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From: J
Sent: Fri, May 27, 2011 6:20:06 PM
Subject: reads - more wastrelism work coming our way
maybe best to read as you listen to some hot tunes to chill out
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Subject: The Dodd-Frank Act May Go Global.... There May be Nowhere to Hide
Importance: High
This is highly important.
Subject: The Dodd-Frank Act May Go Global.... There May be Nowhere to Hide
An interesting article in today's WSJ regarding the Dodd-Frank Act. The US is actively working to impose this act on a global basis. Not surprisingly, many foreign institutions are pushing back on the US . The key take-away is that this is a regulatory change that could significantly alter trading behaviour in the rates market, potentially on a global scale.
As a reminder, The Dodd-Frank Act effectively increases transaction costs on derivatives products, namely interest rate swaps. The purpose is to reduce the risk in the financial system by making swaps transactions go through a clearing house that will impose a hefty initial margin. To avoid the expense of a hefty initial margin, traders may decide instead to use futures and cash products. We attached a report we wrote on this for reference.
Based on meetings with clients, many people are aware of Dodd-Frank but have very little understanding of how it might impact their business. This is a topic that cannot be ignored for much longer. There is a first mover advantage for those who understand what the regulatory change might be and a trading opportunity get ahead of it by positioning properly in the market.
Jim Caron, Managing Director
Morgan Stanley | Research
ASIA BUSINESS MAY 26, 2011 U.S. Regulators Aim to Extend Reach Agencies Weigh Oversight of Certain Financial Transactions by Foreign Central Banks, Sovereign Funds
By DEBORAH SOLOMON
WASHINGTON— U.S. regulators soon may extend their reach overseas and impose restrictions on foreign governments engaging in some financial transactions in the U.S.
South Korea's top central banker has hit out at critics calling for Korea to pick up the the pace to fight inflation. And U.S. regulators weigh oversight of foreign central bank transactions and sovereign wealth funds. WSJ's Jake Lee and Peter Stein discuss.
Foreign central banks, sovereign-wealth funds and international organizations like the World Bank could be subject to U.S. rules intended to reduce risk in the financial system. As part of last year's financial-regulatory overhaul, regulators gained power to scrutinize and regulate market participants engaging in swap transactions, including those backed by foreign governments.
Swaps are a type of derivative used to hedge risk and essentially are agreements between two parties for payments pegged to the performance of stocks, bonds, commodities or indexes. The proposed regulations would require foreign entities to conduct swaps trades on an exchange, potentially post margin and hold enough capital to absorb losses if the trade goes sour.
The prospect of such requirements is triggering a backlash from government-backed foreign institutions, including the European Central Bank, Bank of France and China 's sovereign-wealth fund, China Investment Corp. They argue the U.S. is overstepping its authority and should exclude them from oversight.
"It would be inappropriate to be subject to supervisory requirements by a non-EU authority," the ECB wrote in a May 6 letter to regulators that was reviewed by The Wall Street Journal. "We are concerned that external control of our activities might not be sufficiently sensitive to the practice of managing foreign reserves and could thus frustrate the ECB's performance of the mandate that it has been given." A spokeswoman for the ECB declined to comment.
The Commodity Futures Trading Commission and Securities and Exchange Commission, which are writing the swaps rules, are grappling with the issue and have reached out to the Federal Reserve for guidance, according to government officials. Regulators could exclude some entities depending on how well-regulated and well-capitalized the entities are, these officials said, but added no decisions have been made.
The Fed was granted an exemption from the proposed rules, along with any other federal agency backed by the "full faith and credit of the United States ," according to the Dodd-Frank regulatory-overhaul law.
CFTC Commissioner Jill Sommers, at a public hearing last month, said foreign entities have legitimate issues and their views ought to be considered in the final rules.
A central plank of the 2010 Dodd-Frank law aimed to reduce risk in the financial system by imposing oversight on the $600 trillion derivatives market. Regulators are writing rules dictating how swaps are traded and imposing requirements on those who use and trade them.
Foreign entities may be swept into the fold because their swaps counterparties often are U.S. firms. The Dodd-Frank law requires regulation of market participants "whose outstanding swaps create substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets."
The potential for some international entities to fall under U.S. regulatory oversight wasn't an accident, according to people involved in the legislative process. The World Bank sought clarity on whether the rule would apply to multinational development banks during negotiations last year, these people said.
A World Bank spokesman said, "We haven't seen anything to suggest that Congress or the regulators had any intent to apply Dodd-Frank specifically to the activities of multilateral development banks. We are naturally engaging in the process to ensure that is clear."
Current and former government officials said there are good reasons to make some foreign entities, such as sovereign-wealth funds, subject to the U.S. rules.
"It makes sense to treat sovereign-wealth funds the way you would any other financial player in the marketplace," said Michael Barr, a former Treasury Department official who negotiated much of the bill and is now a law professor at the University of Michigan . "They ought to be bound by the same rules because derivative transactions with them pose the same risks to the financial system as transactions with hedge funds and other investment vehicles."
Foreign governments disagree and have embarked on a campaign to win regulatory relief. Among their arguments is that they aren't engaging in speculative trading.
China Investment Corp., also known as CIC, wrote in a letter to the CFTC and SEC that the U.S. lacks authority to oversee its operations and that its fund isn't risky.
"CIC may use swaps to manage its portfolio risks, but does not use swaps as a way of generating returns (as other investors, such as hedge funds, may do, including by making highly-leveraged investments)," the fund wrote in a February letter. The CIC couldn't be reached to comment.
In March, Bank of France President Christian Noyer met in Washington with CFTC Chairman Gary Gensler to express his concern, according to public and private accounts of the meeting.
"Chairman explained that only exemption was for US central bank, not foreign central banks from the clearing requirement," according to the CFTC's synopsis of the meeting on its website.
"Banque de France is a central bank and cannot be treated as a commercial bank. Therefore, these counterparties should be exempted from such provisions as the Federal Reserve," a spokeswoman for the Bank of France said.The Bank for International Settlements, which serves as a bank for central banks and international public entities, said in a letter to the CFTC and SEC that U.S. supervision will compromise its ability to provide confidentiality and liquidity in times of market stress. U.S.-imposed margin requirements could absorb "liquidity that might otherwise be needed by the BIS for its market activities in times of stress," the bank said in the letter.
Write to Deborah Solomon at deborah.solomon@wsj.com |
