Update 212 — Fin. Market Treasury Report, Pt. 2: Regulatory Agenda Clear, Legislative Not So Much
Last Friday, the Treasury Department released the second of four promised reports on financial regulation and capital markets. This installment features a serviceable recitation of industry complaints, endorsements of portions of GOP legislation such as the CHOICE Act, and a firm deregulatory stance.
How far does the Trump administration want to roll financial regulation back and in what areas? Does it have suggestions for maintaining or beefing up protections? How does it treat DFA rules? What else is coming down the pike? Are there any legislative implications to speak of? See below.
Scope of Deregulation
The administration’s ambition to strip down the regulatory regime implemented in the wake of the financial crisis is evident throughout last week’s Treasury report, “A Financial System that Creates Economic Opportunities: Capital Markets.” The report focuses on capital markets, capital formation, the debt, equity, commodities, and derivatives markets, as well as on financial market utilities and other operational functions.
• Securities Regulation
The Treasury Department argues that deregulation of the securities market is necessary to protect it as the “byproduct of, and safeguard to, America’s global financial leadership.” It calls for significant rollbacks on regulations that govern capital requirements, liquidity standards, and expanded disclosure mandates on the grounds that they punitively discriminate against high-quality securitized product, despite the damaging role of securitizations during the recession.
The report also calls for a securities market liberation which includes the rationalization of capital required for securitized products with the capital required to hold the same disaggregated underlying assets, as well as a relaxation of liquidity standards for senior tranches of securitization.
• Where are the JOBS?
On rules pertaining to access to capital, the Treasury pursues an agenda of regulatory relief. The report builds off JOBS Act of 2012, advocating an increase in the SEC registration threshold to $10 million and an increase in the amounts capital that can be raised in a 12-month period from $1 to $5 million.
When adopted in 2012, the JOBS Act was heralded as bound to launch a wave of new startups and jobs, to create robust markets and reduce costs and red tape. Evaluating the record, its results are nothing to write home about. Treasury’s proposal to extend rollback of the SEC’s ability to monitor fraud in firms may have created more risk than risk capital.
• Treasury Market
The report claims that the supplementary leverage ratios (SLR) have inhibited banks from securing repo financing. In response, Treasury recommends lowering the SLR and capital surcharge for Global Systemically Important Banks (G-SIB), while raising the threshold for Intermediate Holding Companies from the current $50 billion to an unspecified level for participation in the Comprehensive Capital Analysis and Review. These changes would quickly loosen the grip the regulatory agencies and Democrats have fought for since the crisis over Wall Street. The first steps will be to press Republicans to clarify by how much they want to slash leverage ratio requirements and to what level they would raise the G-SIB threshold so we can move forward in defending these provisions put in place to protect our economy.
Treatment of DFA
Where the last report suggested reshaping specific DFA rules on financial institutions, this report gave DFA relatively lighter treatment.
The Treasury goes to lengths to demonstrate the importance of derivatives to almost every sector of the American economy. While it raises general concerns about regulatory burden, it does not call for wholesale regulatory rollback in the derivatives market. It recognizes broad support among market participants of the central clearing and platform trading standardization mandated by Title VII of the Dodd-Frank act. This suggests Title VII will likely remain a durable part of the American regulatory landscape and that the Treasury sees the derivatives regulation enacted in Dodd-Frank as comprehensive.
• Corporate Bond Liquidity
In the absence of any new ideas this report reiterates the Treasury’s recommendation made in June, which included weakening the Volcker, bank capital, and bank liquidity rules. These changes are not fully specified as becoming the norm in regards to this administration, but would remove safeguards against highly dangerous leverage and investing practices while simultaneously exposing more of the economy to them. All in the name of trying to free up cash for corporations in times of “stress.”
New Regulatory Proposals
Some additional rules, procedures, and regulations have been suggested here, though they fall in line with Congressional legislation friendly to Wall Street and shareholders above all.
• Financial Market Utilities (FMUs)
Treasury asserts that since the passage of Dodd-Frank risk concentrations in FMUs have increased dramatically, especially in central counterparties (CCPs). While FSOC has designated a number of FMUs as systemically important, the Treasury concludes that the regulatory oversight and resolution regime of these institutions remains inadequate. In a departure from the rest of the report’s deregulatory push, Treasury calls for “heightened regulatory and supervisory scrutiny” of systemically important FMUs, including:
— the allocation of additional resources to the CFTC to enhance its supervision of of CCPs
— streamlining “advance notice” review processes to better identify systemic risk
— reviewing the risks involved with the lack of Federal Reserve Bank deposit accounts for certain CCPs
— expanding the scope of stress tests to cover different products and scenarios and develop viable recovery wind-down plans for systemically important firms
• Treasury Market
The report aims to address the opacity of Treasury securities trading. To do this they suggest reporting of these trades to the Trade Reporting and Compliance Engine, supporting the Fed’s desire to collect trade data from its bank members, and directing the CFTC to share its futures transaction data daily.
• Credit Union?
Not that kind. There is a new regulatory idea of some merit promoted in the report. It addresses the fact that multiple agencies are sometimes charged with promulgating and implementing different aspects of the same rule, creating an after-you-Alfonse cycle of delay. The report recommends implementation of a rule in such cases by an ad hoc authority. Credit where it is due and perhaps the parties can unite behind this innovative approach.
Treasury does advance a number of specific recommendations on how these market modifications can be improved. These broadly fall into issues of regulatory harmonization, cross-border issues, capital treatment of derivatives, end-user issues, and market infrastructure. While the scope of each of these recommendations is minor, it is possible that they will have a significant impact on the regulatory landscape of the derivative market in aggregate.
Where from Here?
With reports on OLA, Fin-Tech, and Asset Management/Insurance forthcoming, we still have to brace for another wave of attacks on DFA. These reports will clue us in as to how serious the Trump administration is serious about dismantling the centerpieces of DFA, specifically, its systemic risk provisions. June’s report outlined substantive recommendations on DFA rules for financial institutions, while this report was relatively modest in that respect. We should know more by October 21, when the next reports are expected.