Tag: securities

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.

European Benchmark Legislation May Harm Banks’ Derivatives Positions

While the European benchmark legislation was designed to add clarity to the marketplace after the LIBOR scandal, it may wind up causing European banks to drop derivatives positions.

Under the European Parliament Economic and Monetary Affairs Committee’s revised European benchmark legislation, EU based institutions will be forbidden from holding any products linked to unauthorized benchmarks.

Banks are finding this to be problematic, as it seems a majority of non-EU benchmarks will not meet the required standards to be considered authorized, which, as the rules currently stand, could include over the counter (OTC) derivatives.

In the original proposal for European benchmark legislation, the European Commission would have prevented EU financial institutions from using any benchmarks outside of Europe, unless they were produced by institutions with rules comparable to that of the EC. However, many are hoping to have this changed so that benchmarks from institutions who have agreed to the practices laid out by the International Organization of Securities Commission can also be accepted—though even that would rule out most non-EU benchmarks.

It seems unlikely that the European Commission will be giving much leeway to banks in this area, and while European officials are hoping to have the final rule ready by May, it will not be taking effect until later in 2014 or early 2015.

CFTC Sets its Sights on High Frequency Trading

The Commodity Futures Trading Commission (CFTC) is beginning to look into regulating high frequency trading over the coming months.

High frequency traders rely on computer software to make trades in only fractions of a second. However, there have been instances where glitches have hurt the market, and the CFTC has decided that many of its regulations are in need of an update.

Having issued a report on high frequency trading last fall, the CFTC is now looking to get feedback on the many suggestions it has put forth for better regulating the industry.

In the report, the CFTC mentions things like power outages and computer errors as the main cause for concern. Even just last year, thousands of Nasdaq OMX group’s stocks were frozen for three hours due to technological issues.

Among the more notable errors in high frequency trading is the 2010 “flash crash” where an algorithm led to the futures and securities market to drop 5% and then almost entirely recover within just a few minutes.

While the list of suggestions is sizable, the CFTC seems particularly interested in implementing “kill switches” that could halt malfunctioning programs as a last resort scenario.

The deadline for comments on the matter is February 14th. The CFTC is currently reviewing responses and will be making recommendations on the next steps afterwards.

UK Challenge to Short-Selling Law Dismissed by EU Court

According to Reuters, the UK’s attempt to challenge a short-selling law that bans the ability to short-sell shares during market emergencies has been denied by a European Union Court.

Attempting to limit the reach of financial rules designed to regulate the industry, the UK had challenged a part of the short-selling law that grants the European Securities and Markets Authority (ESMA) power to ban betting on falling share prices when the ESMA deems it a threat to either markets or financial system stability.

In order for the UK to challenge the short-selling law, those involved stated that the law overstepped the ESMA’s boundaries based on an EU treaty provision. However, because the ESMA can only enforce this law if national leaders haven’t taken action to deal with disorderly markets, the court ruled against this claim.

Short-selling involves the selling of borrowed shares with the hopes of buying them back at a lower price later.

Britain will also be challenging rules that involve bonus caps for bankers, a financial transaction tax, and the forcing of clearing houses to be moved to the euro zone by the European Central Bank in the near future.

EU Official Calls for Strong Financial Transaction Tax

According to Reuters, the EU’s chief tax official is calling on countries within the Union to implement a strong financial transaction tax, rather than watering it down with various exemptions. The official suggests implementing the rules on a more gradual scale instead.

The EU official, Algirdas Semeta, feels that a deal for regulating financial transaction taxes could be ready to go within the first half of this year, even with countries looking for exemptions for things like interbank securities repurchase deals and pension fund transactions.

Derivatives and securitised debt, which played major roles in the financial crisis of 2008 are also being considered for exemption from the financial transaction tax, with policymakers claiming that including them could harm funding for companies, hurting the economy.

The deal is currently being worked on by 11 countries within the EU, which will serve as a means to have banks repay the money that they borrowed during the crisis.

Semeta fears that if members agree upon a financial transaction tax that is filled with too many exemptions, the transactions may begin to shift abroad.

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.

CFTC May Push Interest-Rate and Credit Swaps onto SEFs

According to Bloomberg, the Commodity Futures Trading Commission (CFTC) is set to push interest-rate and credit swaps onto SEFs in the near future.

While the CFTC is currently reviewing the plans, they haven’t found any reason to object to them as of yet. And with the first of these new requirements being instituted on January 16th, it seems unlikely that they will find one.

Addinginterest-rate and credit swaps to the list of trades that must be monitored is another step toward market transparency for the CFTC, which has been attempting to take the risk out of swaps trading ever since it played a major role in the 2008 financial crisis.

Which swaps need to be traded over SEFs has been a debate within the industry since the mandate was put in place back in October. Packaged swap deals are currently still under debate, as the Securities Industry and Financial Markets Association and International Swaps and Derivatives Association asked for them to remain off SEFs back in November. And with people saying that the industry doesn’t currently have the infrastructure to monitor them properly, they may remain off the platforms for some time.

CFTC Commissioner Scott O’Malia has called for an agency advisory committee on January 21st to oversee the decisions made on interest-rate and credit swaps and to get industry feedback.

EU Proposal Drafted, Offers leniency for Banks

According to Reuters, Banks in the European Union are going to see limits on proprietary trading, based on a draft of an EU proposal.

The EU is drafting a proposal in an attempt to curb the risky trading done by banks that has been considered to be a major factor in the 2008 financial crisis. However, it seems their attempt to tame the $59 trillion dollar market isn’t enough for some, with experts considering it to be lacking in authority, and merely designed to be passed without contest.

Among other issues with the EU proposal, lobbyists have said it gives banks in certain countries a lot of room for interpretation, and may allow some to avoid separating risky investment banking from the deposit taking functions of large banks.

While the proposal will apply to all the bloc’s banks, only thirty top lenders will see limits imposed on their proprietary trading.  And proprietary trading is defined very tightly in the EU proposal, which will allow banks to trade on behalf of customers, “make markets,” and quote prices in securities.

Reasoning for the EU proposal’s leniency seem to stem, at least in part, from financial services chief Michel Barnier’s term being up at the end of October, and his not wanting to “make any waves,” as stated by to a financial industry official quoted by Reuters.

Regulators Consider Volcker Rule Revision

According to Reuters, US bank regulators may be revising a part of the often contended Volcker Rule to allow banks to hold on to a specific type of security generally regarded to be harmless.

The Volcker Rule, which many banks warned would cause a large drop in revenue for them, was set to limit the bank’s ability to hold hedge funds, private equity funds, and a large number of securities, as they had all been linked to the financial crisis of 2008. However, with this revision, banks will still be allowed to hold collateralized debt obligations, or TruPS CDOs.

The decision will be made no later than January 15th, regulators say. While banks had argued for a decision to be made by the end of the year, regulators have stated that a decision by mid-January will have to suffice.

Later agreeing to the issue, the banks will have until January 23rd to reply to the final decision made by US regulators over the Volcker Rule.

Should regulators choose to go ahead with the revision, it will mark the first amendment to the Volcker Rule, which was only approved earlier this month. With the first change coming less than a month into its approval, it seems unlikely that it will be the last.

Sharon Y. Bowen to Take Over for Chilton at CFTC

According to Bloomberg, President Obama has selected securities lawyer Sharon Y. Bowen to replace Bart Chilton as CFTC commissioner.

The news comes on the heels of Commissioner Mark P. Wetjen being voted in by fellow commissioners to replace Chairman Gary Gensler until Obama’s nomination for Timmothy Massad is voted on by the Senate.

Chilton announced his departure from the CFTC last month. A colorful character, Chilton was well known for his outspoken nature and his less than conventional speeches. It will be interesting to see how Bowen fills the role.

While initially scheduled to leave at the end of the year, Chilton will most likely stay on longer than expected to help out, as, until Massad and Bowen are voted in, the CFTC would be left with a mere two of the five commissioners it’s supposed to run with.

Bowen got her law degree from the Northwestern University School of Law in Chicago. She currently represents corporations and buyout firms at Latham & Watkins in New York.

It’s unclear as to when the senate will vote on Bowen.