Financial Regulatory Forum

MF Global bankruptcy shows regulatory resolve

By Nick Paraskeva

Nov. 1 (Thomson Reuters Accelus) - The collapse of MF Global Holdings is the first major U.S. financial bankruptcy since new Dodd-Frank insolvency laws ended the doctrine of “too big to fail,” as well as being the first U.S. failure attributable to the Euro crisis. While the collapse is expected to be handled under pre-Dodd Frank bankruptcy laws and under the Securities Investor Protection Corp., it may signal that regulators are prepared to take earlier action when they see uncovered financial risks.

The default follows agreement last week by EU heads of state, which required banks to increase capital by 106 billion euros to restore confidence. This is based on a higher capital ratio of 9 percent of highest quality capital, after a buffer for the mark-down of sovereign debt value of periphery EU States to current market values. Banks and private sector creditors to Greece accepted 50 percent voluntary write-down, as part of the package. (more…)

Mitigating “Margin Call” risks

By Dave Ingram and Max Rudolph
The opinions expressed are their own.

The financial thriller, “Margin Call,” which opened in movie theaters on Friday, tells the story of a firm in the mold of a Bear Stearns or Lehman Brothers at the height of the financial crisis. The firm in the film is akin to real-life firms that seemingly discover too late their reliance on a culture built on growth at any cost and tainted models at the expense of risk management.

Movies are great teachers, helping everyone better understand complex situations that can be confusing even to experts. “Margin Call” does just this, by putting a spotlight on the crucial role that proactive and skeptical risk management (or lack thereof) plays, particularly in financial services. Although the Occupy Wall Street movement is still in its infancy, it demonstrates how ordinary people feel the impact of the financial industry’s actions – and mistakes. Likewise, the movie demonstrates how great an impact one firm’s actions can have on the entire financial industry, underscoring the importance of risk management in such an interconnected system.

Based on our experience as actuaries, focusing on identifying and mitigating risks, we’ve outlined what we believe are the most important lessons of both the film and financial crisis. Hopefully those who see this movie, and those who lived through the crisis, will heed them.

Banking on Volcker: Big Crisis, Big Rule

By Thomson Reuters Accelus staff

NEW YORK, Oct. 19 (Business Law Currents) – Banking lawyers should be forgiven if they’re not returning calls right away: they’re busy trying to digest the Volcker Rule (or “the rule”). The proposed rule’s 298-page doorstop represents the collective efforts of the Treasury Department, Fed, FDIC and SEC to implement §619 of the Dodd-Frank Act, which itself added a new §13 to the Bank Holding Company Act of 1956 (the BHC Act). The intent of the Volcker Rule is to “generally prohibit any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund (“covered fund”), subject to certain exemptions.”

So does the Volcker Rule satisfy its mandate? To paraphrase ‘The Simpsons’: yes with an “if,” no with an “unless.” The rule carves out significant exemptions from the proscription against proprietary trading, but each of these exceptions has a number of criteria required to take advantage of the exemption. Moreover, a number of the rule’s measures provide for rebuttable presumptions of non-compliance for certain types of trading activity. (more…)

Exchange traded funds’ growth raises multiple regulatory issues

By  Patrick Conroy, James Overdahl, Robert Patton and Raymund Wong; NERA Consulting, Thomson Reuters Accelus contributing authors. The views expressed are their own.

NEW YORK, Oct. 19 (Thomson Reuters Accelus) – Exchange-traded fund (ETF) strategies continue to increase in scope, involving active management and more sophisticated financial instruments. The increasing flexibility and versatility of ETFs have been accompanied by claims by regulators and others of destabilizing effects on markets and potential for abuse by market professionals. Moreover, the suitability of ETFs for retail investors and even institutions has become a source of greater concern. Furthermore, the size of the ETF market has more than tripled by number of ETFs, and more than doubled by net dollar value of assets, over the past four years, as you can see from this chart. (more…)

U.S. credit market remains uneasy in the world of representations and warranties

US dollar note and other currenciesBy Alex Lee

NEW YORK, Oct. 12 (Business Law Currents) - The first half of 2011 saw rebounding credit markets and an uptick in debt issuance. Due to uncertain economic conditions in the second half of 2011, however, even the most fundamental aspects of loan documentation are facing increasing scrutiny. Representations & warranties that were more routine and non-contentious transformed into significantly stricter provisions as a result of the credit crisis.

Gun shy lenders began placing more onerous terms in credit facilities and the reps and warranties were dramatically bulked up. Some borrowers are now required to announce their credit worthiness under no uncertain terms. Recent litigation concentrating on reps and warranties has heightened the already palpable sense of market unease. Lenders are escalating the investigative function of the reps & warranties to more fully flesh out the factual matrix in reliance of which they will decide to provide a credit facility. (more…)

COLUMN – Rogue traders, delta trading and exchange-traded funds

By Helen Parry, the views expressed are her own.

LONDON, Oct. 7 (Thomson Reuters Accelus) - There are many common features in cases of rogue or unauthorised trading, including the use by ostensibly riskless arbitrage traders of fictitious trades on internal systems to mask their unhedged positions. One obvious feature that is present in many rogue trader cases has been a failure in trade confirmation systems and controls. This feature frequently appears conterminously with the fact that a trader has intimate knowledge of and/or power and influence over middle and back office systems. (more…)

Role of hedge-fund boards gains importance in face of compliance, legal pressures

By Judith Gross, Contributing Author. The views expressed are her own.

NEW YORK, Oct. 7 (Thomson Reuters Accelus) - The role of directors on offshore hedge funds has often been, at best, a limited oversight one, with perfunctory meetings and a limited interchange with the fund itself during the year. That has been changing – slowly – as compliance moves to the top of the list of concerns for investors and managers alike. In addition, directors themselves are realizing that the status quo is no longer tenable.

Hedge funds advised by U.S.-based investment advisers tended to only have a board of directors if they were domiciled outside of the United States, since it is a legal requirement in most offshore jurisdictions, but not in the United States. In other words, it has been atypical to see a board of directors on a U.S. fund. But an offshore fund in a place such as the Cayman Islands, the biggest domicile of hedge funds in the world, would certainly have a board of directors. (more…)

U.S. SEC warns brokers over market access, sub-accounts in debut “risk alert”


By Stuart Gittleman and Brett Wolf

NEW YORK, Sept. 30 (Thomson Reuters Accelus) – The U.S. Securities and Exchange Commission (SEC) issued an unexpected warning to broker-dealers to supervise trading by customers with direct market access, especially customers that trade using master- and sub-accounts.

The notice came in the first in a continuing series of risk alerts the Office of Compliance Inspections and Examinations (OCIE) staff expects to issue. The staff did not say whether OCIE found related deficiencies, or at what level, in recent exams, or in reviewing the findings of recent exams by the Financial Industry Regulatory Authority (FINRA).  (more…)

from Christopher Whalen:

The cure for higher ATM fees is competition

Why are Bank of America and other large US banks increasing fees for the use of debit cards and other services?

The short answer is regulation. The Fed's low interest rate policy has a big effect on how banks price all services. Specific to ATM fees, Congress has decided to regulate the fees charged to vendors by banks on electronic transactions, essentially cutting this profit center in half for the largest banks that have $10 billion or more in assets. This fee is still far more than the actual cost to the bank providing the service, but such is life in America’s less-than-free market. Like airlines, the “too-big-to-fail” (TBTF) banks are not really profitable, thus pricing of one product is often skewed to make up for shortfalls in another.

When you look at the TBTF banks, which dominate the industry in the U.S. today, all of them feature business models where monopoly pricing power and the much abused free market operates. The reasons for this are complex, but the power of the TBTF banks – Bank of America, JPMorgan, Wells Fargo and Citigroup – largely stems from the fact that they remain heavily regulated and protected by these same captured regulators led by the Fed. Thus there is no competition for the services these large banks provide.

Advice for Chelsea Clinton: How to be a good board member

By Lucy P. Marcus
The views expressed are her own.

The high profile appointment of Chelsea Clinton to the board of IAC/InterActiveCorp comes at a time when the individual and collective performance of board directors is being scrutinized more thoroughly and more publicly than ever before. A good board can be rocket fuel or it can be rocks in an organization’s pockets. But what does a  new board member need to be active, engaged, and dynamic?

The principles are the same regardless of whether this is somebody’s first or tenth appointment, and their significance does not diminish with every new appointment either. Every boardroom has its own personality, its own cadence, and its own means of getting things done, and there is no way of knowing for sure how that works till you are around the table. But every board deserves the best from each of its members—long-serving and new alike.

The sooner new board directors are comfortable and familiar with the landscape in which their organization operates, with the challenges it confronts, the sooner they can make a meaningful contribution to the organization and help it deal with its current challenges as well as future-proof it.

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