhauling the operations of the $600 trillion dollar derivatives market is no small task. As former commissioner Micheal Dunn explained it to Risk.net, “You can’t make an omelette without breaking some eggs.”

Most commissioners agree that some no-action letters will be necessary. However, it seems for many commissioners, the issue revolves around how the CFTC no-action letters were instituted.

Commissioners have pointed out that while some of the no-action letters are only temporary, quite a few of them are indefinite or permanent. Many of the commissioners only received notice of the letters the night before they were issued, which has them feeling as though their input had not been considered over what is essentially a complete change in policy.

CFTC chairman nominee Timothy Massad recognized the need for a more streamlined and organized rule making process while being questioned at a confirmation hearing by the Senate.

While former CFTC chairman Gary Gensler spent most of his time putting many of the Dodd-Frank rules into place, it seems Massad’s focus will fall on figuring out how to amend and enforce these rules.

EU Anticipates Issues with New European Derivatives Rules

The EU is set to implement new European derivatives rules this Wednesday in an attempt to begin bringing more transparency to the $700 trillion dollar market that has been blamed for being a major factor in the 2008 financial crisis.

While the EU has been working towards creating these new European derivative rules since the crisis, it seems likely that it will still be quite some time before any real results are seen.

Financial institutions in the EU will be required to report all derivative transactions to new trade repositories come Wednesday. However, many companies and financial institutions will not be ready to comply by this time, according to Reuters. An FCA spokesperson told Reuters that while responses to non-compliance will be proportionate, companies need to be aware that enforcement action is very much a possibility.

The 14 “big banks,” which account for about 65% of total derivatives market transactions are already set to comply. Companies who use the market to hedge risks (accounting for between 5-10% of total market transactions) make up the majority of trading entities behind in compliance to the new European derivative rules.

Outside of compliance, experts in the field also point to a fragmentation between the 22 repositories available to trade on as an issue for the EU.

Until the EU designs an aggregation system for all of the data that will begin to be reported on Wednesday, it will remain very difficult to get a clear picture of the entire derivatives market.

Blythe Masters Joins CFTC Advisory Committee

JP Morgan’s commodities chief, Blythe Masters, is now a member of a CFTC advisory committee, according to an announcement made yesterday by the Commodity Futures Trading Commission.

Masters has been working in the swaps industry for well over a decade, and helped JP Morgan begin using credit default swaps to hedge bank risks.

She will be taking part in a discussion the CFTC advisory committee will be having next week over the Commission’s cross-border regulation policy.

The policy, which has been bemoaned by both foreign and domestic banks, says that trades made by foreign banks still fall under CFTC rules if U.S.-located personnel arrange, execute or negotiate the transactions.

The CFTC was sued by several banks recently for this policy, and it seems the Commission is now seeking to amend its guidelines.

Masters is joining the CFTC advisory committee just as JP Morgan is selling of its physical commodities business. The reason for the bank’s decision to sell off its multi-billion dollar operation seems to be the amount of headaches many of the new rules have created for banks in recent times.

The CFTCs apparent change of heart over cross-border regulation has come quickly after former chairman Gary Gensler stepped down, and it seems likely that banks will see a softer side of the CFTC over the next few months, and possibly years because of this.

French Banking Lobbyists Criticize European Union’s Proprietary Trading Rules

The European Union’s plan to quell big banks’ proprietary trading has been met with criticism from French banking lobbyists who say it will give an advantage to US banks, which would not be affected by the new rules.

Interestingly, the rules the European Union has agreed upon are already less severe than their initial plans to actually break up large banks, which were deemed “to big to fail” after the fall of the Lehman Brothers sparked the financial crisis of 2008.

While French banking lobbyists criticize the European Union’s plans, saying they will take away French banks’ freedom to trade, EU commissioner Mike Brainer has pointed out that the new rules will not actually restrict the banks from trading, but merely make them move the trading to a separated subsidiary. The goal behind this is to separate risky trading from the safer banking actives like deposit taking.

Meanwhile, as French banking lobbyists criticize the European Union for being too strict, other countries like Germany and England have found the rule to be adequate, according to a Reuters report on the matter. And, furthermore, other countries have found the EU’s plans to be too lenient on the banks.

The rule will wind up being similar to the US Volcker Rule, though the banning of proprietary trading will only wind up affecting the top 30 European banks.

Regardless, the European Union will have plenty of time to debate the issue, as rules aren’t likely to go into effect until 2017.

IVSC and Global Regulators Begin to Create Valuation Standards for Bank Assets

According to Reuters, global regulators, including the International Valuation Standards Council (IVSC), have begun to plan the first worldwide standard for valuing some of the more difficult-to-price assets held by banks.

The first task of the IVSC, it seems, will be developing a benchmark by which to base this valuation. There is currently little to no guidance on how to price an asset contained within a company’s account, particularly when there is no market for the asset.

The independent, not-for-profit IVSC will be playing a large role in valuating these assets.

According to the IVSC, the main difficulty behind pricing will be derivatives, which should not be much of a surprise, given their reputation for being more risky than most assets.

The IVSC, which is headed by David Tweedie, consists of 74 member bodies from 54 countries, but does not actually have any enforcement powers, which leaves the question of who will be ensuring that any new rules created are followed up for debate.

At any rate, based on the large scope with which the standards will encompass, and with many top accountants in the industry currently warning of moving too fast, it seems unlikely that any actual effect from these standards will be seen for quite some time.

EU Agrees on Market Rule Overhaul

According to Bloomberg, the European Union has successfully come to an agreement on a market rule overhaul that will tighten measures to regulate the derivatives market, slowing down high frequency trading and curbing speculation in commodity derivatives.

The market rule overhaul will push more activity onto regulated platforms in hopes of eliminating some of the risk involved with derivatives trading, which have been cited as playing a major role in the financial crisis of 2008.

The deal has been a long time coming; the market rule overhaul is the product of two years of negotiating by the EU financial services chief Michel Barnier.

The deal they have agreed on is considered to be the centerpiece of new regulation the 28-nation bloc has agreed to implement.

Among the issues the market rule overhaul will cover, certain derivatives in the electricity and gas markets will be moved to trading platforms, though some will also be granted exemptions due to being covered by other EU regulation.

While the deal has been agreed upon, it must still go through a formal approval process. The rules set forth in the deal will not go into effect for at least two and a half years after it is formally approved.

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.