The SEC Financial Stability Oversight Council (FSOC) recently issued a guidance update on counterparty risk management practices for Tri-Party Repurchase Agreements. The update “provides the Staff’s views on the types of legal and operational considerations that a MMF and its investment advisor should consider if a counterparty fails and defaults on its obligations under a Tri-Party Repo.” The update stresses the importance of advance planning in case of default. (more…)
Guidance Update for Default on Tri-Party Repos
FDIC Approves Regulatory Capital Interim Final Rule
This month the FDIC Board of Directors approved the Regulatory Capital Interim Final Rule. The final rule implements a revised definition of regulatory capital, a new common equity tier 1 minimum capital requirement, a higher minimum tier 1 capital requirement, and, for FDIC-supervised institutions subject to the advanced approaches risk-based capital rules, a supplementary leverage ratio that incorporates a broader set of exposures in the denominator. It goes into effect January 1, 20104. (more…)
New Regulatory Framework Suggested for ETF Market
Yesterday, the International Organization of Securities Commissions (IOSC) published a report calling for increased regulation of the Exchange Traded Funds (ETFs) market. ETFs are “open ended collective investment schemes” that are traded like stocks. ETFs “seek to replicate the performance of a target index and are structured and operate in a similar way.” ETFs are becoming increasingly popular for their low cost and liquidity, so the IOSC believes they require increased regulation to protect consumers and investors. (more…)
CFTC Asked to Extend Cross-Border Exemption
Several trade groups, including the Futures Industry Association (FIA), have asked the Commodity Futures Trading Commission (CFTC) for a six month extension of an Exemptive Order from the Dodd-Frank cross-border derivatives rules. The request points out three benefits of a possible extension.
First, the extension would give swap market participants more time to consider the SEC’s “recent proposals relating to its regulation of cross-border security-based swap activities.” Second, “failing to extend the Exemptive Order in the absence of final cross-border guidance could increase uncertainty for international market participants.” Third, an earlier expiration of the Exemptive Order “could jeopardize the productive and cooperative efforts underway towards meeting G20 commitments on an international basis.” (more…)
Self-Regulatory Organization Rule Changes Part 2
This week, four proposed rule changes became effective for self-regulatory organizations. The Miami International Securities Exchange LLC (MIAX) filed two of the adopted rule changes: 1) permitting the listing of additional strikes until the closing of trading on the second business day prior to expiration in unusual market conditions; and 2) expanding the number of expirations available under the Short Term Option Series Program. The NASDAQ OMX PHLX LLC (Phlx) filed the other two adopted rule changes: 1) adopting a strategy fee cap applicable to jelly rolls; and 2) amending the Permit Fee and certain Options Trading Floor Fees, including a technical amendment to the Pricing Schedule.
The third rule change adopts a strategy fee cap applicable to jelly rolls, which are “transactions created by entering into two separate positions simultaneously.”* The two positions are buying a put and selling a call that have the same price and expiration, and selling a put and buying a call with the same price but a different expiration. (more…)
Self-Regulatory Organization Rule Changes Part 1
This week, four proposed rule changes became effective for self-regulatory organizations. The Miami International Securities Exchange LLC (MIAX) filed two of the adopted rule changes: 1) permitting the listing of additional strikes until the closing of trading on the second business day prior to expiration in unusual market conditions; and 2) expanding the number of expirations available under the Short Term Option Series Program. The NASDAQ OMX PHLX LLC (Phlx) filed the other two adopted rule changes: 1) adopting a strategy fee cap applicable to jelly rolls; and 2) amending the Permit Fee and certain Options Trading Floor Fees, including a technical amendment to the Pricing Schedule. (more…)
The “Franken Amendment” Receives New Life; Plan Calls for SEC to Promulgate New Rules for Credit Rating Agencies
Senators Al Franken (D-MN) and Roger Wicker (R-MS) have renewed the call for the SEC to regulate how credit-rating agencies generate revenue. Eight of the nine registered credit-rating agencies employ what is known as the “issuer-pays” model in which ratings agencies receive “their principal revenue stream from issuers whose products they rate.” This model has been blamed for inflating the value of financial products, particularly mortgage-backed securities, and thus misleading investors and contributing to the 2007-2009 financial crisis. The senators want to prevent future manipulation by empowering the SEC to better regulate these credit-rating agencies’ revenue generating systems.
BHCs Instructed to Conduct First Round of Mid-Cycle Stress Tests
This month the Federal Reserve instructed 18 Bank Holding Companies (BHCs) to conduct their first biannual Mid-Cycle Stress Test in compliance with the Dodd-Frank Act. While the Federal Reserve has conducted its own stress tests since 2009, this is the first time firms will conduct the test based on their “own processes and analyses.” (more…)
Class Action Complaint Alleges Conspiracy to Fix CDS Market
A group of institutional investors recently filed a class action complaint against some of the world’s largest banks alleging a conspiracy fix prices and monopolize the market for Credit Default Swaps (“CDS”) in violation of the Sherman Act § 1. Defendants include Bank of America, Barclays, Citibank, and Goldman Sachs. The complaint also names the International Swaps and Derivatives Association (“ISDA”), a financial trade association, which the complaint alleges is controlled by the defendant banks. The plaintiffs are claiming potentially billions of dollars in damages.
A credit default swap is a method of transferring the risk of default for a financial instrument. The purchaser pays a fixed payment to the seller in exchange for the promise to pay off the underlying debt in the event of a default. The complaint alleges that because of the CDS market structure is unregulated and over the counter, every transaction must be with one of the defendant banks.
The complaint characterizes the CDS market as “starkly divided” between the defendant banks “who control and distort the market” and the plaintiffs “who, in order to participate in the market, must abide their distortions.” The complaint alleges that this is the result of an opaque trading environment in which the defendant banks manipulate the bid-ask spreads through their negotiations with individual traders. These manipulations cost the plaintiffs billions of dollars, says the complaint. Plaintiffs allege that several of their attempts to create and regulated exchange were rebuffed by defendants.
Both the DOJ and the European Commission have been conducting their own investigations into these activities. In March, the EU indicated that “ISDA may have been involved in a coordinated effort of investment banks to delay or prevent exchanges from entering the credit derivatives business.”