Week InReview  Fed set to propose rule to make banks keep year's worth of funds  | New CFTC rule will simplify swaps reconciliation process  Dudley says ending TBTF risk is a 'paramount goal' and that Fed should mull discount loans for securities firms | ICYMI + Binge Reading Disorder
Friday, May 6, 2016
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Banks to keep year's worth of funds
Fed will jointly propose rule with FDIC & OCC
(May 3) A rule for large, internationally active banks is designed to 'reduce  the likelihood that disruptions to a firm's regular sources of funding will compromise its liquidity position,' the Fed said in a statement before their vote on Tuesday.
  • Rule is for biggest global banks; less-stringent version applies to lenders with more than $50 billion of assets not meeting threshold as large, internationally active firms
  • Banks would have to make quarterly disclosures; most covered firms already meet the requirements
  • Net stable funding ratio would complement earlier measure that focuses on banks' ability to weather 30-day period of stress
  • 'Requiring our largest institutions to maintain an amount of stable funding that is appropriate given the liquidity of their assets' (Fed Chair Janet Yellen)
  • Proposal calls for banks to maintain stable funding profile 'over a one-year time horizon' (Fed Governor Daniel Tarullo)
  • Proposal must require firms 'to avoid inappropriate reliance on central bank liquidity access' (Tarullo)
  • 'At the same time it should not incentivize firms to horde liquidity in periods of stress, rather than to use it to keep the financial system operating' (Tarullo)
  • Fed is to jointly release rule for 30 days of public comment along with the FDIC and OCC, which have already proposed it; requirements would take effect Jan. 1, 2018
CFTC rule simplfies swaps reconciliation
In effort to roll back burdens of Dodd-Frank
(May 2)  Swaps counterparties will verify fewer data terms during the lifecycle of their deals under a rule unanimously in a closed-door vote of the Commodity Futures Trading Commission. The rulemaking is part of Chairman Timothy Massad's effort to roll back burdensome Dodd-Frank Act requirements.  The final rule defines the material terms that have to be exchanged during reconciliation as 'the minimum primary economic terms of a swap.'  The goal of the rule is to focus on the terms that impact swap valuations and ongoing counterparty payment obligations.  Counterparties no longer will have to exchange data about entering into a swap or a counterparty's status, or information relevant only to cleared transactions. Those details aren't relevant to the counterparties' ongoing rights and financial obligations, the agency said.
'Market and Funding Liquidity"
NY Fed's Dudley speech at Atlanta Fed conference
(May 1)  Last Sunday, New York Fed President William Dudley, gave a speech on 'Market and Funding Liquidity' at the Federal Reserve Bank of Atlanta 2016 Financial Markets Conference on Amelia Island, Florida.  Dudley said the Fed should  consider providing loans at its discount rate to investment firms, not just banks.
  • 'Now that all major securities firms in the U.S. are part of bank holding companies and are subject to enhanced prudential standards as well as capital and liquidity stress tests, providing these firms with access to the Discount Window might be worth exploring.'
  • Regulators from the U.S. and other countries need to address who would provide liquidity to systemically important financial companies if needed, so that responsibilities are 'well understood in both the home and host countries.'
  • 'We have made considerable progress in recent years in enhancing the safety and soundness of the U.S. financial system. But there is more that we need to do.'
Dudley argued that 'an important issue is to identify and address gaps in the lender-of-last-resort function' and that while there has been progress made in pushing big financial firms to draw up living wills 'there is still more work to go on the resolution side.'
  • 'Ending too big to fail has to be a paramount goal of policy.'
  • 'More capital can reduce the perception of the risk of insolvency.'
  • Says clearinghouses have advantages but 'the risk of the clearinghouse is we are concentrating a lot of risks in this basket.'
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