Financial Regulatory Forum

JPMorgan case puts Volcker Rule and SIFIs back in the spotlight

By Patricia Lee

NEW YORK, May 23 (Thomson Reuters Accelus) – The massive losses which resulted from JPMorgan Chase hedging its positions against derivatives has once again cast the spotlight on the Volcker Rule and whether systemically important financial institutions (SIFIs) are too big to fail, industry observers said. Questions have also been raised about the firm’s hedging strategy, and what constitutes hedging in the first place.

Industry officials in Asia suggested that JPMorgan’s $2 billion hedging losses might embolden regulators to strengthen the Volcker Rule, on the premise that it would be of benefit to SIFIs. The rule, named after former Federal Reserve chairman Paul Volcker, forms part of the Dodd-Frank Wall Street Reform and Consumer Protection Act and has proposed the separation of proprietary trading from commercial banking activity. Most notably, it has argued against investing in derivatives or using derivatives as a hedge on investments. The rule has, however, faced strong opposition from many of the large global financial institutions. (more…)

Foreign Account Tax Compliance Act threatens investment in the U.S.

LONDON/NEW YORK, (Business Law Currents) – A fiscal tourniquet will put a squeeze on tax evasion – the Foreign Account Tax Compliance Act (FATCA) is threatening to clog the arteries of the world’s financial system with U.S. withholding taxes and burdensome obligations on non-U.S. firms.

Designed to staunch the bleeding of capital from the U.S. to secret bank accounts, FATCA is clamping down on overseas earnings but its unintended consequences are threatening to undermine investment in the U.S. (more…)

U.S. financial services can expect more Dodd-Frank in 2012, not less

By Rachel Wolcott

NEW YORK, Dec.16 (Thomson Reuters Accelus) – When congressman Barney Frank announced he would not seek another term, enemies were quick to predict the demise of the wide-ranging financial reform act that the Massachusetts Democrat penned with former Connecticut Senator Chris Dodd. These pronouncements are not just premature, but according to regulatory experts, probably wrong. Unless there is a real seismic political shift to the right after the 2012 elections, they say, the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 will survive, perhaps with a little tinkering, and firms had better be prepared to deal with it.

Dodd-Frank will only face a real threat if the Republicans take the White House and a majority in the U.S. Senate, while hanging on to the House of Representatives. Right now, with former House Speaker Newt Gingrich the latest to surge to the top of the Republican pack of presidential candidates, the likely outcome of November presidential elections is far from clear. If President Barack Obama, who signed Dodd Frank into law, stays in office, he can use his veto power to try to protect Dodd-Frank. (more…)

Cost-benefit lawsuits snarl Dodd-Frank implementation

By Nick Paraskeva

NEW YORK/WASHINGTON, (Thomson Reuters Accelus) – A financial industry lawsuit seeking to block new U.S. rules on commodity position limits on the grounds that they lack an adequate cost-benefit analysis could cause regulators to slow their implementation of the Dodd-Frank financial regulatory overhaul and be an indicator of more such challenges. Meanwhile, the Obama administration is saying it will resist efforts to block the law.  (more…)

FACTBOX-CFTC to-do list for implementing reforms

Randall Mikkelsen

Nov 23, 2010 09:08 EST

Nov 22 (Reuters) – The U.S. Commodity Futures Trading Commission faces the mammoth task of writing detailed regulations to implement reforms passed by Congress giving the agency oversight of the $600 trillion over-the-counter derivatives market.

Working from a list of 30 topic areas, the agency may end up writing 50 to 60 regulations, CFTC Chairman Gary Gensler has said.

The CFTC hopes to unveil the first drafts of most of the proposed rules by the end of the year to allow time for public comment and revisions before its July deadline for final regulations. Some rules have earlier deadlines.

Regulators have held hundreds of meetings with industry players as they consider the details. For a full list of meetings, see: http://r.reuters.com/hum65p

Below is a list of rule-making areas for the CFTC: (more…)

from Tales from the Trail:

Think brussels sprouts and cauliflower are agricultural commodities? Think again.

While the financial bailouts tossed to automakers, banks and other groups during the recent economic crisis left a funny taste in the mouth of some Americans, one former U.S. regulator hopes efforts to prevent another panic doesn't go rotten.

The U.S. Commodity Futures Trading Commission is immersed in drafting dozens of rules to assist it in increasing oversight of the once opaque over-the-counter derivatives market, widely blamed for exacerbating the recent financial crisis.

Among the rules it must craft is what the definition of an agricultural commodity is? Of course, corn, cotton, soybeans and livestock, among other items, fall into this realm.

 But what about those "other foods" such as brussels sprouts, artichokes, cauliflower, or anything with curry? A former CFTC chairman says they are "abhorrent to American sensibilities" and should be banned.

"Like every U.S. citizen, there are certain agricultural commodities that are abhorrent to me," said Philip McBride Johnson, who is now with the law firm Skadden, Arps, Slate, Meagher & Flom.

 In a comment letter to his former agency, he said there is a "natural link" between defining an agricultural commodity and a provision in a law that requires the regulator to protect the public by forbidding the listing of certain products that "are abhorrent to American sensibilities."

Clearly banned under this act are financial products based on wars, terrorism, and assassinations. If Johnson has his way, regulators will be able to protect consumers from a dozen foods that don't mesh with his palate.

Swapping the rules: derivatives concern SEC, CFTC and the market (Westlaw Business)

(Westlaw Business) - Swap markets and players were a main focus of Dodd-Frank, yet the SEC and CFTC were left to work out the details. The market, from Ropes & Gray to the Reinsurance Association of America, has provided these regulators with public comment and disclosure commentary. Now that the public comment period has drawn to a close, one thing is clear: issues from “security-based swap” to “swap participant” are certain to have big impact on a broad array of companies, both in financial services and beyond.

Enacted on July 21, 2010, Dodd-Frank incorporated a 360-day-window for the Act’s wrinkles to be smoothed out before implementation. One of the first casualties has been the CFTC’s rejection of discretionary Grandfather relief the Act allows the Commission to provide. Some 300 days remain in which all Dodd-Frank’s administrative detail work must be concluded. According to CFTC Chairman Gary Gensler, 30 teams have been dedicated to address the key policy and drafting issues of the new law. The working definitions of affecting the entire derivatives industry now rest in the hands of the SEC and CFTC.

Title VII of the Act, subtitled Wall Street Transparency and Accountability, defines terms as part of a complex scheme to regulate swap markets and security-based swap markets. The law looks to curtail the kinds of highly leveraged derivatives trades that have the potential to wreck the U.S. economy (again). Even more acutely, the act seeks to prevent Federally regulated institutions from (more) taxpayer bailouts. Market experts, however, have expressed concern that without narrow tailoring, these changes could not only increase compliance costs and margin requirements, but erect barriers to entry and foreclose the use of important risk management tools.

The Act draws distinctions among kinds of swaps (security-based or not; mixed swaps) and the people or companies who trade in them (swap dealers; security-based swap dealers; major security-based swap participants; eligible contract participant). Companies that trade futures contracts will face or avoid heightened scrutiny depending upon where they fall on the continuum of these definitions. In the alternative, these same traders may be able to wedge themselves into statutory exclusions.

In the final analysis, the Act’s definitions, or more accurately, its statutory exclusions, will likely keep many commercial risk derivatives traders outside the thicket of new government regulation.

CFTC Chairman Gensler has taken the first crack by quantifying just how big a ball of red tape derivatives traders can expect. A palpable fear for many companies who hedge commercial risk is that they’ll find themselves overcome with new regulatory costs and compliance headaches.

One nightmare could be the idea of becoming by default one of thousands of new “swap dealers.” In remarks before a regional meeting of the International Swaps and Derivatives Association (ISDA), however, the Chairman noted that “there could be in excess of 200 entities that will seek to register as swap dealers.” The Commission also estimates “20-30 new entities will register as swap execution facilities or designated contract markets” in addition to the 16 futures exchanges already regulated.

ANALYSIS-Even with new rules, life goes on for Wall Street

Reuters Staff

Jun 27, 2010 09:20 EDT

By Steve Eder

NEW YORK, June 25 (Reuters) – U.S. lawmakers have hammered out a law that is designed to fundamentally change Wall Street, but financial professionals largely yawned.

Legislators took steps that at first blush could change the industry, including limiting banks’ swaps-dealing operations and their investments in private equity and hedge funds.

But in the end, banks like Goldman Sachs Group Inc, JPMorgan Chase & Co and Morgan Stanley won concessions that watered down the proposals that could have been most damaging to their profits, staving off a watershed overhaul like the one that took place after the Great Depression.

One former executive at a major bank estimated that profits for the biggest dealers could fall by 3 to 5 percent because of the bill, which is far better than some had expected.

“It really could have been worse,” one banking lobbyist said on Friday morning, calling the process “grueling” and saying that just 24 hours earlier the proposals were more damaging for banks.

“People are going to have to make changes and it is going to cost money, but it’s not going to ultimately change their ability to do business.”

FACTBOX-Winners and losers in the U.S. financial bill

Reuters Staff

Jun 25, 2010 07:26 EDT

WASHINGTON, June 25 (Reuters) – U.S. lawmakers are close to finalizing legislation that will overhaul the country’s financial system and usher in new rules for Wall Street.

A joint House of Representatives and Senate committee approved a bank regulation bill that lawmakers expect to pass each chamber separately in the coming days. It will then be ready for U.S. President Barack Obama to sign into law, possibly by July 4.

Below are some of the likely winners and losers under the regulation bill.

CREDIT RATING AGENCIES – WIN AND LOSE

* Credit rating agencies — such as Moody’s Corp, Standard & Poor’s and Fitch Ratings — will be subject to greater liability.

* Rating agencies could be sued if they “recklessly” failed to review key information in developing a rating.

* The Securities and Exchange Commission will be given two years to find a way to mitigate conflicts of interests at the biggest rating agencies, Moody’s, S&P and Fitch, which are paid by the issuers whose debt they rate. The two years give the agencies breathing space but if the SEC does not find a solution, the regulator is required to implement a proposal by Senator Al Franken and create a board to match rating agencies with debt issuers.

ANALYSIS-Key US senator gains clout on Wall Street bill

Reuters Staff

Jun 9, 2010 14:51 EDT

WASHINGTON, June 8 (Reuters) – U.S. Senator Blanche Lincoln, an Arkansas moderate Democrat, is buoyed by winning nomination to a third term in the Senate but not sure of victory for her hot-button Wall Street reform — forcing big banks to spin off their swaps desks.

The proposal is one of the salient disputes for House-Senate negotiations that could begin this week on a financial regulatory reform law. The Senate endorsed the idea. The House is silent on the question.

(more…)