Splintering of regulatory effort is putting world leaders on the spot. But remedies prove elusive while leaders seem powerless

by David Keefe

As regulators and the financial services industry press for action against the steady splintering of global regulation into national and protectionist initiatives, critics doubt the ability of world leaders to stem the tide.    More>>>

A framework aimed at ending taxpayers ‘bail-out’ of banks seen as ‘too-big-to-fail’ is in sight. Creditors will be ‘bailed-in’ under new rules

By Melvyn Westlake

After months of frequently stalled negotiations, EU governments are finally inching towards a deal over how to handle failing banks without using taxpayers’ money – a key objective in removing any suggestion that some institutions are “too-big-to-fail.” The outstanding issues, including the scope of the new bail-in tool, could be settled by ministers in late May or June, according to one informed source.   More>>>

A leaked draft proposal reveals European Commission’s plans for regulating a key part of the shadow banking sector

Officials at the EU executive are finalising new regulations for Europe’s €1 trillion money market funds industry that will force all funds offering investors a ‘constant net asset value’ to establish a 3% cash buffer. This is revealed in a leaked draft of a regulatory proposal aimed at setting common standards for money market funds and ensuring their structural stability.   More>>>

A proposal will be issued by the Commission this summer. But can it be compatible with national initiatives already in hand?

By Melvyn Westlake

Within the next few weeks, the EU executive will unveil a proposal to restructure Europe’s largest banks. Whatever approach Brussels policymakers adopt to this reform, it seems certain to be highly controversial. For the moment, it is still subject to intensive deliberation. And, the final content and calibration of the proposal will depend on the outcome of a study to assess the impact of structural changes on the supply and price of credit, as well as the implications for financial stability and the resolvability of banks that fail. Any restructuring also has to fit coherently with all the other regulatory changes of the last three years.   More>>>

A selection of news items generated by the American regulatory reform agenda

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LONDON – The financial transaction tax (FTT) that eleven EU countries plan to introduce, possibly as soon as next year, will “extinguish” much of Europe’s market for collateral, which underpins the security of individual financial transactions and counterparties and thereby the stability of the financial system. Given this systemic role of collateral, such an outcome should be a matter of the greatest concern for regulators, central banks, financial intermediaries, and investors and borrowers, including governments, according to an academic paper circulated in early May.

The paper* has been prepared for the European Repo Council of the London-based International Capital Markets Association (ICMA), by Richard Comotto, senior visiting fellow at Reading University’s Henley Business School. Comotto’s paper notes that the systemic importance of collateral is increasingly being emphasised by regulators, who have been reinforcing and extending its use in recent financial market reforms, such as the Basel III capital and liquidity framework, the revamp of over-the-counter derivatives trading and the US Dodd-Frank financial reform law.   More>>>

MOSCOW – There is little evidence to suggest that global financial regulatory reforms have had a significant impact so far on the financing of long-term investment, although on-going monitoring is needed, finance ministers and central bank governors were told at their mid-February Group of 20 meeting. This conclusion was presented to the Group, representing the largest economies, at their Moscow gathering by the Financial Stability Board (FSB), which is coordinating the post-crisis global regulatory reforms.

There has been increasing concern that a number of factors were combining to reduce prospects for the flow of investment in areas critical for long-term global growth and jobs, such as infrastructure, education, research and development, housing and business expansion. The FSB, International Monetary Fund, World Bank and other international organisations are each analysing different aspects of this question. The possible adverse consequences of regulatory reform have been the main focus of the FSB.   More>>>

WASHINGTON – Despite considerable progress with the global financial regulatory overhaul, vulnerabilities remain. In two related areas in particular – the short-term wholesale funding markets and the problem of banks that are “too-big-to-fail” – more needs to be done, Daniel Tarullo, the US Federal Reserve governor responsible for regulation told a Washington audience in early May. “We would do the American public a fundamental disservice,” he said “were we to declare victory without tackling the structural weaknesses of short-term wholesale funding markets, both in general and as they affect the too-big-to-fail problem. This is the major problem that remains, and I would suggest that additional reform measures be evaluated by reference to how effective they could be in solving it.”

Relatively little has been done to change the structure of wholesale funding markets so as to make them less susceptible to damaging runs, he argued. But significant continuing vulnerability remains, particularly in those funding channels that can be grouped under the heading of securities financing transactions (SFTs). Such transactions – repo (sale and repurchase transactions), reverse repo, securities lending and borrowing, and securities margin lending – are part of the healthy functioning of the securities market, Tarullo added. But, in the “absence of sensible regulation, they are also potentially associated with exogenous shocks to asset values leading to an adverse feedback loop of mark-to-market losses, margin calls, and fire sales.”    More>>>

BRUSSELS – The EU executive is launching a public consultation on the performance and effectiveness of the European System of Financial Supervision (ESFS), which was established at the beginning of 2011. The ESFS, which comprises three new pan-EU supervisory authorities and a systemic risk board, working with a network of national central banks, was put in place in the wake of the financial crisis.

WASHINGTON – In a last desperate attempt to forestall imposition of initial margin requirements on non-cleared derivatives transactions, four industry lobby groups have jointly written to top global regulators expressing “grave concerns.” The margin requirements are part of the reforms of the huge, $633 trillion over-the-counter derivatives market. These reforms involve incentives to standardise and centrally clear as much of the market as possible, along with safeguards for deals that remain bespoke, including initial margin requirements.

SYDNEY – Australian regulators are taking a distinctly conservative approach to the adoption of the new Basel III liquidity rules. The main banks will not benefit from the revisions to the liquidity coverage ratio (LCR) that were announced in January by the Basel Committee, which crafted the new global standards. This decision by the Australian Prudential Regulation Authority (APRA) emerged in early May when the regulatory watchdog released its second consultation package outlining its proposed implementation of the Basel III liquidity reforms for the country’s authorised deposit-taking institutions (ADIs).

BRUSSELS – As expected, Europe’s legislators have moved to water down significantly European Union plans to shake-up the audit services market by requiring companies to change their auditors every six years.

After much lobbying, in particular by the so-called Big Four accounting firms that dominate the industry, the European Parliament’s Legal Affairs Committee (Juri) in April backed allowing companies to stick with the same auditor for up to 25 years instead of the six years proposed by the European Commission, the European Union’s executive arm. The lawmakers also rejected the Commission’s plan for caps on audit market share that could have seen the Big Four – PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte – being split up.   More>>>

WASHINGTON – Renewed political commitment is needed both at the national and global level to complete the financial reform agenda, the International Monetary Fund (IMF) said in April.

The reforms need to be implemented “on a timely basis, across countries, and on an internationally consistent basis across countries,” José Viñals, financial counsellor and director with the IMF’s monetary and capital markets department, told reporters. It’s essential to ensure a safer banking system, while minimising regulatory uncertainty and reducing the possibility of arbitrage “which is essential also to avoid international financial fragmentation,” he added.    More>>>

WASHINGTON – Financial markets must exercise continual vigilance against the threat of cyberattacks, the deliberate exploitation of computer systems for criminal purposes, according to America’s financial stability watchdog.

The Financial Stability Oversight Council (FSOC) said so far cyberattacks have not disrupted market functioning nor the health of the financial system. But during 2012 more than a dozen financial institutions were subject to sustained and persistent attacks, FSOC said in its 2013 annual report published in April.    More>>>

BASEL – Over-the-counter (OTC) derivatives notional amounts outstanding totalled $633 trillion at end-December 2012, down from $639 trillion at end-June 2012 and $707 trillion at end-June 2011, the latest (May, 2013) figures from the Bank for International Settlements (BIS) show.

WASHINGTON – Enhancing the profile of America’s stock market watchdog as a globally-focused regulator is an on-going priority, the US Security and Exchange Commission’s (SEC’s) new chairman, Mary Jo White, said in May.

But in remarks on regulation in a global financial system White, a former federal prosecutor with a feisty reputation, avoided giving any hint of how near the SEC is to deciding the controversial issue of whether US companies issuing securities should be allowed to use international accounting rules for their financial statements. The rules – International Financial Reporting Standards (IFRS) – are accepted in more than 100 countries.   More>>>

NORWALK, Connecticut – America’s accounting rules maker has chosen a staff member, Russell Golden, as the organisation’s new head as it faces challenging times on the international front.

In April Golden, 42, was named chairman of the seven-member US Financial Accounting Standards Board (FASB) by its oversight body, the Financial Accounting Foundation.   More>>>

As US regulators decide who’s a non-bank SIFI and who isn’t, some analysts fear life firms will get treated like banks

Regulator broadens attack on Europe’s insurance project but stands accused of ‘EU-bashing’. Delay blamed on governments

With the global deadline missed, national rulemaking is causing confusion and increasing costs, according to industry critics

America's credit loss accounting plans get hostile reaction, and critics want rift healed with international rulemakers