The news these days is coming fast and furious, especially for mid-summer. We’ve missed a few things in our regular posts that we wanted to get back to. This edition covers some recent regulatory activities including formal proposals and informal commentary. Some of this makes sense while other parts make you wince. All together, regulatory reach in the service of no-risk markets continues apace.
Should hedge funds agree to a 48 stay in closing out contracts with a failing lender? This was the point of a recent Bloomberg article, “Hedge Funds Are a Holdout in Fed’s Plan to Prevent the Next Lehman,” by Silla Brush and Jesse Hamilton. The article said that the Fed and other regulators want hedge funds to voluntary change their policies to mimic ISDA agreements that now provide some leeway in pulling collateral, buying in positions or cancelling contracts with failing or failed entities. The idea is to give the market and regulators (like the FDIC under Dodd-Frank’s Orderly Liquidation Authority) to find a buyer for “good bank” assets or a new counterparty for a trade. Hedge funds of course think that this is stupid – they want to protect their clients’ assets. Ultimately the regulators will win this one without a question. Hedge funds will have to tell their investors that some protection has been lost.
A Financial Transactions Tax could be live in 2017. A remark by EU Economic Affairs Commissioner Pierre Moscovici suggests that some sort of FTT could be live in 2017 although the market acceptance that he hopes for may not be along for the ride. Reuters reports that Moscovici said “I have the impression that all of that (the talks) is going to wrap up during the autumn of 2015 with application at the start of 2017.” French Finance Minister Michel Sapin was reported as saying that “a widely applicable tax with a low rate that could be collected in a way that would discourage financial firms from shifting business to countries where the tax did not apply.” Who do these people think they are kidding? The viciously anti-market policies of major European economies leaves little room for financial intermediaries to, you know, run their businesses. Even the Reuters article noted the objection: “BNP Paribas deputing chief operating officer Alain Papiasse said that financial companies in the countries covered by the tax were considering moving operations to London, which has spurned the levy from the start.” This is just absurd. Markets exist for a reason – leave them be already. (For more you’ve-got-to-be-kidding-me commentary from European market officials, see our rebuttal to Jose Vinals, director of the IMF’s capital markets department, “Central banks as market makers: an incredibly bad idea.”
The EU has published their proposal for securities finance reporting and transparency, ie, a Trade Repository. The basic idea is to mimic Trade Repositories for OTC derivatives, which makes sense. The proposal actually says this verbatim. The interesting parts of this proposal are:
– Exclusion of European System of Central Banks from reporting, presumably to protect fiscal policy decisions. Still, its a bad precedent to offer exclusions to a trade repository.
– Investment funds must disclose all of their securities finance transactions and Total Return Swaps.
– ESMA will create rules for further disclosures by UCITS and AIFM funds.
– On rehypothecation, “Reuse should take place only with the express knowledge and consent of the providing counterparty.” Hmm.
– ESMA is responsible for figuring out “the details of the different types of SFTs; the details of the application for registration or extension of services of a trade repository; the details of procedures to verify the details of SFTs reported to trade repositories; the frequency and the details of publication of, the requirements for, and the access to, trade repositories’ data; and, if necessary, the content of the Annex.”