News

SEC Approves 'Negative Affirmation' Rule

By Mike Kentz
June 11, 2016, IFR

The Securities and Exchange Commission has included language in a rule-making finalized last week that some market participants say undermines the point of the entire rule-making itself.

The SEC will allow firms transacting in security-based swaps to comply with a new rule governing trade affirmation procedures via a process known as “negative affirmation”. Under the new rule, when one firm reaches out to another to confirm trade details but does not receive a response, the trade is still considered “affirmed” and is pushed through.

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Regulators to Banks: We’ll Size Up Your Risks

By Donna Borak
June 12, 2016, The Wall Street Journal

International regulators want to limit banks’ leeway in assessing the riskiness of their assets, a step that critics say could crimp lending, dent profits and worsen risk rather than reduce it.

A committee of overseers in Basel, Switzerland, since the end of last year has proposed five different rules that would require banks to use standardized calculations instead of their own when measuring possible losses on everything from loans to interest rates to fraud.

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House Committee Moves to Cut Funding for Financial Regulators

By Lisa Lambert
June 9, 2016, Reuters

A bill to slash funding for the U.S. Securities and Exchange Commission, Internal Revenue Service and other financial regulators passed a key committee in the U.S. House of Representatives on Thursday after a long partisan fight.

The expansive legislation would also place a halt on the payday lending restrictions that the Consumer Financial Protection Bureau recently proposed.

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Comment: Fintech Disruption: The Changing Role of Regulators

By Allan D. Grody
June 9, 2016, FOW

Trapped by still functioning legacy systems and industry infrastructure institutions, the legacy mindset embedded in financial institutions may be providing the opportunity for Fintech companies to sweep past them. Regulators are becoming enablers.

The 'industry’ has long informed regulators as to how to improve markets by invoking the principle of 'best practices’. At the same time regulators have gone along with these best practices by accepting the principle of an industry’s 'consensus’ approval. The two principles, best practices and consensus approval has long been the way regulators obtained input from the industry and made decisions as to what regulations to implement. Incremental change was thought to be the best way forward. Then the financial crisis came along and regulators were forced to step out of their comfortable 'go along with the industry’ mode. In fact the industry, bounded in the past by sovereign regulation, was now forced to consider itself as the unbounded 'global financial industry’. This change was most apparent and traumatic in the over­the­counter derivatives space where the CFTC, the minor regulator in the U.S. back then, led the charge to regulate the previously unregulated industry, and to do it at the global level.

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Debt Traders Miss Credit Default Swaps as Losses Loom

By Joe Rennison and Mary Childs
June 9, 2016, Financial Times

Investors looking for shelter from the next corporate bond storm have all but lost the ability to buy a type of financial umbrella called the single-name credit default swap.

These derivative contracts provide a form of insurance. When the perceived creditworthiness of a company falls, single-name CDS prices rise, offsetting losses on a portfolio of bonds and loans.

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Preview of GOP Plan to Re-Do Dodd-Frank?

By Ted Knutson
June 1, 2016, Financial Advisor

In what is likely a preview of House Financial Services Committee Chair Jeb Hensarling’s proposals to re-do Dodd-Frank coming next Tuesday, a prominent conservative think tank is offering a wish list for changes to the law.

The American Action Forum is calling for the elimination of the Financial Stability Oversight Council (FSOC) and the Volcker Rule restricting proprietary trading by banks and regulations on financial derivatives.

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Even Better Than the Real Thing: Fixed Inc Favors Synthetic

By Dan Alderson
May 16, 2016, GlobalCapital

Post-­crisis regulation, funding pressures, and liquidity demands are leading investors to favor derivative products over underlying assets in ways that have not been seen before.

"Funding challenges are causing hedging and investing activity to increasingly shift toward self­-funding instruments such as swaps or Treasury futures," said Marty Young, an analyst at Goldman Sachs in New York.

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South Korea Pushes for Developed Market Status

By Steve Johnson
May 13, 2016, Financial Times

An impending decision on whether or not China’s $6.1tn onshore equity markets should start to be included in the flagship emerging market index is starting to reverberate around the region.

South Korea and Taiwan are stepping up their efforts to be promoted from the MSCI EM index to its developed world equivalent. And in the case of Seoul, at least, the fear of an exodus of foreign capital in the wake of China’s admittance appears to be a driving factor.

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China Asks Britain for Advice on Creating Financial Super-Regulator

By Michelle Price and Benjamin Kang Lim
May 14, 2016, Reuters

China has asked Britain for advice on plans to create a financial super-regulator, as it looks to improve financial oversight following last year's stock market crash, sources with knowledge of the talks told Reuters.

The discussions between representatives from China and the U.K. Foreign Office and Treasury highlight Britain's burgeoning relationship with Beijing on financial issues, notwithstanding this week's gaffe by Queen Elizabeth, who was caught on camera grumbling that Chinese officials accompanying President Xi Jinping on a visit to the U.K. last year had been "very rude to the ambassador".

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Comment: Banking's New Normal

By James Surowiecki
May 16, 2016, The New Yorker

If you listened only to speeches from the Presidential campaign trail, you’d come away with the strong impression that, eight years after the financial crisis, Wall Street reform has been a bust. Every Republican candidate called Dodd-Frank, the centerpiece of the Obama Administration’s reform effort, a dismal failure. Donald Trump called it “terrible”; Ted Cruz said that it had only helped “the big banks get bigger and bigger and bigger.” Hillary Clinton has been tepid in her defense of Dodd-Frank, and Bernie Sanders called it “a very modest piece of legislation” that changed little about the way the Street does business.

Tell that to the bankers. Banks performed dismally last year, and their 2016 first-quarter-earnings reports show that this one is off to an even worse start. Returns on equity have fallen. Bonuses and salaries are being slashed; in the past quarter, Goldman Sachs cut the amount it set aside for compensation by forty per cent. Payroll is down, too: banks have eliminated tens of thousands of jobs in the past couple of years and are now embarking on a new round of severe job cuts. Some of these struggles can be attributed to short-term factors, such as low interest rates and unusually volatile markets. But there’s no avoiding the deeper conclusion: regulations have simply made banking less profitable than it once was. Before the financial crisis, financial companies (not including the Federal Reserve banks) accounted for nearly thirty per cent of U.S. corporate profits. By 2015, that number had fallen to just seventeen per cent.

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'Cherry Picking' Claims Fly in CSA Rate Floor Negotiations

By Catherine Contiguglia
May 10, 2016, Risk

Banks and end-users are accusing each other of trying to take advantage of the valuation uncertainty surrounding the impact of negative rates on uncleared derivatives contracts.

The move of many benchmark interest rates into negative territory over the past two years has forced counterparties to re-examine the value of interest rate floors written into collateral agreements, known as credit support annexes (CSAs).

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Comment: Regulators Want to Slow Runs on Derivatives

By Matt Levine
May 4, 2016, Bloomberg View

Nobody quite knows what it means for a bank to be "too big to fail," so the regulators in charge of solving the problem have an understandable focus on tidiness. A bank that fails tidily, sensibly, in neat little compartments, probably won't do much damage to anyone else. A bank whose failure is sprawling and incomprehensible might well turn out to be catastrophic.

So the preferred mechanism for winding up a possibly too-big-to-fail bank these days is largely about compartmentalization. You put all of the important, messy stuff into subsidiaries – put the deposits in a bank subsidiary, the repurchase agreements and derivatives in a broker-dealer subsidiary, etc. – and put those subsidiaries under a "clean" bank holding company with a fairly large amount of capital and long-term debt.Then if things go horribly wrong, the holding company's shareholders and bondholders are the ones who lose money, shielding the people who have messier and more systemic claims on the subsidiaries. The regulators swoop in and recapitalize the holding company, or just sell the subsidiaries to other, healthier banks, in any case without ever interrupting service at the systemic subsidiaries. All the bad stuff happens at the holding company, all the important stuff happens at the subsidiaries, and you try to avoid mixing the two. Then all you have to do is make sure that the holding company has enough equity and long-term debt to shield the subsidiaries against any plausible bad outcome.

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IOSCO Considering Benchmark Proportionality Guidance

By Catherine Contiguglia
May 4, 2016, Risk

An international standard-setting group responsible for overseeing global benchmark reforms is considering taking Europe's lead in applying lighter requirements to benchmarks that are deemed less critical.

The International Organization of Securities Commissions (IOSCO) released a set of principles in 2013 seeking to root financial benchmarks in real transactions and strengthen conduct requirements for administrators and contributors. The principles highlighted the need for a proportional approach to avoid a one-size-fits-all scenario, but didn't provide any detail on how this could be carried out in practice.

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HSBC Plans "Busy" 3 Years of Bond Sales as TLAC Looms

By Steve Slater
May 3, 2016, Reuters

HSBC said it expects to be "pretty busy" every quarter for the next three years as it faces having to issue up to U.S.$70bn of debt to meet new capital adequacy regulations.

HSBC sold U.S.$10.5bn-equivalent of senior bonds in late-February and through March, and said more big deals are inevitable.

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Nasdaq’s Blockchain Chief Says Regulators Need to Step Up

By Kim S. Nash
May 3, 2016, The Wall Street Journal

Financial firms testing blockchain distributed ledgers are fast running up against a nagging question: What do regulators think about the emerging technology? Few government and regulatory groups have made definitive statements about the requirements blockchain-backed financial systems must meet, a reticence that is, in part, holding back adoption of the technology, according to speakers at the Consensus 2016 blockchain conference.

Banks, exchanges, settlement firms and governance bodies must work together to set standards, said Fredrik Voss, vice president of blockchain innovation at Nasdaq Inc., speaking at the conference Tuesday. “Regulators need to help us. There needs to be legal certainty,” he said.

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E.U. Watchdog Says Clearing Houses Resilient, Tougher Daily Checks Needed

By Huw Jones
April 29, 2016, Reuters

Clearing houses for derivatives in the European Union must use tougher assumptions when checking their daily resilience to market shocks and defaults by members, the bloc's securities watchdog said on Friday.

The European Securities and Markets Authority (ESMA) published the results of its first annual region-wide "stress test" that covered 17 clearing houses in the E.U.

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Comment: ETD Meets OTC in Rates – the Missing Link

By David Bullen and Gavin Dixon
April 28, 2016, FOW

Interest rate (IR) markets have changed substantially since the financial crisis, both visibly and also less obviously in their market structure. These differences challenge asset management firms attempting to operate on behalf of their clients, especially in liability­driven investing (LDI), where the rules and market are continuing to change around them. The risk management requirements of liability­driven investments challenge asset managers who turn to banks for solutions and liquidity in their desire to transfer risk on behalf of their clients.

New factors that have yet to impact fully, such as the greater flexibility surrounding pensions, prompting elevated transfer­out requests, increases the appetite for LDI fund flexibility. However, this desire for flexibility is at odds with reduced market liquidity and the structural changes that will make flexibility more costly. The reduced market liquidity is largely a result of a reduction in bank balance sheet levels deployed behind IR market­making functions in the bond, repo and swap sectors and the general profitability of investment bank franchises.

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Economist Predicts Regulatory Headwinds Will Ease in U.S.

By Evan Weinberger
April 28, 2016, Law360

The raft of regulations that have descended on banks and other financial firms following the 2008 financial crisis have contributed to the U.S. economy’s continued slow growth, but that drag should decrease as lenders adjust to the new landscape, a top bank economist said Wednesday.

Lindsey Piegza, the chief economist at brokerage and investment bank Stifel Nicolaus & Co., said in an interview with Law360 that a combination of regulations required by the 2010 Dodd-Frank Act, other measures by regulators, flailing economies in Europe and Asia,...

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Brexit Could Put U.K. Clearinghouses in Limbo

By Lynn Strongin Dodds
April 29, 2016, FTF News

The jury is still out but if the U.K. heads out the E.U. door, then it could have a significant impact on the country’s clearinghouses.

The Brexit wars are heating up in the U.K. as the European Referendum draws closer but it is still too early to call the outcome. In the meantime, President Obama lent support to the remain or stay-in campaign during his recent visit to the U.K. But the leave party is doing its level best to...

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E.U. Nations Back One-Year Delay of MiFID II Market-Rule Revamp

By Julia-Ambra Verlaine
April 28, 2016, Bloomberg

European Union countries agreed on their approach to pushing back the overhaul of securities market rules known as MiFID II, setting up talks with the European Parliament on a final version of the legislation.

National envoys on Thursday supported a proposal by the European Commission to push back the start date of MiFID II by one year to 2018, and instructed the Netherlands, which holds the E.U.’s rotating presidency, to start negotiations with the parliament as soon as possible. They also endorsed amendments to the commission’s plan, including pushing back by one year the deadline for member states to convert the E.U. directive into national law.

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