Dodd-Frank – Revisal moves another step as bill is signed

President Donald Trump has signed the bipartisan Economic Growth, Regulatory Relief, and Consumer Protection Act, which revises supervision of banks with less than $250 billion in assets and adjusts other rules in the Dodd-Frank Act.

U.S. President Donald Trump signed into law on Thursday a bill that would ease rules on most banks for the first time since the 2007-2009 financial crisis.

The legislation eases regulations on all but a handful of the nation’s largest banks, and marks a significant victory in Trump’s efforts to cut rules in a bid to spur economic growth. The legislation eases oversight of all banks below $250 billion in assets, and exempts small community banks from a host of stricter rules and oversight established by the 2010 Dodd-Frank financial reform law.

“The legislation I’m signing rolls back the crippling Dodd-Frank regulations that are crushing small banks,” Trump said at the bill signing.

While the new law lessens rules on a large number of U.S. banks, it stops short of eliminating much of Dodd-Frank. Most of that law’s core provisions remain intact, and the new law’s language is primarily aimed at helping smaller community banks, while preserving stricter rules for the biggest banks on Wall Street.

After passing legislation to ease bank rules, Congress may consider an additional package of bills aimed at relaxing securities laws to make it easier for companies to raise capital.

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Brexit – Impact to the Bail-in Rules

Bailing in the debt of a failed bank is a contentious process that needs to pass muster if challenged in an insolvency court. Legal certainty on the treatment of debt eligible for bail-in is therefore paramount.

But nothing about Brexit is certain. That includes the question of whether English courts will continue to recognise European bail-in decisions.

As a result, European banks have been left with a headache as they consider how to handle the preponderance of English-law bonds in their bail

More to follow…

MiFID II and GDPR impact in Client slow down at James Hay

James Hay has blamed new EU regulations as well as a  ‘slowdown’ in defined benefit (DB) pension transfers for a fall in its new client numbers in the first quarter of the year.

A trading statement published by parent company IFG Group revealed the platform attracted 1,400 new clients in the first three months of 2018. This was down 14% on the first quarter of last year, and 11% down on the last quarter of 2017.

‘We believe this reflects the performance of the wider platform market, driven by a slowdown in the DB transfer market, equity market volatility, and adviser focus on factors such as GDPR and Mifid,’ the company said.

Last year platforms and life companies reported an increase in the amount of DB transfer business, but the majority did not disclose figures. Standard Life, one of the few businesses that did reveal the scale of new business, said DB transfer inflows had more than than tripled to £900 million at the halfway point of last year.

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MiFiD II Research – Allianz GI in talks over Unique Deal

Allianz Global Investors has not yet paid for research it consumed in the first quarter of 2018 and will negotiate the cost with providers this week.

The firm’s CEO Andreas Utermann revealed that unlike most other asset managers, Allianz GI has not entered into agreements with any sell-side firms to pay for research, and will now negotiate the cost for the research it has consumed during Q1 this year.

It comes after a warning for asset managers from Edinburgh-based Electronic Research Interchange (Eric), which was founded in 2014 by former Standard Life Investment directors Russell Napier and Chris Turnbull.

Turnbull pointed out that before Mifid II was implemented at the start of this year, fund firms generally did the minimum to comply with new unbundling rules to meet the deadline, adding that a number of firms are set to discover ‘they owe more for research than they have anticipated’ and are ‘not paying for it in the way the FCA intended.’

But Utermann denied his firm would be in for a shock and said: ‘There is a big discrepancy what the big banks want for research. Some say ‘you can have all this [research] for $10,000’ and others say you can have it for $2 million.

‘We’ve consumed the research we need to consume, and we’re in the process of trying to gather all this info – we’ve clocked the hours with analysts, etc… – and determine what we think we should be paying… If we’re wrong, fine, we’ll have another think… we’ll agree the costs afterwards.’

Utermann added that he believes there ‘needs to be a price discovery in the market’ to uncover the true value for research.

Most asset managers made agreements for the price of research with sell-side providers before the Mifid II deadline.

However, Turnbull said that asset managers that negotiated a basic price for written research may be unaware of the full costs associated with broker interactions they previously took for granted, with ‘invoice shock’ catching up with them as they slowly wake up to the true price of broker insight.’

But this was also denied by Rathbones Unit Trust Management CEO Mike Webb, who previously told Wealth Manager his firm is ‘certainly not expecting a shock’.

Webb pointed out the process to prepare for the new rules under Mifid II involved determining what research the fund managers and investment managers throughout the group actually used and what value they attached to it, with the group then entering into negotiations with those houses that added value.

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FCA Priips & ETF Concern

FCA chief Andrew Bailey admits he has serious worries over a controversial piece of EU legislation that has vexed the funds industry. Bailey said he was not alone in being concerned about the packaged retail and insurance-based investment products (Priips) regulations, which came into force on 1 January.

Under the rules, fund managers must provide details on how they expect funds to perform in various market conditions through a standardised key information document (KID). This is designed to help investors make better informed decisions by being able to compare key features, risks and rewards of products.

In a speech on asset management delivered at the London Business School, Bailey highlighted some of the issues with the legislation and the negative impact it is having on the European funds industry.

‘I want to be clear that I am concerned about Priips, and I know I am not alone,’ Bailey said.

‘It carries a risk that it is leading to literally accurate disclosure which is not providing useful context, and there is evidence that funds, for instance from the US, are withdrawing from Europe to avoid the burden.  I have also heard concerns about performance projections. We all have to take this seriously.’

In January the FCA published a statement clarifying its views on the KID. However, Bailey indicated more needed to be done in his speech.

‘Some firms have told us they have concerns about this directly applicable EU regulation,’ he said.

We will continue to engage with firms and their trade associations to consider how their concerns may be resolved so that investors get the full benefit of the regulation.  We will also continue to work with the European Supervisory Authorities, and contribute to the European Commission’s post-implementation review of the Priips regulation.’

The speech also covered the growth of exchange traded funds (ETFs) and the dangers this could pose to the financial system.

Bailey notes that this growth has come at a time of abundant global liquidity on the back on quantitative easing, resulting in investors seeking greater yield by increasing duration. He is concerned that if there is a ‘snapback’ in yields as monetary policy normalises in major economies, this could pose risks for ETF investors.

‘We know relatively little – as we have not experienced a stress since this structure grew so rapidly – about the capacity and willingness of APs (authorised participants) to execute their function in stressed conditions where they may be under pressure to tighten their own risk limits,’ Bailey said.

‘The result could be unexpectedly large discounts for ETF investors selling their holdings relative to the estimated value of the underlying assets, and possibly a need to suspend fund dealings. 

‘We have no easy way of sizing this risk, but we cannot ignore its potential given the rapid growth of ETFs.’

Bailey also expressed some concern on whether the open-ended fund structure could cope in stressed market conditions.

The structure was tested during the dislocation caused by the EU referendum two years ago, when a number of property funds suspended redemptions.

While the suspensions generally operated without major disruption, Bailey feels the system could be improved.

He did not go as far saying the open-ended structure was inappropriate, but said lessons can be learned from the recent bout of property suspensions.

‘I would observe that funds with longer redemption periods did not experience the same issues in this most recent stress situation,’ Bailey said.

‘There is a lesson here about maturity transformation in a market liquidity context.’ 

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Dodd Frank – Big plans to Overhaul the Rules

The head of the main US derivatives regulator on Thursday set out a 100-page blueprint to pare back regulation of the swaps industry that was introduced after the financial crisis, calling it a software upgrade for the rules rather than an attempt to “burn down the house”.

Christopher Giancarlo, chairman of the Commodity Futures Trading Commission, said that small banks should be exempt from collecting margin payments on over-the-counter swaps and that regulators should give banks more leeway to use their own internal models.

The white paper penned by Mr Giancarlo and Bruce Tuckman, the CFTC’s chief economist, contains a mix of short-term policy proposals and longer-term goals for reform of the rules governing swaps, derivatives contracts in which traders exchange financial instruments.

Mr Giancarlo said he would prioritise an overhaul of swaps execution rules, which he has long argued are too restrictive. He said that the Obama-era CFTC inadvertently pushed the trading of certain swaps into less-regulated parts of the market by being too specific about how execution platforms should operate.

The CFTC chair, a former executive at interdealer brokerage GFI, proposed allowing the platforms to operate more flexibly while also forcing a wider range of swaps on to the platforms. He said he would introduce new rules later this year.

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Fed proposes new ‘relaxed’ capital rules


On Tuesday the Federal Reserved proposed new rules that could allow some large banks to reduce the amount of capital they must hold as a cushion against a future economic shock.

The proposal may clear the way for some large banks to reduce their capital levels in the future but the largest firms on Wall Street are not likely to get such relief, the Fed said.

The proposal is expected to reduce bank paperwork and also make it easier for regulators to monitor the health of banks, said Randal Quarles who is the top Fed official in charge of regulations.

 “Our regulatory measures are most effective when they are as simple and transparent as possible,” Quarles, the Fed Vice Chairman for Supervision, said in a statement.

The Fed said the proposed changes are likely to somewhat increase the amount of capital required for the 30 largest banks known as GSIBs or global systemically important banks.

The measures should modestly decrease the amount of capital required for banks smaller than the GSIBs, the Fed said.

“No firm is expected to need to raise additional capital as a result of this proposal,” the Fed said in a statement.

 Banks and other stakeholders will have 60 days to comment on the proposal that is likely to take effect next year, said the Federal Reserve. The new capital standards would be the first reform of capital standards conceived after the decade-old financial crisis.

The new capital standard would be called the ‘stress capital buffer’ and work in tandem with the annual Fed checkup on bank health known as the ‘stress test’.


Finma – Cyber challenges present largest operational hazard facing the financial sector


Swiss supervisory watchdog Finma has identified cyber security risks as it chief policy concern for 2018. Speaking at the watchdog’s annual media conference, Finma CEO Mark Branson noted that the risk of cyber-attacks is increasing as technological change advances.

Cyber-attacks are the most serious operational hazard facing the financial system“, warned Branson.

To address the risks, Branson called for more interaction between different disciplines both within the public sector and between the public and financial sectors, concluding that “working together achieves more than going it alone”. Issues around cryptocurrencies and new business models also warranted a mention, with Branson calling for a balanced approach to policy that encouraged innovation but also reigned in the downside risks.


Former Fed governor looks to AI compliance group

Former Federal Reserve governor Randall Kroszner is among a group of investors in a start-up US fintech company that has raised $6m to apply artificial intelligence to markets compliance.

The first round of funding by Ascent Technologies, based in Chicago, on Thursday highlights interest among investors to use machine learning to reshape the trading industry.

Other investors include David Lehmann, a former head of electronic execution services at Knight Capital; James Gray, the former co-founder and chairman of optionsXpress Holdings and head of G-Bar, a proprietary trader; Steve Kaplan from the University of Chicago and Alsop Louie and Temerity Capital Partners, two venture capital groups.

Young companies such as Ascent, Droit Technologies and RegTek are eager to capitalise on growing interest from markets and regulators in applying cutting-edge technology such as automation and natural language processing to achieve compliance.

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MiFID II – Nearly Two Months in – The Trails and Tribulations of Research Reform

As MiFID II beds down the pressure on the research industry mounts. Banks might see some short-term research-revenue movement due to bill timings whilst others, may seek to shake up their global research operations. Equities trading is also affected and MiFID II might increase the pressure on those already challenged by low volatility with some having closed their European trading units due to insufficient volume.

Meanwhile, data aggregators are emerging as some of the biggest beneficiaries from all of this.

Also larger firms may win a competitive edge over their smaller peers that are less able and therefore less likely to pass on research costs to clients. As a result, smaller managers may lose investment mandates, and the industry may see further consolidation.

Finally, the failure of about 12 of the EU’s 28 countries to fully integrate all of MiFID II into local law has given rise to an unlevel playing field. If the EU rule isn’t localised, it can’t apply directly to companies. Some firm are therefore facing challenges optimising their operations, putting them at a disadvantage compared with peers in countries such as France where the rule has been entrenched in local law by the July 3, 2017, due date. Companies that suffer losses as a result could seek damages from their local government.

Based on article previously appearing on the Bloomberg Professional Services Blog.