Financial Regulatory Forum

Regulation and the day the machines took over -The Scott McCleskey Report

HIGHFREQUENCY/By Scott McCleskey, Complinet

It took five months, a PhD in Physics, a Nobel Prize winner and a staff of quants, but the SEC and CFTC have now figured out what happened to the markets during the “flash crash” in May. Given the well-orchestrated string of sneak-peeks the SEC had given before the publication of the joint report,  the findings weren’t particularly surprising. Nevertheless, they are enlightening both for what they tell us about the state of the markets and for what they tell us about the assumptions we have made when regulating them. The upshot: markets aren’t efficient, and rulemakers should stop acting as if they are.

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

Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, gestures as he testifies before the Financial Crisis Inquiry Commission hearing on the Role of Derivatives in the Financial Crisis on Capitol Hill in Washington July 1, 2010. REUTERS/Yuri Gripas (UNITED STATES - Tags: POLITICS BUSINESS)

Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission.

(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.

ANALYSIS – U.S. TARP program less costly, but not less controversial

By Dave Clarke

WASHINGTON, Aug 19 (Reuters) – The government’s $700 billion bailout of the financial system may still be politically toxic, but for those who voted for the program, there is some good news: the taxpayer bill continues to drop.

On Thursday, congressional scorekeepers projected the overall deficit impact of the Troubled Asset Relief Program — or TARP — will be about $66 billion.

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