The derivatives industry has been up in arms over this little footnote that spans pages 22 and 23 in the new Dodd-Frank-inspired CFTC rules, Core Principles and Other Requirements for Swap Execution Facilities. Click the images to read:
It’s Friday quiz time! Ready? Here goes:
- Take a couple of clued-up Brooklynites in their 30s.
- Add section §619 of Dodd-Frank, aka the “Volcker Rule”.
- Now throw in a lawyer.
What do you get?
[Hint: It's America.] Read more
Bloggers on FT Alphaville are, from time to time, asked how we decide what topics or events to write about. This post is no tell all, but is rather an example of exactly how funny the road travelled can be.
The end of the road saw us reading about whether banks still can get much bigger (to fail), despite the regulatory and legislative efforts of the last few years, particularly in the US. What we found is that there’s a big escape clause in the legislation that makes us a bit queasy. Read more
GOLDMAN SACHS HAS A SECRET PROPRIETARY-TRADING UNIT THAT IS RISKING THE BANK’S OWN CAPITAL BY MAKING INVESTMENTS AND CEO LLOYD BLANKFEIN SAID GOLDMAN WASN’T PROP-TRADING ANYMORE AND THAT IS WRONG AND HE LIED AND HE SHOULD BE HOG-TIED WITH HIS OWN BLACKBERRY CHARGER.
That’s a typical reaction to this Bloomberg piece on Goldman’s “secret” prop-trading team for you. Read more
This is a guest post from Clive Howard, a senior principal lawyer in RJW Slater & Gordon’s employment department. His high-profile cases include acting for Paul Moore in a whistleblowing case against HBOS, and Brodie Clark, former head of the UK Border Force, against the Home Office.
Whistleblowing incentives just got international Read more
A year ago, give or take a couple of days, former FT Alphavillian John McDermott asked the question: is it worth giving a one year-old a birthday present?
Davis Polk clearly thinks so — another year has passed and the law firm has a birthday present for the now two-year old Dodd-Frank Wall Street Reform and Consumer Protection Act. Holding itself out as a maker of infographics, this gem was offered up, excerpts of which are below. Read more
Earlier this year the Fed proposed new rules that would limit banks’ exposure to each other even more than the Dodd-Frank reforms, coming into force next year, already demand. The banks went away to think about it, and it’s safe to say they have some concerns. Goldman Sachs, in fact, has sent the Fed 20 pages-worth of its concerns just ahead of a meeting in New York today with Daniel Tarullo, the Federal Reserve governor, and assorted big bank executives.
In short, Goldman summarises, “parts of the Proposed Rules appear likely to damage, rather than strengthen, the systemic safety of the US financial sector and ultimately the US economy.” Oh, and it’s going to cost the US up to 300,000 jobs according to their calculations and cut economic growth by up to 0.4 per cent. Read more
April 2012 was a pretty big month in Dodd-Frank Act rulemaking; the SEC and CFTC agreed how to define “swap dealer”, “major swap participant”, et al. under Title VII of the Act, dealing with over-the-counter derivatives.
Still a way to go though. Read more
As part of the Dodd-Frank Act, various types of participants in derivatives markets need to be defined. According to the jersey one ultimately gets as a trader of interest rate swaps, credit default swaps and so on, different regulations may apply.
(Where “security-based”, regulator equals SEC, otherwise CFTC.) Read more
Take a moment to imagine what it must be like to be an American regulator. There are plenty to imagine being: the OCC, the Fed, the CFTC, SEC, FDIC, and that thrift one, until it subsumed into the OCC. Got one?
The US Federal Reserve has proposed new rules requiring the largest financial firms to hold more capital and detailed for the first time since the financial crisis how the central bank will deal with giant banks in distress whose failure could threaten financial stability, the FT reports. The biggest banks will be required to achieve a 9.5 per cent ratio of core capital to risk-weighted assets by 2019 as part of the so-called Basel III reforms, the Fed announced on Tuesday, in an expected move that mirrors proposals by a group of global banking regulators known as the Basel committee. Under the proposal banks’ boards of directors would be required to review regular reports from senior management on capital adequacy and sign off on plans to fund institutions in times of liquidity stress and economic strain, says Bloomberg. The boards would annually need to approve internal liquidity proposals and set levels of risk gauged to companies’ “financial condition and funding capacity on an ongoing basis,” the central bank said.
The Federal Reserve is expected to embrace a new global framework that requires giant financial institutions to hold extra capital, the WSJ says, citing people familiar with the situation. The Fed’s embrace of the Basel surcharge is expected to come as part of a draft of new rules for US firms that are considered by regulators to be big enough to pose a risk to the financial system. The proposed rules, required by the Dodd-Frank financial law, are expected to detail how much extra capital these firms must hold as a buffer against losses, the cash they must keep around to reduce their need to tap volatile funding markets, and how much money they can pour into any sort of investment. Fed officials are aiming to release the draft proposal this week, but it may slip into January.
In part one, the appetizer, we quickly looked at whether the US banking sector is stronger than it was in 2008, as Lewis Alexander, the new Nomura chief US economist, argues. On the face of it, he’s right — balance sheets appear stronger, but we can’t be sure.
In part two, the main course, we look at what would happen if a crisis was to hit again. Read more
US policymakers probably have no idea what would happen to domestic banks if Europe implodes, but how useful would it be if they did?
There’s another Nomura note on US banks making the rounds, but this one is made more interesting by who wrote it: Lewis Alexander, a counselor to Tim Geithner from 2009 until February 2011 helping to build the Treasury department’s new Office of Financial Research. He is now Nomura’s chief US economist. Read more
Barney Frank, co-author of the eponymous Dodd-Frank financial legislation, will announce on Monday afternoon that he won’t be running for re-election in 2012.
Frank thus follows co-author Chris Dodd into retirement from Congressional politics. Unlike Dodd, however, we don’t expect Frank will take a job lobbying on behalf of movie stars. Read more
Eleven days after MF Global filed for bankruptcy and the search party for around $600m of customer funds is still hard at work.
But it wasn’t meant to be this way. Client funds are supposed to be segregated in such a way as to be easily identifiable and transferable in the wake of exactly this type of event. The ability to protect client assets, and by extension minimise disruption to the markets, is at the heart of ongoing reform efforts prompted by the financial crisis. Read more
What complications might the alleged commingling of accounts have for the bankruptcy of MF Global?
Well, let’s ask… MF Global! Read more
US regulators will examine non-bank financial groups with more than $50bn in assets to decide whether they are dangerous enough to merit tougher supervision and higher capital requirements – a threshold that will be a relief to most hedge funds and private equity firms, the FT says. The Federal Reserve, Treasury and other regulators on the Financial Stability Oversight Council voted on Tuesday for criteria to designate companies as “systemically important”, a category that the industry has been lobbying hard to escape because of the potential hit to profits. Hedge funds typically fall below the $50bn threshold, as do private equity firms such as KKR and Blackstone. But in the insurance industry, institutions from Prudential Financial to Allstate exceed the threshold. Non-banks with more than $50bn in assets then have to fall foul of one out of a list of metrics to be designated, according to the proposed rule.
Bank of America has been the hardest hit among US banks downgraded by Moody’s, the FT reports, which warned that regulatory reforms made it less likely that the government would step in to bail out creditors when a large bank failed. The Moody’s downgrade on Wednesday to banks’ credit ratings is good news for the Federal Deposit Insurance Corp, which has argued there is no basis for rating agencies to include in their models a premium for banks considered “too big to fail”. The FDIC says new powers granted by the Dodd-Frank Act last year allow the government to wind down safely any financial group, imposing losses on creditors in the process. As well as BofA, Citigroup and Wells Fargo also saw their debt downgraded. However, BofA, which is struggling to emerge from an avalanche of mortgage-related losses and litigation, was worst affected; its stock fell 52 cents, or 7.5 per cent, to $6.38, below the level that Warren Buffett’s Berkshire Hathaway infused $5bn of new capital last month.
Repo transactions and “near-term” commodities and currencies trades are set to be exempted from the Dodd-Frank Act’s ban on proprietary trading, according to a rules draft seen by the FT. Officials said that the exemptions were needed to allow banks to engage in trading, such as repo, which could be critical to financial stability. The 174-page rules document represents the distillation of the “Volcker Rule” portions of Dodd-Frank into regulations. The draft rules would forbid short-term trades that would be significantly likely to lead to “substantial financial loss” but remain silent on whether there should be a “central data repository” to collect and analyse bank trades.
A final version of the Volcker rule for US banks is unlikely to be in place for an October deadline, the WSJ says. The Dodd-Frank Act required the rule, which would limit banks’ proprietary trading, to have been “adopted” by October 18 but a delay of months is likely, following the publication of a proposed rule as soon as this week. A hotly-contested debate over the rule’s terms accounts for the delay, with lawmakers indicating they would prefer to see sharply-drafted regulations rather than for the rule to be rushed out. The Volcker provisions of Dodd-Frank come into force in July 2012.
Tough new anti-fraud and manipulation rules for futures and swaps that came into effect last week have caught trading firms unprepared for a coming crackdown, the FT reports. Traders are crowding into seminars and some firms are stepping up investment in surveillance technology as they seek to catch up with the rules passed last month by the Commodity Futures Trading Commission. The first of dozens of new derivatives regulations required by the 2010 Dodd-Frank financial reform act, the anti-fraud provisions broadened the rules to include swaps and made it easier for the commission to win cases by allowing it to punish attempted frauds and reckless behaviour, in addition to wilful, successful price manipulation. The commission, on orders from Congress, will also go after investors who trade on non-public information where they were tipped off in violation of a pre-existing legal duty. Gary Gensler, CFTC chairman, said: “These rules close significant gaps in terms of our scope and in terms of the cases we can bring. Over time, this will be part of the arsenal to insure that the markets work for the American people.”
Standard & Poor’s has objected to an SEC proposal that ratings agencies be required to disclose “significant errors” in how they calculate their ratings, Reuters reports. S&P raised concern just days after the Obama administration accused it of making an error in calculations determining its downgrade of US debt. S&P vehemently denied it had made an error, but acknowledged that it changed its long-term economic assumptions after discussions with the Treasury. S&P criticised several aspects of the proposals form part of the Dodd-Frank financial sector reforms. S&P opposed proposals under the Dodd-Frank legislation affecting ratings agencies in an 84-page letter to the SEC, dated August 8. It questioned whether the SEC should decide what constituted a “significant error”, and also raised concerns about competition and that rules are consistent globally.
The decision by George Soros to convert his hedge fund into a family office casts light on to efforts by rich families to avoid disclosure under new financial regulation, the FT says. Soros will hand back cash to his few remaining outside investors so his $24.5bn Quantum fund can escape the need to register with the SEC, a new requirement under Dodd-Frank. Financial News figures the new rule may signal a black year for hedge funds, with some managers worried the SEC might second-guess, or even intervene in, their strategies. Meanwhile, MarketWatch wonders what the effect of Quantum’s closure might be on open-end mutual funds and ETFs with“alternative” or hedge-like characteristics.
Banks have mounted a fresh assault on Dodd-Frank Act requirements to increase the collateralisation of derivatives trades, arguing that they will leave the financial system more reliant on the use of Treasuries for collateral than ever, the WSJ reports. The Act’s provisions state that derivatives collateral must be in cash or high-grade securities, though concerns have risen that Treasuries or agency debt will no longer be safe assets for margin requirements in the future. There is in fact an underrated risk that a rapid US ratings downgrade or even default could lead to a fire-sale unwinding of Treasuries collateral in markets, FT Alphaville has previously reported.
Inspired by a printer bleed of a Dodd-Frank diagram from Deloitte, via Politico, here we present a slight diversion from FT Alphaville’s bailiwick.
Every now and again we come across pictures meant to simplify the complexities of the landmark legislation. (We’d never of course suggest they’d ever be designed to obfuscate.) And it hasn’t escaped our attention that, on occasion, they carry a (very) vague likeness to certain works of art. Therefore, safe in the knowledge that this seemed like a good idea at the time, we present one of a very occasional series, Dodd-Frank as drawn by … Read more
Is there any point in getting a one year-old a birthday present? It’s a question of etiquette that has stumped FT Alphaville for many years. Should you just get the parents something? Or put something in trust for when they grow up? Spend it on a six-pack to get you through the wailing cacophany of a birthday party? What to do?
A similar pickle presents us with the Dodd-Frank Act, which was signed into law by President Obama on July 21, 2010. It may look harmless — or indeed downright right cute — but what if it grows up to be a monster that would have made Doris Lessing proud? Read more
Global Sifi buffers is both the likely new name of FT Alphaville’s pub trivia team and a hotly followed piece of financial regulation.
The Financial Stability Board is not due to formally announce its capital recommendations until November, but we already have a good idea what to expect. (The Federal Reserve is also still to announce its proposals.) The very biggest banks are expected to be subject to a 250bps tier one capital surcharge, with the threat of an extra 50bps charge left over to disincentivise supersizing. Read more