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Financial Services Weekly Update

October 12, 2013

Author: Alexis Victoria DeBernardis.

New and Noteworthy Regulations

Federal Reserve: Friday afternoon the Board of Governors of the Federal Reserve System issued a press release in concert with the Farm Credit Administration, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency requesting comment on the agencies’ proposed amendment to regulations relating to mortgages on properties in flood zones. The proposed rule would implement certain provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters) with respect to private flood insurance, the escrow of flood insurance payments, and the forced-placement of flood insurance. The period for comment on the bulk of the rule closes on December 10, 2013, but comments related to the proposed Paperwork Reduction Act analysis will be due 60 days after the rule is published in the Federal Register.

Upcoming Regulations

October 24 - Position Limits and Customer Funds: In an open meeting on October 24, the CFTC is expected to vote on a revised proposed rule to limit the trading-position size that firms are permitted to take in some commodity contracts. At the same meeting, the CFTC is expected to vote on a package of final rules designed to increase collateral held by futures brokerage firms, offer regulators electronic oversight of customer accounts, and require executive sign-off on large transfers of customer funds. Other rules potentially on the docket for October 24 include: a final rule on DCM Core Principle 9; a final rule on ownership and control reports; and a proposed rule regarding futures block thresholds.

October to December - 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 between October and December.

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 Transaction-level rules will not be published this year.

October to January - The SEC aims to complete rules to implement the JOBS Act.

October to January - Five financial regulators are working toward consensus to complete the Volcker Rule before the end of the year.

November to December - In the wake of the completion of an international Basel framework, the CFTC and other regulators may re-propose margin rules.

November and beyond - Standard of Care for Qualified Plans: The Labor Department and the Employee Benefits Security Administration are expected to release the revised proposal to apply a fiduciary standard to all investment advice given to ERISA Plans.


White House Rejects Latest House Proposal: Late Friday - after the first of any progress was made among House Republicans, Senate Democrats and the White House this week - White House spokesman Jay Carney informed press that the White House has rejected a basic element of the House GOP’s latest proposal to extend the debt ceiling. The proposal included a short-term debt limit increase that was conditioned on negotiations on the federal budget. While he praised the bipartisan efforts this week, Mr. Carney explained that the current proposal would only extend the status quo of uncertainty. A compromise between the parties cannot come soon enough as trading in U.S. credit default swaps soars amid fears that the U.S. government may actually miss a payment on its obligations. The cost to insure against a U.S. government default has risen in the last month, and trading of CDS has increased nearly ten-fold.

Yellen Nominated:
On Wednesday, President Obama met most onlookers’ expectations and announced that he has selected Janet Yellen, current vice-chairwoman of the Federal Reserve, to succeed current Fed Chair Ben Bernanke, whose term expires January 31, 2014. Although there have been minor reports of Republican disappointment with the President’s choice, the Senate is expected to approve Vice-Chairwoman Yellen’s nomination.

Lew Senate Testimony:
Treasury Secretary Jack Lew testified before the Senate Finance Committee on Thursday, underscoring the dire circumstances at stake if Congress does not vote to increase the debt ceiling by October 17. In what many have viewed as his press tour this week, Secretary Lew called the debt-ceiling negotiations a “manufactured political crisis” with far-reaching impact. Secretary Lew once again dismissed prioritization as a feasible option - on both logistic and legal grounds - and reminded the Committee that a default of any kind would be unprecedented.

JPMorgan Exiting Physical Commodities Business:
On Wednesday, JP Morgan Chase & Co. launched the sale of its current physical commodities business, after announcing it intention to exit the market this past July. The aggregate assets are valued at $3.3 billion and include the crude, natural gas and base metals assets.

Asset Managers Fire Back on SIFI Designation:
On Monday, a number of asset managers responded to a report published last week by the Office of Financial Research for the Financial Stability Oversight Council. The OFR’s report highlights the potential risks posed by the country’s largest money management firms should any one of them find itself belly up. The firms pushed back on the threat of being labeled “Systemically Important” and the implications that would follow. Many firms recited by public comment their commitment and respective processes to mitigate large-scale risk, and they explained that the structure of their firms places the risk on individual investors rather than the overall financial system.

Retreat from Tapering a “Close Call”:
On Wednesday the minutes from the Fed’s Federal Open Market Committee September meeting were released; it was at this meeting that the Fed decided not to taper its federal bond buying program. While many FOMC participants disagreed on the data and the decision to continue with quantitative easing, the ultimate decision was “a relatively close call.” “At the end of the day, a dangerous tightening of financial conditions, which resulted from Bernanke trying to telegraph his intention to taper this year, and heightened market volatility, pushed the FOMC to keep the juice coming.”

SEC Unveils Market Structure Website: Also on Wednesday, the SEC announced the launch of a new market structure resource on its website. The agency has created a site dedicated to providing investors “with the ability to interactively explore a range of new market metrics and access empirical research and analyses that further inform the broader public on market structure.”

Ex-Gov’t Compliance Officers the New Kings of Wall Street?:
Former federal government compliance officers are making the jump to the private sector to advise financial institutions - the former targets of their government investigations and enforcement actions - and financial firms cannot hire enough of them. The demand is so strong and supply so limited that many firms have resorted to bidding wars for top advisors. “[C]ompliance expertise exceeds the pool of qualified professionals, forcing banks to poach from each other - sometimes by offering to double salaries and other perks like flexible work schedules.”

Upcoming Meetings and Hearings

At this time, there are no relevant hearings scheduled for next week.