US Regulatory Research
Fed Chairman Powell Testifies before the Senate Banking Committee and House Financial Services Committee
On 26 February, Federal Reserve (“Fed”) Chairman Jerome Powell testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs (“Senate Banking Committee”) in a hearing entitled “The Semiannual Monetary Policy Report to the Congress.” In his opening statement, Committee Chairman Mike Crapo (R-ID) highlighted the Fed’s goals to (i) cut its balance sheet, (ii) address the growth of the U.S. deficit, (iii) and review the Fed’s reserve holding requirements. Crapo asked Powell if the Fed is committed to revisiting the Volcker Rule definitions regarding covered funds and the potential elimination of the accounting test. Powell replied that the Fed is addressing these concerns and will do its best to implement them. Senator Tom Cotton (R-AR) asked about stress tests for mid-size banks, saying that some are still being told by examiners that they need to undergo stress tests despite changes to the threshold. Powell pointed out that banks between $10 billion and $100 billion are exempt from stress tests and that the Fed is working to revise its guidance in order to address this issue. When asked about cybersecurity, Powell said that the Fed is closely looking at cybersecurity and that the Fed’s approach will have to take into consideration that larger banks have better resources to protect themselves from cyber risks and can better withstand increased regulatory scrutiny. When asked to assess the overall health of the U.S. banking system, Powell said that the financial system is “quite strong” overall, pointing out that in 2018 there were no bank failures, banks had record profits, there is better risk management in the system, and there is higher liquidity and capital.
On 27 February, Fed Chairman Powell testified before the U.S. House Financial Services Committee in a hearing entitled “Monetary Policy and the State of the Economy.” In her opening remarks, Committee Chairwoman Maxine Waters stressed the importance of an independent Fed and expressed concern over the Fed’s actions following the deregulation path of the White House. Committee Ranking Member Patrick McHenry praised Chairman Powell for his transparency and clear communications to Congress. Representative Frank Lucas (R-OK) discussed the joint proposal between the Fed, Office of the Comptroller of the Currency (“OCC”), and Federal Deposit Insurance Corporation on the Standardized Approach to Counterparty Credit Risk (“SA-CCR”). Lucas said the proposed SA-CCR framework would significantly raise the capital requirements for over-the-counter unmarked swaps, making them more expensive. Powell replied that the Fed is currently reviewing comments received on the proposal and will take into consideration the concerns raised. Representative Bill Huizenga (R-MI) asked Powell whether he intends to address the Volcker Rule’s covered funds provision, to which Powell said that the Fed has received extensive comments on its Volcker proposal and that the Fed is looking for ways to address the concerns raised. When asked about the potential impacts of Brexit, Powell said that Brexit is an unprecedented event and that while the Fed is unsure of its potential impacts on the market, there is a possibility that it may pass without much implication in the U.S. Regarding the new international capital regime being developed for insurance companies, Powell said that he is working with the International Association of Insurance Supervisors to ensure that what is adopted works with the U.S. system and that he will not implement something that does not work with the U.S. model.
Senate Banking Committee Holds a Hearing on Legislative Proposals Regarding Corporate Governance
On 28 February, the Senate Banking Committee held a hearing entitled “Legislative Proposals on Capital Formation and Corporate Governance.” Testifying at the hearing were: Catherine Mott, CEO of Blue Tree Capital and BlueTree Allied Angels; Thomas Quaadman, Executive Vice President of the U.S. Chamber of Commerce’s Center of Capital Markets Competitiveness; and Heather Corzo, Head of Capital Markets Policy at the AFL-CIO. In his opening statement, Committee Chairman Mike Crapo said that the Senate Banking Committee held three hearings in 2018 on legislative proposals regarding capital formation, corporate governance, and the proxy process. Crapo said the purpose of this hearing is to discuss these bills again “in the context of identifying areas where we can find bipartisan consensus in the new Congress.” In his opening statement, Committee Ranking Member Sherrod Brown (D-OH) said he hoped the committee would consider these bills and others while bearing in mind whether they are “good for workers or just good for Wall Street.” Further, Brown argued that the Securities and Exchange Commission’s (“SEC”) Proposed Regulation Best Interest had “weak and incomplete” economic analysis and that the SEC should testify before Congress to explain their rationale. Ranking Member Brown asked the panel about how stock buybacks are impacting wage growth and capital expenditure, to which Ms. Corzo replied that stock buybacks have had a dramatic negative impact on income equality. Mr. Quaadman replied that research and development has increased, capital expenditures have increased, and wages have increased due in part to the fact that stock buybacks provide for more efficient capital allocation.
On 27 February, the Senate confirmed Michael Desmond to be Chief Counsel for the Internal Revenue Service and an Assistant General Counsel in the Department of the Treasury.
SEC & Securities
SEC Modifies Timing for Filing Non-Public Form N-PORT Data
On 27 February, the SEC adopted an interim final rule that will “require reports on Form N-PORT for each month in a fiscal quarter to be filed with the Commission not later than 60 days after the end of that fiscal quarter.” The previous rule required each monthly report to be filed no later than 30 days after the end of each month. The purpose for the changes is to help the SEC prevent cybersecurity risks. In a statement, SEC Chairman Jay Clayton said that he applauded the agency staff’s “efforts to evaluate our data needs and cybersecurity risk profile” and that he believes the “revised approach to the receipt of new, nonpublic monthly Form N-PORT data enables the Commission to receive and analyze this new data while meaningfully reducing the sensitivity of that data at the time it is transmitted to the Commission.” Filing Form N-PORT through the EDGAR system will begin in April 2019 for larger fund groups, those with net assets of $1 billion or more, and April 2020 for small fund groups, those with net assets less than $1 billion.
On 26 February, the SEC named S.P. Kothari as the Chief Economist and Director of the Division of Economic and Risk Analysis, Brent J. Fields as the Associate Director in the Division of Investment Management, and Vanessa Countryman as Acting Secretary of the SEC.
On 28 February, the SEC named Gabriel Benincasa as its first Chief Risk Officer.
CFTC & Derivatives
CFTC, BoE, and FCA Issue Joint Statement Regarding Derivatives Trading Post-Brexit
On 25 February, the Commodity Futures Trading Commission (“CFTC”), the Bank of England (“BoE”), and the Financial Conduct Authority (“FCA”) issued a joint statement on the continuity of derivatives trading and clearing activities between the U.K. and the U.S. after the U.K.’s withdrawal from the European Union (“EU”). The statement announced that the CFTC will continue to give regulatory relief to U.K. firms after Brexit, scheduled for 29 March 2019, and that the BoE and FCA will let U.S. trading venues, firms, and registered central counterparties continue to provide services in the U.K. BoE Governor Mark Carney said, “As host of the world’s largest and most sophisticated derivative markets, the U.S. and UK have special responsibilities to keep their markets resilient, efficient and open. The measures we are announcing today will do that. Market participants can be confident that the clearing and trading of derivatives between the U.K. and U.S. will maintain the high standards of today when the U.K. leaves the EU.” CFTC Chairman Christopher Giancarlo said the measures would “provide a bridge over Brexit through a durable regulatory framework upon which the thriving derivatives market between the United Kingdom and the United States may continue and endure.”
CFTC Chairman and Commissioners Deliver Remarks at DerivCon 2019
On 27 February, CFTC Chairman Christopher Giancarlo and CFTC Commissioners Dan Berkovitz and Brian Quintenz delivered remarks before the International Swaps and Derivatives Association’s DerivCon 2019. In their remarks, the Commissioners addressed recently proposed changes to rules relating to transacting on swap execution facilities (“SEFs”). In his remarks, Chairman Giancarlo argued that the current SEF regulatory requirement is “highly subjective” and “too dependent upon no-action relief, staff guidance and temporary regulatory forbearance to be sustainable.” However, he acknowledged that the proposed rules were met with justified “constructive criticism,” including concerns relating to: (i) “the process and timing of bringing new products under the trade execution requirement”; (ii) the reduction in “the benefits of pre-trade price transparency”; (iii) industry consolidation; (iv) restrictions on off-SEF, pre-trade communications; and (v) impartial access. Specifically addressing CFTC Commissioner Berkovitz’s concerns over the concentration in the swap dealing business, Giancarlo argued that the existing SEF rules have resulted in the concentration of swaps dealing, and Giancarlo suggested that this should lead regulators to reconsider the existing swap rules.
CFTC Commissioner Dan Berkovitz, in his remarks entitled “Improving Swap Market Regulation: Four Reforms,” criticized the proposal to overhaul the SEF rules. Berkovitz argued that the proposal would, among other things, (i) “abandon the methods of execution requirements that ensure that SEFs enable market participants to trade highly liquid standardized swaps with each other openly and competitively”; (ii) “gut the impartial access requirement and instead permit SEFs to discriminate against entire classes of market participants”; and (iii) increase prices for swaps customers. As a result, Berkovitz outlined four reforms that he believes should be made to the existing CFTC rules relating to SEFs: (i) expand floor trader registration; (ii) abolish name give-up; (iii) enable average pricing; and (iv) revise bank capital requirements impacting futures commission merchants.
In his remarks, CFTC Commissioner Brian Quintenz praised the proposal because it would eliminate the current “made available to trade” process by which certain swaps are determined to be required to trade on an SEF. However, Quintenz is concerned that the CFTC’s decision to prescribe execution methods “substituted its judgment over the expertise and judgment of market professionals and, more importantly, is not supported by the statute." Quintenz also acknowledged criticisms he heard regarding the proposal’s approach to pre-trade communication and the potential for the proposal to disrupt existing bank-client trading relationships. He said, “I do not think it was the intent of the Proposal to disrupt these traditional trading relationships. That is why the proposal asks many questions on this issue to gain a better understanding.” Further, Quintenz said that he is “interested to hear from market participants about how pre-execution communications for [‘made available to trade’] transactions could be accommodated in a way that would not impede liquidity formation and pre-trade price discovery on-SEFs.”
On 27 February, the CFTC announced that its Technology Advisory Committee will meet on 27 March 2019.
Fed Releases Minutes From its January 2019 Discount Rate Meeting
On 26 February, the Fed released the minutes of its interest rate meetings held on 22 and 23 January 2019. According to the minutes, the Fed “considered discounts and advances under the primary credit program (the primary credit rate) and discussed, on a preliminary basis, their individual assessments of the appropriate rate and its communication.” The Fed Directors had “mostly favorable reports on economic conditions across sectors and Districts,” and overall “directors remained positive about the outlook for continued solid economic growth, although they also noted potential risks to the outlook associated with recent financial, global, and domestic developments, including the partial federal government shutdown.” Further, at the meeting, no “sentiment was expressed by the Board. . .for changing the primary credit rate at this time, and the Board approved the establishment of the primary credit rate at the existing level of 3 percent.”
Fed Chairman Powell Discusses Recent Economic Developments and Long-Term Challenges
On 28 February, Fed Chairman Powell delivered remarks before the Citizens Budget Commission 87th Annual Awards Dinner in a speech entitled “Recent Economic Developments and Longer-Term Challenges.” In his speech, Chairman Powell focused on “the need for policies that will support and encourage participation in the labor force, promote longer-term growth in our rapidly evolving economy, and spread the benefits of prosperity as widely as possible.” Regarding the current state of the U.S. economy and near-term prospects, Powell said that much of the data available gives a “favorable picture of the economy,” but that it is important to acknowledge that “not everyone has shared in the benefits of the expansion to the same extent.” Powell also cautioned that slowing economies, particularly those of China and Europe, have offered “conflicting signals about the near-term outlook.” Regarding longer-term challenges and opportunities, Powell noted that from 1991 through 2007, the U.S. economy expanded annually by around 3 percent, yet growth since 2007 has averaged just 1.6 percent. He said that “[f]rom the standpoint of future Americans, if the slower growth persists for a half-century, incomes will end up roughly half of what they would have been.” To explain the slower growth, Powell offered two reasons: (i) the slower “growth in the cumulative number of hours worked by all workers” and (ii) “the slower pace of labor productivity growth, or output per hour worked.” In order to counteract these problems, Powell argued that we need “policies that support innovation and create a favorable environment for investment in both the skills of workers and the tools they have.” Further, he said that the U.S. “would benefit greatly from a search for policies with broad appeal that could promote labor force participation and higher productivity, with benefits shared broadly across the nation.”
Fed Vice Chairman Clarida Speaks on US Economic Outlook and Monetary Policy
On 28 February, Fed Vice Chairman Richard Clarida delivered remarks at the 35th Annual NABE Economic Policy Conference in a speech entitled “U.S. Economic Outlook and Monetary Policy.” In his speech, Vice Chairman Clarida said that his “baseline outlook for 2019” projects “somewhat slower but still-solid growth.” However, Clarida cautioned that “a number of crosscurrents that are buffeting the economy bear scrutiny.” These crosscurrents include slowing global growth, particularly in China and Europe, and elevated “[g]lobal policy uncertainty.” Regarding monetary policy, Clarida said that “monetary policy at this juncture needs to be especially data dependent.” He argued that going forward, the Fed needs “to be cognizant of the balance we must strike between (1) being forward looking and (2) maximizing the odds of being right given the reality that the models that we consult are not infallible.” Finally, Clarida highlighted the Fed’s recently announced review of its monetary policy strategy, tools, and communications practices. He said that the Fed “will listen carefully to a broad range of stakeholders offering a full range of perspectives from across the country, and we will draw on these insights as we assess how best to achieve and maintain maximum employment and price stability in the most robust fashion possible.”
FHFA Issues Final Rule on Uniform Mortgage-Backed Securities
On 28 January, the Federal Housing Finance Agency (“FHFA”) issued a final rule “that requires Fannie Mae and Freddie Mac (the Enterprises) to align programs, policies, and practices that affect the cash flows of ‘To-Be-Announced’ (TBA)-eligible Mortgage Backed Securities (MBS).” The final rule refines “alignment requirements to assure market participants that the Enterprises will maintain consistent cash flows and makes explicit the potential consequences to the Enterprises for misalignment.”
· March 4: SEC Investor Advocate Rick Fleming will speak at the Council for Institutional Investors Spring 2019 Conference.
· March 5: Senate Committee on the Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights will hold a hearing entitled “Does America Have a Monopoly Problem?: Examining Concentration and Competition in the US Economy.”
· March 5: SEC Commissioner Hester Peirce will speak at the Council of Institutional Investors Spring 2019 Conference. She will discuss key SEC initiatives and current trends affecting investors, markets, and capital formation.
· March 6: House Financial Services Committee will hold a “Markup of FY19 Budget Views and Estimates.”
· March 6: Financial Stability Oversight Council (“FSOC”) will hold both an open session and an executive session. The preliminary agenda for the open meeting includes proposed amendments to FSOC’s interpretive guidance on nonbank financial company designations. The preliminary agenda for the executive session includes a discussion regarding U.S. nonfinancial corporate credit and proposed amendments to FSOC’s interpretive guidance on nonbank financial company designations.
· March 6: SEC Commissioner Hester Pierce and SEC Senior Advisor for Digital Assets and Innovation Valerie Szczepanik will participate in the DC Blockchain Summit 2019.
· March 6: SEC Co-Director Steven Peikin will participate in the American Bar Association’s 33rd Annual National Institute on White Collar Crime.
· March 7: House Financial Services Committee will hold a hearing entitled “ Putting Consumers First? A Semi-Annual Review of the Consumer Financial Protection Bureau.”
· March 7: SEC Commissioner Hester Pierce and Office of Compliance Inspections and Examinations Director Peter Driscoll will participate in the 21st Annual IA Compliance: The Full 360° View East Conference.
· March 7: CFTC will hold an open meeting to discuss, among other things: (i) amendments to the comparability determination for Japan, margin requirements for uncleared swaps for swap dealers, and major swap participants; (ii) the National Futures Association’s (“NFA”) proposal to amend certain NFA compliance rules and interpretive notices to incorporate swaps; and (iii) a final rule amending regulations on segregation of assets held as collateral in uncleared swap transactions.
· March 8: The SEC’s final rule on disclosure of hedging by employees, officers, and directors becomes effective.
· March 8: SEC Chairman Jay Clayton and Division of Trading and Markets Director Brett Redfearn will speak at Fordham University’s event, “U.S. Equity Markets: Looking Back and Moving Forward.”
· March 9: SEC Commissioner Hester Peirce will participate in a fireside chat with former CFTC Chairman Gary Gensler at the MIT Bitcoin Expo.
· March 11: SEC Commissioner Hester Peirce will participate in a fireside chat with Richard Chambers, President and CEO of the Institute of Internal Auditors (“IIA”), at the IIA’s 2019 General Audit Management Conference.
· March 15: Comments due on the SEC’s proposed rule on updated disclosure requirements and summary prospectus for variable annuity and variable life insurance contracts.