A lot has been happening in the securities finance and collateral worlds over the last week, including new reports on orderly liquidations and an interesting speech from the head of IOSCO. Here’s a roundup of some stories we find compelling:
Orderly Liquidations
On Monday, the Bank of England and the US FDIC released a joint paper, “Resolving Globally Active, Systemically Important, Financial Institutions.” The idea is to develop a US-UK plan for what happens if a SIFI fails. Readers of SFM know that bankruptcy laws between legal jurisdictions can be very different, and creating enough harmonization between them to allow for an orderly wind down of a multi-national bank can be very difficult. The new paper seeks to iron out the process using a top-down approach. “This paper focuses on the application of “top-down” resolution strategies that involve a single resolution authority applying its powers to the top of a financial group, that is, at the parent company level. The paper discusses how such a top-down strategy could be implemented for a U.S. or a U.K. financial group in a cross-border context.”
While we personally liked this report, others were more hesitant. The Global Financial Markets Association posted a rebuttal comment almost immediately, noting that “it is important to recognise that a single point of entry strategy may not be appropriate for all institutions – for example, where there is insufficient capital at the holding company level to absorb the required level of losses.” It’s a fair point, although one that may not be able to be addressed in the time required for regulatory comfort that some sort of plan is in place.
Speech by IOSCO Secretary General David Wright
A speech earlier this week from David Wright of IOSCO had some interesting points on the future of financial regulation looking out 15-20 years. Here are the punchlines:
– “there will be many more big capital and securities markets in the world because they are needed for economic development which is powering ahead in Asia, parts of Latin America and beginning also in Africa…. Brazil, India, China, Indonesia, Singapore, Hong Kong, Russia, Turkey and Mexico to name a few will have much bigger markets than today.”
– “all the fast growing regions of the world fully realize that they cannot rely on the international banking system to support their economic development ambitions.”
– “banks will be permanently restrained in the future with much higher levels of capital and lower leverage.”
– “These trends taken together, mean a major global expansion of market based financing and securities markets is going to happen – replicating in many ways the U.S financial model.”
There is more good stuff here too about the role of US and European thinking in the new world order – its worth a read.
Euribor under siege
In the face of possible rate rigging in Euribor, banks are pulling out. Citi and DekaBank have already pulled and two German Landesbanks are considering leaving as well. Reuters reports comments from the Landesbanks that “‘If, in the future, we would have to reserve capital for this, we will quit,’ a board member of one of the banks said. ‘An evaluation is ongoing into whether we need to stay in the Euribor panel,’ said a source at the second bank.” The ECB has voiced its concern. It makes sense that as more benchmarks come under pressure, the industry would consolidate around just a few that have the most popular and regulatory support. LIBOR seems to be a keeper, although it will see changes. The Reuters story throws into some question whether Euribor will stay around for the long term.