US Regulatory Research
President Trump Signs Bill Reopening the Government for Three Weeks
On 25 January, President Trump signed a bill that temporarily re-opens for three weeks until 15 February those parts of the federal government that were affected by the partial shutdown.
House Financial Services Committee Ranking Member McHenry Sends Letter to Committee Chairman Waters
On 22 January, House Committee on Financial Services Ranking Member Patrick McHenry (R-NC) sent a letter to Committee Chairman Maxine Waters (D-CA) detailing a “list of some of the critical areas for hearings that the Committee should prioritize during the first month of the new Congress.” McHenry suggested hearings on: (i) Brexit; (ii) the Export-Import Bank; (iii) cybersecurity; (iv) China’s “debt trap”; (v) “foreign investment and venture capital in today’s global economy to evaluate how [the Department of] Treasury is implementing the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) and the impact it is having on startup capital formation for America’s small businesses”; and (vi) “scheduled reductions to the Federal Reserve’s balance sheet.” McHenry also suggested hearings that “must provide oversight and ensure accountability for consumers to ensure everyone has fair and transparent access to the financial products they need,” including: (i) the National Flood Insurance Program; (ii) “modernization of the Bank Secrecy Act and Anti-Money Laundering (BSA/AML) regulatory regime”; and (iii) the “regulation of fintech, specifically to examine how the major U.S. financial regulators have started offices of innovation and pilot programs to encourage innovation in financial services and evaluating the strengths and weaknesses of that current framework.”
Rep. Waters and Sen. Sherrod Brown Send Letter to Comptroller Otting
On 25 January, House Financial Services Committee Chairman Maxine Waters and Senate Committee on Banking, Housing, and Urban Affairs Ranking Member Sherrod Brown (D-OH) sent a letter to Comptroller of the Currency Joseph Otting seeking “information about [his] planned tenure” as Acting Director of the Federal Housing Finance Agency (“FHFA”). Waters and Brown expressed concerns over Otting’s recent statements on the FHFA’s mission and the absence of a “comprehensive statement from the White House and Treasury Department under the Trump Administration providing their views on regulation of the housing finance system.” Consequently, Waters and Brown asked Otting to provide their respective Committees with “a copy or detailed description of the mission that Treasury and the White House have outlined…no later than February 1, 2019.”
SEC & Securities
FINRA Releases 2019 Risk Monitoring and Examination Priorities
On 22 January, the Financial Industry Regulatory Authority (“FINRA”) released its 2019 Risk Monitoring and Examination Priorities Letter, which “identifies topics that FINRA will focus on in the coming year.” FINRA’s key areas of focus for 2019 are, among other things: (i) online distribution platforms; (ii) fixed income mark-up disclosure; (iii) regulatory technology; (iv) suitability; (v) senior investors; (vi) outside business activities and private securities transactions; (vii) supervision of digital assets business; and (viii) firms’ compliance with FinCEN’s Customer Due Diligence rule.
SEC Chairman Clayton Issues Statement on Resuming Normal Staffing
On 26 January, SEC Chairman Jay Clayton issued a statement that the SEC has “resumed normal staffing levels and is returning to normal operations.” The Divisions of Corporation Finance, Investment Management, and Trading and Markets, and the Office of Compliance Inspections and Examinations also published statements regarding the recommencement of operations.
CFTC & Derivatives
CFTC Chairman Giancarlo Speaks on Swaps Regulations
On 25 January, CFTC Chairman Christopher Giancarlo delivered remarks before the ABA Business Law Section’s Derivatives & Futures Law Committee Winter Meeting regarding (i) “the cross-border application of CFTC swaps regulations” and (ii) the CFTC’s “recently proposed revisions to the existing SEF [swap execution facility] rules.” Regarding cross-border deference, Giancarlo opined that the CFTC “must move forward to replace its over expansive assertion of regulatory jurisdiction with an approach based on regulatory deference to third country regulatory jurisdictions that have adopted the G-20 swaps reforms.” Further, Giancarlo argued that the CFTC “must adopt a new cross-border framework that is risk-based and offers deference to comparable non-U.S. regulations.” Addressing SEF reform, Giancarlo noted recent industry concerns regarding the CFTC’s recently-issued SEF reform proposal, including the “process and timing of bringing new products into scope, the proposed restrictions on off-SEF, pre-trade communications and revisions to the standards for ‘impartial access.’” As a result, Giancarlo said that he intends “to seek an extension of the comment period for both the SEF proposal” and the request for comment on the practice of post-trade name give-up until 15 March (from the initial deadline of 28 January).
GAO Releases Report on Prolonged Conservatorships of Fannie Mae and Freddie Mac
On 18 January, the Government Accountability Office (“GAO”) released a report examining the government conservatorships of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). The report concluded that federal “support of the housing finance market remains significant even though the market has largely recovered since the 2007–2009 financial crisis.” Further, the report found, among other things, that “[w]hile down from the peak in 2009, in 2017, the federal government directly or indirectly guaranteed about 70 percent of single-family mortgage originations.” The GAO warned that “recent market trends pose risks to these entities and the housing finance system,” saying that “mortgage lending standards have loosened slightly in recent years, which could increase the risk of borrower default. . .and losses to federal entities.” The GAO also found that the “long duration of the conservatorships also raises uncertainty among market participants.” The GAO came to this conclusion by citing experts and stakeholders who “have hesitated to make longer-term strategic plans and goals due to potential housing finance reforms that could markedly affect their industries.” As a result, the GAO recommends that Congress “consider legislation for the future federal role in housing finance that addresses the structure of the enterprises, establishes clear, specific, and prioritized goals and considers all relevant federal entities, such as FHA [Federal Housing Administration] and Ginnie Mae [Government National Mortgage Association].”
Interagency SNC Review Found Increased Risks with Leveraged Lending
On 25 January, the Federal Reserve, Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller of the Currency found increased risks associated with leveraged lending in their latest review under the Shared National Credit (“SNC”) Review programs. The SNC review examined loan commitments that originated before 31 March 2018 and found that, among other things: (i) risks associated with leveraged lending activities are increasing; (ii) several leveraged loan transactions have “weakened transaction structures” and “increased reliance upon revenue growth or anticipated cost savings and synergies to support borrower repayment”; (iii) the level of loans with the lowest supervisory ratings have declined; and (iv) agent banks’ risk management and underwriting practices have improved “in some respects” since 2013. The next report will be published following the third quarter 2019 SNC examination.
· Jan. 29: Comments due on CFTC proposed rule regarding post-trade name give-up on swap execution facilities.