Financial Services Weekly Update

New and Noteworthy Regulations

CFPB: On Friday, November 8, the Consumer Financial Protection Bureau, issued the Homeownership Counseling Organizations Lists Interpretive Rule, which provides instructions to lenders on how to comply with requirements under the High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act. The rule will be effective January 10, 2014.

Federal Reserve, FDIC, OCC: On Tuesday, November 12, the Federal Deposit Insurance Corporation released the economic scenarios and other data notes that will be used by banks with assets of more than $10 billion for stress tests mandated by the Dodd-Frank Act. The data points include certain variables that reflect economic activity, including unemployment, exchange rates, prices, income, interest rates, and other salient aspects of the economy and financial markets. The FDIC coordinated with the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency in developing and distributing these scenarios.

CFTC: On Thursday, the Commodities Futures Trading Commission issued guidance on cross-border transactions and dealings with foreign affiliates that forecloses what some banks saw as a loophole in prior legislation, enabling the banks to keep certain swaps transactions out of the commission’s purview.

Upcoming Regulations

Fed, FDIC, OCC

Long-Term Debt Ratios: Before the end of 2013, U.S. banking regulators are expected to issue a “bail-in” proposal that would require the biggest U.S. banks to hold greater long-term unsecured debt that could be easily converted to equity and reduce systemic risk should a firm fail.

Commodity Futures Trading Commission

Cross-Border: The CFTC is expected to decide by December 21 which entity-level rules at the largest overseas jurisdictions can be substituted for U.S. standards. Transaction-level rules will not be published this year.

 

Securities and Exchange Commission

Money Market Funds: The comment period on the agency's proposal for money market mutual funds (MMFs) closed in September, and the SEC is expected to consider final rules later this year.

 

Other Key Regulations

SIFI Rules and Designations: The Federal Reserve is expected to complete the rules for the “enhanced prudential standards” for systemically significant (SIFI) institutions. These new requirements will relate to liquidity, risk management and early remediation. In addition, the Federal Reserve plans to propose a capital surcharge rule for global SIFIs sometime before the end of 2013.

Volcker Rule: The Fed, FDIC, OCC, CFTC and the SEC are working toward consensus to complete the Volcker Rule before the end of the year, though it is possible that the Rule will not be finalized until early 2014.

 

Standard of Care for Qualified Plans: TheEmployee Benefits Security Administration of the Department of labor is expected to release the revised proposal to apply a fiduciary standard to all investment advice given to ERISA Plans before the end of the year.

In the News

Moody’s Downgrades Big Banks: On Thursday, Moody’s Investors Service announced its downgrade of the senior-holding company debt for four large U.S. bank holding companies. Moody’s downgraded the holding-company ratings of Morgan Stanley, Goldman Sachs Group, Inc., J.P. Morgan Chase & Co. and Bank of New York Mellon Corp. This move follows a review of the banks’ credit ratings beginning this past August and signals the agency’s belief that the U.S. government is not likely to come to their rescue in the event of a crisis.

GAO Releases Report on Big Banks’ Subsidies: Also on Thursday, the Government Accountability Office released its study on financial institutions use of bailout funds during the market collapse. The study is the first of GAO two reports to be released following questions from Senators Sherrod Brown (D-OH) and David Vitter (R-LA) regarding exactly how much taxpayer money was spent on the bailout programs. That figure will be included in the second report, expected next year. Senators Brown and Vitter are co-sponsoring a proposed increase in capital requirements at the nation’s biggest banks, and they stated that yesterday’s report only supports their plan.

Fallout from 2008 Crisis and Shutdown Politics, U.S. Treasuries No Longer Good Collateral: The CFTC is working with the Federal Reserve in considering a regulation that would require Treasury collateral be backed up by liquid credit lines. Policy makers are concerned that liquidating U.S. treasuries may now take too much time, possibly up to a full day. Backing up treasuries with a credit line would take the responsibility for liquidation off the federal government - which supplied more than $2 trillion in emergency aid during the financial crisis - but places additional costs on clearinghouses. Chairman Gensler stated that the CFTC’s four commissioners will finalize the rule by the end of this week by way of private vote.

White House Names Massad to Replace Gensler:

President Obama officially nominated Timothy Massad, the Treasury Department’s assistant secretary for financial stability, on Tuesday to replace Gary Gensler as chairman of the Commodities Futures and Trading Commission when Chairman Gensler steps down later this year. Massad, a former corporate attorney at Cravath Swaine & Moore in New York, has already drawn skepticism that his experience to head the bulldog agency is lacking. Senators Elizabeth Warren (D-MA) and Bernie Sanders (I-VT) have each made public statements reflecting their curiosity regarding Mr. Massad’s qualifications.

Yellen Cruises Through Confirmation Hearing: The soon-to-be Federal Reserve Chairwoman failed to make many waves during her confirmation hearing yesterday, providing rather dovish responses to the left and the right, and sticking to the Fed’s general policy talking points. Of note though, Dr. Yellen stated that the Fed will consider additional rule-making to address regulated banks playing in the physical commodities market. Yellen also remarked that the Fed will respond to industry concerns about the “push-out rule” that requires banks to isolate certain derivatives trading to separate business units. Following yesterday’s hearing, it seems all the more likely that Dr. Yellen will be swiftly confirmed.

Corzine Fails to Win Dismissal: On Tuesday, Judge Victor Marrero ruled against former MF Global CEO Jon Corzine in federal court by declining his request to dismiss an investor lawsuit against him, the firm’s executives and 14 other financial institutions for the brokerage fund’s collapse. The court essentially ruled that the claims could not be dismissed this early in the case, and that the claims themselves were plausible enough to warrant examination on their merits.

Secretary Lew Continues Asian Tour: While in Asia for a five-nation tour, Treasury Secretary Jack Lew granted an exclusive interview to CNBC Asia earlier this week and gave his positive views on the condition of the U.S. economy. His words no doubt offered some comfort to leaders in Japan and China, the biggest foreign holders of U.S. debt. After wrapping up his visit in Japan, Secretary Lew met Friday with Chinese President Xi Jinping and pressed Mr. Xi on his plans for modernizing the Chinese economy. Communist Party officials released a modified communiqué on the government’s major policy goals early Friday, which included intentions of expending the role of the private sector and relaxing the one-child policy.

Upcoming Meetings and Hearings

Securities and Exchange Commission

• Dodd-Frank Investor Advisory Committee Friday, November 22 10:00 AM SEC Headquarters, Multipurpose Room LL-006

Senate Committee on Banking, Housing, & Urban Affairs

• Full Committee Housing Finance Reform: Fundamentals of Transferring Credit Risk in a Future Housing Finance System Tuesday, November 19 10:00 AM 538 Dirksen Senate Office Building
• Subcommittee on National Security and International Trade and Finance, Subcommittee on Economic Policy The Present and Future Impact of Virtual Currency Tuesday, November 19 3:30 PM 538 Dirksen Senate Office Building
• Subcommittee on Financial Institutions and Consumer Protection Regulating Financial Holding Companies and Physical Commodities Wednesday, November 20 2:00 PM SD-G50 Dirksen Senate Office Building

House Committee on Financial Services

• Subcommittee on Oversight and Investigations A General Overview of Disparate Impact Theory Tuesday, November 19 10:00 AM 2128 Rayburn House Office Building
• Subcommittee on Housing and Insurance Implementation of the Biggert-Waters Flood Insurance Act of 2012: Protecting Taxpayers and Homeowners Tuesday, November 19 1:30 PM 2128 Rayburn House Office Building